Greater China
How leaders from the mainland, Hong Kong, and Taiwan are creating an integrated powerhouse
businessweek.com
A decade ago, local farmers were baffled why the city of Shanghai had decided to extend the No. 2 subway line across the Huangpu River all the way to their township of Zhangjiang, at the time just a marshy expanse of rice fields and fish-filled canals. Many electronics experts, meanwhile, regarded official predictions that this site would become a high-tech park brimming with state-of-the-art semiconductor plants as laughable. The most likely investors, Taiwan's big chip manufacturers, were forbidden by their government from transferring such sophisticated facilities and technology to the mainland.
Yet with stunning speed, this vision is becoming reality. Last year, Semiconductor Manufacturing International Corp. (SMIC), headed by former Taiwanese chip executives, opened a $1.5 billion silicon wafer fabrication plant and SMIC is preparing to build another one. Right next door, a joint venture headed by Taiwanese electronics tycoon Winston Wong has opened another sophisticated wafer fab. Taiwan Semiconductor Manufacturing Co. (TSM ), the world's leading contract chipmaker, is planning a wafer fab nearby, too. These are among 70 electronics companies that now have facilities in the 25-square-kilometer zone, which also hosts research labs for companies such as Sun Microsystems (SUNW ), LG, and Sony (SNE ). A 400-researcher lab by General Electric is on the way. Indeed, predictions that Zhangjiang will someday rival Taiwan's renowned Hsinchu Science-Based Industrial Park no longer seem outlandish. "We are just at the initial stage," says Dai Haibo, CEO of the company that manages the zone. As more research labs arrive, "we will be like Hsinchu combined with Silicon Valley," says Dai, who expects Zhangjiang's workforce to swell tenfold, to 200,000, in a decade.
Zhangjiang is but one focal point of one of the biggest economic mergers in history--as profound as the integration of Europe or North America. The concept of a Greater China has been developing since the 1980s, with the mass influx of manufacturers from Hong Kong, and then Taiwan, to the southern China coast soon after Beijing opened its doors. But in the past year, with China's entry into the World Trade Organization, the industrial unification of the three economies has hit warp speed and is spreading deep into the mainland. Political barriers to investment in once-strategic industries such as semiconductors, oil, and banking are crumbling, infrastructure systems are fusing--and Hong Kong and Chinese officials are collaborating on regulatory affairs.
Clearly, Hu Jintao, who was just named General Secretary of China's Communist Party at Beijing's 16th Party Congress, inherits the stewardship of an economy that is vastly different from when Jiang Zemin took full control in 1997. At that point, China was just beginning to seriously whittle down the state sector. This is also an economy that is developing with less and less guidance from the center, and that often makes the tension-filled politics of Taiwan-China relations seem like a sideshow. Beijing is already starting to realize that its goal of absorbing Taiwan is best served by letting the process proceed--not by hurling threats against Taipei. "The general policy now is to be confident and patient," says Wang Yong, executive director of Beijing University's Center for International Political Economy Research. "We should let the forces of integration play a larger role in determining the shape of cross-Strait relations."
A few manifestations of this accelerated convergence:
-- In the past two years, the number of Taiwanese officially living on the mainland has swelled from 300,000 to 500,000. And some estimates run much higher. Several thousand Taiwanese students are pursuing degrees in China rather than at U.S. universities.
-- This year, China will overtake the U.S. as Taiwan's biggest export market. Within the next year or two, when approval for direct shipping and air links are expected, cross-Strait trade will surge even more.
-- China has passed Taiwan as the world's No. 3 maker of information-technology products. But many of the benefits flow to Taiwan companies, who control 70% of the output. China has overtaken Taiwan as a maker of desktop PCs, optical drives, and liquid crystal displays. The share of Taiwanese notebook PCs made in China has leaped from 4% to 30% since early 2001.
-- In a bid to maintain the Pearl River Delta's competitive edge over other parts of China, business and government leaders in Hong Kong and Guangdong are discussing a $1.9 billion bridge linking Hong Kong to Zhuhai and Macao, rail and subway links, easier border crossings at Shenzhen, and ways to coordinate the services of the Delta's five airports.
-- Hong Kong's role as an international capital window for China is growing. Quicker regulatory approval prompted Bank of China (Hong Kong) to place its initial stock offering in Hong Kong rather than New York, while dozens of other Chinese companies have listed on Hong Kong's new second board aimed at startups.
