Doing Business in China More Complicated than Realized

YOUNGSTOWN, Ohio – The economy of China resembles a house of cards liable to collapse at any second but somehow stays intact, the chief engineer in China for the Timken Corp. said Wednesday night.

As that nation’s economy is structured, Craig Seidelson suggested to engineering faculty and students at Youngstown State University, it resembles a Ponzi scheme struggling to maintain sufficient growth that allows it to keep its currency artificially low so it can sustain its level of exports and invest the foreign currency earned in the economies of its trading partners. This sustains its heavily regulated system and allows it to continue.

So far it’s worked, Seidelson said. The question is: How much longer can China’s leaders tiptoe from a manufacturing export economy into more of a mode where its citizens raise their standard of living?

In delivering “Made in China,” the inaugural YSU Industrial and Systems Engineering Lecture, Seidelson addressed potential manufacturing managers on the realities of running factories there. He based his talk on having spent most of his last 15 years in that country overseeing Canton-based Timken’s factories in China.

Seidelson provided a wealth of slides and statistics to show how business is done in China and how the United States and China got where they are today. Both are vital to the economy of the other, he said.

U.S. manufacturers have invested $1.5 trillion in factories in China since that country was admitted to the World Trade Organization in 2001, an investment that supports 10% of American manufacturing jobs today. Since 2001, roughly 1.5% of manufacturing jobs in Ohio have gone to China, putting the Buckeye State in the middle of all states, Seidelson said.

Twenty percent of the goods the United States imports are made in China -- and far more manufactured goods than consumer goods. These goods, roughly $90 billion a year, are made in “tens of thousands” of factories owned by American that employ anywhere from one person to 500 at each site in 17 of the 22 provinces of China. “Sixty percent of factories are small factories in one-factory towns,” Seidelson said.

China has exceeded the level of exports the members of the WTO, including the United States, projected in 2001 and this country has a $400 billion trade deficit with China today. The United States imports four times what it exports to China.

However, China has invested $500 billion in this country, much of its in our national debt but some in physical assets. Moreover, for each dollar an American spends on a Chinese good in this country, 55 cents of that dollar goes to a U.S. service industry. For example, if an American pays $1 for a toy made in China at a retail store, that store keeps much of that 55 cents, which goes to wages for management, salesclerks and shelf stockers, as well as truck drivers and those who keep the trading lines open between the two countries.  

Statistically, the economy of China is much like that of the United States at the end of World War II when 40% of gross domestic product was based on manufacturing, Seidelson said.

China has 112 million documented factory workers and an unknown number of undocumented factory workers, or three of four inhabitants of Earth who work in factories. “Two of three people in China work in manufacturing,” Seidelson said, “including undocumented workers.”

China, he emphasized, has “the world’s largest and lowest paid workforce.”

These Chinese are “the worst paid in the world, about $1 an hour, including benefits, if they work in a city the size of Youngstown, $2.30 including benefits in the largest cities. … The undocumented get eight cents an hour.”

Because the pay is so low, turnover is high. Chinese sign a three to five-year contract to work at a place of business. At the end of the contract, they often have tired of the work and/or feel exploited and move on.

Affecting these decisions. Seidelson noted, is China experiencing a 6% rate of inflation – the United States has a rate of less than 2% -- and factory owners must be prepared to grant annual wage increases of between five and 10% a year. To not do so causes employees to skip out on their jobs, then often filled by undocumented migrant workers.” But there is no quality control,” the speaker pointed out.

Just as often the factory managers decide not to enter into another contract because doing so would guarantee lifetime employment at that worksite.

For those reasons, Seidelson explained, there is high turnover and relatively few seasoned or experienced workers.

China with 300 million people and America, with 12 million factory workers, account for 39% “of everything made on the planet,” China 20% and the United States 19% respectively.

“So what is it about China that makes it so competitive?” Seidelson asked.

To oversimplify, it’s the Chinese legal system, bureaucracy and, by U.S. standards, crushing regulation.

For example, to build a factory or import a machine not made in China, one must secure the approval of 32 agencies, any one of which can deny a license. “All businesses in China need a license,” including one from a regional and/or municipal economic development bureau.

Chinese laws are intentionally written so vaguely to allow wide latitude of interpretation. As Seidelson put it, “In China, a law is a suggestion and town officials can interpret the law as they see fit.”

It also behooves a businessman to hire a lawyer in each town to ensure he has the legal interpretation he needs.

If town officials want a business, “they interpret the law to make it attractive to you.” China has laws governing banking, taxes, land use and the environment. “The laws don’t change,” Seidelson said. “Interpretations do” and can be changed midway through a contract.

Incidentally, the speaker noted the government always owns the land on which a factory sits even though a resident or alien owns the factory.

In this country, economists have computed that $1,700 per American is spent to comply with environmental regulations. “There’s nothing comparable in China,” Seidelson observed.

And where U.S. companies spend $20 billion annually litigating disputes, “Not in China.”

Should a foreigner believe a Chinese has, say, violated his intellectual property and sues in a court in his nation, his victory is hollow because “Chinese courts don’t recognize judgments of foreign courts” and the Chinese have few assets outside their borders and there’s little to seize in satisfaction.

China has its share of business failures, Seidelson pointed out: “Factories close all the time. Joint ventures fail. It’s not a gold mine.”

Failure can result from a bureaucracy changing its mind about whether it wants a business to continue, causing one of its bureaucrats to suspend the owner’s license and suggest he move elsewhere because the town wants to host a different business.

“If they don’t want you,” Seidelson said, “regulation is your enemy. If they want you, regulation is your friend” and navigating the bureaucratic and regulatory maze is a breeze.

Pictured: Craig Seidelson delivering “Made in China,” the inaugural YSU Industrial and Systems Engineering Lecture.

Published by The Business Journal, Youngstown, Ohio.
CLICK HERE to subscribe to our twice-monthly print edition and to our free daily email headlines.

Tags: