The U.S. Innovation and Competition Act

by Joe

Helping America Regain Lost Ground in Economic Leadership and Influence

Few areas amid the continuing trade scuffle between the United States and China are as heated as the ones that exist in the semi-conductor industry.  If your organization competes in this sector, you have doubtlessly been observing recent legislation in the U.S. Senate with a keen eye.

At the center of this tension is America’s contention that China has been an unfair competitor.   Most often at loggerheads in recent years, both parties worked together in the Senate to clear the bill with a two-thirds majority vote.  The bill, referred to as the U.S. Innovation and Competition Act, allocates $250 billion, more than $50 billion annually for each of five years, to subsidize semiconductor manufacturing.  This will help domestic semi-conductor firms compete on an even footing with Chinese firms and will address global chip shortage that’s disrupting supply chains for things like cars, smartphones and appliances.  To assess this budget, keep in mind that this is a funding level similar in real terms to what the U.S. government invested in the 1960’s Apollo space program.  

The global semi-conductor market is at the heart of new Capitol Hill legislation.

A huge amount of the total budget would be funneled directly into applied science initiatives.  For instance: 

$81 billion – allocated to the National Science Foundation.  Roughly one-third of this will be used to establish ten focus areas including artificial intelligence, robotics and biotechnology.

$10 billion – to be directed to university technology centers and innovation institutes to conduct research on the key focus areas. 

$17 billion – directed to the Energy Department for research and development in energy-related supply chain activities.

$10 billion – to be invested over five years to the Department of Commerce to create regional tech hub programs.  One-third of these hubs will be located in rural areas.

$1.5 billion – to be invested in 5G related wireless technologies.

U.S. Commerce Secretary Gina Raimondo has said the funding could result in seven to ten new U.S. semiconductor plants.  The once vibrant U.S. industrial commons supporting the semiconductor industry will need to be re-vitalized to support these plans.  Buy American requirements will support the growth of that industrial commons, and they have also been written into the bill.  Buy American categories include iron, steel, manufactured products and construction materials used in federally funded infrastructure projects.  Also, in reflection of the difficult lessons learned during the Covid-19 pandemic, government agencies will commit to two-year contracts with U.S. suppliers of Personal Protective Equipment.

  

:A People’s Liberation Army Soldier stands guard in front of the Great Hall of the People

In recent essays, this blog has pointed out that the United States, as well as other nations, are taking steps to reassert their economic strengths, especially in the technology sector and that these steps may have the result of further slowing China’s growth, which since the beginning of 2021 has shown some signs of cooling.  This recent Senate bill is clearly part of this trend.   Clearly, no one expected China to show great pleasure about the U.S. reasserting itself economically.  In fact, China’s parliament expressed “strong indignation and resolute opposition” to the bill. The Chinese parliament said in that the U.S. bill showed “paranoid delusion of wanting to be the only winner” and had distorted the original spirit of innovation and competition. In Beijing, Chinese foreign ministry spokesman Wang Wenbin said, “We firmly object to the United States seeing China as an imaginary enemy“.   On the other hand, the American business community has long held that China’s growth in the semi-conductor industry has been based on unfair trade practices like intellectual property theft and forced technology transfers.  The new bill directs the US secretary of state to publish a list of all state-owned enterprises in China that have conducted business using these sorts of tactics. Additionally, America is also working to strengthen its political and business alliances with Japan and Australia, with an eye toward ceasing the importation of Chinese products made with intellectual property that the Chinese did not develop, own or license.

In addition, the U.S. President’s authority to impose sanctions against people or entities that have stolen US trade secrets or benefited from such theft is being reinforced and expanded.  Sanctions against foreign entities or people that have supported or engaged in cyberattacks or otherwise undermined US cybersecurity on China’s behalf are likewise strengthened in the new bill.  It would create an inter-agency task force to address Chinese market manipulation in the United States and authorize spending to support an independent media in China.

Of course, there are very important geo-political implications related to the bill, and support of the U.S. semi-conductor industry.  Senate Majority Leader Chuck Schumer explained it this way,:

“The premise is simple, if we want American workers and American companies to keep leading the world, the federal government must invest in science, basic research and innovation, just as we did decades after the Second World War. Whoever wins the race to the technologies of the future is going to be the global economic leader with profound consequences for foreign policy and national security as well.”

