Caterpillar announced Sunday that Cat China and AVIC Liyuan Hydraulics Co. “have signed a joint-venture agreement to establish a company to design and manufacture medium- and heavy-duty hydraulic pumps and motors for the construction equipment industry.” The press release was picked up and reprinted in the Journal Star Monday on the web — it will probably appear in Tuesday’s paper.
This joint venture comes on the heels of Cat’s September 29 announcement that they were building their twelfth factory in China, this one to make mini hydraulic excavators. That announcement was met with some criticism, not so much at Caterpillar per se, but against U.S. trade relations with China. From the American Thinker blog:
Why can’t Caterpillar make a profit exporting mini-excavators to China? The answer is simple: China has a 30% tariff on all excavators. In fact it has a similar high tariff on just about every vehicle…. When President Obama’s economic adviser Larry Summers was Secretary of the Treasury under President Clinton, he oversaw China’s entry to the WTO (World Trade Organization), and he let China declare all these vehicles as a “strategic sector” entitled to high protective tariffs….
The Chinese government has long used these tariffs as a lever in order to loot American companies of their technology. First it forces vehicle-making companies to locate their factories in China if they want to sell to the growing Chinese market. Then it forces them to “share” their proprietary technologies with Chinese competitors. Caterpillar already has 11 factories in China. It also has two Chinese competitors – Liugong and Sany – that are producing what one expert describes as “knockoffs” of Caterpillar models, and they are exporting them to the world.
From a similar post (same author) on a different blog, they add, “What we see is American trade pacifism at work. We keep our markets open to Chinese products. They close their markets to American products and then, in return for access, force our companies to build factories in China and give Chinese competitors their proprietary technology.” The upshot is, “If trade were free and balanced, Caterpillar might profitably produce excavators in the United States and sell them in China, but with the Chinese government setting the terms of trade in a way that keeps out made-in-America products, Caterpillar has little choice but to locate its factory in China.”
Well, they have “little choice” if they want to do business in China, that is. It’s easy to see why they would want to do business in China — so obvious I need not recite the reasons here. But is it worth the cost in the long run if they ultimately have to share their research and development with their competition? What happens when they start having to compete with cheaper knock-offs of their products — not just in China, but worldwide? I can’t help but wonder if they’re sacrificing long-term viability for short-term gain.
“I can’t help but wonder if they’re sacrificing long-term viability for short-term gain.”
That is the American way…
Good find…. their posts even have Jim Dugan’s attention from Corporate Public Affairs.
The Unions can be their own worst enemy. Obviously manufacturers can be more profitable if they move their big operations to China because they don’t have to pay the extortion fees of inflated wages and benefits demanded by the Unions. It’s all good, until the fatted calf escapes and leaves nothing behind. I wonder what the unemployed think of their union representation?
Is it a good thing? – Not just “NO,” “HELL, NO!”
Commenting,
While you’re bashing Unions the answer is right in front of your face in black and white.
“What we see is American trade pacifism at work. We keep our markets open to Chinese products. They close their markets to American products and then, in return for access, force our companies to build factories in China and give Chinese competitors their proprietary technology.” The upshot is, “If trade were free and balanced, Caterpillar might profitably produce excavators in the United States and sell them in China, but with the Chinese government setting the terms of trade in a way that keeps out made-in-America products, Caterpillar has little choice but to locate its factory in China.”
Why? Hmmm, I wonder if it has anything to do with the massive amounts of debt we owe to China? Wouldn’t want them to collect on their loans would we? When it comes to debt America is like a crack addict and we keep electing dope dealers! As long as we here in America point fingers at each other, we will stay stuck in the ruts we seem to have found ourselves in.
Unions or non-Unions, America can’t compete with a work force that works for $100 a month. To that aspect, complaining about unions is moot when Chinese workers will work for $7.50/hour less than our $8.25/hour state minimum wage.
Trade reform is what we need to keep jobs in America, not squabbling about unions.
I visited a CAT facility in China earlier this year and the head of that facility told us that there is currently a very small market in China for CAT products – even those made in China. Almost all of the CAT products made in China are exported to other Asian markets. Those Chinese made CAT products are still priced many times higher than their competition (whose products don’t last nearly as long). He said that for heavy equipment like CAT products, the Chinese still view machinery like a medium wheel-loader as a “disposable” item.
Maybe that will change over time (CAT’s goal is to become the leading construction equipment brand in China by 2015 – currently there are many competitors all in the single digits in market share), but in the interim, CAT is able to take advantage of low Chinese wages. Those wages are artificially low due to China’s currency manipulation (some estimates are that it is 30% or more undervalued). We benefit by being able to buy tons of different stuff that costs relatively little. China benefits by creating more jobs – and there are still hundreds of millions of Chinese peasants moving from the poor countryside farms into the cities looking for work. Keeping those masses content with jobs keeps the ruling party in power.
