Prospects for Onstar and a Booming Automobile Industry in China

OnStar will soon be making landfall in China. GM recently announced this development which would mark the first time that the service would be offered outside of North America.

For those of you unfamiliar with OnStar, it is quite an interesting and comprehensive service. Utilizing mobile and data communication and GPS technology, emergency responders can locate individuals who are in danger or who have been in an accident. I myself do not own the service, but I do find it quite remarkable. Upon hitting a sort of "panic button," locational information is transmitted to an OnStar node center (as pictured here) and then onto emergency personnel. In addition, I was surprised to learn that OnStar provides diagnostic advice for vehicle maintenance and even boasts a "stolen vehicle slowdown" system in which police can remotely slow and disable your vehicle in the event it is stolen or hijacked. Not bad huh?

Now many of you are probably wondering why this service has not been exported in bulk. Despite the unique functions, roughly 5-6 million in North America and Canada employ the service. While this is certainly a substantial number, it is small potatoes when matched to vehicle ownership numbers. Some reasons for this are price, utility, and privacy. Many people are unwilling to pay a high price for the features OnStar provides and even question the need for such a service with the existence of sophisticated mobile phone technologies. Also, the issue of privacy has also raised alarm as locational information could be used for surveillance or other illegal activity.

In turns out though, that OnStar could not pass up the potential that is China. As I mentioned in an earlier blog post, China has recently become the largest consumer of automobiles (and continues to rise at a high clip) in the world and there is potential here to tap this enormous market. Relatively speaking, and I can attest this based on experience, China is a nation of "new drivers." While we have been driving here in the United States for decades, driving in China is a relatively new phenomenon. This is evident by the still large volume of bicycle traffic competing with automobile traffic in China's congested cities, as well as the song of horns and vehicle accidents that often occur. It makes perfectly good sense to market a safety product there amidst the surge in vehicle ownership that is currently ongoing. Another reason that OnStar could and should be bullish is recent news that the automobile industry will continue to experience growth.

The growth I am referring to is based on findings from Nissan Motors which sees the automobile industry in China growing even after government stimulus measures expire. I talked a little about how growth numbers were inflated in an earlier post concerning vehicle sales based on incentives similar to the United States "Cash for Clunkers" program, which to many is synthetic and not true demand. Nissan Motors CEO even went as far to say that Nissan Motors will struggle to meet future demand. To combat this Nissan and other automobile manufacturers are turning to their factories in Guangdong province in the hopes of ratcheting up their capacities.

While I am not sure if I will go this route, one thing about business related to China that has never stopped having lucrative potential is automobiles and anything that pertains to automobiles. If you or I can create the newest and next best windshield wiper blade, interior espresso machine, or stylish hubcap, the potential that is the Chinese Market awaits. Before I go I want to leave you with this: Last year over 9 million automobiles were purchased, and as you probably guessed, that number is supposed to rise!

Guangdong

Today I want to talk about China's most populous province. Along with being the most populous province in China, it is also one of the most prosperous. It is of particularly of interest to Chinese firms and multinational firms as Guangdong province has a very dense and expansive production base.

Besides being a factory hub, Guangdong is also unique in respect to the rest of China. Like their brethren in Hong Kong, their spoken language is Cantonese. Although most of the younger generation increasingly speaks Mandarin, those attempting to wield Mandarin may find things difficult. Perhaps if business is to be done, one should brush up on some polite Cantonese gestures.

Another item of interest is Guangzhou, the third largest city in China and a major center for businesses who utilize one of the many smaller factory cities nearby, the most prominent being Dongguan. Besides the international airport, Guangzhou also has access to the South China Sea via the Pearl River. I have spent several weeks in Guangzhou and came across Africans, Eastern Europeans, and many other nationalities from Europe to the Pacific Rim. Many are working in the clothing, textiles, and toy industries to name a few.

As a result, it is no wonder that Guangdong is often referred to as "the factory of the world." What is most interesting to me is Guangdong's future path. The Chinese government has shown interest in eliminating some of these antiquated factories in favor of hi-tech industries. A pretty bold agenda, but possible considering that Guangdong is an economic powerhouse. Led by development in Guangzhou and Shenzhen, Guangdong province has a larger economy than Singapore or South Africa. The question is, with the implementation of hi-tech industries, what does this mean for the hundreds of thousands of migrant workers who now call Guangdong their home?

