Lies, Damn Lies, Statistics and Making Lots of Money in China

Excellent post on China Challenges blog the other day on media and political manipulation of China trade numbers. The post highlights a NY Times article that "finally makes the critical point that 'Made in China' is often times 'Made by Someone Else.'"  The article talks about how multinational companies, like Motorola and Dell often use China as "the final assembly station in their vast global production networks."  It is companies like Motorola and Dell that reap the bulk of the profits from China trade. 

The other day a Shanghai business consultant told me he is constantly having to moderate his Western clients' interest in cutting its Chinese manufacturing costs.  This consultant told me he does this out of a fear that reducing Chinese manufacturers' paper thin margins any further necessarily will lead to quality problems.  As an example, he told me of just recently having pointed out to one of his American clients that the Chinese manufacturer was already making less than three cents per item in net profit, as compared to the more than five dollars per item in net profit received by the American company. 

Dong Tao, a UBS economist says essentially the same thing in the article: "Look, a Barbie doll costs $20 but China only gets about 35 cents of that."  Chinese officials rarely miss an opportunity to argue that the trade statistics showing huge surpluses for China are misleading indicators of the country's prosperity. "What China got in the past few years is only some pretty figures," said Mei Xinyu of the Ministry of Commerce Research Institute. "American and foreign companies have gotten the real profit."

This coincides both with what we have seen on the ground in China and articles that cite actual numbers.  For instance, just the other day, the Wall Street Journal (again, one of the few Western publications that deals fairly and accurately with China) ran an article entitled, "U.S. Firms Are Finding A More-Open China," discussing China's substantial progress in opening up to foreign business.  NOTE:  The Wall Street Journal does not allow for linking to specific articles.

The article starts out talking about how "American businesses report they have more opportunities than ever before as China steadily opens its markets, even as the U.S. threatens tougher action over its record trade deficit with the world's most-populous nation" and then notes the differences between reality and "political tone:"

As further evidence that China is opening, the annual [AmCham-China]survey found that market competition in China is heating up. U.S. companies are battling other foreign businesses -- not just Chinese companies -- for market share, and they are being squeezed by imports, too.

The study offers a striking contrast to the political tone in Washington, where Beijing is coming under increasing fire as a result of its huge trade surplus with the U.S., which reached $201.62 billion in 2005, according to U.S. data. This week, U.S. Trade Representative Rob Portman criticized China for keeping American products out of the country through unfair competition and trade barriers. Mr. Portman also faulted China over piracy, and he promised tougher enforcement of trade laws.

The chamber report draws on an annual survey of hundreds of its members conducted over the past seven years, a period that straddles China's entry to the Geneva-based World Trade Organization in 2001. It indicates that China has gone a long way to make good on its WTO commitments to enlarge market access. In 1999, only 24% of respondents reported success in cracking the China market. But in 2005, 72% said they had expanded the range of their products and services since China joined the WTO.

The study highlights a growing gap between perceptions in Washington about trade with China, dominated by the debate over manufacturing outsourcing and job losses, and the experience of U.S. companies that have taken the plunge into China.

Some two-thirds of American companies said they are profitable or very profitable in China, and 42% said their China margins were higher than their world-wide margins.

The article also notes that increased liberalization in China has also allowed more foreign companies to go in as a wholly foreign owned entity (WFOE), as opposed to as part of a joint venture:

At the same time, U.S. businesses are enjoying more freedom to maneuver. China once required almost all foreign companies to set up joint ventures with domestic firms -- forced marriages that often ended unhappily. But in 2005, 60% of survey participants said they operated a wholly owned venture, up from 33% in 1999. During that period, the number of companies operating joint ventures dropped to 27% from 78%.

We view the WFOE v. JV statistics as further supporting our contention that, in most instances, a Wholly Foreign Owned Enterprise is  preferable to a Joint Venture, with the WFOE using a regular contract to secure its relationships with local Chinese companies.  We have blogged on this issue before, in WFOE v. JV and in "When in China, Don't Get Screwed -- The Movie."