The Chinese Century, cover story of New York Times published on July 4, 2004
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The Chinese Century
July 4, 2004
By TED C. FISHMAN
New York Times
http://www.nytimes.com/2004/07/04/magazine/04CHINA.html?ex=1090005058&ei=1&en=9a341c096b403be1
The following are just portions of this long article as cover story of New York Times published on July 4, 2004
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Still, barring Mao's resurrection or nuclear cataclysm, nothing is likely to keep China down for long. Since 1978, its gross domestic product has risen fourfold; in straight dollar terms, China's economy is the world's sixth-largest, with a G.D.P. of around $1.4 trillion. It has gone from being virtually absent in international trade to the world's third-most-active trading nation, behind the U.S. and Germany and ahead of Japan. Tom Saler, a financial journalist, has pointed out that 21 recessions, a depression, two stock-market crashes and two world wars were not able to stop the U.S. economy's growth, over the last century, from $18 billion ($367 billion in 2000 dollars) to $10 trillion. In constant dollars, that is a 27-fold increase.
China is poised for similar growth in this century. Even if China's people do not, on average, have the wealth Americans do, and even if the United States continues to play a strong economic game and to lead in technology, China will still be an ever more formidable competitor. If any country is going to supplant the U.S. in the world marketplace, China is it.
Mao as Proto-Capitalist
Mornings at Wanfeng automotive factory outside Shanghai begin with a neat line of employees doing calisthenics to martial music broadcast over a P.A. system. The blue-uniformed workers, nearly all of them young men, make for a clean-cut, well-pressed company line. The Japanese introduced courtyard exercises and company songs to the world back in the 70's, when that nation appeared to have the world's best industrial jobs. Today, Japan is just stumbling out of a long malaise, and its dwindling pool of young laborers seem to lack the compulsion to work like hell.
But the striving Japan of old still sets a good example for would-be worldbeaters, as Wanfeng's management knows -- only the Chinese manufacturer goes one better. Its employees regularly have their spirits revved at company boot camps run by People's Liberation Army drillmasters who inculcate the twin virtues of patriotism and hard work. The results are impressive. Ten years ago, Wanfeng was hammering out motorcycle wheels by hand in a Chinese garage; a few years later it was the No. l seller of aluminum-alloy motorcycle wheels, first in China and now in Asia. The company soon became a top national and global seller in alloy automobile wheels too.
Wanfeng may have received some breaks on the way up: the company-produced video that describes its rapid ascent does not identify the early contracts that enabled Wanfeng to grow so fast, nor whether Wanfeng had insider connections to state-run companies in the motorcycle and car businesses. There is nothing in the company literature about how the private company secured its financing, either. Nonetheless, Wanfeng today is still scrappy, aggressive and capable. It now turns out about 60,000 vehicles a year that, if you squint just a little, appear to be remarkably like Jeep Grand Cherokees. They look great, come with every modern luxury, including leather seats and DVD video systems, and purr when driven.
Yet Wanfeng's factory itself is a bare-bones machine. Most tellingly -- this goes a long way toward accounting for China's current status as an economic juggernaut -- there is not a single robot in sight. Instead, there are hundreds of young men, newly arrived from China's expanding technical schools, manning the assembly lines with little more than large electric drills, wrenches and rubber mallets. Engines and body panels that would, in a Western, Korean or Japanese factory, move from station to station on automatic conveyors are hauled by hand and hand truck here. This is why Wanfeng can sell its hand-made luxury versions of the Jeep (to buyers in the Middle East, mostly) for $8,000 to $10,000. The company isn't spending money on multimillion-dollar machines to build cars; it's using highly skilled workers who cost at most a few hundred dollars a month -- whose yearly pay, in other words, is less than the monthly pay of new hires in Detroit. Factory wages in the country's booming east coast cities can be $120 to $160 a month and half that inland, according to Merrill Weingrod of China Strategies, an affiliate of Kurt Salmon Associates, a consulting firm.
Wanfeng is hardly the first to mobilize Chinese labor as a stand-in for machinery. Mao Zedong believed that China could leapfrog other developing countries by employing an effectively unlimited supply of human labor. Chinese peasants and urban laborers would take the place of the expensive machines that the Western industrial powers had spent 100 years developing; China's wealth, Mao reasoned, lay in its abundant population.
He was right, though China failed disastrously to execute his Great Leap Forward in the late 50's. Most famously, Mao exhorted the Chinese to build backyard furnaces to melt down their iron implements, all in service of his goal to have China outproduce Great Britain in steel and to surpass the British economy in size in 15 years. Instead, the people were left without the few tools, pots and pans they had started with. And they starved: the Great Leap Forward was the direct cause of the famine that killed 30 million people, among the deadliest man-made disasters in history.
