When China Rules the World (31 page)

The technological picture, as in virtually every other aspect of China’s development, is extremely uneven, combining the primitive, the low-tech, the medium-tech, and pockets of advanced, even very advanced, technology.
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There is, however, little reason to doubt that China will scale the technological ladder.
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This, after all, is exactly what happened with other Asian tigers, most obviously Japan, South Korea and Taiwan, all of which started on the lowest, imitative rungs, but which now possess impressive technological competence, with Japan and South Korea well in advance of most European countries. The evidence is already palpable that China is engaged in a similar process and with the same kind of remarkable speed.
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It is an illusion to think that China will be trapped indefinitely in the foothills of technology. In time it will become a formidable technological power.

China’s growing ability to climb the technological ladder, however, does not imply that it will be successful in building a cluster of successful international firms. Until very recently, China fared very poorly in the Fortune Top 500 global firms. Of the world’s top ten brands, only one, China Mobile, is Chinese, and of the top 100, only four are Chinese.
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However, the picture is beginning to change. In 2006, 20 Chinese firms featured in the Fortune Top 500, by 2007 the number had risen to 24, and by 2008 to 29, including four state-owned banks, the largest construction companies and the oil giant Sinopec. This compares with 153 from the US, 64 from Japan, 39 from France, 37 from Germany, 34 from the UK, and 15 from South Korea. Major Chinese manufacturers like Haier, Galanz and Konka, which have cornered the lion’s share of the domestic market in consumer appliances and also made serious inroads in many developing markets, however, still remain, in comparison with their American, European, Japanese and Korean competitors, very weak in terms of size, management, governance, and research and development.
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Unlike the early Asian tigers, Chinese firms were unable to postpone their move into foreign markets and production until they had acquired a solid financial foundation, technical competence, a well-established brand and high profitability based on domination of their home market; the major motive for many Chinese companies going abroad, in contrast, has been their desire to escape the cut-throat competition - much of it foreign - and sparse profits of the domestic market following China’s accession to the WTO.
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Peter Nolan, an expert on Chinese business, has argued that it will be extremely difficult for Chinese companies to make the A-list of multinationals precisely because they have not had the chance to build themselves up domestically behind a protectionist wall. He also suggests that over the last twenty years there has been a global business revolution, as a result of which Chinese companies, far from catching up, have fallen even further behind the top international firms, making their task even more difficult.
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If China fails to produce a cluster of major international firms it will stand in sharp contrast to Japan, South Korea and Taiwan.
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But it is premature to think in these terms. However difficult and different the circumstances China faces, it is already busy inventing its own path of development, as Britain did as the pioneer country, the United States as the inventor of mass production, and Japan as the innovator of a new kind of just-in-time production. What might this be? In the Chinese car market, the more expensive sectors are overwhelmingly the preserve of European, American and Japanese firms, but emergent Chinese firms like Chery and Geely dominate the lowest segment.
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Chinese firms are able to produce cars much more cheaply than foreign producers because they use a modular, or mix and match, approach rather than the integrated method of production for which Japanese firms are renowned. Firms such as Geely and Chery utilize a range of parts which are borrowed, copied or bought from foreign companies. The end product is of relatively low quality but extremely cheap. The Chevrolet Spark, which is very similar to the Chery QQ, sells for twice the price. A similar kind of approach can be seen with the Tata Nano in India, which sells for less than $2,500, half the price of the next cheapest car on the market.
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Modular - or open architecture - production is extremely well suited to a developing country, being relatively labour-intensive and very difficult, if not impossible, for Western and Japanese firms to imitate. In the Chinese case, it was first developed by the motorcycle, truck and consumer appliance industries and then adapted by the domestic car firms.
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The fact is that in China, as in most other developing countries, the low end of the market will remain by far the largest sector for many years to come. Despite fearsome competition from foreign producers, Chinese car manufacturers have very slowly been increasing their share of the Chinese market, currently the world’s second largest: in 2006 their combined market share was 25.6 per cent, just behind the total Japanese share of 25.7 per cent and ahead of the aggregate European share of 24.3 per cent, with Chery and Geely, the two largest, enjoying a combined share of around 10 per cent.

This suggests that we should expect Chinese firms to enter at the bottom end of the global market for mass consumer goods, initially mainly in the developing world - of which there is already clear evidence
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- but later moving into the developed world. It will take time for firms like Chery and Geely to establish themselves in Western markets, where standards and tastes are very different from the ‘cheap-end’ advantage presently enjoyed by Chinese firms. Indeed, both have postponed their American launch dates until around 2009 or later. A cautionary tale in this respect is provided by TCL, the Chinese TV manufacturer, which entered into a joint European venture with the French firm Thomson. It made a number of serious miscalculations based on its ignorance of the European market and announced in 2006 that it would close its European operations.
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But TCL is an exception: Chinese electrical appliance firms have overwhelmingly chosen to establish their overseas manufacturing subsidiaries in developing rather than developed countries. There is a certain parallel, in this context, between Chinese firms initially targeting the developing world and the earlier experience of Japan and Korea. Japanese companies, for example, first dominated the then relatively poor local East Asian markets and only later began to make serious inroads into Western markets. In Europe and the United States, furthermore, both Japan and South Korea started at the cheap end of the market then steadily worked their way up. The same will be broadly true of China, except it will probably prioritize the developing world even more strongly. Chinese exports to Africa, the Middle East, Asia and South America have recently been growing far more rapidly than those to the United States. China sent more than 31 per cent of its exports to the US in 2000 but that figure had dropped to just over 22 per cent by early 2007 and is now 18 per cent.
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Although China is already making significant progress in low-and medium-technology industries such as white goods and motor vehicles, it is also intent, in the longer term, on becoming a major player in a high-tech industry like aerospace. China will shortly begin production of its own regional passenger jet,
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while Airbus has announced its intention of shifting some of its manufacturing capacity to China.
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Possibly as a way of leapfrogging the development process, the main Chinese aerospace group was reported in 2007 to be considering investing in, or bidding for, six of Airbus’s European plants that had been deemed surplus to requirements, although in the event no offer materialized.
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Given time, it is inconceivable that China - already the second largest aircraft market in the world
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- will not become a major aircraft producer in its own right. The fact that it is steadily developing its space programme - it conducted a successful manned space flight in 2003, launched a lunar orbiter in 2007 and plans to launch its own space station in 2020 - indicates that China is intent on acquiring highly sophisticated technical competence in the aerospace field.
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Looking into the future, therefore, one can anticipate a number of broad trends regarding the development of Chinese companies. We will continue to see the slow but steady emergence of Chinese multinationals in areas which play to their domestic comparative advantage, such as white and electrical appliances, motorcycles, trucks and cars.
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We can expect Chinese brands to emerge in fields such as sports equipment (for example Li-Ning)
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- linked to China’s growing strength as a sporting nation - and Chinese medicine. We are likely to see Chinese firms become major competitors in high-tech areas such as aerospace (AVIC 1), telecommunications (China Mobile and Huawei), computers (Lenovo)
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and perhaps in renewable energy (for example, Suntech Power Holdings). China’s banks, construction companies and oil companies are already rapidly emerging as global giants, helped by the scale of the Chinese market and the resources at their disposal. In 2007 the boom on the Shanghai Stock Exchange saw PetroChina briefly overtake Exxon as the world’s largest company. By the end of 2007 China possessed three of the world’s five largest companies, by value though not by sales, namely PetroChina, the Industrial and Commercial Bank of China (ICBC) and China Mobile.
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We can also anticipate some of the big Chinese firms seeking to expand overseas by taking over foreign firms. There have already been examples of this with Lenovo acquiring IBM Computers and the Chinese oil giant CNPC unsuccessfully seeking to buy the US oil firm Unilocal; awash with cash and eager to shortcut their expansion, it is not difficult to imagine this happening on a much wider scale. An obvious area is commodities, with Chinalco’s stake in Rio Tinto, the Anglo-Australian mining group, an example.
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With many Western companies suffering from a serious shortage of cash as a result of the credit crunch, the takeover opportunities for cash-rich Chinese companies, the oil companies in particular, are likely to be considerable, with Western political opposition weakened by the recession.
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Meanwhile the establishment of the China Investment Corporation, armed with funds of $200 billion, of which some $80 billion is for external investment, could give China growing potential leverage over those foreign companies in which it decides to invest.
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Finally, we should not forget the increasing importance of Chinese subcontractors as ‘systems integrator’ firms in the global supply chain of many foreign multinationals, a development which might, in the long term at least, prove to have a wider strategic significance for these multinationals in terms of their management, research capability and even ownership.
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