Viewpoints: China Needs to Play Fair!
By Douglas K. Woods
President and CEO
Liberty Precision Industries
Just a few weeks ago marked the Grand Opening of an exciting new venture in China. No, this wasn't a new plant to make cheap goods for Wal-Mart. This was a Technical Center to help sell high-tech, American-made products in China.
The event was the opening of the new Shanghai Technology and Service Center by AMT--The Association For Manufacturing Technology, the trade association that represents US makers of advanced manufacturing technology equipment. The Center is intended to allow US builders to hold live product demonstrations for potential Chinese customers, do customer training, store parts, and serve as a base for service operations.
In operation since mid-2004, the Center is a great success. AMT member companies have filled it to capacity--and beyond. Some 40 companies now have a presence in the Center, and more are waiting to get in. They all want to be part of what's happening in that market.
China is now the world's largest consumer of machine tools. It is the fourth largest vehicle market, behind the US, Japan, and Germany. Auto production could be 10 million vehicles per year by 2012. Appliance production has been growing 22% each year. Annual growth in Gross Domestic Product has been about 9%, before inflation.
As wonderful as this market appears, however, there are underlying issues that must give us pause. US companies still face barriers--some created by our own government--when trying to sell to Chinese industries. For example, it is unnecessarily difficult to obtain US export licenses to sell some high-tech manufacturing equipment. And, in a post-9/11 world, Chinese businessmen and engineers are often denied visas to come to this country to inspect equipment they'd like to buy or have already purchased.
But it is the Chinese government that pursues the policy that keeps the playing field decidedly un-level.
Using a simple but effective monetary strategy, China for years has subsidized its domestic manufacturers to the tune of billions of dollars. They do this by keeping their currency, the yuan, artificially cheap in the world financial market. This makes Chinese products artificially cheap in the global marketplace. How cheap? According to a number of experts, the subsidy amounts to as much as 40%. In other words, Chinese manufactured goods are up to 40% less expensive than comparable goods manufactured in America due to the artificially inexpensive yuan.
China also has a huge workforce just emerging from the throes of communism that works for extremely low wages. In China, manufacturing wages average less than $5 per hour compared with $20 per hour in America.
China has brushed aside calls for reform from top US officials, including Treasury Secretary John Snow. The impact on domestic manufacturing has been devastating. At my Rochester-based company, which designs and builds flexible machining systems, I live with the impact every day. Many of our key customers have shifted their components manufacturing to China. Consequently, they're not making capital investments in their domestic plants. And while there obviously has been growing demand for machining systems in China, it has been very difficult for small manufacturers such as myself to set up facilities quickly enough to take advantage of the market changes. The net result for my company has been less business and consequent job cuts.
Perhaps most troubling, because of its implications for national security, this unfair subsidy will help the Chinese penetrate America's manufacturing technology market. Machine tools are essential for all manufacturing--and foreign-made equipment now accounts for 70% of all machine tool sales to American manufacturers. We may be approaching the day when the technologies and skills necessary for a healthy US defense industrial base no longer exist in America. If that happens, we'll have to rely on China and other nations for the tools necessary to defend our homeland and protect our interests abroad.
China wants a prominent place in the global market, and that's fine. They are seeing and realizing the benefits of a market economy, and that's great. Their market growth and thirst for capital equipment are creating opportunities for companies with a presence in China.
But it's also time to insist the Chinese let the global market set the value of its currency so fair and open competition can truly thrive.
This article was first published in the January 2005 edition of Manufacturing Engineering magazine.