But even as the Communists pauperized the nation and continued to exercise complete control over the deployment of labor -- determining, for example, who would be moved out of the countryside and into the cities -- they also primed China for the capitalist successes to come. Prasenjit Duara, a professor of Chinese history at the University of Chicago, acknowledges the paradox: ''The Communists made the work force docile and organized labor to be a managed entity that could be continuously mobilized,'' he says. ''A Marxist might see China under Mao as producing the conditions of capitalism.'' (Duara adds that the institutions created by the Communists to provide housing, education and medical care later saved capitalists the price of developing the work force.) An obedient labor force keeps management costs down too. Despite the enormous numbers of workers in Chinese factories, the ranks of managers who supervise them are remarkably thin by Western standards. Depending on the work, you might see 15 managers for 5,000 workers, an indication of how incredibly well self-managed they are.
''There is a reason why the world is so impressed by Chinese workers,'' Weingrod says. ''Culturally, the Chinese put a very high premium on not losing face. In manufacturing, that translates into not making mistakes on the production line. Their self-discipline and their ability to adapt are key factors driving Chinese competitiveness.'' And for every worker disinclined or unable to apply himself with energy and concentration, there is always another poor Chinese worker waiting to escape the farm or adrift in the so-called floating population of the underemployed, willing to take his place.
Still, it's not only cheap labor that drives China's economy. ''If you look just at low wages, you overlook the talents of Chinese manufacturers to drive their costs down,'' Weingrod says. The best operations are as efficient and as responsive as the world's elite manufacturers.
China's miracle economy can come at you in a lot of ways. By now most of us know that China is the factory floor of choice for the world's low-road manufacturing: it assembles more toys, stitches more shoes and sews more garments than any other nation in the world. But moving up the technological ladder, China has also become the world's largest maker of consumer electronics, like TV's, DVD players and cellphones. And more recently, China is climbing even higher still, moving into biotech and high-tech computer manufacturing. No country has ever made a better run at climbing every step of economic development all at once. Behind China's rapid economic ascendancy over the last 25 (and especially last 10) years is the basic fact of China's huge population. China is home to close to 1.5 billion people, probably, which would make the official census count of 1.3 billion too low by an amount equal to roughly the population of Germany, France and the United Kingdom combined. China has 100 cities of more than a million people. Since economic liberalization began in 1978, under Deng Xiaoping, the Chinese have started tens of millions of businesses. The number of Chinese who have left farms and now trawl the cities for work probably exceeds the entire work force of the United States.
China is not home to the cheapest work force in the world. Even at 25 cents an hour, Chinese workers cost more than laborers in the poorer countries of Southeast Asia or Africa. In the world's miserable corners, children carry rifles and walk mine fields for less than a dollar a day. China is the world's workshop because it sits in a relatively stable region and offers manufacturers a reliable, pliant and capable industrial work force, groomed by generations of government-enforced discipline.
The other great contributing factor is the migration of hundreds of millions of peasants from the countryside now that the government makes it easier for them to leave. Indeed, the country's embrace of market capitalism over the last decade and the government's insistence that farmers fend for themselves are combining forces to all but evict peasants from the land. The plots allotted to farm families are on average 1.2 acres but can be as small as an eighth of acre; in hundreds of millions of cases these farms fail to generate enough money for a family. Average city incomes, according to the Chinese government, are $1,000 a year, which is three times what they are in the countryside. That disparity has set in motion the largest human migration in history. By 2010, nearly half of all China's people will live in urban areas.
What these numbers mean is that China's people must be regarded as the critical mass in a new world order. The productive might of China's vast low-cost manufacturing machine, along with the swelling appetites of its billion-plus consumers, have turned China's people into probably the greatest natural resource on the planet. How the Chinese (and the rest of the world) use that resource will shape our economy (and every other economy in the world) as powerfully as American industrialization and expansion has over the last hundred years.
We Have Created a Monster
In the political debate over trade and jobs, China is the place where the world's companies choose to exploit low-cost manufacturing. The framing of this debate implies that American consumers and businesses have strong choices in the market; in fact, China, supplying ever more goods as it does, in ever more varieties and at ever better prices, is straitjacketing the choices of American businesses. China's size does not merely enable low-cost manufacturing; it forces it. Increasingly, it is what Chinese businesses and consumers choose for themselves that determines how the American economy operates. The American political debate on China's economic threat overlooks this dynamic entirely.
The experience of Motorola, the U.S. telecommunications giant, offers a lesson in how China's size changes the rules of competition and consumption there and everywhere else.
Every month, five million new subscribers sign up for mobile-phone service in China. The country's 300 million mobile-phone users make China by far the largest such market in the world (and hundreds of millions more accounts are up for grabs). Hence the world's makers of handsets need to be in China. It gives them a chance to grow at a time when the big European and U.S. markets are saturated. Not that it's a seller's market: for equipment makers, China is also the most competitive and protean environment in the world. New manufacturers appear out of nowhere; new phones materialize daily at big-city stores. There are 800 current handset models to choose from. Young urban consumers change phones on average after only eight months -- they sell them to someone else or pass them to family members. Mobile phones in the hands of migrant construction workers, whose annual wages might not cover the cost of a phone, are a common sight in Shanghai and Beijing.
And this mobile-phone market in China is one that Motorola invented.
