September 4th, 2007
The past few weeks have not been good ones for products manufactured in China and financial instruments created in the United States. The â€œMade in Chinaâ€ brand is now an un-trustworthy brand to millions of American consumers. New, mortgage backed debt instruments, highly rated by U.S. bond rating agencies are now being questioned in financial capitols around the world.
In an earlier column entitled â€œMade in Chinaâ€ I discussed certain historical forces and timelines that are to some degree at cause for the recent rash of dangerous products being produced in China. In a historically short period of 30 years, the country is moving from being a rural, agrarian economy to one of the largest industrial economies in the world. In addition, in this same time period it is moving from being a secretive, xenophobic, communist state run by a central planning committee to a major player on the world economic stage that has standards of safety and openness. This huge a transition in such a short time has never occurred, so a number of sizable bumps in the road are to be expected.
This historical perspective notwithstanding, the Made in China brand is in serious trouble. Most of the readers of this blog are probably either parents or pet owners. If you are a parent, particularly of a young child, you will now look at all toy packaging and truly think twice before you buy a toy that has the words â€œMade in Chinaâ€ printed on it. Lead poisoning? Not in my household! Magnets that can be easily swallowed? Not for my child! If you are a pet owner, you will also think twice about buying any pet food with those same words. Hundreds if not thousands of pets worldwide have been poisoned by â€œMade in Chinaâ€ pet food, so why take the risk?
To some degree the American consumer has brought this on herself. In the searching for ever lower prices she has embraced things made in third world countries because they are lower in cost. This downward pressure on prices makes all companies producing goods in China, American or not, vigilant and relentless in finding ever cheaper ways to produce. What of course was assumed was that the issue of safety would be respected as it is elsewhere in the world. Obviously this is not the case. Now that the safety, and in fact life, of a child or a pet may be in question, the value of lower cost goes out the window. So now, to some degree, Made in China means potentially unsafe goods.
Since the end of WWII, the U.S. has been the dominant economy in the world. The dollar has been the dominant currency and the financial markets and investment instruments have been considered to be blue chip and trustworthy. When the investment banks and rating services of Wall Street team up to offer the world highly rated investment products they have been globally perceived as legitimate, secure and more or less liquid. This reputation is being put to the test with the ongoing problems in the mortgage backed securities marketplace. There has been unexpected illiquidity and questionable underlying value in this market sector, which has caused havoc elsewhere in the financial landscape. This has brought about an outcry in the financial capitols of the world for more involvement in the U.S. investment marketplace.
In the past twenty years, all kinds of new investment instruments have been created by Wall Street investment banks in their ongoing quest for ever more fee income. So far, the global marketplace has embraced this process. The banks and rating services got bigger and global investors gladly bought new financial products as they came from the top investment brand in the world, Wall Street. Now the global marketplace is demanding a place at the table when these instruments get created and rated. The Wall Street investment brand has been damaged.
These two damaged brands point to the ongoing move to a global society. China must embrace the openness, safety and accountability in the manufacturing process that other countries expect or risk serious economic consequence. U.S. financial institutions and markets must open up to more high level involvement from around the world or face a much tougher sales environment in the future. We are in a global economy and we are moving toward a more global culture. This is nothing less than a transformation and any transformation can cause pain and discomfort.