Services: Performance of the Future

Services have outperformed the economic leverage of manufacturing. The growth not only changes the structure and composition of economic activities in both the United States and the world but also leads to a more integrated future. Both legislators and negotiators must pay more attention to the service components of international exchanges if they are to achieve long-term change.

Worldwide, services contributed more than 60 percent of total value added in most major economies in 2017. China and India were the exceptions. For world trade, the value of services exports grew 5.1 percent per year between 2006 and 2016 with a rising tendency. 

U.S. services now account for over two-thirds of GDP. The U.S. companies achieved more than $2.2 trillion in recorded international services sales In trade, services deliver a large surplus. Four out of five new private-sector jobs in the U.S. are created by services. In 2015, the Peterson Institute estimated that the elimination of global barriers to trade in services would increase the U.S. service exports by $300 billion and create 3 million jobs when fully implemented.

There is more to services than meets the eye. Services come in different categories and at different, often opaque international levels. Examples are varied performances in fields such as telecommunications, financial services, computer services, retail distribution, environmental services, education and express delivery.

Manufacturing strength increasingly comes from strong and tailor-made services which enable manufacturing to be more effective and competitive. Current cars are service driven and updated with sophisticated navigation systems. TVs have to connect to streams in order to be smart. iPhone sales rely on Apple’s support services, including troubleshooting and retailing. Even a traditional aerospace exporter like Boeing uses cloud services to manage inventory, optimize maintenance, and minimize the costs of system malfunctions.

Service performance at high has typically been greatly underestimated due to insufficient measurement insight. For example, if a person travels abroad for medical tourism, such value generating activity is hardly recorded. A local session of advice with a financial expert may create high value. However, poor valuation and insufficient recordation lead to only little understanding of current account impact.

Services and manufacturing are not at opposite ends of a scale. Rather, services strengthen the performance of manufacturing and are enhanced by the application of technology. Through its investment in the services sector, China has greatly improved the capabilities of its logistics, transport and infrastructure conditions. China can now demonstrably use its newly generated logistics expertise to outperform its competitors. For example, due to its service investments, the transport time of persons and goods via the new Hong Kong-Zhuhai-Macao Bridge has diminished from 4 hours to 30 minutes since the end of 2018. What a time wharp, yielding clear insights into shifting capabilities. Many will be the companies and countries which sign up to exchange raw materials for infrastructure. 

The integration between services and manufacturing will relegate entire supply chain conditions, which have been laboriously created, to a mere blur. Today, most apparel manufacturers own retail stores. Many store brands like Target build up their own manufacturing, controls, and retail distribution. Apple manufactures its own chips, fingerprint sensors, and other custom components. Concurrently, its retail stores flourish and allow it to control its direct distribution and sale to customers.

Services growth promotes new types of manufacturing. Printing technology gives new meaning to scale economies. Services, combined with flexibility and adjustment bring opportunity and vitality to the global economy. In terms of innovation and employment, strong services are no less important for a country than a strong manufacturing sector. U.S. legislators and negotiators must place growing emphasis on services and their links, both direct and indirect, with manufacturing. A more integrated economy will provide all with a significant payoff.

Professor Czinkota (czinkotm@georgetown.edu) teaches international marketing and trade at Georgetown University and the University of Kent in Canterbury. His latest book is ‘In Search for the Soul of International Business’ 2019, Businessexpertpress.com

News from the USTR: Expiration of the Generalized System of Preferences Program

United States Trade Representative Michael Froman issued the following statement regarding the July 31, 2013 expiration of the Generalized System of Preferences (GSP) program.  GSP is a 37-year-old trade preference program designed to promote economic growth in the developing world by providing preferential, duty-free entry for up to 5,000 products when imported from one of 127 designated beneficiary countries and territories.

 “Beginning August 1, U.S. businesses and consumers will pay more for thousands of goods imported under the GSP program, including many inputs for U.S. manufacturing,” said Ambassador Froman.  “The Obama Administration urges Congress to extend this important trade program, which increases U.S. competitiveness, keeps costs low for U.S. consumers, and benefits some of the world’s poorest countries.”

Read more here. What is your opinion about the expiration of the GSP? Post your view in the comment section below!

