The inflection point in reversed capital flow from China to the US has occurred and will accelerate

On the Brownfield side of manufacturing, automotive manufacturers and similar Tier 0 producers; and on the Greenfield side, Venture Capitalists, have driven their respective tier base and investment stable firms to China based solely on piece part or operating cost with no particular thought to what happens when (a) the cost advantage dissolves, (2) the effects of that move - which I call destabilization once its full ramifications become felt (also here and here), and (3) the shifting of money from dollars and treasury notes to investment by Chinese entities at a time when their US/EU competitors are facing relatively higher capital costs.

I wager that many firms don't even have the foresight to look past the piece part cost trap much less the other drivers. With so many sitting ducks, Chinese investors will prosper.

Monaghan speaks of a Chinese inflection point that I submit has already arrived but its structural effects have yet to make a measurable effect:

[B]eneath the excitement of the domestic [Chinese] story emerges the prologue to something perhaps far more important. China and Chinese corporations are no longer simply a destination for capital but a point of origin. A fundamental change has begun. Today, five of the top 10 global companies by market capitalisation are Chinese. We are seeing the first ebb in the tidal flow of capital. China's sphere of influence and responsibility is changing. The fundamentals that created China's success equally pressure China to find new sources of competitive advantage. Chinese capital will flow to those sources as the domestic economy matures. No longer is the local market the sole consideration. China is now actively adjusting focus and capital from internal to international markets. That ebb will become an unstoppable current.

In any case, Monaghan's inflection point of capital flow had already begun only to be accelerated by weaknesses occasioned by the excesses of the subprime loan fiasco. China and other sovereign state investors will acquire stakes in key US investment banks on the cheap. (Yes, the markets have continued to fall, making some of these investments look less attractive, but were it not for the subprime impact those stakes would not have been available at all, much less than at the negotiated prices.) Monaghan makes what I would call a statement of the patently obvious were it not for the many firms that are unaware:

These should be asked frequently and especially at any change in operating or environmental conditions. (They form a key jump point for our strategic planning and technology forecasting efforts.) Most firms are not doing so with respect to China, or if they are, do not like their implications and so push them aside.

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posted on January 7th, 2008 at 9:07

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