Saturday, March 05, 2005

The Chinese Challenge

BOOK REVIEW

In the final analysis, it comes down to people, millions and millions of people – 1.3 billion people by official count, unofficially probably closer to 1.5 billion people. “First and foremost, the country’s [China] huge population changes the fundamental rules,” says the author of China Inc, Ted. C. Fishman (Scribner, 342 pages, $26).

These millions are drawn to factory towns nobody in America has heard of with names nobody can pronounce that are larger than Chicago. These towns have become the new Ruhr Valley, the new Pittsburgh-Detroit, soon perhaps the new Silicon Valley. Three shoe factories in the city of Dongguan alone employ a quarter of a million workers.

No industry is safe from the inexorable pressure of these workers, from cheap, simple Christmas tree ornaments, made by the nimble fingers of thousands of women who haven’t the faintest idea what an angel is, to sophisticated electronics components, car parts and machine tools. Soon Chinese cars will begin to appear in American showrooms (or maybe Wal-Mart).

Of course, to simply say that China has a lot of people is to state the obvious. The issue is how China has marshaled this enormous workforce to create the world’s fastest growing economy. This is the subject of Fishman’s excellent and very readable new book that deftly combines anecdotes and analysis to help us understand China’s economic miracle.

Basically, the Chinese communists broke centuries of feudalism to mold this inchoate mass of people into a docile and disciplined workforce. Then the economic reforms set in motion by of former leader Deng Xiaoping in 1979 unleashed the pent-up natural entrepreneurial spirit of the Chinese people, producing a workforce that has become irresistible to the world’s manufacturers.

Strangely, the still nominal communists who run China have succeeded in turning Marxism on its head. Classical Marxism holds that capitalism is the final stage of human development before communism. In China, communism has become the final stage before the full fruition of capitalism.

When Japan Inc. seemed poised to conquer the world, the iconic image of Japan’s economic prowess was the fully automated automobile factory, robotic arms looking like arms of a giant praying mantis, sparks flying, not a human anywhere in sight. The iconic image of China Inc. is row of young woman, all wearing identical blue uniforms, hunched over an assembly line in an electronic-components factory, like an endless chorus line seemly stretching out forever. Not a robot in sight.

Who needs robots when every day brings more and more recruits to the labor force from the countryside, more cogs, if you will, in the giant Chinese manufacturing machine, a vast floating population of migrant workers advancing on China’s cities that is larger in itself than the entire American workforce? Therein lies the challenge for America and the rest of the world.

In retrospect it was not so difficult for America to meet Japan’s challenge, which was fundamentally founded on quality, automation and productivity. Japan is a sizeable country, but it never based its competitive advantage on armies of low-paid workers alone, nor its marketing strategy simply on price. Basically, Japan competed by raising standards of quality and productivity.

That gave America an opening for a comeback. Quality can be improved, productivity can be raised, robots can be replicated. It mainly took determination and capital. But how, short of annexing Mexico (which would still leave China three times as populous), do you compete with China’s endless supply of workers?

Alas, Fishman offers few answers. China’s millions, of course, are a potential market for American and other countries’ products, and the numbers of people with the wherewithal to buy things is large and rapidly growing. But for many American manufacturers the Chinese market is a double-edged sword, the author says.

Any exporter faces the prospect that his technology will be assiduously studied, dissected and replicated at a much lower cost. This does not even take into account outright piracy. As Fishman points out, piracy of computer operating software not only robs Microsoft (which seems strangely tolerant about it) but also gives industries that use computers an advantage across the board.

The term “economic miracle” has been over-worked since the end of World War II. First came the “German miracle,” then the Japanese miracle, then the Asian Tigers miracle, and now the Chinese miracle. But in this case the rise of China in the past 20 years has truly been miraculous.

One can cite the usual statistics, such as years of consistent 7-9% annual growth, but the fundamental fact is that China in recent years has lifted more people out of poverty than any other country in the world, anytime, anywhere. That, of course, is good news for China. For the rest of the world it is a mixed blessing and poses a supreme challenge for the 21st century.

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"But how, short of annexing Mexico (which would still leave China three times as populous), do you compete with China’s endless supply of workers?. . . Any exporter faces the prospect that his technology will be assiduously studied, dissected and replicated at a much lower cost."

There are signs that developed countries can't compete. They are studying the fine print of WTO rules as a result. The rules allow member countries to protect their industries against, for example, foreign imports of textiles if these suddenly come flooding in. European and US leaders are coming under enormous pressure to protect their domestic manufacturers.

But this is only the latest problem with evolving global economics. Exchange rate intervention is also causing harm to Europe. Perhaps the G8 will sort this all out this year.

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