THE CHINA SYNDROME

Sometimes I am reminded that I've been doing this for a long, long time. Like when I remember an old post on an obscure subject, search it out, and discover that it's from 2005.

Yes, many years ago I wrote about why I was not impressed by the dire predictions from right-wing thinkers about the military growth of China. That old post was mostly an excuse to show a funny video of a shitty Chinese SUV being crash tested and crumpling like a Dixie cup in a 40 mph collision. While no one can question the manufacturing capacity of China, the nation's business and economic culture has yet to show that it can innovate or build things that aren't disposable.

While we don't hear much these days about the Chinese military taking over the world (with knockoffs of 1980s Soviet designs) we do spend quite a bit of time worrying that they will conquer America and the rest of the Western world economically. We constantly fear that they will take not only manual labor but white collar jobs as more Chinese students receive educations identical to their American, Japanese, and European counterparts. Alarmingly, Chinese industry is starting to make inroads into high-tech areas of manufacturing – aerospace, precision electronics, etc. – previously thought to be off limits. Most recently, the media has run a number of alarming "Oh no, the Chinamen are a-comin'!" stories about Chinese automaker BYD, which is set to become the first Chinese car company to go on sale in the U.S. next year with its rumored low cost, long range (~150 miles) electric car.

Here's the problem. Even when they wade into high-end manufacturing, Chinese business culture seems to be built on three basic principles:

1. Steal old designs from Western manufacturers
2. Reverse engineer it down to the last screw, and make a cheap, cut-rate version of every component
3. Assemble a final product without the slightest regard for safety and durability

What comes next is the real golden rule of Chinese business strategy: It doesn't matter how much it sucks because someone will buy it. Someone will always buy it if it's cheap enough. Is that someone the American or European consumer? That's pretty doubtful. It turns out (thanks again, Wikileaks!) that the Warren Buffett-backed BYD isn't much different from other Chinese automakers without American capitalist patrons. The EV design complies with "Chinese intellectual property law" – which, if you know anything about Chinese industry, is about the funniest phrase imaginable. Can it beat a lawsuit in a U.S. courtroom? Oh, and apparently the doors fall off if you slam them too hard.

European buyers have already had a brief experience with Chinese automaker Brilliance Automotive, whose death traps were sold between 2008 and 2010 on the continent. Western consumers will buy a Chinese t-shirt, Chinese plastic crap from Wal-Mart, and even Chinese consumer electronics…because all of those products, even a relatively expensive TV, are considered essentially disposable in our society. If a TV works for 3 years and then craps out, we just buy another one. A car is a major purchase for the non-wealthy (and the wealthy sure as hell aren't going to buy a Chinese compact car) and it's hard to see the market, even if prices are ridiculously low, for cars that work for a year and then give up the ghost.

Then again, that worked for GM, Ford, and Chrysler for 40 years. *rimshot*

Rather than end on that hugely hilarious joke, lest we get carried away mocking the limits of China's ability to conquer the U.S. economically we should note well what the Koreans have done in a very short timeframe. Ten years ago Korean cars – Hyundai, Kia, Daewoo, etc. – were the crap stuck to the bottom of the shoe of the auto industry. In a very, very short amount of time those manufacturers have figured out how to make great products and first Ford/GM and now Toyota & Honda are scared shitless of Hyundai and its avalanche of cheap, high quality products. China could figure things out someday and make a similar turnaround. But until we see some sign of that happening, it's probably safe to scale back the "China's taking over the world!" hysteria.

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31 Responses to “THE CHINA SYNDROME”

  1. ladiesbane Says:

    China is exploiting Africa and South America for raw materials in ways that would make Imperial Britain blush with envy. I worry about their growing dominance in those areas, as well as in tech manufacture and business-to-business services. They are patiently outwaiting India, whose errors are compounding. Cars? Who cares.

  2. HoosierPoli Says:

    In the long run, Chinese cost-of-living will increase to a point where their employee and material costs are no longer a slam dunk against western markets, and outsourcing should stabilize or even reverse. Then again, as the saying goes, "In the long run, we're all dead". Timescales are key.

