The future of American manufacturing is in Asia and the Middle East. These two regions, followed by Latin America, will account for more than two-thirds of global economic growth over the next several decades. The demand in these regions for manufactured goods such as commercial aircraft, power plants and automobiles is projected to grow continuously throughout this period. For example, between 2011 and 2031, the Asia-Pacific region alone is expected to buy some 12,000 commercial airliners of all sizes, about the same number as North America and Europe combined. The same is true for automobiles with demand in Asia already equaling that of the West as a whole and expected to grow substantially in the years to come. As both populations and incomes in these regions continue to grow so too will the demand for white goods, labor saving devices, medical equipment and other high value manufactured products.
Western manufacturers have been working assiduously to meet current demand and to position themselves to capitalize on anticipated future demand. Often this requires U.S. companies to partner with local firms and even transfer intellectual property and manufacturing know-how to foreign companies that could one day become competitors. It is possible to give away too much in an effort to break into a potentially lucrative market. Aerospace industry experts point to Canada’s Bombardier as an example of a company willing to sell the West’s technological crown jewels to China in a misguided attempt to gain an advantage in what is assessed to be the world’s largest single market for single aisle commercial aircraft. The right strategy for a U.S. company is to provide enough help to foreign partners to make them valuable members of a supply chain while maintaining a competitive advantage through continual innovation.
The case for investing in Asia and the Middle East rests on factors that can be quantified and projected: GDP growth rates, demographics and government budgets. Even then, there are disputes about the reliability of the data and accuracy of projections. For example, some analysts have questioned the likelihood that China’s economy will continue to grow at the rate it has for the past several decades. Among the concerns they point out is the disconnect between high rates of GDP growth and relatively tepid growth in electric power generation. Their argument is that since China’s economy is export-oriented and manufacturing-based the rate of growth in electric power generation should parallel that reported for overall GDP. The suggestion is that China’s economy is not growing as rapidly as reported. Fortunately, if China’s rate of economic growth does slow, there will be time for U.S. companies to adjust.
The biggest risk facing U.S. firms seeking to expand their activities in Asia and the Middle East is from factors that are both impossible to quantify and difficult to predict, so-called Black Swans. In particular, U.S. firms may be facing a period of growing regional instability and even state-on-state conflict. Take the so-called Arab Spring. The explosion of popular discontent against long-established regimes in Tunisia, Libya, Egypt and Syria took everyone including intelligence analysts and academics by surprise. Given the failure to anticipate those events how much confidence can U.S. companies have in the stability of other regimes in the region? Then there is the possibility that Iran’s effort to acquire a nuclear weapon could trigger a major regional conflict with consequences impossible to calculate.
China’s GDP may continue to grow at an impressive rate forever. That is not where the risk resides. Rather, it is the political stability of the Chinese regime and regional peace that must be in question. It is an article of faith among China watchers of every stripe that the country is stable and the Chinese Communist Party is in control. Much the same thing was said about the Communist Party of the Soviet Union almost until the day it and the Soviet Union collapsed. While there is a case to be made that the Communist Party has succeeded in buying off the Chinese people there is an equally strong argument that the creating of a middle class of four or five hundred million is a profoundly revolutionary act the consequences of which cannot be predicted.
There is also a risk in holding too tightly to the belief that the Chinese leadership values stability above all other policy goals and that consequently while Beijing may bluster and threaten, it would never seek to advance its objectives by means of force. One has only to look at the popular response to the current dispute with Japan over the Senkaku Islands to question this assumption. There are reports that drivers of Japanese cars in China have been hauled from their vehicles and beaten. My son, who resides in Beijing, arrived home for a visit with gifts that included several bumper stickers very popular with taxi drivers in that city with patriotic and even jingoistic expressions of support for their nation’s claim to these eight barren rocks.
Without question, expanding U.S. exports to China and the Middle East is in everyone’s interest. However, U.S. companies need to have a well thought out plan B that takes account of political and even military Black Swans that could radically alter market conditions in either or both of these regions.
Find Archived Articles: