Nothing succeeds like success.
Even in China, where the iPhone is not yet officially available, there has been a lot of enthusiasm for the Apple iPhone, and the halo is spreading to other Apple products too, starting with the iPod, and spreading to other computer products. However, if you visit Apple’s China website, there is no mention of the iPhone.
Apple should take a leaf from Hollywood, which over the past few years has shifted to a model of launching new movies in all major markets on the same day. This saves marketing costs and maximizes media and user buzz, which travels over the Internet and text networks at very fast speeds.
“Get your product marketing act together and your new product launches together guys! The US market is not the only market in the world. If you don’t, you are leaving money on the table! People in China and in other countries want new Apple products, and they want them NOW.”
A major economic effect of the debate over China outsourcing which has not been mentioned is that it has helped US companies boost their margins, and most of all, the American economy, keep prices stable even though money supply has grown. Many of these US corporate profits have found their way into hedge funds, fueling a liquidity bubble.
Economics teaches us that the more money is issued by a central bank, the cheaper it becomes. In this respect, a currency is just like any other product or commodity; the more available the less value it has unless it is offset by an increase in demand.
In today’s US economy, money is not created just by the central bank, it is also created with credit instruments, such as credit cards, which shift the responsibility for credit creation to the individual and away from the banks. When the economy is growing and everything is going fine, no problem. But when times change, such as with the subprime mortgage problems in the US, things can begin to turn ugly quickly.
The global economy in general, and the US market in particular, have gotten a free pass from price inflation, largely because of China outsourcing. Chinese suppliers, and the Chinese government, with their seemingly limitless willingness to take devaluing US dollars, and to hold their manufactured products’ FOB prices, have in fact protected US consumers from price inflation.
How do we know?
Let’s take a look at the exchange rate between the euro and US dollar, two major currencies which are freely traded on currency markets with a minimum of government interference, unlike the RMB, which is traded within a government-set band.
Google Finance tells us that the euro has risen 22.09% against the US dollar since Sept. 2003. This means that if the RMB was allowed to rise, as many in the US congress and media have requested, then Chinese product prices would rise considerably, hitting American consumers in the pocketbook at a time when many are already facing a credit pinch. Without a doubt, many more Americans would be pushed into bankruptcy by such a move.
When price inflation hits, it usually first manifests itself in commodity prices, such as oil and metals. These are the raw materials of manufacture, which are processed into other materials which find their way into the supply chain. And now, the US is facing increased competition for these commodities, mostly from China and India, resulting in higher prices. For this reason, Jim Rogers, who has been long on China for ages, believes that commodities are a sure-fire investment, going so far as to write a book, “Hot Commodities, How Anyone Can Invest Profitably In the World’s Best Market”, on the subject. Normally, these higher commodity prices would be passed down the chain, who would eventually pass it down to consumers.
US importers have been lucky keeping prices in check by pressuring their China suppliers on price, and sometimes by switching to other suppliers. Most of these Chinese suppliers are operating on very thin margins, since they face higher material costs, and now in China, labor shortages as well.
Facing these pressures and falling margins, it is common for Chinese manufacturers to lure in new suppliers with low unit prices to secure the customer, then to either 1) gradually raise prices or if that fails, 2) to cut back on quality.
So far, American importers have been able to hold the ground on prices by pressuring their suppliers, and sometimes by switching to new suppliers. Common sense tells us that manufacturers cannot indefinitely manufacture at a loss; something has to give. This is the economic context within which everyone is operating.
When that happens, prices will rise and inflation will raise its ugly head again.
Paul Midler has written an excellent article ‘Quality Fade: China’s Great Business Challenge’. Midler, who is founder and president of his own outsourcing firm, China Advantage, discusses what he calls ‘Quality Fade’ in China.
In the article, he talks about how how Chinese companies almost consistently fail when it comes to improving the quality of their products and services. Most of the time, this happens when after securing an overseas buyer, the manufacturer cuts back on quality materials. For the overseas buyer, this creates a dilemma. He/she has jumped through hoops to find a supplier, so he really doesn’t want to change manufacturing suppliers. So in a way, he really ends up trying to cover the weaknesses and shortfalls of the manufacturer’s products. This creates a downward spiral in quality, until something dramatic happens, such as a product recall, or in the worst case, even deaths. In a globalized world, this leads to a public relations disaster of global proportions, affecting not only Chinese consumers, but consumers all over the world. In the US, which is now going through the runup to the 2008 elections, China (whatever that is), has become the demon of choice among TV commentators such as Lou Dobbs (who always refers to the country as “Communist” China. After all, he’s got to hit those American fear words).
Midler makes the point that quality does not always rise over time. The example he raises was that Chinese silk was known for its quality in the late nineteenth century, but it was then overtaken by the Japanese. By 1930, Japan was exporting twice as much silk as China. As he puts it, the Chinese start out well, and “the initial production sample is fine, but with each successive production run, a bit more of the necessary inputs are missing.”
So what is the cause of quality fade? Midler says “The factory owner who practices quality fade knows exactly where he stands with his customer in these cat-and-mouse games. He has virtually nothing to lose and only margin to gain — and, having gotten away with it once, no one should be surprised when he goes for it again. When the factory owner offers his most sincere apologies and promises that it won’t happen a second time, importers simply close their eyes and hope for the best.”
In 1986, David Halberstampublished an excellent book The Reckoning. In this book, Halberstam looked at how a small Japanese manufacturer, Honda, took a Detroit giant, Ford, and won over consumers by creating a culture of quality and continuous product improvement. At its time of publication, the book spurred a renewed interest iin the US in product quality improvement. This took form in the Malcolm Baldridge National Quality Award, the only quality award in the US handed out to corporations by the US president.
So what makes for quality? Most importantly, a corporation must make a thorough commitment to quality from the top down. At Toyota, it means that any floor worker can stop the manufacturing line anytime they discover something wrong without suffering recriminations from management. In fact, they are rewarded for their actions, and are asked to share their knowledge about what they learned.
While Lou Dobbs can blame “Communist Chinese companies” for shoddy workmanship and quality, the fact is that there are many companies in China which make excellent quality products. Their names are Toyota and Honda, just to name a few.
In the past few years, the Chinese government has put its strong support behind creating Chinese global brands. It would do well to everyone in China to study how global brands became popular, by creating great brands and offering great quality products which excite consumers.
The true way to making great Chinese brands is competing on quality and design, not on cost. This change has to come about from a commitment from the government such as Lee Kuan Yew did in Singapore, and from Chinese business owners.
It is high-time for Chinese to invest and believe in China, instead of going for the quick buck.
This blog will cover China, business, economy, the Internet and technology. In short, it will cover most of the things which I find interesting. I hope that you will find the views expounded here different, maybe even unique. And I hope that you can participate in the conversation too.
After all, that’s what blogging is all about.