In a recent study reported by the Federal Reserve of San Francisco, goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the "Made in China" label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending.

When a foreigner buys something in China, in some cases, they find out that things will cost more than what the local Chinese will pay.  For example, the Chinese can book hotels at a lower price directly from China, although some hotels will say that this price will not apply to a laowai (foreigner).

Also when you go into a bar, often they give you a higher price when you order drink or in a shop, a higher price for the merchandise. When people grab you on the street to try to sell you stuff, they also are likely to tell you a price that is much higher than what they charge local Chinese.

So you will ask, why does this happen?

As a laowai, do I look like an ‘easy mark’?  Are the Chinese trying to take advantage of me? You’ll be surprised to know that the Chinese believe that laowei is more generous than Chinese, and this is actually is a way that Chinese will show their appreciation.

Nowadays, many international companies are doing business in China, arranging hotels, flights, business meals, presents, etc. all on the company’s expense. If your company spends more than a few thousand USD per month, and you could be guaranteed savings from 30-40%, would you hire a company and spend 5% to achieve this goal?

Tell me what you think?

By Jeffrey Holtmeier (Jeff@cu-bd.com) & Junying Sun  (jun@cu-bd.com)

China's $300 billion 16,000 KM  (~10,000 mile) high-speed rail megaproject while slightly behind schedule is about 50% complete. The system will criss-cross China north and south, east and west from as far north as Harbin (Maine in USA) to Hong Kong (Miami, FL) in the South and Chengdu (Colorado) in the west. 

On July 1, the Beijing to Shanghai route will begin service shuttling passengers at speeds of 300kmh (210mph) along the 1,100 km (650 mile) route for a cost of $86. This is about half of the cost of air travel between these cities, and about half the time factoring in airport and air time. 

By reducing cost and travel time in between Chinese cities, this will continue to spur trade, and ease the flow of people from east to west, and west to east. As China continues to develop in to a consumer society, and expand growth from the eastern shores to the middle and west, additional opportunities for China business development will follow. 

China plans to urbanize another 400 million people in the next 10-15 years and many will likely move into second and third tier cities like Zhengzhou, Chengdu and Hangzhou. US companies who recognize the opportunities created by China's massive infrastructure investments and urban migration can create opportunities to be successful first movers in their market segments in China. While most Americans have heard of Shanghai and Beijing, between these two cities there are less than 40million of the 1.37 billion people, and the China land mass is equal to USA.

Much has been written recently about the significant wage increases in China's manufacturing labor force. Notably, last fall Apple/HP/Dell assembler Foxconn DOUBLED the monthly wage of their 500,000 factory workers in Shenzhen to RMB 1,200 and Chongqing Province saw a 28% increase in their minimum wages in 2010.

While the percentages look dramatic, it's important to cite the relative nature of these cost increases to similar factory jobs in the US and EU. Example: Honda's Ohio factory has an average hourly wage (including benefits) of $50, and Hundai's Alabama factory is $27.

Here are several major Chinese cities monthly  'Minimum Wages' as of March 2011 in Yuan after increases ranging from 14-28%:

Jiangsu   1,140 

Shanghai 1,280

Chongqing 870

Zhejiang    1,310

Guangdong 1,300

While the increases are significant, note the range based on current exchange is $133 to $200 USD per month.  Chinese labor laws are strict and from this figure there are worker contributions to social security, housing fund and requisite tax deductions, thus on a gross basis this maintains an hourly rate from $0.83 to $1.25 per hour.

Going forward, companies may seek  lower cost labor for certain low skilled manufacturing in countries like Viet Nam and India which pleases the Central Chinese government as China continues to move up the value chain and lead the world in higher skilled production including electronics manufacturing. These relative increases may impact end user pricing albeit marginally, but likely won't deter China from their continued dominance in high quality/low cost producers to the world, unless of course US Labor Unions can compete with a loaded hourly wage of $1.25.

If you haven't been to China, it will be difficult for you to understand how Chinese view 'quality' versus what an American finds as acceptable quality. For example, you can find shops, markets, or street vendors that will sell you a t-shirt for 5 RMB ($0.74) which will last maybe 1 or 2 washes. Chinese know that you should not expect a high quality shirt for 5 RMB and are quick to point out that you 'get what you pay for'. Americans on the other hand may expect this t-shirt to be like their Hanes or Jockey, and then be disappointed when it falls apart,

Remember, this is the same country that produces many high quality goods from famous world wide clothing vendors, and China is the manufacturing home of Apple, Dell, HP and many other high quality products, so this proves that China has the ability to manufacture 'quality' products if directed properly.

Many times, US companies will outsource production of products on their own to a China vendor, expecting similar quality to what would be manufactured in the US. Often, these US companies will be disappointed in the quality of their products that are made in China because the expectation was not clearly defined in the contract or in the specification, and there is a lack of understanding of the Chinese cultural mindset.

This is a simple example of the significant cultural differences between China and USA that need to be considered before doing business in China. It is best that when a US Company decides to outsource to China that these companies will find a reputable company with Chinese staff on the ground in China to provide that bridge between the deep cultural divide that exists.

