FAQs

IS CHINA EATING OREGON’S LUNCH?

While some industries are being starved out by China’s low wages, others are fattening up on China trade.

The Beijing-bound Boeing 747s lifting off every Thursday and Sunday from PDX symbolize more than just a promising East-West air freight route. The flights, which launched in November, are evidence that Oregon’s business links to Asia have taken a pronounced turn toward China. It’s a development that’s giving a big boost to trade and investment opportunities on both sides of the Pacific.

But if Oregon businesses can’t manage to fight off the onslaught of fierce Chinese competition, key homegrown industries Ñ aluminum fabrication, agriculture and semiconductor production, to name a few Ñ could be stripped to the bone in coming years.

China is Oregon’s fifth largest export market and growing, up 20% between 2000 and 2001, and Gov. Ted Kulongoski made China the destination of his first international trade mission. The country is home to the world’s largest population. It has a rapidly growing middle class that’s urban and entrepreneurial, and its people have an insatiable appetite for Western clothes, shoes, movies and electronics. More mobile phones (about 190 million) and televisions (about 26 million) are sold in China each year than anyplace else.

“The Chinese want to consume exactly what we want to consume, from wood products and apples to computer chips and flat panel displays,” says Allen Alley, CEO of Tualatin-based Pixelworks.

But there’s a flip side. Chinese companies are gunning for our business, and what’s more, the country’s exploding middle class work force can do many of our best jobs already Ñ and for a lot less. “They speak English better than I do, and they’ve been educated at MIT or OSU,” says Alley of the engineers his company employs in China and Taiwan. “You have to be 10 times more productive than the guy in China.”

Just consider the threat China poses in metal fabrication. While Northwest smelters are idled by high electricity rates and low world metal prices, China has built an industry fired by a cheap, dirty and plentiful fuel Ñ coal. Its mines and smelters pay a fraction of U.S. wages, and they don’t need to meet rigorous environmental or safety standards. In Oregon, the industry has shed some 2,500 family-wage jobs since 1998.

Domestic industries in the U.S. have been grappling with competition from places with lower labor costs and fewer legal protections for decades now. But China is different Ñ by its sheer size and economic clout, its entrepreneurial energy, its top-down economic planning and autocratic control over workers, and its insulated financial system. The regulatory environment in China is still fraught with perils for any U.S. company, especially those that try to protect their valuable intellectual property while working with Chinese partners.

Of course, along with crisis comes opportunity. And for those Oregon companies that have the where-withal to stay afloat and add sail in this sea of change, the payoff could be enormous.

“If we view China as a threat, it will be a threat,” says Alley. “If we see it as an opportunity and look for ways to mine that, it will be an opportunity. There are roughly 1.3 billion potential customers there, and that can be nothing but good for our economy.”

WHEN JIN LAN left China for Oregon some 20 years ago, his home country was a lot like North Korea is today, he says. “The economy was on the verge of collapse. People dressed in their blue Mao uniforms and didn’t think beyond their family living quarters.”

These days fashionably dressed Chinese women walk through the streets of increasingly cosmopolitan cities such as Shanghai and Beijing, gleaming office towers rising around them. “China is transforming itself from a very backward agrarian culture to a progressive industry- and information-culture,” says Jin, who owns the Vancouver, Wash.-based China trade consulting firm Octaxias. “There’s so much development there that people joke that the national bird is the crane.”

China is still far behind the U.S. in terms of technological sophistication and disposable income. Much of the population is poor, and its manufacturing economy operates more like a factory for the world than a center of innovation. The bulk of exports are labor-intensive products such as toys, shoes, apparel and low-end electronics.

But China is an economic juggernaut and to ignore the rising tide is to risk being swamped by it. GDP increased by 8% a year between 1996 and 2001, and the country’s booming middle class now rivals the population of the entire U.S. China’s membership in the World Trade Organization is helping the government drive a national march into globally competitive export sectors such as agriculture, heavy manufacturing and high tech. China’s rapid industrialization is seen by many as the most significant global economic change of our time.

