China’s Leadership: The Competitive Threat to the U.S.A.

This week on WEALTHTRACK China expert Jim McGregor gives us his candid assessment of the competitive threat
that China’s leadership poses to the U.S.. next on Consuelo Mack WEALTHTRACK Hello and welcome to this WEALTHTRACK podcast.
I’m Consuelo Mack. Our focus is China. The backdrop: contentious trade talks with
the U.S. Which have roiled markets,… massive pro-democracy protests in Hong Kong, and an
overtly aggressive Chinese president Xi Jinping – who since he took office in 2013 has taken
on more power than any Chinese leader since Mao Zedong, and has announced plans to dominate
key global industries with his Made in China 2025 initiative and dominate land and sea
routes from Asia to Europe with his China Belt and Road Initiative, the most ambitious
infrastructure investment effort in history based on the ancient silk road. Our guest is the refreshingly candid china
expert, James Mcgregor, whom I have known for years since we met at The Wall Street
Journal, then CEO of Dow Jones Company in China and was the former chairman of the American
Chamber of Commerce there. He is currently Chairman of APCO Worldwide,
Greater China where he specializes in advising multinationals on business, public policy,
and communications strategies. He is currently chairman of APCO Worldwide,
Greater China where he specializes in advising multinationals on business, public policy,
and communications strategies. He is the author of several books, including
“No Ancient Wisdom, No Followers: The Challenges Of Chinese Authoritarian Capitalism.” We will
have links to Jim on our website, wealthtrack .com. Consuelo: Jim McGregor, it’s great to have
you on this WealthTrack podcast. There is a lot to talk about. There’s been so much
going on in China, and I really want to discuss your role as chairman of APCO Worldwide, Greater
China and specifically what you are advising businesses on the current state of China’s
leadership under President Xi, who has been dubbed the chairman of everything COE. So
tell me what you’re telling businesses. McGregor: I advise businesses basically fasten
your seatbelts because this is not a passing squabble. McGregor: This isn’t just another downturn
in U.S. China relations. This is a paradigm shift. McGregor: And we don’t know what it’s going
to look like when we come out the other end. McGregor: McGregor: China’s on the move and very strong
and very, you know, very exclusive ways, doing things its own way around the world and following
rules where they work for China. If they don’t work for China. McGregor: They pretend they don’t exist. And
meanwhile, we’ve got you know, the U.S. is going through all of our own trials and tribulations
on where we’re headed in the world. McGregor: it’s a new day and age, its a new
day and age where, you know, from the past the last 30 years in China are not the next
30 years in China and the U.S. China relations we’ve had in the past are not the relations
of the future. And this is sorting itself out. It’s going to have to sort itself out,
whether it’s the ongoing trade war, whether it’s how do we decouple on technology, how
do we handle China with its belt and road initiative. And it just goes on and on and
on into everything from military to technology to soybeans. Consuelo: How has it changed the business
climate in China for foreign businesses specifically and U.S. multinationals? Who are your clients? McGregor: Well, you know, the business reasons
we’re in this situation as the business climate has changed McGregor: for foreign multinationals and foreign
companies in China over a period of the last five to 10 years. Xi Jinping, we’ve been more
and more kind of looking at what I call reform and closing as opposed to Deng Xiao-Ping’s
reform and opening. China is doing a number of reforms for its own companies and its own
systems, but it’s step by step in making it more difficult for foreign companies, and
when Chinese company can do it, a foreign company does they can suddenly find they’ve
got little room to do business in China. And then when we get to tech, it’s a lot of this
is really we have a technology war going on more than a trade war. And with China and
its various technology policies that have been capped off by “Made in China 2025”, which
is basically about dominating all the important technology, these are the future from chips
to artificial intelligence to new materials to cloud computing; you name it. And the thing
about this policy is it’s not so aspirational. It’s got it’s got quotas. You know, they say
by this year, the Chinese market will have 80 percent in this sector will be Chinese
companies. And it’s very clear that the goal is to step by step, have Chinese companies
replace foreign companies in the China market and then beat them globally. And we’ve learned
long ago in China says they’re going to do something. You better pay attention. Consuelo: Are those realistic goals? Consuelo: It sounds as if you are saying that,
in fact, they are that where there’s a Chinese will, there’s a way. Is it possible that they
will dominate A.I., for instance, artificial intelligence or, you know, tell me where you
think that they have they are developing clear competitive advantages and maybe where they
are not, because I just have a hard time believing just because they say that they’re going to
dominate these key industries, that, in fact, they have the technology and the wherewithal
to do so. McGregor: Yeah. Let may take that a little
different direction. McGregor: If you look at China’s development
in the past and the way we in the West looked at China, we had a bit of arrogance that you
could not become a prosperous country unless you had democracy and open information. And
China has kindly turned that on its head. And actually, now the Chinese system has some
advantages because of the amount of money that can be put into these technologies by
companies and entities that don’t have to make money. You know, if you’re Huawei, and
you’ve got a 30 billion dollar line of credit from China Development Bank and standards
made from you for you and this and that, you know, you can you can really power ahead on
5G with billions of dollars worth, while Verizon And the rest of the phone carriers out there
have to make money. And then on the side, they do their R & D., But what we’re really
talking about here, Consuelo is talent. Can China innovate? You’re damn right they can.
