Posted by Martyn
One thing that many China expatriates have known for years, especially those involved in joint ventures, is that foreign firms with Chinese joint venture partners, with their insatiable demands for cash, technology and professional know-how, would badly lose out when their ex-joint venture partners and Chinese subcontractors started manufacturing and exporting for themselves. In my experience, Chinese companies normally use foreign firms as merely a stepping stone on the way to acheiving their own goals.
In the last two decades, Japan and the former Asian Tigers progressed from manufacturing-based to high-tech economies just at the same time as China opened up to foreign investment. Jobs and factories were outsourced to China to take advantage of the cheap and unlimited labour. Currently, other Asian countries account for around two thirds of total F.D.I. into China. South Korean companies, however, are seeing their decision to invest in China come back to haunt them:
Take Chinese MP3 player manufacturer AVC, which recently entered the Korean market with its SIGN brand. Located in Shenzhen, the company was originally a subcontractor for Korea’s largest MP3 manufacturer Reigncom. To add insult to injury, its products are well received in Korea and have won design prizes in Europe.
China’s largest home electronics manufacturer Haier, meanwhile, whose affordable air conditioners are a hit in Korea, has now started selling premium LCD TVs, while China’s top PC manufacturer Lenovo, which has launched a full-scale assault on the Korean market this year, is vowing to cleanse the image of Chinese products of its cheap and tacky reputation.
Chinese-made goods have already secured over 80 percent of the Korean market. Now, the Chinese invasion has gone upscale, with anything from digital TVs to spandex and heavy industries like steel and chemicals.
China already dominates many international markets, such as textiles. Although foreign-funded companies still account for a majority of exported goods out of China, domestic firms are catching up fast. Chinese manufacturers are also moving up the technology ladder and starting to export high-tech goods. As above, dominating countries like South Korea in their own markets with cheaper versions of products that Koreans have long made for themselves and the rest of the world. The next big Chinese export onslaught will be automobiles.
While Chinese companies still have a lot to learn about the global marketplace and, unlike Japan in the 80s, are somewhat less willing to learn from foreigners and overseas Chinese, the oncoming onslaught of Chinese manufactured goods is, I fear, unstoppable.
1
By davesgonechina
So if we assume as given that:
a) the export onslaught is inevitable in most if not all sectors
b) Chinese exports will eventually meet if not surpass current premium quality standards for whatever product we’re talking about
c) free markets are not going away
Then aren’t we getting into a Thomas Friedman here, the world being flattened into a playing field based on innovation?
September 20, 2005 @ 10:33 pm | Comment
2
By Thomas
The problem is, as you start going quality based instead of quantity based, maintaining the huge Chinese workforces will become uneconomical. Sure some companies can scale back on employees. But a prolongued trend of this in an industry will throw millions of Chinese out of work. And China is not anywhere near ready to throw all of those people into services.
There’s a dark other side to the trend listed above.
September 20, 2005 @ 11:22 pm | Comment
3
By bobby fletcher
Reminds me of the “Japan Inc.” stuff back in the 80’s. Now hindsight tells us, was Japan really evil, or we weren’t competitive enough?
September 21, 2005 @ 12:34 am | Comment
4
By Simon
Bobby is exactly right. China’s following a well worn path to prosperity…Japan did it, Hong Kong did it, Singapore did it, Korea did it…as labour gets more expensive, China will switch up the value chain. The challenge for Chinese products is whether they can be known for their quality rather than their price…and how their Asian and other competitors will react. Once you get away from competing on price, it becomes a far more level playing field and China is starting a long way behind.
I might add this technology transfer thing has been going on for a while….gunpowder, anyone?
September 21, 2005 @ 3:55 am | Comment
5
By dylan
But the PRC isn’t just like all those other Asian tigers. The PRC still has up to 800 million peasants living on the land with few skills, education or things to sell except their labour. As PRC moves “up the value chain”, how will they be employed? Look at the experience of the Asian tigers with their much smaller agricultural populations. They all still have great problems looking after that sector and providing jobs, often resorting to protectionism and other market distorting practices. Then there is the political and social impact of the san nong which will be exacerbated. Why is it that the PRC is considered to inevitably succeed in moving up the value chain?
September 21, 2005 @ 6:13 am | Comment
6
By Daniel
I do not think that Japan and the Asian Tigers had anywhere near China’s very high levels of corruption eating away at the economy like a cancer.
Also, China’s ccp accept this corruption, which is essentially from it’s own cadres, as part of the price China must pay for ccp-controlled economic development.
