China to surpass U.S. in manufacturing by 2015 on road to Empire

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August 06, 2009

China to surpass U.S. in manufacturing by 2015 on road to Empire

As a former Global Sourcing Manager for a number of Fortune 500 and middle-market manufacturers, it comes as no shock to me that China may overtake the U.S. as the world’s largest manufacturer. IHS Global Light has projected that this will happen by 2015 in a forecast published in the Wall Street Journal yesterday. It's yet another sign that China is burgeoning and destined to be an economic empire. Last year’s IHS estimate did not have China surpassing the U.S. until 2016, and 2 years ago the target date was 2020. Once China becomes the world’s foremost economic superpower, one can only wonder when they’ll start spending more money on their own defense to achieve global hegemony, as opposed to financing the U.S. military.

Does this seem far-fetched? Well, all it would take for the unraveling to begin would be for China to cease funding U.S. debt, considering China currently owns approximately $1 trillion of U.S. bonds. A few months ago, Chinese Premier Wen Jiabao announced that his country was “worried” about its holdings of US treasury securities, as he blamed Western countries for the global financial crisis because of their reckless economic policies. This isn’t only economic saber-rattling, because there has been intense public debate within China about the possibility of stopping the procurement of US bonds, another example of a fiery Chinese nationalist movement that has been spreading. A bestselling book that hit the market in March is a bit unsettling to boot, called Unhappy China, that suggests China “should rise up and lead the world”. Here is an excerpt:

If China stood as the world's top country, it would not act like the United States, which has been irresponsible, lazy and greedy and engaged in robbery and cheating. They have brought economic recession to the whole world."

It is unthinkable that China would bail on the U.S. considering the relationship is so codependent, because China thrives on U.S. trade and consumption of their manufactured goods. Not to mention that China, along with many other countries, indirectly pays the U.S. to be the “Leviathan”, policing the world to ensure stability. China buys our bonds and we make sure rogue states stay in line. The U.S. military budget is at approximately $636 billion in 2009, which is more than the rest of the world combined. It's double the total military spending of the EU, and is just under 10 times the size of China’s military expenditures – although China’s military spend has been growing rapidly, relatively speaking. The U.S. indeed monitors the world with nearly 1,000 military facilities in 46 countries and territories - like some ubiquitous goliath maintaining world order.

But, as previously stated, what happens when China does start keeping its money for their own defense? It looks like this shift has been underway because China has doubled its military budget since 2006 and it now has 2.3 million servicemen and women. Of course, military dominance won't happen overnight. The Pentagon estimates that China won’t be able to project small military units far beyond the mainland until 2015, and won’t be able to project large-scale operations far from China until after 2020. However, their recent strategies appear to be focused on one thing – true defense; and their number one goal is to prevent the U.S. from attacking them. But, if they did it economically, at what point will they surpass us militarily?

China has benefited from the mixed capitalist-communist nature of their economic system. They tend to get the best of both worlds by enjoying the fruits of free market capitalism, while at the same time the state subsidizes Chinese corporations in order to dump prices to win markets, and have been able to sell more goods by manipulating their currency to make their export products even more attractive. The reality is that China is one of the only countries to not be severely impacted by the global financial crisis, which should be a bit disconcerting. They have enhanced their geopolitical position in the world as a result of the worldwide recession, and having weathered the storm they could already be considered the number one economic superpower in terms of cash rich. China has $2.3 trillion in foreign exchange reserves which makes it the wealthiest nation on earth.

Because of their ability to leverage their economic model, many in the West see China with an unfair competitive advantage. According to the Wall Street Journal, this latest news hasn’t helped this perception:

U.S. manufacturing is shrinking, shedding jobs and, in the wake of this deep recession, producing and exporting far fewer goods, while China's factories keep expanding. If manufacturers on both sides of the Pacific were thriving, there would be little reason to butt heads. But given the massive trade gap between the two nations and uncertainty in the U.S. over when and to what degree manufacturing will recover, China's ascent has become a point of growing friction."

But the bitter irony is the vicious cycle that American manufacturers find themselves in, because in order to remain competitive globally they must outsource jobs and purchase goods offshore, considering some manufactured goods can be produced 30-40% cheaper (and that's landed cost) in China than they can stateside. This includes everything from toys to highly-engineered components that are critical to the manufacture of American automobiles, trucks, locomotives, aircraft, NASA spacecraft and strategic weaponry for the armed forces. I know from personal experience that without sourcing at least 20% of their cost of goods sold offshore, the gross profit alone of many of these companies would be upside down, and that's even before accounting for indirect MRO supplies, plant, equipment, transportation and administrative costs. The only reason one company in particular was profitable two years ago was due to the weak dollar that enhanced the value of goods sold into Europe, which certainly does not make for a feasible long-term business strategy.

The answer to this dilemma is not easy, the point is that we are dependent on China for not only financing our debt but, ironically, we need them to ensure our manufacturing sector survives. Globalization advocates believe that it is just natural for China to overtake the U.S., and none should worry because the laws of the free market are simply at work. Others beg to differ, such as Peter Morici, an economist at the University of Maryland:

The notion that we can be a non-manufacturing society is folly. It's pseudo-science that gives rise to the collapse of civilizations"

China certainly has its weaknesses, including lack of its own home grown resources - besides coal, human rights issues, and poverty. To put this in perspective, consider that of the 1.3 billion Chinese, well over 1.1 billion have a third-world standard of living.

However, it’s hard to avoid comparing America’s current situation with the rise and fall of previous empires like Britain and Rome, two examples where dominant superpowers were spread too thin militarily and crumbled from within financially. Plus, it has less to do with China’s strengths than it has to do with America’s weaknesses. Empires were made to fall, and once America is replaced by China, China will probably follow suit for the same reasons that all Empires seem to fail - greed.

And I end with an ancient Italian proverb I hope is a needless admonition, and an oracle that is never fulfilled:

“Wealth conquered Rome after Rome had conquered the world”

By: Michael Hughes - Chicago Geopolitics Examiner - August 4, 2:18 AM

SOURCE: examiner.com

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