Recently in China Category

(Updated 9 Feb 2010 with new estimates of value captured by Chinese manufacturers.)
(Updated 12 Feb 2010 with cost estimates for the iPad.)

Wired's cover story this month proclaims that "In the Next Industrial Revolution, Atoms Are the New Bits".  As I address this "revolution" in the last chapter of my book, and as we are thinking hard about manufacturing issues as the LavaAmp moves forward, I have a few observations about the topic.

Chris Anderson, the Editor of Wired and author of the piece, asserts as the core of his story that

The tools of factory production, from electronics assembly to 3-D printing, are now available to individuals, in batches as small as a single unit. Anybody with an idea and a little expertise can set assembly lines in China into motion with nothing more than some keystrokes on their laptop. A few days later, a prototype will be at their door, and once it all checks out, they can push a few more buttons and be in full production, making hundreds, thousands, or more. They can become a virtual micro-factory, able to design and sell goods without any infrastructure or even inventory; products can be assembled and drop-shipped by contractors who serve hundreds of such customers simultaneously.

To summarize (and oversimplify) Anderson's article, the future is about innovators -- individuals, really -- having access to manufacturing for small runs that can be scaled up as needed.  Design will be digital, and as the appropriate machinery continues to increase in capability and fall in price, manufacturing will increasingly be digital too.

In a full snark-on mode response at Gizmodo is Joel Johnson, with a blog post entitled "Atoms Are Not Bits; Wired Is Not A Business Magazine".  The snark distracts from some otherwise interesting analysis, which you can read and which I will get to below.  The comments on the post are unusually perceptive and many were made by people who are clearly plugged in at a professional level to the atoms-and-bits manufacturing story.

The summary of Johnson's argument is that small production runs equal small money, prototyping is not manufacturing, labor is cheap in China -- so what?, and some/all of the small production available now may be the result of oversupply due to the recession.  Many of these points are probably cogent.

But even when it comes to demonstrably successful examples of bootstrapping from rapid prototyping to international sales, Johnson is skeptical.  Wired's Anderson points to Aliph, makers of the Jawbone line of headsets, as an example of a virtualized business (ie heavy on creativity and IP, but with minimal capital infrastructure) that supports his case.  Johnson shoots back with this:

It's great that hobbyists can make ever more complex items, sell them on the internet, and have a small business. But the same process used by Aliph to manufacturer Bluetooth headsets (and bear in mind it takes 80 people just to coordinate this!) is exactly the same outsourcing process used by Apple to make iPhones.

Here Johnson makes a very interesting point, but is so full of kvetch that he trips over it and misses the significance of his observation.  Of the 80 or so people working at Aliph, only 8-10 will be actually working directly on engineering or manufacturing.  At least half the full count will be in sales, marketing, and customer service, with the rest distributed in IT, administration, and support, and finally with a few (probably 5-8) executives atop the whole thing.  The interesting bit is that those 8-10 people are able to coordinate the same sort of production infrastructure used by Apple and its many hundreds (thousands?) of staff in engineering and manufacturing.  

When it comes to manufacturing labor and cost, there are a few other observations that are worth pulling into this discussion.

• First up is an article from The Economist last week about the results of recent teardowns on smartphones.  The numbers from iSuppli are interesting: of the four leading phones they took apart, the cost of components falls in a very narrow range of $170-180.
• Next is a blog post from Slashdot a couple of months ago pointing to stories about the value breakdown on the retail sale price for consumer electronics.  The post refers to some analysis by Edmund Conway at The Telegraph suggesting the value added for an iPod assembled in China is only "a couple of dollars".  On a ~$200 widget that, let's call that $2, or 1%.  That number should hold for anything resembling a smartphone, which means assembly labor plus overhead (and local profit) adds only about $2 to the phone, too.  (Update 2: iSuppli evidently already has done a teardown on the iPad, and "manufacturing costs" are about 5% of the total component costs.)
  
• Minimum wages in China range from ~$.4 to ~$.7 per hour, so that $2 in labor would pay for several hours total time.  This has to be an overestimate, by a long way.  I'll bet the assembly doesn't require more than a few minutes of labor per unit, with the rest going to overhead and profit.  Another issue is that Apple is probably paying Foxconn and its employees above minimum wage in order to retain trained labor, keep IP inside the company, and keep down the "fair day's wage" complaints from shareholders and critics in the US.  But that is just a guess, of course.  (Update 1: In a February 8th column at the NYT, Roger Cohen reports that a watch manufacturer in Dongguan is pulling down 5-8% of the retail price of various brands.  Wages are running $150-200 per month in that part of China.  I don't think this changes the numbers I've used above and below.)
  
• With so little labor involved in the assembly, what other options are available to manufacturers today?  At the US minimum wage, spending that same few minutes assembling a doodad in the States would add a few more dollars to the cost -- not so much.  I'd pay that difference to know something was made here in the States.  The overhead on the factory is another matter, though.  It could be that paying for the real estate and the rest of the capital equipment makes assembly in the US uncompetitive.  (Though it would be the construction of the factor and the initial installation of the equipment that made the difference in cost -- the material cost of the building and the equipment would be roughly the same in China.)
  
• That said, there is plenty of industrial land in Detroit laying fallow at the moment.  Tax breaks to build assembly plants in depressed US cities could probably bring a lot of those jobs home.  Yes, they would be minimum wage, but there are a lot of people here waiting for any job.
  

