Asia's next crisis: 'Made in China'
Rapid evolution of Chinese economy threatens regional status quo
By KENICHI OHMAE
http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nb20010730a1.htm
Two seemingly separate events occurred this month: Beijing was awarded the right to host the 2008 summer Olympic games, and stock prices and currency rates in Singapore, Taiwan, and Hong Kong hit their lowest weekly marks since the 1997 Asian crisis.
Together, this says a great deal about the future of Asia -- and the immense challenges that the rest of the world faces from China.
Policymakers and industrialists will be paying a great deal more attention to China in the near future, but not because of human rights, the militarism of the central Communist government, or the opening of Chinese markets. The Chinese production economy is about to explode with accelerating vitality, and the rest of the world is unprepared for it.
I saw the implications of this recently on a visit to a 3-year-old manufacturing plant in the Pearl River Delta, one of the fastest-growing regions in China. This plant had 50,000 workers -- all young women, and none wearing eyeglasses.
"Don't you have any employees with bad eyesight?" I asked the manager.
He replied: "We fire them when their eyes go bad. They can find another job -- that's not my problem. There are plenty of people who want to work for us."
From the perspective of industrialized nations, practices like this are brutally cruel and would not exist in any other nation of China's stature due to labor laws. But in Shengzhen, Shanghai, Suzhou, Dalian and many more Chinese cities, where hundreds of millions of people eagerly flock to urban jobs from the hinterlands, such practices are taken for granted.
A situation with precedent
To find a comparable precedent, you would have to go back 40 years, to Japan's postwar economic surge. There are also echoes of Dickensian England -- the dawn of the industrial revolution -- or the "robber baron" era in America, when labor was inexpressibly cheap and technology was new. One advertisement for a factory in Dalian, offering the equivalent of $100 per month, drew 2,000 girls from nearby farmlands. They literally surrounded the plant, seeking interviews.
Those who are hired work round the clock and live in company dormitories. They often study electronic circuitry or other high-tech skills on their lunch hours. Those laid off (for nearsightedness or other reasons), generally don't return to the peasant life; they become urban entrepreneurs in the burgeoning freelance and service businesses of China's new cities.
By itself, China's glut of low-wage and highly educable workers gives that country a remarkable competitive advantage. But there are three other engines fueling China's economic juggernaut as well.
One system, 10 nations
First, there is the political structure. In the last few years, because of a concerted policy of economic deregulation, the People's Republic has matured from "one nation, two systems" -- an empire with communist and capitalist components -- into "one system, 10 nations" -- a commonwealth of semiautonomous, self-governing economic regions. Some of these regions, such as Shengzhen, Shanghai, Dalian, Tianjin, Shenyang, Quindao and Suzhou, are already growing much faster than any the "Asian Tigers," such as Malaysia, Taiwan, Thailand and Korea.
The average population of these "region states" is 5-7 million. Although China is nominally Communist, businesses in these regions have far fewer regulations to deal with than their counterparts in Japan, France or Sweden. By comparison, China is a capitalist's paradise, so long as you remain within these regions and do not deal with the central government in Beijing.
Burning hunger to win
Second, Chinese industrialists are eager to learn and uninhibited by complacency.
I was a close adviser to several Japanese companies that cracked the U.S. market in the 1970s and 1980s. I vividly remember their executives confronting that formidable challenge by saying, "How can we do this?"
Today, their successors tend to enumerate all the reasons they can't act, and blame the economy and government for their troubles.
But Chinese companies have picked up where the Japanese left off. They are developing innovative, low-cost export businesses in apparels, vitamin supplements, foods (including shiitake mushrooms and vegetables popular in Japan), watches, consumer electronics and appliances, plywood, footwear, and precision electronic and mechanical components.
In the Pearl and Yangtze River deltas, there are more than 50,000 electronic component suppliers sophisticated enough to deliver their wares "just in time" to the local Japanese and Taiwanese manufacturers.
In Japan, apparel companies like Fast Retailing (known for the Uniqlo brand) have taken advantage of large-scale production in China and halved consumer prices of high-quality clothing. In the otherwise very depressed Japanese market, Uniqlo has been doubling its sales for three consecutive years, with an awesome operating margin of 25 percent. The direct approach, in which Japanese-designed products mass-produced in China are sold in company-owned stores, is now being called "Uniqloization."
Many companies are following suit in such industries as glasses and stationery.
In short, China is rapidly supplanting industries that took other Asian countries 15 years or more to build.
Currency system strong
The third and most influential factor behind the scenes has been the stability of China's currency. This represents either an accident of history or a supreme example of cunning foresight.
