The Coming Global Triumph of Communications and the Threat to American Standards of Living

VON.x Conference and Expo- Industry Perspective Panel March 18- 2008

Reed Hundt

2

3

U.S. HOUSEHOLD WEALTH DECLINES$ Billions

Source: Financial Times.com, March 6, 2007

3Q 07

57,718

4Q 07

-1%

58,251

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China – The world’s manufacturer

•Largest exporter of apparel

•In 2006 China will manufacture 400 million mobile handsets (more than 60% increase from 2005)

•China is the Number 1 producer of pork

•Global center of consumer electronics and telecom equipment

•China is producing three times as much

as it did 10 years ago; losing manufac-turing jobs as it increases manufacturing productivity

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China the technology innovator

Source: Morgan Stanley Research

•Mobile Internet (China Mobile, Tom Online, Super Girl)

•Online gaming (Netease)

•Comprehensive messaging (Tencent)

•Clicks plus bricks (Ctrip)

•Bridging old media and new media (Hunan Satellite TV)

•3G (TD-SCDMA) (Datang, ZTE, TD Tech, Putian)

•IPTV (UTStarcom, ZTE)

•PC monitor manufacturing (TPV)

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China the information society

Source: CNNIC; World Bank; Morgan Stanley Research

•No. 1 in mobile users

•No. 1 in Internet users under the age of 30 (70% of Chinese Internet users under the age of 30)

•Urban areas have 5x more Internet users than rural areas

•60% of them are the only children of family

•30% of Chinese Internet users have college degrees

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China the consumer market

Source: CNNIC; Morgan Stanley Research

•Internet users

•Broadband users

•Mobile users

•Mobile services

•Online gaming

•Online brand advertising

111m

64.3 m

393 m

$963 m

$570 m

$281 m

Size

18

50

17

24

46

28

Annual growthPercent

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But China doesn’t compete with USA and Chinese don’t directly compete with Americans

•Firms compete against firms

•Firm success determines employee success

•Investors can invest in winning firms

•Employees can work only in firms that hire in their country

•Americans will earn more only if their employers pay them more And only winning firms pay more

•Will obtain economies of scale in China

•Compete vigorously in Chinese growth markets to become strong

•And challenge American firms for global leadership

•China is more important as a source of firm rivalry than worker competition

Chinese firms . . .

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Advantages for Chinese firms

•High skills

•Low wages

•Favorable currency for export

•Access to savings

•Huge foreign investment

•Vigorous local competition

•Ineffective regulation

•Few barriers to starting firms

•Wide open markets

•No litigation

•Little taxation

•Culture of entrepreneurship

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Advantages for American firms

•Easy access to rich American consumers

•Easy access to cheap capital

•Reliable infrastructure

•Reliable rule of law

•Most productive employees in world (most capital employee)

•Most entrepreneurial culture in world, other than China

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Disadvantages for American firms

•High labor costs (especially benefits)

•High energy costs

•Mature domestic market (tired marketers?)

•Vs fast growing foreign markets

•Increasing barriers to entry in existing markets

•Need to be overseas to compete there

Result: American firms seek growth overseas

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If firms don’t invest in America, they may invest in job creation in other countries

Source: New York Times

“In the United States, nonresidential fixed investment as a percentage of GDP fell to 11.56% in 2005 from 12.55% in 2000”

Text Text Text

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• For 50 years, Americans have made 20% of the world’s goods

• While numbering only 5% of the world’s workforce

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As a result, as the world economy grew

•Americans created and captured more wealth

•Employees make more money only if their firms win in domestic and global competition

•You can’t earn a rising income at a falling firm

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0

5,000

10,000

15,000

20,000

25,000

30,000

1,500 1,600 1,700 1,800 1,900 2,000

China

United States

1990 international dollars

Source: Maddison (2001)

American per capita GDP has soared for nearly 200 years

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Qianlong Emperor, 1793

"We have never valued ingenious articles, nor do we have the slightest need of your country's manufactures."

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There are three keys to success

1.Invest more behind the 5%

2.Win in foreign markets to increase the 20%

3.Create new markets at home and abroad to increase the 20%

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Americans should want

1. Investment in firms creating new markets (Google)

2. Investment in firms entering old markets (SpectrumCo)

3. Investment by existing firms fending off rivals (Telcos in fiber)

4. Winning American firms attacking foreign markets

These are the ways money produces high wage jobs for Americans

•Open markets, new markets, new technology

•Antitrust, finance, research, and development

•A new economic strategy for the nation: don’t pick winning firms, do open new markets

•Hope for big winners in new markets and old markets

The right response to China is more firm creation in America: here’s how

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Source: U.S. Census Bureau

Employment size Employment

Employer firms covered in Statistics of U.S. Business2,500 employees or more

Firms

5,657,774

3,634

115,061,184

43,877,243

Employers (firms with payroll) – 5,541,918

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The big winners have to come from creative destruction . . .

•Invested capital has to be replaced rapidly

•New investments must be made in old and new markets

•Incumbents have to fall to rivals

•New firms have to win big

•Only to face new rivals themselves

•All markets have to be easy to enter and hard to hold forever

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Source: Peter Drucker

“Innovation in Schumpeter’s famous phrase is also ‘creative destruction’. It makes obsolete yesterday’s capital equipment and capital investment.”

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A big American advantage

Of 6 million firms, 10% die and 10% are born every year

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In the 90s, births > deaths by 1-2% . . .

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. . . and not surprisingly

Before the Golden 90s and the Distraught 00s,the death rate exceeded the birth rate

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The hotbed of firm creation has been the Internet markets . . . which show:

•An open architecture of law

•An open technology of networking

•Entrepreneurial leaders from outside the system

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A Different way

•Encourage high risk, high reward (make the equity premium the byword of policy)

•Redistribute opportunity not wealth

•Open markets to rivals but don’t pick winners

•Make competition hard and investment easy

•Focus on Micro as well as Macro

•Respond to China at home more than in Beijing

•The best defense is a good offense

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Not just firms but individuals have to be more entrepreneurial

•About 40% of American households do not have enough savings to survive at the poverty level for more than 3 months if they lose their work

•Half of Californians cannot afford post high school education

•For half the nation, risks outweigh rewards

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Source: The New York Times

Goal: achieve the employer-to-employer mobility rates and income levels of Silicon Valley: both about 40% higher than the U.S. average

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The American Dream

•Democracy and entrepreneurship

•Individual freedom and collective progress

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China’s growth suggests that the whole world can live the American Dream