SAP Ariba’s Atzberger on China’s Economic Ascent and Opportunities for Innovation

In the first part of this Spend Matters Conversation, Founder and Head of Strategy Jason Busch talks with SAP Ariba President Alex Atzberger about how Chinese trade policy has evolved in recent years and where it may be going. This second installment explores opportunities in light of China’s evolving economy, as well as potential for innovation. Those interested in the topic of China's ascent in the world economy, trade policies and market economy status (MES) should also look at our dedicated multimedia site on the topic.

Jason Busch: I went to Wikipedia as we were talking, and I looked up the definition of “mercantilism” because I think the concept is important if we look at China’s policy in the past decade, as well as potential U.S. policy.

I’ll quote from the entry: “Mercantilism was an economic theory and practice, dominant in modernized parts of Europe from the 16th to the 18th century, that promoted government regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. Mercantilism involved a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially finished goods.”

Here’s the kicker, which is a little bit scary: “Historically, such policies frequently led to war and also motivated colonial expansion.” We can discount that last piece, thank goodness.

When it comes to U.S. trade policy and China, I see the dichotomy of where we are today as represented by two blocs in the U.S. (which together is a mirror for nearly all other trade stances) in a single supply chain. One is the steel association, led in part by labor and manufacturing. Dan DiMicco, who came out of Nucor, is the leading policy voice for this group.

The steel industry (and Dan) obviously can prove economically that China has dumped product in the U.S. in the past decade. Any reasonable party at the WTO or someone else could look at that and say, “Yeah, that makes sense.”

Perhaps it’s not to the degree to which they might claim, but certainly some of the dumping has happened. Obviously, the steel industry would love to see tariffs erected and greater protectionism, but what’s funny is that the second group, the automotive industry and the various blocs within automotive, including both labor and business, don’t want to see any new rock-the-boat policy elements introduced with China. This is because the supply chains are so interdependent, whether it is importing goods into the U.S. or whether it’s export and production in China – and sales into China.

It’s funny. We see different tiers of the U.S. supply chain reacting differently, and it’s not fair to label it the “U.S. supply chain” view. It’s more the lower-tier production (and producer) perspective versus the U.S.-based multinational supply chain, within discrete manufacturing and automotive, taking two very different perspectives on the issue.

Alex Atzberger: To your point, I think the supply chains are so intertwined today that it is very hard to pull apart all the different views and perspectives. But at the end of the day, I think from a policy perspective it kind of comes down to whether or not you embrace globalization. It’s very hard to imagine rewinding some of the things that have occurred in the last 20 years, given the level of importance on both sides, both in terms of the sell-to and an import-from market.

JB: Excellent point. It segues to my third and final question and topic: Is this a blip?

If we want to look out 10 or 15 years, will we see the saber-rattling going on right now as a blip in terms of China’s future import/export trade in general? If we look at this from the lens of China, and we forecast out, are we dealing with a volatile situation, which is temporary, or do we think this is going to be a more sustained risk factor for China and Chinese trade?

AA: For me, it is so impressive when I’m in China and I see how fast that market is moving.

When you look at where China is today, it’s very hard for me to imagine that in 10 to 15 years, the two largest economies in the world won’t have moved forward in their relationship, because for both economies, there’s so much at stake relative to technology progress. So I remain over the long term positive about where things are going. I also think that for companies that I’m working with right now, it’s interesting how the world is changing. I think you’re probably very familiar with companies like China Sun that back in the day were the window into China.

We’d come to them and say, look, I need t-shirts or something, and they would source the materials and find a factory to produce them. If you look at a company like that, they have evolved to actually provide product design capabilities. At the same time, the companies in the U.S. have become much more like supply-chain orchestrators.

And I think what we consider global manufacturing will further evolve. Of course, manufacturing shouldn’t be dead in the U.S., and I don’t think it will be. In the same way, I think China, with its rising income and middle class, will look for products that will not necessarily be made in China. And the balance will continue to shift. Companies will continue to evolve and move up their value chain. And despite current political trends and nationalistic tendencies across Europe and the U.S. and other places, I still think that in the long term, globalization is the only way forward.

JB: I just go back to history and look at where China has been in the past. I think we can largely say, from a contemporary lens, unless you’re a sympathizer with the Communist cause, the Great Leap Forward and the past 60 years were very painful in a lot of ways. Millions died unnecessarily during the rise of Communism.

But, before Mao, China had such a rich history of innovation. In light of the politburo today, I think it’s very easy for us to dismiss the fact that China has only been a copycat and an IP thief in the past few decades, and has not innovated much -- based on innovation as a percentage of overall contribution to GDP -- on its own. But that is a very short-term lens on history, even if it’s largely accurate.  

If we look at things we take for granted today, from paper to movable type to gunpowder to navigation equipment like the compass to even the process for steelmaking — which is somewhat ironic — China led the way for a lot of the past 2,000 years.

To say a trading economy is not going to have a place in the world given that history of innovation is crazy. Even if we can write off the past 60 years as an innovation challenge for China and chalk it up to favoring domestic growth and the rising middle class or whatever you want to attribute to it, I think there’s no way that we’re not going to see a China on the world stage in the next 15 or 20 years without innovation returning.

I think China will get its innovation mojo back. I do. I think it’s only a matter of time. Alex, you referenced a lot of the tech companies in China earlier in our conversation. Certainly some are fast followers, but there’s innovation as well, so I would say my prognostication for 20 years out is to look at China as an innovator again, as opposed to China as a follower.

AA: I think that’s a good way to summarize it. It’s interesting. Take for instance payment systems between people. They use WeChat to actually do payments from one phone to another, and when you consider that we can’t do this today on WhatsApp, it’s really interesting how WeChat has evolved, to your point of innovation.

And that’s my point. I think that in the third or fourth evolution of China, they will start importing to actually fulfill the needs of that rising middle class. I think it will be in America’s best interest to support or be engaged in that goal as well. I think it’s a lot of economic opportunity.

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