its factories in America. Finally, America is a beneficiary of the same phenomenon. While much attention is paid to American companies going offshore to China, little attention is paid to the huge amount of offshore investment coming into America every year, because foreigners want access to American markets and labor just like we want access to theirs. On September 25, 2003, DaimlerChrysler celebrated the tenth anniversary of its decision to build the first Mercedes-Benz passenger car factory outside Germany, in Tuscaloosa, Alabama, by announcing a $600 million plant expansion. “In Tuscaloosa we have impressively shown that we can produce a new production series with a new workforce in a new factory, and we have also demonstrated that it is possible to have vehicles successfully 'Made by Mercedes' outside of Germany,” Professor Jiirgen Hub-bert, the DaimlerChrysler Board of Management member responsible for the Mercedes Car Group, announced on the anniversary.
Not surprisingly, ASIMCO will use its new camshaft operation in China to handle the raw material and rough machining operations, exporting semifinished products to its camshaft plant in America, where more skilled American workers can do the finished machining operations, which are most critical to quality. In this way, ASIMCO's American customers receive the benefit of a China supply chain and at the same time have the comfort of dealing with a known, American supplier.
The average wage of a high-skilled machinist in America is $3,000 to $4,000 a month. The average wage for a factory worker in China is about $150 a month. In addition, ASIMCO is required to participate in a Chinese government-sponsored pension plan covering heath care, housing, and retirement benefits. Between 35 and 45 percent of a Chinese worker's monthly wage goes directly to the local labor bureau to cover these benefits. The fact that health insurance in China is so much cheaper-because of lower wages, much more limited health service offerings, and no malpractice suits-“certainly makes China an attractive place to expand and add employees,” explained Perkowski. “Anything which can be done to reduce a U.S. company's liability for medical coverage would be a plus in keeping jobs in the U.S.”
By taking advantage of the flat world to collaborate this way– between onshore and offshore factories, and between high-wage, high-skilled American workers close to their market and low-wage Chinese workers close to theirs-said Perkowski, “we make our American company more competitive, so it is getting more orders and we are actually growing the business. And that is what many in the U.S. are missing when they talk about offshoring. Since the acquisition, for example, we have doubled our business with Cummins, and our business with Caterpillar has grown significantly. All of our customers are exposed to global competition and really need their supply base to the do the right thing as far as cost competitiveness. They want to work with suppliers who understand the flat world. When I went to visit our U.S. customers to explain our strategy for the camshaft business, they were very positive about what we were doing, because they could see that we were aligning our business in a way that was going to enable them to be more competitive.”
This degree of collaboration has been possible only in the last couple of years. “We could not have done what we have done in China in 1983 or 1993,” said Perkowski. “Since 1993, a number of things have come together. For example, people always talk about how much the Internet has benefited the U.S. The point I always make is that China has benefited even more. What has held China back in the past was the inability of people outside China to get information about the country, and the inability of people inside China to get information about the rest of the world. Prior to the Internet, the only way to close that information gap was travel. Now you can stay home and do it with the Internet. You could not operate our global supply chain without it. We now just e-mail blueprints over the Internet-we don't even need FedEx.”
The advantages for manufacturing in China, for certain industries, are becoming overwhelming, added Perkowski, and cannot be ignored. Either you get flat or you'll be flattened by China. “If you are sitting in the U.S. and don't figure out how to get into China,” he said, “in ten or fifteen years from now you will not be a global leader.”
Now that China is in the WTO, a lot of traditional, slow, inefficient, and protected sectors of the Chinese economy are being exposed to some withering global competition-something received as warmly in Canton, China, as in Canton, Ohio. Had the Chinese government put WTO membership to a popular vote, “it never would have passed,” said Pat Powers, who headed the U.S.-China Business Council office in Beijing during the WTO accession. A key reason why China's leadership sought WTO membership was to use it as a club to force China's bureaucracy to modernize and take down internal regulatory walls and pockets for arbitrary decision making. China's leadership “knew that China had to integrate globally and that many of their existing institutions would simply not change and reform, and so they used the WTO as leverage against their own bureaucracy. And for the last two and half years they've been slugging it out.”
Over time, adherence to WTO standards will make China's economy even flatter and more of a flattener globally. But this transition will not be easy, and the chances of a political or economic crackup that disrupts or slows this process are not insignificant. But even if China implements all the WTO reforms, it won't be able to rest. It will soon be reaching a point where its ambitions for economic growth will require more political reform. China will never root out corruption without a free press and active civil society institutions. It can never really become efficient without a more codified rule of law. It will never be able to deal with the inevitable downturns in its economy without a more open political system that allows people to vent their grievances. To put it another way, China will never be truly flat until it gets over that huge speed bump called “political reform.”
It seems to be heading in that direction, but it still has a long way to go. I like the way a U.S. diplomat in China put it to me in the spring of 2004: “China right now is doing titillation, not privatization. Reform here is translucent- and sometimes it is quite titillating, because you can see the shapes moving behind the screen-but it is not transparent. [The government still just gives] the information [about the economy] to a few companies and designated interest groups.” Why only translucent? I asked. He answered, “Because if you are fully transparent, what do you do with the feedback? They don't know how to deal with that question. They cannot deal [yet] with the results of transparency.”
If and when China gets over that political bump in the road, I think it could become not only a bigger platform for offshoring but another free-market version of the United States. While that may seem threatening to some, I think it would be an incredibly positive development for the world. Think about how many new products, ideas, jobs, and consumers arose from Western Europe's and Japan's efforts to become free-market democracies after World War II. The process unleashed an unprecedented period of global prosperity-and the world wasn't even flat then. It had a wall in the middle. If India and China move in that direction, the world will not only become flatter than ever but also, I am convinced, more prosperous than ever. Three United States are better than one, and five would be better than three.
But even as a free-trader, I am worried about the challenge this will pose to wages and benefits of certain workers in the United States, at least in the short run. It is too late for protectionism when it comes to China. Its economy is totally interlinked with those of the developed world, and trying to delink it would cause economic and geopolitical chaos that could devastate the global economy. Americans and Europeans will have to develop new business models that will enable them to get the best out of China and cushion themselves against some of the worst. As BusinessWeek, in its dramatic December 6, 2004, cover story on “The China Price,” put it, “Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s. Industries requiring huge R&D budgets and capital investment, such as aerospace, pharmaceuticals, and cars, still have strong bases in the U.S.... America will surely continue to benefit from China's expansion.” That said, unless America can deal with the long-term industrial challenge posed by the China price in so many areas, “it will suffer a loss of economic power and influence.”
Or, to put it another way, if Americans and Europeans want to benefit from the flattening of the world and the