If you add the value of the software to the cost (say ~$30 on an iPhone), then you dilute the value of the assembly labor even more.  Thus even more of the value of the object is in bits rather than atoms and their arrangement, and the difference in wages between China and the US is diluted further still.  Even the arrangement of the atoms is really about bits, since all the sub-components of an iPhone roll off of manufacturing lines with minimal labor involved.

Around the office, we have been pondering many of these issues as they relate to biological technologies and the LavaAmp in particular.

We continue to refine the hardware design of the LavaAmp, and it looks like we have the production hardware down to 5 or 6 components, 4 of which are injection molded plastic.  The labor will only be in assembly of the final box, as all sub-assemblies should all come off automated fab lines of one kind or another.  All the real cost is in the design and tooling -- once we get up and running the per unit costs should be quite reasonable.

The reason that this is worth a larger discussion is that Biodesic is exploiting all of the trends and resources that Anderson writes about, however we are building not a consumer electronics widget but rather a tool that will facilitate the manipulation of biological systems.  As the boundary between bits and atoms blurs in one area (consumer electronics), the resulting improvements in design and manufacturing capabilities create opportunities for further blurring the boundary between bits and atoms in biology.  The LavaAmp should enable many more people to query DNA in their environment, and possibly even to play with PCR assembly of genes and genetic circuits, which is an experiment I am keen to try.  Trends like this will continue to put technologies into the hands of an ever wider range of people around the planet.

If you work with this sort of technology on a daily basis, what I wrote above comes as no surprise.  But that describes a very small minority of hardware and wetware hackers.  Many more people will come to realize it soon.  New manufacturing realities and the resulting new tools are about to contribute substantial change to our economy.

Yesterday's New York Times carries a story by Andrew Jacobs on a new UN study that describes the effects of industrial pollution on China's health, environment, and economy.  The article contains some slightly different estimates than my earlier posts on this issue, The Future of China's Economy, and More on China's Economy, Food Production, and Food Demand.

Here is the press release about the report from UNEP, and here is the report itself, "Atmospheric Brown Clouds: Regional assessment report with focus on Asia".

Here are a couple of tidbits about China from the Times story:

Although their overall impact is not entirely understood, Professor Veerabhadran Ramanathan, a professor of climate and ocean sciences at the University of California, San Diego, said ...some studies suggest that the plumes of soot that blot out the sun have led to a 5 percent decline in the growth rate of rice harvests across Asia since the 1960s.

...Henning Rodhe, a professor of chemical meteorology at Stockholm University, says... “The impacts on health alone is a reason to reduce these brown clouds,” adding that in China, about 3.6 percent of the nation’s annual gross domestic product, or $82 billion, is lost to the health effects of pollution.

In addition to the general effects of warming that reduce agricultural yields in Asia, farmers are evidently facing a reduction due to decreased insolation.  As long as our energy production is "carbon-positive", this is going to be a problem.

The health impact estimate above is on the high end of those I have found, but I don't see any reason to discount it relative to the others.  I wonder how long it will be before Asian pollution starts to have a measureable effect on health here on the West coast of the U.S.  Is anybody looking for this explicitly?  A positive correlation would have very interesting consequences in our international political economy.

The IHT is carrying news of a new land policy in China.  Here is the lead:

The print version I picked up in Hong Kong today is a bit different.  It carries this crucial bit of information:

It is unclear how much the plan is intended to increase total per capita income in rural areas.  I think this is particularly important because it will strongly influence how much almost 800 milllion people (according to the article) have to spend on food.  Implementing the land reform plan may put a time scale on the increase in food demand that I speculated about recently in "More on China's Economy, Food Production, and Food Demand".

If the numbers in that post are mostly correct, this would mean that if China is going to stay self-sufficient with respect to food supply needs to increase its domestic production by something like 20% in the next 11 years.  They have their work cut out.

What a difference a few years makes.  SB 1.0 was mostly a bunch of professors and grad students in a relatively small, stuffy lecture hall at MIT.  SB 2.0 in Berkeley expanded a bit to include a few lawyers, sociologists, and venture capitalists.  (I skipped 3.0 in Zurich.)

At just over 600 attendees, SB 4.0 is more than twice as big as even 3.0, with just under half the roster from Asia.  The venue, at the Hong Kong University of Science and Technology, is absurdly nice, with a view over the ocean that beats even UCSB and UCSD.  Kudos also to the organizers here.  They worked very hard to make sure the meeting came off well, and it is clear they are interested in synthetic biology, and biotech in general, as a long term proposition.  The Finance Minister of Hong Kong, John Tsang, spoke one evening, and he was very clear that HK is planning to put quite a lot of money and effort into biology.

Which brings me to a general observation that Hong Kong really cares about the future, and is investing to bring it along that much sooner.  I arrived a day early in order to acclimate a bit and wander around the city, as my previous visit was somewhat hectic.  Even amid the financial crisis, the city feels more optimistic and energetic than most American cities I visit.

I will have to write up the rest of the meeting when I get back to the States later this week.  But here are a few thoughts:

As of the last few days, I have now seen all the pieces necessary to build a desktop gene printer.  I don’t have prediction when such a thing will arrive on the market, but there is no doubt in my mind that it is technically feasible.  With appropriate resources, I think it would take about 8 weeks to build a prototype.  It is that close.