Having only recently passed through the Senate, the bill is now in the House of Representatives and the usual deliberations and negotiations will occur.  However, with the strong support from both parties that the bill received in the Senate, it’s expected that the bill will eventually clear the House and be signed into law.

Any time a large stone like this is tossed into the waters which define U.S.-China relations, there will be many ripples.  The Chinese have already expressed discontent.  It’s difficult to know exactly what the implications of these events will be.  However, Word4Asia will continue to monitor and inform as we always do.  

As ever, if your plans include China, we’d love to dialog with you.  Our large mainland China network, and our over twenty-years’ experience guiding our clients to success in China may be an important part of your success.  We’d love to discuss options with you.  Please contact Dr. Gene Wood at gene@word4asia.com if you’d like to talk!  We’ll keep an eye out for you!

One Year After Covid-19, China’s Economy Continues to Grow.

by Joe

Is There Trouble on the Horizon?

Over a year after the start of the global Covid-19 pandemic, the United States and China continue their competitive sparring for the spot of Earth’s largest economy.  Much has already been said about China’s incredible economic rebound in the final quarter of 2020.  This aim of this month’s blog is to provide a brief review of the industries in China’s economy that are leading the nation’s economic success.  At the same time, there are signs of a coming slow-down in China which will be briefly addressed.

Let’s begin the review by recognizing that China had a very strong first quarter in 2021; GDP rose versus same quarter a year ago by 18.3%.  Adjusting for the 2020 economic impact of the corona virus on China’s economy, this still means that China’s 1st quarter 2021 GDP is more than 12 percent ahead of the same quarter in 2019.  For another comparison point, consider that China’s average quarterly growth rate between 1989 and 2019 was 9.4 percent.  12 percent quarterly growth is a big deal.

China’s economic growth has historically come from three key areas:

  • Increasing affluence and market demands, especially among younger, urban consumers
  • A consistently positive balance of trade (although China has had to face increasing resistance to this over the last few years)
  • Government infrastructure investment 

A review of the leading Chinese industries, ranked by estimated percentage growth for 2021, reveals what will be required to continue growth.  Similar requirements will have to be achieved throughout China’s economy if growth at the Q1, 2021 level is to continue. 

Rank
Industry

Industry Revenue

(Billions)

Percent

Growth
Factors that Drive Future Growth
1
Passenger Rail Transport
$30.9
55.3%
  • Government investment in railways 
  • Robust demand for passenger railway transport  
  • Increases in operating scale
  • Improvements in structure and quality 
  • Increases in transport capacity 
  • Modernization of railway equipment
2
Internet Services
$803
18.5%
  • Significant increase in the number of internet users 
  • Pricing competition will slow industry revenue growth.
  • Growth will attract new industry competitors.  
  • Web portals will continue to play an important role in the industry. 
  • Leading competitors will expand to maintain market share.
3
E-Commerce
$1,800
18.5%
  • E-commerce companies continue to improve services
  • Internet penetration continues to increase
  • Customer sentiment is high 
4
Medical Device
$26.1
18.1%
  • Government healthcare policies and export incentives 
  • Exports
  • Continued increases in domestic demand driven by
  • Continued growth in affluence among certain demographics within China.
5
Toll Road Operations
$73.9
17.7%
  • Large government investment and demands for toll roads. 
  • China’s expressway network gradually being completed 
    • Personal demand for road use 
    • auto ownership increasing
    • Expanding tourism sector expands
  • Commercial road uses increasing 

Despite all of the good news, however, there are signs that China’s economy is beginning to slow. Several important KPIs (key performance indicators) follow:

Is the Chinese Economy Cooling Down?

Examples:

Consumer Price Index:  CPI rose to .9% in April, 2021 versus .4% in March.  Typically, rapid economic expansion can lead to price inflation, which, in the long run, can lead to an economic contraction if the decline in consumer demand results in higher unemployment.

Producer Price Index:  PPI in April, 2021 was 6.8 percent versus 4.4 percent.  Often, an increase in PPI is a precursor to increases in CPI, as wholesalers raise prices to cover manufacturer price increases.  

Balance of Trade:  Chinese imports increased by 43.1 percent in April 2021, versus the same period in 2020, and increased 13 percent over March, 2021 import values.  Obviously, increases in China’s imports. Represent GDP leakage out of the nation’s economy as well as having a significant impact on Chinese manufacturers.  A continuation of this trend could ultimately lead to a reduction in the size of the labor force.

