ChinAmerica ChinAmerica THE UNEASY PARTNERSHIP THAT WILL CHANGE THE WORLD HANDEL JONES Copyright © 2010 by Handel Jones All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher ISBN: 978-0-07-174425-6 MHID: 0-07-174425-8 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-174242-9, MHID: 0-07-174242-5 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs To contact a representative please e-mail us at bulksales@mcgraw-hill.com TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGraw-Hill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting there from McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise To my parents, David and Ruth Jones, who gave me life CONTENTS Foreword Acknowledgments Introduction PART I BEATING AMERICA WEALTH BATTLE THE FRONT LINES OF THE CHINAMERICA WEALTH BATTLE HOW CEOS REPLACED GENERALS PART II UNITED STATES: THE WEAKENING GIANT THE DECLINING U.S AUTOMOBILE AND STEEL INDUSTRIES U.S COMPUTER INDUSTRY—A WINNER TO DATE THE ROLE OF GOVERNMENT IN U.S INDUSTRY PART III CHINA: THE GROWING GIANT WHAT IS CHINA TODAY? CHINESE CULTURE CHINESE GOVERNMENT POLICIES CHINESE ECONOMIC PHILOSOPHIES 10 CHINA’S FUTURE LOOKS BRIGHT PART IV WHAT HAPPENS NEXT IN CHINA AND THE UNITED STATES 11 TAIWAN AND ITS SYNERGY WITH CHINA 12 A RESTRUCTURING PLAN FOR THE UNITED STATES Endnotes Index FOREWORD BY JOHN DICKSON THE GROWTH OF CHINA is clear, imposing, and seemingly inevitable Meanwhile, the United States is operating with large deficits and a perceived and real loss of its global leadership role What does this mean for the future of America and China and the generations of citizens of both as yet unborn? ChinAmerica provides great clarity of the characteristics of the Chinese people and their ambitions for themselves and their nation If any sense is to be made of the future relationship between the two countries an understanding of the evolving trade and competitive dynamics between them is essential and this ChinAmerica delivers ChinAmerica is essential for government and business-people who want to understand China as well as to anyone who has an interest in geopolitics and global markets The consequences, which even great nations suffer, because of internal inefficiencies and the pressure from outside competitors, need to be understood in detail It is clear from the book that unless the United States makes radical changes in investment and competitive strategies, a dramatic weakening in global competitiveness and wealth is inevitable Pleas from the United States for level playing fields and the protection of yesterday’s industries will not save the day It is no good asking or expecting China to change its trajectory China is on a growth path with a confidence and ebullience that has not been seen in the world of economics since the United States in the early post–war years It is the United States that needs to change and to change dramatically and soon This book is relevant and timely for readers in each of the megapowers Predicting the future is more often than not a fools’ game, but grasping what is actually happening today and how that will shape the future is not Thanks to Handel Jones’ experience over many years this book provides an excellent basis for at least determining the risks and opportunities facing both nations It is a very valuable and timely contribution ACKNOWLEDGMENTS THE IDEAS IN THIS BOOK came together after decades of my being involved with international businesses and meeting thousands of very smart and knowledgeable people Ideas and concepts need to be substantiated by recent and verified data, and I would like to thank the large number of acquaintances who provided the input that enabled me to validate or discard these concepts To understand China, there is the need to spend time there and feel the pulse of the people who live there My many visits to China, especially those in late 2009 and early 2010, have been invaluable in enabling me to meet a wide variety of people who have contributed input to my understanding of the strengths and weaknesses of China I would like to thank the people in China who have shown me the factors driving the industrialization of China A significant amount of the