East Beats WestEast Beats West The Rise of China & It’s The Rise of China & It’s

Implications for the U.S. Economy Implications for the U.S. Economy & HR Professionals& HR Professionals

Two GoalsTwo Goals

1.1. A Quick Overview of the 2007 A Quick Overview of the 2007 Economy & U.S. Housing MarketEconomy & U.S. Housing Market

2.2. Discuss How the Emergence of Discuss How the Emergence of China Will Affect HR Professionals in China Will Affect HR Professionals in the Coming Decadesthe Coming Decades

A Review & Preview A Review & Preview of the U.S. Housing Marketof the U.S. Housing Market

In Two Power Point SlidesIn Two Power Point Slides

LAST YEAR

THIS YEAR

!!!!Reduced!!!!

The 2007 OutlookThe 2007 Outlook

Falling Oil & Commodity PricesFalling Oil & Commodity Prices Moderating Inflation Moderating Inflation Low long-term interest rates & Low long-term interest rates &

mortgage ratesmortgage rates A global economic boomA global economic boom

• Asia on fireAsia on fire• Germany out of doldrumsGermany out of doldrums• Latin American SambaLatin American Samba

The U.S. War EconomyThe U.S. War Economy

The 2007 OutlookThe 2007 Outlook

Soft Landing for the housing and Soft Landing for the housing and auto sectors?auto sectors?• Maybe – the global warming effectMaybe – the global warming effect

An endlessly resilient consumer?An endlessly resilient consumer? Growth in the 1.5 to 2.5% range?Growth in the 1.5 to 2.5% range?

• Depends on whether China will finance Depends on whether China will finance U.S. “twin deficits”U.S. “twin deficits”

The Budget DeficitThe Budget Deficit

The Trade DeficitThe Trade Deficit

The Chinese Dollar DilemmaThe Chinese Dollar Dilemma U.S. tax cuts put money directly in the hands of U.S. tax cuts put money directly in the hands of

U.S. consumersU.S. consumers The Fed’s easy money policy coupled with The Fed’s easy money policy coupled with

Chinese currency manipulation stimulates a boom Chinese currency manipulation stimulates a boom in re-fi cashoutsin re-fi cashouts

Flush U.S. consumers go to Walmart and binge on Flush U.S. consumers go to Walmart and binge on cheap Chinese goodscheap Chinese goods

U.S. dollars build up in Chinese banks.U.S. dollars build up in Chinese banks.

The Asian Dollar DilemmaThe Asian Dollar Dilemma Chinese recycle dollars back into U.S. treasury bills Chinese recycle dollars back into U.S. treasury bills

to prevent the dollar from weakeningto prevent the dollar from weakening Koreans, Japanese and Taiwanese forced to do the Koreans, Japanese and Taiwanese forced to do the

same thing same thing A flood of Asian capital keeps long term interest A flood of Asian capital keeps long term interest

rates and mortage rates lowrates and mortage rates low What happens when China stops accommodating What happens when China stops accommodating

our consumption?our consumption?• Soaring interest rates & InflationSoaring interest rates & Inflation• Housing market collapse?Housing market collapse?• Recession?Recession?

A China PrimerA China Primer

China vs. the U.S.China vs. the U.S.

Roughly same geographic area Roughly same geographic area Almost five times the populationAlmost five times the population Less cultivatable/habitable landLess cultivatable/habitable land

The Chinese EconomyThe Chinese Economy

10% GDP annually since 198010% GDP annually since 1980 Economy has doubled three timesEconomy has doubled three times Over 100 cities with more than 1 Over 100 cities with more than 1

million peoplemillion people

The World’s Factory FloorThe World’s Factory Floor

>70% of DVDs & toys>70% of DVDs & toys >50% of bikes, cameras, shoes, >50% of bikes, cameras, shoes,

telephonestelephones >1/3>1/3rdrd of air conditioners, color TVs, of air conditioners, color TVs,

computer monitors, microwave ovenscomputer monitors, microwave ovens Dominant in furniture, jeans, Dominant in furniture, jeans,

refrigerators, washing machines, refrigerators, washing machines, underwearunderwear

