resource. This person will schedule
meetings, set agendas, and give the
panel frequent updates about how its
advice is being implemented.
Q Don’t parade the panel around just
to get publicity. The goal is to make
informed, science-based changes that
have an impact, not to create media
sound bites. Furthermore, publicity
seeking may alienate the panelists and
waste their valuable time.
It’s important to take the advisory
panel seriously and to work hard to show
its members that their ideas make a
difference. That way they’ll become true
partners in helping the company address
consumers’ concerns and advance social
initiatives.
Steven Grover ( sgrover@whopper.com) is
vice president for food safety, quality assurance, and regulatory compliance at Burger
King, based in Miami.
Reprint F0806B
SUPPLY CHAIN
Subsidies and the
China Price
by Usha C.V. Haley and George T. Haley
Many assume that China’s cost advantage in manufacturing comes from cheap
labor. But in China’s burgeoning steel
industry, our research suggests, massive
government energy subsidies, not other
factors, keep prices down. These subsidies have broad implications for how
companies compete and collaborate with
Chinese businesses.
In 2005, Beijing designated steel as a
pillar industry for the Chinese economy.
China was the world’s largest producer
of steel, with 27% of global production,
but until then it had imported 29 million
tons of steel annually. That year, China
suddenly transformed itself from a net
steel importer to a net steel exporter. In
2006, the country became the world’s
largest steel exporter by volume, up
from the fifth largest in 2005. Today it
remains the world’s largest consumer
and producer of steel, with 40% of
global production. How did China make
these astonishing gains so quickly and
manage to sell steel for about 19%
less than steel from U. S. and European
companies? Labor accounts for less than
10% of the costs of producing Chinese
steel, and Chinese steel doesn’t appear
to rely on scale economies, supply-chain
proximities, or technological efficiencies
to lower its costs.
Let’s look in detail at the probable
source of this cost advantage. In research
conducted with funding from the Alliance
for American Manufacturing – work
that draws heavily on our decade-long
previous study of Chinese industry –
we found that total energy subsidies
to Chinese steel (from 2000 to midyear
2007) reached $27 billion. (See the
exhibit “Energy, Subsidies, and Steel.”)
About 95% of that amount was for coal.
( These numbers are conservative best
estimates, based on data from Chinese,
U. S., and international agencies, industry
associations, individual Chinese companies, and other sources.) Our analysis of
the relationship between the increase in
energy subsidies and the growth of Chinese steel production and steel exports
showed a powerful statistical correlation;
this is not a chance association.
Our research revealed that energy subsidies to the steel industry were paid to
the energy sector and passed on through
lower energy prices, which suggests
that the energy supplied to China’s other
manufacturing industries is subsidized
as well. The steel industry may benefit
disproportionately from energy subsidies
because of its voracious appetite for coal,
but the energy subsidies obviously help
other industries too.
Foreign companies doing business
in or with China or competing against
Chinese rivals need to recognize a few
things about subsidies. First, they can
be abruptly affected by political forces.
For example, the November 2007 World
Trade Organization subsidy-reduction
agreement between the U.S. and China
cut export subsidies to foreign companies located in China but maintained subsidies to Chinese companies. This shows
how subsidy-based cost advantages of
foreign companies located in China can
suddenly evaporate.
Second, companies that offshore to, or
source or import from, China may suffer
price shocks if they don’t discount fluctuating, subsidy-based cost advantages.
Our research showed that under scrutiny,
subsidies from Beijing often dry up, only
to be replaced to varying degrees by
subsidies from provincial and local governments, which use them to support
employment, build self-sufficiency,
and promote import substitution locally.
Companies should establish relationships