The impact of Greater China as an exporter is being felt around the world. Its share of total world exports has gone from 6.9% to 9.6% in just four years, surpassing Japan, according to the World Bank. By 2007, it should reach 13.7%. Also by that time, as the mainland and Taiwan open their markets to comply with WTO commitments, Greater China should pass $2 trillion in exports and imports, excluding the trade between the three economies, estimates Goldman Sachs & Co. (Asia). That would make it nearly twice as big as Japan as a trading power and two-thirds the size of the U.S. Measured in terms of purchasing power, the World Bank estimates Greater China will overtake the European Union in five years, with a combined gross domestic product of $12 trillion. By that yardstick, it would be nearly triple the size of Japan. The market capitalization of the stock bourses of Hong Kong, China, and Taiwan could challenge Tokyo's $2.1 trillion by that time.
You can expand this concept of Greater China even further if you include the huge populations of overseas Chinese who still consider the mainland home and increasingly are returning to start businesses there. Of the more than 400,000 Chinese who have studied overseas in the past two decades, some 140,000 have moved back, bringing with them advanced degrees, Silicon Valley experience, and venture capital. Shenzhen Mayor Yu Youjun reports that his city already has 300 companies run by returnees. More than 1,000 overseas-educated Chinese move there each year.
Stretch the notion a bit more and it's easy to view China as the hub of North Asia. Ex-McKinsey & Co. consultant Kenichi Ohmae argues that what's emerging is a United States of China, where dozens of growth zones essentially rent themselves out to foreign investors. He estimates 100,000 South Koreans live in cities on the Yellow Sea such as Qingdao and Tianjin; some 4,000 Japanese companies have operations near Dalian. Singaporean companies also are a big source of capital.
The real architects of this growing economic colossus are the entrepreneurs of greater China and the officialdom of cities such as Shanghai, Chongqing, Shenzhen, Dongguan, and Hong Kong. They have spent two decades creating networks of influence and putting down roots, advantages that will be extremely difficult for other foreigners to match. Equally important, these players are providing China with the managerial and financial expertise needed to compete in the world.
Why is this process speeding up? The biggest driver is China's economic reforms, now anchored by its entry into the WTO. Another is the ever-deeper integration of Hong Kong since the departure of the British in 1997. Security regulators and monetary authorities from Hong and Beijing now work closely with each other. Meanwhile, mainland companies such as Bank of China, which used to be shadowy presences in Hong Kong, now use it as a base to learn international management standards. InvestHK, a Hong Kong government body, has set up three teams dedicated to bringing mainland companies to the territory, and China's foreign trade ministry has begun bringing delegations of private mainland entrepreneurs interested in opening Hong Kong offices. "For years, Hong Kong's main function has been to send capital to China," says Li Luoli, president of the China Development Institute in Shenzhen. "Now, this role is to help Chinese companies go abroad."
After years of trying to keep its distance from the mainland, deflation-ravaged Hong Kong is also looking to it as a savior. A few years back, Hong Kongers were willing to commute by hydrofoil or air-conditioned bus to factories in the Pearl River Delta, but few wanted to live on the mainland. Now, they're fighting for jobs there. Thousands flocked to a mainland job fair in Hong Kong early this year. Hong Kong property magnate Vincent Lo says he has to turn down transfer requests from his Hong Kong staff.
Calmer relations across the Taiwan Strait are also helping. Just 18 months ago, when longtime opposition candidate Chen Shui-bian took office as president, Beijing lashed out at every defiant move by Taipei. Lately, China has downplayed Chen's remarks on cross-Straits issues. It has also signalled it may be willing to consult Taiwan on trade issues, and has toned down demands that Taiwan accept its "One China" principle before having such contacts.
Both sides clearly would benefit from full-fledged cooperation. Taiwan still bans imports from China of thousands of products, from car engines to most farm goods. Worse, the lack of direct shipping and air links, which turn a one-hour flight into a day-long ordeal transiting through Hong Kong, add 60% to freight costs. Removing all such barriers would add 3% to the economic growth of both Taiwan and China by 2011, calculates George Mason University economist Zhi Wang. It also would boost their combined exports by $10 billion a year. "Political relations can slow down integration," says Acer Inc. Chairman Stan Shih, who has set up major factories across the mainland. "But economic movement just cannot stop."
