China Economy Passes USA in Size This Year says The Economist - What would Kondratieff think of this within the natural succession pattern of global hegemony ie Long Wave Cycle

The Economist has just couple of weeks ago calculated that the transition-point of when China's economy will pass that of the USA will happen still during this year 2014. I knew China was rising and knew it would inevitably pass the current largest world economy, the USA, in size at some point in the, say mid-term future like by the end of this decade maybe. It was inevitable. But the news did shock me considerably, in how fast it is happening. I can't confess to 'bothering' to do a very frequent monitoring of the major world economies haha, so this may have been 'obvious' to those with a serious world economics focus, but for me it was a shock. And I have been thinking a lot about the matter since the news broke. I incorporated the point to the presentation I delivered to end this year's Forum Oxford Conference earlier this month.

What impact? Well, some of the stuff is pretty obvious. If you plan on selling things as a multinational corporation, in the past you 'wanted' to succeed in America. If you could make it there, you'd make it everywhere... The USA was the holy grail of any brand with aspirations of global relevance. That era is now passing and China is becoming (and in many individual sectors of commerce, has already become) the largest market. This in turn draws the best and brightest among the youth to go pursue their 'China Dream' and thus eventually the USA will be a 'quaint' and 'second rate' market. Still big obviously but look at smartphones. China and USA were neck-and-neck in smartphone sales volume in 2011. Today only three years later, China's market is twice the size of the USA in smartphones. And bear in mind - the US market also grew in this period. Its not like the US market is somehow disappearing (and shifting to something else, 'newer').

THE THREE CITIES

There were obviously far more than 'just three' big powerful cities in the USA in the past century or so. There often were given industries (or giant employers) who were associated with a given city. Detroit was Motown, the home of the four US carmaking giants back in the day when American Motors and Chrysler still existed as 'Big 4' US carmakers. Los Angeles is pretty well the global center for the epitome of entertainment - thanks to Hollywood. Any successful rap star or TV actor or reality TV star or even videogame (Angry Birds?) wants to next become a Hollywood movie star. But yeah, the last two or three decades there were really three cities that were massively above the others in the USA, and very much so also globally. Washington DC was the home of the US goverment, in the era after the Berlin Wall came down and the Soviet Union split itself apart. After decades of a duopolistic rival geopolitical system of the Cold War, the USA discovered itself to be the sole remaining global superpower. That meant that Washington DC became for all practical purposes the 'center' of power for the globe. For whatever you think of George W Bush (ie Bush 2, the one that many now call Bush the Lesser) his government was putting together large international alliances - clearly led by the USA - to go fight wars in Afghanistan, Iraq etc. If there was a world crisis of some kind, whether natural disaster or man-made - then governments would send delegations to Washington to plead for US involvement and leadership to go fix things.

The second concentration of power was around money. Wall Street is in New York City. And for all the other great things that the Big Apple has, its driving engine has been for more than a century now, the financial sector. New York has been and still today clearly is, the center of the global financial system. New York has many other major industries too from television to the fashion industry but Wall Street rules New York. And as the planet still evolves around economic systems based on money, the US Dollar and its home, New York City, have been the engine of the global economy. We saw it just very recently in the Great Depression of 2008 when the world economy 'cratered' to use Presidential candidate John McCain's words. New York City was for much of the past century the world's largest city.

The third city of huge relevance was the home of the IT revolution. Locals willl limit this to be far less than San Francisco or the 'Bay Area', they say it is Silicon Valley with very defined borders. But that was where most new millionaires were made in the past two decades. The whole planet's economy was given a boost with automation and computerization and the internet (and social media) for the past 3 or so decades and that was all centered and originating from Silicon Valley. San Francisco California.

As the title of largest economy is about to shift in the coming months to China, the most obvious shift will be that of the global financial center migrating from New York City to Shanghai. This is just like what happened with London and New York with finance early in the past century. The US dollar will eventually give way to the RMB ie the Yuan, the Chinese currency, again following the pattern we saw that happened when the UK Pound gave way to the US Dollar as the preferred global currency of choice in international business. We already see the strong foundation for this shift happening as China is the banker who holds most of the massive goverment debt that was created under the past two US Presidents. So you think 'but New York, New York' what with its beautiful skyscrapers... Have you visited Shanghai? The skyline is remarkably similar to that of New York with the tall skyscrapers except that the new ones up and still being built in Shanghai - go far higher than those in Old New York...

Then there is Washington DC. Currently Beijing the Chinese capital is quite content to play 'second fiddle' on world geopolitical matters but how long will that last? Similarly to how the USA wanted to be isolationist and not get stuck in the European squabbles of wars before World War 2, currently China is quite content to mostly just finance whatever wars the other major powers want to wage, and not really take a global leadership position in political power. But that will change too. The more the USA becomes a crippled economy and 'beholden' to its banker, China, the more China can - and will - excert its rising power. I think this may take still decades to emerge but I think it is inevitable that when children of today are adults, they will automatically consider Beijing to be the dominant global geopolitical power, not anymore Washington DC just like today we don't consider London on par with Washington DC.

