Don't Crown China Yet

It may be a Western bias, but I sense some folly in the rush to coronate China as the world's next biggest economy. Some studies project that the Chinese economy will -- within the next five to 10 years, or latest by 2030 -- zip past the old, doddering United States in much the same way it left bumbling Japan behind a year or so ago.

China may eventually claim the crown of the world's No. 1 economy, but I doubt it will happen quite as quickly as many economists are predicting. Companies in the electronics industry, and other manufacturers, should keep this in mind as they plan the long-tail of their supply chain with China in mind as both a production center and a consuming nation. China could be king, but it isn't yet, and it may never be. And the biggest obstacle to achieving that glorious future is China itself. (See: The World's Largest Economies 2012.)

I could trot out some data to support my position, but some of the information I want to point out in this blog doesn't necessarily lend itself to big-data analysis. My hesitant view on China's supposedly glowing economic future is not based on wild assumptions, however. The available economic data, combined with recent geo-political developments, growing caution about transferring more production to China at the world's biggest companies, and China's belligerent attitude towards its neighbors point to the possibility that the country's economic expansion may stumble when we least expect.

The analogy isn't perfect, but a similar example to China exists in the electronics world, where Apple Inc. (Nasdaq: AAPL) reigns precariously as the world's most valuable company. Until recently, most analysts believed that Apple was bound to continue increasing its market share in smartphones and tablet PCs. That's obviously no longer the case. I differed before from the then-prevailing view, and still do today. My reasons are simple.

First, Apple is in a commodity business. (See related posts below.) Yes, it sells its products at a premium to those of rivals, but the iPhone, iPad, iPod, or Apple TV are still commodity products.

Second, it was only a matter of time before rivals got their acts together and began lopping off Apple's first-mover advantages. It took a while, but the company's rivals couldn't allow it to continue building up overwhelming advantages over them. They've finally burst the myth that Apple cannot be beaten. End of story.

What does this have to do with China? The same lessons apply. Four critical factors are combining to whittle down Apple's dominance: Apple envy (you would be jealous too of a company with $137 billion in cash and short- and long-term investments); Apple deficit (I'll say it again, it's a commodity business); Apple hubris (the arrogance of infallibility that Apple demonstrated under late founder Steve Jobs) and; Apply folly (for all the adoration it gets from devoted fans, Apple isn't the most beloved company in the supply chain.)

China has similar but even more pronounced weaknesses. In less than three decades, it has grown at a breakneck pace to push France, the UK, Germany, and Japan off their coveted spots in the global economic ranking. The US is supposedly next. China would be lucky to grab that No. 1 spot, but I predict if it does, it won't hold it for very long. I could list a bunch of reasons for this, but I'll settle for the following four:

1. China Envy: This exists and is growing like wildfire even in underdeveloped African, South American, and Eastern European countries. Many of these countries have seen their economies devastated by the influx of cheaply-produced Chinese goods.


2. China Deficits: The Chinese economy is still struggling to overcome some basic problems related to legal rules, IP enforcement, infrastructure, etc. These are obstacles companies are giving greater weight to in their decisions regarding production facility location, not to mention the added headache of rising transportation and other logistics costs.


3. China Hubris: China, like Apple, seems to be convincing itself that its economic prowess puts it above the rest of the world. The growing sentiment within the country is that they've created a unique economic model, one that beats the West at its own capitalist game. Have they really?


4. China Folly: The foolish belligerence of China towards key trading partners like Japan and neighbors like the Philippines, Vietnam, and South Korea over disputed islands is, in my opinion, one of the greatest dangers facing China as a future world economic and military power. It can't throw its military weight around and then expect others to cuddle up to it economically.

I will address each one of these in future blogs, and discuss how failure to take heed of the challenges they pose could hobble China's rise to the apex of world economic superpowers.