‘Made in China’: the dilemma


China is the showcase of the world with ‘Expo 2010 Shanghai China’.  Still classified by the IMF as a developing country, its economic health, its strong membership of the G-20, its permanent seat on the United Nations Security Council, its Shanghai stock market ranked 5thworldwide, 4 of its companies in the world’s top 10, the largest standing army in the world, its nuclear capabilities point more towards China as a global superpower

China’s current economic strength adds to its global superpower status:

  • China is primarily a market economy based on private property ownership
  • Best Current Account Balance in the world1
  • The world’s 2nd largest economy measured on Purchasing Power Parity (PPP)1
  • The 3rd country worldwide on market value of publicly traded shares1
  • The world’s 3rd largest country for investment in research and development as % of GDP1
  • The 4th largest GDP real growth worldwide in 2009 at +8.7%1
  • China contrary to public belief does not just copy products. In 2009, 582,000 patents were registered in China.  Based on 2008 figures, China registered more than twice the number of US patents.3
  • China is not only about manufacturing: Services provided 40.5% of GDP (33.2% of workforce) in 2009, (Industry 48.6% of GDP for 27.2% of workforce), Agriculture (10.9% of GDP for 39.5% of labour force)1
  • Although China is the world’s biggest producer of Carbon dioxide due largely to its current
    over-dependence on coal, China has fully grasped the eco-friendly economic potential benefits and is the world’s leading investor in renewable energy technologies.
  • China does not live in isolation: it is a leading player in free trade areas and security pacts amongst APAC nations and other developing countries1, especially in Africa, using its full power to influence the world economy and world order.

The 2010 economic outlook strengthens China global superpower status:

In 2010, the differential between China, the US and the Euro Zone is going to widen even further:

  • Expected 2010 GDP Growth: China +8.6%, US +2.4%, Euro Zone +0.6%
  • Expected 2010 Consumers Expenditure: China +8.8%, US +1.2%, Euro Zone +0.4%
  • Expected 2010 Investments: China +11.1%, US +1.9%, Euro Zone -0.2%6

Why is China so successful?

  • Manufacturing as a low-cost producer: combination of cheap labour, good infrastructure, medium level of technology and skill, relatively high productivity, favourable government policy
  • Undervalued exchange rate which can be seen as anti-competitive2

Why are foreign companies so attracted by China?

  • A current largely untapped market of already 100 million middle-class residents and over 800,000 super-rich.  China is the world’s second consumer of luxury goods after Japan. 

Improvements made in China:

  • The poverty rate has been reduced despite a widening rural-urban income gap and a still low per capita income (ranked 128th worldwide).1 Literacy has also increased dramatically.
  • So has the life expectancy which has gone from 50 years old in 1950 to 73 years old in 20094, but this is now also the number 1 issue for China for the future, with an ageing population.2

Other Challenges for China:

  • Some analysts are predicting a ‘China bubble’ due to an unsustainable and artificial growth rate
  • Pressure from younger generation for higher wages as shown recently at Honda & Foxconn

THE DILEMMA:

China is the world’s 2nd largest exporter.1The paradox is that 55% of Chinese exports are conducted by joint ventures and foreign companies.  This can be explained by the average hourly labour cost of $1.64 in China (vs. $24.59 in the USA and $37.66 in France).5 THIS IS THE DILEMMA: WHAT WORK IS GOING TO BE LEFT FOR THE SO-CALLED DEVELOPED COUNTRIES AND WHERE IS THE RECOVERY GOING TO COME FROM? WITH SUCH A LABOUR COST DIFFERENCE, DEVELOPED COUNTRIES ARE UNLIKELY TO RE-LOCALISE THEIR INDUSTRIES IN ORDER TO BOOST THEIR OWN RECOVERY.

References

1 ‘CIA World Factbook’; 2 ‘Le Monde Bilan Economie 2010’; 3 ‘China Office of Intellectual Property and US Office of Patents and Registered Trademarks’; 4 ‘World Health Organization’; 5 ‘Enjeux Les Echos May 2010’; 6 ‘The Economist – The World in 2010’

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About Raymond Piombino

Market Research Principal Consultant & Founder of Bordeaux Consultants International. Experience on large international multi-mode quantitative studies.
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10 Responses to ‘Made in China’: the dilemma

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  3. Farai says:

    Brilliant article. China is slowly becoming the center of attraction for most industrialized nations. By the turn of the next decade, the country will surpass all the heavy weights in terms of economic growth.

  4. Gareth Nelson says:

    Raymond – your blog is very interesting and well researched about China. I think it has some challenges ahead too, which you should look at.