coordination of the research in China has been done by Zhou Min, who also provided valuable feedback on the data A book is more than just a gathering of insights and facts I would like to thank the members of the International Business Strategies (IBS) team who assisted me in the development of this book Research and editing of the information have been admirably done by Sarah Nocé and Joanne Kim Sarah has also managed the production process efficiently Robin Soe contributed in the verification of information, and Jay Marcorelle provided invaluable guidance and support Lastly, IB Kim has provided strong suppport and has been instrumental in making sure all the pieces fit together A number of industry experts in academia and in the electronics and venture capital industries provided valuable ideas and were vital sounding boards for providing feedback on my views I would like to thank Richard Kulle, John Dickson, Don Lucas, and Dr Henry Kressel for their input on early concepts Other industry officials who provided guidance included Michael Jones and Megan Jones They provided feedback on the banking perspectives with respect to China By being in Hong Kong and traveling extensively in Asia, Michael has developed a deep understanding of the role of China I am especially appreciative of the support and guidance from my publisher, McGraw-Hill Mary Glenn has been an enthusiastic supporter who understood my intent from the beginning and provided vital guidance and direction Her colleague Tania Loghmani was a very efficient editor, making the book more readable A special thanks to Tania Thanks also to Karen Schopp of McGraw-Hill for her strong encouragement and distribution ideas Another key person in the process has been Larry Marion of Triangle Publishing, who, in addition to being an active agent, has been very thorough in editing and reformatting the book Thank you, Larry A complex project requires strong support and effective implementation Thank you all very much INTRODUCTION CHINA IS THREATENING TO USURP the position of the United States as the global leader in wealth Will the United States remain wealthy and strong, or will the United States be financially weakened by China? This book analyzes why the United States is in a downward financial spiral while China is in an upward financial spiral, one that will decimate the U.S economy and lifestyle if changes aren’t made At the end of the book, I offer a restructuring plan to help Americans redirect our country back on the road to an equilibrium with China, so that the two countries can continue to work together rather than separately and in a state of economic tension My first real exposure to China and Chinese leaders was in Dallas, Texas, in the early 1980s At that time, I was a vice president of strategic planning and engineering of a large multinational electronics company, and I was invited to give a speech about the future of data communications technologies After the presentation, I had lunch with the former president of the People’s Republic of China, Jiang Zemin, who at that time was the minister of electronic industries We had a detailed conversation about the outlook for new electronics technologies A few months later, I was invited to give a talk in Beijing on the future of the communications industry I accepted, but I could not attend because the U.S government requested that I not visit China for security reasons Naturally, I was disappointed, but I started to develop a deep curiosity regarding China In the late 1980s, I launched a market research and consulting company called International Business Strategies (IBS) We provide in-depth market and technology analyses of many electronics industry sectors, for a wide variety of American, European, and Asian clients As our firm’s interest in China grew, I read extensively on China However, my reading produced only a limited knowledge of the country To gain a deeper understanding, I would have to have face-to-face interactions with people in China and Asia So beginning in the early 1990s, I began to visit China and Taiwan and other countries in Asia Over the next 15 years, I would make at least trips a year to Asia—in 2008, I made 10 trips to