  3. marcus Says:

    Right Wingers In America: "OMGZ! Don't over-tax! You'll limit the economyzzz"
    Right Wingers In China: "OMGZ! Don't over-protect the earth! You'll limit the economyzzzz!!!

    Lesson: Fuck those fuckers, they're fucking us all up

  4. Nunya Says:

    China is due for a pretty serious bust. Their growth rates are huge and despite the authoritarian government, the workers want a piece of the pie. Wages are going up and labor is actually gaining a voice.

    Bear in mind that the prosperity comes from only the coasts. The rest of China is made up of poorly educated and unmotivated peasants. They are seeing the wealth of the coastal folks and want a piece of it for themselves.

    Let's not forget, of course, that the infrastructure outside of Shanghai and Bejing is ttotally inadequate.

    In short, China isn't going to invade America any time soon. I expect a serious fracture within five years and expect that Japan will probably do a little old fashioned exploitation of the coastal sections when that time comes.

  5. comrade x Says:

    Remember back during the Cold War we Westerners would snicker at those documentaries on the shoddy products of the Commie Countries behind the Iron Curtain?
    Guess what Wal- Mart and Target are importing? And with our ever shrinking wages, guess what we are buying?

  6. nanute Says:

    Yugo? The Chinese model.

  7. a Says:

    I can't wait to see the paltry tariffs on those cars… (Anyone want to compare them the the tariffs on a BMW?) Sorry I am of the mind that a car tariff is a car tariff, but China has us over the proverbial barrel when it comes to tariffs – as in we would not be able to pay back their loans – the natural retaliatory response to our tariffs.

  8. anotherbozo Says:

    Informative post, Ed.

    I'm still trying to figure out if you're being ironic with your representation of the passing years. "I've been doing this for a long, long time… from 2005." Six years is a long, long time?

    Damn kids. Make us old farts seem even older.

  9. Monkey Business Says:

    While Hyundai may seem like a good example of a foreign car company building shitboxes for years and eventually getting them right, there are still plenty of people that remember when they were shitboxes. Now, the problem with starting out building shitboxes is that it becomes part of your corporate DNA. Your engineers, your purchasers, your workers, all get used to building shitboxes, and no matter what you do that shitbox-building culture becomes ingrained in the company, and no matter what you build next, it is still, at heart, a shitbox.

    To give you an idea of where Kia/Hyundai fits in the US market, here's the top companies by cars sold in 2010:
    Chevy/Cadillac/Buick/GMC: 2,202,927
    Ford/Lincoln: 1,842,267
    Toyota/Lexus: 1,717,917
    Honda/Acura: 1,230,480
    Chrysler/Dodge/Jeep/Ram: 1,085,211
    Nissan/Infiniti: 908,570
    Kia/Hyundai: 894.496

    Long story short, I think Hyundai could eventually overtake Chrysler and Nissan, but I sincerely doubt their ability to overtake Honda or Toyota. Best case scenario, they're the fifth largest car company in North America, and half the size of Ford or GM.

  10. Tim H. Says:

    Chinese products seem to suck less every year, American industrial capacity is shrinking. May not be armageddon coming, but it's bound to be unpleasant. Especially for the military.

  11. bb in GA Says:

    I think the views presented about China are correct, but very myopic.

    Let me string some factoids together about them Chicoms…

    1.)They still have trouble employing and feeding their population.
    2.)There is a shift going on from country to city living that exacerbates 1.)
    3.)There is a gender imbalance in Chinese society that derives from their one child policy coupled with selective abortion to produce more sons than daughters.

    If they lose their markets for ‘crap du jour’ because we in the West are choking on our debts, the Chicoms stand a good chance of economically imploding themselves and the government losing control.

    Historically, when there is an impending doom, governments do something expedient like start an international adventure (expansionist war) to relieve the pressure by diverting attention from the situation and rallying patriotism agin’ THEM.

    This route would be especially appealing to a society that has tens of millions of ‘excess’ males with about zero chance of ever having a wife.

    Even in a nuclear exchange, when you have a population of about 1000 million, you won’t miss millions, tens of millions, even hundreds of millions of people.

