Sunday, April 01, 2007

Suicide by China

Jeffrey Saut:“Texas Hold ‘Em”

The Chinese state has finally confirmed what we have been saying for a number of months: they have announced that $8 billion of government money has now been authorized and allocated as seed money to begin constructing a state-held Chinese airplane company. Furthermore, the new company will be designed to stand as a competitor to America's Boeing and Europe's Airbus. What makes this a bit shocking is that the Chinese ruling party's commission was so bold that it admitted China still does not have all the technical expertise it needs to build such large planes, but not to worry, it said, that is why they had approved Airbus' request to open a new factory in China -- one that will build four giant A320 jumbo jets a month.

“As usual, the government has required that all modern technology in the Airbus plant must be transferred to the Chinese state. This new plant will yield a treasure-trove of missing technology to fill in the gaps in China's knowledge when it comes to building larger civilian and military planes. China has already pulled much technology from dozens of Boeing projects in the country -- enough to allow them to soon build their own small jetliners. They are accepting orders now for a small regional plane, with deliveries to start in one year.”

. . . Adrian Van Eck

We reprise Adrian Van Eck’s comments this morning because they speak to a point we have been making for the past few years whenever asked, “When will the Chinese stop buying our bonds?” Unwaveringly, our response has been, “Whenever the Chinese no longer need us!” Yet the thought process goes much deeper than that. We here in the U.S. are playing the card game called “Texas Hold ‘Em” whereby you win one hand at a time. The Chinese, however, are playing the board game called “GO.” Now “GO” is played by two people alternately placing black and white stones on vacant intersections of a 19 x 19 rectilinear grid. A stone, or group of stones, is captured (and removed) if it is surrounded by the stones of the opposing color. As opposed to “Texas Hold ‘Em,” instead of playing to win one hand at a time, the strategy of “GO” is to sacrifice a “stone” here and there to win in the long run.

Think about these two different strategies and reread Mr. Van Eck’s comments. Plainly the Chinese are “importing” technology at a MUCH faster rate than they could ever develop it on their own. We have seen this strategy time and time again whereby the Chinese only allow a high tech manufacturing plant to be built if the company’s modern technology is transferred to the Chinese state. So while companies think they are winning “one hand at a time” by being allowed to build this or that plant, the Chinese are importing technology that would take them decades to develop on their own! Eventually China will be able to build Airbuses on their own and with China’s much cheaper labor costs . . . well, you can figure out what is going to happen over the long run.

Said strategy is about to dawn on America’s automobile companies in spades when China’s “Chery” automobile hits our shores in the not too distant future. As Adrian Van Eck concludes, “If we were Boeing (BA/$90.98), we would cancel every program now running in China, because they are simply training those who would compete with and destroy them! And if we were one of the CEOs of giant U.S. firms who are following Boeing and sending them state-of-the-art equipment (ready to copy), I would understand that this announcement of China's plan to build big planes is a warning shot across the bow. Any of them could be next."

Reminds me of a story from North Dakota. Guy from the local implement dealer goes out to the Hutterites (a German sect that live on large collective farms) and shows him the new manure spreader. They seem impressed and ask if they can try it out for the weekend. With dollar signs dancing in his imagination he readily agrees. Comes back monday and the manure spreader is sitting out in the yard with two more spreaders lined up next to it. They'd taken it apart, figured out how it worked and used it to make a couple of copies, then put it back together again. Of course, they didn't buy the spreader. The Russians used to do that sort of thing, but for high tech goods, the assembly tools and processes themselves are part of the puzzle so the Chinese have taken a new approach. Any company that assembles goods in China is cutting their own throat.

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