China, Trump, and the Future
At NEPCON recently, I sat down with Hamed El-Abd of WKK to discuss China’s fluctuating economy, the impact of the U.S. presidential election, and the overall craziness of doing business in modern day China.
Barry Matties: Hamed, you were telling me about how the market conditions are changing quickly here in China. Can you expand on that a bit?
Hamed El-Abd: China is a quick up and down always, but what's happened in the last couple of weeks is that we've seen the start of an uptick. The logic behind the uptick is the central government has been very concerned about a lot of companies leaving China. Everyone is wanting to leave China because the costs are out of control—they’re too high. The central government has decided to freeze factory wages for the next two years, and this has been reflected at this show right away. Look how many people have been at the show. Normally you don't have this turnout, over the last couple of years the show has been slower and this year it has been very busy. People are here. They're looking. They're serious. They haven't been buying for the last three years, so now all of this frustration is coming out. They need to buy equipment to be competitive.
Matties: Is this an unprecedented move for them to put a freeze on wages?
El-Abd: They haven't done this before, really.
Matties: This is a new strategy.
El-Abd: Yes, this is a new strategy. Of course, if you're a factory worker you're not going to like it, but you're not going to like it if you don't have a job, either.
Matties: Also, with automation coming in, factory workers are in a tough position.
El-Abd: I don't think that people, the average guy, has understood automation yet. Even the factory managers haven't understood the automation yet. When automation does come in, they're looking at it like, "I need to replace people." They could give a damn about what happens to the guy that you just laid off. You laid off a hundred people, two hundred people, they're not thinking that way. They're focused on how to automate to replace these people so that it costs less. Later, in a few more years, when these robots are going to be everywhere, and when you've replaced all these people and the people start losing their jobs, then you have a problem. That problem is equally the same in the United States, in Mexico, and in Europe. It's going to be the same.
Matties: That's why Trump is so popular at this moment. I mean for that very reason. Whether you like his politics or not, it's a popular statement to come out and say, "I'm here to bring jobs back." Not to make it a political conversation.
El-Abd: But if you bring robots to the U.S. those people are still unemployed.
Matties: Many believe that in the U.S., with the mix and volume of work we do, will warrant robots. People are less interested in automation and more interested in process step elimination. I think you can gain a lot more by reducing process steps than you can by putting handling equipment in. Maybe some companies have the ability to do both, but in America a lot of companies don't. They have to make those choices.
El-Abd: I understand your point. I see it, but look at that machine [Nano Dimension machine in our past issue]. It has the ability to produce a multi-layer board with 3D printing. You don't need a lot of people for doing that. Now this is a prototype, fine. How soon before that technology translates to mass production? It's coming. It's not long. That's what I'm trying to say. We're talking about a ten-year period. Within a ten-year period, there's going to be so much automation of all different types that people won't have jobs. Factory-type people won't have jobs. It doesn't matter if you don't have a factory job here in China or in the United States. We need to be thinking about what’s going to happen to all these people. Trump's not thinking that way. The people here, they're just worried about the jobs leaving, the factories leaving. They're not concerned yet with the implications.
Matties: They don't understand the impact. They haven't felt it really because factories have moved west to China or they migrate to wherever the jobs are.
El-Abd: Or they're going to Vietnam or wherever—they're leaving here. They're leaving here and what else are they people going to do? These are factory worker jobs.
Matties: With the wage increases that have come, I look around and real estate prices are through the roof here. People are still spending money. Bicycles are gone. Nice cars are everywhere. Is it a transition to more of a recreational society—a service society? Golf courses, RVs, campgrounds, things that China doesn't really have yet, but there's a whole industry, a service sector, that could be developed. Is that where we're headed?
El-Abd: I think that they are going in that direction. They see how America is enamored with sports. They're trying to get the Chinese people to be very sports-minded. I don't know if you noticed it but they opened their first soccer sports academy. It is absolutely amazing. It's a beautiful, humongous campus with a hundred soccer fields. Then they said they're going to open 20,000 of these by 2017. Twenty thousand schools by 2017 that are like this, only for soccer? I was amazed. I said, "Did I get that number right?" Yeah, that's the right number. Oh, wow.