    That’s sobering

    //bb

  12. Ivan Ivanovich Renko Says:

    I can speak as one who visits China for business pretty regularly:

    1) Heretofore stealing a design and presenting it as their own has been their mode of operation, but there's a change afoot. I work in the tire industry and I can tell you that at least one of their tire manufacturing equipment manufacturers is very close to being first rate, and are working hard to get there. The one company I'm thinking of (and I won't name names but you can probably google them-they have an English website) have leadership who want to be players in the global tire industry, and recognize that they have to "bring it" to be considered as such.

    2) Though they *start* by reverse engineering other stuff, they're perfectly capable of innovating on their own.

    3) They've created an incredible manufacturing capability by exporting, but they are now turning that capability to supplying the home market– and foreign firms (one of which I work for) will have a tough time entering that ENORMOUS market. And man, when I say ENORMOUS, it's not in any way an exaggeration. The "small" city of Qingdao has 8 million people– we won't get into Beijing or Shanghai. I've traveled by road around some of these cities and to some extent into the countryside, and the urban infrastructure is enormous and growing.

    In my eight weeks in China over 2010, I only saw one area that felt the least exotic; otherwise (other than the Chinese characters on all the buildings) you could be in pretty much any Western city.

    Except for all the Buicks, of course. They bloody love Buicks in China.

  13. Hairless in Gaza Says:

    Please don't forget:

    In my childhood (early 1960s), MADE IN JAPAN was synonymous with "cheap-ass junk." By the late 1960s, the transistor radio killed our consumer electronics industry (anybody remember Motorola television sets?) In 1970, the first Toyota Corollas were being sold here for $1970.00, I kid you not; the general reaction was, "How cute! They're trying to make cars now!"

    Around that point, MADE IN KOREA was synonymous with "cheap-ass junk." Wash, rinse, repeat…

  14. The Moar You Know Says:

    What Ivan Ivanovich Renko said. Things are changing there. You wouldn't buy a Chinese car NOW; you might well want one twenty years from now.

    In 1997 I went to Korea for the first time. At the time, all Hyundai sold here was the shitbox Excel, a car so awful that owners of it banded together to sue. Good luck with that, Hyundai is South Korea's largest company. Anyway, I was over there and did I see freeways clogged with Excels? Nope. I saw freeways clogged with big, beautiful awesome Hyundais that were light years ahead of what we were seeing in the states. I couldn't believe it. I asked myself "now, why aren't they selling THOSE here? They'd make a fortune!"

    Apparently Hyundai figured that out as well. It may also be of interest to note that Hyundai cars are 100% union built. Everyone in South Korea is in a union, or so it seems. The results speak for themselves. Hyundais are nice cars.

    China? Interestingly enough, while every car I saw on the road in Korea was made in Korea, that wasn't the case in China at all when I first went there. The most common car back then was the sedan known as the VW "Fox" here in the US, they called it the "Santana" over there. Santanas, microvans, a thing I called "the deadly juggernaut", which was a three wheeled motorcycle-type thing with the exposed engine sitting directly in front of the driver, and the occasional Benz were what clogged their roads. Now, as Ivan says, it's fucking Buicks. They love those goddamn things.

    They also had the most incredible freeway I've ever been on, but that's another story. The Chinese will build a decent car one of these days. It won't be earth-shattering, but few vehicles are – car design is a very conservative practice, and really, there's only so much you can do with four wheels and an internal-combustion engine.

  15. Major Kong Says:

    That's why GM dropped Pontiac and kept Buick – for the Chinese market.

  16. truth=freedom Says:

    My first (OK, only) new car was a 1988 Hyundai Excel. Except for an unfortunate mismatch between its electrical power requirements and the output of its alternator, it was an excellent vehicle. I am of the opinion that Hyundai's real problem was not that they "made crap" from the beginning, but that they allowed a culture of making money to win over a culture of making things that work.

    I see this *all* the time.

    Why just yesterday I learned that my own company is rushing software out the door without testing it so we can meet a schedule. Never mind that the most minimal testing would take only two weeks and it's a beta release that goes to our five most important customers. We're sacrificing quality to appear to get things done on time. It's dumb-dumb-dumb, and the longer it takes to bite us in the ass, the more likely we'll be to assume that we're doing good work and don't need to sweat the small stuff. Appearances are all that matter, so if it compiles, we should ship it….