Largest Consumer Market in the World

One of the things that amaze me most about China is the strength of consumer demand. Economic difficulties fail to derail the will of Chinese consumers, they simply keep spending as they bum rush glitzy shopping malls. As for the shopping malls, they keep springing up all over China. I am not one for shopping, but I do enjoy poking around these places when I am there. They are multi-storied, have all matter of goods and services available (my favorite aspect is the plethora of food stands and restaurants), are teeming with Chinese and expats alike, and some even have full size movie theaters on the top floor (in which you can watch the latest Hollywood blockbuster no less).

To show the sheer magnitude of this consumer market, ingest these facts: China Mobile, which is state-owned and one of two major providers in China, has just seen their customer base cross the half billion mark. As a result, it is easy to comprehend that China Mobile has the world's largest mobile network and the most subscribers. China has also recently become the world's largest automobile market as well.

I must admit, this news does not really surprise me all that much. However, what does surprise me is during China's trouble economic period (let us not forget that China's exports are down at the moment) this rampant consumerism has not only sustained but is increasing. This is good news for China as it tries to diversify and boost domestic demand, a key element of Beijing's economic strategy.

Despite all the positive indicators, many economists and skeptics are not buying the surge. Beside the concern about the sustainability of such a robust consumer push, they are also concerned about the data itself. Many contest that the figures in play also account for government expenses and purchases. Like the United States, China is also employing a stimulus program of sorts.

While these factions can go back in forth all they want, I believe that while the growth may not be as high as Beijing purports, it is still nonetheless growth! All over China in various slices of life, things have been happening rapidly. More rural and provincial Chinese are getting into the mix, albeit some of this is on account of incentives in place by the Chinese government (much like the United States "Cash for Clunkers" program), still, this information is still telling. In Chinese urban society, incomes are rising and so is the pollution from new automobiles clogging the roads and highways.

I've mentioned before in earlier posts the vitality of China's consumer market. There is of course an element of risk. There could be a drop off in spending or the bubble may burst. I am no economist, but if I had a thriving business and a marketable product, I would bet all the chopsticks in China that this will happen later rather than sooner and that profits could be made. The key is to understand the nature of the Chinese and find that next untapped market.

World of Warcraft

Wow, I just read an interesting article about World of Warcraft. As many of you know, the game is popular all over the world and China in particular has a VAST following. I can attest to this. Visit any internet cafe throughout the country and you will find it teeming with adolescent boys (and some time girls) drinking soda, smoking, and hacking away at their enemies!

Surprisingly, China has banned foreign investment into their online gaming industry. The reason? They want to tighten control over the virtual world within the popular game. This astounding. I am not surprised however; China has been filtering Google and other Western media for some time now in an effort to keep out influences and information perceived to be harmful. It seems they are taking it to the next level with the virtual communities of World of Warcraft and their ilk. I am not going to get into the political nuances of this, but this news could have an implication for business.

So what does this have to do with World of Warcraft? Since there is such a prolific amount of Chinese gamers, the government may be concerned about what else is going on besides slaying the Burning Legion! I researched a bit and was impressed with the depth of the game and ability to interact with people all over. I remember years ago playing Warcraft II where you only had a choice between the Humans and the Orcs. Seems like there is much more going on with this one.

Along with banning foreign investment, firms also will be unable to participate in technology support and other influencing agreements with Chinese gaming firms. This is of note, particularly for businesses planning to tap into a rich and growing market in online gaming. Since the news is very recent, I am interested to see any developments and to what extent these restrictions may be. Something else to think about: How will this be received by gamers?

Competition in the Friendly Skies?

I was reading about China yesterday and I came across something very interesting. China, which has been a relative backwater as far as the airline industry is concerned, is now stepping up efforts to rival the world's largest airline manufacturers. That's right Boeing! Be advised Airbus! The name of the jet is C919, but it is still in developmental stages and likely will not be rolled out until 2014. Still, this development is significant in terms of international business.

First of all, it is a display of China's increasing capacity to shift from lower tech consumer goods to higher tech consumer goods. In this respect, China is following the lead of "tiger economies" in the region such as South Korea, which has made a shift from lower tech consumer goods to a market of high quality electronics, vehicles, and computers. China still has a long way to go, but this development shows the potential that remains untapped.

China has made it clear that this is a strategic decision as well as a business decision. China hopes to field the C919 for primarily domestic use but also for sale on the global market. It is yet to be determined what kind of effect this will have on American manufacturer Boeing and European manufacturer Airbus, but it is likely both are paying heed to the developments occurring in Beijing.