Why? Because, well, we train them. McGregor: If you look at the tens of thousands
of incredibly smart and capable Chinese who have gone to M.I.T., Carnegie Mellon, Cal
Poly Tech, they’ve worked for Siemens, they work for Google, they work for HP, you name
it. Those people are now in China. And, you know, well, Xi Jinping is really consolidating
a lot under the state-owned enterprise for the party’s own power. At the same time, they
are pushing ahead with entrepreneurship, innovation. There’s endless amounts of Chinese venture
capital money available to these people. And they’re there, and they’ve got all the advantages
in the world, and they’ve got the talent, and they’ve got the ability to do it. I mean,
if you look at the leading Chinese artificial intelligence companies or chip companies or
whatever, these people came out of Microsoft, they came out of Intel, they came out of Qualcomm,
that came out of Nvidia. You know, we have to really wake up. You know, I see too much
in the U.S. where people say they can’t innovate at state enterprise. China’s got multilayers.
And we have to remember is the talent. And as long as China enables talent, which they
are doing on the technology side, very, very much so. We have to wake up and compete, to be honest
with you, with what’s going on with this trade where America should be taking. This is a
Sputnik moment. You know, to fix our own immigration to anybody who gets a Ph.D. in the sciences,
give them a green card, fund our own science, technology and science and technology, education.
On the other hand, China’s one is treating this as a Sputnik moment, saying we can’t
be dependent on American technology and American suppliers, so we’re going to replace them. Consuelo: Is so interesting, Jim, because
it sounds as if, you know, you’re talking about a Sputnik moment because when you were
just talking, I thought of the entire JFK. Putting down the gauntlet, saying that we’re
going to go to the moon by the end of the decade. And, you know, spending the resources
and developing the talent and everything else, and we actually succeeded in doing that. However,
resources are exhaustible, and so when you’re talking about unlimited money, they don’t
have to compete in the marketplace, they don’t have to make money in order to get the funding,
whatever it is. I mean, is there a limit to what they can do, or We just haven’t seen
that yet? McGregor: Yeah. Well, of course, you are.
Does China have endless money? We ask ourselves this question all the time because of all
the money it’s putting into the Belt and Road and everything else. Remember, a lot of this
money there’s a lot of rich Chinese people with, you know, hundreds of millions of dollars,
if not billions of dollars. And they’re also investing. You know, this isn’t just the government.
You know, you talk about you. What you said about Kennedy, struck me because Ren Zhenfei,
the founder of Huawei, just a few days ago. He sent out a directive to his, hundred and
seventy thousand or whatever employees that they are now in the live or die moment and
that, you know, the way he put it in five years Huawei would be flowing with new blood.