Over the last twenty years China has dangled the dream of the fabled China market in front of the eyes of all foreign companies, as it has done for hundreds of years. This has allowed it to gain the technology it needed to develop home grown industries like wihte goods, high technology goods and, like the post says, vehicles.
A short cut to success.
Cheating foreigners and grabbing existing technology is easy but progressing to the next stage will be be China’s achilles heel. Chinese companies do well to copy and use existing designs but when it comes to spending the R&D big bucks needed to be innovative it will be found wanting.
This will be China’s downfall. It will never lead the world in anything. It will always trail the developed countries, copying and cutting prices for established technologies.
September 21, 2005 @ 2:14 pm | Comment
7
By wawa
Wait until China’s educational system is reformed to promote more creativity like the western countries, and then you will see the real scary China.
September 21, 2005 @ 3:19 pm | Comment
8
By Daniel
wawa
I have heard some sweeping statements in my time but your comment takes first prize.
Wait until China’s education system is reformed? Does the ccp have a magic wand to wave about in Beijing? A quick wave, a few abracadabra and the eduction system is, as you say, reformed.
Dream on.
At the present, many peasants (all 800 miilion of them) think that sending girls to school is a waste of money – and that is from those who CAN afford it, many can’t. Those girls who do get the chance to go to school should also be thankful that they weren’t aborted after the ultrasound scan, or left to die somewhere.
Even though elementary school is supposed to be compulsory, how many tens of millions of children in the countryside never finish it? Even the ones who do manage to get that far have zero chance of doing much more with their ill-educated lives than becoming either farmers or migrant workers. Some choice.
AND THIS IS AFTER 30 YEARS OF ECONOMIC REFORM!
The day that the ccp reform the education system is the day I see a poor ccp cadre.
ie NEVER.
September 21, 2005 @ 5:00 pm | Comment
9
By wawa
Daniel, are you really talking about today’s China or the China 30 years ago? Don’t know your background on China, but you did sound pretty odd to me.
September 21, 2005 @ 6:42 pm | Comment
10
By lin
Daniel,
davesgonechina might be right, and You have definitely missed some important news recently.
“China will eventually go from the world factory to the world laboratory”
This is something I read yesterday.
I couldn’t find the exact link now. Basically the news mentioned that many giant international companies are setting up R&D labs in China and many of them already did. For example GE has a huge R&D department in Shanghai. Yet you may have heard that Chinese SOEs have little interests in R&D and ever growing college students in China have hard time to land a job. Well, savvy foreign companies always see this as a great opportunity. What will be the consequence, if a good engineer or scientist in China costs $5000/year, a Ph.D. being willing return to China with degrees from US universities costs only $20000/year, while a chemical, electrical and computer engineering graduate in US will easily cost $40000-$80000/year? Besides, the scale-up technicians are cheap, the workers are cheap, the land is cheap, the tax is low, (Chinese government may even give them a big tax break) environmental cost is low, and a lot of raw materials are cheap in China. Not to mention a big potential market is just right here.
Do you see the opportunities that China could emerge as the world laboratory? At least Kai-fu Lee sees it and did a boatjumping move from M$ to Google China. After setting up the highly regarded M$ research unit in China many years ago, he decided to setup a research unit for Google. M$ sued him because too much he knows how to attract the most talented Chinese software engineers. At the same time of this lawsuit, M$ decides to expand their research department in China in competing with Google expansion in China. I heard they will hire 300 top graduates by the end of the year before Kai-Fu Lee does the same for Google.
Again, do you see the opportunity that China could emerge as the world laboratory? Actually India already did at relatively small scale in software industry. Why not for China? People in US have already talked about what else can be outsourced, and I ask: what else can not be outsourced?
Back to China, if you see everything dynamically, years later, these trained R&D talents in big international corporations will eventually diffuse out to all over the China. They may jump the boat or set up their own enterprises. The best of all, unlike know-how, patents and product lines that domestic companies are buying hard from overseas companies, everything that the R&D engineers learned from their Giant corps employers will flow in their blood and stay in their brain forever. Nobody can take it away from them.
Probably my theory is scarier than Martyn’s. However we have known, as a biased news spreader, Martyn like scaring people:) While talking about the cheap Chinese products flooding the world market, he failed mentioning that a great deal of giant international companies is making a great deal of money in China. Some of them, such as P&G, even dominate the Chinese domestic market. After 20 years of economic development, Chinese don’t even know how to build a good passenger car engine yet.
Everything boils down to the education plus the bigger environment for business to grow and for people to live. This is what you don’t need to worry about because these two things can not be outsourced. US has been the strongest player in both areas for many years, which guarantees the leading position of US as innovation center and money center in the future.
September 21, 2005 @ 10:53 pm | Comment