“It’s all happening so fast,” says Frank Capolupo, Western region director for the Society of the Plastics Industry. Oregon plastics manufacturers have been devastated by competition Ñ first from Mexico, now from China, he says. “A lot of the family-owned businesses are gone. The dynamics make my head spin.”

China has changed the game, and the new rules have made for some very nimble, jetsetting, worried Oregon CEOs. Many find themselves competing with cheap Chinese imports, while exploring ways to get their own products into China. Others are shifting production and engineering there.

“Today you’ve got to constantly expand your horizon just to stay alive,” says Ron Stewart, owner of Columbia Gorge Organics in Hood River, who has seen neighboring farmers sell out or go bankrupt under the onslaught of cheap produce from China and other low-wage countries. “It’s like a swan: It looks pretty good on the surface, but peek under the water and you’ll see how fast its feet are moving.”

Allen Alley puts it another way: “We’re living in a world in which change is the only constant.”

OREGON’s SEMICONDUCTOR MANUFACTURERS began shifting production to China in the mid-’90s to be closer to their customers. In 2002, exports of unfinished semiconductor chips and other electronics accounted for 56% of Oregon exports to China. Intel has three production plants in Shanghai, and R&D labs in Shanghai, Beijing and Shenzhen. It’s invested more than $500 million in China and expects to employ 3,000 Chinese workers by 2004. Hillsboro-based TriQuint Semiconductor has a new assembly and testing facility in Tianjin. And Tualatin-based Pixelworks has offices in Beijing, Shenzhen and Shanghai.

Pixelworks’ Alley has logged thousands of miles flying across the Pacific to work with customers, mostly Asian television manufacturers. Four of the top six Chinese cathode-ray tube television brands are embedded with Pixelworks’ video signal processors. About 60% of the company’s integrated circuits are sold to Japanese multinationals including Sony, Sanyo, Hitachi and Toshiba.

Some of the 45 Chinese workers Pixelworks employs perform R&D to supports local production lines. The most cutting-edge engineering is still done in Oregon. Keeping the high-end R&D at home is the industry standard, and Alley doesn’t expect that to change. “The inspirational work will be done in Oregon, and the software tailoring for the local markets and most of the manufacturing will be done in Asia.”

Alley insists he’s not at all concerned that the Chinese television manufacturers that are his customers today will start making their own video chips based on Pixelworks’ proprietary technology. It’s not simply a matter of the Chinese catching up in the technology race. Rather, he says, there are deep-rooted cultural differences that will continue to propel U.S. firms to the forefront of innovation.

“It’s rooted in part in our language. When kids learn English, it’s Ôbe creative, write what you feel, express yourself,’” says Alley. “The Asian languages are very character- and stroke-based. ÔDon’t be creative, be precise.’ That’s imbued in their language and their culture.”

Entrepreneurs here push the technological frontier, says Alley, which his Asian customers aren’t doing. “They’re not small, entrepreneurial, quick-moving, inspirational engineering companies.

It’s like worrying about Europeans moving up the food chain. Nobody seems to be worried about them.”

That doesn’t mean Oregon can coast along on its past successes. Chinese engineers are becoming more sophisticated, and what’s considered cutting edge today will be standard tomorrow. The challenge for Oregon is to nurture an entrepreneurial climate that puts a premium on ideas.

“You do that with a strong education system,” says Philip Levy, academic director of the Yale Center for the Study of Globalism, “and a general economic environment that says it’s okay to take chances and even fail as an entrepreneur.”

WHILE HIGH-TECH COMPANIES are using their advantage in technology to partner with Chinese counterparts, many Oregon manufacturers find themselves going head-to-head with Chinese competitors. Lower energy prices, government subsidies in the form of free land, massive tax breaks and an insulated banking system all give Chinese-based operations a huge leg up on U.S. firms.