And if they survive this critical moment in history, they will be able to dominate the
world, which is his goal. Think about that. That’s the spirit they have going. Look, I’m
not here boosting the Chinese. McGregor: As you know, I’ve been there for
30 years, and I am a fact-based person. And I’m also quite critical of things. But my
these days, I want to wake up America, I want to wake up America, that we have to wake up
and we have to compete. It’s not so much. You know, trying to say, well, China won’t
be able to do this, and they can’t do this. They can’t do that. China’s the one with the
can-do spirit. Now we’re the one with the can’t do spirit. I mean, I’m in Washington
twice a year with business people from American business, you know, American chamber and visiting
with congressmen and senators and members of the administration. And we go to them with
ideas that say, well, you know, why don’t we do this one does that. They say that’s
a great idea, but we just can’t do that. We can’t do things around here. Well, I can tell
you, China is not a can’t do place, but America’s got to get back to it. You know, we got to
compete. Consuelo: As far as that we have to compete
because traditionally we’ve competed through the private sector and much less through government
funding. But is it possible in a capitalist system and in a free market system where we
do have to pay attention to the bottom line and the balance sheet, Can this kind of competition
and competitive effort come from the private sector, or are you saying that we need a new
public, private partnership approach, as you said, a la the Sputnik moment? McGregor: Well, actually, Consuelo, if you
look at our history, if you look at the history of innovation in America, it goes back to
government. It goes back to academic academia and goes back to companies all working together.
And we’re where we have really, you know, where we have overcome barriers and where
we’ve gone through our own Sputnik moment, that’s been government money working with
the private sector. We’ve just quit doing that. We’ve kind of bled ourselves dry now.
You know, you need the government involved in this. You know, look, we go way back to
China. America was the world’s largest state-driven economy during World War 2 when we were run
by the war production board. And it was a, you know, a guy from Sears. No, I’m not saying
we go back to that, but let’s not be let’s not delude ourselves and where we came from.
A lot of the reason America got where it is, it was government working with business, not
just business on its own. You know, business is too short term centered. It’s you know,
let’s just worry about the next quarter. And, as you saw the conference board the other
day was talking about, we’ve got to go beyond just, you know, shareholder value. We’ve got
to look out for employees, got to look out for our businesses, and we should probably
lookout for the country. This is where globalization has really caused the problem with American
business, because if your only incentive is for shareholders and you’re an American big
American company, well, the majority of your business these days, the vast majority for
the technology companies is outside of the U.S. So, how do you get them to care about
the U.S. and have to make decisions that are best for the U.S. economy that’s going to
take government. Consuelo: Politics is really important in
the US, but it’s especially important in China. And I’m looking, as I mentioned earlier on
in our discussion, they call President Xi Jingping the chairman of everything and he
certainly has consolidated power. There’s been a huge shift in party leadership. He’s
locked people up. There’s much more, as I said, intervention, overt intervention. There’s
much more suppression of dissent than there has been. I mean, none of those are conducive
really to as far as I can tell, or maybe this is just a false, you know, Western view to
innovation and creativity. If you’re afraid that if you get too successful that you’re
gonna be locked up or if you speak your mind that your businesses are going to be shut
down. Isn’t it possible that the seeds of the destruction are in this consolidation
of power and the crackdown on dissent and, the crackdown on minorities and travel? And
you tell me. Isn’t that a problem or couldn’t it be a problem? McGregor: Yes, it can. McGregor: You know, Xi Jinping, when he came
into office, he came into a mess. Corruption was off the charts. McGregor: They had to change the economic
model from, low-cost manufacturing and kind of borrowing and stealing the technology of
others that, you know, it’s got to be Their own consumer market that built the economy.
They’ve got to do their own technology and all of that. And he had a mess on his hands
politically. But what has he done since then? I look at his administration is really a story
of overreach, going too far in every direction “Made in China 2025” is an overreach. The
Chinese people are completely capable, as I was saying earlier, building a world-beating
tech sector. McGregor: they’ve gone to our schools. They
worked in our companies. There’s abundant venture capital. You know, if this was private
Chinese people going out and buying companies and doing joint ventures and whatever, the
world would not have a big problem with it. It would work fine. But because it was a state
and it was about crushing and dominating, and it woke up to the world technology companies.