Ralph Baric continues to do work on SARS that completely scares the shit out of me.  And I am really glad it is getting done, and also that he is the one doing it.  His work clearly demonstrates how real the threat from natural pathogens is, and how poorly prepared we are to deal with it.

Jian Xu, who is better known for his efforts to understand the human gut microbiome, spoke on the soup-to-nuts plant engineering and biofuels effort at the Qingdao Institute of Bioenergy and Bioprocess Technology, run by the Chinese Academy of Sciences (QIBEBT).   The Chinese are serious about putting GM plants into the field and deriving massive amounts of energy from biomass.

Daphne Prauss from Chromatin gave a great talk about artificial chromosomes in plants and how they speed up genetic modification.  I’ll have to understand this a bit better before I write about it.

Zach Serber from Amyris spoke about on their biofuels efforts, and Amyris is on schedule to get aviation fuel, diesel, and biogasoline into the market within the next couple of years.  All three fuels have equivalent or better characteristic as petro-fuels when it comes to vapor pressure, cloud point, cetane number, octane, energy density, etc.

More soon.

Over the next two decades the Panda may begin to feel peckish. A hard look at China's food production and resource availability suggests more difficult times ahead. And this is just one potential problem. Throughout my travels and reading over the past 5 years, I have noticed that people with lots of experience on the ground in China question whether the current pace of development is sustainable.

The upshot of all this may be that the easy gains have been made. In the years to come, China will be faced with extremely hard choices about how to simultaneously maintain economic growth, clean up its environment, and feed its population, particularly when it appears that most of the expected increase in food demand due to rising incomes has yet to be realized. So, following up on last week's post about The Future of China's Economy, here are a few more thoughts that frame future potential stumbling blocks.

Running Out of Cheap Labor, and Coming Home for L.A.'s "Clean" Air

John Pomfret, formerly the Beijing Bureau Chief for the Washington Post, definitely has a lot of experience in country. In "A Long Wait at the Gate to Greatness", he asks, "Is China really going to be another superpower?"

His short answer is, "I doubt it." In more depth:

It's not that I'm a China-basher, like those who predict its collapse because they despise its system and assume that it will go the way of the Soviet Union. I first went to China in 1980 as a student, and I've followed its remarkable transformation over the past 28 years. I met my wife there and call it a second home. I'm hardly expecting China to implode. But its dream of dominating the century isn't going to become a reality anytime soon.

Too many constraints are built into the country's social, economic and political systems. For four big reasons -- dire demographics, an overrated economy, an environment under siege and an ideology that doesn't travel well -- China is more likely to remain the muscle-bound adolescent of the international system than to become the master of the world.

Pomfret goes through the same sort of list of potential stumbles that I compiled for last week's post, and adds a few more. He notes that that population control policy has produced an inverted population pyramid, which requires a smaller, young population cohort to support a larger, older cohort as the latter leave the workforce. This while life expectancy has more than doubled in the last fifty years. Thus the expectation is that the workforce will shrink over the coming decades, labor costs will rise, and more of that labor will be put toward supporting non-working elders.

Pomfret also observes that:

One important nuance we keep forgetting is the sheer size of China's population: about 1.3 billion, more than four times that of the United States. China should have a big economy. But on a per capita basis, the country isn't a dragon; it's a medium-size lizard, sitting in 109th place on the International Monetary Fund's World Economic Outlook Database, squarely between Swaziland and Morocco. China's economy is large, but its average living standard is low, and it will stay that way for a very long time, even assuming that the economy continues to grow at impressive rates.

Unlike many observers, he doesn't discount the potential drag on economic growth from pollution, leading off with a personal anecdote:

When my family and I left China in 2004, we moved to Los Angeles, the smog capital of the United States. No sooner had we set foot in southern California than my son's asthma attacks and chronic chest infections -- so worryingly frequent in Beijing -- stopped. When people asked me why we'd moved to L.A., I started joking, "For the air."

Pomfret is perplexed about why Westerners seem to be ignoring pollution's ~10% hit to the Chinese GDP: "Somehow, though, the effect this calamity is having on China's rise doesn't quite register in the West." As I discussed in the earlier post, this shortsightedness confuses me, too, particularly when you combine the effects of pollution with the demands on domestic water and land to provide food for a hungry population.

Missing Food Demand

In a report last year from the Economic Research Service of the USDA, Fred Gale and Kuo Huang suggest that China may face increasing difficulties in meeting domestic food demand. I find their argument quite compelling and will later state it even more firmly than they do.

Gale and Huang observe that growth in food demand has, unexpectedly, not kept pace with overall economic growth. Here is the conundrum: "Given the responsiveness of food demand to income growth, China's rapid growth of 9-10 percent per year suggests that its demand for food is growing faster than its production capacity. ...How is it that China's surging income growth has not pushed its demand for food beyond its domestic production capacity?"

The main factor the authors identify is that while a small, wealthy fraction of the population now evidently has enough to eat, and thus spends additional income on quality rather than quantity, a large majority of consumers have yet to fill their bellies.

