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04/09/2012

Book Review: The End of Cheap China


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Cheap goods from China have benefited millions of Americans, increasing their standard of living, vastly attributing to low inflation. Low-cost production is something we have come to accept, moreover, to expect. But as Shaun Rein's new book, The End of Cheap China: Economic and Cultural Trends that will Disrupt the World concludes, this is about to change.

Higher labor costs, shortages of skilled workers, rising commodity and real estate prices are combining to change this happy world for American consumers. It is also changing and disrupting how American companies view and use China. The biggest change according to Rein is that, "Instead of the market to produce in, China has become the market to sell into. China is increasingly becoming the country driven by the "optimistic consumer class."

Rein is well quaified to discuss The End of Cheap China. He first went to China in the mid 1990s to study Chinese at Nankai University. Later, he founded China Market Research Group. His firm supplies market intelligence to companies in a wide range of industries, as well as to hedge funds and private equity investors. His book is the result of this market intelligence, and his experience in China. Rein describes the phenomenal changes in Chinese culture by gathering information from those on all tiers of Chinese society. He notes the intricate Chinese–American relationship and gives the reader the feel of an on-the-ground observor on Chinese way of life—business practices, education, and politics—versus the often more academic approach of many writers on China.

China-Trip


Rein writes about his visit to Laura Furniture, the world's largest funriture factory. The factory employes 10,000. Laura Furniture now faces shrinking profit margins as labor costs escalate. The Chinese labor force is very mobile, moving quickly for higher pay. The annual employee turnover rate is 30+%. This is pushing Laura Furniture and many other Chinese companies to redirect their sales from exports to internal demand. Some lower-end manufacturing can be relocated to Vietnam and Indonesia. However, these countries lack enough skilled workers and the infrustructure to be significant alternative manufacturing locations.

One of the big challenges in China is its education system. This system is focused on memorization and test taking, versus the analytical thinking that is the core of American and English education. In addition, students can not freely pick their college major. The Chinese elite, seeing the inadequacies of their education system, elect to go to Western universities. The poor education system creates a shortage of management and executive talent at Chinese companies, affecting their ability to compete. Education and training are now major growth investment opportunities.

Despite this inadequate education system, China is a learning country. When Chinese companies make foreign acquisitions, they keep the management and bring in Western executives. They seek to learn from their acquisitions. This is in marked contrast to Japanese companies who set ceilings and push aside non-Japanese executives in the companies they acquire.

As an American living and immersed in China, Rein offers an informed view of the relationship between China and America. This is important in an election year when some American politicians use China as the scape goat for our economic problems. In China, an anti-America sentiment is growing. They resent our living off their savings, used to finance our consumer spending and military power. As often noted, its a complex relationship, e.g., American naval power protects and guarantees China's routes to its raw material sources.

The End Of Cheap Power is a must-read for those who seek to understand what the growing ecomomy and power of China means for us, and for those who seek to profit from this growth.

–Bill Hayes

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Comments

I agree with what you say generally, but the disappointing thing for me about the book was that there was hardly anything in it that I hadn't read about China at least two years ago, some of that by Shaun Rein himself. The inherent problem with China books, especially one like this, is that they are out of date the day they are written but they don't come out for another couple of years.

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