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China's 'changing reality' a challenge and opportunity for the West: Wharton Dean

Yahoo Finance
Yahoo Finance

When it comes to China, Westerners tend to focus on four major trends:

- The slowdown of their economic growth.
- Their crackdown on corruption.
- The growth of their middle class.
- The emergence of a Chinese private sector led by tech companies.

But if you delve deeper into those trends you see that some of the things we take for granted are changing. “We've gotten used to China as a low cost assembler to the world,” says Geoffrey Garrett, Dean of the Wharton School of Business at the University of Pennsylvania and an avid China scholar. “That reality is changing.”

As the Chinese middle class grows, the country is moving away from the assembly line-cheap labor mentality and towards a consumption-driven economy. It’s a reality that both challenges American companies and provides them with opportunity.

In the past, “[Americans] were concerned that China was stealing our jobs because of lower wages and the like," Garrett explains. "But of course we benefited enormously from the fact of the Chinese assembly line. Going forward, today, we're benefiting enormously from the Chinese market.”

Related: The China Syndrome: It's getting rough but US firms can't quit China

Take Apple (AAPL) as a test case. In the past, Apple was known for using Chinese labor to assemble its iPhones and iPads (remember the Foxconn scandal?) Now, however, China is one of the biggest markets for iPhones, and a large reason Apple shattered sales records when the iPhone 6 debuted last year. Apple reported total sales in China jumped 70% year-over-year.

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For another example – Garrett points to GM (GM). "General motors sells more cars in China than the U.S.; a lot of people don't know that,” he said. “The Chinese market is incredibly beneficial to American multinationals. As you've mentioned it's not trivially easy to operate in the Chinese market but the upside is unbelievably high.”

While “Made in China” will likely never disappear, it may be taking a backseat to a new refrain: “Sold in China.”

Meantime, foreign companies are looking to cheaper alternatives than China, including other Southeast Asian countries and Mexico. Nike (NKE), for example, still produces in China but moved the majority of its factory work to Vietnam where labor is cheaper. Foreign direct investment in China has improved since it took a hit in 2012, though Chinese outward investment has increased as well. In fact, many experts think that once the numbers are tallied, we will see that in 2014 Chinese investment abroad surpassed foreign direct investment in the country for the first time.  And Garrett predicts it won't be the last time, suggesting tech giants like Baidu, Alibaba and Tencent are merely the first wave of Chinese companies with the heft and mindset to compete on the world stage.

“China, like all other countries, including the U.S., is the sum of lots and lots of actions,” he says.

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