The Dragon Bubble

I’ve been, uh, flipping through some books lately. As far as I understand it, they were written by economists, financial analysts and political journalists. And there was this general idea of the seemingly unstoppable growth of China crashing down.

Look, I’m just a mathematician and programmer. I don’t know much about statistics, or demographic studies, or sociology, or economics, or global financial analysis. I just pick up a book that looks interesting and start reading, ok?

UPDATE: Here are some of the books I, uh, flipped:

Here’s the gist of what I understood:

  • China’s massive growth hinges a lot on manufacturing and building real estate (commercial buildings, factories).
  • Manufacturing and building new buildings need lots of raw materials.
  • Countries providing steel, copper and other raw materials are riding on China’s growth.
  • China’s manufacturing and building works on the assumption that the infrastructure is needed for future expansion.
  • China doesn’t have a big enough domestic consumption for that infrastructure.
  • The recent global financial crisis has stunted, if not removed, other countries’ enthusiasm for overseas investment (say in China).
  • China is set to become the world’s largest manufacturer of things.
  • A monopoly of China being the largest manufacturer may not be in the interests of everyone. I’ve read of toxic plastic toys, deadly baby milk formula powders, and suicidal iPhone factory workers.
  • We may be following “Be liberal in our input, but be stringent in our output”, but China’s not. See China’s Internet censorship laws.
  • China is set to consume lots of energy, as her people get lifted from poverty. The “getting out of poverty” thing is good. It’s just that the world isn’t ready with more energy. It sounds unfair, as there are arguments that 1st World countries (in particular, America) enjoyed unbridled (and rampant) use of energy (coal, oil), yet other countries can’t (when it’s their “turn”). We need those alternative and affordable sources of energy, like yesterday.
  • China has bought (as well as other countries) lots of America’s debt, mainly in the form of Treasury bonds.

Please note that this isn’t a China bashing. And note that those authors are American (I think). They weren’t “attacking” China, so much as pointing out probable situations.

So as far as I understand it, China’s growth is fueled primarily by outside investors. It’s domestic consumption is marginal. Jobs are outsourced to China because it’s cheaper there. Manufacturing is done in China because it’s cheaper there, what with the infrastructure the Chinese government had encouraged into place, and the influx of raw materials due to other favourable conditions (such as being cheaper there. Have I mentioned that?).

Here’s a possible situation. America is arrested by her (unimaginably high and increasing) debt crisis, and curbs her consumerist behaviour with less imports (not just from China). Europe has her own debt crisis to deal with. Globally, everyone is affected, because (that I’ve read) 25% of the global economy is due to the exchange of US dollar. China starts to see less investments in manufacturing and building. Australia doesn’t have a strong demand from China for copper, and starts looking somewhere else to invest in. Whatever it is, China’s growth slows and eventually bursts.

Thus the Dragon Bubble.

So who rises? Apparently India and Russia. India, because her measures to lift her people out of poverty are somewhat more stable. People get educated, and get jobs (Is your call centre based in India? Is your development work augmented by, if not outsourced entirely to, Indian developers?). But India still has her old caste system firmly in place, and it will take some time for the growth to spread. But India also has a population just as large as China. And she speaks English.

And learn Mandarin (or Chinese)!. Just in case the Dragon manages to burst through its bubble and has claws in every country in the world. If you can’t speak the tongue of the Dragon, you can’t understand and talk with the Dragon. I’m fine, since I’m bilingual in English and Chinese (as well as C# and VB.NET *smile*).

What about Russia? It turns out that the reason is due to Russia’s possession of oil (lands). Western Siberia, I believe. Hey, I just flip through interesting-looking books.

A couple of definitions to continue with a more light-hearted story. Offshoring is when your company has an office in another country, and your company tasks that office with work. That office is still under your company, perhaps as a wholly owned subsidiary. Outsourcing is when your company tasks an outside company with work. The outside company is involved with your company only so far as being paid is concerned.

Let me tell you a short story. In a previous employment, I had to work with an offshore office in China. That offshore office belonged to a wholly owned subsidiary of my employer, and the subsidiary specialised in IT work. The point was that it’s cheaper for the Chinese there to do certain work than hiring, say, me to do it.

In hindsight, my previous employer entered the offshore/outsource game late. The balance sheet looked great in the short term, but as time went by, and difficulties in coordinating development work increased, the cost savings started to be less prominent.

Hey I understand what you may be going through, or seeing around you. Jobs flying out of your country to “cheaper” countries such as China, India and Philippines. So to make the process easier for you, understand this: If a task can be systematised such that anyone can do it, that task will be systematised so that anyone can do it. If your job consists of checklists doable by paying someone else cheaper, you don’t have that job anymore. Worse, if a task can be automated by computer software, consider it gone.

The offshore team assigned to my team was great. The programmers there did well, once you explained the business requirements and the programming requirements enough to them. But I felt my colleagues here (in Singapore) can explain things too far. One of them went so far as to write the actual SQL statement for use in the code. I felt that was unduly unnecessary.

The more interesting part of the story happened to a colleague’s team. There was a Chinese candidate slated for work in a week’s time. The candidate was a fresh graduate and was hired and assigned to my colleague’s team. The offshore office even sent the candidate’s resume to us. We spent about half an hour marvelling and commenting at the resume written in Chinese, because we’ve never seen one not in English.

One day before the candidate was to report for work, my colleague received notice from the offshore office that the candidate had quit. What? The candidate quit before even starting work? Apparently, a particular university had accepted the candidate, and the candidate decided to pursue a Master’s degree. I don’t know whether to laugh or be outraged.

I intended to write this as a pithy Seth Godin-like post, but apparently I failed. Utterly. I decided not to redact what I’ve written.

  1. Jay Johnson

    Thanks Vincent. It’s great to branch out it to new areas of learning! The topic is interesting and one that is quite relevant. Some of my thoughts:

    * I heard that one of China’s bubbles was population related. Since the country has had a one-child-policy for decades that has skewed the demographics considerably. When that (smaller) generation comes of age and takes over, it could cause problems. Additionally, since most families “chose” a male for their one child, their is a huge lack of girls.

    * While it’s true that Chinese Labor Costs can’t be beat, that represents only a faction of the costs of doing outsourcing. Many companies are finding that supply chains around the world, long lead times, and the unpredictability of things like product recall, human rights issues, and future instability make going through China not as attractive as first thought. Some are returning manufacturing home and using Lean (modeled after Toyota) practices to stay competetive.

    * As Seth Godin would say: just write – every day

  2. Vincent

    I would say that America faces a similar problem, with the relatively larger number of Baby Boomers than Gen X/Y (or whatever is the politically correct term).

    Outsourcing doesn’t mean business relationships go out the window. Sometimes, it’s easier (and maybe faster) to do something in-house. I just hope people understand that lowering cost is the only way they could survive, and that outsourcing to a cheaper alternative is the only way for them to lower cost, they’ve got a lot of thinking to do. Outsourcing is *not* a silver bullet, and might even have a more damaging recoil.

  3. Vincent

    People think outsourcing is mainly cheap. That’s true, provided they stay cheap. What happens when the outsourcee gets more work? They up their wages. Maybe not up to the level where the original job came from, but it’s still higher than before. Then outsourcing might not be as cost-effective anymore.

    Hauling parts around the globe takes money. Which might be why manufacturing is starting to go back to be integral with the system again.

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