Thomas Friedman - The World is Flat

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 started back in 1992-1993, everyone thought the hard part was to actually 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.

“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 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 an offshore 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.