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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.

None of the above includes the ultimate destabilizer when the Chinese employ administrative edicts, tariff strictures and noncommutative standards (Chinese products meet the standard but foreign products do not) to force out foreign firms out of China in concert with investments into the home territories of those firms. See Confluence of thinking on Chinese outsourcing and supply chain risks from DSB and USCC.

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:

The implications are as significant as they are far reaching. It impacts everything from talent to technology, capital to competition and revenue to risk. It calls into question the very fundamentals of our investment and strategy in China and the role China will play in our global or regional operations. It implies increasing volatility and the need to ensure our organisations are agile and prepared for change...

It is essential for firms to break out Jack Welch's five strategy review questions:

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.

China's Inflection Point
Steve Monaghan
15 Jan 2008

Citi Writes Down $18 Billion; Merrill Gets Infusion
Edited by Andrew Sorkin
DealBook/New York Times
January 15, 2008, 6:44 am

The Subprime - Trade Deficit Connection
Thomas Palley
posted on January 7th, 2008 at 9:07

Sub-prime Casualties Who Should Have Known Better
Finding Dulcinea
January 6, 2008 3:05 PM

$9.4 Billion Write-Down at Morgan Stanley
New York Times
December 20, 2007

Case Study: Jack Welch’s Creative Revolutionary Transformation of General Electric and the Thermidorean Reaction (19812004)
Pier A. Abetti
Volume 15 Number 1 2006, pp 74-84

China Investing in Rust-Belt Companies
Auto-Parts Maker Wanxiang Invests in U.S. Partners As Its Ambitions Expand
Wall Street Journal
November 26, 2004
Fee archive
Free Mirror

Control Your Destiny or Someone Else Will
James Altfeld's 'Cliffs Notes' version of Jack Stack's A Stake in the Outcome, 2002

The GE Way Fieldbook: Jack Welch's Battle Plan for Corporate Revolution
By Robert Slater
McGraw-Hill Professional
ISBN 0071354816
Published 2000

Gordon Housworth

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