Waking up to China

The Malta Independent - Friday Wisdom

My contribution of last week ‘Blind Alley’ has generated abnormally high volume of feedback mostly agreeing with my analysis though quite a few offering different opinions on who is to blame.

Let’s not waste energy in arguing about guilt apportionment and preserve our energy for devising a plan on how to regain sustainable economic growth and international competitiveness.

One of the consequences that the saga of the budget measure to remove the days of leave in lieu of public holidays falling on weekend is that it might lead to very false conclusions. For those who were against such measure it could lead them to conclude that what they did not get through negotiations they might get through industrial relations measures either at macro (state) or at micro (company) level. Those who proposed such measures (government) or were prepared to subscribe to them (employers and unions other than the GWU) might wrongly assume that the measure is all that was needed to restore our economy to health.

If only we could leave aside such bickering and take an honest look at what is happening at the world around us and prepare ourselves for the threats and challenges coming our way, irrespective of whether we face them or continue to bury our head in the sand!

The principle challenge and threat come from China. Every country is having to come to terms with the reality of the Chinese economy, growing at 9% plus per annum, which will change the economic landscape of the world.

Every manufacturer in the world must be having a hard look at China and these include many of the factories which are the backbone of Malta’s manufacturing industry. Nobody can ignore a market of one point three billion people whose consumption and standard of living is increasing far beyond anything comparable anywhere else. Nobody can ignore the potential of not only tapping into such huge market but actually producing in China at a considerable cost saving.

If one wants to size up the huge significance of China’s presence on the world markets since it gained accession to the World Trade Organisation, one need just ponder on the quite unique phenomenon that is occurring presently in the world economy. While raw material prices are on a sharp upward trend in view of the increased demand originating from China, in some mysterious way such increase in raw material prices, metals and energy included, is not transmitting itself to the consumer/retail price level. This is quite different from the experience of the seventies and eighties when increase in raw material and energy prices quickly transferred themselves to high retail price inflation and eventually to monetary tightening that forced economies into a deepest post war recessions.

The difference this time is China. China is becoming the manufacturing power house of the world keeping retail price levels low or indeed falling as raw material hikes are more than compensated by production efficiency gains given the low cost environment prevailing in China.

And it is not just China. What China is doing for manufacturing, India is doing for back offices service industry, including IT, whilst Russia is also gearing itself, endowed with rich resources as it is, to become an international economic power-house to be reckoned with.

Given these economic events of metamorphosis proportions, can we afford to continue arguing whether to have 37 or 35 annual days of leave and public holidays? As the French roll-back the 35 hours week and as the Germans force cut-back in their social security structure, can we afford to be alienated by petty internal issues rather than launch a national plan to re-position ourselves properly to make most of the changing economic scenario?

This week the Chinese celebrated the start of their Mandarin new year – the year of the rooster. Places like Las Vegas, built as the world gambling city out of a spot in the Californian desert, re-tooled their expensive outfits built to replicate Paris and Venice to welcome the flood of Chinese tourists who are taking advantage of the economic and political liberation back home to get out and see the world.

Very soon the loss of jobs in manufacturing for the developed world will be more than compensated in the creation of new jobs in the service industry meant to meet the increased the demand of Chinese, Indian and Russian nouveau-riche. Tourism will be one of the major beneficiaries of such an economic shift and tourism services just cannot be outsourced to other countries; they have to be delivered on the spot to the visiting consumer.

Given our characteristics and the underlying strength of our tourism product, if only we can discover it, enhance it and invest in it, we stand much more to gain from the Chinese challenge than we stand to lose from the Chinese threat to manufacturing. This means that basically even our manufacturing has to be shifted to those processes which require instant reaction and delivery to markets demands, producing in small batch runs which cannot be served by the long lead times and huge volumes that go with production in distant Asia.

We can get out of the blind alley if we wake up to the opportunities coming from the Chinese and others.