The sources for our research are always listed below. Obviously, data errors will lead to inaccurate summarizing. Before you make decisions, we suggest doing your own due diligence.

Word4Asia occupies a unique niche in the world of consulting to organizations with their eye on China.  We continually keep ‘an eye’ on what is happening in this vital global economy and share our expertise with our clients.  If your plans include work in mainland China, we hope you’ll reach out to us.  We’d enjoy an opportunity to share our over twenty years of active involvement in this fascinating market and country and we’d love to be of service.  To start a conversation, please reach out to Dr. Gene Wood at gene@word4asia.com

All the best!

References:

https://fortune.com/2021/04/16/china-gdp-economy-2021-q1-recovery-losing-steam/

https://www.ibisworld.com/china/industry-trends/fastest-growing-industries/

Post Covid-19, China Sets Its Sights on Economic Growth and Climate Change

by Joe

As ground-zero for the worldwide pandemic, of all nations, China has had the longest period of all nations to contend with, and recover from, the economic impact of the global recession that followed it.  As covered recently in this blog, China has managed to be the only major economy to register economic expansion in 2020.  However, this has not been without costs elsewhere in the nation.  One of the areas that China has suffered a setback was in their chronic pollution problem.   As China’s lockdown ended in the final months of 2020, many of the major gains in pollution abatement had disappeared, literally up in smoke.  

China has a stated goal of becoming ‘carbon neutral’ by 2060.  However, like many industrial nations, China is also in a Catch-22 situation with regard to continuing to expand their economy while also meeting their goals to reduce their carbon footprint.  China’s industrial infrastructure is industry-driven and, in 2019, over two-thirds of their energy was coal (dirty energy) supplied.   Coal-based energy is a leading contributor to their challenging air pollution problem.  The Chinese cities with the biggest air pollution challenges include Taiyuan, Beijing, Urumqi, Lanzhou, Chongqing, Jinan and Shijiazhuang.

One of the dilemmas China may face in achieving their 14th 5-year plan (the first plan was published in 1953) lies in disagreement among their top government officials about policy priorities.  In 2020, the party boss of the Ministry of Ecology and Environment stated that while China remains steadfast in their 2060 goal, provincial efforts to supercharge their post-covid economic recovery, were having a negative impact on winning the ‘blue sky war’.   Four of the 20 points stated in this latest Five-year Plan address climate change.  They include:

  • Reduction in energy consumption per unit of GDP(%)
  • Reduction of CO2 emissions per unit of GDP (%) 
  • Forest coverage rate (%)
  • Comprehensive energy production capacity. 

All four of the energy- and climate-related indicators are labelled as “binding”.  A link to an excellent article from Carbonbrief.org can be found at the bottom of this blog.  It provides a thorough summary of all climate-change related policies included in the 14th Five-Year Plan.

Ironically, even as China continues to expand their coal-fired plants, the nation’s air pollution problem is also eroding their gains in GDP.  According to a report co-published by Greenpeace and CREA (Council of Republicans for Environmental Advocacy), in 2018, dirty air cost 6.6 percent of China’s GDP, compared to 5.4 percent for India and 3 percent for the United States.  Agriculture is one of the hardest hit sectors in China’s economy.  The skies are so murky that declines in photosynthesis are reducing crop yields, forcing China to increase the amount of grain the nation imports.  A Chinese agriculture expert suggested that, at present levels, smog will create a situation “somewhat similar to a nuclear winter.” 

An economic recovery which does not also address the pollution issue in China will have major implications for China’s future economic health as well. According to a report released by Greenpeace and CREA, Pollution is also threatening China’s political stability. According to a Harvard survey conducted in 2016, one-third of respondents in China said they would petition or protest against air pollution had it negatively affected their own health or the health of their family members.  It isn’t only China that is being impacted. 

Recent research shows that Chinese air pollution has actually contributed to up to 65 percent of the ozone increase in the Western United States. We are, after all, one world. 

At the same time, in late 2020, during a video conference with the UN General Assembly, President Xi stated recently that China is aiming to hit peak emissions before 2030 and to achieve carbon neutrality by 2060.  To understand how big a commitment this is, consider these three statistics: 

  • China produces 28% of the world’s CO2 (a greenhouse gas).
  • 50% of the world’s coal consumption is burned by China each year.  
  • Over 25%of the world’s climate pollution originates in China.

China has certainly itself a BHAG (Big Hairy Audacious Goal).  