At this stage, the manufacturer has made some pretty bold claims. First of all, he said that the C919 will be superior in terms of fuel efficiency than planes the same size, such as Boeing 737 and Airbus A320. Additionally, the C919 will be marked down below the going price of its future competitors. I think this could be very significant for several airlines, which in a struggling market are in need of updating their fleets and improving quality while maintaining or reducing expenses. I am curious how this will play out over the next decade and to what extent China will shop their C919.

Despite these boasts, many analysts and think tanks question the likelihood of such claims. They concur that the cheaper labor market does not necessarily equate to cheaper planes, as materials costs usually make up the lion's share of expenses. Also, analysts claim that China's investigation using composite materials instead of steel (to boost fuel efficiency), likely will not come to fruition as rivals Boeing and Airbus have delayed similar projects citing little difference in efficiency.

Success or not, I feel this project will have a significant impact on China, if not the global community. With a rising Chinese middle class, the airline industry is booming. If anything, the C919 can be a huge boon to domestic airlines as the demand for airline travel in China is currently and likely to remain high. I, among others, hope to have a front row seat as this development unfolds!

United States-China Trade Relations and the Chinese Yuan

Of all the trade relationships, the United States trade relationship with China is one of the most unique. Through the context of globalization, the United States and China have become increasingly interdependent on one another. The United States is far and away the largest importer of Chinese goods, more than Japan, South Korea, and Germany combined. Also of interest, and not as well known, China has increasingly boosted their quantity of U.S. imports. Over a decade ago, China was the 13th largest export market, now it ranks 4th.

What can we attribute this to? Certainly with the rise of the Chinese middle class, the demand for quality American goods has risen. Additionally, globalization has spread over the past couple decades and penetrated deep into societies.

Before getting into some of the trade inequalities that exists, let's give credit where credit is due shall we? The flood of Chinese imports (quality issues aside) has resulted in cheaper products for U.S. consumers and helped keep inflation in check. Secondly, U.S. investments in China consistently perform better than the global average. Also of note, and of particular interest to this blogger, American businesses in China have been generally successful, also performing better than the global average.

Despite these positives and despite the increase in U.S. exports to China, the trade balance between the two countries is still skewed towards China. Many economists, particularly in the United States attribute this to the Yuan/Dollar exchange rate. The Chinese Yuan is a "floating" currency which is pegged to the United States dollar and is closely monitored and some might say manipulated. The result? A currency that is worth much less than it should be. The Chinese Yuan is worth much less that purchasing power parity would suggest. This results in Chinese exports being much more competitive and makes U.S. imports less attractive. It is no wonder that U.S. officials (and the World Bank) have called on China to re-evaluate their currency! Still, much depends on the eye of the beholder. Americans living in China and those conducting business likely favor the status quo. It is the American manufacturer who is most at odds. Facing a substantial decline in domestic production, this only further complicates matters for those exporting to China.

Outsourcing: A System of Tragedy and Triumph

Outsourcing. Everyone talks about it and we have all heard about it. Buy American they tell us. Don't send our jobs overseas. For many people this line of thinking is not necessarily in the fore of their minds. That is, until they are notified that they have lost their job because it can be done by intermediaries in a foreign land at a huge discount. Buy American? Sure if you can afford it. Let's just say there is a reason that China leads the world in exports.

From an economics standpoint, outsourcing makes perfect sense. It is in a particular firm's best interest to lower costs and efficiently employ capital and resources to improve the bottom line. More and more firms are outsourcing to places like India (Information Technology) and China (automobile parts). In the case of China, this has had a significant impact on places like Detroit and Flint, heavily dependent on the automobile industry.

Critics of outsourcing will point to reductions in quality control measures, language barriers, exploitation of workers, and damage to local labor markets to name a few. These are significant risks for a firm to undertake and outsourcings are not always successful. With that being said, more often than not, reward is not achieved without risk. For some firms, the promise of wage differentials and increased efficiency is too much to pass up. Often, they reap the spoils as a result.

While much can be said about the victors and the fallen, there are other things to consider when talking about outsourcing. What are the incentives for the firm to outsource and who should control what? This is a big question as multinational firms that engage in outsourcing need to establish ownership or dictate who should own or run a particular input. Some firms like to micromanage, while others put key business decisions and operations in the hands of local managers. As you can imagine, micromanagement comes with added costs to the firms, and delegating often can lead to detrimental results. Looking at another angle, country A and country B aside, what are the implications for international trade as a whole. For example, how does the outsourcing of U.S. jobs to China affect Japan or Europe or international trade as a whole? These are all things I would like to analyze in more detail in coming posts.