THREE BILLION NEW CAPITALISTSThe Great Shift of Wealth and Power to the East
BASIC BOOKSCopyright © 2005 Clyde Prestowitz
All right reserved.ISBN: 0-465-06281-4
Prologue..................................................ix1 Icebergs Ahead..........................................12 How the Capitalist Road Turned East.....................223 The Global Ballet.......................................434 Made in China...........................................585 Serviced in India.......................................796 High Tech I: America's Baby.............................1067 High Tech II: The World's Baby..........................1358 Cheap No More...........................................1509 The End of the Dollar...................................16410 The Comfortable Road to Ruin...........................19511 The Great Shift........................................22412 To Ride the Third Wave.................................254Notes.....................................................279Recommended Reading.......................................297Acknowledgments...........................................299Index.....................................................303
Chapter One Icebergs Ahead
America is in danger of following Europe down the tubes, and the worst part is that nobody knows it. They're all in denial, patting themselves on the back as the Titanic heads for the icebergs full speed ahead. -ANDY GROVE
As the headlines listed in the prologue attest, many world figures now fear that a crisis scenario may no longer be a fantasy. American leaders are not concerned. None other than former Secretary of State Colin Powell recently told the Atlantic Monthly that, "The United States cannot be touched in this generation by anyone in terms of military power, economic power, the strength of our political system, and our values system."
There are good reasons for Powell's confidence. With just 5 percent of the world's population, the United States accounts for over 30 percent of its production and almost 40 percent of its consumption. At $11 trillion, America's gross domestic product is more than twice as big as that of the next largest national economy, and its real per capita income is far above that of any other major country. Its language, American English, is the language of commerce worldwide, and the U.S. dollar is the world's money. Go anywhere in the world and people will tell you how much something costs in dollars and will accept dollars without hesitation. Indeed, Americans have a special privilege in this regard: whereas others must first earn dollars in order to buy oil or wheat or Toyotas on the international market, Americans only need to print more dollars. Of the world's 1,000 largest corporations, 423 are American, and the New York and Nasdaq stock exchanges account for 44 percent of the value of all the stocks in the world. The United States is home to the world's finest universities and the overwhelming majority of its leading research centers, and it spends more on research and development than the next five countries combined. It is, quite simply, the richest, most powerful nation the world has ever seen.
Americans long ago adopted the view that helping the rest of the world get rich is good for America. And thus, for the past half century, the United States has-through the process of globalization-orchestrated the growing integration of national economies to create an international exchange of goods, services, money, technology, and people. The results have been as intended and expected. This globalization has largely been directed by America, but it has enhanced American wealth and power by enabling others, particularly our allies, to flourish. It was this process, not military threats, that won the Cold War by lifting billions in the free world out of poverty and creating centers of wealth and power around the planet. In Asia, Japan became the world's second largest economy; other countries like Singapore and South Korea flourished so greatly that they became known as "tigers." Across the Atlantic, the European Union grew from six to twenty-five countries and introduced the euro, the first common European currency since Roman times. In Latin America, Mexico has attracted huge foreign investment by becoming a virtual extension of the American economy, and Brazil is flourishing by dint of American and other foreign investment.
Although American corporations initially led globalization, they are no longer the only or even the dominant players. Sony, Nokia, Cemex, and Samsung are just a few of the growing numbers of non-American companies that have become global household names. Of course, American influence has not disappeared. American music, clothing styles, sports stars, and movies are not the only entries, but they set the pace, as have Silicon Valley entrepreneurs and the Nobel Prize winners of great American universities like MIT, Harvard, Stanford, and Caltech. Some people and countries have been uncomfortable with the American flavor of this system and have criticized globalization as a euphemism for Americanization. Yet they have found it hard to resist-one of McDonald's most successful restaurants being on the Champs Elysées in Paris, for example.
In the end everybody seems to want to join, and in fact almost everybody has joined. "Globalization" was an odd term to use during the Cold War because half the world was socialist or communist and not playing. A citizen of the communist bloc who dared to even suggest playing risked being purged (or worse) as a hated "capitalist roader."