Then they have golf camps. They're learning baseball. They're learning rugby. All these things that are not native to the area. They see how rugby generates income in Hong Kong for the Rugby Sevens, how much money they make. The Hong Kong people, even though they're Chinese, they watch it. They get involved in it. They want to do something like that.
Matties: The other thing that I heard in new market development is the new Chinese Hollywood, where they’re starting to make Western-style movies that will appeal to the West.
El-Abd: They want to compete with Hollywood. They can do that.
Matties: Getting back to the wage freezes and automation, it's not without a plan to take care of these people it seems.
El-Abd: No, I don't think that building a Hollywood is because they're going to lose all these other jobs. I think that they're just going to have additional things. They haven't figured out yet how much of an impact losing all these other jobs is going to be in ten years’ time.
Matties: They're creating whole new sectors.
El-Abd: They're creating whole new things, yes. Hopefully, these new sectors will take some of these people up. Again, you're talking about factory level people, who are less educated, and that’s very different than doing jobs for a Hollywood set and things like that. It's different.
Matties: That's the other part. Even in America, the types of jobs that we're going to see in the future are jobs that require higher education. You're going to have to have computer skills because you're going to be running equipment via computers. You're not going to be loading boards. It seems like China may have a stronger labor pool in that regard as well.
El-Abd: I think that we need to understand that China graduates a million engineers a year. We don't. Maybe they're not the greatest of engineers, but I would say 25% of them are pretty damn good engineers. Think about that. We need more engineering. We need more software skills, all of those things are very important and they're cranking them out.
Matties: We mentioned Trump and it looks like he's moving forward. There's a lot of talk from him about how he's going to deal with China. What's the take from China on that?
El-Abd: They basically think he's nuts. The reality is he says he's going to put 35–40% tariffs on Chinese made goods. Let's be logical. If he did that, he'd shut down American industry very quickly. How's Wal-Mart going to survive?
Let's say all iPhones are made here. Are you going to move iPhone production to the United States? Is America ready to pay three times the price of an iPhone? The other thing that the Chinese have, which we do not have in America, and if you're a logical businessman you have to understand this, is a supply chain. The supply chain is gone in America. If you were to build the iPhone in America, the supply chain with all the materials that you need are not made in America. You're going to have to import everything.
The other thing is young American engineers, I'm sorry, they don't want to work in a factory—no way. These guys are now raised on Google and Facebook and things like that, with that kind of environment. They don't want to work in a factory floor. Let's be logical. How are you going to do it? It's not possible. In my opinion, because of the oncoming of automation and robotics, the future will hold satellite factories in America, satellite factories in China, China factories producing for the China market and American factories producing for the American market. That's what's coming, but it's going to take us some time to get the supply chain right. We have to get the supply chain in the loop. The investments we should be making should be in all these logistics’ companies, because they have to move stuff around quickly. That's coming.
A lot of that is going to have to change. How do you make the casing? Where do you buy the casing? Where do you buy the glass? Where do you buy the components? Right now, the components are not made in the United States and you’ve got to import the components. Are you going to have a component factory making that stuff in America? No, I don't think so.
Matties: It sounds like no matter what the path is, prices are going up, with a Trump administration, whether it's a tariff or new supply chain costs or whatever it is.
El-Abd: If he does become president, I see costs going up and I see a little bit of a shock. On the other hand, Trump is Trump. He talks. Whatever he says today, it may not mean anything tomorrow. He changes his mind every day. If he gets into office, he’ll say, "No, no, no, we're not going to put a 45% tariff. We're not crazy." He's a businessman. He will say and do whatever it takes to get elected and then after he gets elected he'll say something else.
Matties: That will be interesting to see. He's had amazing success in the campaign so far.
El-Abd: It's been a big surprise to me that so many Americans are not really questioning, "How are you really going to do it?" They're blindly following. It could be the shock therapy that America needs to straighten out America. He could be a one-term president who shocks America into realizing that they have to make all these right changes, but I don't think he's presidential.
