Peter Olney of the Institute for Labor and Employment in CA has written on the need for organized labor in the U.S. to hone its domestic sights on what the FT reporter termed the “global hub-and-spoke network (which) is designed to link hundreds of towns and cities with an overnight communications infrastructure that keeps the world's “just-in-time” supply chain taut.” As Michael noted, state Dems saved the ILE from Gov. Arnold’s budget knife.
Seth Sandronsky
Date: Mon, 9 Aug 2004 12:23:22 -0400 From: Marvin Gandall <[EMAIL PROTECTED]> Subject: Continuing China fever
Today's Financial Times offers more dramatic evidence of how China has become the new beacon for Western-based multinationals. It describes the fierce struggle for dominance being waged over control of the lucrative China-US air cargo trade by FedEx, UPS, and European carriers like DHL --somewhat reminiscent of earlier competition over the sea trade lanes. The air cargo battle is being waged at both ends - in China, for customers and distribution hubs, and in the US, for landing rights.
The article is another illustration of how “from iconic multinationals such as General Motors, General Electric and Goldman Sachs, to specialists such as Home Depot or Avon, almost every significant chief executive has Chinese expansion plans at the top of his or her to-do list...lately the level of interest has begun to feel more like an obsession.”
The looming cloud on the horizon, of course, is the potential collapse of the US dollar, on which this booming export trade depends. But the parallel rapid development of the Chinese domestic market lends support to the view that if the 19th century belonged to Britain and the 20th century to the US, the 21st may well belong to China.
Marv Gandall ------------------- Midnight in Memphis, new dawn in China By Dan Roberts Financial Times August 9 2004
High over the Pacific Ocean, flight FX 24 from Shanghai to Memphis is one of the most closely monitored aircraft entering US airspace. Every night the Federal Express cargo jet is packed with 77 tonnes of digital cameras, mobile phones and other high-value electronics that make it the company's single largest source of revenue and a significant contributor to America's ballooning trade deficit.
Until recently the top priority route for FedEx was its daily flight from Tokyo, which carries express packages from all over Asia. But as with most big US companies, FedEx's attention is increasingly focused on one market: China.
Corporate America's interest in the world's most populous nation is nothing new - China's dramatic economic boom has aroused growing curiosity from US boardrooms for several years. But lately the level of interest has begun to feel more like an obsession.
During Wall Street's last round of quarterly earnings announcements, few large companies got very far into their conference calls with analysts before the subject of China came up. From iconic multinationals such as General Motors, General Electric and Goldman Sachs, to specialists such as Home Depot or Avon, almost every significant chief executive has Chinese expansion plans at the top of his or her to-do list.
As domestic US growth shows signs of slowing and Europe's recovery remains relatively subdued, business leaders in the world's largest economy are determined not to miss China's potential contribution to the bottom line. Rising profits from China play an essential part in many analysts' financial modelling for this year and next.
There are plenty of potential problems. Many smaller companies still view China predominantly as a threat. European and Japanese multinationals are queueing to claim their share of the prize. And it is not yet clear how far Beijing may be prepared to welcome foreign competition for Chinese companies in some sectors. One way to take the pulse of corporate America's love affair with all things Chinese is to watch the elaborate mating game being played out by companies such as FedEx.
Express cargo aircraft are the clipper ships of the modern age, carrying 2 per cent of international trade measured by volume but 50 per cent measured by value. In the early hours of a sticky Tennessee night more than 80 of these aircraft an hour descend into FedEx's global hub at Memphis, making it the busiest cargo airport in the world. A military-style “command and control” centre ensures that, no matter how bad the thunderstorms get over the Midwest, the valuable flights from Asia are always the last to be diverted or cancelled.
But the express logistics industry is about more than just ferrying cargo back and forth. A global hub-and-spoke network is designed to link hundreds of towns and cities with an overnight communications infrastructure that keeps the world's “just-in-time” supply chain taut. In developed markets such as the US, the ability to guarantee overnight shipment of parts and finished goods has allowed companies to reduce average inventory levels by a fifth over the last decade and is thought to have played a significant role in improving productivity across the economy (see charts).
It is for this reason, above all else, that FedEx and rivals such as United Parcel Service and DHL are paying so much attention to China. As it becomes the workshop of the world, teeming factories along the Pearl and Yangtze river deltas represent both the start of the world's supply chain and the source of some its biggest transport bottlenecks.
Growing recognition of this fact has also helped to spark interest among Chinese government officials. Despite the relatively immature state of its own competing airlines, Beijing last month signed an unusually liberal agreement with the US allowing a fivefold increase in the number of cargo and passenger flights between the two countries. A key part of this air services agreement was permission for carriers such as FedEx to open cargo hubs from 2007 and begin building the kind of logistics infrastructure demanded by companies with local manufacturing operations.
The progress in opening up China's airspace illustrates an approach being taken by many of the more successful US multinationals. By targeting sophisticated markets where there is relatively little domestic competition - whether it be electricity generating equipment from GE or logistics expertise from FedEx - infrastructure providers are able to secure the kind of welcome in China that other manufacturers or service sector companies struggle to achieve.
Fred Smith, FedEx chairman and chief executive, describes the lobbying process to increase access to China as considerably more straightforward than in supposedly liberalised markets such as Britain. “We had all this independent research that showed how important the fast movement of freight was to the development of the economy,” he says. “But we didn't have to make much of a sale - they [the Beijing officials] got it.”
