Chinese copy cats and Japanese bullet trains; lessons for America

I’ve just returned from a family trip to China and Japan. The great thing about travel is the fresh light it sheds on things what otherwise would be overlooked. This trip was no exception.

After a few days back home, two things stand out: Chinese competitive business practices and Japanese infrastructure policy.

China is on the way to becoming the world’s largest economy. I talked with numerous Americans, both in China and here, who have started businesses there. Here’s their collective thumbnail description of how Chinese businesses compete:

First, research carefully your competitor. Figure out his business model, target market, product strategy, pricing tactics. Everything. Then “reverse engineer” your competitor’s product; that is, work out how your competitor designs and manufactures his product, what technology he uses, what design and materials are being deployed.

Then do everything you can to reproduce your competitor’s methods and products. That certainly includes copying and, if you can get away with it, stealing his technology, plans and detailed drawings.

Figure out how to make a cheaper version of your competitor’s product, maybe by using much cheaper labor, maybe by stealing her inventions, maybe by just copying her design and promotion tactics.

Bring your cheaper product to market and let the normal forces of supply and demand have their way.

The business logic is simple. In a country with 1.4 billion people, the Chinese domestic market’s plenty big enough to make even a miniscule market slice plenty profitable. Not only that, but it makes no sense to spend money on expensive R and D when you can steal it much more cheaply from a competitor when it’s ready to use.

Several years ago, a good friend, a very capable and experienced American businessman from the west side of Michigan, opened a subsidiary in China. He pulled out within a few years. “There’s no point,” he told me. ”Once you have figured out how to do business in China, they’ve copied your systems, your products, your research.” That’s not the universal opinion of people I talked to, but it’s pretty close.

In the minds of most economists, “free trade” brings substantial advantages for consumers who benefit from comparative advantages from specialization. Maybe so. But not when “free trade” greases the skids in favor of a business model like the Chinese. So it’s naïve to knee-jerk favor international free trade agreements without very carefully understanding the fine print and making sure that bad consequences for American are mitigated.

I wouldn’t be surprised if economists are just beginning to rethink the plusses and minuses of our past policy infatuation with international free trade agreements.

The other side of the policy coin has to do with what the Japanese are doing to their infrastructure system, especially rail. While in Japan, we travelled throughout the country on the “Shinkansen”, the bullet trains that knit the landscape together with trains that speed along at a maximum of 200 miles per hour, carrying more than 150 million passengers per year. The trains are clean, the attendants and conductors polite and helpful. The trains run in near-absolute quiet, for the rails are welded together, so you don’t get the bothersome the “click-clack” of American trains.

And they’re absolutely on time. When your ticket says the train leaves at 3:47 p.m., it leaves exactly at 3:47. I learned to set my watch by checking the train departure times rather than the other way around.

The Japanese have invested plenty in their bullet train infrastructure system and that investment is paying off big time in improved productivity and citizen convenience. Why on earth we don’t make similar investments in infrastructure in our own country is beyond me, whether it’s trains, air travel, roads, shipping and ports. If one of the long-term problems with our economy is lack of jobs for ordinary non-high tech workers, an awful easy way to improve the future of folks now left out is a national program of infrastructure improvements, perhaps modeled on what the government did after the Depression.

It’s in part a consequence of our political culture that has increasingly discounted the value of a whole range of “public goods,” whether quick and easy transportation (as in Japan), or reliably safe drinking water (as in Flint), or roads that don’t tear your car up in the Michigan winters. And of course our schools, where student achievement is going down and our young people are being systematically shortchanged in international competition.
On our trip, we saw firsthand how the Chinese work to manipulate the business competitive system to their advantage and how the Japanese invest in the basic structures underlying a thriving economy, while our politicians at home remain preoccupied with who is peeing in which toilet. Somehow we’ve got our priorities messed up – and realizing that, too, is a benefit of travel.

All the same, it sure is good to be back home, to smell the clean air and see the flowering trees and play in the evening cool with my dog on the lawn.