Yes Virginia, the Ham Is Chinese (Part 2)

The result is economic growth at double digit levels for several decades and a rapidly expanding middle class.  This success has also led to new economic challenges as the expectations of China’s citizens for higher wages and quality of life have risen. China may well be approaching a tipping point for an economic  transition from being export focused to becoming  consumption-driven.  After  improving the world by manufacturing good basic products, Chinese businesses must now learn how to succeed through marketing and excellence.

Just as American brands like KFC, Coca Cola, Apple, Buick, and Pampers have learned how to successfully win over consumers worldwide, Chinese companies need to compete for brand preference employing more than a low price approach. Already, Chinese products are emerging as leading brands.  WPP’s 2013 BrandZ Most Valuable Global Brands research has 12 Chinese brands among the top 100 global brands. However, a closer look at this study reveals that the top Chinese brands are mostly successful in China alone, and in sectors where access by foreign firms such as telecommunications, banking and insurance, Web-based technology, and energy is restricted. Though there are many Chinese consumer brands, such as Haier, Tsingtao, Li-Ning, Lenovo, Baidu, Tencent, and Huiyuan Juice, marketing to consumers outside of China has not been highly successful for Chinese brands thus far.

Marketing guru Philip Kotler defines marketing as both an art and a science. Chinese firms have mainly concentrated on science, via price. Now they must become better at creating higher quality products, placing them in distribution outlets that Western consumers prefer, and promoting them with a direct appeal to Western emotions.  The best way to accomplish all this quickly is through the acquisition of Western firms with already established base of consumer preference.  Therefore, in addition to the establishment of new brands, we are likely to see a significant expansion of Chinese acquisitions of U.S. and European consumer goods brands in the coming years.

Is this a good thing? Acquisitions by foreigners tend to be accompanied by concerns. When U.S. giant Kraft acquired British Cadbury, there was worry about diminished  chocolate quality in the U.K. Now Americans (accompanied with much hamming it up by master comic Jay Leno) state that the Smithfield acquisition could lead to diminished quality and loss of American jobs.

Far from it ! The Chinese are not just obtaining products – imports and exports would have done that. Rather, the acquisition helps integrate China into the global economy, and contributes to its future branding success by delivering new connections, experience, capabilities and trust. The key benefits will be learning of both quality and marketing.

This article is a part of a series written by Michael Czinkota and Charles Skuba. Read part 1 here.  Guest writer Charles Skuba teaches international business and marketing at Georgetown University. He served in the George W. Bush Administration in trade policy positions in the U.S. Department of Commerce.

Yes Virginia, the Ham Is Chinese (Part 1)

For many Americans, Virginia ham is a long established part of a festive family dinner. But good old American traditions like that can carry new meaning in a global economy.  The recent news that Smithfield Foods, owner of leading pork brands like Smithfield Ham, Eckrich sausages, Armour meatballs and Farmland bacon, is to be acquired by Chinese company Shuanghui International Holdings Ltd. caused indigestion for some in the United States.

The $4.7 billion deal, announced on May 30, 2013, would be the largest acquisition of a U.S. company by a Chinese firm. It is another of a series of recent significant global acquisitions by Chinese firms. Other examples include the 2012 purchase of the AMC movie chain by Dalian Wanda Group Corp. of Bejing and the 2013 acquisition, of Canada’s Nexen by China National Offshore Oil Corporation (Cnooc). At year’s mid-point, 2013 promises to be a record year for Chinese foreign direct investment in the United States. It is also indicative of a new focus for Chinese investment : branded consumer businesses.

Chinese businesses, some state-owned, have proven remarkably successful in the global economy.  Many American companies in a broad range of industries source their manufacturing activities or components from China.  Within a few decades, China has developed into a manufacturing powerhouse, accounting for over ten percent of global exports.

This article is a part of a series written by Michael Czinkota and Charles Skuba. Guest writer Charles Skuba teaches international business and marketing at Georgetown University. He served in the George W. Bush Administration in trade policy positions in the U.S. Department of Commerce.

Thailand’s Economic Success

While countries around the world like the United States and those in the European Union are suffering, Thailand has reported a gross domestic product growth of 18.9% compared to last year. This growth can be attributed to the devastating floods in 2011 which diminished both production and consumption. By comparison, the current investment in rebuilding supports growth.

On Monday, February 18th Thailand’s government reported that the GDP growth for 2012 was 6.4%, with expectations for 4.5 %– 5.5 %growth in 2013. Whether the growth will mainly be in manufacturing or in services (such as medical tourism) is a key question.