The underlying cause for lagging food demand is not surprising once you think about it. Because economic benefits, in particular income gains, disproportionately go those with already high incomes, and because those with high incomes tend to spend on quality rather than quantity, the total volume of food consumed by the Chinese population has risen only slowly. The authors note that:

...Expenditures by the top tier of households--China's emerging class of professionals and entrepreneurs -- have grown at double-digit rates. Food expenditures were nearly stagnant for the bottom 20 percent of urban households. Food expenditures by rural households grew 2.6 percent annually.

...Income growth for low-income urban and rural households--the majority of China's households--was well below GDP growth. ...Average income for the lowest decile of urban households actually declined slightly between 2000 and 2003.

This suggests to Gale and Huang that, "Food consumption and income growth patterns may explain how China has been able to remain self-sufficient in most food items." The authors stop their argument here, but I think they could go further.

The Still-Hungry ~1 Billion

The lag between GDP growth and food consumption has important implications for future increases in food demand.

Based on the statistics compiled by Gale and Huang, it looks to me like more than 90% of the Chinese population has a per capita annual income below 10,000 Yuan. This is an interesting figure for considering future food demand because Gale and Huang also demonstrate that pork consumption in China continues to rise as a function of income until about 10,000 Yuan. Poultry and seafood consumption also rise strongly as a function of income, but notably don't saturate like pork at 10,000 Yuan. More meat consumption requires more grain and more water to raise the animals (see a previous post, "China and Future Resource Demands").

Here is where I think the argument could be made more forcefully.  As best I can make out, what all the above means is that most of the increase in food demand we might expect from rising incomes in China has yet to be realized; more than 80% of the population is, "Still at income levels where they demand increased quantities of many foods as their income rises."

So where is China going to get all this food? One answer is imports, another is to go offshore to buy or rent farmland (see the "China and Future Resource Demands" post), and yet another is to push domestic production. But the latter may be difficult.

"Who Will China Feed?"

This is the question asked by Fred Gale and Bryan Lohmar in an essay in Amber Waves, the USDA magazine. They elaborate their surprise at China's ability to feed its population: "While China has emerged as the world's leading importer of soybeans, vegetable oil, cotton, wool, rubber, and animal hides, it has been surprisingly successful at meeting the basic food needs of its population of more than 1.3 billion people, and it has stepped up as a major food exporter."  (They make no mention of the income inequality and consequent food spending gap explored above.)

Given the pace of growth and limited resources, they ask, "How long can China sustain this momentum?"

China imports only small amounts of premium-grade rice, minor amounts of wheat in most years, and no corn. China has maintained agricultural self-sufficiency in grains as it carries out the world's largest and fastest urbanization and industrialization. Economic development is increasing competition for scarce resources in China, but growing incomes are allowing most consumers to increase consumption of fruit, vegetables, and livestock products.

China has become a significant food exporter by ramping up production in many sectors and gaining world market share. Indeed, China has been a net food exporter for most of the last three decades. China dominates world markets in a variety of products areas, including garlic, apples, apple juice, mandarin oranges, farm-raised fish and shrimp, and vegetables. At times, it seems that China has suspended the law of scarcity by boosting production in many sectors and selling at low prices without having to sacrifice production in other sectors.

One way to look at this is that China is exporting high value "food products", not staples that the majority of Chinese themselves consume. This strategy contributes to the trade surplus, but the use of land to grow crops for export must clearly be balanced with domestic demand for staples. This balance also points to the fact there is some room for moving crop land now used for exports back into production to satisfy domestic demand.

Here are two key paragraphs on how China has increased its food production yields:

Investments in research and development raised the quality of inputs and the efficiency of their use over the past two decades. Research into improved varieties and quality of seeds surged after the late 1970s. By the turn of the century, China had more agricultural researchers than any other country, and a larger budget for public sector agricultural research than any developing country. Fertilizer quality in China also has improved over the past two decades, as farmers move away from applying pure nitrogen fertilizer to applying more nitrogen-phosphorous- potassium blends. China has been importing breeding animals--which are often crossed with domestic breeds--to improve efficiency of weight gain, improve disease resistance, and raise milk output. The government has offered subsidies to farmers for dairy herd improvement for several years.

China today is the world's largest agricultural producer and consumer. With an estimated 10 percent of world land resources and 6 percent of world water resources, China produces 30 percent of the world's rice, 20 percent of the world's corn, a fourth of the world's cotton, an estimated 37 percent of the world's fruit and vegetables, and half of the world's pork. For most products, China's world share of production is close to or exceeds its 20-percent share of world population. China, however, has exploited the means of coaxing food and fiber out of a limited natural resource base to the extent that additional gains will be more difficult than in the past.

Gale and Lohmar go on to discuss water and soil quality issues, fertilizer and pesticide use, and industrial pollution, while briefly addressing labor costs:

China has been able to maintain low-cost production in international agricultural markets largely because of low labor costs. Historically, Chinese farms have raised large amounts of output from small plots by using labor-intensive production strategies, such as growing multiple crops per year, intercropping, and growing vegetables in courtyards. But hundreds of millions of rural workers have found nonfarm employment over the last two decades. The flow of labor from rural areas enabled China's industry and cities to boom, while wage growth was relatively stagnant for much of the last two decades.

China's rapid economic expansion appears to have finally exhausted the pool of under-employed workers. Since 2003, wages have been rising at a double-digit pace. The dwindling pool of available rural workers is resulting in increased mechanization of harvesting and planting. Anecdotal evidence also suggests that intensive agricultural practices, like double-cropping, transplanting seedlings by hand, and small-scale hog production, have decreased due to labor shortages and high wages.