    1) Demographics – China’s one child policy is now starting to show through in the demographics. Firstly one child per family means that there is one child to 2 parents. China is thus starting to have an older population profile like the west. In addition because parents could only have one child many (especially in rural areas) aborted female foetuses. This means that there are a lot more men than women in the younger generation, which could cause social issues
    2) The regime – As China continues to progress, the old guard of the Communists still keep a tight rein on power. The question is whether at some point they will face a challenge e.g. from the generation of angry young men (who can’t find wives) at point one.
    3) At the moment China’s economy is export driven. If the West continues to struggle then China will find it hard to export at such a rate if Westerners are unable to buy as much. China needs to sell more internally by continuing to grow the middle class (although this has political risk e.g. at point 2)
    4) While China may now be looking at green technologies, their growth has come through rapid industrialisation. At some point China will have a legacy of pollution and industrial diseases to deal with.

    Due to the points above some commentators are suggesting that India may become more of a powerhouse than China in the years ahead.

    • Many thanks, Gareth for your very thorough reply.
      I agree on points 1 and 2 and to some extent on points 3 & 4.
      Regarding point 3, higher wage demands might also be an issue, but China has started diversifying working a lot on its internal market, the other developing markets and especially Africa.
      Regarding point 4, I suppose it will be the same as when European countries moved from coal to other energy sources, decades ago…
      Personally I do already see India as an economic powerhouse but not as a global superpower (which in my view takes into account both economy and politics/geo strategy and international relations), as India is too busy with its own challenges with Pakistan and Kashmir and has not got the same geo-political ambitions, aspirations and attitude as China’s leaders.
      From my point of view, China wants to take the vacuum left by the USSR break-up and position itself as the alternative and/or opposing block to America and its allies.
      Also India is a democracy following the British model which of course China is not.
      India is also facing some other internal issues:
      – India still has a very high % (25% in 2007) of people living below the World Bank’s international poverty line. Income per capita based on PPP is half that of China, ranked 164th in the world. India has the same widening rural/urban income gap as China.
      – India has not got the ageing population issue but has challenges related to its growing population.
      – India and China have more or less the same gender imbalance.
      – India still has a very low literacy ratio especially amongst female.

  5. Orrin Charles says:

    This was a good post.
    it is interesting to think that China, with it comparative advantage in manufacturing over so many other countries, could suffer in the future from generating too much wealth, as their will eventually be no money anywhere else and the IMF will become the CMF.

    According to Hoftstede’s Cultural Dimension Theory China has a high Power Distance Index (80 PDI) and a low Indivualism (20 IDV) rating, this would suggest that there could potentially widen in class system.

    With such a low labour cost and the considerable difference from other countries, I would think that countries will need to look towards standardisation of technology which i’m my opinion is one of the most concerning issues in GDP growth worldwide. Here’s why, we have in the West a product life cycle of personal equipment (i.e MP3 players, Mobile phones, PDA) less than 1 year, partnered with this, new connection specifications (USBs, MiniUSB), and gadgets, which leds to, along with other factors, an increase in product waste and low compatibility issues.

    And last point SO-CALLED DEVELOPED COUNTRIES need to create a tax on large companies purchasing from China (yes, i said it) OR give entrepreneurial companies subsidies for investing in local production and local innovation, as their margins will be undoubtedly lower.

    The question is do these So Called Developed Countries like being spoon fed?

    • Many thanks for your very interesting feedback, Charles.
      As noted by Geert Hofstede, ‘the High Power Distance ranking is indicative of a high level of inequality of power and wealth within the society, but this condition is not necessarily forced upon the population, but rather accepted by the society as their cultural heritage’. I am not sure we can link the low Individualism rating to the potential widening in class system. This low individualism is historical and inherited from the Communist society. I think the question is more whether the younger generations will continue to accept these inequalities as cultural heritage and whether this unorthodox mixed system of market economy based on private property ownership (which will create more individualism) and single party rule is a sustainable model in the long term.
      I don’t fully agree with your assessment of the product life cycle in the West. This is done purposedly by the business industry to keep the economy alive artificially by ensuring that your product is obsolete within a year so that you buy the next generation and so on… Also the business industry is creating incompatible systems on purpose to lock the customer in. Apple is a great example with the ipod, the iphone, itunes, its applications platform and so on… I am not necessarily saying that this is right, but this is the way it is…

  6. Saeed Sheikh says:

    A Good intersting and informative Article on China
    SaeedSheikh

  7. Geoff Le Quelenec says:

    We need to continually ask the question about emerging or developing economies … as compared to whom? If China can still be called an “developing economy” with a straight face after reviewing the numbers above, what will it take for it to qualify as fully “developed”.

    The G8 has been forced to accept the new players into the expanded G20 by dint of sheer economic muscle. How long will these new powerhouses accept the implied second tier status before the realization they may be in the drivers seat kicks in?

    Furthermore, when do we begin to identify and group the economies that are in decline? How long before we begin to label and group old powers such as Greece, Italy, the UK and perhaps even the good ol’ US of A together. What do we even call them? “Submerging economies”?

    Geoff Le Quelenec
    geoff@lequelenec.com

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