And finally, the driver of the new economy? Do you know where Shenzhen is? Shenzhen is quite much the modern updated version of Silicon Valley. Its an ill-defined place that is growing too fast for maps to keep abreast. Its population is a mystery too as it grows so fast. It is situated a bridge North of Hong Kong. Literally. You can take the Hong Kong transit to the edge of the city then walk over the bridge to be in Shenzhen. Hong Kong has a population of 7 million including the world's largest number of millionaires in any one city. And then just across the city limits, live another at least 15 million more. Many in Shenzhen are the factories and suppliers to what is sold in Hong Kong. Many more in Shenzhen are shipping related businesses. But the driver of the Shenzhen economic miracle is ... the mobile phone (and now its evolution, smartphones). Yes .80% of all mobile phones manufactured in the world are made in China, and 7 out of 8 of those, in a dense cluster of tech startups all within a bicycle-ride from each other. The world sold 1.8 Billion mobile phones in 2013. So yes, 70% of those, nearly 1.3 Billion were manufactured in Shenzhen. If Silicon Valley and the computer revolution drove the economy at the end of the last century, the new economy now is obviously driven by mobile .A large part of those revenues are with 'carriers' ie mobile operators who are local, and whose business is felt within the local economy. Vodafone in the UK, Sprint in the USA, Telefonica in Spain, MTS in Russia, MTN in South Africa etc. But of the hardware - that comes from China. From Shenzhen. Huawei is headquartered in Shenzhen. ZTE is headquartered there. As is Yulong. Who is Yulong? The makers of Coolpad smartphones. Already three of the world's 10 largest smartphone makers come out of Shenzhen and five years ago none of these three registered among the Top 10 largest smartphone makers. (and two more of the Top 10 today, Lenovo and Xiaomi are also from China but they are based out of Beijing).

So whatever you thought of, fondly or unflatteringly about New York City, its time to now learn to shift that thinking to apply to Shanghai, where soon Shanghai will take over not just as the global finanacial center but many of the other New York industries too, from Fashion to television. Beijing will become the new Washington DC but that transition will take considerably longer. Yet do be prepared. And the fastest change that is happening already is that Shenzhen is the new Silicon Valley. Right next to the glamorous iconic world city of Hong Kong (like Silicon Valley is next to similarly legendary San Francisco).

KONDRATIEV WAVE

So now, lets do some serious pontification about what might be coming and when. I get to use 'properly' a tool I discoverd in the advanced macroeconomic course in my MBA studies in New York City 26 years ago. Lets see what the Kondratiev Wave (also spelled Kondratieff) aka 'Long Wave' theory of economics has to say to advise us in this transition of power on the world stage. I utterly fell in love with the K Waves or 55 year cycle (aka 50 year cycle) theory when I learned it, but at that time, in the late 1980s, it was beyond any argument that the USA was the solo global superpower. And Kondratiev's wave wouldn't even move to another phase for another... 25 years. I knew in my MBA studies that if the K Wave was 'for real' I would be nearing retirement by the time anything 'new' might be offered by the wonderful economic theory.

Well, guess what kids? We are now 25 years past that point (26 years actually) and with the news from the Economist about China, there is obviously no doubt China is about to become the global largest economic power. Passing the USA. Right on schedule, according to Kondratiev's long wave theory. As his waves run 55 years (or 50 years, its not that precise haha).

So you've of course heard of Adam Smith and Mlton Friedman and John Maynard Keynes and Karl Marx (he too was an economist). But you probably never heard of Nikolai Kondratiev (also spelled Kondratieff) before I mentioned him on this blog or in my Twitter stream. Don't worry, Kondratiev was not one of the communists/socialists, while he was a Russian economist. His theory was formed well before Lenin got his little revolution-thing going on in Russia. (So nothing to be afraid about, you won't have to send the children out of the room haha).

Kondratiev studied long-term economic changes and trends. He discovered that in addition to far more obvious short-term cycles we have in the economy - like the annual cycle - Christmas trees sell better in December and ice cream sells better during summer months than when its snow on the ground, etc... - there is a 'Long Wave' in economics. He timed that cycle at roughly 55 years. His main theory evolved around the economic engines of the industrial revoluton (there was no Long Wave before the steam engine). Stand-alone steam engines fuelled the first wave. Trains and steam-powered ships powered the second wave. Then came electricity which brought even more access to 'power' through a far more practical delivery system than shoveling coal into you steam engine. Electricity powered the third wave. And Kondratiev was just alive long enough to see the fourth wave - that powered by petroleum that then gave us the automobile and airplane among the many jumps in the global economy. After petroleum the fiftth wave we know was the IT revolution and now we're just entering the sixth wave powered by mobile. Not bad, eh? (Read more about him in Kondratiev via Wikipedia)

So far so good. Seems like yes, there is a long-wave theory that runs maybe 50-55 years or so. Why this pattern? Kondratiev noticed that early on, a new engine of the economy will attract a lot of investment and new infrastructure is bult for it. That requires new skill and capabilities. Then as the technology matures, it goes more into a need for maintenance and we humans start to neglect that for the next new shiny thing and the old tech starts to wear down and loses its competitive edge as we build the next wave. The young best minds learn the new technology and meanwhile those mostly older people still supporting the older technolgoy become every more interested in personal issues like happiness and vacation-time etc, while at a new technology stage there is the passion to work overnight on the cool new thing... (if you want to learn more about K Waves here they are on Wikipedia)

There is much more but we KNOW that mobile is the big thing and this blog has been celebrating that shift for a decade now. Kondratiev won't really help us with that part. It just happens to 'fit' the facts as we've already reported them. 

