China has eaten away at US IT manufacturing. But recent hacking attacks, and other fears, have led to attempts to redress the balance, and cities stand to gain here.
For background, last year, two companies, Huawei and ZTE, were caught building hacking code into equipment for the US military. As a result, in a report last October, the US House of Representatives Intelligence Committee said telecom operators should not do business with these companies, effectively blacklisting their equipment for US sales.
Now, the US has gone further, with HR933, a bill that restricts government organizations from buying IT equipment from China without first getting approval. While HR933 has a sunset clause at the end of the 2013 fiscal year in September, it is a major shot across the bows for the PRC.
China has been given notice that it can no longer enjoy the freewheeling environment of the past, where theft of secrets, artificial pricing, and near-slavery gave the nation a competitive edge.
On its own, this wouldn't have too much impact. But other factors are at work. The renminbi is appreciating against the dollar, making China's competitive edge weaker. It's still in a "managed float," and artificially low, but it has moved 30 percent upward in seven years.
Further, stories about working conditions, worker riots, and massive pollution issues are impacting companies like Apple. Add to this the fact that the Obama administration has set up a Cyber-Warfare Command to address hacking, and China is feeling quite a bit of pushback.
In December, Apple announced that some Mac computers will be built in the US, and others are moving jobs, too. These are small starts, but the realization that an aggressive China could shut us down by hacking, or by refusing to supply gear, is daunting. Like the Huawei case, Chinese equipment could be "booby-trapped" with code to cause it to fail or to leak secrets, and the worry that this could hit critical infrastructure was made more real after Stuxnet took out the Iranian nuclear centrifuges.
So, is the US doing enough? The simple answer is no! Until substantial portions of the computer and mobile industry repatriate from China, we are strategically vulnerable.
The economic arguments for Chinese manufacture are much weaker than they were even a couple of years ago. We've learned from their low overhead operations just how to build in volume. When we started losing manufacturing to China, our factory overhead was horrendous. Companies like IBM had as many as 7,000 design engineers in their PC divisions, and armies of buyers and manufacturing engineers.
Now, we've figured out that scaling volume doesn't involve much more overhead than making a few hundred computers.
Beyond that, though, we need incentives to on-shore business, and here's how US cities stand to gain: The President should consider grants to establish IT manufacturing in cities hit in the recession, such as Detroit and Chicago. This could generate millions of new jobs. Congress should also make the ban on government purchases of PRC-produced equipment permanent, and incent commercial purchasers to follow suit, perhaps by withdrawing tax deductibility.
China is vulnerable to a trade war. If manufacturing utilization drops, or the real estate bubble bursts, it will have to work to rebalance relationships internally, and with the rest of the world.
It's time to move away from appeasement and show that we take this seriously. Chamberlain learned that at Munich, and we need to take that lesson to heart. We have precious little to show for years of polite negotiation.
— Jim O'Reilly, President, Orion Consultants