And so there’s a lot of pushback. China’s got a hell of a time doing any acquisitions
of any technology overseas for many years. The Belt and Road Initiative has been a big
overreach and led to a lot of problems in poor countries where they’re heavily indebted
to China. The South China Sea and those islands is an overreach because after spending 20
years of making, you know, trying to make friends with its neighbors or at least pretending
to make friends with its neighbors. And it just said, hey, this is ours. This is our
ocean. And you guys better behave and get along with us. So it’s you’re right in that.
How does it what does this add up to? I mean, look at the situation in Hong Kong right now.
The people in Hong Kong have grown up with liberty without democracy. McGregor: But they have had liberty. They
had unbiased courts. They had the legal system that protected them. And they don’t want to
lose that. This is a middle class rising up. These aren’t a bunch of radicals. In Hong
Kong, you grow up without walls. In China, you grew up with walls. You can only go so
far in either direction. But those walls are wider than ever. So people feel pretty good
about it. In most cases. But they don’t understand what’s going on. Why? Why not? Who are these
Hong Kong people, and why are they doing that? It’s a real dilemma. It’s a real dilemma on
how do you bring this to a close, especially when you’ve got the things going on with the
Uyghurs and Shane John. So we have Consuelo. You’re right. You know, it’s not all smooth
sailing. There’s a lot of problems mounting for this leadership. And we’re not sure how
it’s going to sort itself out. I again, I want to turn to the United States and say,
even if China runs into big problems unless we have our stuff together. Not automatic
that we’re going to win anything. Consuelo: The significance of the Hong Kong
anti-government demonstrations. How significant are they? And how much of a threat to Chinese
leadership? And is it possible for there to be an outcome that that does favor greater
liberalization in Hong Kong? McGregor: Well, if you look at how they’ve
handled it, you know what the propaganda apparatus is at full steam and what is happening in
Hong Kong, according to the propaganda, is that this is the machinations of the West,
especially America. You know that that is who is doing this and it’s about keeping China
down. So to flip from that to some kind of a concession on liberalization and Xi isn’t
a person that concedes on liberalization, he’s a hard line from morning till evening
and throughout the night. And I don’t know if he’s capable of doing any kind of concession.
And the thing is, they don’t want this to infect the rest of China. If people in Hong
Kong demonstrate and they get concessions out of it, what does that mean for the rest
of China? That’s why this is so, so complicated and unpredictable where it would end, because
if he goes in there and does a Tiananmen style crackdown and then, you know, people are killed
or hurt, and they round them up, that’s also going to alienate the world. McGregor: And what are American multinationals
going to do if they go in and start shooting in Hong Kong, are they’re going just to do
business as usual in China. How this plays out on top of all the other things going on.
It’s just I don’t know, but it’s fraught with danger. Consuelo: Jim, speaking of difficult problems,
let’s talk about the trade relations with the U.S., and there was a Wall Street Journal
op-ed by an Obama administration official. And the headline was, We have lost the trade
war with China. What’s your assessment of the trade relationship between China and the
U.S.? McGregor: Well, to a large extent, I may agree
with that. We needed to push back, and it was coming. You know, Hillary would have pushed
back Trump, you know, pushed back. McGregor: But the way we’ve done it is is
not very effective. In fact, I think some days I think we’re making China great again.