For Robert Galvin, the company's former and longtime chief executive, China in the early- to mid-80's promised a market that could more than make up for Motorola's having been foiled in Japan for years. But first the company had to develop a top-drawer telecommunications infrastructure. In an unscripted bold stroke at a dreary state ceremony during a tour of the country, Galvin turned to the minister of railroads and asked him whether he wanted to do a good job as minister and be done with it or whether he wanted to create a world-class society. In doing so, Galvin tapped a thick vein of economic patriotism.
Motorola's company archives on its move into China are deep and open. They show that Galvin and his team knew that eventually the transfer of technology to China would sow formidable Chinese competitors. Nevertheless, Motorola decided its best strategy was to get into China early. Before long, Motorola's reports to China's political leaders -- infused with the same missionary vocabulary on industrial quality that had made the company a model for American manufacturers -- were soon parroted by China's leadership. Galvin also brought Motorola's best technology to China. The proof today is in the size and efficacy of the country's mobile communications network: calls get through to phones in high-rises, subway cars and distant hamlets -- connections that would stymie mobile phones in the U.S.
What no one at Motorola saw was that the Chinese market would become the most competitive one of all. Nokia and Motorola now battle for market share in the Chinese handset business. German, Korean and Taiwanese makers figure strongly. And all these foreign brands are now facing intense competition from indigenous Chinese phone makers. ''Competition goes through a cycle in China,'' says Zirui Tian, a researcher at Insead, the French business school. ''At first the foreigners can make things at much lower cost than the Chinese. But as local companies come along to supply the multinational companies, the supply network expands very fast. Then local Chinese manufacturers can start to source their parts in China and drive the prices of their products far lower than the multinationals.''
One of Motorola's most important suppliers is the battery maker BYD Company Ltd., based in Shenzhen, near Hong Kong. In only a decade, the private company has gone from virtual invisibility to owning more than 50 percent of the global market in mobile-phone batteries. Before BYD, phone batteries were made in highly automated plants, like those run by Sanyo and Sony in Japan. But BYD, like Wanfeng, stripped robots and other machines out of the manufacturing process and replaced them with an army of workers. By paying for Chinese salaries, and not for million-dollar American, German or Japanese machines, BYD slashed the price of batteries. Initially the company could not meet Motorola's quality demands, but the American company sent a team of engineers to work with the upstarts, and six months later BYD earned a Six Sigma certification, a universally recognized badge of quality (which Motorola itself invented). The fact that in China machines can be replaced by people for huge cost savings and without sacrifice in quality changes the competitive landscape of the global marketplace. When Motorola and Nokia were pressed to lower their prices by Chinese competitors, they turned to BYD.
One of the biggest challenges facing Motorola and other global manufacturers is that Chinese suppliers are getting too good. Their quality, low-priced parts have helped create new, homegrown and extremely aggressive competitors. More than 40 percent of the Chinese domestic handset market now belongs to local companies like Ningbo Bird, Nanjing Panda Electronics, Haier and TCL Mobile. Ningbo Bird will produce 20 million handsets in 2004 and is likely soon to nudge its way into the ranks of the top 10 mobile phone makers in the world. Yet Motorola can't exactly exit the Chinese market. If it did, says Jim Gradoville, Motorola's vice president of Asia Pacific government relations, the Chinese companies that emerged from the crucible of their market would be the leanest and most aggressive in the world, and a company like his would have no idea what hit it. So Motorola stays. Already the largest foreign investor in China's electronics industry, Motorola plans to triple its stake there to more than $10 billion by 2006.
More Power to the Chinese Consumers
Generalizing about Chinese business always raises exceptions. The country's crazy quilt of state-owned, village-owned, private and hybrid businesses was stitched together over 25 years of rocky reforms. Peasant entrepreneurs, opportunistic officials, government planners, new urban sophisticates and foreign investors all created operations that best fit the moment they stepped into the evolving market economy. And yet, looking at the marketplace from the broadest perspective, one overwhelming fact stands out. Ninety percent of everything made in China is in oversupply; in other words, nearly every manufacturing industry has surplus capacity. And instead of using cheap labor to push their profit margins higher, Chinese companies use cheap labor to drive down prices to the sweet spots for the great mass of Chinese consumers.
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The China Price
China now offers the world a labor supply with depth unlike anything ever seen. In a recent policy brief for the Carnegie Endowment for International Peace, Sandra Polaski, a former State Department special representative for international labor affairs, writes that to put things in perspective, ''if all U.S. jobs were moved to China, there would still be surplus labor in China.'' That fact highlights what is most sobering about China's booming economy: it can force down the value of work in any job that is at all transferable.
In American business this is called the ''China price.'' It is the price American suppliers to other American businesses have to match to keep their customers. It is the price at which Chinese manufacturers can deliver the same goods and services. Last November, the Chicago Federal Reserve Bank noted the complaints that ''automakers have reportedly been asking suppliers for the 'China price' on their purchases.'' It also observed that U.S. suppliers had been asked by their big customers to relocate production to China, or to find subcontractors there.
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''First there was the wholesale price, then the retail price and now there is the China price, and it is very real,'' says Oded Shenkar, a professor at the Fisher College of Business at Ohio State University. Big manufacturers, Shenkar says, come into their American suppliers with the China price in hand and present ultimatums, often veiled, that the price be met.
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