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Larry Krieg
Tue, 05/03/2016 - 10:55am
Re: investment If we don't invest in our own communities, how can we expect others to invest in us? Our legislators have worked to create a low-tax environment to invite business to Michigan. The result has been a low-tax environment where you can't drink the water and you can't educate your children. We're trying to compete with third-world countries by becoming more and more like them, but I'm not sure we can out-compete them in their own arena. PS - most US railroads now use welded rail, so if you hear the "clickety-clack" on Amtrak, savor it as a nostalgic moment!
Jan Barney Newman
Tue, 05/03/2016 - 11:30am
Phil, So refreshing to have this account of your travel to Japan and China along with all the REAL news we can count on from Bridge. Indeed, these are lessons to be learned from travel. Thank you for that and all that Bridge brings to its readers.
duane
Tue, 05/03/2016 - 1:33pm
“…no sense to spend money on expensive R and D when you can steal it…” The problem isn’t ‘free trade’ it is illegal trade and the lack of willingness to enforce the laws/agreements. “…the rails are welded together…” Mr. Power needs to understand that is not the unskilled uneducated doing that welding. “Why on earth we don’t make similar investments in infrastructure in our own country is beyond me,” It is not simply spending money, it is about what that money is spent on. It is about what is being moved and why. “If one of the long-term problems with our economy is lack of jobs for ordinary non-high tech workers, an awful easy way to improve the future of folks now left out is a national program of infrastructure improvements, perhaps modeled on what the government did after the Depression.” Mr. Power needs to realize that the world has changed from the Depression era and that we have move from a strong back and a willing to carry a heavy load to a world of knowledge and skills. To put people to work they need to be prepared with an understanding what the work ethic is, they have to have the knowledge and skills for the work, and they need to be willing to go where the work is. Mr. Power needs to let go of the political hype of the Depression and open his eyes to the reality of today’s world. I wonder if he realized that China is losing millions of jobs to other nations in Asia because their world is changing to be knowledge based. “And of course our schools, where student achievement is going down and our young people are being systematically shortchanged in international competition.” Mr. Power should try to understand that the students who are being short changed by the education they are being offered, rather it is by the lower expectation that he has, by less interest in learning, less effort in learning. I talked to a ten year old this week that who was studying a higher level of algebra than I did at 14 and he was spending more time learning it than I did. He will be ready to compete internationally because he has the desire to learn. “Somehow we’ve got our priorities messed up – and realizing that, too, is a benefit of travel.” Mr. Power should all travel with his mind while setting at home, read such books as the works of Malcom Gladwell starting with Outlier [consider the rice growers of China culture and what we can learn], Thomas Sowell’s work starting with Wealth, Poverty and Politics [how throughout history the impact of the cultures of the individuals] or even Alexis De Tocqueville’s Democracy in America. Travels across countries is necessary to open the mind, it can be much more enlightening to travel through ideas and having conversations about those ideas and with others have applied those ideas. If you want to reorient our priorities start with the results you want to achieve, then look to those who are achieving those results and learn why. The world has changed and yet is has stayed the same. What we have learned of science has changed how we apply it, but the people who succeed use the same human attributes and are affected by the cultures [both the macro and the micro] that they live in just as past generations have. When will you start you become part of the conversation rather than simply toss out your wants and dreams for others deliver?
David
Sun, 05/08/2016 - 11:02am
In other words, all is well so we can forget about those Chinese and Japanese models and just keep reading Thomas Sowell. I do read Sowell periodically to remind myself of all the things I am intrinsically against. He is a prime apologist for the failures of the 'tricke down' philosophy.
Eric
Tue, 05/03/2016 - 1:44pm
Investment in high speed rail is also good for tourism...had a similar experience traveling across Italy at 90mph versus having to rent a car and navigate a foreign country.
Matt
Tue, 05/03/2016 - 1:47pm
