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Many people would think that trading raw materials is mutually beneficial between countries. The US economy depends on profiting globally, and we understand the benefit of using cheap labor in foreign countries through FDI. However, what happens when a state financed enterprise in China strategically buys up raw materials like iron and petroleum. I am not just talking about an even percentage, I mean “greater than 90% of the world’s raw supply of iron” and complete control over the U.S. petroleum supply.1 Fortunately, the US government noticed what they were up to and made it illegal for another county to purchase a controlling interest in the U.S. petroleum supply. On a side note, it was only five years ago that the North Korean government financed a massive plant to produce billions in counterfeit U.S. currency. Everyone knows that the U.S. military forces are superior to any other country, but there is one thing that we do not have. China has a “population of 87 million exceeds most European nations”.2 Many of these people are living in less fortunate conditions. You might even assume that they would prefer a better life, and the right leader could influence them to do so at the expense of other nations.
We are vastly out numbered, so what makes our military forces superior?

The answer is technology, industry, petroleum, and iron. Technology is always either for sale, or it can be gathered through espionage. China can buy the same level of technology from intermediaries or allied governments. Industry can be built with economic growth. Currently China is the number one growing economy in the world. It nearly controlled our petroleum supply domestically and failed, so China decided to buy petroleum from Saudi Arabia through German intermediaries. Now our gas prices are going through the roof and stock analysts are saying its some kind of market fluke created by a belief that oil prices will continue to soar.

Iron, the main export that I would like to discuss, is five times its original price four years ago when China started buying up the world’s supply of raw iron. Right now, they are using this iron to create cranes and other machinery to export to the US and other nations, but most of the iron is being stockpiled in China for future use. What future use? We can only speculate. Why would China stockpile their ever-increasing supply of iron and still buy more, regardless of the price (literally)? What big plans do they have for such an immense stockpile of iron? Aren’t bullets, guns, factories, and tanks made out of iron? Absolutely, here is a piece of an article on the Chinese economy.

“In recent years China’s booming economy, fueled by large inflows of foreign direct investment (FDI) and rapid export growth, has emerged as a significant force in the global economy. This year, China surpassed the United States as the world’s largest recipient of FDI, and its bilateral trade surplus with the United States reached $117 billion in the 12 months up through August 2003. Both inward investment and export growth create strong demand for China’s currency, the Yuan. All things being equal, such demand pressures should cause the Yuan to appreciate relative to the U.S. dollar and cause China’s external position to return to balance.”3

Since China is the number one growing economy on the planet, they also have the number one growing currency relative to the US and other nations. Everyday China is become more industrialized. They used to be a purely state controlled economy, but they are starting to develop into more of a free economy in some areas. Overall, they are not shutting down as many businesses that do not pay the government officials regular bribes, which is definitely a move in the right direction.

The US wants to encourage free trade with China because of their enormous population. This means that US companies would have access to a huge new market of consumers. It also means improving the quality of life in China. It is also widely known that many native Chinese women perform acts of prostitution or marry solely to support their family. It is also common in China to see people walking barefoot because they cannot afford sandals, or seeing people including children who are starving. China also has more than 300 organized crime syndicates with a history that goes back to the Shaolin Monks. China is a desperate nation, so desperate that they engage in foreign currency scams to inflate the value of the Renminbi (pronounced Yuan). In 2000, the exchange rate was 8.3 Yuan per U.S. dollar. Today, the exchange rate is 7.6 Yuan per US dollar. Here is the second piece of the article above.

“But all things are not equal: China pegs the Yuan to the dollar at a fixed rate and strictly regulates imports and the allocation of foreign exchange. In order to maintain the Yuan’s fixed value, China must create a residual supply of Yuan to counter growing demand for its currency; China achieves this by buying dollars in foreign exchange markets. Between December 2000 and July 2003, China more than doubled its foreign reserve holdings from $168 billion (16% of its GDP) to $361 billion (31% of its GDP).”4

“How should the United States respond? On nine occasions between 1988 and 1992, the U.S. Treasury found that similar external surpluses accompanied by much smaller accumulation of foreign reserves constituted evidence that countries—including China—were manipulating their currency’s value for competitive trade advantage. When such a finding is made, U.S. law requires the Treasury Secretary to undertake negotiations to end such manipulation. Current evidence indicates that China is engaged in just such a manipulation of the Yuan for competitive gain.”5

Today, foreign “investment, combined with China’s swelling export earnings, have pushed the country’s foreign exchange reserves beyond $600 billion”.6

One thing that I learned from experience is that desperate people and people that try to steal from others generally cannot be trusted. This is why, among all the other evidence I provided above, I do not think we should let the Chinese government do whatever they want. They should not have a majority of the world’s iron, petroleum or our country’s economic and physical security in the palm of their hands. What good are tanks and supply trucks that do not have gas? This may seem silly today, because we are not at war with China.

