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jobs during this period, compared with 2 million in the United States. "As its

manufacturing productivity accelerates, China is losing jobs in manufacturing-many

more than the United States is-and gaining them in services, a pattern that has been

playing out in the developed world for many years," the study said.

China's real long-term strategy is to outrace America and the E.U. countries to the

top, and the Chinese are off to a good start. China's leaders are much more focused

than many of their Western counterparts on how to train their young people in the

math, science, and computer skills required for success in the flat world, how to

build a physical and telecom infrastructure that will allow Chinese people to plug

and play faster

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and easier than others, and how to create incentives that will attract global

investors. What China's leaders really want is the next generation of underwear or

airplane wings to be designed in China as well. That is where things are heading in

another decade. So in thirty years we will have gone from "sold in China" to "made

in China"to "designed in China" to "dreamed upin China"-or from China as collaborator

with the worldwide manufacturers on nothing to China as a low-cost, high-quality,

hyperefficient collaborator with worldwide manufacturers on everything. This should

allow China to maintain its role as a major flattening force, provided that political

instability does not disrupt the process. Indeed, while researching this chapter,

I came across an online Silicon Valley newsletter called the Inquirer, which follows

the semiconductor industry. What caught my eye was its November 5, 2001, article

headlined, "China to Become Center of Everything." It quoted a China People's Daily

article that claimed that four hundred out of the Forbes 500 companies have invested

in more than two thousand projects in mainland China. And that was four years ago.

Japan, being right next door to China, has taken a very aggressive approach to

internalizing the China challenge. Osamu Watanabe, chairman of the Japan External

Trade Organization (JETRO), Japan's official organ for promoting exports, told me

in Tokyo, "China is developing very rapidly and making the shift from low-grade

products to high-grade, high-tech ones." As a result, added Watanabe, Japanese

companies, to remain globally competitive, have had to shift some production and a

lot of assembly of middle-range products to China, while shifting at home to making

"even higher value-added products." So China and Japan "are becoming part of the same

supply chain." After a prolonged recession, Japan's economy started to bounce back

in 2003, due to the sale of thousands of tons of machinery, assembly robots, and other

critical components in China. In 2003, China replaced the United States as the biggest

importer of Japanese products. Still, the Japanese government is urging its companies

to be careful not to overinvest in China. It encourages them to practice what Watanabe

called a "China plus one" strategy: to keep one production leg in China but the other

in

a different Asian country-just in case political turmoil unflattens China one day.

This China flattener has been wrenching for certain manufacturing workers around the

world, but a godsend for all consumers. Fortune magazine (October 4, 2004) quoted

a study by Morgan Stanley estimating that since the mid-1990s alone, cheap imports

from China have saved U.S. consumers roughly $600 billion and have saved U.S.

manufacturers untold billions in cheaper parts for their products. This savings, in

turn, Fortune noted, has helped the Federal Reserve to hold down interest rates longer,

giving more Americans a chance to buy homes or refinance the ones they have, and giving

businesses more capital to invest in new innovations.

In an effort to better understand how offshoring to China works, I sat down in Beijing

with Jack Perkowski of ASIMCO, a pioneer in this form of collaboration. If they ever

have a category in the Olympics called "extreme capitalism," bet on Perkowski to win

the gold. In 1988 he stepped down as a top investment banker at Paine Webber and went

to a leverage buyout firm, but two years later, at age forty-two, decided it was time

for a new challenge. With some partners, he raised $150 million to buy companies in

China and headed off for the adventure of his life. Since then he has lost and remade

millions of dollars, learned every lesson the hard way, but survived to become a

powerful example of what offshoring to China is all about and what a powerful

collaborative tool it can become.

"When I first startedback in1992-1993, everyone thoughtthe hard part was toactually

find and gain access to opportunities in China," recalled Perkowski. It turned out

that there were opportunities aplenty but a critical shortage of Chinese managers

who understood how to run an auto parts factory along capitalist lines, with an

emphasis on exports and making world-class products for the Chinese market. As

Perkowski put it, the easy part was setting up shop in China. The hard part was getting

the right local managers who could run the store. So when he initially started buying

majority ownership in Chinese auto parts companies, Perkowski began by importing

managers from abroad. Bad idea. It was too expensive, and operating in China was just

too foreign for foreigners. Scratch plan A.

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"So we sent all the expats home, which gave me problems with my investor base, and

went to plan B," he said. "We then tried to convert the 'Old China' managers who

typically came along with the plants we bought, but that didn't work either. They

were simply too used to working in a planned economy where they never had to deal

with the marketplace, just deliver their quotas. Those managers who did have an

entrepreneurial flair got drunk on their first sip of capitalism and were ready to

try anything.

"The Chinese are very entrepreneurial," said Perkowski, "but back then, before China

joined the WTO, there was no rule of law and no bond or stock market to restrain this

entrepreneurialism. Your only choices were managers from the state-owned sector, who

were very bureaucratic, or managers from the first wave of private companies, who

were practicing cowboy capitalism. Neither is where you want to be. If your managers

are too bureaucratic, you can't get anything done-they just give excuses about how

China is different-and if they are too entrepreneurial, you can't sleep at night,

because you have no idea what they are going to do." Perkowski had a lot of sleepless

nights.

One of his first purchases in China was an interest in a company making rubber parts.