If you look at the sequence of events and how we’ve done this with the tariffs and then
tying it to North Korea and dropping out of the Trans-Pacific Partnership, and they go
to that for a second, dropping out of the Trans-Pacific Partnership, which was Obama’s
signature trade policy, that that created a trading regime of 40 percent of GDP. It
is opened up those countries to us. We’re already open to those countries in Asia. And
it gave those countries a hedge against China. And China was not part of it. And I know the
reformers in Beijing wanted us to do TPP because it would incentivize China to change, too,
in a positive way to be in a trade regime, not hitting them over the head and telling
them what to do. And we’ve gone through so many zigs and so many zags in this trade,
in our trade negotiations with China. They’ve just decided they can’t deal with us and they’re
going to wait us out and they can wait a lot longer than we can because, you listen to
Kudlow and some of the stuff that comes out of this administration, they seem to believe
that China is going to bend at the knee at the majesty of the United States. McGregor: They do not understand the power
of China and indeed the companies there and the technology and the people and the money
and also it’s quite coordinated. They can wait this out a lot longer than we can. I
work with the Semiconductor Industry Association and the advanced medical device. And these
you know, if you’re in those businesses and you don’t have the China market, you’re not
going to make it globally. Our American chip companies, anywhere from 20 percent to 75
percent of their chips, go to China. They can’t lose that market. So it’s very, very
complicated. And, you’ve probably ascertained I’m not a big fan of President Trump. He’s
kind of like the drunken sailor of trade negotiators. He has gone one way, one day and another way
the next day. And Chinese thinks, well, this guy, we can’t deal with him. And poor old
Lighthizer trying to, have a professional negotiation. But he gets to clean up the mess
of the last tweet. We needed a push back, but boy, we’re not doing it in an effective
way, in any way, shape or form. Consuelo: Final topic of conversation, because
WealthTrack is about long term diversified investing and certainly in any well-diversified
portfolio China should play a part. What does the current state of China’s leadership, which
is going to be around barring some unforeseen circumstance for a long, long time? What about
the investment opportunities for foreigners in China? McGregor: it’s not a bad time for venture
capital, actually, except a trade war is getting in the way of cross-border venture capital. McGregor: I would tell people, and I’m not
qualified to tell people how to invest, but I would have them look at their portfolios
and look deeply into the companies that they’re invested in and what they’re doing and how
they’re handling China. Because I can tell you, Consuelo, one thing that is going on
that is not very well covered is, you know, the supply chains we’re seeing we’re seeing
some supply chains leaving China to Vietnam, Indonesia, the Philippines, and Mexico. And
in many cases, that was just waiting to happen because costs have gotten so high in China.
These people were eating margin to stay in China because China was so efficient and worked
so well. But with the trade war happening, kind of the straw that broke the camel’s back
on moving, I’m moving that manufacturing out. On the other hand, there’s lots of companies
doubling down on China, Lots of Fortune 1000 companies are doubling down on China, because
if you are in coatings, chemicals, components, anything to do with high-end manufacturing,
Internet of Things, self-driving cars, electric vehicles, they know China’s going to be the
leader in those sectors. And if you’re not in China, you’re not going to make it. And
so there’s a lot going on major companies putting more and more and their investment
in China. And with what’s going on with Huwaei and blocking, you know, technology companies
from supplying Huwaei and more and more Chinese companies, I’m afraid we’re going to see some
of these big American technology companies de- Americanize. McGregor: You know, when we used to have companies
that because of American taxes are so high, they go buy a company in Ireland and then
become an Irish company to avoid taxes. We may start seeing some of the American technology
companies get themselves a legal foothold somewhere else so they can claim they’re not
American so that they don’t get blocked from selling into China because China is still
the market and this is a market for the next several decades and they’re hell-bent on technology
development at high-end manufacturing. And you can’t not be a part of that. So, this
administration has a very simplistic view and also an overblown view of our power versus
China. We need to be much more informed and much more realistic on where we are. And look,
I’m a patriotic American. I was in the army. I was in Vietnam. I care a lot about America.
And that’s why I talk like this. I can see we you know, we better focus on ourselves
and compete. Consuelo: Jim McGregor, always a pleasure
to talk to you. We welcome your perspective. It’s unlike anyone else that’s basically just
about exists in the globe. You’ve had a footprint in Journalism and in running a business over
there and now advising businesses. So, you’ve really got just an amazingly broad and in-depth
perspective on China. So we really appreciate your sharing it with us on WealthTrack. McGregor: I’m always happy to talk to you,
Consuelo. I want to thank you our viewers for joining
us on this Consuelo Mack Wealthtrack podcast. Make the week ahead a profitable and a productive

3 thoughts on “China’s Leadership: The Competitive Threat to the U.S.A.”

  1. TPP is not going to work for USA. It’s hard to coordinate G-7 to fight China together. It’s impossible to coordinate 40+ countries. USA had upper hand when it deals with other countries one by one. In the long run it might be better for USA just decoupling with China.

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