Who Stole the American Dream?

by Hedrick Smith

  In 2003, the Thomson-RCA plant began to feel price competition on TV sets with low-cost Chinese components. “They were selling at prices that most people couldn’t even manufacture out[side] of the U.S.,” Strutz told me. That put a crunch on the Thomson plant, according to Roy Wunsch, the former mayor of Circleville. Wunsch said he was told that Sanyo, under pressure from Wal-Mart, demanded drastic cost cuts from Thomson.

  “Wal-Mart’s going to say, ‘If you want our space, you’re going to have to match our price or figure something else to do,’ ” Strutz confirmed. “And so it forces a supplier like Sanyo to go back upstream … in our case, to the glass manufacturer—to look for price concessions.” But if Sanyo can’t get a price cut from Thomson-RCA, what happens? I asked. Ruefully, Strutz replied: “Then they go to China.”

  That’s exactly what happened. The Thomson plant, like Rubbermaid in its showdown with Wal-Mart, could not swallow the cost cutting that Wal-Mart was demanding through Sanyo. So Thomson lost its big Sanyo contract in 2003, and eighteen months later, the Thomson plant shut down. Eight hundred workers lost their jobs, and the work all wound up in China.

  Wal-Mart Sets Up Shop in Shenzhen, South China’s “Miracle City”

  China was a gold mine for Wal-Mart. Like other U.S. multinationals, it set up shop in China big-time, with headquarters in Shenzhen, the miracle city that embodies China’s breathtaking explosion of economic growth since 1978. For centuries, Shenzhen had been a sleepy little fishing village just across Kowloon Bay from Hong Kong. Then in 1978, Chinese leader Deng Xiaoping proclaimed a new strategy of economic reform. He blessed private farming, free markets, and an “open door” to world trade. He named Shenzhen a customs-free zone for trade—a springboard for China’s export strategy to the West. Overnight, Shenzhen shot up. Its economy grew at the rate of 50 percent a year.

  When I first saw Shenzhen in 1996, it was already a raw city of half a million or more, a magnet for bright, adventurous young people from all over China. It exuded the coarse, cocky self-confidence of gold rush territory. It looked like a naked construction site—cranes dominating the skyline, the skeletons of buildings rising from the mud, concrete pylons and idled machinery littered everywhere, tiny figures of construction workers climbing like flies on the honeycombs of future skyscrapers. The mood was electric and the atmosphere permissive, epitomized by Deng’s famous dictum “Black cat, white cat—it’s a good cat if it catches mice.” Translation: It doesn’t matter whether the Chinese economy is Communist or capitalist, as long as it works.

  Eight years later, in 2004, when I got back to Shenzhen, it had been transformed into a modern-looking city of seven million people. Along boulevards now neatly lined with low trees and hedges were ten- and twelve-story glass office buildings and towering twenty-five-story apartment houses. It was still a city of young people, now nicely dressed; not a single Mao suit or old padded peasant outfit in sight. Cellphones were ubiquitous. Unhappily, I didn’t see the Chinese shopping for American products. Electronic goods were being hawked everywhere—laptops, boom boxes, and TV sets, almost all Chinese made. Even in the local Wal-Mart, the goods were overwhelmingly Chinese.

  In Shenzhen, down a side street behind one of the thirty-five supercenter stores that Wal-Mart had opened in China, I found the epicenter of Wal-Mart’s China operations. What Wal-Mart calls its “global procurement center” opened in 2002. Two years later, more than five hundred people were working there. Their mission was to keep the import pipeline to America full. But Wal-Mart kept a low profile with the U.S. media; its deep dependence on China was at odds with its “Buy America” ad campaigns. Wal-Mart/Shenzhen didn’t talk to American correspondents. So I found a scholar, Gary Gereffi, a marketing sociologist from Duke University, who had talked to Wal-Mart’s Shenzhen managers.

  What Wal-Mart told Gereffi was that China accounted for 80 percent of Wal-Mart’s six thousand suppliers worldwide. “China is the largest exporter to the U.S. economy in virtually all consumer goods categories,” Gereffi explained. “Wal-Mart is the largest retailer in the U.S. economy in virtually all consumer goods categories.”