So, as John Pomfret suggested in his piece in the Washington Times Post (!), labor costs are already affecting food production. But the bigger issue is in trying to identify where, exactly, future gains in production are going to come from.  Rough estimates of the probable increase in demand give some context for the magnitude of the problem.

Returning to the correlation of meat consumption and income: It appears from FAO and USDA data that China is bound to eat more meat, especially pork, as incomes continue to rise.  Growing meat for human consumption creates a big lever in water and grain markets.  Producing a kilo of pork requires approximately three kilos of grain, and producing a kilo of beef requires about eight kilos of grain.  Based on the data in Gale and Huang, in appears that as income rises from 3000 to 10,000 Yuan, pork consumption increases by about 50%, to ~23 kg, which will require about 70 kg of grain.  This in addition to the ~30% increase in grain products (~6 kg) directly purchased by households as incomes rise over that range.  Fish and poultry demand about doubles, too, from ~8 to ~16 kg per capita, but estimating the additional grain consumption here is hard.  I'll hand wave and make a low-ball estimate that it will take only another 16 kg of grain to feed the the fish and poultry.

Adding this all together, that is an additional per capita  increase in grain demand of more than 90 kg.  Here is the kicker: that number appears to hold for at least 500 million people, perhaps as many as a billion.  That amounts to at least 45 million tonnes (metric!) of grain, perhaps as much as 90 million tonnes.  The Chinese population would then still be consuming only about 80% as much animal protein per capita as Europeans, and only a little over half as much as us gluttons in the U.S.

China produces about 500 million tonnes of grain per year (see the USDA ERS China Ag and Economic data page), so supplying increased meat demand with domestic grain supplies would require a (very rough) increase of between 10 and 20% in total yield.  That doesn't necessarily sound like much -- I actually expected the increase to be a larger percentage of current harvests -- and might be accomplished by breeding, genetic modification, and better farming practices.  But as detailed in my earlier posts, China is losing both arable land and usable water.  With only 7% of the globe's arable land to work with (ignoring losses to due climate change and prior poor farming practices), the country is going to have to work very hard indeed to squeeze more grain out of those limited resources.

That leaves imports, which means competing on the world commodity markets for food.  In combination with rising labor costs at home, all this points to rising domestic prices and rougher going for the Chinese economy.

It's hot and damp in southeastern China this time of year.  So reports a relative of mine working in the area who called to chat a few days ago.  He was suffering through another day without air conditioning, in the middle of yet another regional power outage due to a shortage of coal.  This occurrence is evidently not uncommon.  We hear a great deal in the U.S. about the unstoppable juggernaut of the Chinese economy, but sometimes I wonder if the Chinese aren't setting themselves up for a stumble or two.

(Update: For more on resource demands, see my subsequent post "More on China's Economy, Food Production, and Food Demand".)

Many of the signs point to inevitable economic superiority.  The Carnegie Endowment for International Peace released a report last week that projects China's economy will overtake that of the U.S. by 2035 (Yahoo News). "China’s Economic Rise—Fact and Fiction", by Albert Keidel, concludes that China's economy is now dominated by internal growth rather than exports, and that China's economy will be twice that of the U.S. by 2050.  Keidel gives the nod to financial and bureaucratic tangles as the primary threats to growth, but does not appear particularly concerned about environmental damage and pollution. He argues that:

The record for several other East Asian economies argues that pollution is unlikely to undermine China’s growth in the coming decades. In particular, Japan, South Korea, and Taiwan all passed through similar periods of serious pollution associated with rapid industrialization. In these cases, policy responses were also delayed but eventually reduced pollution levels that in some dimensions were worse than China’s today.

Maybe so, but, depending on how you look at the numbers, the cost of pollution may be wiping out all of China's GDP growth.

(Update 25 July, 2008: Here is a video feed from Fora.tv of a panel discussion at the Carnegie Endowment for International Peace discussing the "Fact and Fiction" report.  I haven't watched the whole thing yet...)

Attempting to Account for the Costs of Pollution

For most of the last decade, China’s government has downplayed the cost of environmental damage to the country’s GDP.  However, according The Economist, in March of 2008, Pan Yue, a deputy minster at the State Environmental Protection Agency (SEPA), publicly estimated that environmental damage reduces GDP by as much as 13%.  As recently as May, 2006, the official estimate was only 3% of GDP for 2004, a tally contained in the first and only “green audit” of the economy.

The direct costs to human life are substantial, but official estimates are also variable.  A study by SEPA and The World Bank, published last year, “The Cost of Pollution in China”, estimates that pollution is directly responsible for at least 750,000 deaths a year, while in a 2006 speech Mr. Pan stated that approximately 70% of China’s two million annual cancer deaths were caused by pollution.

The disparity in these figures is evidently caused by political tension between different parts of the Chinese government.  Both the health findings and the future of the “green GDP audit” were evidently compromised by political infighting between state scientists, regional leaders, and officials in other ministries.  The New York Times reported that:

The official explanation was that the science behind the green index was immature. Wang Jinnan, the leading academic researcher on the Green G.D.P. team, said provincial leaders killed the project. “Officials do not like to be lined up and told how they are not meeting the leadership’s goals,” he said. “They found it difficult to accept this.”

