CHINA MAKES EVERYTHING, WHY CAN’T IT CREATE ANYTHING?
With China as the world’s growth engine, it is a mere 30 years since its communist leadership exchanged Maoist rhetoric for cood old capitalism – or what it calls “socialism with Chinese characteristics”. China has become the world’s second largest economy and the chief rival of the US for golbal dominance. China’s 1.3 billion upwardly mobile people are voracious consumers of everything. Through its relentless exports, it has amassed a mountain of cash reserves and made itself the US’s biggest foreiegn creditor.
But that is fading into history as it has become a victim of its own success. Decades of nonstop growth have altered its place in the golbal economy and changed how it must compete with rich nations like the US and emerging economies like India. Its econoomic miracle has resulted from government support, cheap labour and state-directed finance, but that cannot ensure its future. It can no longer rely on just making lots of stuff – it has to invent things, design them, brand them, and market them. Instead of following the leaders of global industry, it has to produce leaders of its own.
Such a transition is not easy. Few emerging nations in modern times have made the leap from assembler to inventor, copycat to innovator. That would mean an overhaul of its economy. Many of the products China manufactures today aren’t really Chinese at all. Apple iPads might be exported from assembly lines based in China, but they do little more than piece them together. The core technologies come from elsewhere. and even the factories are run by foreign firms. For Chinese companies to compete with the world’s best, they will have to create products of their own that have an impact similar to the iPad’s. That requires a set of skills and know-how they don’t yet possess and a level of managerial expertise they have,’t yet developed.
The new Chinese leadership is pushing for free-market reforms – liberalizing finance, supporting private enterprise and opening protected sectors. So far, progress has been slow. The Shanghai special zone to experiment with freer capital flows is a first baby step. Reining in an overbearing bureaucracy will require formidable political will. is the leadership able to deliverd a comprehensive reform package with exucutable specifics and clear timetables? There are five challenges that China must address.
1. Labor is no longer cheap.
Some American companies are moving their manufacturing base to India. China’s economic ascent is underpinned by a giant, impoverished workforce. Labor was so cheap and plentiful that few other countries could match it. But with the population aging rapidly, thanks to the government’s one-child policy, the workforce is shrinking, and assembly-line work less appealing. As a result, wages are skyrocketing. Over the past 10 years, the cost of a worker has quintupled to $500 a month, and even at that increase, it is difficult to find enough staff to fill the needs of common factories. By contrast, in Mumbai, workers are 75% cheaper and far more plentiful.
The competition for talent is so fierce in China, that most employees earn well above their counterparts in other emerging markets. Data on median salaries show that a machiine operator earns %6,405, a skilled secretary in Beijing $11,213 (compared to $4,817 and, $7,809 respectively, in India). Cheap labor isn’t there anymore.
Rising cost are even making China less competitive than the US. The decision to offshore production to China was once almost automatic for American executives, but that is no longer true. Taking into account rising wages, labor productivity and other factors, the coat of manufacturing in China will roughly equal that in the US by 2015. 21% of US manufacturers are either actively bringing back production to America (reshoring), or planning to do so over the next two years. Manufacturing in China is not as efficient as many believed – the China handicap – the added burden of large inventories, inflexible supply chains and missed market opportunities caused by long-distance production. By investing in automation, manufacturers have been able to return much of their parts manufacturing and most of their finished-product assembly back to the US while maintaining profitability. Not only foreign companies are shipping out, but Chinese companies, like footwear maker Huajian, are going to countries like Ethiopia, with wages one-eighth of those in Chinese plants. Chinese shoemakers need to do more than compete on cost to ensure China’s future in the industry- they must focus on R&D and improving productivity.
2. Companies lag behind in technology.
Some Chinese companies, most notably telcom-equipment maker Huawei, are globally competitive, but they are rare. Most lag behind in critical technology. In 2006, Geeley, a Chinese auto maker, had plans to export their small sedans to US consumers. That didn’t happen as their cars were simply not ready to compete in the tough American market. They needed to improve skills, quality, maintenance and management.