Economists such as Paul Krugman have suggested we become much more forceful with China over unfair trade policies and currency manipulation. Almost every economist loves free trade, Krugman included, but that has to include a freely floating exchange rate – which China doesn’t really do. And he argues that the foreign debt issue isn’t nearly the problem some think it is (“an unloaded water pistol pointed at our head”)
http://krugman.blogs.nytimes.com/2010/03/15/chinas-water-pistol/
I’m not too convinced on the technology argument. I don’t believe there’s any CAT R&D in China, for example, and Chinese companies could always buy a CAT product and reverse-engineer it. What China most gains with a company like CAT being in China is knowledge of the manufacturing process. And it’s a process that generally takes parts from many suppliers and assembles them. Any company could copy that – what takes great effort to copy is the CAT brand/reputation and logistics/supplier/dealer network.
VW has been in China since the 80’s, and GM has been there for over a decade (Buick is the sales leader in China). Even there – what Chinese car companies are you even aware of?
Lastly, it seems to me that China companies generally play in the low-end market – utilizing their low wages where it’s most vital. What current Chinese company is a major player in any “high-end” side of a market – the way CAT is?
“…foreign debt issue isn’t nearly the problem some think it is…”
Exactly what I would expect to hear from a free market capitalism addict.
I’m curious Jon, do you have any ideas on how we escape this liquidity trap?
That’s funny – to be called a “free market capitalism addict” – when part of the proposed solution is a lot more government spending. And, in particular with China, to suggest a lot more governmental trade reform.
http://web.mit.edu/krugman/www/trioshrt.html
“The whole subject of the liquidity trap has a sort of Alice-through-the-looking-glass quality. Virtues like saving, or a central bank known to be strongly committed to price stability, become vices; to get out of the trap a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and central bank aren’t as serious and austere as they seem.”
And you think those are viable options? Your responses via Krugman seem to only be proving my point.
To be clear, I wasn’t call you that, I was calling Krugman that. And yes, even “free market capitalism addicts” like government spending when it’s in the form of bailouts. Any thing to keep the crack rock in hand.
The upshot is, “If trade were free and balanced, Caterpillar might profitably produce excavators in the United States and sell them in China, but with the Chinese government setting the terms of trade in a way that keeps out made-in-America products, Caterpillar has little choice but to locate its factory in China.”
Caterpillar only produces mini excavators in Sagami, Japan and the Leicester, England, UK. Tthe machines were introduced in 1998 and have never been produced in the United States.
The upshot is, “If trade were free and balanced, Caterpillar might profitably produce excavators in the United States and sell them in China, but with the Chinese government setting the terms of trade in a way that keeps out made-in-America products, Caterpillar has little choice but to locate its factory in China.”
Caterpillar builds medium and large hydraulic excavators at Aurora, and many of these are exported to China. But the company only produces mini excavators at two locations: Sagami, Japan and Leicester, England, UK. The machines were introduced in 1998 and have never been produced in the United States.
Sterling is right. It’s impossible to “compete” with a fascist dictatorship with well over a billion people. Not going to happen, unless, of course, we become a fascist dictatorship whose workers earn $1 a day, or less.
Jordan is correct regarding production of excavators. Japan is the worldwide design center for this machine group as well. But plants are being built to produce equipment in China, many of which will be lower priced products specifically designed to market to the China/Asia market, as Jon described.
Without Caterpillar’s worldwide base of business and production it would not have weathered the recent recession near as well, nor bounced back so robustly. The reality is that many American workers were able to keep there jobs and less workers were laid off because of sales generated in foreign markets during the down turn.
The expansion of CAT into China, Panama, and India has opened up job opportunities for those with a specialized skill set. Take a look at the listing of job vacancies on the CAT website — tax accountants, engineers, skilled trades, analysts of various sorts. If individuals are trained, comfortable with working with other cultures, and willing to relocate for career opportunities, CAT has openings. But, if you are waiting for CAT to fling open the doors and make the U.S. it main manufacturing hub, well . . . then you will be waiting for a while. Instead of bemoaning the fact that things are not the way they used to be, isn’t it better to get on with it and begin training or retraining for what job there are out there now and in the future.
It’s a sadly interdependent and dysfunctional relationship:
China stops buying our debt and our economy collapses.
Our economy collapses and we cease being the largest importer of Chinese goods.
Notice I said stop buying our debt, i.e., we are now so dependent on borrowed money from China, it wouldn’t have to sell any of our debt to bring us down, just stop buying more.
“Our economy collapses and we cease being the largest importer of Chinese goods. ”
The current objective of the Chinese government is to become less dependent on exports as a driver of the Chinese economy. With a billion people in a largely untapped domestic economy, there are huge opportunities for internal growth. Suffice to say, the day will come when China no longer needs or is willing to buy our debt. The predicted impact of us no longer buying their exports will be a mere blip on their economy, while it will be a HUGE negative to ours.
There is no mutual assured destruction scenario here. We are clearly in the junior position.
I have just observed all the interesting scenarios debated in your forum but being english all I will say is every dog has is day and its looks like the time is up for the great u.s.a.