Here is the point: Even a 10% reduction in Chinese GDP would, in effect, zero out the overall growth of the economy.  Viewed this way, despite its role in the global economy, any “wealth creation” and growth in China may be accounted for entirely by the cost of degrading the local environment and increasing human disease and death.  You can understand how government officials might be uneasy about publicizing this figure.

According to officials at The World Bank, its “Cost of Pollution” report was similarly abridged for political reasons; “China’s environmental agency insisted that the health statistics be removed from the published version of the report, citing the possible impact on ‘social stability’.”  As a result, one-third of the document was reportedly withheld from publication.  The tension between open communication and central control, and between development and damage, is evident in a press release from Gov.cn, the Government’s official web site:

Even though the economic growth characterized by "high consumption, high pollution and high risk" is of its own historical significance in China, China's economy has been in the bottleneck period of resources and energy today and it cannot bear any risks of resources exhaustion.

Meanwhile, Chinese society has also entered the period with various conflicts protruding in which per capita GDP is about 1,000-3,000 US dollars, which cannot bear up any social problems caused by environmental pollution.

The government is clearly aware of the social and economic threats of environmental damage.  As reported by the Shanghai Daily, the most recent five year plan; “Requires energy consumption per unit of GDP to decline by 20 percent from the previous planning period.  The total amount of major pollutants discharged will be reduced by 10 percent, and forest coverage will be raised from 18.2 percent to 20 percent.”

In an effort better address environmental concerns, in March of 2008 the State Council upgraded SEPA to a full Cabinet-level ministry.  To gather, “Accurate and high-quality data [of] pollution sources,” the government launched in the first pollution census in February 2008.  And yet even while the central government attempts to close illegal and polluting coal mines and coal burning plants, journalists regularly report that local and regional authorities either ignore or explicitly condone the reopening of those facilities (1, 2, 3).

It does not appear that China’s reliance on coal is going to decrease any time soon.  China has recently been building coal-fired plants at the rate of one every 7 to 10 days, with plans to build 500 more over the next decade.  The fraction of newly built power plants that burn coal has increased from 70% to 90% since 2000.  Thus, without either a more unified approach to reducing pollution or a substantially stronger response to that end by the central government, environmental damage will continue to directly plague both the economy and human health.

The Future Cost of the Building Boom

Here is something I don't see discussed in the press: where are the Chinese going to get all the coal to fire all the new power plants, especially when they are already facing supply shortfalls?  (Update: To clarify, I am less concerned here with the amount of coal in the ground than supply chain issues.  If they are already having trouble moving coal quickly enough to existing plants, how will they manage the increased demand?)  And while they may have the coal in the ground, how much will it cost to mine it with labor costs rising all across the country? And what about the costs of additional transportation infrastructure?

This brings us back to my father-in-law, sweltering away in Xiamen, and one of stumbling blocks the Chinese may be literally building for themselves.  As reported by The New York Times:

Each year for the past few years, China has built about 7.5 billion square feet of commercial and residential space, more than the combined floor space of all the malls and strip malls in the United States, according to data collected by the United States Energy Information Administration.

Chinese buildings rarely have thermal insulation. They require, on average, twice as much energy to heat and cool as those in similar climates in the United States and Europe, according to the World Bank. A vast majority of new buildings — 95 percent, the bank says — do not meet China’s own codes for energy efficiency.

All these new buildings require China to build power plants, which it has been doing prodigiously. In 2005 alone, China added 66 gigawatts of electricity to its power grid, about as much power as Britain generates in a year. Last year, it added an additional 102 gigawatts, as much as France.

Damn.  So not only is China building enormous power generation capacity, but their underlying infrastructure is inherently inefficient.  This kind of systemic inefficiency is often attributed to, excused, or even just written off as a characteristic of a particular "stage of economic development" (see Keidel for one example).  It is certainly true that the U.S., Japan, and Europe all went through periods when the focus was on generating jobs and building wealth, only later to be followed up by mining inefficiencies to squeeze more product out of each unit of water and energy.

But all of China's infrastructure, all that housing and commercial space, is brand new.  So here are more questions: Is the government's plan to replace inefficient buildings over the next couple of decades?  Will labor remain so inexpensive that Chinese infrastructure is, in effect, disposable?  What are the secondary costs of maintaining that construction boom (e.g., energy, pollution, materials)?

It would seem that without a truly radical change in energy production, China is setting itself up to rely on dirty coal for many decades to come.  And so I wonder: How it is that the country will escape continued environmental damage that is equivalent to China's GDP growth?  You can't put off dealing with those costs forever.

The U.S. is borrowing cash from China to buy petroleum, and we have to sort that out as soon as possible.  But the Chinese are using their health, and thus their future productivity, as collateral for present growth. Even if they don't stumble, they may have to pause to catch their breath.

It isn't news that China has a huge and still growing population, nor that the economy is growing rapidly in the context of an enormous trade surplus.  But looking at what China is today importing, and extending a few trends out into the future a decade or two, gives an interesting slant to food and energy markets that everyone should be thinking about.

I've been digging into these issues as part of Bio-era's consulting practices on biofuels and emerging biotechnologies.  What follows are some notes on trends to watch.