Over the past two decades, however, China, India, and the former Soviet Union all decided to leave their respective socialist workers' paradises and drive with their combined 3 billion citizens onto the once despised capitalist road. Although these people are mostly poor, the number having an advanced education and sophisticated skills is larger than the populations of many first world countries. They are arriving on the scene in the context of revolutionary changes. A series of global treaties, concluded largely at American behest, has dramatically lowered trade and investment barriers, making the old rutted capitalist road a lot smoother. With contract manufacturers that can produce anywhere in the world and express delivery companies like FedEx and UPS that can deliver anywhere in the world in thirty-six hours, the road has become a highway. Finally, the global deployment of the Internet negated time and distance for transactions that can be done in bits instead of atoms. Now the highway is a high-speed capitalist raceway, and those 3 billion new people driving on it are, effectively, in your office and living room, and you are in theirs. All of this has generated a whole new wave and model of globalization that is turning the world upside down.
The global economic system was designed during the Cold War to attract these newcomers to capitalism, but no one actually anticipated that they would join or what their absorption into it would mean. Although this new wave of globalization has many potential advantages for everyone, it also poses serious challenges. It comes at a time when a fundamental flaw in the international economic structure has combined with American self-indulgence and Asian mercantilism to stress the system and make it vulnerable. The irony here is that the winners of the Cold War were less prepared for victory than the losers were for defeat. Thus the impact of the new wave, if not handled carefully, could bring the whole system crashing down.
They Can't Move the Snow to India
It was in the winter of 2003 that my oldest son, Chummy, gave me my first glimpse of the powerful forces being unleashed by the new capitalists and how they might interact with the old system and structures. We were skiing on the north side of Lake Tahoe in California, where he lives. On the lift he asked if I would consider coinvesting with him in a local snow-removal company.
"What do you mean by snow removal?" I asked, somewhat surprised because my son is a high-level software developer.
"Well," he explained, "the company has contracts to plow the parking lots and access roads of the hotels and vacation condominiums around here whenever it snows, and that happens pretty frequently between November and May."
"But what on earth are you doing," I exclaimed, "going into something as mundane as snow plowing?"
"Dad," he said, "they can't move the snow to India."
It took a minute for that to sink in. It had never occurred to me that my son had anything to fear from India or anywhere else in terms of his career path. It was I, after all, who had advised him to go into computer science, secure in the knowledge that it would put him in a position to write his own ticket. When I asked if his job was in any danger, he thought it unlikely but noted that "outsourcing" is the new management buzzword.
"You can never be sure," he said, "that some MBA hotshot with little knowledge of the technology but a big need to impress top management with his or her sophistication won't decide to move the whole operation offshore to India or elsewhere."
My son further explained that all the big consulting and service firms like Bearing Point, IBM, Deloitte, and others were making daily pitches to top management on how much they could save by outsourcing to India.
After asking about the snow removal company's financial status and agreeing to put in a few dollars, I decided to add India (where I hadn't been in twenty years) to the countries in Asia I was scheduled to visit over the next four weeks.
At my first stop in Tokyo, discussion centered almost exclusively on China. The tone of the talk was somewhat schizophrenic. Several years ago the Japanese had feared being "hollowed out" as China took over production of steel, machine tools, and electronic components, but now they were talking of China as an opportunity. They even spoke of China possibly replacing America as the world's growth engine and of Japan orienting itself more toward China and less toward America. They were proud of their corporate and national strategy for maintaining a strong manufacturing base that allowed them-unlike the United States, which they said had little to sell-to capitalize on the China boom. Yet in the hon-ne, or real truth, of quiet conversation after a few drinks, Japanese corporate and government leaders alike wondered how Japan would be able to compete with China in the future.