In the same address, President Xi also called on all countries to achieve a green recovery for the world economy in the wake of the coronavirus pandemic.  President Xi also promised that China will start down this road right away by instituting more vigorous climate policies.  Assuming that China stays on course with this commitment, this could also mean reductions in the amount the nation invests in oil development.  China is the biggest energy financier – as well as the largest oil market.  

Various environmental advocacy groups have stepped forward to assist China meet their commitment to carbon neutrality by 2060.  One of these is the Environmental Defense Fund.  The EDF is working with the Chinese government to launch a national system to control climate pollution.  Specifically, the EDF has helped China in the following ways:

  • Develop a carbon market (carbon credit system).  

Initially, the national carbon market will cover the power sector, which includes over 1,700 mostly state-owned companies.  This will make it the world’s largest carbon market.

Moving forward, this national carbon market will expand to include more than 7,000 companies in eight industrial sectors (power, petrochemical, chemical, building materials, iron and steel, nonferrous metals, paper production, and aviation). 

  • Market-based Emission Reducing Incentives

Over the past two decades, EDF has helped China establish a variety of market-based incentives to cut emissions and strengthen enforcement of environmental laws.

  • Already, the EDF has trained over 3,600 government and industrial stakeholders on carbon credit trading.  
  • 58,000 Chinese environmental officers have already been trained
  • Under EDF guidance, one million tons of greenhouse gases have been verifiably reduced through low-carbon farming techniques.
  • Providing input into new environmental policies and programs which are being included in China’s latest five-year plan. 

Under the new administration in Washington, The US and China have also begun collaborating to combat climate change.  John Kerry and Xie Zhenhua, the climate envoys for the world’s two biggest economies, have agreed to work together “to tackle the climate crisis” with specific, measurable actions that will reduce emissions in ways that are consistent with the 2015 Paris climate accord.  In a joint statement, Mr. Kerry and Mr. Xie said, “Both countries recall their historic contribution to the development, adoption, signature, and entry into force of the Paris Agreement through their leadership and collaboration,” This agreement is particularly significant because it has been reached despite the economic and human rights tensions that exist between our two nations.  

China’s progress in addressing the climate crisis is just one of the many facets of life in China we stay abreast of at Word4Asia.  We believe that God has assigned mankind to be wise and responsible stewards of all the resources He has given us.  In much the same way, we are dedicated to working as stewards of the goals and objectives each of our own clients contract with us.  If your plans include China, we believe that our accumulated experience, our mainland China network, and our professional code of ethics may make us an ideal resource for you.  If you’d like to find out more about the work we do, and how we may be able to help you, we hope you’ll contact us.  You can start by reaching out to Dr. Gene Wood at gene@word4asia.com

https://time.com/5935138/chinas-environment-economic-recovery/

https://www.bbc.com/news/science-environment-54256826

https://www.edf.org/climate/why-china-center-our-climate-strategy

https://www.ft.com/content/71f724ff-a25c-4ff7-8713-b0aa02d3adb5

Understanding China’s Post Pandemic Business Environment

by Joe

In last month’s blog, Word4Asia reviewed changes in China’s economy that have occurred since the Covid-19 pandemic first appeared.  We chiefly focused on changes in the way China’s consumers have adapted to the new realities.  In this month’s blog, we review the anticipated changes that China’s businesses are experiencing.

In July 2020, The Diplomat completed a  survey of 135 Chinese senior executives regarding their outlook on post-pandemic economic recovery.  The sample was not representative and was skewed toward high-tech and online companies (55 percent).  However, it did include a mix of industrial and automotive firms (11 percent), financial (8 percent), and consumer/retail segments (13 percent), as well as healthcare (8 percent), media and education companies.  

The survey revealed that 80% of the companies were experiencing a negative impact following the pandemic. A decline in sales, and resulting layoffs were expected.  This was true even for companies that were entirely focused on the Chinese local market.

As time has passed, 50 percent of the surveyed firms believed they’d have to reduce headcount by more than 25 percent.  In reality, it’s turned out that only 20 percent of large companies have been required to do so.  

One-third of the companies originally surveyed have had trouble paying their rent, making payroll, or paying their bills.  On the other hand, 20 percent of tech/online and large-sized companies have actually done better than projected.  Small and medium sized companies have fared the worst during China’s economic recovery.