Arable Land:  China is actively moving farmers off the land in an attempt to slow desertification:

The relocation program is part of a larger plan to rein in China's expanding deserts, which now cover one-third of the country and continue to grow because of overgrazing, deforestation, urban sprawl and droughts.

The shifting sands have swallowed thousands of Chinese villages along the fabled Silk Road and sparked a sharp increase in sandstorms; dust from China clouds the skies of South Korea and has been linked to respiratory problems in California.

Since 2001, China has spent nearly US$9 billion planting billions of trees, converting marginal farmland to forest and grasslands and enforcing logging and grazing bans.

The policy is driven in part by concerns over food, as farmland yields not only to the deserts but also to pollution and economic development. China has less than 7 percent of the world's arable land with which to feed 1.3 billion people -- more than 20 percent of the world's population. By comparison, the United States has 20 percent of the world's arable land to feed 5 percent of the population.

...The battle against deserts is playing out across much of western China. Desertification has caused as much as US$7 billion in annual economic losses, the China Daily reported.

Over the past decade, Chinese deserts expanded at a rate of 950 square miles (2,460 square kilometers) a year, according to Wang Tao of the Chinese Academy of Sciences in Lanzhou.

...Global warming also threatens to make a huge dent in grain production, which has already slipped from 432 million tons in 1998 to 422 million tons in 2006 because of desertification. At the same time, grain consumption has risen about 4.4 million tons a year to 418 million tons, in part because of rising demand for beef, chicken and pork.

The production declines have forced China to draw down its grain stocks, and eventually it will need to buy a massive 30-50 million tons a year on the world market, Brown said.

Fresh Water Supplies:  According to an article at Yellow River Conservancy Commission, evidently a Chinese government endeavor:

China has been a production marvel when it comes to labor costs, but not for water costs. To produce a unit of GDP, China uses approximately six times more water than the Republic of Korea and ten times more than Japan, according to Zhai Haohui, vice minister of water resources.

...The water shortage nationwide will reach 50 billion cubic meters by 2030 -- up from the current 6 billion cubic meters, according to the Ministry of Water Resources.

A recent article in the Independent claims that glaciers in the Tibetan plateau, which provide freshwater to much of the country, are now melting at 7% annually.  I've seen that number as high as 13% elsewhere.

Commodities Imports:  The USDA simply says, "China's Demand for Commodities Outpacing Supply".  Demand for corn has exceeded supply in recent years, and I've read that this is the first year they might wind up importing corn.  China already imports enormous amounts of soy; just before I went to Asia in June, the quarterly Chinese buying trip to the U.S. purchased four times as much soy as markets were expecting, $3 billion in one week. 

Meat Consumption: A recent report from the UN FAO, "Livestock's Long Shadow", points out the repercussions from increasing meat consumption around the world: inefficient use of grains, massive consumption of fresh water, increased pollution and greenhouse gas emissions.  Here is a summary from the FAO magazine, carrying the title "Livestock impacts on the environment", which has a link to the full report at the bottom of the page.

Among the most remarkable tidbits from the report, and a key part of the analysis Bio-era is giving to investors in Asia, the U.S., and Europe about the future of commodities usage in regards to biofuels, is related to future Chinese meat consumption.  If China maintains the historical relationship between per capita income and meat consumption (See figure 1.4, page 9 of the FAO report.), by the time it reaches average European income levels supplying all that meat will require 40% of world grain supplies.  40%. 

This is one of those numbers that makes you wonder where and when the current system will break down.  China today has ~15% of world population, and will probably max out at about 18%, with only ~7% of the globe's arable land.  And yet supplying them with mean could consume 40% of the world's production of grain.  Either very strong cultural practices related to meat consumption will have to change (a hard thing to do), or China will be importing a huge fraction of the world's commodities.  Is that the future use of China's massive foreign currency holdings?

Fuel Mix:  According to the USDA FIA "China Bio-Fuels Annual 2007" (PDF), diesel dominates the fuel market in China.  In 2006, 120,000,000 MT of diesel and 40,000,000 MT of gasoline were used across the country (see figure on pg. 8).  Gasoline consumption appears to have leveled off, while gasohol usage has jumped considerably over the last 4 years.

Biofuel Use: The government has put a moratorium on using corn to make ethanol, and may in fact ban that use of corn altogether, but the USDA predicts, "China Fuel Ethanol Production Projected to Increase 12% in 2007":

A report from the US Department of Agriculture Foreign Agricultural Services (USDA FAS) estimates that the production of fuel ethanol in China will reach 1.45 million tonnes (484 million gallons US) in 2007, up 12% from 1.3 million tonnes in 2006. Official production of fuel ethanol in China began in 2004.

...Now, according to the FAS report, plans are to increase ethanol feedstocks from non-arable lands making the use of tuber crops and sweet sorghum. Given the new constraints, a realistic 2010 target appears to be between 3 and 4 million tonnes (1 billion and 1.33 billion gallons US).

...Diesel is the primary fuel used in China. In 2006, China consumed 120 million tonnes of diesel and 40 million tonnes of unblended gasoline. A rise in the use of E10 has caused gasoline consumption to plateau over the last four years. During this time, automobile use in China has increased on average 11.8% annually.

A story at Green Car Congress speculates that, compared the US, cellulose to ethanol may move faster in China because of labor costs.  It's interesting as well that, "China Oil and Food Corporation (COFCO), the country’s largest oil and food importer and exporter, is partnering with Novozymes on the production of cellulosic ethanol."