Talent from Taiwan and Hong Kong has been pivotal to China's ability to maintain annual growth rates of at least 7%. It plays a key behind-the-scenes role at advanced plants and research labs provided by multinationals such as Cisco Systems (CSCO ), Ford Motor (F ), Nokia (NOK ), Sony, and Motorola (MOT ). "All of our Chinese plants are being built with Taiwanese managers," says Gerard J. Kleisterlee, CEO of Royal Philips Electronics, which has cut its Taiwan workforce from 12,000 to 4,000 in the past few years as it shifted production to China.
You get a glimpse of the new China at Shanghai's Xintiandi. Just a few years ago, its rows of tile-roofed shikumen, or stone houses, were crumbling relics of a colorful past. In the mid-19th century, when this 52-hectare area was the heart of the French Concession, Chinese from surrounding provinces crowded here to escape the Taiping Rebellion. Decades later, when Shanghai was Asia's top commercial hub, the area boasted clubs and nightspots where young Chinese mingled with Europeans or plotted revolution. After the 1949 Communist victory, the prosperous Chinese in Shanghai scattered abroad, and the neighborhood fell into neglect.
Now, every night, ethnic Chinese from Taiwan, Hong Kong, and the U.S. mingle with the mainland's nouveaux riches in the painstakingly renovated shikumen, home to the city's hippest restaurants, boutiques, and bars. Renowned painter Chen Yifei owns a stylish clothing shop, and one of Taiwan's biggest food companies owns the local Starbuck's Corp. (SBUX ) franchise. Tycoon Vincent Lo, born and bred in capitalist Hong Kong, is heading redevelopment of Xintiandi into a $3.5 billion complex that will include high-end apartments and a 68-story building with a luxury hotel. In a twist of irony, the First Congress Hall, where the Chinese Communist Party convened its first meeting in 1921, sits amidst the hubbub, newly renovated as a tourist attraction.
Xintiandi shows the consumer side of integration. Other economic hotspots offer glimpses of how far industrial integration has come. The steamy Pearl River Delta is rich with such examples. The sprawling campus of Taiwan's Wistron Corp. in Zhongshan, an electronics contract manufacturer spun off from Acer (ACEIF ), looks as if it was transplanted from Hsinchu, Taiwan's technology heartland. The neatly manicured grounds include dormitories with basketball courts for its 2,800 workers, a 200-engineer software-development lab, and three factories making desktop PCs, set-top boxes, DVD players, and PDAs--almost all for export. Soon, the Zhongshan facility will make Xbox game consoles for Microsoft Corp. (MSFT )
A chief lure of the region is the mass transfer of Taiwan's components industry. "Guangdong Province has the most developed component-supply base in the world," says Jeff Tsao, general manager of the Wistron plant. Only two years ago, at least 80% of the components used in Taiwan-owned factories in South China came from Taiwan. Today, more than half are sourced locally, and the share is growing fast, estimates Beijing-based economist Andy Rothman of CLSA Emerging Markets. Even executives who visit the region frequently are stunned at the pace of change. During a recent visit to his company's factory in Shenzhen, James E. Sacherman, chief marketing officer for contract-manufacturing giant Flextronics International Ltd. (FLEX ), says he asked his staff there if he could buy certain cables locally. He was told there were now 300 suppliers in the immediate area. "It's all the same guys I used to visit in Taiwan," he marvels. "All of their friends are there, too."
The transformation is just as visible in Kunshan in Jiangsu province, a region that will soon surpass Taiwan in production of notebook PCs. Many of the 30,000 Taiwanese residents of Kunshan are buying homes in the city's vast villa complexes and sending their children to a Taiwanese-run school. Tree-lined Tinglin Road has so many Taiwanese-owned restaurants and clothing boutiques that locals refer to it as Taipei Road. Chang Hwa Commercial Bank Ltd. has just opened an office. Hundreds of Taiwanese companies--including Acer, Compal (CMPXF ), Hon Hai Precision Industry (HNHPF ), President Foods, and Nanya Plastics--have invested some $7.5 billion in the area.
