The Chinese question

Can anything not be about Donald Trump these days? There is an understandable sense of franticness among a lot of segments around the world about just what the second Donald Trump presidency will mean. And I do not mean to twaddle at length about the politics or the international relations or the ethics or philosophy or any such. These matters have already been covered in much depth in almost every other media source available.

But the measures taken by the new American administration on the economic and commercial front may set off a chain reaction of impacts, which may hit ordinary businesses and consumers far removed from the centre of the action. But there is also the distinct possibility that Donald Trump may merely be a useful alibi to a creeping sense of disillusionment with international commerce that had been building up for some time.

Take the unease with China, for instance. Donald Trump has spent over a decade calling them out for problematic policies and practices, and taking the international rules of commerce for a ride. But Trump was not the first or the only one being suspect. Hordes of small, medium and large businesses have been complaining for as long as one can remember about the predatory instincts of the Chinese manufacturing machine. What is frustrating is not the economic sense behind cheap manufactured goods; who doesn’t like a lower cost if they are not producers? What is frustrating is the reported lack of transparency when it comes to the origins of and sustainability of these low prices. And we are not supposed to ask such questions aloud.

The businesses in developed and high-income economies which have benefited most from the China phenomenon are those who are most capable of splitting up their businesses into its various components and shipping off parts of its value deal wholesale to China. This requires a level of scale and sophistication that most businesses do not have. Businesses that have invested in some manufacturing plant and equipment find that the only bit of their company that is competitive is the trading arm.

We have come to a situation where essentially, “the world trades what China makes”.

A lot of credit is due to the Chinese ability to scale up so rapidly in such a short period of time. Or maybe it is not a short period of time any longer; we just haven’t noticed how quickly time has passed. The Chinese story that is relevant to us today began only in the 1990s, where after the fall of the Soviet Union and the formal end of global communism, and the conclusion of international trade conventions that focused on harmonising world commerce, Chinese manufacturing soared. This required immense changes, in China, in terms of the way business was done. It required immense movements of capital, machinery and labour. I don’t know how they managed to convince so many ordinary Chinese workers, at the beginning of this mega-trend, before the fruits were visible, to forego high wages or adequate living standards. Perhaps they did not need much convincing.

But we have the world of today; and China is very much at the centre of it. Indeed, China has become sufficiently expensive enough, now that the country is outsourcing its manufacturing to Vietnam and Thailand!

The reason why the majors in developed and high-income economies did not mind the shipping off of large chunks of their value chain to China was in part due to a religious adherence to a business principle laid out by the Indian-American business theorist and Professor in the MBA programme at Columbia, Dr C K Prahalad, who drafted the principles of “core competences” for multinational conglomerates, which he initially developed for use by General Electric, which was a huge deal in the 1990s and decades prior – at one time, the world’s largest corporation! Under the leadership of Jack Welch, they went on an acquisition spree in the 1980s, which saw them getting involved in everything from electric bulbs to jet engines and to equipment lease finance. I had worked with them in the United Kingdom for a short while, and I came off extremely impressed by the level of their internal organisation.

What was in it for those shipping these processes off was that it was felt at the time that the core competences – the key value generator of a business proposition – would continue to stay with the company HQ. This is what Apple is doing with its host of products; and I made a comment about that in this magazine a few years ago when I mentioned that while all (or most) of the production of Apple products takes place in China, this only accounts for two per cent of the total value generated per Apple product; 98% of the value is generated in the design and marketing, which is all controlled firmly from the United States (sorry, California!).

What all these models discounted heavily was the Chinese ability to learn. And they learn fast. In the 1960s and 1970s, Japan was where China was in 2000s, and Japanese products were similarly laughed off in Western markets as cheap, tasteless but useful. In response, perhaps, Japan invented the Deming Prize, the international benchmark for quality manufacture.

China, and the western response to it, is in many ways a Japan redux. And with perhaps 20 times as much force and velocity!

That the Chinese are learning, and now generating ideas, with the same rapidity and scale with which they took up those grimy manufacturing jobs is shown with the recent release of DeepSeek. Suddenly, it is not just the manufacturing divisions of multinational conglomerates which seem fit to be shipped off to the Far East! The loud disquiet we hear in response to DeepSeek’s AI model, built at a fraction of the cost it apparently takes to develop these models in the United States (DeepSeek built at the expense of some USD 6 million what took an American company a few hundred billion dollars), is not really with relation to the technological aspect of it; it is the dawning realisation that what they thought could not be vulnerable to being shipped off – their command over IP – are now firm candidates to be put on that boat.

We see this in the automobile industry, as well. The German car industry, the flagship industry of that country and a byword for efficiency and competence and safety (though we can’t be so sure, after all those braking flip-flops), is officially in trouble, as admitted by one of the leading candidates in the upcoming German elections. There too, China. The Chinese are assembling cars the way they assemble phones. China has zoomed past both Germany and Japan to become the world’s largest exporter of cars; and an increasing share of these exports is not just assembled European, American and Japanese brands; we are having to take names such as BYD, Geely, SAIC with renewed respect! And the Germans don’t even register when it comes to EVs. Even Tesla, maker of the first viable electric-only car, is now facing the heat from Chinese competition in the EV space, which it helped create some 20 years ago! It is like selling tea back to the British at Boston Harbour!

And as if divine intervention decided to sweeten the deal even more in China’s favour; some 80% of the kind of rare earth minerals that are relevant and essential to the by-now present EV battery revolution are within the land borders of China.

All this may explain why, despite being such a toxic social pariah for all these years, multinational conglomerates have been extra nice towards Donald Trump and his, ahem, second coming! He is the outlet for their frustrations. He is speaking their language. It appears it is the multinational conglomerates that are the real Donald Trumps.

China, China, China!