US technology base warned of seismic shift to China
February 03, 2005
FOR well over a century a big portion of US wealth has been generated by its manufacturing and technology heartland.
At the World Economic Forum it was clear that much bigger chunks of US manufacturing are now shifting to China and there is real danger that significant segments of its technology base will go as well.
Microsoft's Bill Gates warned that US visa laws were reducing the number of Asians entering the country and in the long term this would cut research there.
At last year's forum, China announced a slowdown but the weight of new projects from US, Japanese and other business centres contributed to a $60 billion capital investment spree in 2004 which made the slowdown a minor affair.
Chinese officials told the forum that investment had reached a dangerously high level. Apart from the US and Japanese-led manufacturing investment, there was also a scramble to try to overcome Chinese infrastructure shortfalls and the wave of speculative investment that led to countless apartments in Shanghai being bought by overseas investors but remaining tenantless.
US companies really have no choice. The cost of making a wide variety of goods in China is 20-50 per cent lower. US price competition is intense, so once one company in an industry goes to China the rest must follow.
What started as a low-technology movement is rapidly extending into the more sophisticated products that house the US technology base.
The big retailers, led by Wal-Mart, are putting their house brands on Chinese goods. In previous decades, Korean and Japanese manufacturers had to spend a fortune establishing brands to sell their goods into the US market.
There is debate in both the US and China about the long-term effects of this massive manufacturing shift.
Some of the Chinese at the WEF feared China would only be used to undertake manufacturing and that the high-value technology and design processes would stay in the US.
That's certainly true at the moment. Both China and India are simply part of the multinational corporate structures, but there are increasing signs that the technology is beginning to pass to China.
For example, in mobile phones the domestic Chinese market is enormous and so it is becoming the global design centre.
Wal-Mart is pressing ahead with radio monitoring of its stock. China is its main stock supplier, so they are becoming deeply involved in this technology development.
The shift of technology out of the US will accelerate because the US has been cutting back on the proportion of people it is educating in science and engineering.
In India and China, about 40 per cent of the tertiary student intake aims for engineering degrees, compared with an incredibly low 4 per cent in the US. American students want to be investment bankers because that's where they perceive the money to be.
Eventually the US may find it hard to generate today's wealth, but for the next decade or so the lower costs that China delivers will increase the US standard of living and boost profits.
Not far behind China is India, which also has an ambitious set of objectives. The ageing of the populations of Western countries gives India the chance to fill labour gaps.
It has a large pool of English-speaking engineers who can operate remotely in India or on-site. Accordingly, they plan to gradually move from their current position as a low-cost provider of services to a source of talent and capital for the West and later China. About one quarter of the 1 billion Indians live below the poverty line, so the country has a huge task.
Australia is outsourcing its manufacturing and services in a similar way to the US. But there is a difference -- the Chinese need our resources, particularly natural gas, iron ore, copper, uranium and nickel.
But in the future, services may become a much greater export to China, particularly if the US keeps its current visa policies, which make it hard for Asians to enter.
Gates revealed that the number of Asians coming to Microsoft's US science department had fallen 35 per cent and there had been a dramatic slump in Chinese people coming to US universities.
Australian universities have a magnificent opportunity to benefit from this US mistake -- although in the longer term the Chinese will set up their own facilities.
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