The cool part we can gain from Kondratiev Waves is how it relates to - or has been applied to - the dominant world superpower and geopolitical hegemony. This was not the core of Kondratiev's work but is more the derivative works based on his K Waves. But this part offers us a fascinating tool to map out likely developments in the world economy, geopolitics and even social and cultural matters. If the Kondratiev wave is valid (in this context) then we may have real valuable 'road map' insights to consider in this transtion as the USA moves into the painful stage of being 'the past superpower' and has those hard times emotionally as a nation, while then China has to get to grips on the scope of its true global power and what to do with it.

KONDRATIEV WAVES AND DOMINANT GLOBAL SUPERPOWER

So this is now adaptation of and development beyond Kondratiev's original thinking. Some of the geopolitical dimensions were argued by George Modelski in his book Long Cycles in World Politics. And then of course there have been debates on who was the true global superpower and exactly how long was the 'wave'. Some have argued that Britain was the world hegemonic superpower twice, etc. But if we apply the Kondratiev Wave 55 year cycle to the world geopolitical history of the past 250 years we get rather nicely this kind of pattern:

First (industrial age) global superpower was Spain with a vast empire covering much of North and South America. Spain which had seen its empire grow and shrink, entered a prolonged period of prosperity in the second half of the 1700s after national political reforms (Bourbon Reforms) and Spain saw the first major industrial production outside of the country where steam engines were invented (Britain) with the Spanish textile industry going to steam power in that time. Spain scored a major naval victory against its nearest military rival - Britain - at the Battle of Cartagena de Indies (ie in the Caribbean off the shores of Colombia today.). Spanish world rule came to an end under a short guy named Napoleon, just North of the Border, in France.

The second global superpower was France, established by Napoleon and extending to the French Revolution till the middle of the century. France not only greatly benefitted from industrialization at this time but brought about huge societal change starting with the idea of bringing democracy to the people by chopping off the heads of those who had been in power (the Guilliotine). Napoleon gave us for example the Metric system of standardized and harmonized measurements that all are divisible by 100 (and 10 and 1,000)

Then in those intra-European squabbles that had lasted centuries, suddenly a unifier appeared in Germany. Otto von Bismark for the first time unified Germany and its time as top dog came at the second half of the 1800s when Germany industrialized and became the biggest economic power and gave us such wonders as Daimler Benz's wild idea of the automobile and Mr Zeppelin built airships that could travel across oceans . German power ended at World War 1.

The fourth global superpower was Britain, in the early years of the 1900s century. London was the financial capital of the world and the Royal Navy ruled the seas and after taking over German Empire possessions in the aftermath of WW1, the British Empire become the largest ever seen by mankind. The BBC offered radio broadcasts heard literally all over the planet while British-born comic Charlie Chaplin, through his successful career in America, became the first globally identified celebrity. The British invented the jet engine and television and the computer among many contributions to the world. But British rule ended after World War 2 as the British Empire was broken up. 

The Fifth global superpower was the USA, from about the 1950s (while it was obviously strongly rising already during the late stages of WW2) till about now. Nuclear bombs and energy, Rock and Roll and Rap. Soap operas and reality TV. The center of finance. Undisputedly strongest military by just about any means. Sent man to the moon, operated the first re-usable space-plane (the Space Shuttle) and now is getting ready to have commercial space travel operators.

(And the sixth will be China from right-about-now, Funksoulbrother. Maglev baby!)

The pattern is not perfect but fits rather nicely. Now to the good parts:

WHAT HAPPENS AT TRANSITION OF K-WAVES

So the cool stuff.. There are many rather clear patterns in a geopolitical and even social and cultural sense, from the transtion from the old hegemonic power to the new. First, that there usually are wars around the time that signal the shift. The wars don't have to be 'against each other' although they can be. From a military point of view, the newcomer will be far more able to utilize new technology and weapons vs the older power. Compare the navies of WW2. Going into the war the king of the oceans was the 'battleship'. Aircraft carriers were untested weapons, while costing similar levels as battleships. The Royal Navy of Britain had the most battleships. At the end of the war Britain knew that aircraft carriers ruled but the USA had produced massively more aircrafft carriers than Britain. In a similar way many of the very costly weapon systems that the USA has in its military arsenal today are relics of the cold war that did not provide anywhere near the value of what their costs had been - stealth bombers for example - compared to far more modern weapons (drones, cruise missiles) that any new aspiring military power could develop today at a tiny fraction of the cost...

The old superpower is stuck fighting many costly wars in trying to maintain the big empire, The new superpower tries to avoid wars altogether, but is happy to finance the wars of others (for a profit) and to sell weapons to all sides... The old superpower goes ever more into debt and has economic problems and resorts to high taxes resented by the population, while the new superpower gains from export sales and profits from financing, thus having a prosperous and happy population with enviably low taxes. The big businesses come of course mainly from the rising superpower (often also the newcomer companies buy traditional big famous companies of the past power). This pattern holds (to varying degree) with all previous transitions but it is very strongly visible in the transition from British hegemony to the US period. The US didn't want to get into WW2 and the US economy sold and supplied anyone who could afford to pay, until the USA joined the war on the side of the Allies (there were many Americans who wanted USA to join Hitler's side - yes, and others who wanted the USA to not join WW2 at all, until Pearl Harbor happened).

New trends and inventions arrive at a disproportionately large degree from the rising supepower. New artforms are discovered there. The new superpower tries to adopt all sorts of ideas and trends from the old superpower idolizing it and ranking it 'better' at just about anything. Meanwhile the cultural, scientific and business leaders of the old world want to go succeed in the new one. Oh and the cultural 'contributions' of the arising superpower are seen as 'frivolous' and 'not really art' in the older world.