In support of this opinion, many nations like Japan learned long ago that warfare in the physical sense is foolish and destructive, because it diminishes the productive capacity of the nation unless they can build new factories just as fast as their enemies can blow them up.

Today, the real modern warfare is economics. If China shuts down U.S. companies that depend on buying iron at a certain price in order to earn a profit after U.S. labor costs, then they take our market share and our productive capacity depends on whether China will sell us what we need. Prices are good today because Chinese labor costs are low, but it will not stay that way according to economic theory. Eventually the FDI, which exceeds our nation, will create even more jobs and economic prosperity in China. The end-result will increase wages, and hopefully it will improve working conditions.

However, if China does not sell to us anymore and they do the same bullying routine in other international markets, then we could be at a serious economic and military disadvantage. Should we trust China and believe that they want to change for the better? Here is an article that may shed some light on that question.

“China wants to suspend human rights talks with the United States. The news came after Washington said yesterday that it will condemn Beijing’s serious violations with a resolution at the UN Human Rights Commission currently underway in Geneva. The Chinese foreign minister called the action taken by the Americans a ‘serous meddling in China’s internal affairs.’ China’s Vice Foreign7 Minister said the ‘clash intentionally provoked by the United States has now seriously damaged any basis for dialog and discussion on human rights issues between both countries. China must immediately suspend talks and discussion.’ Yesterday, US State Department spokesperson, Richard Boucher, expressed the American government’s disappointment with Beijing’s inadequacies in improving human rights conditions in the country, after commitments it undertook in 2002 and 2003. Boucher also stressed Washington’s concern about ‘backward steps’ being taken by China, as reported in the American government’s world human rights report released last Feb. Last year the United States asked for a resolution, stating that Beijing had made limited, though significant progress in the sphere of human rights. The resolution was presented each year after the brutal repression of the student protestors in Tiananmen Square in June 1989. This year various human rights organizations, like Human Rights Watch, asked that the United States to put back a motion to blacklist Beijing. Even American trade union representatives requested that their government condemn China for the way it trades its labor force. Meanwhile Amnesty International called for a moratorium on the death penalty on China, reporting that the Chinese legal system does not guarantee fair trials and often punishes innocent persons. Yesterday the AI published a report titled ‘Executed according to law?’ ‘The report was released following statements made by a member of Chinese Parliament who said that every year there are at least 10,000 people sentenced to death in China 5 times more than all cases of capital punishment registered worldwide’.”8

The Chinese people are very much like our own with the exception that they communicate more through context and women are not valued very highly in their society. They also have four different cooking styles based on the four different regions. They speak different languages in each region, and they have a wide array of different traditions based on the former cultures that lived there before. China does not tolerate freedom of speech and they frequently kill anyone who is suspected on saying negative things about the current government. There is no defense or
fair trial, and basic human rights are not valued by their government. Their economy is state controlled, but they are slowly changing into a free enterprise economy.

I think that trading with China is mutually beneficial as long as they are not buying up significant amounts of raw materials that affect our national security. After the “911 attacks on New York and the Pentagon”, security measures at the ports are very strict in the US.9 The Port of Tacoma and the Port of Seattle have cameras, tall fences, and security personal strategically placed. They also conduct more customs inspections than before, and canines are commonly used to find people and contraband. The US also has a satellite system that detects nuclear radiation, infrared (heat signatures), records and filters every electronic conversation in the US, and video records the activities of the world’s ports. They also pay very close attention to refrigerated and abnormally heavy containers for biological weapons and shielded nuclear material.

