by Dean Whittaker

In his 2005 book, China, Inc. , Ted C. Fishman offers an in-depth look at the economic changes taking place in China along with the implication of these changes for much of the rest of the world.

The words “Made in China” are so common today that we seldom notice. China has become “the shop floor” of the world. In 1995 6% of the merchandise sold at Wal-Mart was made in China . Today, 75-85% of the merchandise sold in 3,400 Wal-Mart stores is made in China . In the April 7, 2005 Detroit Free Press, a headline read “GM Sells Supplier on China .” The article describes a meeting with 328 representatives from GM suppliers in which they were told that they would need to consider relocating to China in order to offer GM competitive prices on their automobile parts.  GM, which buys $80 billion in parts per year, has a clause in its contracts which gives its suppliers 30 days to meet the best price available worldwide or risk immediate termination.

World commodity prices, including those for petroleum, steel, and other raw materials, have soared as China has begun a global acquisition of natural resource companies and entered into long-term contracts with Russia and Iran to help meet its growing energy needs.

At the same time we face these challenges, China offers great opportunity. Its economy has been growing at over 10% per year and is expected to continue to grow at a 7% rate just to provide enough jobs to employ its growing population. In the past few years, as many as 300 million workers have moved from rural areas into cities seeking economic opportunities and creating over 160 cities with over 1 million in population (the US has only 9). China ‘s small social experiment in capitalism ten years ago near the Hong Kong border has mushroomed into a nationwide rush to a communist-controlled capitalist system.  This shift is creating an overwhelming burst of consumer demand along with enormous opportunities for companies around the world to provide goods and services to over 1.5 billion new customers.

This rapidly rising demand for goods and services in China has resulted in a major shift of investment capital to China from other parts of the world.  (This may partially account for the 50% drop in average annual new and expanded activity in the US in the last two years.)  In a recent McKinsey Quarterly report, “When Offshore Manufacturing Doesn’t Make Sense ,” the author describes some of the risks companies face when considering an offshore location, including supply chain disruption, loss of intellectual property, delivery times that exceed product life cycles, poor customer service and other issues.

China – friend or foe?  It just depends on which side of the economic opportunity you sit.  Focusing your retention and expansion strategies on those firms which produce low-volume, high valued-added products containing significant intellectual capital and a short product life cycle that continue to have a market niche may prove useful.  However, even those companies producing commodity products may be compelled to relocate to lower cost locations to remain competitive.