China —learning firsthand as much as I could about Chinese companies and their relationships with Japanese, South Korean, Singaporean, and other Asian companies The original idea for this book came from driving through the Pudong industrial zone in Shanghai in late 2008 I wondered how it was possible to take a marsh and build on it within a short time the tall office complexes and hotels and the hundreds of factories that I was seeing I could also see as I drove through the area that, while the new development was extensive, behind the new buildings there were rundown structures and squalor I wanted to understand which was the real China: the glowing new buildings or the drab old ones? Was the country like a Hollywood studio lot where there was nothing behind the faỗades of the new buildings? Was industrialized China just a big Potemkin village? Or was China, as its people have been proud to describe it, really a phoenix rising from the ashes? Indeed, a year later, many of the old buildings I had seen in Pudong were gone, replaced by new buildings It was, and still is, a tidal wave of progress government-owned system, 78 manufacturing facilities, 85 nuclear power, 155 transportation system, 252 Fuel-efficiency automobiles, 107 Funding, 245–246 G Game console companies, 95 Geely International Corporation, 191 General Electric, 34, 241 General Motors, 32, 37, 38, 42 Germany automobile industry, 45 engineering disciplines, 100–101 exports, 20 manufacturing facilities, 85 steel and aluminum industry, 199 transportation vehicles, 252 Global market share, 34 Globalfoundries, 218 Goldman Sachs, 247 GOME, 167 Google, 44, 55, 96, 100, 101, 240 Government (U.S.), 75–110 See also United States bailouts, 77 corporations, 108 government-owned industries, 77–78 industrial decisions affected by politics, 81–87 stimulus packages, 77, 107 Government-sector employees, 29, 30, 107 Grand Canal, 153 Grandparents, 131 Great Society welfare programs, 142 Great Wall of China, 129–130, 153 Greed, 31, 32, 110 Grove, Andrew, 101, 102, 241 Guchi, 166 H Hard disk drives, 56 He Guoqiang, 144 Health care, 78, 79–80, 146 Hefei, 125 Hewlett-Packard, 52, 100 High-speed rail, 154 High technology, 100, 150, 176, 199 Hitachi, 56 Hon Hai, 169 Honda, 42 Hong Kong, 208 Hu Jintao, 143 Huai-Hai Battle, 201 Huateng, Ma, 134 Huawei Technologies, 64, 135, 160–161, 173, 177 Hui Liangyu, 145 Hurd, Mark, 55 Hyundai, 11, 41 I IBM, 51–53, 56, 57, 88, 94 IM Flash, 66, 88 Immigration policies, 103–104 India IBM employees, 57 infrastructure, 165 middle class, 139, 162 mobile handsets, 222 oil, demand for, 162 Qualcomm protocol, 63 raw materials, demand for, 197, 258 software development, 57, 100 steel market, 50 textile industries, 167 U.S employment, 101, 103 Individualism, 130–131 Industrial Technology Research Institute (ITRI), 22, 214 Inflation, 246 Infrastructure China, 82–83, 153–155, 253, 256 communications, 256–257 restructuring plan, 251–253 support, 94–96 U.S., 82, 83, 94–96, 251–253 Infrastructure stimulus programs, 50 Innovative technologies, 34 Integrated circuit (IC), 66–67, 152 Intel, 53, 65, 66, 88, 185, 222, 241 Internet, 19, 185, 188 iPod, 96 ITRI, 22, 214 iTunes, 96 J Japan automobile companies, 35 compensation, 247 engineering students, 101 expansion of facilities to U.S., 102 exports, 20 flat panel displays, 90 LCD production, 219–220 manufacturing technologies, 93 OLED technologies, 220 product quality, 204–205 seniority, 134 steel market, 50 transportation services, 252 wireless communications, 257 Jen-Hsun Huang, 101 Jia Qinglin, 143 Jiang, Jason, 134 Jobs, Steve, 30, 55 Johnson, Lyndon, 84, 142 Jones, Handel, 273–274 Juran, Joseph M., 205 K Kennedy, John F., 30, 205 L Large long-term investments, 150 LCD, 90, 219–220 Leadership, 234–235 Lee Hsien Loong, 234 Lee Kuan Yew, 254 Lenovo, 54 LG Electronics, 20, 237 Li, Robin, 134 Li Changchun, 143 Li Keqiang, 144 Liangyu, Hui, 145 Liquid crystal display (LCD), 90, 219–220 Lucent equipment business, 86 M Ma, Jack, 134 Ma Huateng, 134 Manufacturing base, 198 Manufacturing facilities, 85 Manufacturing strategies, 71 MediaTek, 221–222 Memory chip companies, 66 Micron, 66 Microprocessor, 53–54, 184–185 Microsoft, 100, 183 Migration, 