China 2013: the year of reshoring to America?

• Author: Navarro, Peter
• Position: STRATEGY/VIEWPOINT

"The problem with our system is that everything is short term, so when you say to an American CEO 'Do you realize that the Chinese are going to take your technology and they're going to be your competitor?' the CEO says: 'Yes, but I only have three or four years to get my stock up so I can get my bonus,' and they kick the can down the road, and it's the next guy's problem."

This observation from Dan Slane, chairman of the Slane Co. and a commissioner on the U.S.-China Commission, from a documentary film by this author, Death By China, highlights an issue critical to the strategic decision to do business in China: in their rush to leverage cheap labor, a lax regulatory environment, a surfeit of government subsidies and a huge emerging market, far too many corporate executives could be underestimating the risks of putting their eggs into an increasingly dangerous Chinese basket.

Economic risks in China range from outright piracy and counterfeiting to the forced transfer of sophisticated technology to potential Chinese competitors. Geopolitical risks include increasing trade tensions between the United States and China in concert with the transformation of the Chinese military from a primarily defensive force to one increasingly capable of projecting military power all over the globe.

Given these emerging economic and geopolitical risks, 2013 should be the year in which financial executives re-evaluate their China exposure. If that exposure is high, it may well be time to start reshoring--at least some production and operations--back to the U.S.

To date, most executives have viewed China as the proverbial pot of gold--and perhaps with good reason. After all, a company wishing to export back into the U.S. typically could move its production to China and cut costs by as much as 50 percent. It could also gain access to the world's largest emerging consumer market.

China ... Not All As Expected

That said, a rising number of companies have found China simply to be fool's gold. The most naive--typically smaller companies--have seen their corporate blueprints, processes or technologies quickly stolen and have lost their proverbial shirts. But even large American corporations with sophisticated management structures have had their pockets picked.

Consider this case study from the Death by China film told by Forbes magazine columnist Gordon Chang: "Google came into the Chinese market and of course, it ended up with a dominant market share. But Beijing wanted Baidu, a local company, to be able to outpace Google. What Beijing did was it hacked Google's network, it stole its source code, and now, Baidu has more than 75 percent of the China search market. This shows that basically Beijing wants the local companies to be the national...