The “China Price”The “China Price”

Wages 39.41%

Export Subsidies 16.71%

Network Clustering 16.02%

Undervalued Currency 11.44%

Counterfeiting & Piracy 8.63%

FDI 3.09%

Health & Safety 2.44%

Environmental 2.26%

TOTAL 100%

Weapons of Mass ProductionWeapons of Mass Production

Wages < $1/hrWages < $1/hr Unemployment rate >10%!Unemployment rate >10%! 300-500 million peasants waiting in 300-500 million peasants waiting in

wingswings

Industrial Network ClusteringIndustrial Network Clustering

Entire cities specialize in industry or Entire cities specialize in industry or segmentsegment• Leilu (bicycles), Yanbun (underwear), Leilu (bicycles), Yanbun (underwear),

Hongmei (textiles)Hongmei (textiles) Reduced transportation costsReduced transportation costs Huge supply chain efficiencies & Huge supply chain efficiencies &

information externalitiesinformation externalities

FDIFDI

>$60 billion a year>$60 billion a year• U.S., Japan, S. Korea, Taiwan, Hong U.S., Japan, S. Korea, Taiwan, Hong

KongKong Latest technology = lowest cost Latest technology = lowest cost

productionproduction Latest management techniquesLatest management techniques Mercantilist aspectsMercantilist aspects

• Round tripping of capitalRound tripping of capital• Lax regulatory environmentLax regulatory environment

China’s 21China’s 21stst Century Mercantilism I Century Mercantilism I

Blatant currency manipulatorBlatant currency manipulator• 20-40% undervalued20-40% undervalued

Flagrant violations of WTOFlagrant violations of WTO• Export subsidiesExport subsidies• Cheap energy, land, capital Cheap energy, land, capital

China’s 21China’s 21stst Century Mercantilism II Century Mercantilism II

Counterfeiting & PiracyCounterfeiting & Piracy• The World’s Pirate NationThe World’s Pirate Nation• Not just DVDs and Louis VuittonNot just DVDs and Louis Vuitton

Environmental & Health/Safety Environmental & Health/Safety StandardsStandards• World’s most polluted nationWorld’s most polluted nation• World’s most dangerous workplaceWorld’s most dangerous workplace

The Environmental Scorecard IThe Environmental Scorecard I

16 of 20 most polluted cities16 of 20 most polluted cities Largest SO2 emitterLargest SO2 emitter Second largest CO2 emitterSecond largest CO2 emitter ¼ of mercury pollution¼ of mercury pollution Regional: Acid rainRegional: Acid rain Global: Chinese “chog”Global: Chinese “chog”

The Environmental Scorecard IIThe Environmental Scorecard II

70% of rivers polluted70% of rivers polluted Half of population exposed to water Half of population exposed to water

contaminated by human wastecontaminated by human waste Liver & stomach cancers an epidemicLiver & stomach cancers an epidemic Red tide risingRed tide rising

The HR NightmareThe HR Nightmare

China’s March Across the Value China’s March Across the Value ChainChain

AssemblyAssembly ProductionProduction DesignDesign R&DR&D

China’s March Up the Value ChainChina’s March Up the Value Chain

Tube socks Tube socks TVsTVs AutosAutos Biotech & PharmaceuticalsBiotech & Pharmaceuticals Aircraft & ShipbuildingAircraft & Shipbuilding

HR ImplicationsHR Implications

Permanent Wage & Job ShocksPermanent Wage & Job Shocks• Depressed wage levels for several Depressed wage levels for several

decadesdecades• More Limited Job OpportunitiesMore Limited Job Opportunities• Less permanent employmentLess permanent employment• Even “local” industries like real estate at Even “local” industries like real estate at

riskrisk

Solutions?Solutions?

U.S. lives within meansU.S. lives within means China abandons mercantilist policiesChina abandons mercantilist policies A day of reckoning is likely aheadA day of reckoning is likely ahead Don’t fall in love with China!Don’t fall in love with China!

The Well-Timed Strategy The Well-Timed Strategy

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