U.S.-China Relationship - A True Business Perspective - Frank Li, Ph.D. Founder & President West-East International, Inc. Frank (Xiaofeng) received his BE from Zhejiang University (China) in 1982, ME from the University of Tokyo (Japan) in 1985, and Ph.D. from Vanderbilt University in 1988, all in Electrical Engineering. He worked for several companies until 2005 when he founded its own company, an import-export firm. Today, is a leader in the weighing industry not only in products & services, but also in thought & action. Frank writes and speaks frequently on many subjects. For more info about Frank and, visit www.west-east-international.com. Frank has many fond memories about Vanderbilt, where he spent 3 years and 10 days (8/20/1985-8/30/1988). He completed his Ph.D. in a record time and lived his entire Vandy time in the Lewis house, forming and raising his young family including a baby boy, who in 2009 graduated from Yale, the Vanderbilt of the north! This lecture is his 1st step in giving something back to his beloved university of Vanderbilt 1/27/2010 Frank Li @Vandy's B & E Schools 1
Contents Overview: the U.S. vs. China China: Some politics 1 st (3 slides) China and emerging economies How to view China s economy? What does China offer? Business models Speaking of Wal-Mart 2 big itching business issues Viewing the U.S. from China 2 easy ways to reduce our deficit DUI: China is doing better Concluding remarks Boundary-less Q&A 1/27/2010 Frank Li @Vandy's B & E Schools 2
Overview: the U.S. vs. China Comparison The U.S. China Area (M Square Miles) 3.5 3.6 Population (M) 300 1,300 2008 Per Capita $45,000 $4,000 2008 GDP (T) $14 $4 1990 GDP (T) $8 $0.6 China may overtake the U.S. in GDP by 2030! China is still a poor country by our standards. Why such a big surge? China adopted capitalism! 1/27/2010 Frank Li @Vandy's B & E Schools 3
The China miracle The regime just had its 60 th birthday (1949-2009) 1 st 30 years: It nearly destroyed China 2 nd 30 years: It completely renewed China What was the differentiator? The re-introduction of capitalism! What s the big deal? It changed our basic assumption (or belief) that the combo of capitalism & democracy is the only way to prosperity, because the combo of capitalism & autocracy has clearly worked in China, in a remarkable way totally unprecedented in the human history! 1/27/2010 Frank Li @Vandy's B & E Schools 4
China s political system It s a 1-party & authoritarian system This system, while it tramples personal rights, turns out to be superbly efficient & effective when combined with capitalism, especially for such big things as infra-structure development and long-term planning. The risk? Strong men (or women) on the top! Fortunately, they are all dead now and it s not easy, if not impossible, to have new ones, unless there is a major war. 1/27/2010 Frank Li @Vandy's B & E Schools 5
China s problems & solutions Major Problems: Pollution that came with the rapid development Today, there are more skyscrapers in Shanghai than in NY City, and 90% of them were built over the past 15 years! Corruption worsened by the 1-party system Solutions: Stay the course and control the problems. I hope China will, over time, evolve into a democratic system better than the one in the U.S. Minor Problems: Taiwan, Tibet, human rights, etc. Solution: Time! Do NOT be fooled by the single-issue extremists!!! 1/27/2010 Frank Li @Vandy's B & E Schools 6
China & emerging economies What are the emerging economies? BRIC: Brazil, Russia, India and China Are they all equal in maturity? No. China is like a 20-year-old man, ready to roar, while the other 3 are still pre-teen, promising but unreliable. The U.S. (& Japan) is middle-aged at 40, while Europe is an old man at 60. In view of this recession, we all fell and are badly bruised. China will recover 1 st, followed by the U.S. and then Europe. So it s right for you to focus on China, now! 1/27/2010 Frank Li @Vandy's B & E Schools 7
How to view China s economy? China s economy today is very much like the U.S. economy in the 1950s or the Japanese economy in the 1970s. It is still primitive. It s like the U.S. in that it has a huge internal market. 2 notes: in auto sales, China is now #1 on earth, with ~13.5M units/year. the Chinese have been much more open than the Japanese in opening up its internal market to the foreigners. It s like Japan in that it s heavy in export. One good thing this recession has done is the revelation of the basic flaws in the export-heavy business model. As a result, the Chinese will adjust more quickly than the Japanese, not only because of the need, but also because of the ability, since China is, after all, a much bigger country than Japan. Do not laugh at China s products for their poor quality. They are improving quickly and they are coming, for real. 1/27/2010 Frank Li @Vandy's B & E Schools 8
