The Real “Great Leap Forward”

Henry Blodget – Slate

One criticism of my “Where’s My $58 Million, Madame Wu?” column, in which I described the adventures of a 1990s China investment fund, was that, given the speed at which China is changing, the 1990s were equivalent to the Dark Ages. So let’s get up to date.
Foreign business in China follows two distinct strategies: export and domestic. The export strategy is to take advantage of China’s low-cost manufacturing capabilities by making products to sell elsewhere in the world. The domestic strategy, meanwhile, is to sell products and services to the 1.3 billion Chinese consumers (or rather, to the small minority who make more than a couple of dollars a day).
According to China, Inc., a (great) new book by Ted Fishman, China now draws more foreign investment capital than any other country ($53 billion in 2003). The half-trillion foreign dollars invested in China since 1979 have built an estimated one-third of the country’s current production capacity. A large chunk of this money, interestingly, has come from Chinese expatriates, some of whom fled the country during the Communist takeover.
The domestic strategy, selling to Chinese consumers, is challenging but often successful. Most of the country is still locked in unfathomable poverty—25 years of economic progress in rural Xiaogang, Fishman reports, have increased annual per capita income from $2.50 to $313—but China’s population is so huge that even a fraction of it represents an enormous market. For example, according to the Harvard Business Review, China is now adding 4 million to 6 million new cell phone subscribers per month. This statistic is mind-boggling. It means that, every year, China adds a new cell phone market about the size of Germany’s—and Germany is the third-largest cell phone market in the world. (No wonder handset manufacturers like Motorola are so jazzed about China.) Other products that foreign companies are selling include cars, soap, sneakers, shampoo, watches, soda, beer, noodles, hot water heaters, televisions, clothes, VCRs, film, coffee, courier services, cameras, and motorcycles.
Still, the most common foreign-business strategy in China is export. China’s manufacturing costs are so low that factories can undercut not only operations in the United States and Europe, but previous low-cost export platforms like the Philippines and Mexico. Because so many companies have now pitched camp in China, today’s manufacturers usually have two choices: follow or quit. As China’s economy has developed, moreover, its manufacturing capabilities have become increasingly sophisticated, allowing factories to climb the complexity ladder. In 1990, according to the Harvard Business Review, China led the world in the production only of textiles and televisions. By 2002, this dominance had extended to refrigerators, PCs, motorbikes, cigarette lighters, and cell phone handsets. What’s more, so many of China’s impoverished farmers and unemployed state workers need jobs that China’s production costs are likely to stay low for decades. Ted Fishman says that between 90 million and 300 million Chinese farmers have migrated to cities in recent years—a labor pool that, even at the midpoint of that range, exceeds the total workforce of the United States. Fishman also observes that, between 1998 and 2001, China’s state-run companies fired 21 million people, more workers than are employed by the entire U.S. manufacturing industry.
Of course, it is not just foreigners who have noticed China’s manufacturing supremacy. Chinese companies are also exporting hundreds of billions of dollars’ worth of products each year (and they’re selling more than cigarette lighters and fireworks). For example, according to the Harvard Business Review, Pearl River Piano now owns more than 10 percent of the U.S. piano market; CIMC makes and sells most of the world’s shipping containers; Galanz supplies 40 percent of Europe’s microwave ovens; and Haier not only clubs Whirlpool, Siemens, Electrolux, and Matsushita in China’s domestic home-appliance market but is now invading the low end of the U.S. market as well (click here to buy a Haier countertop dishwasher). Furthermore, despite the soothing myth murmured by U.S. digerati (“We design it, they make it”), China’s high-tech industry is developing fast. By 2002 China’s digital switch and router leader, Huawei, owned 3 percent of the international router market—a beachhead gained by introducing products that cost 40 percent less than, say, Cisco’s.
In some areas, China’s advantages extend to the top of the food chain. One industry in which China could conceivably develop a sustainable advantage over foreign competitors, for example, is biotech. Here, U.S. regulatory policies and religion often act as a straitjacket: Now that President Bush has decreed that destroying embryos for stem-cell research is immoral, for example, federal stem-cell funding has been curtailed. China, meanwhile, has recognized that stem-cell research is an area in which the country could take the global lead. Thus, China has made it a national priority.
So, if the 1990s were the Dark Ages for doing business with China, this is a snapshot of what the opportunity looks like today. Based in part on this snapshot, I am ready to offer a preliminary answer to one of the two questions I posed at the outset of this series: Is the China business opportunity real enough that the next generation of gold-seekers should “go East”? Provided one construes “go East” to mean “learn Mandarin, develop guanxi, and be prepared to weather multiple economic and political storms over a multi-decade career,” the preliminary answer is “Yes.” I say “preliminary” because the next books on my reading list have titles like The Coming China Collapse.


http://slate.com/id/2113345/

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