  “It sounds like a commercial marriage made in heaven,” I observed.

  “Wal-Mart and China have a joint venture. Both of them are geared to selling products in the United States at the lowest possible price,… and both are determined to dominate the U.S. economy as much as they can in a wide range of industries,” Gereffi replied.

  He explained how Wal-Mart coaches Chinese producers how to capture the American consumer market. “Wal-Mart gives Chinese suppliers the specifications for Wal-Mart products and they teach those suppliers how to meet those specifications. They have to do with price. They have to do with quality. They have to do with delivery schedule,” Gereffi said. “So Chinese suppliers learn how to export to the U.S. market through large retailers like Wal-Mart.”

  The Wal-Mart Cost Squeeze

  With Chinese suppliers, Wal-Mart can be even more brutal than with American companies. So said Kenneth Chan, an experienced Hong Kong entrepreneur in his early forties who had sold many low-cost items to Wal-Mart and other big-box U.S. retailers. “Wal-Mart is—they are very shrewd people. They know that they have the volume orders behind them and they can go into a factory and almost demand, ‘These are my list of demands. This is what I need,’ ” Chan reported. “There’s always going to be somebody that will say, ‘Okay, I will take this order at whatever cost and I’ll find a way to do it,’ whether it’s using inferior materials or just finding a way to cut corners.”

  Chan described the Wal-Mart squeeze. Its buyers would call three or four vendors into a bargaining booth and pit them against one another. “They just put the product in front of you and ask everybody to bid a cost on the product—it’s very high pressure,” Chan said. “The things that I was involved in were inexpensive, less than a dollar.”

  “So they’re pounding you for a few pennies?” I asked.

  “Yeah, they’re pounding, in a lot of cases, for just one penny,” he replied.

  Wal-Mart: Huge Profits on Chinese Imports

  At the other end of the pipeline, in America, former store manager Jon Lehman saw the payoff for Wal-Mart in 1993, when the high command in Bentonville turned on the spigot of Chinese imports. Sam Walton had died a year earlier and the U.S. economy was slowing. Wal-Mart’s sales were sluggish and the company’s stock price fell sharply. In a panic, Wal-Mart’s new management cranked up the flow of cheap imports to recover.

  “I saw this as a store manager, a giant influx of imported merchandise …,” Lehman recalled. “The stores were inundated with inventory—inundated. I mean, we had so much of this cheap crap floatin’ around the store, we didn’t know what to do with it.” Overwhelmed, Lehman called a vice president at headquarters to ask what was going on. “He said, ‘Jon, we’ve got to bring our profit in for the quarter, for the month, for the year. You know our stock has been declining. You do understand, Jon, that these imports have a high margin and they’re going to help your profit and loss statement. They’re going to help the company’s profit-and-loss statement.’ ”

  In fact, the flood of Chinese imports delivered exactly the kick start that the top brass wanted. The impact was dramatic. “The margins on the merchandise that were coming in from—the Wal-Mart import items—were incredible …,” Lehman told me. “Like 60 percent, 70 percent, 80 percent, you know—incredible!”

  “Compared with what from American-made items?” I asked.

  “Well, compare that to an electric razor that you might be makin’ 20 percent on, 18 percent on,” he said.

  “We understand that Wal-Mart is delivering us lower prices,” I said. “But you’re saying not just lower prices, but much bigger profits for Wal-Mart?”

  “Well, absolutely, yeah,…” Lehman asserted. “Wal-Mart pays billions—not millions, but billions of dollars to make you believe that as a consumer. That’s all you see on television: ‘Low prices every day.’ That is what W
al-Mart wants you to believe…. But what’s really goin’ on is Wal-Mart’s finding a cheaper way to get it, and Wal-Mart’s getting’ rich. They’re makin’ tons of profit.”

  Shenzhen Port: From Zero to Number Four in the World

  The sheer volume of goods streaming out of China to America through Shenzhen Port is staggering. A steady torrent of flatbed trucks converges seven days a week on Shenzhen Port, hauling containerized shipments from a beehive of factories all over the Pearl River Valley of South China. The port is the funnel for a colossal profusion of plastics, footwear, appliances, jeans, bicycles, lawn mowers, lamps, cellphones, TV sets, laptops—roughly 80 percent of the 120,000 items carried in a typical Wal-Mart superstore.