Matties: I agree with that. It's a shock. It's wake-up call, and not just to the American people but to the leadership. The population is tired of, what do we have, .04% growth?
El-Abd: And stagnation in government.
Matties: Not just stagnation, just gridlock. I mean absolute gridlock. We struggle to pass a bipartisan piece of legislation.
El-Abd: There’s one thing that I advocate and I have advocated for 25 years. Living out here, you have a flat tax. I believe that the American people, if you explain the flat tax to them, it makes sense. First of all, the IRS would be a quarter of the size that it is today. What you do is you draw a line. Everybody below the line is classified as the poverty line. Then everybody above it, it doesn't matter who you are, you pay one flat tax, no deductions. No deductions for grandma, kids, whatever—you just pay one flat tax period. Forbes has been pushing this for more than 20 years.
If you kept the flat tax at say 18%, what they don't tell you is that if every American pays 18% we'd have more money than the government has ever had before. Right now, more than 50% of the population doesn't pay anything. Or, if you get a guy like Bill Gates, and I'm not knocking Bill Gates, but he's got all these accountants moving and shoving money around so that he's exposed to the least amount of taxes possible. He would pay 18% period. No deductions, no hiding anything, you would pay 18% and you're happy.
Matties: It's level.
El-Abd: It's level and everybody is paying the same. That is the right way to go about it. Everybody pays the same in Hong Kong. We pay 16% in Hong Kong. In Singapore, I believe it's 20%.
The thing the American people need to understand, at the end of the day, is the government would have more money and you would pay less taxes. You and your neighbor have paid the same amount of money. None of this crazy stuff. Some people will tell you the rich people have to pay more. The rich people aren't paying any. They've got all these accountants.
Matties: Yeah, they know how to move it around. There could be a national sales tax on what you purchase even. If you earn money and want to let it sit in the bank account, let it sit there, but it’s when you spend it you pay your share of tax.
El-Abd: I also don't like the double taxation, meaning that you earn a hundred thousand, you pay your taxes, and next year you pay another tax on the hundred thousand that you paid taxes on. You should pay on what you earn that year, business taxes, corporate tax. How many American companies have left the United States because of American corporate tax? Are we going to keep shoving them away? That's wrong. They should pay a fair tax for being in the United States and they should pay a worldwide tax, end of story, or only on what you have in the United States. If you have it in Europe, you pay European taxes. If you’re in China, you pay Chinese taxes. You don't pay here and here and here. They should just get you for one huge tax once.
Matties: How is it in China? What sort of tax rates do the corporations pay? How does that work?
El-Abd: The Chinese are very pragmatic people. They look at it and they say, "We need money." They tax you. Then they realize they're overtaxing you so they give you tax incentives. Right now, they're giving you incentives.
Matties: What sort of incentives do they put out there?
El-Abd: It depends on the company, the deal, how many employees you have and where.
Matties: Back to our manufacturing; I was talking to a fabricator in south China and they were telling me that the government is mandating that they bring in automation before people.
El-Abd: I wouldn't say they’ve mandated it, but they are encouraging automation.
Matties: He was saying it was a law of some sort, a local city law.
El-Abd: Maybe it's a local city law, I don't know.
Matties: He said that part of it he said was traffic. I think it's more to the national strategy of wages.
El-Abd: It’s also environmental. They just announced a few weeks ago that they're banning electric bicycles here. Everybody's upset about it.
Matties: Is it a battery issue?
El-Abd: I don't understand it. Nobody understands it. I was at the electronics show a week ago in Hong Kong and they had electric bicycles there. The guy said, "We're just exporting. We're not selling anything in China because we don't understand this new law." The problem is most of the poorer people need an electric bike to get around. They don't want them on the roads. There's a problem.
Matties: What do you think about our industry in general? What do you see for the next year or so?