Please note that having one nation as the prevailing superpower does not mean nobody else can contribute. While the USA was the clear global leader especially in almost all areas of technology, it ws the Soviet Union which first went to space and then was first to put a man into space. The position of hegemony does not give a nation monopoly on invention or leadership.

So look at the past 50 years or so in culture. What have the Americans given us? Rock n Roll, what many called devil's music. 24 hour news. CNN faced the same complaints as it tried to fill 24 hours of time with news material, one could argue it spawned the speculation-news by the panels, to speculate on anything when no real news is available since the last update some hours ago today (witness CNN coverage of MH370). Andy Warhol who would make 'art' out of images of cans of Campbell's Soup. MTV and music video - an artform that was widely ridiculed by early rock and pop artists who thought it trivialized them. Hiphop in dance. Rock n Roll and Rap in music. Social media, citizen journalism and the 'selfie'.. Blue jeans became acceptable attire as did the T-Shirt and the baseball cap. Madonna taught girls to wear underwear on top of their clothes... And what did British pop/youth oriented artists do? They aped and adopted the American innovations often faster than their American cousins. Meanwhile what did Americans idolize? Anything from Britain was the really 'classy' stuff. Monty Python and The Economist and Benny Hill and the Beatles and the Rolling Stones and The Guardian and Ricky Gervais and the BBC etc. For Americans, if it came from Britain, it was considered to be inherently classy.

Again this is nothing new. Look at the previous transition. In the first half of the 1900s what had been 'proper' theater and live music, became the gramophone, cinema, radio and television. Britain at the lead of all those, especially the recorded music industry and early (AM-technology based) radio broadcasts. Classic 'real' books were turned into formulaic bestsellers (deplored by the literary critics) such as Agatha Christie's books and at the end of the period we get of course Ian Fleming's James Bond as the prototype action thriller bestseller book series. Not a high mark in literature even as his books were at one point the most-sold fiction of all time...

The same pattern holds in the previous cycles too. The British admired the German contributions to art and science. German artists and engineers wanted to succeed in London and Britain. Half a century prior, the Germans admired the French, etc.

What can we take from this? That new artforms will probably be now created/invented in China and they may often seem frivolous and 'not really art'. Like say videogaming. Yes, videogaming is traditionally centered in Japan and South Korea but right now China is catching up to them in total gaming revenues and has far more gamers. There is a large programmer generation of young recent college grads in China who will give us our next Angry Birds and Super Mario Brothers and Grand Theft Autos.

What will original media be like on mobile? One original music format not existing in other music platforms is the ringback tone (I do not mean ringing tone). Ringback tones (invented in South Korea) are a massive industry in China already and delivering a lion's share of total industry revenues for the Chinese music business. One of the beauties of ringback tones is that they cannot be pirated. So the music industry loves ringbacks. But ringbacks were a technical solution to play essentially the same song as we might buy as an MP3 file. What completely new media appear on mobile? Augmented Reality is one possible type. Expect a lot of that talent and creativitiy to soon come from China.

Yes, there will be violinists and opera singers and ballet dancers too. And rock and roll bands, rap artists, hiphop dancers too. But of newest types of artists - say 'selfie' photographers. Would we be quick to accept 'selfies' as art forms or just frivolous egostistical nonsense? But remember what people thought of rap as 'not music' and MTV music videos as 'inferior' forms of music performances. If the pattern holds, and signs are strong it will, China will discover and enable the launch of new artforms and big artists in it. Just like how the USA gave us Elvis Presley and 50 Cent.

Language? Yes, currently English is the most used language on the planet but it may not be for long, as Chinese is the second most spoken language already. As the USA diminishes in economic, geopolitical and industrial leadership, and China replaces that - Chinese will become the preferred language for young ambitious youth to study. Just how we (non-English native speakers) did in the past century. Ni Hao os hello. Xie Xie (pronounced she-she) is thank you. There you go, you've already started... :-)

THEN WHEN WAR COMES

Military focus. The old superpower has invested heavily in what was once the necessary technology to win the past wars. British built battleships up to WW2. The Americans have built such a massive amount of aircraft carriers, that of all carriers afloat, more than half are American today. And American carriers are also far larger than those of other fleets. And the majority of whats in other fleets - the majority - is with US allies. But the USA has a tradition of wanting to have these superweapons because they won the last world war for them.

China doesn't need them. Yes, they have their first carrier and will build a few. But China has already developed an 'aircraft-carrier-killer' missile. One missile that can sink the carrier and is such a powerful weapon, currently no 'anti-missile' defense systems can stop it. Oops. Just like how in World War 2, the Japanese sent some aircraft from carriers to sink the US and British battleships that were on the Pacific. The new weapon can be very effective in eliminating what once was the dominant system.

Then its cyberwar. We've just heard the US accuse China of cyberwar and espionage. Modern fighter planes are designed to be so unstable, that a human cannot fly them. They can only stay in the air because computers make so many adjustments in fractions of seconds, that the unstable airplane seems to fly straight. All modern fighter planes are like this. They call it 'fly by wire' as the pilots controls do not move the tailfin and controls. The pilot now sends controls to the flight computer, which then makes the necessary adjustments. Same is increasingly true of most major weapon systems. The modern big 'battleship' is the destroyer (a smaller ship but modern destroyers have more destructive power than the mammoth battleships of WW2). 30% of the total cost of a modern warship is .. electronics. The computers, radars, communication systems, etc. 

