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Whither U.S. Competitiveness?

The U.S. can keep an edge if it takes the right steps.

With apologies to Charles Dickens, is it the best of times, with the United States poised for continued strong economic performance, or is it the worst of times, with the U.S. on the brink of being upstaged by China and India?

That was the burning question at the 7th Annual CEO Leadership Summit kickoff dinner. It was held Nov. 15 at the former Kennedy Winter White House, now owned by John Castle of private equity firm, Castle Harlan. The answer to the question for the CEOs of United Technologies, Caterpillar, Freddie Mac, International Paper and other major companies was that, yes, there is going to be a narrowing of the gap in incomes and living standards between the U.S. and the emerging powers. But if the U.S keeps reaping the gains of productivity and stays committed to penetrating those markets with goods and services, there is little reason that America must lose its overall leadership position.

The sharpest exchange was on the subject of where the next generation of engineers is going to come from. The estimates are that China is graduating 10 times more engineers than the U.S. is. “Well, then,” said George David, chairman and CEO of United Technologies, “let the work follow that. This is one of these things where we say the sky is falling. I don’t think it is.”

“But what happens when the next generation comes of age?” asked Robert Greifeld, CEO of The Nasdaq Stock Market. “Is that where the new concepts are going to be developed, as opposed to Silicon Valley or Route 128? They’ll be coming out of China because you’ve ceded that today, and we pay for it a generation hence.”

“This is like the story of the frog in boiling water,” argued Bill Brody, president of Johns Hopkins University, joining the fray. “You bring up the water slowly and the frog doesn’t feel it. I think we’re going to wake up 20 years from now and say, ??Boy, did we screw it up.’”

David didn’t buy the argument. “If the market wants to generate engineers in China, that’s fine,” he said. “And if it doesn’t want to generate them in America, that’s fine, too. We’ll just hire them in China. What you care about is, does American capital ultimately preside over this world system?”

“But you have to create value here,” Brody replied. “We can’t all be Wall Street fund  managers trading stocks to one another. We can’t all be hedge fund managers.”

These issues are big for Caterpillar as well. “My concern,” said CEO Jim Owens, “is that the MITs of the future won’t be in this country. If you go to our tech center just outside Peoria, it looks like the United Nations. Probably the majority of our masters and doctoral graduates there doing engineering work immigrated to this country. They came to graduate school and stayed here.

“In the future, we’ll have more research and engineering done in India, China and probably even the United Kingdom than we have had historically,” Owens said. “The technical base of competence around the world is shifting away from the United States, which I view as a long-term issue for the standard of living. I think we need a manufacturing base, and we’re going to have to do something proactively to keep it.”

Although CEOs are oriented toward market solutions, some argued that the Bush Administration ought to be doing a better job to enhance U.S. competitiveness. “There are health care costs and structural labor costs and tort reform,” said International Paper CEO John Faraci. “I get pessimistic because I thought, maybe naively, that the Administration was going to get something done after the election, and they just lost control of the agenda. So nothing is going to happen.”

Still, however, Faraci’s factories in the U.S. are the most productive in the world, as the company has found in benchmarking studies. “We’re not suffering from an inability to be innovative and productive,” said Faraci.

How does it all play out? Clearly, the gap in living standards and technology base between the U.S. and other countries is going to narrow. But that doesn’t mean the U.S. has to lose its edge altogether. “I think the standard of living is going to come up rapidly in the rest of the world,” said Cat’s Owens. “China has grown at 10 percent per annum for 20 years. Today, we can build a world-class hydraulic excavator in China. We’re developing a supply base and bringing in a lot of our technology.”

Participants argued that the emergence of China and India will follow a different pattern than that of Japan, which maintained barriers against many foreign businesses. China’s growth “will create opportunities,” said UTC’s David. “As they gain prosperity, they want houses, they want roads, and they want airports. Pretty soon, they’ll want rental cars at the airports.”

Freddie Mac’s chairman and CEO Richard Syron also predicted that the Chinese will start spending more of their money, rather than buying U.S. government debt. “At some point,” he said, “all these people in China are going to decide they don’t want to save 25 percent of their income. They’d like to have a TV and a VCR and a car.”