While Taiwan is replicating its tech empire on the mainland, some of Hong Kong's pioneering companies are pushing much deeper into the interior. "Now, they are moving very dramatically into middle China, with western China as the next great push," says Michael L. Ducker, FedEx Corp.'s (FDX ) express international executive vice-president. To meet the shipping needs of Hong Kong and other companies, Ducker says FedEx plans to open offices in 100 new Chinese cities over the next five years. Besides developing Shanghai's Xintiandi district, for example, Vincent Lo has bought up cement plants in Chongqing and the neighboring provinces of Sichuan and Guizhou. In October, Lo led a delegation of more than two dozen businesspeople to look for opportunities in Chongqing.
Perhaps Hong Kong's most crucial role, though, is as Greater China's Wall Street. Bank of China is making its Hong Kong affiliate a laboratory for good banking practices in one of Asia's most sophisticated and well-regulated capital markets. The Industrial & Commercial Bank of China has set up a merchant-banking arm in the city.
China also is tapping Hong Kong government talent. Former top Hong Kong Securities & Futures Commission (SFC) official Laura M. Cha has taken a staff job in Beijing at the China Securities Regulatory Commission (CSRC). She is helping draft reforms that, among other things, will permit foreign investment in China's publicly traded state enterprises. Former Hong Kong SFC head Anthony Neoh is the CSRC's senior adviser and helped push through new proposals to allow foreign portfolio managers to buy Chinese stocks. "China needs Hong Kong because it can't manage its own pool of domestic savings," which is estimated at up to $500 billion, says Brookings Institution economist Nicholas Lardy. "This help in building China's financial infrastructure is hugely important."
Financial industries also are melding as Beijing gradually opens its banking sector to foreigners. Last December, Hongkong & Shanghai Bank bought a stake in Bank of Shanghai. And mainland-born Weijian Shan, who heads U.S.-based Newbridge Capital's office in Hong Kong, is leading negotiations to buy a stake in Shenzhen Development Bank Ltd. If the deal closes, Newbridge would be the first foreign institution to control a mainland bank.
In yet another sign of how integration is breaking down barriers, the banks of Taiwan and China are starting to commingle. In the past year, Beijing has allowed several Taiwan banks to open offices, while China's Shanghai Pudong Development Bank and Fujian Industrial Bank have applied to do business in Taiwan. Even major government-owned companies are starting to cooperate in ways unimaginable just a year ago. Taiwan's China Petroleum Corp. (SNP ) is jointly exploring for reserves with Beijing's China National Offshore Oil Corp., and Taiwan's China Airlines has just won approval to buy a stake in the mainland's China Cargo in anticipation of new business with the establishment of direct flights.
There are potential hazards to full-fledged economic integration. As Taiwanese and Hong Kong companies become more dependent on China for their manufacturing, components, engineering, and markets, they will become more vulnerable to a political or financial crisis there. Both remain distinct possibilities: China's banking system is in precarious shape, with an estimated $700 billion in bad loans. Millions of angry workers with scant pensions are losing their jobs at state-owned industries, and labor protests are breaking out across the mainland. "In a crisis, Chinese labor could become as destabilizing a force for the world economy as oil prices," says Ted Dean, managing director at information-technology consultant BDA (China) Ltd. in Beijing.
There also is the possibility that political tensions could once again sour Taiwan-China relations. It was only two years ago, after all, that China implied it was ready for war if Taipei didn't start seriously negotiating to rejoin the mainland. Taiwanese political leaders could provoke Beijing again by taking steps toward independence. As for Hong Kong, the worry is that the city's ineffective leadership will squander many of its advantages--a strong rule of law, good civil service, free media, and a tough anti-corruption stance--and blur the distinction with the mainland.
Still, there is a more encouraging way to view the Chinese convergence. As more and more citizens of Taiwan, Hong Kong, and China live, work, and study together, they increasingly will see themselves as part of one entity. This attitude clearly is discernible among the Taiwanese students who choose to study at Chinese universities. Taiwan-born Wang Jikang, 28, who is pursuing a master's degree in law at Shanghai's Fudan University, says he decided against a U.S. school because opportunities are brighter in China. Most of his Taiwanese classmates feel the same, he says. "Taiwan doesn't have an economic future outside the mainland," he adds. But because of Taiwan and Hong Kong, the mainland has a much brighter future as well, one that will be shaped increasingly by the best and brightest of all three regions working together.
By Dexter Roberts in Shanghai and Mark L. Clifford in Chongqing, with Bruce Einhorn in Taipei and Pete Engardio in New York |