Despite bottomless investment and state protection, the country’s carmakers cannot compete head-to-head with foreign manufacturers. At home, international brands like Chevrolet, Volkswagen and Hyundai dominate 70% of the passenger-car market. Overseas, Chinese exports are often driven by price-conscious consumers in poor nations. Despite heavy investing in R&D and automation, Chinese-branded cars still suffer 49% more intial defects than international ones sold in China. Putting together long-lasting, world-tested products takes years. Chinese carmakers are still going through a learning phase.
Meanwhile, their foreign rivals haven’t stood still waiting for them. Chinese shipbuilding overtook South Korea as the world’s larges producer of vessels, but Chinese yards generally export ships of older, simpler design that command lower prices. Koreans have advanced into more expensive, technologically superior products like supersize container ships and sophisticated drill vessels for the energy industry. The Koreans are much more mature in R&D and quality.
3. Innovation doesn’t come easy.
There are clearly innovative firms in China, like Tencent with its creative Internet and mobile services. Xiaomi has become a competitor to Apple in China with its low-cost smartphones, even though it is only three years old. However, the innovation that takes place in China tends to build upon existing technology, not generate revolutionary ideas. Most experts believe that the US holds the most promise for producing disruptive technologies over the next four years. China hasn’t developed the track record or financial networks to support the sort of speculative researh that can spawn big-time innovation that often takes years to bear fruit. Silicon Valley has a clear edge with an ecosystem to make big breakthroughs.
Many countries are trying to create their Silicon Valley but with limited success. For China to do so will require intensive reform of its financial system, so it more effectively supports private enterprise; of its regulatory environment, to better protect intellectual property; and of its exam-obsessed education system. China’s schools may excel at infusing students with strong skills, but they fail to foster the creative thinking crucial to innovative research.
To lure Chinese engineers out of their shells is difficult as they don’t tinker on their own projects. They are happy doing what they were asked to, and are too worried the company would be angry if their experiments flopped. A fear of failure is part of the culture. Companies need to provide funding for personal initiatives while making it clear there is no pressure to transform them into business results. Role-playing workshops enhance critical thinking. Chinese engineers shy away from critical questioning which is fundamental to R&D. In Silicon Valley, people question the status quo and find alternative ways.
4. There are too few golbal brands.
Though the Chinese manufacture a lot of stuff, only a handful of firms (PC giant Lenovo and appliance maker Haier) have internationally recognized consumer brands. Chinese sportswear maker Li Ning, has spent heavily but failed to lure international shoppers. Its management has just gone through the motions of their competitors. Chinese executives are too fixated on their production and not enough on their customers to make progress on branding. There is a general weakness in the humanities – a committed, honest interest in other people. To compete in the international market, Chinese clothiers need to combine a Chinese lifestyle image with international methods to be unique and competitive. Even at home, they are being seriously tested in major cities by foreign competitors.
5. Good managers are hard to find.
A nimble corporate management has difficulty finding talent to fill the needs of all the rapidly expanding businesses. The scarcity of qualified workers is the number one human-resource challenge. The median salary for an upper-middle manager in Beijing rose to over $105,000 in 2012, already more than two-thirds the level in the US. The dearth of capable managers is the biggest thing holding business back. Managers often need to be trained from scratch, intensively immersing promising managers in different aspects of the business and carefully moving them up into senior positions. In the restaurant business, responsibilities are broken up into narrowly defined slivers- one monitors the kitchen, another oversees the servers, another the facilities. Detailed checklists and procedures on everything, from how a waiter should interact with customers to personal hygiene to food preparation, are monitored by the management. The restaurants need 30% more staff than a similar one in the US. Without proper managers, everything has to be overengineered.
Despite these challenges, don’t count China out. It has routinely silenced naysayers and defied doom-and-gloom predictions. Even with the slowdown, the economy is still expanding at over 7%. Yet transforming a fractious, developing country of such gargantuan size into an economically advanced nation has simply never been done before. Fifty years of business innnovation in the US is trying to happen here in ten years.