China’s growth brings opportunities, concerns

Filed under Economy, International, Management, Manufacturing, News

By Hallie Busta

— Chinese and American business executives will do more than shake hands when the visiting state’s delegation wraps up this week’s official visit with a stop in Chicago. A number will be signing off on business deals intended to nurture an economic partnership between the two global powers, observers said.

Earlier this week, the Chinese delegation visited Washington, D.C., where Chinese President Hu Jintao met with President Barack Obama to discuss economic, global security and human rights issues, The Washington Post reported.  In addition, a Bloomberg news report had China surpassing Japan as the world’s No. 2 economic power and rivaling the United States for the top spot.

China’s growth `a mix of good and bad’

China’s rapid growth has many Americans concerned, according to a September poll released by the Chicago Council on Global Affairs. About half of the 2,000 respondents regarded China’s rise in economic power as “mostly negative,” while the other half saw it as a mix of good and bad.

Chinese economic growth has opened up opportunities for Chinese businesses to look to the United States for possible partnerships or greenfield investments, according to Tom Bartkoski, director of international business development at World Business Chicago.  But the investors face a steep learning curve, he said.

“It’s a matter of making the two business cultures work together,” he said.

Chicago Customs District imports from major trade partners outpaced exports by a three to one margin in 2009, World Business Chicago reports.

Economic tensions put U.S. at a disadvantage

But some fear that the economic trail leading to and from China will hamper trade relationships and, ultimately, put the United States at a disadvantage.

When manufacturers move production to China, they take advantage of the low-cost labor there and often change their focus to price, rather than value, said Dan Brown, adjunct professor of product design at Northwestern University and president of LoggerHead Tools Inc. in Palos Park.  “Then the market settles at the lower cost,” Brown said.

Looking beyond labor cost

Companies should look beyond China’s low labor cost, Brown said, by developing value-added products that can command a higher price. He recommends U.S. manufacturers strive to produce innovative, “well-designed” products that help support higher-paying jobs.

Illinois imports, exports both fall in 2009

In the Chicago region, overall international exports of commodities fell to $96.7 billion in 2009 from $117.2 billion in 2008, after experiencing steady increases in previous years, according to World Business Chicago. The import data includes some products made by American companies with facilities overseas, including in China, Bartoski said. Exports also say a decline, according to the data.

After climbing steadily since 2005, both imports and exports in the Chicago Customs District declined in 2009 from the prior year, World Business Chicago reported.

Karen Eng, president of Cybernet System Management Inc. in Schaumburg, has been doing business in China for nearly two decades. When the engineering and technology consulting firm’s multinational clients began spending a significant amount of capital overseas in China and India, Eng too began to look at expansion.

Doing business with China has economic benefits, Eng said. “If you have a solid product and a solid service, it’s definitely worthwhile just because their economy is so strong right now,” she said.

Different legal systems

But Chinese and American businesses that want to work together must learn to navigate differences in legal systems and intellectual property laws. “We need to keep communicating the importance of transparency in the business place,” said Bob Holden, chairman of the Midwest U.S.-China Association and former Governor of Missouri.

While Brown said he has seen successful relationships between American businesses and Chinese manufacturers, it’s generally a one-way street, with U.S. companies outsourcing to China.  The challenge is U.S. companies have to compete against a deflated Chinese currency and low labor costs. “People are paid in the local currency (in China). If it’s never allowed to rise relative to the dollar, we’ll always be importing, but never exporting” because the Chinese workers won’t be able to afford to buy U.S.-made products, Brown said.  The only way to compete, Brown said, “is to build it there and sell it there.”

As a result, the concept of free trade as “a rising tide that lifts all boats” doesn’t really play out for small manufacturers and American workers, Brown said.  Instead, it has transferred jobs from the United States to China.

A growing partnership

But as China shifts from a nation of exporters to a nation of consumers, marked by an increased standard of living, a growing demand for products and services might provide an economic opportunity for small businesses.

The question becomes, “How much of that [demand] might be met from sources within China and how much of that might be from sources outside of China?” Bartoski said.

As for Chinese businesses taking root in the United  States, their proximity to other small American businesses may open up the opportunity for local-level business connections, with small businesses here supplying the new companies with the resources they need to operate, Bartoski said.

“There’s a lot of room to run in the U.S. for Chinese companies,” he said.

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