All of which means that successful strategies for penetrating the emerging markets will be critical to determining the outcome of the grand  debate about U.S. competitiveness.

Relationships on the Ground Are Key to Winning China Strategies

Winning in China is a lot about people. Chief executives need to cultivate relationships with people in government who make decisions. And they need to find the right kind of people to run their businesses.

If that sounds simple, it isn’t. And it takes years to get the equation right.

One key is establishing relationships with mayors and provincial leaders before they are elevated into key positions in Beijing. United Technologies launched its first foray into the China market following its historic opening in the early 1980s with an Otis elevator joint venture. The mayor with whom George David negotiated the deal, Li Ruihuan, went on to become a member of the country’s supreme decision-making body, the Standing Committee of the Politburo, giving UTC entræ#169;e at the top. It was much the same in negotiating Carrier air conditioner deals in Shanghai in the mid-1980s with Mayor Zhu Rongji. He rose to become premier, in charge of managing the nation’s economy. “The Chinese political leadership is remarkably stable,” David says. “They stay in their jobs for a long time, and when they get promoted they don’t forget their old jobs.”

The strategy for a CEO should be helping these officials accomplish their goals. “If you’re good citizens, doing the right things, being a reasonable employer, raising environmental and living standards and offering benefit plans and health and welfare, you get really good, loyal friends in China,” David explained.

Provincial leaders are another key source of connections, said Robert Kuhn, an advisor to Citigroup China and author of a best-selling biography in China of former President Jiang Zemin. He visited 32 cities in 19 provinces in 2005. “The senior leaders of these provinces are some very smart people: Ph.D.’s in economics from Beijing University; people in their early to mid-fifties at the most senior [levels of] leadership- dynamic, creative and almost everyone is fluent in English,” said Kuhn. “These will begin to be the leaders in 2007, and surely will be the leaders by 2012.”

Simply going to China and having a formal meeting with a top official doesn’t carry nearly as much weight. “If you go in,to see  President Hu Jintao, that certainly is a great honor,” said Kuhn. “But to do business in China, one must go beyond formal meetings with senior leaders. If you get to know people in the provinces and municipalities, where they’re working on very specific issues, the difference is incalculable.”

Caterpillar, which entered the Chinese market soon after President Nixon cracked open the Bamboo Curtain, takes the market so seriously that it has shaped the experience base of top management. “One of our challenges is we’ve got to find ways to keep some of our senior executives truly plugged in, in terms of business relationships,” CEO Jim Owens said. “I lived and worked in Asia for eight, nine years. I travel there two or three times a year now. I probably go to China more than most other countries. Two of my other group executives-so three out of six of us-have lived and worked extensively in Asia, and spent a lot of time in China.”

At the same time, the company has identified talented Chinese employees and sought to develop them by moving them to different countries, including stints back at headquarters in Peoria. The most promising of these employees receive stock options as a way of securing their long-term loyalty. These Chinese nationals with international experience are particularly useful in managing Cat’s operations in China, said Owens.

These Chinese, sometimes called “returnees,” are playing an increasingly important role in how all foreign companies are managing their operations, said Tom Neff, chairman of Spencer Stuart U.S., an executive search firm. “Ten years ago, most of the management talent were expats, either Westerners or Chinese from the other nearby countries,” said Neff. “Now, Westerners are less visible. They’re much more expensive relative to other choices.” The returnees “are less expensive, they speak very good English, they’re multi-cultural, they know the markets, and particularly important, they have local connections.”

The competition for talent has intensified as more Western companies have shifted their China regional headquarters from Hong Kong to Shanghai or Beijing, which has resulted in some “poaching” of talent, said Neff.

There are many other elements of getting the right China strategy in place. Some CEOs insist on wholly owned ventures; others accept joint ventures. And, of course, protecting one’s intellectual property is critical. Putting the right people in place, however, seems to be the cornerstone.

SUMMIT PHOTOS

About william j. holstein