Phil, seems to me that you can't blame Flint's water problems on lack of investment, in fact quite the opposite! If they weren't interested in making investments in that system, they would have stayed on the Detroit water system continuing to be gouged and NONE of this would have occurred. Instead it was Flint's EM agreeing with the city officials, trying remedy this situation,and making a big investment that brought us to this point. (I'll grant with poor execution.) Maybe a better question/issue is how does this kind of capital investment decision fall under the EM's job description for running a broke city?
M.E. SINGER
Tue, 05/03/2016 - 5:11pm
Very insightful commentary, with a poignant diagnosis of our politician's perspective (taking their eye off the ball). For over 20 years, we have witnessed the political decision to dis-invest in the nation's infrastructure, including rail, roads, bridges, and the FAA's Next Gen radar. Rail alone requires replacement of 100+ year old tunnels and bridges on the Northeast Corridor; relief of gridlock around Chicago. All of these projects are necessary to the nation; yet, this simply attests to the willful dis-investment in the nation's infrastructure. As a result of this failed national policy, the deterioration of such critical infrastructure has placed our mobility and economy in a death spiral. The current, and next administration, must establish priorities for funding infrastructure, and bring Congress in line with the public interest; lobbyists be damned. Where is La Guardia when we need him?
Dennis Fitzpatrick
Tue, 05/03/2016 - 7:02pm
A few observations. Reverse engineering it's not illegal. Undoubtedly, every major company in the United States does reverse engineering on their competitors products. A great learning tool. If you are not learning from your competitors then you are going to be out of business shortly. China's state-owned Enterprises are bureaucratic quagmires. They are sinking under massive debt and excessive employment. The private sector in China is lean, mean and innovative. Since China does not have to consider property rights and human rights they have the ability to get what they want done when they want it. If they say a high-speed train is going from A to B in 6 months it generally happens. By contrast the U.S gets nothing done, except maybe right-wing and left-wing rants. How about some type of compromise approach? Before you invest trillions in a massive High-Speed Rail Project, consideration should be given to the impact of the autonomous car on the way we move people.
Observer
Tue, 05/03/2016 - 9:20pm
It may be that "The Japanese have invested plenty in their bullet train infrastructure system and that investment is paying off big time in improved productivity and citizen convenience." But Japan, (and Europe) is a far more densely populated country than the United States. What works well in Japan is extremely unlikely to be nearly as rewarding in this country. We definitely could profitably invest more money in infrastructure, but we have chosen instead to invest in social engineering of one sort or another. Of course, now that we have adjusted to those programs, we hear complaints about poor infrastructure. Now we are told "Oh, you want decent infrastructure? That will require higher taxes." And I think that Mr. Power will find that infrastructure is not nearly as labor intensive as it once was. And Mr. Power is only partially correct when he says, "It’s in part a consequence of our political culture that has increasingly discounted the value of a whole range of 'public goods,'...." It certainly wasn't the case in the Flint water situation, which wasn't a case of lack of investment. He is certainly correct about Michigan's roads, but he may recall that it was the considered judgment of Michigan's voters that that investment wasn't worth making. They turned down Proposal One by a four to one margin. And he is mistaken about education being a "public good." A "public good" is both non-rival and non-excludable. Education does not meet those criteria. If one student occupies a seat in a class, no one else can occupy that seat. And a student can be excluded from a class if the appropriate fees have not been paid. None of that means that education is not of immense social value; it is. None of that means that government should not provide financing. And I doubt that financing accounts for the decline in student achievement. And it does not mean that government has to operate schools. And he is mistaken when he says, "the Japanese invest in the basic structures underlying a thriving economy" The Japanese economy is far from thriving. They have paved over much of the country to little or no effect except the accumulation of vast amounts of debt. There is no doubt there is much about Chinese business practices that is highly irritating, but that does not mean we should abandon free trade. It is still, on balance, a positive for us and the world. He is quite right when he says, " “free trade” brings substantial advantages for consumers who benefit from comparative advantages from specialization." Yes, some producers are injured, but those injuries are outweighed by the benefits to consumers. There is no question that free trade and globalization have their downsides, but they have lifted over 700 million people out of extreme poverty. That is not a trivial thing. If Mr. Power believes in progressive taxation, the redistribution of wealth from the one percent to the 99 percent, how can he object to allowing poor people around the world to earn a better life?