El-Abd: Well, Q1 was terrible. We see the uptick over the last two weeks because of what the government regulations have done. It's just like when Janet Yellen plays around with the interest rates. Business will go up or down depending on what she does. I think that it's the same kind of a thing that you have here. Right now, we're seeing an uptick. Is this uptick going to stay? How long is it going to stay? The other thing that we need to consider, whether we believe it or not, is that the American election does play a role in business. Who's going to get elected? If Trump comes in at 40% import taxes, how's that going to affect the business? Trust me, it will affect business. We just don't know. It's very unclear. This is a very unclear year. We knew that it would be flat or a little bit lower than last year because of the election. Now, it's hard to say.
Matties: I know you just opened your new facility, and added quite a bit of square footage, I think. How do you plan for the future then, and strategize for your own business?
El-Abd: It's all about two things: new and advanced technologies and automation. You saw the robots that we have in our booth. We're building those. The customers where we've put them in are very, very happy with them. We see that as being a really big earner for us. One of these cells can replace five people doing soldering on the production floor. We see that growing.
It's all about the next step, the next generation. What new technologies are coming? A company like us, if we're selling robotics and automation, that's going to continue in the service side of the business, servicing all these products that we're putting out there. That's how we plan to continue to grow, with new technology and all of these new processes for building a board. How you build the board is going to change. For example, this is our 30th year with Yamaha, and we have now have launched a new machine, the Zeta machine, which is the fastest machine in the world, 200,000 CPK. We want to take that to the next level and continue to grow.
Matties: It's all about speed, isn't it?
El-Abd: It's all about speed because you need to get the product out to market as quickly as possible. The cycle of an iPhone is that every year you get a new phone. But if you look at the other ones, it's less than six months and they’ve got something else. I think Apple needs to address that issue.
Matties: What about the military market in China? Is that a growing market? Are there a lot of investments coming into the military here?
El-Abd: The military market is very tightly controlled, obviously by the state. To answer the question, it is growing. China is exporting more and more military technology than it's ever done before. Whether they're selling fighter jets or whether they're selling artillery pieces, missiles, airplanes, helicopters, submarines—whatever they're doing. They were not really known as a major exporter. Now, they're a player in the market.
Matties: We've known each other now going on 12–15 years, and in some of our early interviews, you were saying, "Just wait, the quality of their manufacturing is going up." We've really seen that in the last five years.
El-Abd: We underestimate, and by “we” I mean the United States and Europe, and we have always underestimated the Chinese. We say, “It's crap. It's not good. I don't want to buy this Chinese stuff.” At the end of the day, they're learning and they're getting better and better. They're building aircraft and helicopters and selling them. They can't afford to have quality problems and these things crashing or they're never going to sell any. They did sell some twin prop commercial airplanes that didn't do well. They crashed a couple. The foreigners won't touch it. They can't make money unless they fix all these problems.
Matties: You look at every manufacturer, whether it’s German with Volkswagen or Japan with Mitsubishi. They all have issues.
El-Abd: The Chinese are selling their cars, exports. You're not seeing them in America but they're all over the Middle East, Africa, and South America. They're selling their cars. They're eating into a market that was the mainstay of American and European car manufacturers. Their cars are getting better. Remember Korea? Early Hyundai cars and how crappy they used to be? Now, they're world class, quality cars. The Chinese built a competitor to Tesla, Faraday.
Matties: Tesla is trying to sell cars here, but it's at a much lower rate than they anticipated.
El-Abd: As a matter of fact, Elon Musk just fired his management team here and got some new people because he was unhappy that they weren't being aggressive enough in selling. Funnily enough, Hong Kong is the highest density market for Tesla in the world. There are more Tesla cars in Hong Kong per capita than you've ever seen anywhere else. Everybody's got one in Hong Kong. My neighbor has one. I asked him how much he spends on electricity and he said 200 Hong Kong dollars a month. That's it, like $30 U.S. a month in electricity. He has a separate gauge right over his charger. If you look just here, in Shanghai not so much, but in Shenzhen, you have BYD electric taxis or BYD electric police cars. They're doing very, very well. You see them in Hong Kong now, a BYD electric taxi. It's coming.
Matties: The automotive industry in general is just changing so dramatically and the amount of onboard electronics is just incredible.
El-Abd: You're going to see more and more of that. The car is 30% electronic today. A couple more years, it will be 50% electronics and you'll be able to do so much more.