In 1997, when Hong Kong was returned to China, the United Kingdom agreed to leave about $38 billion of reserve capital in the territory -- but only if the Chinese promised to keep the currency intact. It was stipulated that for every new Hong Kong dollar that its three central banks minted, they would hold in reserve the equivalent of about 13 U.S. cents -- a very high amount.
The Chinese not only accepted this, but pegged their mainland currency, the renminbi (RMB), against the Hong Kong dollar as well. They also prohibited exchange of renminbi outside of China, limiting speculators to the H.K. dollar. In effect, by embracing a restriction against minting money to relieve economic pain, China has made itself immune from the currency fluctuations that have bedeviled Mexico, Indonesia, Russia, Brazil and Argentina. As a dollar-based economy, China enjoys the same protection against inflation the United States does.
The world has never seen an economy with these qualities before. And because it is so new, the effects are just now being felt. Already, China is doing to the rest of the Asian economy what Japan did to the West 20 years ago. The currencies of and the stock prices in Korea, Thailand and Malaysia have declined precipitously since 2000. Some countries, like Japan, Singapore and Taiwan, are being hit much harder by this new competition than they were by the economic crises in 1997.
Time to wake up
What should politicians and industrialists outside China make out of all this?
We must shake ourselves out of complacency.
For decades, economists and investors have waited for China to wake up, fearing its overwhelming population but lusting after its enormous market. Finally, the awakening has begun, and it will expand much more quickly than most of us expect. If Hong Kong's trading volume is added to the export and import volumes of China, it becomes the third largest trading nation in the world, trailing the U.S. and Germany but surpassing Japan.
There is reason to believe that China's central government will rapidly evolve into a "United States of Chunghua," with most economic decisions made at the regional or provincial level. Chunghua, which translates into English as "China," actually means "the prosperous center of the universe." China's regional autonomy is far stronger than Japan's and Germany's. Chinese states compete against each other for foreign investment and markets. In a strange way, the federal governance structure of China is the closest, among all large nations, to that of the United States.
This regional competition will further accelerate China's economic expansion far beyond anything we have seen in Asia to date. Americans (and others) will be forced to trade with China, as consumers will demand China's inexpensive products and producers will require inexpensive components. Like the U.S. in first half of the 20th century, and Japan in the second half, Chinese industries will overcome protectionist efforts to resist. Other nations will be challenged to match China's unfair advantages with innovation and other forms of competitiveness.
And it won't be easy. Each time a Chinese industry has competed directly with a foreign industry, China has won.
That doesn't mean that China should get blanket political approval from the West. On the contrary, it has never been so dangerous.
Wither democracy?
China is not a democracy, and the human rights and totalitarian abuses of the Chinese government will continue. But they will occur in the context of one of the most highly capitalist societies on the planet.
This, in itself, will test many prevailing assumptions about economic development.
For example, Western nations have traditionally preached that democracy is a prerequisite for economic prosperity. But Democracy at this stage of China would lead the majority of its population to demand greater distribution of wealth, as they have in India. But there are still 900 million farmers in China with an average annual income of $500. Distribution of wealth would lead, as it has in India, to the distribution of poverty. So it will be a long time before China adopts democracy and the central government gives up its unchallenged power.
Constructing a new view
American politicians and businesspeople seem to oscillate between viewing China as a James Bond villain and a market to be exploited. Both of these views are now obsolete. Many of China's consumers, for instance, will be cunningly reserved for its own domestic industries.
China is a fierce new economic competitor, perhaps the fiercest since the U.S. itself came on the scene at the turn of the last century.
In the short run, China's emergence is triggering a second Asian economic crisis more severe than the first. But unlike the currency speculators who triggered the 1997 crisis, China won't go away.
In the long run, the ability of a company to thrive in this new world will depend on how well it can figure out how to "internalize" China's advantage to increase its own competitiveness.
Unlike what the newspaper headlines indicate, competition is not a fight between China and the U.S. or Japan, but a race in each market in which the victor will be the company that best internalizes China's competitiveness to beat its domestic competitors. The rest of us will have to temper our opposition to China with the fact that, as consumers, we will never have had it so good. People around the world will soon come to depend on the quality and price of goods that China can provide better than any other nation. When we finally meet the enemy, over in Beijing, we will find out it is us.
Kenichi Ohmae is managing director of Ohmae & Associates and author of "The Invisible Continent -- Four Strategic Imperatives of the New Economy (Harper Collins)."
The Japan Times: July 30, 2001
