Continuing our effort to refine a prediction for Chinese economic direction, I believe that China will:

(1) Increasingly digest and take advantage of foreign technology to create increasingly effective and efficient local products (and only then will it more rigorously enforce anti-piracy laws -- akin to what Japan is now doing in such areas as flat panels)

(2) Go beyond commercial, increasingly commodity products to embed unique Chinese standards that bar or slow foreign entry, i.e., increasing Chinese price-volume curve efficiencies while damping foreign efficiencies and denying revenue to Chinese competitors (e.g., DVD, CMDA, PC chipsets, Red Flag Unix, encryption algorithms)

(3) Continuing reduction or elimination of foreign royalty payments for any and all products - a corollary to (2) - be they products made for domestic Chinese consumption or export (the recent Microsoft contract cancellation is a mere tip of this iceberg)

(4) Displace less efficient foreign suppliers in foreign supply chains and so assume a greater percentage of a supply chain's critical path (e.g., US automotive OEMs will continue their pursuit of lowest cost suppliers to the point that they will abandon their historic 'domestic' suppliers for Chinese suppliers, thereby decreasing the critical mass of those offshore suppliers)

(5) Acquire one of the three PC manufacturers among the top ten firms that are not expected to survive the current in-progress shakeout of the global PC market by 2007 (Gateway has been the most frequently mentioned candidate but others are possible). I would expect that process to expand into other manufacturing sectors - see (6)

(6) Create reverse distribution channels under Chinese control for Chinese products thereby gaining stability while increasing price-volume efficiencies and further denying revenue to their competitors (China has watched the postwar Japanese model and will beat them at their own game)

(7) Move to gain influence on retail distribution chains in the US and elsewhere to continue that reverse distribution control. I will go so far as to put Wal-Mart in that category (a firm that cannot not now survive without Chinese products, either from indigenous Chinese firms or foreign transplants driven to China by the supply chain owners)

For those of you who think that Wal-Mart is a bit of a reach, I point to Wal-Mart's recent agreement "under pressure from the Chinese labor federation," to "permit branches of the official Communist Party-controlled union in its Chinese stores if employees requested it." The Chinese are superb at executing the long view, far better than the US, and this could well be the start of a gentle, incremental long range Chinese approach.

Many US and European actors will remember the postwar Japanese turnaround yet will be caught flatfooted by China's retracing that same path because China will traverse it far faster than did Japan. (It is almost axiomatic that each technology generation takes half the time of its predecessor as the baseline of technology, equipment, and knowledge available to the new entrant is significantly greater. "The China Price" is worth the read for the sweep and velocity of this trend line.

I also think that there is a parallel to the Nixon administration's green light to Japanese firms to hollow out early US technology/electronics markets, e.g., TV, radio, VCR, in return for Japanese support of US foreign policy aims, with the actions of the Clinton and Bush administrations to push down US product manufacturing costs under a misplaced view that this 'would draw China in' to the world economy as a 'controllable player.' If control remains a dominant factor, that control will shift to China rather than the US or the West.

Tech Firms Keep Riding Chinese Tiger
By Cynthia L. Webb
Washington Post
November 30, 2004
Note, Cynthia Webb's Filter column at the Washington Post is a good technology feed that amalgamates associated themes. This entry happens to deal with China.

"The China Price"
Business Week SPECIAL REPORT
DECEMBER 6, 2004