Saturday, November 23, 2013



     The immense weight of China dominates much economic prognostication these days. Will it overtake the USA and become the dominant power of this century ? What are its strengths and weaknesses ? In the November 18 edition of Time Magazine Michael Schuman looks at this question from the perspective of China's need to learn innovation. Not simply to produce. This is one area in which it is well behind the USA, to the great comfort of American apologists.

      China is facing a period of transition and needs to adjust.

     "China is a victim of its own success....The country can no longer rely on making lots of stuff; China has to invent things, design them, brand them and market them. Instead of following the leaders of global industry, China has to produce leaders of its own."

     China has taken steps to address the needs of its new stage of development, but it has a long way to go. Chinese labour is no longer the dollar-store market of the world. Chinese firms are beginning to outsource to other countries. The author looks at one instance, that of Speciality Medical Supplies who tried this year to shift production to India. Their Chinese workers revolted and held the American manager hostage in his office for six days. Tsk !

     Labour costs in Mumbai would have been 75% less than in Beijing. Wages in China are growing, courtesy of demographics and a shortage of skilled labour. Companies such as toymaker K'NEX are even beginning to "reshore" production back to the USA as other financial factors put pressure on the shrinking labour-cost advantage of China versus America.

     There is also the problem of China's slow adoption of cutting-edge technology. The failure of China's auto industry to make an impression in world markets is illustrative. Failure to adapt has resulted in a 49% rate of initial defects in Chinese-made cars. Ooops ! China has overtaken South Korea as the world's largest shipbuilder, but its vessels are built on older models while the Koreans have moved on to the lucrative markets of supermassive container ships and vessels for energy exploration.

     What innovation there is in China generally builds incrementally on existing technology rather than groundbreaking ideas. The Chinese educational system is good at skill-building but poor at instilling creativity. Chinese engineers tend to be conservative and every concerned about possible consequences of failure. Especially when new ideas are involved.

     China is also notably deficient in marketing. As the author says; "Chinese executives are too fixated on their production and not enough on their customers.". This may be a hangover from the Marxist mode of management, and new Chinese entrepreneurs are indeed trying better ways to sell their products to the world. Jazzed up with a veneer of the exoticism of Chinese culture.

     China lacks management skills, and those who have them can often command relatively huge salaries. Some firms have responded by making their businesses top heavy. What they lack in quality they try to make up for in quantity. Perhaps this managerial over-oversight is also a Marxist leftover.

     Yes, China has had almost miraculous economic growth, but there are many problems that still hold the country back. This article is a good overview of some of them. It's valuable even though it is replete with "evidence" that is only anecdotal.

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