Offshore Land Deals:  Early this year, Chinese companies signed deals worth US$ 4.9 billion to secure growing rights on 1.2 million hectares (~3 million acres) (Here's the version from Bloomberg, via the IHT).  A similar deal was signed between China National Offshore Oil Corp (CNOOC) and Indonesia, to the tune of US$ 5.5 billion for land to grow crops for ethanol and biodiesel and for processing plants (U of Alberta China Institute,  Biopact).

Finally, China recently announced an increase of planned biofuels use to 20 MMT by 2020.  This is absolutely enormous, as a story at Biopact notes:

The total production of biomass energy from non-grain crops will grow to 500 million tons of coal equivalent, worth some 3 trillion yuan [€290/$385 billion], which will account for 24 percent of the nation's total energy consumption.

In the end, given the shortage of water, the decrease in land suitable for crops, the increase in meat consumption, etc., it just isn't clear where all the biomass is going to come from.  Clearly a great deal of it will be imported, and we can now see where some of China's foreign currency reserves are going to go over the next couple of decades.  Commodities markets are going to get tighter worldwide as a result.

Everyone interested in the future of biology should be paying attention to what Chinese students are up to.  The latest post on the Synthetic Biology discussion list, maintained by the MIT group, announces an upcoming workshop at Tianjin University on the International Genetically Engineered Machines (iGEM) competition.  I'll bet there will be an enormous demand by students to create teams for iGEM.  The resulting profusion of skills and new parts, which will presumably become Biobricks, is only going to make the future more interesting.  Interesting, as in, "May you live in interesting times," with all the promise and peril that implies.

The NatureJobs section in this week's Nature has a short news piece on science funding, education, and investment in China:

The US National Science Foundation's Science and Engineering Indicators 2006 could perhaps be renamed 'Here Comes China'. The biennial report shows an increasingly international science and technology workforce, with China showing large gains in internal investment in R&D, investment by multinational corporations, and numbers of Chinese nationals earning science and engineering doctorates in the United States.

China has increased its R&D investment 24% per year over the past five years, compared with 4–5% for the United States. This growth, from US$12.4 billion in 1991 to $84.6 billion in 2003, puts the country behind only Japan and the United States. Meanwhile, investment by US-based multinationals into Asian markets outside Japan has more than doubled, from $1.5 billion in 1994 to $3.5 million in 2002, with more than $1 billion going into China alone. Finally, Chinese students earn more US science and engineering PhDs than those of any other foreign nation.

These statistics are impressive, but they tell only one side of the story. What do they mean in terms of jobs and who will get them? The United States, Europe and Japan still produce many PhDs and create a host of jobs. But China is coming on strong. One wild card is whether Chinese PhDs will stay in the United States or return home. While China's PhD production in the United States has increased, PhDs by US white males has dropped from its peak of about 8,900 in 1994 to just over 7,000 in 2003.

It would be premature to say this marks the end of US dominance in science and engineering employment, but it does show that the United States is producing less of its own scientists and may have more difficulty recruiting from abroad as other nations, particularly China, ramp up funding and infrastructure. As the report says, these trends point to a "potentially diminished US success in the increasing international competition for foreign scientists and engineers".

Everyone has probably  heard that China has confirmed human cases of the H5N1 flu ("China Reports Second Bird Flu Death", Reuters via NY Times).  The Chinese government now acknowledges that they have a "serious epidemic" (CNN), and has culled more than twenty million birds in response to localized outbreaks.

In an attempt to keep control of the situation, "China Threatens Police Action in Fight on Bird Flu" (Reuters via NY Times).  I find particularly interesting the new regulations forbidding actions that restrict accurate reporting of the progress of the virus; "Any practices which affect the reporting of epidemic diseases, including deception, false or late reporting, are forbidden," according to Vice Agriculture Minister Yin Chengjie.  As I wrote last spring (The Economic Consequences of Chinese Pandemic Un-Preparedness), the structure of governmental power in China appears to have changed significantly over the last few years.  According to people who spend significant amounts of time in country, the central government is no longer able to exert much authority over local governments, nor can it count on accurate information coming in from the provinces.  It will be interesting to see if the new regulations have an impact on disease reporting.  With less than clear initial explanations of the enormous benzene spill near Harbin (NY Times), it may be awhile before up front communication is the norm.

The government has also announced plans to vaccinate 14 billion birds to combat further spread.  Of course, the first question everyone is asking is where they are going to come up with that much vaccine.  Everyone in the west seems to agree that the domestic Chinese poultry vaccine production capacity is only in the neighborhood of several hundred million doses annually, which suggests they face significant challenges in vaccinating more than 10 billion birds anytime soon.  An article in the International Herald Tribune casts doubt on the feasibility of this strategy, with veterinary experts expressing blunt skepticism; "Dr. Leon Russell, president of the World Veterinary Association, said '..For the life of me, I can't figure out how China will vaccinate billions of chickens'."

(UPDATE 28 November 05):  Last Thursday's Nature has a short news piece claiming that China has already vaccinated 8 billion birds and that "the country's ten vaccine producers can make 16 billion doses of vaccine per year".  That is quite a contrast to other numbers I've read, and definitely disagrees with the rest of this post.