Detroit: Chinese Opportunity and Warning

Detroit, China, America and the Asian Century

by John West, Asian Century Institute

Detroit has filed for bankruptcy. Chinese investors are swooping in on Motown. Is this a symbol of the great power transition of the Asian Century?

Detroit has filed for bankruptcy. Chinese investors are swooping in on Motown. Is this humiliation of the once proud city a symbol of the great power transition of the Asian Century?

Some 60 years ago, Detroit was the richest city in America and perhaps the richest in the world. Motor City was the beacon of America’s industrial might and genius. But since 1950, Detroit’s population has fallen 63%, and its median household income is now the lowest of America’s 30 largest cities.

Detroit’s Big Three – GM, Ford and Chrysler – suffered at the hands of competition from Japanese companies like Toyota and Honda. And the city has suffered from mismanagement, corruption and labor issues. Its long term debts are $18 billion, of which $9 billion are unfunded retirement benefits.

Detroit is America’s largest municipal failure. But it is not the first, and it won’t be the last. Since 2010, there have been some 36 municipal bankruptcy filings in the US. And many others share the same problems of mismanagement and large unfunded retirement and health benefits. Irresponsible political leaders made promises to workers, knowing that future political leaders, not them, would have to solve the inevitable problems.

Detroit’s bankruptcy created a buzz on Chinese social media platform, Weibo, and CCTV. Flush with foreign exchange reserves Chinese investors have been flocking to Detroit to buy up real estate at firesale prices. The US National Association Realtors ranked Detroit in the top five hottest cities receiving inquiries from Chinese real estate buyers. And this new investment craze has only just begun.

What’s more Chinese automobile companies are moving in and investing in Detroit businesses and technology. The city has skilled workers and technology, just the things that China’s fledgling automobile industry needs. And this investment is creating the foundation for two-way trade.

Shanghai Automotive Industries, China’s biggest auto maker, opened new offices in suburban Detroit. The Detroit Chinese Business Association now boasts a membership of about 100 Chinese-owned businesses, mostly auto-related. These companies employ thousands of American workers. And Michigan is now one of the top 10 US states for investment from China.

Chinese companies are looking to follow in the footsteps of Toyota and Honda which invested in and conquered the US market many years before. Toyota came from nowhere half a century ago to become the world’s leading automobile producer today.

What to make of all this?

As tragic as the plight of Detroit and many other US municipalities might be, bankruptcy is the best way to clean up the mess of the past, and lay the foundations for a fresh start in the future. This is one of the strengths of the “creative destruction” which is part and parcel of America’s capitalist system. And attracting outside capital from China and elsewhere can be a very effective way of creating a new future.

Ironically, Detroit’s bankruptcy should be a warning to China itself. Many of its own local governments are saddled with enormous debts resulting from the spending binge to keep the Chinese economy motoring along following the 2008 Lehman shock. This spending was financed by China’s public banks, and all too often went on white elephants, rather than productive investment. Chinese local government debt could grow to $2.6 trillion by the end of the year (29% of GDP), according to Huatai Securities.

So China itself needs face the music of excessive debt. But this is more complicated for a Communist government paranoid about stability and its own survival. And because of manifold restrictions and barriers, there is much less scope for foreign investors to participate in the cleansing operation.

What can we make of the future of American cities, which have historically been the driving force of American capitalism and prosperity. After all, today, all too many have creaking infrastructure, and large pockets of poverty, as well as debt burdens. It is difficult to compare them favorably with many Chinese cities which have brand spanking new infrastructure.

America’s municipal financial problems are just one aspect of the constant state of flux we witness in the dynamic US economy, with some industries and regions rising and others falling. And it’s cases like Detroit that regrettably attract the most attention. Fortunately, we have the “Innovation Cities Global Index”, created by the Melbourne-based “2thinknow”, which provides some interesting insights.

This index measures three preconditions for innovation, namely cultural assets, human infrastructure, and networked markets. Cultural assets include arts, culture, sports, music, environment, parks and spaces — they inspire new ideas. Human infrastructure means universities and businesses which help with the development of ideas. And networked markets through physical trade or digital communication enable the sharing of ideas with the rest of the world.

Three American cities, Boston, New York and the San Francisco Bay Area, are ranked in the world’s top four innovative cities. They are the “other side of America” from Detroit. And Seattle, Los Angeles, Washington DC, Philadelphia, and Chicago are also in the world’s top 30. In stark contrast, mainland China only has one city in the top 30, with Shanghai at 29th. Beijing is a long distant 53rd!

Chinese cities may well have some of the world’s best hard infrastructure. But they have great difficulty competing with the “soft infrastructure” of American cities. At their best, American cities are a melting pot of artists, academics and investors, men and women, young and old, and of different ethnic and cultural backgrounds, which is a potent force for generating and realizing new ideas.

In fact, growing numbers of China’s creative and innovative elite are attracted to the ecosystem of American cities which tolerates or even encourages differences, rather than conformity, promotes risk taking, and does not instantly punish making mistakes. Among the very many American Chinese success stories are people like: architect I.M. Pei, YouTube co-founder Steve Chen, Academy Award winning filmmaker Jessica Yu, CNN journalist Emily Chang, cellist Yo-Yo Ma, Nobel Prize-winning Energy Secretary Steven Chu and civil rights activist Sherman Wu. Much of China’s elite, including President Xi Jinping, send their children to universities in US (or other Western countries). And the majority of these students don’t return home.

As China continues its march up the development ladder, it will increasingly be faced with the innovation imperative, rather than copying and absorbing from knowledge and technology of world leaders, as it is doing in Detroit today. Its cities will need soft infrastructure to match their hard infrastructure. They will have to manage the process of creative destruction, and the vicissitudes of economic history. And they will need to see artists like Ai Weiwei as social assets, rather than threats to political stability.

In this regard, the US provides great inspiration and lessons. New York was on the ropes just a few decades ago, and is now back near the top of the global list. A reformed and renovated Detroit could well follow the same path.

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REFERENCES:

1. Time magazine. Broken City: Detroit. August 5, 2013
2. 2thinknow. Innovation Cities Program. Innovation Cities Index 2012-13
3. Jing Daily. China In Detroit, Part 1: A Conversation With Jerry Xu, by James Charney. June 19, 2013
4. Jing Daily. China In Detroit, Part 2: A Conversation With David Cole, by James Charney. June 20, 2013

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