In this video, I’ll explore whether China can lead the world economy.
I recently spent time in Shanghai and Guangzhou, observing China in action, taking notes and photos.
I reported to Kelly Letter subscribers in early March 2017, and have condensed that report into this video.
China is routinely presented in media as the world’s next economic leader. Its growth has been impressive:
[China’s historical GDP growth shown at 0:44.]
By comparison, the 2016 nominal GDP of the United States was $18.6T, Japan’s was $4.4T, Germany’s was $3.5T, and the United Kingdom’s was $2.8T.
According to The Economist Intelligence Unit, China’s current path will make it the largest economy in the world by nominal GDP in 2026.
Three problems with the idea that China will supplant the United States as the leading economy of the world:
1. It’s not as developed as its image in media suggests.
2. It does not innovate.
3. Its growth may not continue as expected due to the rise of automated manufacturing.
We’ll take each in turn.
1. China is not as developed as its image in media suggests.
Pictures of China invariably show the skylines of Shanghai, Beijing, and Guangzhou as testament to the country’s rapid growth and modernity:
[Photo of Shanghai skyline shown at 2:20.]
That’s the Pudong skyline east of the Huangpu River, dominated by the Oriental Pearl Radio & TV Tower.
[Photo of Beijing skyline shown at 2:44.]
That’s the 3rd Ring Road into the city center past the oddly shaped and iconic CCTV building.
[Photo of Guangzhou skyline shown at 2:58.]
That’s the Canton Tower along the Pearl River.
All three are beautiful and deservedly admired, but there’s no depth to the image they present. Upon closer inspection, the advancement falls apart.
For example, the Shanghai Maglev Train is the fastest commercial electric-train in the world, with a top speed of 268 mph. I was excited to ride it.
What a letdown: The person selling the ticket at a counter looked tired and unkempt. Seat covers rumpled. Digital clock and speed readout broken.
Within the impressive city centers it’s easy to find outdated methods of construction using woodstick scaffolding.
[Photo of Guanghzhou woodstock scaffolding shown at 4:23.]
I also saw rundown streets with people carrying baskets of slaughtered chickens on bicycles, and urban wastelands of empty dormitories flanking wide concrete lots covered in dust.
[Photos of Guangzhou urban wasteland and Shanghai slums shown at 5:11.]
I looked up at the towers and wondered who in the world works in them, and where they live. Of course there are fine parts of each city, but they’re never far from third world conditions.
These real-life experiences in China are borne out in the data. GDP per capita in the United States was $57,300 in 2016. It was $48,200 in Germany, $46,200 in Canada, $42,500 in the UK, and $38,900 in Japan. In China, it was $14,300.
2. China Does Not Innovate
China’s economy grew through manufacturing. It makes more than any other country.
Apple’s iPhone is assembled by Foxconn and Pegatron, both Taiwanese. Most iPhones from Foxconn are assembled at its Shenzen, China location.
The iPhone is a good example of the problem for China. It’s designed elsewhere. China is just the factory floor.
[Photos of Foxconn shown at 7:50.]
A March 2014 article in Harvard Business Review, “Why China Can’t Innovate,” placed blame on the restrictive environment created by state control, a force weighing down on universities and companies. The Communist Party requires placement of a representative in every company with more than 50 employees. Talk about a status-quo magnet.
This does not explain the rip-off culture, though. Knock-off products everywhere.
[Fake Apple Store images shown at 9:13.]
Even in areas where Chinese innovation is slick, it’s derivative. For example: Jack Ma’s Alibaba Group.
[Photo of Jack Ma shown at 10:51.]
It runs a set of web portals and e-commerce services and retail operations descended directly from their original counterparts in the United States, such as Amazon, eBay, PayPal, and Wal-Mart using technology created in the West, such as the internet, cloud computing, mobile operating systems, and so on.
It has succeeded spectacularly, employing nearly 50,000 people and generating revenue of $21B, but hasn’t broken much new ground along the way.
Except in creative financial reports.
[Alibaba fraud news story shown at 11:47.]
It claimed to have shipped 278 million orders on a single day in November 2014, more than 7.5x greater than the 37 million orders Amazon shipped on that year’s Cyber Monday, and even more than Amazon’s 244 million users.
We could say it’s not clear where the “40 thieves” fit into China’s modern Ali Baba tale.
3. China’s growth may not continue as expected due to the rise of automated manufacturing.
Robots are coming.
[Photo of robot assembly line shown at 13:15.]
Scenes like this one will become common in all industries, not just automotive.
Foxconn plans to replace workers in its factories with “Foxbots.” It set a benchmark of 30% company-wide automation by 2020.
[Photo of Foxbot shown at 13:41.]
Already, one of its factories has replaced 60,000 workers with robots. It’s bringing 10,000 new robots online per year.
Why can’t Apple build its own robot-run factories?
China is behind the times on this front.
As of last summer, it employed just 36 robots per 10,000 manufacturing workers, compared with 164 in the US, 292 in Germany, 314 in Japan, and 478 in South Korea. This measurement is called robotic density, and is one to watch in the years ahead.
Understandable panic. If automation creates a mass exodus of manufacturing, lacking innovation results in no new ideas to fill the gap, how much impact?
According to China’s National Bureau of Statistics, manufacturing provided 20% of urban employment in 2014. While China’s services sector is gradually growing in importance, industry comprised 41% of China’s economy in 2015, according to Statista. A significant slowdown in manufacturing would greatly harm China’s economy.
I do not believe China can lead the world economy.
It will be held back by its largely undeveloped status, its lack of innovation, and the rise of automation.
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Good job Jason. I have a new insight into China. I tried to deal with China in buying some products to sell on Amazon and was very disappointed with trying to communicate and finalize deals. Those whom I was dealing with in China kept changing the prices when I was ready to place an order. But on the other hand I did make friends with a couple of people there. So there are some who have high ethics when it comes to doing business.
I hope that the US can be more independent from China and other countries in manufacturing soon. Do you see an honest increase in manufacturing here in the US in the near future because on changes that President Trump is making in the economy, etc?
Thanks again for the great Video.
Have a Blessed Easter Holiday, Dennis.
Excellent analysis. Always interesting Jason.
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