What Does China offer? Good infra-structure Cheap labor Skilled (& unskilled) workforce A huge market Americans: GM, GE, Boeing, Microsoft, Intel, Dell, Wal-Mart, etc. Japanese: from electronics to cars Germens: for luxury cars especially 1/27/2010 Frank Li @Vandy's B & E Schools 9
Business Models Multinationals Build factories (and R&D labs) in China Make goods cheaply, bring them back here or sell over there Super shoppers like Wal-Mart Set up the purchasing dept in China Buy goods cheaply, bring them back here or sell over there Chinese manufacturers go global. Time for China to have its own Nikes & Sonys. But which Chinese companies will be successful? Use the Olympic model: Come to the Olympics only if you are atop domestically. In other words, Bet on the domestic leaders in China. You cannot be a global leader if you are merely an exporter (and you are nobody inside China). 1/27/2010 Frank Li @Vandy's B & E Schools 10
Speaking of Wal-Mart Here is what the owner of a big Chinese shoe manufacturer told me in 2007: I made 3 big mistakes in my business: The big mistake was that I started selling to Wal-Mart in 1995. The bigger mistake was that I did not put up enough resistance to Wal-Mart s price cut in 2000. The biggest mistake was that I stopped selling to Wal-Mart in 2005. Why has Wal-Mart been doing so well? Squeezing its suppliers hard is a key. 1/27/2010 Frank Li @Vandy's B & E Schools 11
2 Big Itching Biz Issues IP (Intellectual Property) Microsoft handled this best & has been profiting from it. China invented paper and fire powder. Here is a 2000-year-old Chinese law: For 5000 years, every other country has to pay us (the Chinese) 1% of the sales price for every piece of paper and every bullet purchased. Currency manipulation The U.S. is no better than anybody else on earth. Just ask the Japanese who bought huge properties in the U.S. in the 1990s, only to have to sell them back in the 2000s, on cents out of dollars! $/Yen exchange rate: 1/250 in 85; 1/120 in 95; 1/85 in 09. No real change in trade imbalance between the U.S. and Japan. Japan suffered sustained deflation for 2 decades! Don t expect the same obedience from the Chinese! 1/27/2010 Frank Li @Vandy's B & E Schools 12
Viewing The U.S. from China The U.S. is still the greatest country on earth. The Chinese adore Americans! The U.S. has been in decline for 2 main reasons The other countries are rising. The U.S. made several critical mistakes Internationally: We have damaged ourselves so much (e.g. Iraq & Gitmo) that President Obama was recently awarded the Nobel peace prize by talking [about peace] only not for who he is but for who he is not (George W. Bush). Domestically: Out of control spending and socialism leaning. The Chinese are rightly worried about the U.S. deficit, as they hold a lot of U.S. T-bonds. 1/27/2010 Frank Li @Vandy's B & E Schools 13
2 easy ways to reduce our debt Students (per McKinsey) (http://whatmatters.mckinseydigital.com/currencies/china-s-exchange-rate-policy-and-what-it-means-for-the-dollar) China s foreign reserves: $2.2T Self-financed Chinese students studying abroad 2002: 102,047 2008: 161,100 (= 8% increase year over year). 2018: 348,882 (@8% increase/year) @$60K/year, the total accumulated cost will be $606.8B How big a piece of the pie does the U.S. want? We have the best high-education system in the world! Tourism: Let the Chinese come and visit us That s China s DGP in 1990!!! 1/27/2010 Frank Li @Vandy's B & E Schools 14
DUI: China is doing better The new DUI law in China has been in place for ~1 year and it s hugely effective. Here is how it works (basically): If you drink 1 beer and get caught within 30 minutes while driving, you can be detected (by a breath device) as DUI. You will then be taken to a hospital for a blood test. If confirmed, here are the punishment: Your driving license will be revoked immediately & forever. You will be detained in a multi-star hotel for 15 days and you pay the bill. Your workplace will be notified (which is very humiliating in China) and you will be fired if you are a government employee. Why can t we do something like this? Too many human rights, even for the wrong-doers? 1/27/2010 Frank Li @Vandy's B & E Schools 15
Concluding Remarks The U.S. and China must work together, as China will soon become the 2 nd largest economy on earth (overtaking Japan), let alone the fact that China is our biggest debtor. We can, and should, learn from each other a lot more. Focus on the positives. Do NOT judge things over there too quickly by right or wrong. Instead, take them as just being different 1 st and take your time to digest Visit China and see her with your own eyes: the good, the bad, and the ugly. For undergraduates: How about teaching English in China, as summer interns and via AIESEC (www.aiesec.org)? For graduates: How about working in China for 2-3 years? 1/27/2010 Frank Li @Vandy's B & E Schools 16
Boundary-less Q&A Politics Corporate politics Diversity Entreprenuialship 1/27/2010 Frank Li @Vandy's B & E Schools 17