China does not perform any significant security measures other than custom inspections accompanied by armed guards. Custom inspectors frequently accept bribes to expedite export and import processing, which creates a huge delay for companies who did not pay bribes or paid less. Dogs are also used for detecting contraband, but they use german sheppards instead of beagles. German sheppards are know to be effective in chasing down people and enforcing security. However, beagles have two hundred times the ability to smell contraband. This means that their port security is seriously lacking unless they physically inspect every crate, which they do not normally do whenever a bribe is taken to expedite the customs process.

Recently, the Port of Tacoma purchased three cranes from China to unload containers off the ships. They purchased scrap iron from suppliers in Washington State, melted the iron down, manufactured the cranes, and sold them back to us for less than domestic companies could make them.
Inventories of iron are currently state managed and exceed “70% of iron imports internationally”.10 US laws regarding customs are identified as governing security measures domestically. Otherwise, maritime laws apply to shipments.

The political ramifications of cutting off certain resources to China will make them an enemy. In order for the US to be effective at cutting off the massive purchasing campaign of iron by China, it will need allies who are all the current trading partners to do the same thing. However, this would also make them enemies of China, and suppliers are becoming very wealthy by selling their raw materials for a higher price to China. This means that international trading partners must have a significant reason to cut China off or limit them other than the US’s economic prosperity.

Culturally we also have to consider that the Chinese want a better life, and they want independence. It is unlikely that the US will be able to push the Chinese government into giving their people human rights without completely replacing their government or waiting a significant number of years for their human rights policies to catch up with the rest of the civilized countries in the world.

Geographically, China has taken over Hong Kong, which is the largest shipping location of Chinese imports and exports. The decision of the Chinese government to take over Hong Kong assures their ability to distribute goods internationally without major changes in worldwide distribution. Economically, we must understand that China has a lot to offer in terms of cheap labor and outsourcing, but it may come with a steep cost in the near future.

Letters of credit are guaranteed by international banks in Malaysia and China based on current deposits. This insures payment on receipt of goods for both imports and exports. The global marketing process for government contracts is the same as it is in the US. Foreign bidders are required to send a proposal to the government authority issuing the contract. Whether they choose to buy or not from a foreign source is a balance between price driven economics and supporting local companies.

China has no restrictions on the treatment of their employees, the ages of workers, the hours they work, the healthcare of employees or their working conditions. US employers must abide by laws concerning the treatment of minors, paying overtime, paying wages, paying health and unemployment benefits, discrimination, etc.

Foreign investment in China is carefully controlled in specific sectors and industries. Foreign investment in the US is allowed as long as it does not negatively impact our national security. This is why the US government stopped China from purchasing a controlling position in the U.S.’s primary oil supplier. However, it is almost a guarantee that they will try again.

If you choose to do business in China, please carefully consider the implications of your actions. Making a great profit is very important, but it can never come at the expense of our lives, the lives of our children or the world’s stability and security. I think the world has a great opportunity everyday to change for the greater good, maybe our enemies will decide that building a better world for everyone is better than petty arguments over land, money and religion.

Bibliography
Flannery, Russell. At Your Service, China! New York, NY: Forbes, 2007

Goodman, Peter S. China Ends Fixed-Rate Currency. Washington DC: Washington Post, 2005

Hersh, Adam S. China’s currency manipulation and U.S. trade. Washington, DC: Economic
Policy Institute, 2003
http://www.epinet.org/content.cfm/webfeatures_snapshots_archive_10302003se

Hill, Charles W.L. Global Business Today 5th Edition. New York, NY: McGraw-Hill Irwin,
2008

R., M. Beijing suspends human rights talks with United States. Geneva: Asia News, 2004
http://www.asianews.it/view4print.php?l=en&art=524

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Insight

Trade exchange between different cultures and countries has long yielded rich rewards for those who recognize the potential.

After all, as far back as the 1st century BC, merchants and caravans followed the Silk Road – the overland trade route from northern China to the Western World – and brought precious silks, tea and other resources from China to the rest of the world. Not only did linking different countries and cultures prove profitable, but new and greater products and ideas flowed between the countries.

The Silk Road of the 21st century is technology driven. This trade exchange, built on fiber-optic cable, sprang from the Telecommunications Act of 1996. Now, it is the R&D departments of companies from the United States and other countries that benefit from the resources and opportunity found in China.

Today’s China, the fastest growing country in the world, offers the:

• Biggest engineering talent pool

• Biggest emerging market

• World’s number one manufacturing industry

Strengthening ties, country-to-country, people-to-people, has shown time and time again that remarkable achievements, that otherwise would have been impossible, can come to fruition.