Now consider cyberwar. All those combat systems are networked computers. They are increasingly built to communciate with each other. And they get regular software upgrades to add new functionality. What if you were able to insert a virus or trojan into one of those military systems? Remember the case of Iran being able to take down one of the US spy drones? They didn't shoot it down. It is not known how Iran was able to bring it down, but it is believed that Iran had been able to hack into it. Take control of it. 

Imagine a war, and the other side can suddenly make your fighter jets unable to target enemies. Or even if able to target, not launch any missiles. Or able to launch missiles but right after launch, the missiles lose targeting contact to the jet that fired them and aimed them. Worst, what if someone were able to take control of your missile after you fired it, and turn the missile to come and shoot YOU down?

With traditional bullets and 'freefall' iron bombs this was impossile. The bullet was shot, it flew a ballistic trajectory and if the aim was good, it would hit the target. The bomb dropped, if the bombing sights were accurate, would hit close enough to the target to make big holes in whatever was underneath. But guided weapons, computers, radar, and communication gear are suspectible to jamming and worse, Now having the super-expensive F22 Raptor and F35 Joint Strike Fighte becomes pointless if the enemy can make those expensive fighter planes impotent in the air.

So who is graduating the most computer scientists? China. Who has the most mathematicians? China. Who is graduating the most communication engineers? China. What is America graduating from its universities? Cinema majors, dance majors, all sorts of new media experts like in social media.. And tons and tons of attorneys, accountants, businessmen. But ever less mathematicians, ever less engineers. And what do those few engineers do? Do they go work for the military in the USA? No. They go to work in Silicon valley. If the USA does buy services from them, odds are that work goes into maintaining and updating those systems on the aircraft carriers, destroyers, fighter planes, tanks, stealth bombers etc. Not in preparing the USA to win a cyberwar.

China will have prepared relatively little with the older possibly soon-obsolete weapon systems, their manpower and tactics. They will have devoted most of their investment into mastering the newest technologies. So take stealth. The USA has pioneered stealth aircraft and spent countless billions in the F117, B2, F22 and other stealth systems. China is only now test-flying its first prototypes of its first stealth fighter (no other country, not Britain, not France, not Sweden, not even Russia, has yet made stealth warplanes). But China's stealth fighter has been able to incorporate a lot of the latest that the USA has. Perhaps some of that was done by espionage, perhaps simply by studying the designs as the US planes have been featured quite often in various publications and if you know where to go, can be seen and photographed when they take off and land.

TECHNOLOGY AND MEDIA

So then our areas of interest. Britain was able to capitalize on recordings, cinema, radio and early television. By the time color movies were popular and TV went into color, the USA had taken over. James Bond still helps keep what is left of the British cinema industry alive but its nothing compared to Hollywood. There is the occasional surprise British TV hit globally (The Office, Top Gear) but most globally circulated TV series now come from America. The USA also came to dominate recordings and radio. But the internet? Britain was out of the game and offers a trivial contribution (the Guardian, BBC) to the internet media today. 

Expect this same pattern now to repeat with China growing and the USA shifting to the sidelines. I've been reporting for example how strongly Chinese newspapers have embraced PAID branded news content on mobile, via MMS and SMS. When will American newspapers wake up to this MASSIVE revenue potential? Not until half of them have died, I'm sure. So we will see the time coming when Chinese newspaper tycoons will start to come a'shopping in America, to buy the NY Times or Washington Post or San Francisco Chronicle. Owned by the Chinese. 

Or look at Facebook and QQ (QQ is the closest thing in China to what is Facebook in America). QQ was far faster to discover the massive revenue and profit on mobile. Now Facebook has followed. But the second largest social network on the planet behind Facebook is... QQ. And it is far more profitable. But then look at all the other online and mobile services in China and compare to their western counterparts. All of China is 'mobile first'. If the future is on mobile, that gives the Chinese players a massive head-start. And they will come soon shopping for expansion. Just like we saw General Motors and Ford expanding their car empires globally, and Coca Cola and Levis and Pepsodent. We will increasingly see Chinese brands doing that in the first half of this century. Sometimes buying existing Western brands (like say Lenovo which bought IBM's computer business and the Motorola handset business), other times bringing their brand directly to us (like Huawei, ZTE).

How inconvenient is it, if you find something at a store. You pick up your phone (lets assume you have a smartphone and you have already downloaded and installed a shopping app), and you see the same item on the shopping app, but at a cheaper price. Then you wait until you get home - because they need the credit card info, and you know its extremely clumsy to enter the 16 digit code etc on your tiny touch-screen. And at home you have the PC. So you go home, then go online, then get to the shopping site, then order your item. Then enter you credit card info. Tedious.

In China if you've got you mobile shopping account set up, you are in the store, you take out your phone (doesn't need to be smartphone, can be featurephone) go to the big mobile shopping service, you select the item, see its cheaper, you hit a few keys and your account is charged the amount and the purchase is completed. Simple. Fast. Easy. Not only that, you may belong to a shopping club which will let you go to a speciic mall or shop, where today you get BONUS discounts simply for 'group shopping'.. That is the power of mobile. The velocity of the monetary transactions is faster. The money is moved more rapidly from one economic entity (the buyer) to anohter (the seller) who can then move more rapidly to buy more inventory... The whole economy is accelerated as we increase the velocity of monetary transcations. But Americans still pay by the slowest of invented payment methods, the cheque haha...