But the biggest advantage comes from cheap labor Ñ so cheap that companies that sited production facilities in Mexico, Taiwan or Korea a decade ago are pulling up stakes and heading for China.

For Oregon manufacturers of plastic components, China has brought on a nasty case of dŽjˆ vu. When Hewlett-Packard moved its printer division out of Corvallis to Guadalajara, Mexico, in the late Ô90s, the Oregon plastics vendors that supplied HP with computer components followed Ñ at least those that could afford the move. The smaller shops closed. Today, the companies that remain are battling China for customers.

“Those jobs aren’t coming back unless something happens to force those companies out of China,” says Capolupo of the Society of the Plastics Industry. “If you want to continue paying $1,500 for a computer versus $5,000, they are going to be made there.”

Wilsonville-based Vision Plastics makes injection molds used in electronics, sporting goods and medical equipment for customers including IBM and Tektronix. “My industry isn’t what it used to be,” says owner Ron Stevens. “I’ve seen five or six Oregon companies go out of business in the past two years, and it’s all because of the labor.”

The wage differential is so great that Stevens subcontracts some jobs to Chinese companies. One vendor pays employees $100 a month plus room and board. Stevens pays each of his 175 employees in Wilsonville about $1,800 a month.

He first went to China six years ago in search of vendors to make plastic molds for him. “We went looking for avenues to lower cost,” he says. “That’s allowed us to maintain a market presence here.” He’d rather keep all the production at home, but in today’s competitive global environment Stevens feels he has no choice but to seek out Chinese partners.

In the years ahead, Stevens expects Vision Plastics’ business will consist of a combination of low-volume production in Oregon and overseas product management for U.S. customers. “What I see three years from now is that customers will want to develop products and do the first year’s production here,” he says. “Once the kinks are worked out and the products are on the market, then they’ll move it overseas.”

INCREASED MARKET OPPORTUNITIES for Oregon companies are the counterpart to job losses here due to Chinese competition. “The potential is huge, and I don’t think most Oregon businesses realize that,” says John Mazzocco, a partner in 3, The Public Communications Company, a Portland-based PR firm.

Mazzocco, recently in China as part of a private sector-led trade mission, signed a contract with a Chinese spring water company to promote a product that removes arsenic from drinking water. Another delegate hopes to bring together a Northwest apple producer with a Chinese manufacturer of apple juice concentrate.

Oregon’s greatest opportunity in China in the next 10 years may lie in exporting our expertise in areas such as engineering, medical technology, sustainability and environmental remediation. China is investing heavily in modernizing its roads, water and sewer systems, and starting down the path to environmental protection.

Team Oregon is a textbook example of the leverage Oregon companies can potentially bring to China. This private- sector environmental team includes the Portland-area companies SERA Architects, GreenWorks Landscape, Century West Engineering and the consulting firm Cogan Owens Cogan. The group has done a host of trips throughout Southeast Asia landing contracts and promoting Oregon’s expertise in sustainability.

“There are lots of opportunities

for Oregon companies to offer products and infrastructure consulting on large environmental projects,” says Youqing Ma, China trade specialist at the

Oregon Economic and Community Development Department. Already, Oregon-made cement sealer and grass seed are being used in the construction of the massive Three Gorges Dam on the Yangtze River.

NOT EVERYONE SEES CHINA as a promising market or a good trading partner, though. Ron Stewart of Columbia Gorge Organics is skeptical that the produce grown on his 150 acres will ever find its way to China, despite the fact that tariffs on U.S. imports are being reduced under the WTO agreement. The reality, he says, is that low-wage countries such as China, where farm workers are paid about 80% less than in the U.S., will always have a competitive advantage.