Matties: Is there anything we should know about this industry that we haven't talked about?
El-Abd: I think we've covered everything about this industry. It's still the best industry to be in. It's unique. It's growing. It's changing. It morphs every few years into a whole bunch of new technology. We're going to see so many new things happening in the coming few years. It's going to be exciting. If you go over here to the ABB booth and look at the robots that they have, those robots were all designed and built in China, in Shanghai. They're amazing because the robot arms can move in 14 directions. It’s very clever stuff. Honestly, I don't think they're that expensive. Each one of these things is $70,000. For Europe and America, that's a bargain. For China, it's a little bit pricey, but they'll come down.
Matties: That's the kind of simple automation that we could see in America, where you take a robotic arm, bolt it on a table and it starts right away.
El-Abd: You get rid of the people. It doesn't get tired. It doesn't have to take a break. It doesn't get a lunch. It doesn't get pregnant, all these things.
Matties: What do you think Chinese manufacturers struggle the most with?
El-Abd: It’s a combination of people and government. With government, they're always changing things, changing rules and regulations, especially in the area of labor laws. They are making it very, very difficult to get rid of people.
Matties: Kind of the European philosophy.
El-Abd: Yeah, German. They copied a lot of the German regulations. It's very hard to get rid of people. What you do is you hire somebody and then they sign a contract. When their contract is up, they sign a second contract. After the third contract, you can't get rid of them. They're there. I'm not saying you can't get rid of them. You can, but you have to pay out the whole contract, the entire value of the contract plus two. It gets very, very expensive for you. You have to be very careful who you hire. It's like the NFL, if you get a player and he doesn't produce, you cut the player. Here, you can't. You're stuck with the guy. That's a big issue and a big, big problem.
As a businessman, I think that whole concept, that you can't get rid of somebody, is not good. That is equal also if the person does something wrong. There should be a mechanism that you can fire them without paying them off. Under the current labor situation, if somebody in your company steals from you, you have to pay them out. I said, ‘I'll be damned if I'm going to pay somebody who did something wrong, a year and a half.’ What happens is you have to go to court and it ends up costing a lot of money. To me, it's simple. If I can prove that you've stolen or if I can prove you've done something to harm the company, then I should be able to fire you on the spot; get out of here.
Matties: There's inherent risk in this because it opens the door for lazy, non-performing workers.
El-Abd: We had a person who was caught doing something wrong, and I couldn't fire him. They said, "You can fire him, but you have to pay him out." I said, "Wait. Wait. Wait. I will not pay somebody out that has done something wrong to harm the company. It's not me. I won't do it." It's like rewarding somebody. I wouldn't do it.
The government hasn't figured that out yet and they have to do that. I asked them, "What can I do?" They said, "Well, you can do anything but fire him unless you pay him out." What do I do? I put him in a corner, took his phone away, took his computer away, took everything away and just left him in the corner where everybody could watch him. It was like a dunce corner. Then I figured he's going to go sooner or later but he lasted nine months, which is more than I wanted but I didn't have to pay two years. If they quit, that's it.
Matties: That really creates an atmosphere of adversaries.
El-Abd: There are young people, unfortunately, who take advantage of these regulations.
Matties: That's one of the things I've noticed. Obviously, you've been in China many more years than me, but I can see there's a new generation that's coming into the work force, with new thinking. It feels like a completely different China in many respects.
El-Abd: They're learning a lot. How can I manipulate the system in my favor? The other thing is the scamming. You ask somebody, "Where did you go to school?" They say, “I went to school here." They buy all these degrees online. They can buy degrees. One guy told me he worked for Philips, for this company and that company. We went and checked. He didn't go to school there but he's got a diploma and a degree. He shows it to you but he didn't go to school there. We have to be careful because we're hiring technical people who didn't go to school.
Matties: That's a tough climate to do business in.
El-Abd: Tough climate. T-I-C: This is China.
Matties: This is China. If you want to hone your business skills, come do business in China. Hamed, thank so much for spending time with me. It's always appreciated.
El-Abd: Thanks a lot.