  17. evrenseven Says:

    I'll give you a great example of what you're saying: My buddy does the logistics for moves of server farms; when to shut down which servers for minimal impact on service, contracting for the physical labor, providing backup services, etc. He's been in China for SIX MONTHS because no one there can figure out how to put a plan together to move a building of servers. Of course he can contract for 800 people to show up and carry these things on their backs for $1/ day, but out of 2 billion people, they have to hire someone from the Silicon Valley to go put the project together.

  18. Chicagojon Says:

    Personally I'm looking forward to flying in a China developed and produced C919: http://www.bbc.co.uk/news/business-12684919

  19. Middle Seaman Says:

    Our DNA is the same that every other country has, China included. China has currently a population problem and a catch up problem. They will catch up eventually. The market is just about open. We already suck compared to German engineering, Swedish medicine, Japanese precision, Indian software and services and there is more to come since we are going downhill quite fast.

    If you worry, why worry about the Chinese only? How about Brazil, Canada, Israeli hi-tech, etc. Everyone is progressing, even the long dormant Arab world already gave us a lesson in democracy (Egyptians) and the unions were delight to follow it in Wisconsin.

  20. jjack Says:

    Although you have pointed out the plethora of problems facing China, one thing to note is that they seem to actually take their problems seriously and attempt to do something about them. They are starting from a pretty far-behind starting point, but are on a generally upward trajectory. We are starting from a relatively advanced position and trying to see how fast we can decline.

    If they ever do "take over the world" it will be because we think that all the things that they're doing *right* are somehow the cause of our problems (investing in infrastructure, social programs, technologies…public education…people belonging to unions…)

  21. don't know Says:

    @ The Moar You Know:

    South Korean Trade Union Density is about 10%, lower than the U.S.

    Source: http://stats.oecd.org/Index.aspx?DatasetCode=U_D_D

    Hyundai cars may be 100% union built in Korea (google was no help on this), but they I would bet a whole lot they are not union built at their plant in Alabama that makes Sonatas and Elantras.

    I'm pro-union, just saying that our impressions don't always meet reality.

  22. JazzBumpa Says:

    Of all the divergent views expressed here, I find myself in general agreement with most of them.* My biggest disagreement is with Middle Seaman. The Germans, Swedes and Japanese may be better than us, but the differences are incremental. We definitely do not suck.

    Moreover, Indian software and services are not better than ours. In fact, they are far worse. What they are is CHEAP.

    Three to four years ago, the U.S. auto industry was in a god-damned uproar to get components supplied from India and China. Two years ago they fucking gave up. First off, the savings (which is what drove this nonsense) weren't worth it, and second, they made shitty shit, had NO concept of quality and automotive safety, and totally failed to comprehend what standards and contractual obligations actually mean.

    Long run, China is not going away, and they will have to be reckoned with. Short term, they still make shitty shit. Medium term, there will be a stumble. Whether it is some relativity minor adjustment or a major collapse remains to be seen. Either way, it will be painful, and more than just locally.

    They do have a lot of disposable people . . .

    Not feeling good about this,
    JzB

    * including bb in Ga. Mark this day on your calendar.

  23. Ike Says:

    Hey BB. The Chinese have never in the last 5000 years been expansionist militarily beyond their immediate geographical area. (Yeah, I know about Zheng He. He was mostly interested in diplomacy and trade)

  24. Hawes Says:

    You should check this recent take on China will take over the world. Saw it today on CNN.

    http://zombieland-nowbrainfree.blogspot.com/2011/03/bad-ads.html

    The ad link is at the bottom.

  25. Jacob Davies Says:

    The whole China thing is 1 part hilarious, 1 part terrifying, and 1 part awesomeness.

    It is very very similar to what happened with Japan with the slight difference that China has 10x as many people as Japan and therefore instead of competing with the US for its internal market the way Japan did, China has essentially submerged the US internal market for low-end goods by bringing massive economies of scale along with some nice cheap labor.

    However as several people have noted, China is now exceeding its own natural resource production considerably, has overshot its food supply considerably, has overshot its environmental constraints, has a low-end workforce that is rapidly expecting their share of the Western-type prosperity they see certain people around them enjoying, and

  26. Jacob Davies Says:

    [oops, misclicked]

    and therefore is going to have a wage/inflation crunch and stop being the low-wage factory of the world in a very short period of time.