At the same time, Stewart is pretty sure that the million acres of Fuji apples he’s heard have been planted in a northern province of China will flood the U.S. market, along with fruit from nearly every other rural part of that country. “Chinese products come in about 50% lower priced than ours,” says Stewart. One Hood River neighbor, he says, knocked 35% off the price of the Yali pears he ships to Los Angeles to compete with those coming all the way from China.

Stewart racked up $3 million in sales last year, and his organic label gives him an edge over nonorganic foreign imports Ñ at least for now. “I feel my niche won’t be a niche much longer,” says Stewart. “A lot of the acreage in China can be certified organic because they don’t use pesticides. They can’t afford to.”

In a perfect world, Stewart says, the U.S. wouldn’t do any business with China until it adopts a true democracy, accepts international labor and environmental standards, and supports a worldwide pricing structure. He says he’d settle for a fair wage tariff on all agricultural imports, a move that could benefit U.S. and Chinese farmers.

“Let’s say a box of apples had a $4 labor tariff applied. A dollar-fifty could go back to the Chinese village where the fruit was produced,” he says. “It could go back into water and sewage systems, to hospitals and schools.”

Global standards for wages, working conditions and environmental protection, proponents argue, would result in a free and fair trade system. Critics counter that imposing Western standards worldwide would deny market opportunities and inhibit economic growth in developing countries.

And in the long run it’s precisely that growth, says Pixelworks’ Alley, that offers Oregon the greatest hope of competing with China and benefiting from its massive market. It will be a painful transition in the interim, he admits, but China’s economic renaissance coupled with its appetite for Western goods will level the playing field Ñ given time.

“If they aspire to our Western lifestyle, then wages will have to increase. They may not come up to our level, but they have to grow dramatically from where they are today or they’ll never be able to afford these luxury goods.” Case in point: Salaries for China’s top-level engineers have doubled in just the past four years, according to Alley.

TRYING TO CRACK THE CHINA MARKET is a high-risk operation. Contract and patent laws are tough to enforce, bribery and fraud are widespread, and most Chinese distributors aren’t authorized to conduct transactions in U.S. currency. The country has up to five years to fully implement international trade rules now that it’s a member of the WTO.

David Austin, director of business development for Clatskanie-based GreenWood Resources, has made four trips to China to explore ways to market his poplar trees. China is reforesting 12% of its land, he says, and 40% of the trees planted will be fast-growing varieties like the non-genetically engineered ones GreenWood grows on its plantations in Oregon and Washington. So far, Austin has struck out, but not because the Chinese don’t want his trees.

“I’ve visited eight different provinces and was strongly courted,” he says. “I had one governor say, ÔI’ll give you 5 million acres to plant your trees.’ But no one wants to pay for it, and the Chinese are just developing their contracting law.” That doesn’t mean Austin is giving up. “They’re replanting an area the size of Texas,” he says.

In accordance with its WTO entry, foreign companies will be able to distribute their own products in China by next year, but companies have to think carefully about what operations to locate there.

“You probably shouldn’t be using your core technology in China,” says Karen Sutter, director of business advisory services for the Washington, D.C.-based U.S.-China Business Council. “The laws on intellectual property in China are good. But once you lose your IP, it’s too late.”

Still, foreign investment is pouring in. The telecom and construction industries are predicted to remain hot. The 2008 Beijing Olympics present myriad opportunities for Oregon firms as the country invests millions to upgrade infrastructure, construct event venues and beautify outdoor spaces. And if the country’s middle class continues to expand Ñ along with disposable income Ñ Oregon’s high-tech chip manufacturers should see a corresponding increase in demand for higher-end electronics.

Of course, all this hinges on the assumption that the gates to China will swing open even wider. And that’s not a given, according to Sutter, who says political and economic battles between the U.S. and China could erupt, souring relations and stifling trade.

“The danger lies in whether both sides can handle the growing interaction,” she says, “or whether they’ll submit to pressures domestically from special interest groups.”

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This entry was posted on Thursday, April 3rd, 2003 at 9:14 pm