What of 'mobile first'? Now we hear from 20 different industries, by their established leaders, like HP the biggest desktop PC maker, or Google the biggest internet company, or Sony the biggest home electronics giant or Visa the biggest credit card company or Starbucks the biggest coffee shop chain - that they all are thinking mobile first in some way or another. But most of the USA is very VERY far from even talking 'mobile first' far less acting mobile first. Most don't have a mobile strategy. Most who do, only have a smartphone app and think that is a mobile strategy. Its precious few who actually think mobile is front and center of their future (Starbucks, Google, Coca Cola, Facebook are a few exceptions to the rule). Microsoft has a new CEO who does now talk the talk, but the company just took over Nokia's handset business and makes by far the most of its revenues and all its profits on its traditional business of the desktop Windows and Office Suite and Xbox. Mobile is generating a massive loss for Microsoft. It will be years before Microsoft might be a 'mobile first' company, in the way say Google and Facebook are today. And most US companies are nowhere near where Microsoft is, in wanting to pursue a mobile direction.

Then go to China. Mobile is THE channel for 'everything'. The CEO of WPP China said that in China all advertising is mobile first, but if the advertiser is limited in budget or resources, then they go mobile-only!. Yes, mobile only! Can you imagine Nike or Levis or Corn Flakes doing that any day soon in America? Of course not. But look what Mary Meeker just wrote in her latest Internet Report? That the biggest gap in where advertising spending is wasted, and where the opportunity is, is that mobile is the most under-utilized medium (and print most wasted).

Marketing, media, advertising and customer service innovations will start to come increasingly from China. Like Facebook's 'discovery' of how to make money with mobile (copying QQ of.. China). Again, China will not have a monopoly on innovations and creativity. But being the biggest economy, where the newest consumer tech and mass medium is actually physically being manufactured (smartphones) and where the economy has fully embraced the ENGINE of the next wave of industrial growth (mobile), the gains will be made disproportionately in China.

What does this mean for you? It means you should monitor China. If you can, learn the language. If you possibly can, go visit it. Visit it often if you can. Schedule a stop-over in China on your next intercontinental trip, even if it means 'flying the long way' to where you are going. Then monitor the developments in and from China. Whatever is the area you are focusing on. What is happening in Chinese cars, Chinese airlines, Chinese hotels, Chinese music, Chinese whatever. Some of the developments are culturally specific that may never expand far beyond China, like how Cricket never became a global game (but Soccer did) as neither did American baseball (but basketball did). Some may be relics of the communist era. But much will come and many things we think now as 'quaint' or 'frivolous' from China will soon be as common as the generic Chinese restaurant is in every city, much as MacDonalds and KFC. 

Go visit Shanghai, go visit Shenzhen, go visit Beijing. Just how we went to visit New York, San Francisco and Washington DC in the past century. If you can't read Chinese, then get some good 'sources' for China news and developments. I'll of course on this blog keep an eye on whats happenin' across the bridge, haha, but I'm not a China specialist. Whenever you can, meet up with Chinese colleagues, talk with them, learn their culture and what is new with them. Remember, we will be learning and mimicking the Chinese just in the same way as the world learned from and mimicked the Americans in the past 50 years.

If you took just a 'basket' of major US corporations in the 1960s, bought their shares, you'd have made far more money than if you bought a similar basket of British, French, German or Spanish companies of those same industries. The US economy grew faster and created more wealth. Now it is China's turn. As long as you aren't thinking short-term as in a few years, but think about your kids for example, more about a decade or more, then Chinese investments (as a basket across industries) should be outperforming all other markets. Yes, a given country might rise even faster, from the Emerging World. But China will do far better than any older more established market of today. Again, I don't mean this as an investor blog haha, so the effect won't be obvious in a year or two. But when measured over decades, this is now the period of China, no longer the era of the USA. And those Chinese companies will be the next global giants (powered disproportionately by newest technologies, starting with mobile, then green tech, nanotech, AR and whatnot).

Also recognize what this means to the USA and Americans. They are now in an 'inevitable' decline in their relevance, as an economic and financial power, as a geopolitical and military power, and as a cultural and social power. It will be very painful for the Americans to take, as the world loses interest in them and starts to admire the Chinese instead. To understand what this can bring, look at Britain and how much it suffered and its population bitterly complained about the past glories of the days of empire. And tried to hold on to a special place on the world stage but obviously was being replaced by the USA. Britain went into years, decades even of internal bickering, labor strife and the blame-game. It wasn't really until Margaret Thatcher and the Falklands war, that kind of shook Britain out of the decades of despair into a state of discovering its new place as one of the major powers while no longer a superpower, and able to feel proud of itself again. A similar painful stage is now coming to the USA, and they will not want to hear that they are falling behind. They will easily become provoked and angry when people start to say that. Yet it is.. (sorry).. inevitable, if Kondratiev's Wave holds true for this next cycle - and all signs suggest the theory holds. The USA has already committed all the typical steps and problems that occur to propel the downfall - look at how much the nation has gone into debt - for what? To finance two lengthy wars and to give the millionaires big tax brakes. Those debts will have to be paid - and who owns most of that debt? China.

So thats whats on my mind today. The Kondratiev Wave. Its come to fulfill yet another cycle. China will have 50 years now (maybe 55) until the next global hegemony power steps in. Who will that be? Maybe India, maybe Russia, maybe Nigeria, maybe Brazil, maybe Indonesia, maybe a unified EU/Eurozone. Maybe a nation that today doesn't exist (remember how Germany didn't exist when France was the global hegemony power before it). 

