Doing overtime in the workshop of the world
news.ft.com
By James Kynge in Beijing
Published: October 28 2002 18:09 | Last Updated: October 28 2002 18:09
The power behind China's emergence as the workshop of the world resides within people like Liu Hongmei, a 19-year-old with ruddy cheeks and a floral headscarf who recently stepped off a bus in the booming southern city of Zhuhai.
She has come from an impoverished village in the central province of Hunan, motivated by her parents' entreaties to earn enough to pay for her brother's schooling and by her own insight that her marriage prospects would improve if she managed to save something.
"If you want to marry a man with money, you have to have money yourself," she says. "The dragon accompanies a dragon, the phoenix a phoenix and the son of a poor rat will forever dig holes."
The migration of Ms Liu to the Pearl River delta near Hong Kong encapsulates China's surging economic vitality. The old strictures of communist population control are falling away, allowing some 150m migrant workers to seek jobs in the booming cities along the coast.
Their sense of purpose is intense. If they work hard and save money, they can hope for a life far removed from the subsistence living their parents coaxed from a small parcel of land and a few pot-bellied pigs. The most common complaint voiced by migrant workers in Zhuhai, factory managers said, was that they did not get enough overtime.
"I have never seen the level of quality and dedication I have seen in the workforce here," says Tim Dinwiddie, the Zhuhai manager of Flextronics, the world's largest contract manufacturer of electronics. His factory employs 7,000 people working on 1.6m sq ft of factory floor. By the end of this year, as new orders drive expansion, there are expected to be 12,000 workers on 2m sq ft.
Mr Dinwiddie is convinced that the phenomenon around him is no passing cycle. Whereas previous shifts in global manufacturing capacity from the US and Japan to south-east Asia lasted roughly 10 years, the relocation of factories to China may endure a good deal longer than a decade.
"Every single major [corporation] realises this. They have been thinking about [shifting capacity]. Now they realise that action has to be taken," says Mr Dinwiddie, whose own career has followed capacity migrations from the US to Singapore and then, three years ago, to southern China.
China's labour supply seems almost inexhaustible
In Singapore, Malaysia and other south-east Asian countries, wage inflation followed as labour resources were stretched. In China, the supply of labour seems almost inexhaustible. In addition to the 150m migrant workers, around half of the 400m people currently employed in farming are thought to be surplus to requirements, Chinese academics estimate.
Flextronics in Zhuhai - which assembles products for Motorola, Ericsson, Sony, Nokia, Dell, Apple, 3-Com, RSA Security, Microsoft, Philips and others - employs young women like Ms Liu almost exclusively. They earn an average of $100 to $150 a month, a fraction of what counterparts in Singapore, Malaysia, Mexico and other manufacturing economies might receive.
On top of that, electronics components are almost always available cheaply and locally. "The supply base around Hong Kong and southern China is phenomenal, and because it is so close you can minimise costs," says Mr Dinwiddie. "Also, the export logistics are good. In terms of the price of shipping a container, Hong Kong is cheaper than Singapore."
In other industries, too, the maturation of the supply chain is fostering dramatic results. Among the best selling cars in China's foreign-dominated vehicle market this year are models from Chery and Geely, two domestic corporations that were able to source their components from the local market.
Such examples unnerve China's competitors. Lee Kuan Yew, Singapore's senior minister, sees China replicating Taiwan's success but on 50 times the scale. In South Korea, Jin Nyum, the deputy prime minister, has likened China to a black hole sucking in manufacturing capacity because it is "capable of producing everything".
This year China is expected to overtake the US as the world's leading destination for foreign direct investment. Officials in Beijing predict a record $55bn in investment inflows as multinationals scramble to take advantage of a wave of market liberalisation that has flowed from China's accession to the World Trade Organisation late last year.
Some sceptics, however, dismiss the shift of capacity to China as little more than the creation of a giant sweatshop. Raw materials come in, Chinese workers assemble them by hand, and the end product is exported, adding little value and creating little wealth for China.
There is some truth in this characterisation. Some 50 per cent of China's imports are materials destined for re-export and the net export share of China's total is small, averaging only 7 per cent in the last three years, says Qu Hongbin, an analyst at HSBC. But against that, foreign enterprises have been the driving force behind China's export boom, increasing their share of total exports from 1 per cent in 1985 to 50.1 per cent in 2001.
Observers say, however, that it is a largely invisible contribution to China's economy that makes the foreign-invested enterprises (FIEs) Beijing's most valued sector. FIEs impart management skills, production know-how and transfer technology. That is why even after WTO entry, China collects only 15 per cent in corporate tax from FIEs in special economic zones but takes 33 per cent from their domestic counterparts.
China's ascent up the technology ladder has been rapid
The dividends reaped by such policies are plain to see. China's ascent up the technology ladder has been rapid. Chinese companies now make mobile telephony base stations, routers and sophisticated internet equipment. The domestic market for 300MW coal-fired turbines is supplied entirely by local companies, and 600MW generators are soon to be commercialised.
Chinese consumer electronics makers have driven their Japanese competitors from the domestic market. Motor cycle manufacturers are expelling them from third countries and indigenous research centres are busy developing a home grown "maglev" train that floats on a magnetic field rather than running on rails.
Many of the world's top technology companies, lured by the abundance of talent graduating from Chinese universities, have established R&D centres that undertake cutting-edge research.
Alcatel, the French telecoms company, will this year spend around 15 per cent of its worldwide R&D budget in Shanghai. "China has long been a recipient of telecom technology," says Ron Spithill, executive vice-president of Alcatel. "But very soon China will be a source of innovative technology."
James Yeh, head of IBM's China Research Lab in Beijing, says the raw talent available in China is at least as good as anywhere else in the world. Researchers at his lab are engaged in mainstream IBM work rather than China-specific projects.
With mobile phone users standing at 169m and increasing by several million a month, foreign semiconductor makers have started to shift production to Shanghai and Tianjin, near Beijing . Raymond Chang, the Taiwanese head of SMIC near Shanghai, says production costs are 10 to 15 per cent lower than the next cheapest place in the world.
But perhaps the greatest competitive advantage that FIEs enjoy in China is a lack of government interference. Unlike companies in the state-owned sector, they are allowed to employ as few workers as they wish, do not have to pass on dividends to local functionaries and are often not squeezed for corrupt donations in the same way as their domestic counterparts.
These advantages go some way toward accounting for the extraordinary success of some foreign companies in China. McDonald's and Kentucky Fried Chicken between them have some 700 store s in China. Kodak has half the market for film and photographic paper. Procter and Gamble is the biggest seller of shampoo. Motorola, Ericsson and Nokia have more than 90 per cent of the mobile phone market.
Although some domestic competitors chafe at such dominance, Beijing realises that its remarkable economic transformation over the past 24 years is in no small measure due to the combination of foreign technology and management with a Chinese workforce. In spite of pressures to increase its tax take from FIEs, government officials appear anxious not to kill the goose that lays the golden eggs.
Pan Yue, deputy director of the Office for Restructuring Economic Systems, a body under the State Council (cabinet), says: "China should not only be a workshop for foreign invested enterprises. It should also be a centre for multinationals' research and development, a base for manufacturing and a regional headquarters." |