David Richards
Mon, 05/09/2016 - 10:51am
Your comments reflect being an informed Observer, but there are some points I would either disagree with or supplement. Voters did not turn down the road proposal because they were unwilling to pay for good roads. The proposal was simply too complicated and included items not related to roads, according to polling done at the time. The general public in Michigan wants decent roads, and is willing to pay for them, but for political and ideological reasons, it is not happening. You are correct that Japan (and Europe as well) has a more concentrated population making an effective public transportation system, such as the bullet train in Japan, easier and more practical to implement. The missing part of your comment is that it is a chicken and egg situation. Effective mass transit, such as the train system Japan-wide and the very extensive rail system throughout Tokyo, encourages concentration of population leaving more of the countryside available for agriculture and recreation. In the US, and particularly in the Detroit area, we have encouraged sprawl, making the costs of our roads, water lines, utilities, etc. more expensive, increasing taxes, and at the same time discouraging the development of the types of transportation facilities available in Japan and Europe, or even New York or San Francisco.
Thu, 05/05/2016 - 11:41am
This is the type of reporting we used to get in North America, bravo. I agree with the need for infrastructure improvements throughout North America. In a country that was founded on the rail system, it is disheartening that we have abandoned this type of travel, especially at a time in our history where rail travel would be economical and desirable. With the advent of clean energy and efficient electrical engines, rail travel would relieve congestion from our highways and provide an environmentally safe means of transport and travel. The jobs and technology of an entirely electric bullet train system of transport and travel would have tremendous benefits to our economy and environment. it an idea that is long overdue. its time to invest in America again.
matt
Fri, 05/06/2016 - 11:37am
Aren't the tracks and infrastructure privately owned by the Rail cos? Why does it seem that the readers here are so seemingly determined to give money to fat cats like Warren Buffet? Or is it that they're mistakenly (wishfully) thinking that the rails are all publicly owned?
Rich
Sun, 05/08/2016 - 9:07am
Japan - 145,000 sq. miles, 70,000,000 people U.S. - 372,000,000 sq. miles, 330,000,000 people You do the math. It is not the same.
David
Sun, 05/08/2016 - 11:07am
GDP in the US is about 3X Japan's. We tend to ignore our infrastructure because getting it done would involve increasing taxes. So instead of paying more taxes, I pay more to the auto body shops. Remind me again how much money was saved by changing the Flint water supply.
duane
Tue, 05/10/2016 - 12:39am
Are you suggesting we should all be paying the state more more and more money because they all screwed up the Flint system. What about my town that has been doing the investing in keeping our system providing reliable quality water for decades. Why should we be burden for the screw-ups in Flint when our City has been doing the right things and we have been paying to get the right things done? Run your town into the 'ditch' and get all the other people to pay for cleaning up the mess for you. If you were offering ideas about how to ensure the money would be spent wisely this time I would probably be more supportive. But I have lived too long in Michigan and listen to too many politicians on both sides of the aisle and to many who want to spent more and more of other people's money but never care about what we get for that money. Mr. Power want fast flashy trains, replacement of the old system [no mention of new technology to make it better], and you want us to spend more and more on infra structure but neither of you care enough to be concerned if we get good value for all that money. I learned to spend other people's money like it was my own or my children's, so I am resistant when people simply want to give more money to people who have screwed up how they screwed up with what they have already spent.
Aldon Maleckas
Tue, 05/10/2016 - 10:50am
Trains received a bad rap when unions decided they could put one or two drivers in each box car, call it a semi, and receive more union dues.