Comments

[newbie]

// US is gearing towards robotics, no need of cheap labor force

1. China is no longer cheap labor force. Cheap labor is India etc.

2. Robotics would need no labor force at all, neither cheap, neither expensive.

// bolsheviks and the SR were enemies

Chairman of the Petrograd Military Revolutionary Committee, that is formal head of October Revolution, was (leftwing) SR Lazimir. So, SR and Bolsheviks were very close allies in 1917

// the Communists purged the SR mercilessly after the October revolution //

Nope, given circumstances (civil war, SR coup attempt etc) Bolsheviks theatment of SR was exeptionally mild. Reason: they all knew history of French Revolution very well, it was their major cookbook and example kept in mind.

Look at SR Konratiev as example. Appointing a head of Institute, where he writes his major works, isn't really that harsh treatment.

"Communist" is too vague a category. Mensheviks, and many others, also were 'communists' at that time. And Kondratiev was a Marxist economist.

When Stalin's purges began, it could neither be called "communist purged SR", nor "Bolsheviks purged SR", since it were Bolsheviks themselves, who suffered most from Stalin's purges.

// SR were vastly more popular than the bolsheviks

Bolsheviks were popular in cities, since they were industrial workers ('proletariat') party. Leftwing SR were popular in rural areas. As peasants were majority of Russian population at the time, Bolsheviks declared 'proletarian dictatorship', that is, a power of a minority (workers, urban population) over majority (peasants, rural population). Right before Civil War started, it was set in 1918 constitution, that one vote of a worker is equivalent to five votes of peasants. Given about 20% of workers populace, it was 50:50 deal among Bolsheviks and Left-Wing SR. But capitalist parties, whose support at he time was stable nil, has no hopes in elections of any kind, and so they allied with the West and started Civil War.

Rightwing SR has no serious popular support, as Civil War has shown. They tried to be a third force in the war, with little success.

Leftwing SR were popular around 1917-19. But Stalin's purges began much, much later, when SR popularity was already ancient history.

[newbie]

// it is hard to believe that a planned economy will be more efficient than a free market economy //

India had free market economy, and China had not. Why then, it is China who is new world power, and not India?

[E.Casais]

@Leebase

It is a common pitfall to think that what applies to individuals is relevant in the same way to states. This is not so.

Case in point, linking with Tomi's post: during WWII, the UK ended up massively indebted to the USA. Did it provide leverage to the UK against the USA? Nope. On the contrary. The UK had to give up its gold and its patents (ASDIC, Radar, atomic technology, etc) to the USA.

China will "foreclose" when the USA will be in a comparable dire need of more financing, or some crucial manufacturing products (that it no longer manufactures), or, who knows, the support of a 100'000'000 strong army against an unforeseen global enemy.

[newbie]

// China will have 50 years now (maybe 55) until the next global hegemony power steps in. Who will that be? //

Nobody will be. Kondratiev's conjunctures are for growing capitalist economies. Each next capitalist economy center (CC, for short) is substantially larger than previous one. This (larger size) is a CONDITION AND REASON for a transfer of economic power.

UK was roughly 50mil populace, with controlled markets, mostly european, of about half-billion, 8-10 times of UK population.

USA was roughly 300mil, which is about 6 times bigger than UK, with half of the world (about 2-3 bn) controlled markets

China is 1+ bn. It would need whole world (7 bn or so) as its market space.

There's could be no next China, as there is no country of about 5 bn population with about 40 bn of markets.

Even usa-china transfer could be too huge a transfer to happen.

These are statements of a modified theory (compared to one that tomi explained), where several CC could exist at the same time.

So, there were no germany-uk transfer, according to this modified theory. Germany, as well as Japan, and also USSR from 1917 (not Russia), were these alternative CCs, this solving the confuse with different CC lines.

France never has been a CC, it was always a sub of UK. CC is an ecosystem, that is, CC is producing product and mostly all of its parts. France never achieved anything close to this.

When there's a lot of free place, CCs may either appear from nothing (Japan, Germany, Soviet bloc), or as a transfer from former CC (UK-USA). Or they could be consumed by a bigger rival, like Japan, Germany ad USSR were, which usually takes a form of war (WW2 and WW1 were such wars, where Japan and Germany disappeared). In the case of transfer, new CC should be substantially larger than old one.

New CC to appear from nothing should be about the same size as existing ones, to compete. Japan and Germany were alternative CCs to UK. They appeared due to proper 'protectionist' market regulations in 19th century

Soviet bloc, appeared in 1917, was an Boloshevik's feat (helped by bright minds like Kondratiev) to build artificaly, in a planned way. It competed with UK-USA, which made a bi-polar world.

These will be no more alternative CCs, since the current single CC (defined as ongoing USA-China transfer) is just too big for anyone to compete with it.

Chinese going to India, Africa etc, is not 'Go game' tactic. They just really need it, all these places.

USA, a previous and smaller guy, had no needs in India Africa etc., it was happy with control over EU, latin america and such. The only thing USA needed, is to block Soviet growth there, these wars in Vietnam, Korea etc. To keep the comparable size, but still a smaller and weaker rival (USSR) from growth.

However, China, given its size, needs to develop these markets, they need them just to go on.

That's why this chinese 'go'-looking strategy.

[eduardo m]

Nice post, Tomi.

However, you are missing some major barriers that China faces in becoming the next superpower.

--it lacks a government that is well-supported by the population. When an economic downturn happens, it is likely to be deeply rocked by mass unrest, as has happened many times in China's past.

