The Week that Changed the World

Posted Friday, May. 16, 2014  comments  Print Reprints
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The 60s brought us an era of great epic movies, whether it was David Lean’s Lawrence of Arabia or his follow-up film, Dr. Zhivago; and certainly making that same short list of film classics was Robert Wise’s The Sand Pebbles. Two of the three epics chronicled times when the imperial powers fought for control of backward, Third World countries; Lawrence of Arabia, set during the Great War, detailed Lawrence’s participation on the Middle Eastern front and in helping the Arab tribes as they attempted to unify into nations.

The Sand Pebbles, a fictional work by Richard McKenna, was based loosely on his time serving on U.S. gunboats on China’s Yangtze River in 1936, trying to enforce the West’s open trade policy with that country. McKenna rose to the rank of Chief Machinist’s Mate in the Navy during his 22-year career, and his book delivered a brilliant historical synopsis of American pride, hubris, racism, personal compassion, then ultimately sacrifice and honor. Director Robert Wise, hot off The Sound of Music, considered it his best work.

In 1966 the book and film’s portrayal of a backward, impoverished, war-torn China mirrored our personal/national bias toward that country. To us China was a land of unimaginable poverty and ignorance, alternately ruled by Sun Yat-Sen’s Nationalists, feudal warlords and, eventually, Communists.

McKenna died in his early 50s from a heart attack, two years before The Sand Pebbles’ release. Eight years after McKenna died, President Richard Nixon went to China in what was described as “The Week That Changed the World.”

Nixon’s plan has several key goals. Opening relationships with China would help us separate it from Russian Communist influence, but we also needed to find ways to entice China to help resolve the Vietnam War. Finally, it was crucial to regional stability to resolve the potential conflict between the Chinese mainland and the government in exile on Taiwan. On most counts the Nixon’s trip failed in its primary objectives. But what that Presidential trip effectively did was let China re-engage with the outside world in economic ways whose results no one could possibly have foreseen.

Baby, You’re a Firework!

By 1973 the U.S.-China Business Council had officially formed. In the intervening 40 years, trade has grown from less than $100 million annually to more than $1 billion worth of goods and services moving between our two countries each day.

According to the China Business Review, more than 800,000 American jobs produce goods and services that China buys. Some of those jobs can be found at BMW’s South Carolina plant or that of Mercedes-Benz in Alabama. After all, when a new 2014 BMW X-5 built in South Carolina has a window sticker of $55,000 in the U.S. — and, once it crosses the Pacific, that exact same vehicle will retail for slightly over $193,000 — that’s a smart business model.

So many of our SUVs, including the Jeep Grand Cherokee, Cadillac Escalade, BMWs and Mercedes left our shores for China that, in 2011, the Chinese government threatened to add a punitive duty of 22 percent on top of the 25 percent tariff already levied on these vehicles. According to Reuters, China claimed that “U.S.-built SUVs and luxury sedans were being dumped on the Chinese market and causing substantial damage to China’s domestic industry.” Maybe that’s what pushed Fiat-Chrysler’s recent decision to resume full-scale manufacturing of its Jeep line of vehicles in China.

Few remember, but one of the first foreign car companies to do business in China was Beijing Jeep. It required just an $8 million investment on Chrysler’s part in the early 80s, but returned $50 million in profits for the parent company here in America. Even as late as 1994, Jeep controlled 10 percent of China’s then-pitiful 320,000 total new car sales each year.

Limited Reciprocity

In the last 20 years, however, the growth in China’s automotive sector has been nothing short of phenomenal, far outpacing even the American automobile industry’s breakout period of 1910 to 1929. Consider this: 20 years ago all of China purchased fewer new cars than were sold in Dallas and Fort Worth, and today their industry sells more new vehicles than we Americans have ever purchased in one year.

Moreover, a few of China’s larger automotive concerns are already exporting vehicles to other countries, while Chinese electric buses are being built in California. And earlier this year Volvo said it was only a matter of time before its Chinese-built production would be exported to the U.S. One wonders: Will we put a 25 percent import tariff on those vehicles, or add a punitive duty, because Chinese automotive exports to our country “could cause substantial damage to our domestic industry?” It’s not out of the question, since we still have a heavy import tariff on imported trucks — but, when it comes to China, such a step toward reciprocity is highly doubtful.

Then again, China’s internal new car market apparently still has room to grow. Not just on the country’s new highways, where traffic jams can last for days; but the overall demand for car ownership, at least from a financial viewpoint, is becoming ever more viable. Last week the Wall Street Journal pointed out that in the not-too-distant past Chinese car buyers had to pay for their new vehicles in cash; today they can finance Audis through Volkswagen’s finance arm with 20 – 30 percent down and an 8 – 12 percent interest rate, limited to 36-month terms. One wonders how many cars we could sell in this country today under those financial terms — even though the exact same vehicle lists here for one half to a quarter of what a Chinese buyer must pay for it.

Sleeping Giant Wakes Up Fast

When one considers that last year McKinsey forecast that within 8 years China’s urban population will rise by another 100 million people (to 357 million), and fully 54 percent of all urban households (up from just 14 percent of the urban population today) will have disposable income between $17,021 and $36,711, it’s easy to speculate that China’s new car market could easily grow to 30 million-plus vehicles annually. Then too, today their used car market is almost non-existent, but the coming onslaught of trade-ins will certainly change that sales dynamic.

Contrast China to America, and you immediately see that their population of households with high disposable incomes could one day soon exceed America’s entire working population. Unlike America, China is a country that has no problem building roads, bridges, airports, port facilities, telephone and Internet infrastructure — not to mention the incredible growth in their manufacturing sector, which they plan to use someday to become the world’s largest export nation.

Of course, if those forecasts for personal wealth don’t pan out, China’s economic growth is so phenomenal that it could be a mirage and collapse under its own weight. So far, though, it has defied economic gravity; as proof of that, the Chinese can’t get enough of those new $193,000 BMW X-5s. Americans, by contrast, are holding onto their vehicles longer than ever.

Then again, we are a very long way from seeing China and its population as depicted in the movie, The Sand Pebbles. Similarly, most of the Middle East no longer bears any resemblance to the landscapes in Lawrence of Arabia. It’s fair to say that our opinion of China from the 1960s obviously was totally ignorant of its citizenry’s personal desire to compete with the world one on one.

How could we have been so wrong? We were blinded by national hubris. Maybe a better question might be, “What hath Richard Nixon wrought?”

© Ed Wallace 2014

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. He hosts Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net; read all of Ed’s work at www.insideautomotive.com

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