124–125 Military, 47, 48, 73, 97–98 Misdirection, 175 Mobile TV, 182 Motherboards, 218 Motorola, 60, 62 Mulally, Alan, 38 Murdoch, Rupert, 181 N Nanotechnology, 52 National Broadband Plan, 63 National health care coverage, 78, 79–80 Natural resources, 258 See also Raw materials New technologies, 18–19 Nixon, Richard, 32 Nokia, 15, 35, 56, 105, 237 Notebook computers, 52 Notes (endnotes), 263–273 Nucor, 49 O Oak tree analogy, 26 Obama, Barack, 7, 11, 27, 31 ODM companies, 226–228 OLED, 220 Olevia, 182 Olympic Games, 196 Organic light-emitting diode (OLED), 220 Original design manufacturing (ODM) companies, 226–228 Outsourcing of manufacturing, 91–94 See also Contract manufacturers P Palm, 62 PCs, 54, 183, 185 Pensions, 29, 146 People problem, 28–32 Performance management, 235–236 Perseverance, 174 Personal computers, 183–185 Personal debt, 134 Pharmaceutical industry, 18, 70 Philips, 228 Pioneer, 59 Pollution, 155 Pork-barrel politics, 30, 82 Positive trade balance, Post-American World, The (Zakaria), Poverty, 30 Power supplies, 155 Presidential misbehavior, 32 Printed circuit boards, 219 Prius, 34 Product quality, 178, 204–205 Protectionism, 159–161, 256 Q Qualcomm, 63 Quanta, 216 R Railroad, 153, 256 Raw materials, 161–163, 242–245, 258 Research and development, 96–101 Research in Motion (RIM), 62 Restructuring plan (U.S.), 231–262 cohesive society, 250–251 communications infrastructure, 256–257 corporations, 236–239 creativity, 239–242 funding, 245–246 goals, 231 infrastructure, 251–253 leadership, 234–235 performance management, 235–236 prerequisites to building wealth, 233 railroad, 256 raw materials, 242–245 wealth building, 253–255 wealth distribution, 246–250 what to do, 259–262 RIM, 62 Roelandts, Willem, 101 Russia government control, 198 natural resources, 143 software development, 57 S SAIC, 189–192 Samsung, 20, 35, 66, 88, 90, 105, 237 SanDisk, 57 Seagate, 56 Semiconductor, 65–69, 98, 220–224 Semiconductor Manufacturing International Corporation (SMIC), 152, 229 Semiconductor wafers, 22, 68, 69, 88–90, 152, 217–218 Senators, 23 Set-top boxes, 60 Shanghai, 152 Shanghai Automotive Industry Corporation (SAIC), 189–192 Share buyback activities, 105 Shenzhen, 124, 131 Shenzhen Institute of Advanced Technology (SIAT), 135 Short-term consumption, 31 SIAT, 135 Silicon Valley, 240 Silicon wafers, 22, 68, 69, 88–90, 152, 217–218 Silverblatt, Howard, 18 Sinopec, 173 Smart cards, 187–188 Smart grid, 252 SMIC, 152, 229 SOE, 137, 171–174 Software, 57–58 Software development, 100 Solar energy, 83 Solectron, 92 Solid-state drives, 56 South Korea automobile industry, 41 exports, 20, 237 OLED technologies, 220 steel market, 50 wireless communications, 257 Spansion, 66 SPR, 69, 82 State-owned enterprise (SOE), 137, 171–174 Steel industry, 48–50, 198–199 Strategic petroleum reserve (SPR), 69, 82 Strong economic power, Support infrastructures, 94–96 Surowiecki, James, 121 Sutardja, Sehat, 101 SyNAPSE, 52 T Taiwan balance of payments, 20 China, and, 208, 219, 228–230 component manufacturers, 254 computer companies, 54 contract manufacturers, 93, 169, 224–226 electronics industry, 138 emigration to U.S., 103 fabless vendors, 222–223 GDP, 211, 212 LCD production, 219–220 motherboards, 218 ODM companies, 226–228 OLED technologies, 220 positioning actions, 21–23 printed circuit boards, 219 semiconductor industry, 220–224 venture capital, 213 wafer foundries, 68, 89, 217–218 Taiwan Semiconductor Manufacturing Company (TSMC), 68, 214, 218, 229 Taoism philosophy, 136 TARP, 77 Tax revenues, 17–18 Taxes, 79 TCL, 182 Television, 58–59, 180–183 Television chip sets, 222 Tesla, 47 Texas Instruments, 98 The 36 Strategies, 168, 175, 239 Toyota, 11, 34, 35, 42, 46 Trade balance, Trade barriers, 81 Trade deficit, 9, 10 Trade unions, 84, 168 Train, see high-speed rail Troubled Asset Relief Program (TARP), 77 Tsinghua University, 142 TSMC, 68, 214, 218, 229 U UMC, 218 Unemployment, 106 United Kingdom automobile industry, 41–42 declining power, 20–21 entrepreneurship, 248 high technology, 100 United Microelectronics Corporation (UMC), 218 United States agriculture, 23, 70, 84 aircraft manufacturing, 69 automobile industry See Automobile industry balance of trade, 107 banking