Saturday, January 01, 2005

Myths Bounce

A new year has begun, but for most people things will keep going on as they have. Call it habit, momentum, impetus, but things tend to follow established patterns, whether you are talking about people, businesses - or even nations.

Earlier this week, I wrote posts on Employment and Self-Employment. This was partly simple soliloquoy on the basics every high-school graduate should know, yet most people learn the hard way much later, but it was also laying out some facts unique to the United States. Simply put, the United States is more business-friendly than any other nation on the planet, and this is why the USA will remain not only the most influential and potent country in existence for the next generation. Yes, there are nations which cozy up more to corporations, and yes, there are nations which sponsor massive industries in order to gain control, and yes, there are nations which have selected companies which lead the world in their field, but taken as a whole in the facets most critical to GDP growth and stability of currency, the USA has no rivals. Forget Superpower; the United States is effectively the Ultra-Power.

Take China for example. Over the past year, I have heard and read how China is a rising economic power, a revolution waiting to dominate the Asian continent, then the Pacific, and will match the US in economic power within twenty years. I heard an echo then, and I bet you did, too. Because the same things that are being said now about Jiang, were said in the early sixties about Khruschev and the Soviet Union. As we all know, the USSR's boasts proved hollow, and the Empire simply rotted from within, until Reagan forced Gorbachev to spare his people a bloody revolution of starving malcontents. Many of the PRC's fans today, make a point of saying how different things are now, but if you look at the signals, the truth shows up readily and without mercy for the Communist regime.

Look at their oil industry, for instance. China boasted about revamping their oil drilling and refining capacity way back in 1991; they made a big case about not caring anymore about OPEC, because the oil discovery in the South China Sea was going to change everything. Only, they couldn't get the oil the way they planned, the countries of Vietnam and the Phillipines fought and won in court for the best oil fields, and three major refinery acidents in as many years crippled the promised development of China's delivery system. Basically, China wanted it to work, but simply did not have either the technical level nor the business savvy to set up the requisite agreements to get their partners to do what they needed. That's one reason why China set up weapons deals with Saddam between 1997 and 2003; Iraq had lots of oil it wanted to sell under the table, and China wanted a lot of high-grade petroleum. Short term win, long term bust.

Then, consider automobiles. China sent students to Business Schools to learn how to modernize and market succesful consumer products, and one of the winners that always showed up in rising countries, was automobile exports. Japan of course, with Honda and Toyota led the way, but the relative success of Daiwoo and Hyundai showed the market was still hungry for cheap cars. China figured it couldn't miss. It guessed wrong. No fewer than twenty plants were built in China between 1994 and 2002 to make autos for export; the sales have been dismal by any standard, even inviting comparisons to the wretched Yugos from a generation ago. China has tried to claim that over 50,000 cars have been sold each year, but cannot name who is supposed to be buying them.

It's true that China has done well with cheap clothing and some simple electronics, but that is where the SOEs, or State-Owned-Enterprises, come in. Basically, China is trying a tactic that Japan used in the 1960s and 1970s; flooding a market with very-inexpensive products to drive out competitors, hoping to make up the losses later when the market was cornered. The problem is that Japan understood the balance of capital and investment, while China has simply flooded every market it could find, with no organization or follow-up. And China is already losing out to new rivals, from India, Thailand, and Brazil, who are targeting the markets with the best potential for growth. In short, China is losing money for no effective purpose than because they don't know what else to do.

What's worse, China has managed to make the worst of innovation. Mass production machinery has improved, but instead of training employees at SOEs for other skills they could use to help the country move forward, China simply lays them off. And in a Communist country, being "laid-off" means a constant 16%-25% Unemployment Rate. In a country of over a billion workers, that has led to whole towns of families with no work for years on end, and this has caused revolts and uprisings dozens of times. If these virtual armies of unemployed and starving people ever get organized, that's an instant army of 250 to 300 million angry, hungry people.

The same thing happens in many other nations. India, Brazil, and China represent the nations which are winning in the short-term, but cannot gain strategic gains because their tactics do not result in long-term stability or open expanded markets. Other nations with state-controlled economies, like Japan, France, or Russia, are more stable but unable to bring about the flexibility to evolve from the past to take full advantage of the new technology. Consider Japan, for example, and the legendary case of the VCRs. When Japan succeeded in driving out US makers of VCRs, many people believed that Japan had permanently dominated the market. Instead, American companies let go of the lost battle for the video players, and locked in control of the video cassettes. In any given year, the US makes more than ten times the revenue of videotape and DVD sales, that Japan does from player sales. Adaptability.

The US continues to lead the world in patents for business-applicable machines, for new medical procedures and new developed pharmaceuticals, for new alloys and composite materials, and for new businesses opened. That's not just last year, that's every year since 1945.

As long as America smiles on business, the world will see America out front. Way out front.

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