Long Circle urges you to explore the opportunities that exist in China today, especially if your business focus is embedded systems technologies for software and hardware.

With our global reach, we could see the importance of China, and we have grown significantly in the past five years in this critical market. Today, we have $5 billion in revenues and 12,000 employees.

GE 2005 Annual Report/

Letter to Stakeholders

Biggest Engineering Resource Pool

The last few years have convinced Fortune 100 companies and start-ups alike that China, home of the fastest growing economy in the world, is key to achieving their strategic plans, as well as the business objectives of their R&D departments. GE, Microsoft, Motorola, Intel, Nokia, Oracle, and SAP are just a few of the multinational companies with R&D operations in China, and for some important business drivers:

o Lower costs

o Lower wages

o Expanded productivity

o Reduced time-to-market

o Strengthened R&D embedded technology engineering resources

Wages are lower offshore, there’s no question about it, but the experience the workforce has must be in product research and development, not IT. With China’s deep pool of engineering talent, especially R&D embedded technology engineers, companies can expand and strengthen their R&D resources.

For example, the Microsoft Research (MSR) Asia lab has engineers working on a wide range of advanced technologies – from spoken-language technologies such as automatic speech recognition to face detection and tracking, face modeling and recognition, cartoon generation, image and video retrieval for MSN, and Xbox camera-based game interfaces. According to Forbes, Microsoft’s investment in all China-related R&D activities is approximately $100 million US dollars annually. In addition, with currently more than 800 employees in China, Microsoft is predicted to grow that number substantially over the next three to five years.

Biggest engineering talent pool; most engineering graduates each year

Engineering Graduates China India United States

Source: Duke University*352,000 112,000 137,000

Source: Unknown ** 600,000 350,000 70,000

*Source: A study released in December, 2005 by Duke University (and also widely quoted in the media, including The Christian Science Monitor) citing the number of engineering graduates in each country yearly.

* Note: Statistics widely quoted, from Fortune Magazine to Senator Ted Kennedy’s speeches. However according to the Wall Street Journal online, these figures are misleading and no one can track down a concrete and reliable original source.

Biggest Emerging Market

How could any organization that wants to be successful in the global arena ignore China today?

China is the world’s most populous country – 1,313,973,713 (2006 est.) – and organizations like the Finnish mobile telecommunications giant Nokia expect China to be a key growth driver for their global operations. Nokia provides equipment, solutions and services for network operators and corporations’ mobile phones and network equipment.

According to Infoworld’s online Web site:

“China has 400 million mobile users and its 3G (third generation) networks are not yet switched on, providing a future avenue for further growth. “ According to a study done by Norson (Hong Kong) Information Technology , “. . . after three years of 3G availability, more than 84 million Chinese will use 3G services.”

Consequently, construction is underway on Nokia’s new and expanded China headquarters, scheduled to open in 2007, that will host over 1500 of Nokia’s R&D, sales and marketing operations, pre-production, logistics, sourcing and manufacturing operations.

During China’s President Hu Jintao’s recent visit to the United States, he attended a dinner at the home of Microsoft’s Bill Gates and called for broadening the relationship between the United States and China.

“Today, many cargo ships are very busy crossing the Pacific Ocean, laden with the rich fruit of our strong trade ties and friendship between our two peoples,” Hu said. “I am sure that with the further deepening of China’s reform and opening up, we are going to see an even broader prospect for the economic cooperation and trade between China and Washington State and China and the United States as a whole.” Source: Reuters

According to the US-China Business Council:

• China’s economy grew 10.2 % in the first quarter of 2006.

• The government’s new focus on balanced growth and its attempt to shift from an investment- and export-driven economy to a consumption-driven one will mean more policies to promote consumption.

• GDP (purchasing power parity): $8.158 trillion (2005 est.)

• GDP – per capita: purchasing power parity – $6,200 (2005 est.)

• GDP – real growth rate: 9.2% (official data) (2005 est.)

• GDP – composition by sector:

Agriculture: 14.4%

Industry and construction: 53.1%

Services: 32.5% (2005 est.) Source: [www.uschina.org]

World’s #1 Manufacturing Industry

China is “the world’s factory” and produces $60 billion worth of consumer electronic goods a year. The “Made in China” label is found everywhere.

When China became a member of the World Trade Organization (WTO), it agreed to abide by WTO standards and regulations, along with the rest of the WTO countries. And this opened up one of the world’s largest economies to the rest of the world. Forward-thinking organizations did not hesitate to capitalize on the unprecedented opportunity.

For example, GE has long regarded China as an essential piece in the company’s strategic plan. According to Jeff Immelt., “We have been there for 15 – 20 years, so we know how to do business. We have been on the ground. We have 12,000 employees. And I think at the end of the day, China is trending towards being a great global competitor and following the rules. And that is important to us and it’s a way that we can be successful as well.”

Today, companies doing business in China find tax incentives, excellent civic infrastructure, government support, a political environment that encourages foreign business, rapid economic growth, a deep pool of engineering talent and college graduates, and improving legal, banking and financial systems.

China Strategy: Choose the Right Road to China

There are basically three paths an organization’s R&D department can follow to successfully gain entry into China. Take time to consider the best route for your company, especially if
your focus is in R&D embedded technology.

? Single, Independent Project

Beginning by outsourcing a single, independent project is an excellent way to start on the path to China. Typically, these projects involve software and hardware development, testing, maintenance, or product enhancement. This transaction type outsourcing is turn-key, straightforward, and has a quick ramp up time. An R&D department can:

o Capture an opportunity within a short time frame.

o Boost bandwidth to meet short-term demand.

o Outsource clearly defined short-term projects.

Companies going this route find cost savings through transaction-type outsourcing and capitalize on short-term cost savings.

? Partner Program

A long term, relationship-based service program is another excellent way to leverage China’s technology resources. A dedicated team within the China outsourcing vendor’s R&D department can be created, trained, hosted, and managed exclusively for your embedded systems R&D technology projects. Clients take advantage of lower wages, while benefiting from a team educated on the Client’s corporate values and culture, providing a true business level alignment. A China R&D department can:

o Offload non-core functions.

o Fill in needed skills.

o Increase engineering efficiency.

o Increase return on R&D.

? Offshore R&D Center

Many companies find they benefit most from a one-of-a-kind incubation center that is an extension of their R&D department back home. Building a R&D facility from the beginning and introducing best practices provides the optimal solution to meet your company’s strategic goals.

Your company takes advantage of China’s low cost workforce, manufacturing capacity, and emerging markets and there are no intermediaries or third party costs.

A China R&D Center can:

• Provide confidence and security to handle sensitive data and intellectual property inhouse offshore.

• Train talent according to your company’s unique standards and values.

• Increase talent retention by providing attractive culture and a sense of belonging.

• Share services with other functions of the company.

• Engage in long term innovation-driven research that does not usually generate immediate profits.

• Access the China labor market directly.

Turn to China

Throughout history, new products, new ideas, and new opportunities have come about by crossing borders. The global exchange of trade, expertise, and capabilities means exciting ideas and innovations which benefit everyone.

China today is a country with unlimited opportunity. However, personal connections and relationships are essential to any successful business in China. Would your company like to expand into China, but is unsure about potential roadblocks such as regulations, recruiting, and setup? The right vendor can smooth your way.

In addition to entry into China, a potential vendor’s technology expertise must not be overlooked. For example, does the potential vendor focus on embedded technology? Do they have experience with manufacturers, original equipment manufacturers (OEMs), original design manufacturers (ODMs), independent software vendors (ISVs), system integrators (SI), and value added service providers (VASPs) who rely on embedded hardware and software technologies?

Intellectual property is a concern everywhere, but especially in a new environment. What are a potential vendor’s procedures for protecting your intellectual property?

Remember, when searching for the best route to leverage China’s vast resources and opportunities, it pays to make certain you have the best vendor as your guide.

A journey of a thousand miles

Begins with a single step.

Lao-tzu (604 BC – 531 BC)

Chinese philosopher

About Long Circle

Long Circle provides outsourced engineering services to companies whose products and services rely on embedded software and hardware technology. Long Circle and the Long Circle China Center of Excellence enables U.S. companies to reduce costs, increase engineering bandwidth, and broaden market reach by providing low-risk, strategic access to China’s engineering talent, manufacturing industry, and emerging markets. To learn more about Long Circle, visit http://www.longcircle.com.