Many would be surprised to know that famous many well known Chinese public companies listed in the US markets are actually Cayman Island entities. Some of these companies like Baidu, CTrip, China Sunergy, Focus Media, Shanda, Noah Education Holdings, VanceInfo, Tom Online and Vision China Media to name a few are actually Cayman Island entities. 

This offshore structure provides flexibility for exit strategies whether an IPO or acquisition, reducing US Corporate taxes and reducing the impact of China's currency exchange restrictions.

U.S. trade rebounded strongly in 2010, as fast-emerging economies led by China became a vital export market. After falling dramatically during the recent economic downturn, US exports expanded by 17% to $1.8 trillion last year.

The 2010 data show China holding its place as the top source of imports into the US after having jumped ahead of Canada, Japan in Mexico in the past decade. China also rose to become the number 3 market for exports in 2010, up from number 18 in 1090 and number 13 in 2000.

Like many countries, China once relied on the US for computers, but now looks to America for semiconductors, civilian aircraft and parts, and complex industrial machinery as well as medical technologies and materials such as copper and chemicals that serve as inputs for other goods.

Many US companies who once saw China as a threat now see it as an opportunity. Many Chinese companies are looking for US quality which is still superior to Chinese goods and services. Many small companies in the US are experiencing faster growth in sales to China than sales domestically, a pattern begun by large companies such as Caterpillar who for the first time in their long history, reported that 2010 revenue in Asia exceeded that in Europe, Africa and the Middle East combined.

Chinese consumers embrace US 'brands' and appreciate the high quality, and as they move to a consumer based economy, there is significant opportunity for many US products and services.  

A story in Bloomberg BusinessWeek about a US company moving from Massachusettes to China caught my eye.I began to wonder why the US does not attract many Chinese businesses and are there other underlying reasons why some US companies move to China, aside from the labor arbitrage?

With the financial condition of states and municipalities, they're all hard pressed to offer incentives, particularly in the form of tax concessions.Read Evergreen Solar's CEO Michael El-Hillow on why he closed his US plant, fired 800 workers and is moving his company to China.

As told to Diane Brady:

"We make silicon wafers that go into solar panels. In 2008 we decided to build a plant in Massachusetts to be near our research and development facility. There was a groundswell of optimism that the U.S. was going to take the lead in the drive for alternative energy.

There were challenges from the start. Lehman Brothers was our banker and had almost a third of our outstanding shares as part of a financing transaction. That disappeared in Lehman's bankruptcy and cost us about $300 million. Then we went to the federal government to get help from the TARP funds, but they said no because we weren't a financial institution.

In December 2008 we were approached by a Chinese company, Jiawei, which was impressed with our wafer technology. The Chinese government agreed to support a loan that would cover two-thirds of our expansion in China. The subsidies we received from the government here covered less than 5 percent of the cost of our U.S. plant. We received $20 million and some future tax credits, but you can't pay taxes if you don't make money.

One mistake was making the U.S. facility too large. We should have made it a quarter the size. I wrote to the governor of Massachusetts, and we went to everyone we could think of—Congress, our banks. Nobody could help us. Then, late last year, prices went down 10 percent in one month for the modules we sell—on top of steadily falling prices for the last three years. That left us no choice but to stop making panels in the U.S. and shift our focus to making wafers in China. The access to capital for startups there is staggering.

About 800 people in our U.S. factory will lose their jobs, but the company wouldn't have survived if we didn't make this choice. Now we'll focus on what we do best. If we had stayed here, we would have been insolvent by September. We needed to do this to survive, although my hope is that some day more jobs will come back here."

Link to story:http://www.businessweek.com/magazine/content/11_06/b4214080431984.htm?chan=magazine+channel_etc.

At the current size and rate of growth in China (10.2% in 2010) the economy in China will add about $1 trillion in GDP in 2011. What that means in simple terms that is almost like creating half of the United Kingdom… in 1 year. Over the last 10 years, China’s economy has created 3 United Kingdom’s, practically from a stand still.

According to Jim O’Neill, the chairman of Goldman Sachs Asset Management group (and the man who coined the acronym BRIC for Brazil, Russia, India and China) the behemoth in the group, China, has had a transformation so thorough that most people (companies, investors) don’t realize the sheer dimension of its rapidly growing importance in the world economy.

With China’s incredible momentum, and their plans to urbanize another 400 million people over the next 12-15 years, I would not want to be short China.

How does your company’s strategic plan include China? China’s market opportunity is so significant and their labor force so vast that it creates a wide array of opportunities. There are many potential opportunities for technology companies, health-services providers, insurers, and pharmaceutical companies in China’s fledging healthcare industry, just to name a few.

Spend a little time doing China market research and regulatory reviews to see how your company can take advantage of this once in a lifetime growth opportunity. Whether it is China outsourcing or distribution in China, don’t look past this giant of the middle kingdom.  

The USA (3,794,083 square miles) and China (3,696,100 square miles) are nearly identical in size, so imagine this:

Take the population of the United States then add Mexico, Canada and Brazil, throw in the rest of the Western Hemisphere, than add Japan and Nigeria and put all of these people in the USA and you now 1.3 billion people.