  At Shenzhen Port, I saw a veritable city of containers stacked ten and twelve stories high, sprawling over several square miles of territory, waiting to be loaded onto fleets of container ships bound for America’s West Coast ports. Shenzhen Port hummed with activity. As flatbed trucks raced up to dockside, tall, computerized cranes leaned down like giant mechanical giraffes to pluck up ten-ton containers and then set them down neatly on board the ship. The tempo was swift and steady—up, down, up, down, up, down.

  Shenzhen was a natural deep-water port, but the rush of its development was astounding. In 1994, the modern port did not exist; it was nothing but a barren rocky outcrop. Ten years later, in 2004, the modern Port of Shenzhen was already the world’s fourth busiest, busier than Shanghai, Rotterdam, Hamburg, and Singapore and challenging Hong Kong as number three. It was handling nearly eleven million containers a year, more cargo than America’s two big West Coast ports—Los Angeles and Long Beach, California—combined. Two-thirds of its traffic was headed for America. No one spends on Chinese goods like American consumers. Western Europeans are less profligate.

  Shenzhen Port officials boasted that Wal-Mart is one of their top customers. “Wal-Mart sources a huge amount of products from China,” Kenneth Tse, general manager of the export terminal, told me. “We have our contacts in Bentonville. We show them how market-oriented we are. They have to satisfy themselves that China has the infrastructure that they need and that their shipments will flow smoothly. They do their comparative shopping, and I can see now that South China has become the preferred manufacturing base for them.”

  “Wal-Mart is providing a gateway into the American economy for overseas suppliers in China and elsewhere—and it’s doing it on a scale that is unprecedented,” Professor Gereffi confirmed.

  Aware of growing anger among Americans about job loss to China, Wal-Mart has played down the scale of its China trade. As early as 2004, I was told, Wal-Mart’s direct imports were more than $30 billion, plus tens of billions more imported for Wal-Mart by its U.S. suppliers, and those imports were rising sharply. “Next year [the figure] will be higher, and the year after that, it’s likely to be higher as well,” Wal-Mart vice president Ray Bracy told me.

  At Long Beach: The Lopsided Trade

  In California, at the Port of Long Beach, I got a firsthand look at our lopsided trade with China—the opposite of what our business and political leaders had promised. On a water tour, Yvonne Smith, the port’s communications director, pointed out ships from China, Japan, and other nations. “But they’re all carrying Chinese cargo,” she advised. “China is where it’s being manufactured.”

  “So what are they shipping in and what are we shipping back?” I asked.

  “Well, we’re bringing in consumer products. We’re bringing in about $36 billion worth of machinery, toys, clothing, footwear—$36 billion from China comes through Long Beach alone,” Smith said.

  “And what are we shipping back?” I asked.

  “We’re shipping out about $3 billion worth of raw materials,” she said. “We export cotton, we bring in clothing. We export hides, we bring in shoes. We export scrap metal, we bring back machinery.”

  “So, they’re doing all the …,” I stammered. “We’re like a third world country.”

  Her litany went on: “We’re exporting waste paper, we bring back cardboard boxes with products inside them.”

  Even more important were cargoes that Yvonne Smith didn’t mention—high-tech equipment, industrial machinery, advanced telecom devices, Internet backbone components, high-quality lasers used in fiber-optic cable systems.

  I stumbled into a discovery when I asked Smith about the computerized cranes that were unloading the cargoes for the Port of Long Beach. Proudly, Smith told me that these were leading-edge technology. Long Beach had sixty of them, costing $6.5 million apiece. They used to be made in Germany; now, mostly in Shanghai.

  The U.S.-China Trade Deficit: $2 Trillion

  Wal-Mart may have been the prime mover in pushing the China trade and driving American jobs to China, but almost everyone was in the game: Target, Costco, Best Buy, an army of mass retail chains, plus big manufacturers such as Boeing, which has contracted with the Chinese and Japanese to make parts for the new 787 Dreamliner jet, as well as other U.S. multinationals such as Apple with its iPhones and iPads made in China or Hewlett-Packard and Cisco importing components for laptops, printers, cellphones, and Internet switching gear.

