How China Will Change Your Business

It is plainly understood that asking suppliers to lower prices is merely another way of telling them they ought to be prepared to meet the best price out of China, even if they are making their products in Japan or Germany. General Motors, which buys more than $80 billion worth of parts a year, now has a clause in its supply contracts that gives its supplier 30 days to meet the best price the company can find worldwide or risk immediate termination.

In fact, in the U.S. between 1998 and 2004, prices fell in nearly every product category in which China was the top exporter. "The manufactured goods that have dropped in price the most are those made by China," says W. Michael Cox, chief economist for the Federal Reserve Bank of Dallas, citing figures assembled by the bank for its 2003 annual report, published in 2004. Personal computers, the most outstanding example, fell by 28%, televisions by nearly 12%, cameras and toys by around 8%, while other electronics, clothing of all sorts, shoes, and tableware also dropped in price.

9. China's growth is making raw materials more expensive. Even as China puts pressure on U.S. manufacturers to lower prices, it's squeezing them from a different direction. Its voracious demand for raw materials has caused prices to spike. Copper prices jumped 37% last year, aluminum and zinc both rose about 25%, and oil was up 33%. In 2003, according to the calculations of Stephen Roach, chief economist at Morgan Stanley, the Chinese bought 7% of the world's oil, a quarter of all aluminum and steel, nearly a third of the world's iron ore and coal, and 40% of the world's cement. The trend is for bigger amounts yet to come.

The squeeze is leaving U.S. manufacturers with no alternative but to become more productive. Better machines, software, and advanced management techniques, for instance, now mean that U.S. companies on average produce far more per worker than they did a quarter of a century ago when manufacturing employment was high. From 1977 to 2002, productivity throughout the U.S. economy grew by half, but in manufacturing it more than doubled. Surprisingly, despite losing huge numbers of workers, U.S. manufacturers actually finished 2003 making more stuff than they did in 2001. Output was up, if only by half a percent.

10. No company has embraced China's potential more vigorously than Wal-Mart. And no company has been a bigger catalyst in pushing manufacturers to China. Estimates of how much of Wal-Mart's merchandise comes from abroad today range from 50% to 85%. Chinese factories are, by far, the most important and fastest-growing sources for the company. In 2003, Wal-Mart purchased $15 billion worth of goods from Chinese suppliers. A whopping portion of between 10% and 13% of everything China has sent to the U.S. winds up on Wal-Mart's shelves. Writing in The Washington Post, Peter Goodman and Phillip Pan reported in February 2004 that "more than 80% of the 6,000 factories in Wal-Mart's worldwide database of suppliers are in China." The company has 560 people on the ground in the country to negotiate and make purchases.

Wal-Mart is often demonized for its part in shipping U.S. manufacturing jobs overseas. It is difficult, however, to separate the role of Wal-Mart's thousands of suppliers in the migration of manufacturing out of the U.S. from the larger global trends realigning how and where the world makes things. If Wal-Mart has a unique part in the trend, it is in how expertly the company has managed that trend and, in so doing, accelerated it. China's low-cost manufacturing machine feeds Wal-Mart's critical mass by allowing companies to build assembly lines that are so huge that they achieve ever-greater economies of scale and drive prices downward all the more.

Wal-Mart's Chinese suppliers can achieve startling, market-shaking price cuts. By selling portable DVD players with seven-inch LCD screens from China for less than $160, for instance, Wal-Mart recently helped cut the price of these trendy devices in half. Even with superlow prices, Chinese factories can sell in such giant quantities that they willingly oblige. To get ready for its big Thanksgiving sale in 2002, Wal-Mart picked Sichuan Changhong Electric, one of the world's largest makers of televisions, to supply sets under the Apex Digital brand. Changhong makes 15 million TVs a year, most of them for export. Eight of 10 shipped overseas go to the U.S. In 2002, its sets at Wal-Mart sold for far less than comparable models from other makers, sometimes undercutting the competition by $100 or more. The models the company delivered for the sale helped the event net $1.4 billion.

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