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10/01/2011

The unpredictable

Unbeatable in mass production – but is China already on the brink of instability?

By Claudius Semmann

Doing the development in one country, designing in another, producing in a third country, and then selling worldwide: That's necessary today to make money, emphasizes Rudolf Weiler, Managing Director of Digisound, the transducer manufacturer. The expert on China and India warns, at the same time, about the pitfalls of global production – and the prosperity divide in China.

Weiler is convinced that, in coming years, China will go through hard times and possibly split into two economically separate areas. Dollar signs in Chinese eyes would be hard to ignore, he says. He notes competition among neighbors, communities, towns, cities and provinces – "Everybody tries to outdo the other." Digisound's Managing Director expects a conflict in China's society developing between the rich coastal regions and China's inner provinces. "That's where you will find huge cities which are extremely impoverished in parts", explains Weiler who had been a guest at the 8th HanseLog of the Bundesvereinigung Logistik (BVL – Federal Logistics Association) last week in Hamburg.

Reliable production. Digisound manufactures electro-acoustic and optical signal transmitters such as loudspeakers, buzzers, reverse gear warning devices, hooters, and alarm horns. The medium-sized company is a supplier for the automotive industry, the medical engineering sector, as well as the telecommunications industry. For years already, the company from Norderstedt near Hamburg has been present with its factories in India and China. China's strength: "Very reliable mass production at extremely economical prices", sums up the Digisound Managing Director. He says that no other country would produce mass-market products as accurately and cheaply. Wei1er: "We have a fault rate of five parts per million; thus, for one million parts, there will be five defective ones."

In contrast, mass production at reasonable prices would hardly be possible in India. A buzzer in an alarm clock would cost Digisound USD 0.04 in China, but USD 0.11 in India. And that would also be due to bad efficiency, says Weiler. But: In China, his medium-sized company also had negative experiences. He says that collaboration in joint ventures were usually difficult. One of the reasons is that the Chinese are still considered copycat world champions. According to Weiler, a long-term problem could be that China is being fed so much information and knowledge. German companies should better ward against uncontrolled knowledge transfer. "In this respect, companies are often very careless", observes the expert.

Weiler speaks from personal experience. He says he had seen exactly the same factory being built another 3 km away as the crow flies. After that his company had wanted to terminate the joint venture. However, it's difficult to get out of cooperations again once they've been concluded. So Digisound simply removed a major part of its production from that location. Gerd Kerkhoff – the expert on purchasing and medium-sized companies of the consultancy that bears his name – has this to say about the problem: "The question is: To what extent should more complex developments be left to the Chinese at all. Because they would permanently try to tap knowledge. "It's not without good reason that white-collar crime authorities currently consider their greatest problem to be hacker attacks from China", reports Kerkhoff in his talk with DVZ.

Political risks. For industrialized nations, the importance of countries such as Brazil, India and foremost China is ever increasing. "Growth is further shifting towards the newly industrializing nations or emerging markets. They are our future", emphasized Carsten Klude, Senior Economist of Hamburg's private bank M.M. Warburg at HanseLog. Currently, the seven leading industrialized nations still hold a share of approx. 50 percent in the global economy while the BRIC nations hold about 20 percent. As recently as ten years ago, Brazil, Russia, India and China held a combined 8 percent.

However, political risks, bureaucracy and corruption would remain high in the newly industrializing nations, warns BRIC expert Maria Laura Lanzeni from Deutsche Bank. In the medium range, BRIC nations would politically "not be exactly stable" according to her assessment. Kerkhoff holds a similar view: "A risk which is always looming with China: Its politics are unpredictable."