The speed at which Chinese markets for air services and the like are opening up also illustrates the value of the prize for those multinationals that can get in first. Not only is this a huge market, it is one of the last significant markets in the world to liberalise. “China is the important issue of the 21st century,” adds Mr Smith. “Its inexhaustible supply of labour and engineering talent is going to be an incredible part of the economic story of the world.”
This is far from a winning situation for all concerned. Fierce battles remain, particularly over which companies should get to use the coveted new flight allocations. Some 39 weekly slots between China and the US become available between now and March for four US cargo carriers to share. Yet seven companies are demanding up to 53 flights between them. The US Department of Transportation has given them until today to make their case and is expected to make a final decision in September.
With so much business at stake, operators already in China, such as FedEx and UPS, argue that landing rights should go to those most able to take advantage of them immediately. Those wanting entry counter that they should be given the chance to stimulate greater competition.
Tussles over landing rights are standard fare in the express cargo business, which has lobbied for deregulation of the airways throughout most of its short life. But even by these standards, the scramble to gain a toehold in China has generated some heated exchanges. UPS, for example, has accused FedEx of seeking to hog slots that it does not need. In response FedEx has called UPS the “Don Quixote” of the case for tilting at windmills and accused its rival of seeking to create a “pseudo- hub” rather than invest in genuine infrastructure.
Petty as such squabbles can seem from the outside, they are part of a great game being played out by multinationals in China. While FedEx and UPS fight among themselves, DHL - their European rival owned by Deutsche Post - is pressing ahead with opening a $100m cargo terminal in Hong Kong. Similar epic battles are being fought in the car industry, where General Motors is seeking to overtake Volkswagen's early market lead, and in the power and transport markets, where GE and Siemens compete for billions of dollars of new infrastructure orders.
The outcome of this rivalry is watched keenly by cities seeking foreign investment. In the case of the express cargo industry, the economic prize sought is the location of regional distribution hubs, which can make surrounding areas much more attractive for further inward investment.
FedEx, for example, has generated intense local interest by announcing talks with airport authorities in Guangzhou, the southern Chinese city at the heart of the Pearl River delta's manufacturing boom. Though unlikely to result in a completed hub until perhaps 2010, the talks are a coup for Guangzhou, which has built a new airport after years of struggling with overcrowded transport infrastructure. It also represents a challenge to Shenzhen and Hong Kong, nearby ports that have long prided themselves as the gateways to the Pearl River.
FedEx insists the talks are not yet finalised, suggesting it wants to continue haggling over terms while retaining the option of going elsewhere. Both UPS and DHL hope to establish facilities in Shanghai, where the Yangtze River delta rivals its southern neighbour as China's export powerhouse.
Elsewhere in Asia the competition is viewed with concern. FedEx and UPS have both invested heavily in hubs in the Philippines, where the Guangzhou talks have led to fears that China's growth may undermine FedEx's plans to expand its hub at Subic Bay, near Manila.
FedEx rejects the argument, pointing out that, just as it maintains a number of different hubs in Europe and the US, there is no reason it cannot continue simultaneously to expand regional Asian facilities in Japan, the Philippines and China. Nevertheless the same hub-and-spoke system that makes the overnight cargo industry economically viable also tends to concentrate secondary economic benefits at the busiest points of the network. Memphis, for example, is Fed Ex's only hub with direct flights to all other points in the US network as well as many international destinations. Economists at the Stanford Research Institute have calculated that, as a result, 130 foreign-owned companies from 22 countries employing 17,200 workers have clustered around Memphis to take advantage of later pick-up times for overnight deliveries.
It is far from easy to open a hub. The Memphis hub has been described as one of the world's most complex works of industrial choreography. Up to 5m individual packages must be unloaded, sorted and reloaded during a four-hour window so planes have time to reach their destinations by dawn. As the Chinese economy matures beyond its early reliance on labour-intensive manufacturing, infrastructure investment of this type becomes ever more important. In a world of global supply chains, sophisticated distribution centres are likely to become a sine qua non for successful economies.
An assessment of the advantages that China can derive from foreign investment influences Beijing's bargaining with many multinationals. Goldman Sachs, which recently won approval for an investment banking venture in China, has even been encouraged to make a “donation” to help a troubled domestic firm. One worry for many multinationals is that different arms of the government might not view their presence in the same light, undermining whatever deals are reached. In the case of express deliveries, for example, opposition from China's state-owed postal service and its airlines remains a serious concern (see left). “The Chinese bureaucracy is big and there are lots of different interests,” says Rush O'Keefe, the FedEx lawyer leading its entry.
Yet multinationals cannot afford to ignore the rewards. While growth rates in most markets are measured in single digits, FedEx boasts annual growth in China of more than 50 per cent. UPS says year-on-year growth was running at almost 70 per cent in the second quarter. In boardrooms across America, the common refrain is that this is a once-in-a-lifetime opportunity.
“There are hundreds of millions of people who are finding it glorious to get rich,” concludes Mr Smith in a self-conscious echo of the phrase Deng Xiaoping used to ignite China's boom. The assumption behind his enthusiasm is that it will be US multinationals that will help them do so.
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