  Apple’s longtime CEO, Steve Jobs, won praise for creating jobs in America from Republican leaders like Indiana governor Mitch Daniels, but in fact, Apple under Steve Jobs had only forty-three thousand employees in the United States, while it indirectly employed seven hundred thousand at its overseas suppliers, mainly in China. As The New York Times reported, Apple overlooked sweatshop conditions and fatal explosions at supplier plants in China, not just because Chinese labor was cheap, but because state-subsidized Chinese suppliers jumped to meet Apple’s tight deadlines by rousting workers out of bed at midnight and reportedly working them fifteen hours a day. With a competitive advantage from these illegal labor practices, confirmed by an outside audit inspection, Foxcomm, Apple’s biggest supplier in China of iPads and iPhones could undercut and beat out American rivals. “The speed and flexibility is breathtaking,” said one Apple executive. “There’s no American plant that can match that.”

  Many other American firms found the pull of China’s low-cost, moderately skilled workforce and its state-supported industrial clusters irresistible. With overseas production based in China shipping goods home to American consumers, U.S. multinationals were contributing to America’s record $273 billion trade deficit with China, triple the level a decade earlier. From 2001 to 2010, right after Washington approved free trade with China, the red ink was overwhelming. We Americans bought $1.928 trillion more in goods from China than we sold to China.

  As a result, China has become not only America’s main supplier, but America’s main banker, the largest holder of U.S. debt, with financial reserves topping $3.2 trillion, giving it enough financial leverage to wreak havoc with the American economy if it ever chose to sell off a large slice of its U.S. Treasury holdings.

  This is the opposite of what America’s business and political leaders promised.

  The Hyped Sell on China Trade

  When the House passed the new free trade agreement with China in May 2000, President Clinton proclaimed that it would “open China’s markets to American products made on American soil—everything from corn to chemicals to computers.” In September, as the Senate was voting, George W. Bush, then the Republican presidential nominee, supported the trade deal and, through his spokesman, declared that it would “open markets to American products and help export American values, especially freedom and entrepreneurship.” Charlene Barshefsky, the U.S. Trade Representative, rhapsodized about the export potential for the United States “across all sectors and all fields of a magnitude unprecedented in the modern era.”

  Business eagerly pushed for the new permanent trade agreement with China, replacing the annual agreements that were subject to bargaining and delays. The Business Roundtable, drumming up congressional votes, ran an ad envisioning massive export gains. “With 1.3 billion people, China is the world’s largest mar
ketplace,” the Roundtable ad asserted. “A new trade agreement opens China’s market to our goods and services.”

  General Motors predicted it would sell $2 billion in exports to China within five years. Telecom companies saw a potential bonanza. Caterpillar and Deere forecast strong exports of farm tractors and combines. Drug companies were optimistic. “The potential is explosive,” declared Mark Grayson, speaking for the pharmaceutical industry trade group. Dave McCurdy, president of the Electronics Industries Alliance, gushed over new sales on the horizon: “From semiconductors to circuit boards, from PC’s to cellphones, China is simply the most dynamic international market for U.S. high-tech exports.”

  In hindsight, the bravado of American industrial and political leaders sounds like a pipe dream that failed to note that in 2000, the U.S. trade deficit with China was already $83 billion. Not everyone was so hopeful. Organized labor opposed the trade pact, warning of massive job losses at home as U.S. firms moved plants to China in the chase for cheap labor. Smaller and midsized U.S. manufacturing firms feared that big multinationals were angling for ways to cut costs and squash smaller domestic competitors by producing cheap goods in China for export back to America.

  “We were sold a bill of goods,” asserts Alan Tonelson of the U.S. Business and Industry Council, a trade group of two thousand smaller manufacturers. “We thought that expanding trade with countries like China, using multinational companies as the main traders, would tremendously increase U.S. exports to this huge, rapidly growing market. But that assumed that the multinationals largely saw China as an end-use customer. In fact, if you check their websites, it’s clear that they saw China as a production and export platform. I think the multinationals did this quite knowingly. They understood exactly what China offered. They looked at China like a super-Mexico.”