To adapt to the difficulties many companies are experiencing in China, Chinese managers are already moving headlong into revising their strategies, tactics and operations.  In a recent study, the management consulting company, McKenzie, recommended the following actions:

Updating new product development roadmaps:  Updated plans must reflect the trends that have been developed throughout the pandemic.  Sparkling Zero series is performing extremely well. Brand upgrading is a major shift. Consumers are looking for higher quality, established brands. We’ve also captured in-home consumption by converting consumers to premium take-home packs, like mini-can multipacks, shifting away from big bottles. This shift could also be long lasting as consumers build in the habit of consuming higher quality products in a size that is right for them.

Developing new distribution channels:  In last month’s blog, we reported on the ways Chinese consumers have moved much of their purchase behavior to e-commerce.  Prior to the pandemic, Chinese consumers were already ahead of the rest of the world in total e-commerce spending.  Sales strategies will have to reflect the new trends, including developing different online and offline channels, including direct-to-consumer, social commerce, ecommerce marketplaces, and physical channels.   


For example, China’s convenience stores and drug stores have seen a long-term increase in consumption while clothing stores, and department stores have seen a long-lasting decline.  Manufacturers will either have to find ways to penetrate new channels or suffer an erosion in sales.

With the heightened attention in hygiene and health, Chinese businesses will be reviewing their supply chains to safeguard their employees and consumers.  Risk mitigation will be, and alternate material sourcing should already be underway.  These changes have been felt differently across various industries.  For instance,“contactless” car return service, and other self-service measures, including delivering disinfected cars for pickup and drop-off by customers in community areas.  Store employees were also provided with protective equipment and disinfectants to prevent virus transmission.

Improved flexibility:  The world may be in store for future pandemics.  The way the environment is changing, it’s almost a certainty.  The world economy is also increasingly volatile.  Chinese management teams adopting a more flexible perspective and building contingencies into their plan’s organizations.  Chinese firms have been optimizing their investment in ad campaigns, to actually reduce consumer demand, and re-negotiating contracts.

The technology sector is one area which is not at all certain at this time.  Over 40-percent of Chinese tech firms have a level of concern regarding access to global technology.  The US-China trade war is one reason for this, as the United States has tightened down on Chinese access to American technology.  In addition to the United States, other leading tech nations, such as Japan, South Korea, Germany and Singapore are also de-coupling with China.  The majority of executives surveyed by The Diplomat have forecast some level of U.S.-China decoupling in the technology sphere. Looking out five to 10 years from today, in fact, across all company types — local Chinese tech and non-tech companies, and MNCs with headquarters in the U.S. or non-U.S. countries — only a minority believe we will have a globally open marketplace where Chinese and U.S. tech companies continue to compete in each other’s home markets.  In response, Chinese tech firms are planning to access more of their technology from other Chinese firms within the PRC itself.

The pandemic has changed business across the world.  Business in China, which has for many years experienced a long trend of annual growth, is clearly at an inflection point.  How its managers address this new challenge will have an impact on any organization with objectives there.  At Word 4 Asia, we make it our business to keep our network members and stakeholders abreast of these changes.  We’ve succeeded in helping our clients accomplish their objectives in China by understanding the nations’ regulatory requirements and respecting  its culture and values.  If your organization is interested in possibilities in China, we would enjoy a conversation with you.  Our knowledge, experience and mainland network may be just what you need to succeed.  Feel free to contact us at: gene@word4asia.com

https://thediplomat.com/2020/07/after-covid-19-rebooting-business-in-china/

https://www.mckinsey.com/featured-insights/asia-pacific/how-consumer-companies-in-china-are-preparing-for-the-next-normal-a-virtual-roundtable

https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20still%20the%20worlds%20growth%20engine%20after%20covid%2019/mckinsey%20china%20consumer%20report%202021.pdf

https://wtop.com/news/2020/01/top-10-countries-for-technological-expertise-ranked-by-perception-2/

 

The U.S. Innovation and Competition Act

Few areas amid the continuing trade scuffle between the United States and China are as heated as the ones that exist in the semi-conductor industry….’

 

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One Year After Covid-19, China’s Economy Continues to Grow.

Over a year after the start of the global Covid-19 pandemic, the United States and China continue their competitive sparring for the spot of …’.

 

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China Sets Its Sights on Economic Growth & Climate Change

As ground-zero for the worldwide pandemic, of all nations, China has had the longest period of all nations to contend with, and recover …’.

 

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