In Beijing and Shanghai I was struck again, as I have always been during my visits over the past twenty years, by the rapidity of China's continuing modernization. Stay away from China for six months and you no longer recognize the place when you return. As I took the twelve-minute ride from the airport to downtown on Shanghai's new maglev bullet train, I couldn't help thinking how nice it would be to have something like this in America. That thought recurred over the next few days as I made my rounds of factories, government offices, consulting firms, and think tanks. By now everyone knows that China is the world's location of choice for low-cost commodity manufacturing. But what I kept hearing and seeing was that it is also rapidly becoming the location of choice for high-tech manufacturing and even research and development.
This impression was greatly strengthened by my visit with old friends at Motorola in Beijing. In the 1980s, as the U.S. trade deficit began to soar, Motorola was a prime leader in an effort to ensure continued high-tech production in the United States through a coordinated industry-government program to improve U.S. high-tech competitiveness. Now, I was told, Motorola had just moved a big part of its manufacturing and R&D to China.
I winged on to Singapore, where I was scheduled to meet with the senior minister and father of his country, Lee Kuan Yew. I knew that Lee, having foreseen that China would displace Singapore as a low-cost manufacturing location, had been urging a new high-tech and service-oriented strategy for the now wealthy and high-cost city-state. How did he view the future? With concern, was the answer. China was moving much faster than even he had anticipated, and India's domination of services was completely unexpected.
In India, after a tour of Delhi, Hyderabad, Chennai, and Bangalore, I realized I was seeing a revolution-a different, more exciting, and more challenging future than I had imagined. In the "accent neutralization" classes at call center training schools, I listened to English-speaking Indian young people learn to sound like people in Kansas or Ottawa. Thus, if you're a customer of Dell Computer or United Airlines or some other U.S. company phoning a call center to get tech support or make reservations for a trip, you will think you're talking to someone across town or in another American city; you won't realize that India is at the other end of your line. In Hyderabad I met with Raju Ramalinga, the founder of Indian infotech services provider Satyam, and I listened as he explained how in 1972 he had started sending programmers to U.S. clients for limited software writing contracts. Now, at their request, he has taken over complete management of those clients' back offices all over the world. By doing the work at the Satyam campus outside of town, he cuts client costs by 70 percent. In Bangalore I saw 1800 Indians with Ph.D.s in electrical engineering and computer science designing Intel's latest chips. Again, the cost savings were huge; more importantly, Intel couldn't find the same number of equally qualified people in the United States. In Chennai I visited the new biotech industrial park to be directed by Krishna Ella, a University of Michigan Ph.D. who, after several years at the leading edge of biotechnology in the United States, has come home to India, where costs are 20 percent of those in the U.S. market. By the end of my tour, I understood my son's interest in snow removal. I also understood why the notion of outsourcing was sending shivers down the spines of millions of formerly secure upper-middle-class professionals who were beginning to appreciate how blue-collar workers feel about visiting the unemployment office.
I flew home via Frankfurt and Paris. On the Lufthansa flight from Delhi, I read the cover story in Der Spiegel about whether, in response to global competition, Europeans could bring themselves to change from their current thirty-five-hour work week to a forty-hour one. After what I had seen over the past three weeks, the question seemed trivial. Can Europe survive? is more appropriate, I thought. But then I remembered that the maglev trains in Shanghai were built in Europe, that Finland has a trade surplus with China, and in Europe my cell phone would work everywhere, instead of only in certain locations, as it does in the United States.
At Charles de Gaulle Airport in Paris, I bought a pile of newspapers and magazines for the flight to Washington Dulles. The Guardian of London had a front-page story about how the deficit-ridden British National Health Service was thinking about air-expressing blood samples to India for analysis to save money. Lab results would be returned via e-mail.
As I arrived in Washington, tax time was fast approaching. So I booked a quick appointment with my tax accountant at a medium-size local firm. As we chatted about my expenses, donations, and deductions, I happened to mention that I was just back from India.
"India!" he exclaimed. "We just did a deal to move our whole data processing operation to Bangalore. Your taxes will actually be calculated there." He explained that the move was saving the firm 80 percent on its processing costs. (I wondered why my bill was not being reduced, but that's another book.)
That night I phoned my daughter to let her know I was back and to get caught up on the grandchildren.