When he subsequently reached an agreement with his Chinese partner to purchase his

shares in the company, the Chinese partner signed a noncompete clause as part of the

transaction. As soon as the deal closed, however, the Chinese partner went out and

opened a new factory. "Noncompete" did not quite translate into Mandarin. Scratch

plan B.

Meanwhile, Perkowski's partnership was hemorrhaging money- Perkowski's tuition for

learning how to do business in China-and he found himself owning a string of Chinese

auto parts factories. "Around 1997 was the low point," he said. "Our company as a

whole was shrinking and we were not profitable. While some of our companies were doing

okay, we were generally in tough shape. Although we had majority ownership and could

theoretically put anyone on the field that we wanted, I looked at my [managerial]

bench and I had no one to put in the game." Time for plan C.

"We essentially concluded that, while we liked China, we wanted no

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part of'Old China,' and instead wanted to place our bets on 'New China' managers,"

said Perkowski. "We began looking for a new breed of Chinese managers who were

open-minded and had gotten some form of management training. We were looking for

individuals who were experienced at operating in China and yet were familiar with

how the rest of the world operated and knew where China had to go. So between 1997

and 1999, we recruited a whole team of'New China' managers, typically mainland Chinese

who had worked for multinationals, and as these managers came on board, we began one

by one to replace the 'Old China' managers at our companies."

Once the new generation of Chinese managers, who understood global markets and

customers and could be united around a shared company vision-and knew China-was in

place, ASIMCO started making a profit. Today ASIMCO has sales of about $350 million

a year in auto parts from thirteen Chinese factories in nine provinces. The company

sells to customers in the United States, and it also has thirty-six sales offices

throughout China servicing automakers in that country too.

From this base, Perkowski made his next big move-taking the profits from offshoring

back onshore in America. "In April of 2003, we bought the North American camshaft

operations of Federal-Mogul Corporation, an old-line components company that is now

in bankruptcy," said Perkowski. "We bought the business first to get access to its

customers, which were primarily the Big Three automakers, plus Caterpillar and

Cummins. While we have had long-standing relationships with Cat and Cummins - and

this acquisition enhanced our position with them- the camshaft sales to the Big Three

were our first. The second reason to make the acquisition was to obtain technology

which we could bring back to China. Like most of the technology that goes into modern

passenger cars and trucks, people take camshaft technology for granted. However,

camshafts [the part of the engine that controls how the pistons go up and down] are

highly engineered products which are critical to the performance of the engine. The

acquisition of this business essentially gave us the know-how and technology that

we could use to become the camshaft leader in China. As a result, we now have the

best camshaft technology and a customer base both in China and the U.S."

This is a very important point, because the general impression is that offshoring

is a lose-lose proposition for American workers-something that was here went over

there, and that is the end of the story. The reality is more complicated.

Most companies build offshore factories not simply to obtain cheaper labor for

products they want to sell in America or Europe. Another motivation is to serve that

foreign market without having to worry about trade barriers and to gain a dominant

foothold there-particularly a giant market like China's. According to the U.S.

Commerce Department, nearly 90 percent of the output from U.S.-owned offshore

factories is sold to foreign consumers. But this actually stimulates American exports.

There is a variety of studies indicating that every dollar a company invests overseas

in anoffshore factory yields additional exports for its home country,because roughly

one-third of global trade today is within multinational companies. It works the other

way as well. Even when production is moved offshore to save on wages, it is usually

not all moved offshore. According to a January 26, 2004, study by the Heritage

Foundation, Job Creation and the Taxation of Foreign-Source Income, American

companies that produce at home and abroad, for both the American market and China's,

generate more than 21 percent of U.S. economic output, produce 56 percent of U.S.

exports, and employ three-fifths of all manufacturing employees, about 9 million

workers. So if General Motors builds a factory offshore in Shanghai, it also ends

up creating jobs in America by exporting a lot of goods and services to its own factory

in China and benefiting from lower parts costs in China for its factories in America.

Finally, America is a beneficiary of the same phenomenon. While much attention is

paid to American companies going offshore to China, little attention is paid to the

huge amount of offshore investment coming into America every year, because foreigners

want access to American markets and labor just like we want access to theirs. On

September 25, 2003, DaimlerChrysler celebrated the tenth anniversary of its decision

to build the first Mercedes-Benz passenger car factory outside Germany, in Tuscaloosa,

Alabama, by announcing a $600 million plant expansion. "In Tuscaloosa we have

impressively shown that we can produce a new production series with a new workforce

in a new factory,

and we have also demonstrated that it is possible to have vehicles successfully 'Made

by Mercedes' outside of Germany," Professor Jiirgen Hub-bert, the DaimlerChrysler

Board of Management member responsible for the Mercedes Car Group, announced on the

anniversary.

Not surprisingly, ASIMCO will use its new camshaft operation in China to handle the

raw material and rough machining operations, exporting semifinished products to its

camshaft plant in America, where more skilled American workers can do the finished

machining operations, which are most critical to quality. In this way, ASIMCO's

American customers receive the benefit of a China supply chain and at the same time

have the comfort of dealing with a known, American supplier.

The average wage of a high-skilled machinist in America is $3,000 to $4,000 a month.

The average wage for a factory worker in China is about $150 a month. In addition,

ASIMCO is required to participate in a Chinese government-sponsored pension plan

covering heath care, housing, and retirement benefits. Between 35 and 45 percent of

a Chinese worker's monthly wage goes directly to the local labor bureau to cover these

benefits. The fact that health insurance in China is so much cheaper-because of lower

wages, much more limited health service offerings, and no malpractice