--the finance system is deeply dysfunctional, with countless billions in bad loans and immense over-investment in real estate.

--thanks to the one-child policy, China faces a deep demographic crisis in the coming decades, with the labor force shrinking and the retired population skyrocketing

--continuing growth would require far more in energy and other natural resources than the globe can supply

--enormous ecological damage that impacts on the health of the population

--poor health, sanitation, and a lack of enforced regulations, and enormous corruption. Its so bad a large portion of millionaires leave and take up residence in the US or other western countries.

The problem is that China has grown explosively without first getting its political and societal fundamentals in order. It is entirely possible it will stall out and even go into decline starting in another decade or two.

[tontridge]

#include
#include

typedef struct
{
int linecount;
char line[80];
}page;

void get(page *paper);

main()
{
page *paper;
paper = malloc(sizeof(page));
get(paper);
printf("\n%s\n",paper->line);
free(paper);
}

void get(page *paper)
{

char ch= ' ';
paper->linecount = 0;
printf("\nEnter the thing buddy: ");
while (ch != '\n' && paper->linecount line[paper->linecount++] = ch;
}
paper->line[paper->linecount] = '\0';
}

[Winter]

@E.Casis
"The fact that violations of IPR are widespread in China just mirrors what took place in the USA and Europe in the 19th century at the height of the first industrial revolution."

Indeed. The Dutch example was especially clear. But even today it is obvious.

Every US politician or civil servant will stress at every opportunity tha patents exist to "Protect AMERICAN innovation".

Patents most definitely do NOT exist to protect non-American (i.e. non-USA) innovation. The same holds more or less in the EU.

[zlutor]

China always - except last two centuries - dominated "all its known world" - but via commence not military power.
Of course they used military power but for keeping trading ways open...

Their society is not individual, goals are set by the leaders and passing decades does not really count. See 'rare-earth metals' storiy: http://en.wikipedia.org/wiki/Rare_earth_element

So, things are just going back to 'normal' from their point of view... :-)

[zlutor]

@Tomi: any comment on this: http://www.4-traders.com/SAMSUNG-ELECTRONICS-CO-6494906/news/Samsung-to-Launch-Tizen-Smartphone-Soon-Update-18529378/

Let's see how it goes...

It either proves B95 - there is no (sw development) life outside of SV :-) - or give us some hope he is wrong on it... :-)

[Kirsi Kommonen]

Thank you, Tomi, for the big awakening... haha.

As long as the actual message in Tomi's post is not heard because people are too busy trying to come up with excuses and explanations for why this development should not be true, we are wasting time...

Believe it or not, the Chinese will buy and copy all knowledge they have not already got, branding expertise included. If Western brands and businesses are not willing to get away from their comfort zone and learn the ropes on the Chinese market, tough luck. Then they will either fight the same fight on their home soil and loose (even more embarrassing) or end up being bought up by Chinese capital. The only way to continue to be competitive in the long run is to be competitive against the Chinese.

On top of our children learning Chinese at school, they will learn the Chinese management and competitive strategies such as the Art of War at business school. And what do you know, the Chinese have believed that there is a 60 year cycle with everything in the world... or maybe 55, haha.

[Siasa]

@KK

You are simply just missing the point. While China is succeeding now, they simply can't continue dominating in the future because there are even more powerful countries. Countries like India. While China is actually destroying the future of the nation with the one child policy, India is not doing such thing.

It's inevitable that counties like India will dominate in the future. India has no aging industrial infrastructure they need to maintain. India can simply build a new modern one with a fraction of the cost China needs for maintaining the current aging industrial infrastructure.

[E.Casais]

@Baron95

"circa 1820, China's GDP was about 10 times LARGER than US GDP."

Perhaps true, but not terribly relevant. The USA was a country in the making, not very populated (actually, in the process of replacing the native population by an immigrant one), nor as intensely industrialized as the UK, for instance.

The real comparison is with Europe. I never saw complete figures for 1820, but during the whole 18th century, the two worldwide largest (by far) economies were China and India, with neighboring regions (like Siam or Ceylon) more prosperous and economically active (as measured by international trade, for instance) than many comparable European countries.

Current trends are indeed a return to the normal.

"just like the EU is a larger economy than the US, it punches way below their weight [...]"

And it will continue to do so, since the EU, despite the unified market and many common regulations, has neither a unified economy, nor a single culture, nor a common finance system, nor an integrated military.

"China, will be even further condemned to punch way below its weight internationally.*

And 50 years ago, it was "condemned" to remain a closed, overpopulated country mired in privations and underdevelopment. Chinese are actors of history, not subjects "condemned" to socio-economic iron laws promulgated by Western pundits.

"There is no global rush to watch Chinese programs around the world, no lines forming for the introduction of Chinese products"

As Tomi pointed out, historically one is generally beholden to the previously dominant originator of cultural production, which continues to enjoy its reputation, while the new entrant takes over and is being often initially considered as inferior.

There might not be line of fans to buy Xiaomi phones in the West, but it will not last long till the vast majority of mobile phones are designed and manufactured in China. It is already the case with PC, for instance. And again: in Western countries we are naturally oblivious to economic and cultural trends taking place in regions and amongst populations in which we are not interested (e.g. central or southeastern Asia, Africa, or Latin America). You will find plenty of Chinese cars in those regions, for instance. Chinese martial arts movies and Chinese eateries are popular all over the world as well.

I suspect many surprises are in store. I also agree with multipolarity and continued Japanese decline.