Yoshikami: Low Cost China Is Old News
I spent one day in Detroit last week moderating a panel for a large Chinese industrial zone as well as for automakers. In the audience were CEOs and others seeking to understand trends in the automotive industry as they relates to China. It was a fascinating discussion.
Interestingly, while many consider China as the home of low-cost production, senior executives from companies and government officials indicated that this is changing. The low-cost advantage that China once enjoyed (at least in the East Coast cities called the Gold Coast) is starting to fade.
The Chinese are beginning to outsource to India and Africa. What is occurring is a major shift in China's economy where it will no longer be a purely low-cost manufacturing economy, but instead it will capitalize on a lower cost, highly educated labor force. Yes, Apple will make iPhones in China but that will change over time. Costs are rising.
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For example, in the city of Hangzhou, there are 6 major universities providing highly skilled professionals working for Chinese industry. Additionally, after years of professional Chinese moving to the United States to work, this trend has now begun to reverse. Many Chinese immigrants are now moving back to China to take advantage of growing opportunity in their home country.
This means that China and its economy are changing, and the impact from an economic and market standpoint are significant. Growth rates (which had been driven by low-cost production in a booming global economy) will not be 12 to 14% ever again. Even a growth rate of 8% might be optimistic as the economy transitions from exports to internal consumption. More measured growth will likely be the norm.
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It's clear that senior executives in the automotive industry find this transition to be attractive to capture the professional educated workforce graduating from Chinese universities. Selling to China's rising middle class is also perceived to be a huge opportunity. For example, Ford is opening new dealerships in China at the pace of one per week. Companies are moving business centers, research and development efforts, and other business units to China to have a presence in the Asian region and sell to the Chinese population.
What does this mean for investors?
This transition is a positive long-term trend for the global economy. In the long-term, it is a positive for the Chinese economy. In the short-term, it means that there are uncertainties about China's economy. For that reason, investors should be cautious in loading up too much on China investments; a transition is occurring. Consider U.S. Multinationals as a safer way to play China's long term story. And don't forget other Asian countries as a potential opportunity.
The bottom line for investors is that long and short term matters when deciding on the proper weightings for your China investment plan. Its not the same old China; make sure you adjust accordingly.