industry, 245 capital-intensive industries, 87–91 cell phones, 61–62, 64–65 computer industry See Computer industry consumer electronics, 58–61, 84–85 consumption, 10, 118 cost base, 20 cultural decay, 32 currency, 11 debt, 27–28 defense industry, 70 driver for GDP growth, 27 enforcement of regulations, 31 executive compensation, 104–106 federal taxes, 29–30 fiscal deficit, 10, 205 foreign-born leaders, 101–102 government See Government (U.S.) government-sector employees, 107 immigration policies, 103–104 imports, infrastructure, 82, 83, 94–96, 251–253 military, 47, 48, 73, 97–98 oak tree, as, 26 outsourcing of manufacturing, 91–94 people problem, 28–32 pharmaceutical industry, 70 poverty, 30 R&D spending, 97 research activities, 96–101 restructuring See Restructuring plan (U.S.) socialistic philosophy, 78 steel industry, 48–50 trade deficit, 9, 10, 107 unemployment, 106 visa policies, 103 wealth trends, 106–109 wireless communications, 62–64 U.S dollar, 11, 12, 107 U.S Steel, 49 Universal health care coverage, 79–80 V Vanguard, 218 Video games, 95 Visa policies, 103 Visteon, 39 VIZIO, 58, 182, 213 Volkswagen, 43 Volt electric car, 47 W Wafer fabrication, 68, 69, 88–90, 152, 217–218 Wang Jingze, 168 Wang Qishan, 145 Water shortages, 155–156, 253 Watergate scandal, 32 Wealth building, 253–255 Wealth distribution, 246–250 Wealth trends, 106–109 Welch, Jack, 234, 241 Wen Jiabao, 143 Western Digital, 56 WiMAX, 65 Windmill development, 83 Wireless communications, 62–64, 96, 185–188, 257 Wu Bangguo, 143 Wuhan-Guangzhou bullet train, 154 X Xbox, 60 Xerox, 99, 100 Xi Jinping, 144 Y Young entrepreneurs/managers, 134, 137–138, 174 Z Zakaria, Fareed, Zenith, 86 Zhang Dejiang, 145 Zhou Yongkang, 145 ZTE, 177 About the Author Handel Jones has more than 35 years of experience as a strategic business consultant for large multinational companies He is the founder, chairman, and CEO of International Business Strategies, Inc of Los Gatos, California, which for more than 21 years has provided highly detailed and rigorously researched information about competitive positioning and key market trends of the electronics, computer, and consumer products industries Handel Jones has developed a deep understanding of the global business environment through the providing of strategic support to corporate giants in multiple geographic regions over the past 30 years Jones has developed a deep understanding of the factors that impact future competitive positioning of countries and corporations through his international experiences The corporate environment is highly results-oriented, which forces rigorous analysis in order to maintain credibility over an extended timeframe These disciplines combined with a strict mathematics education at an early age have been the basis for the thorough analysis process in ChinAmerica As founder, chairman, and CEO of International Business Strategies, Inc., Jones has had a consistent record of providing highly detailed and methodical information to international clients within the electronics industry Clientele has included IBM, GE, Samsung, LG Electronics, Sony, Toshiba, Nokia, Philips, Motorola, Intel, Fujitsu, Microsoft, TSMC, China Resources, and others In addition, Jones has also provided consulting support to financial institutions, including Blackstone, Carlyle, Bank of America, Citi, JP Morgan Chase, and others Support has also been provided to Ex-Im Bank of Washington, D.C The analysis of the changing global business environment and the impact on the competitiveness of the United States and the growth of China stimulated the writing of ChinAmerica .. .ChinAmerica ChinAmerica THE UNEASY PARTNERSHIP THAT WILL CHANGE THE WORLD HANDEL JONES Copyright © 2010 by Handel Jones All rights reserved Except as permitted under the United States... society after the devastation of World War II, to face the reality that it will lose economic supremacy Essentially, the United States is in the same position that Europe was in after World War II—watching... wood, and other commodities from around the world The huge surge in demand for raw materials has inflated the prices of these commodities for the entire developed world So not only has the cost