    Then they get to have a Japanese-style aging population crunch as well.

    So they have some issues.

    Where we're going to get to not very long from now is a situation where the majority of the world's population expects to sit at a desk in a nice air-conditioned office playing Farmville and living in a 1,500 sq ft house with their two cars and still enjoy all the manufactured goods that we have come to know and love, and a shrinking fraction of the world will be available to actually make all that shit.

    Which is going to be good news for workers in the developed world who are going to look a lot more competitive, and also good news for workers in the undeveloped world at that point – which is gonna be Indonesia and sub-Saharan Africa mostly – and before we know it the whole fucking world is going to want a job where they can play Farmville all day and still have a BMW in the driveway, and we're either gonna have robots make all that shit or have massive inflation in the price of goods and we're going to look back on the era when there was a Texas-sized slice of China's industrial output being shipped to us in exchange for imaginary money as some kind of strange magical golden age, as we sign another $50,000 check to the car mechanic who has us over a barrel because decades of Farmville didn't do anything for our mechanical skills.

    Well, maybe.

  27. vegymper Says:

    from China-exploited South America, here where we grow soybeans to feed them fatter, I find particularly interesting the discussion about China, with its little bit of fear-cum-high-browed-scorn… and especially when it comes to cars, OH CARS, OMG, the most wonderful creation in history. I wonder what kind of cultural/anthropological effort would demand to an American to imagine a world where cars are just things, and not symbols of all that is American…

  28. wetcasements Says:

    It's already been mentioned, but South Korea basically copied Toyota to become what they are today. Granted, they did it in a relatively short period of time. It took Japan a bit longer to go from crappy small electronics to the Toyota/Honda standard of excellence.

    I think China has other problems, but there's no reason (given some time) a copy-cat can't become king of the hill when it comes to cars and electronics (hardware).

    Now software? In my completely non-expert opinion, Asian countries will never be in the same ballpark as American companies. I live in Korea, and the idea that a person who makes a new program gets to own and/or get rich off of it is just completely alien. It's kind of funny to see such wide-spread piracy here (I work at a respectable Korean university, and everybody is using pirated copies of Windows, as do the local government offices) but in the long-run this will kill actual innovation. If you're a smart software designer, why would you stick around in Asia just to get ripped off? America has problems, but the culture certainly rewards those who want to get paid off indivdiually, and not as a small cog in a big company.

    It goes hand-in-hand with the larger attitude to copyright and intellectual property, i.e., they don't exist. When one of my students needs a textbook he'll just photocopy the entire thing, god forbid he actually buys a new one. When I did some moonlighting a taught an extra college course of 30 students I told them what book to buy. They went to someone at the university itself and paid five dollars for 200-page Xeroxed texts.

    I try to discourage this but they just laugh at me. And the situation is much worse in China.

  29. Paul W. Luscher Says:

    Sorry, sir, some of this sounds like the snark that used to be directed against the Japanese.

    I am a photography afficionado. While the camera I use is a Japanese brand, the camera itself was made in China. And I would have to say that the build quality and reliability are very good…just as good as anything made in Japan.

    Anecdotal evidence to be sure, but I think you're painting with a broad brush when you say the Chinese can't build anything "that isn't disposable," and that they assemble products without "the slightest regard for durability."

    So I'd be little careful about denigrating the Chinese giant. I 'm old enough to remember when "Made in Japan" was supposed to mean cheap and shoddy…except that now, our cameras, our consumer electronics, and a good number of our autos are…"Made in Japan"….

  30. Prudence Says:

    I'm a bit late to this party, but having spent a lot of time in China, I can tell you that your view of the car industry there is very limited. The Chinese aren't schmucks- for example, they did a joint venture with VW- after 10 years, the Chinese partners keep all the profits and make all the cars. This has already happened.

  31. bb in GA Says:

    Ike:

    I am ignorant of Chinese history relative to expansionist war.

    Thanks for the 5K year heads up. My only fig leaf here is that I was repeating the general behavior of goernments in trouble – 'start a damn war, quick' and applying it to this case as a hypothetical.

    //bb