Thomas Friedman - The World is Flat

Before China signed on to the WTO, there was a sense that, while China had opened up to get the advantages of trade with the West, the government and the banks would protect Chinese businesses from any crushing foreign competition, said Jack Perkowski of ASIMCO. “China's entry into the WTO was a signal to the community outside of China that it was now on the capitalist track for good,” he added. “Before, you had the thought in the back of your mind that there could be a turning back to state communism. With WTO, China said, 'We are on one course.'”

Because China can amass so many low-wage workers at the unskilled, semiskilled, and skilled levels, because it has such a voracious appetite for factory, equipment, and knowledge jobs to keep its people employed, and because it has such a massive and burgeoning consumer market, it has become an unparalleled zone for offshoring. China has more than 160 cities with a population of 1 million or more. You can go to towns on the east coast of China today that you have never heard of and discover that this one town manufacturers most of the eyeglass frames in the world, while the town next door manufacturers most of the portable cigarette lighters in the world, and the one next to that is doing most of the computer screens for Dell, and another is specializing in mobile phones. Kenichi Ohmae, the Japanese business consultant, estimates in his book The United States of China that in the Zhu Jiang Delta area alone, north of Hong Kong, there are fifty thousand Chinese electronics component suppliers.

“China is a threat, China is a customer, and China is an opportunity,” Ohmae remarked to me one day in Tokyo. “You have to internalize China to succeed. You cannot ignore it.” Instead of competing with China as an enemy, argues Ohmae, you break down your business and think about which part of the business you would like to do in China, which part you would like to sell to China, and which part you want to buy from China.

Here we get to the real flattening aspect of China's opening to the world market. The more attractive China makes itself as a base for off-shoring, the more attractive other developed and developing countries competing with it, like Malaysia, Thailand, Ireland, Mexico, Brazil, and Vietnam, have to make themselves. They all look at what is going on in China and the jobs moving there and say to themselves, “Holy catfish, we had better start offering these same incentives.” This has created a process of competitive flattening, in which countries scramble to see who can give companies the best tax breaks, education incentives, and subsidies, on top of their cheap labor, to encourage offshoring to their shores.

Ohio State University business professor Oded Shenkar, author of the book The Chinese Century, told BusinessWeek (December 6, 2004) that he gives it to American companies straight: “If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won't work.” Chinese producers can make the same adjustments. “You need an entirely new business model to compete,” he said.

China's flattening power is also fueled by the fact that it is developing a huge domestic market of its own. The same BusinessWeek article noted that this brings economies of scale, intense local rivalries that keep prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in twelve-hour days, an unparalleled component base in electronics and light industry, “and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores, Target, Best Buy and J.C. Penney.”

Critics of China's business practices say that its size and economic power mean that it will soon be setting the global floor not only for low wages but also for lax labor laws and workplace standards. This is known in the business as “the China price.”

But what is really scary is that China is not attracting so much global investment by simply racing everyone to the bottom. That is just a short-term strategy. The biggest mistake any business can make when it comes to China is thinking that it is only winning on wages and not improving quality and productivity. In the private, non-state-owned sector of Chinese industry, productivity increased 17 percent annually-I repeat, 17 percent annually-between 1995 and 2002, according to a study by the U.S. Conference Board. This is due to China's absorption of both new technologies and modern business practices, starting from a very low base. Incidentally, the Conference Board study noted, China lost 15 million manufacturing jobs during this period, compared with 2 million in the United States. “As its manufacturing productivity accelerates, China is losing jobs in manufacturing-many more than the United States is-and gaining them in services, a pattern that has been playing out in the developed world for many years,” the study said.

China's real long-term strategy is to outrace America and the E.U. countries to the top, and the Chinese are off to a good start. China's leaders are much more focused than many of their Western counterparts on how to train their young people in the math, science, and computer skills required for success in the flat world, how to build a physical and telecom infrastructure that will allow Chinese people to plug and play faster and easier than others, and how to create incentives that will attract global investors. What China's leaders really want is the next generation of underwear or airplane wings to be designed in China as well. That is where things are heading in another decade. So in thirty years we will have gone from “sold in China” to “made in China” to “designed in China” to “dreamed up in China”-or from China as collaborator with the worldwide manufacturers on nothing to China as a low-cost, high-quality, hyperefficient collaborator with worldwide manufacturers on everything. This should allow China to maintain its role as a major flattening force, provided that political instability does not disrupt the process. Indeed, while researching this chapter, I came across an online Silicon Valley newsletter called the Inquirer, which follows the semiconductor industry. What caught my eye was its November 5, 2001, article headlined, “China to Become Center of Everything.” It quoted a China People's Daily article that claimed that four hundred out of the Forbes 500 companies have invested in more than two thousand projects in mainland China. And that was four years ago.

Japan, being right next door to China, has taken a very aggressive approach to internalizing the China challenge. Osamu Watanabe, chairman of the Japan External Trade Organization (JETRO), Japan's official organ for promoting exports, told me in Tokyo, “China is developing very rapidly and making the shift from low-grade products to high-grade, high-tech ones.” As a result, added Watanabe, Japanese companies, to remain globally competitive, have had to shift some production and a lot of assembly of middle-range products to China, while shifting at home to making “even higher value-added products.” So China and Japan “are becoming part of the same supply chain.” After a prolonged recession, Japan's economy started to bounce back in 2003, due to the sale of thousands of tons of machinery, assembly robots, and other critical components in China. In 2003, China replaced the United States as the biggest importer of Japanese products. Still, the Japanese government is urging its companies to be careful not to overinvest in China. It encourages them to practice what Watanabe called a “China plus one” strategy: to keep one production leg in China but the other in a different Asian country-just in case political turmoil unflattens China one day.

This China flattener has been wrenching for certain manufacturing workers around the world, but a godsend for all consumers. Fortune magazine (October 4, 2004) quoted a study by Morgan Stanley estimating that since the mid-1990s alone, cheap imports from China have saved U.S. consumers roughly $600 billion and have saved U.S. manufacturers untold billions in cheaper parts for their products. This savings, in turn, Fortune noted, has helped the Federal Reserve to hold down interest rates longer, giving more Americans a chance to buy homes or refinance the ones they have, and giving businesses more capital to invest in new innovations.