China syndrome: the eager have landed

Philip Hopkins – The Age

May 6, 2005
China will have an impact on Australia 10 times greater than that of
Japan 40 years ago, the Future Summit in Melbourne was told.
Jonathan West, an Australian who is associate professor of Harvard
University’s Graduate School of Business Administration, said
Australians believed China would buy Australia’s products – food, commodities, energy, raw materials – and Australia would buy China’s labour-intensive manufactures.
“I think that story is dangerously wrong,” he said in a keynote address yesterday. “Yes, there are great opportunities to sell to China. But China is also emerging as a strong competitor in the things we want to sell to the world.”
Professor West said China was transforming the dynamics of world trade. As the largest buyer of soy beans, for example, it had created a supply giant in Brazil.
In 1990, the US had been the leading cost producer in agriculture for
200 years. By 2000 the US had lost that position to South America.
Professor West said Brazil had 90 million hectares of unused fertile
land – five times the production area of Australia. “This is scheduled to come on stream in the next few years,” he said, complete with infrastructure of roads, railways and silos.
Brazil also had a structural cost advantage, with one hectare of
agricultural land costing $500 compared with $3000 in Australia.
“Brazil is building five new ports; Australia is having a debate
whether to upgrade a couple of ports,” he said.
Professor West said not only was China creating a competitor of
Australia in Brazil but was itself an agricultural competitor.
In five years it had created a bigger area under grapevines than
Australia has, with the help of Australian viticulture experts. “I have enjoyed drinking high-quality Chinese wine – at only $1 a bottle,” he said.
Professor West said China’s advantage was not in cheap, unskilled
labour. “Its fundamental advantage is cheap, skilled labour,” he said.
An American engineer was paid $150,000 a year, whereas a Chinese
engineer was paid $120 a month. “China is graduating 500,000 engineers a year,”
he
said. “They are not thinking about how to consume Australian products.
They are thinking about how to make the products the US and Australia make, how to replace our products and sell them.”
Professor West said China’s advantages – labour-intensive industries
with a much lower cost structure – were at work in skilled manufacturing. A Chinese battery maker BYD (Brings You Dollars) had gone from 3 per cent of the global market to 40 per cent in five years. They had blown their main competitor, Sanyo, “out of the water”.
“Battery making (for mobile phones) is a classic example of what China
shouldn’t be able to do. It’s capital-intensive and made with robots,”
he said. However, BYD bought a robot, pulled it apart to find out how it worked, and replaced it with labour.
“Six hundred people in a row wrap metal in metal and pass it on to
others. They build with one-15th the capital cost of Sanyo – not the labour cost,” he said. BYD only spent 1.5 per cent of sales on research and development compared with Sanyo’s 8 per cent, but had 10 times as many engineers.
Copyright C 2005. The Age Company Ltd


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