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Report From China: Sliced Duck And Sharp Views With Reed Hundt

An analyst from McKinsey & Co.--where Hundt logs half his working hours--a manager from Intel, whose board he sits on, and the CEO of a Silicon Valley-Shanghai startup who has also retained Hundt as a director are close-talking and furiously shuffling papers, making sure Hundt knows where he has to be when tomorrow. Not a detail from breakfast on has been left to chance.

Hundt's busier than usual these days, having just published a book, In China's Shadow (Yale University Press), in which he argues that the United States needs new policies to compete. He looks up from his plate of crepe-wrapped sliced duck and proffers a take on the predicament American businesses find themselves in as they try to tap China's market of 1.3 billion people. Competing with China is different than other commercial and political challenges the country has faced, Hundt says.

Take Japan. In the '70s and '80s, Japanese companies swiped American companies' customers and profits, including Intel's, in electronics and automaking, forcing big changes in the way American businesses designed products, set prices, and managed their workforces. But competing with China might be worse. For one thing, China has the "luxury" of a huge domestic market to sell to, says Hundt, whereas Japanese giants like Sony needed to build their businesses around exports from the get-go. Japan has U.S. military protection, giving the United States "invisible negotiating power" that it doesn't possess with China. And Japan's economic strength stemmed from manufacturing, laden with the high costs of transporting goods. So Japanese companies moved production closer to their customers, setting up auto plants in Tennessee and Kentucky and creating good-paying American jobs.

Now the best jobs are at Google, not General Motors. And Chinese economic stars like Semiconductor Manufacturing International and Cisco Systems' rival Huawei Technologies don't carry the cost of hauling goods; China's billion-dollar-a-year chipmaker won't be opening a plant in Arizona anytime soon, Hundt wryly notes.

China isn't a threat to the U.S. military or the American way of life, Hundt said one evening last week by phone from his home in Chevy Chase, Md., but it is to American business. "This is often lost in all the macro discussion," he says.

China's universities are cranking out three times the number of engineers as in the United States, and those workers earn far less. Beijing's support for homegrown companies includes easy credit, low taxes, lax environmental laws, and subsidized worker housing and transportation. In the tech sector, China is pushing its own standards in next-gen cellular networks, digital TV, and other areas, relieving its companies of having to license intellectual property from foreigners and imposing new expenses on imported IT products that need to comply. "It's pretty tough to compete with," says Hundt. "It's pretty optimized for startups to thrive in China and export like crazy."

To catch up, the United States needs to open markets like energy and health care to startups and pursue less restrictive, more cooperative methods of research and development, with fewer patents and less litigation, he says. And higher taxes aren't the answer. "If you tax the rich and provide the money to the middle class, you haven't improved anyone's future," he says.

After this week's elections, Hundt plans to meet with Sen. John Kerry (D-Mass.) and Chuck Schumer (D-N.Y.) to review the country's economic policy toward China. While he's in the country, he'll try to help Intel expand its $6 billion-a-year business here, and startup chip designer Telegent Systems establish one. It's a hypermanaged schedule that's completely au courante.

For more on Aaron Ricadela's trip to China, see "Friendship, Peace, Cooperation, Development."

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