Even winners worry over world's workshop
China's neighbours fear its limitless supply of cheap and skilled labour, writes Mark O'Neill
HITACHI IS TO invest US$826 million in China over the next five years to increase the proportion of its goods made there from 2.5 per cent to 7 per cent.
Last month, Matsushita Electronics said it would invest US$160 million in China over the next two years, adding to the 36 plants it already has there and which account for 25 per cent of its factories overseas. It also said it would close money-losing plants in Western Europe and the United States.
Is China becoming the workshop of the world, where multinationals can make anything at a fraction of the cost of in their home countries, using a limitless supply of cheap and skilled labour? What is the economic future for China's neighbours and what products will be left for them to make? Many people in Asia forecast a nightmare scenario.
Jin Nyum, Economic and Finance Minister of South Korea, said last week that China was becoming a 'juggernaut in the global economy, turning itself into the world's manufacturing plant, which will suck all manufacturing facilities into it like a black hole'.
Fred Bergsten, director of the Institute for International Economics, said at the weekend that corporate Japan was in despair as it saw China, with its low costs and cheap currency, 'hollow out' Japanese industry.
According to Beijing's statistics, China has for the past eight years attracted more foreign direct investment than any other country in the world except the US, totalling US$348.4 billion by the end of last year, averaging US$42.7 billion a year for the 1996-2000 period. In the first nine months of this year, China attracted US$32.2 billion, an increase of 21 per cent over the same period last year. For Chinese economists, their country's hour has come.
'We have the conditions to become the workshop of the world,' said Lu Zheng, head of the industrial and economic institute of the Chinese Academy of Social Sciences. 'We have a cheap and high-quality workforce. For a long time, we considered our huge population a burden, but now we see it as our competitive advantage. Each year, our universities turn out one million science graduates.
'We have solved those bottlenecks that held up our development in the 1980s - telecommunications, power and transport. Neighbouring countries cannot equal the facilities we have now. We can supply the raw materials, equipment and components for nearly all products. We have an enormous domestic market, which small and medium-size developing countries cannot match.
'With the liberalising of world trade and increasing globalisation, it will make economic sense to manufacture most industrial products in China. So becoming the world's workshop should be the strategy of our development.'
Wang Zhile, director of the centre for research of multinational companies at the International Economic & Trade Research Institute under the Ministry of Foreign Trade and Co-operation, agreed.
'These multinationals are in the middle of restructuring their manufacturing capacity, turning China into the workshop of the world,' he said.
'This process will accelerate as a result of the September 11 incidents. One Japanese firm was considering a plant in the US, but has decided to shift its purchasing to China.
'Seeing our cheap, good-quality labour, European and American firms came here but Japanese firms were reluctant to do so at first. Now they have changed and are investing here.'
He pointed to Toshiba, which announced earlier this year that it was closing all its colour television production in Japan and shifting them to China. It has already invested US$6 billion in China and is turning it into a key part of its global manufacturing network.
He Xiangjian, president of the Meide Group, one of China's biggest producers of consumer electronics, said China offered the best conditions in the world for the manufacture of these products.
'For me, the ideal place is the Pearl River area. We have low costs, support of the local government, abundant supply of labour and high quality of workers. I want to build the world's biggest manufacturing base. China's entry into the World Trade Organisation, lower tariff levels and the globalisation of the economy provide excellent conditions for developing our industry,' he said.
Unlike many of his Chinese competitors, he has not invested overseas. In 1997, he considered a factory in Vietnam but after two years of debate, decided against it.
'It has low labour costs but the supporting infrastructure and overall costs could not compete with those of the Pearl River area,' he said.
Jorg Wuttke, chairman of the German Chamber of Commerce in China, said Southeast Asia must wake up to the threat that China would suck away its inward investment.
'What they have is tourism, agriculture and raw materials. For manufacturing, why go to Southeast Asia and not China? China and India offer both large domestic markets and the ability to export. The Southeast Asian economies are very dependent on exports,' Mr Wuttke said.
'South Korea and Taiwan have finished the transition from an agricultural to an urban economy. Their wages are high and they have trade unions. But China offers a limitless supply of labour that will be available for years and years.'
He said that what had happened since September 11 had made China more attractive than other countries, now considered less stable because of large Muslim populations.
'Of course, there is political risk in China too. But the most important risk is what chief executives read in newspapers. In this respect, China has done a good job,' he said.
The transformation of China into a global workshop may be good news for multinationals, but not so good for Chinese firms, especially after entry into WTO. Take consumer electronics. Thanks to dramatic growth in the industry over the last 20 years and development of powerful companies such as Haier, Konka, TCL and Chang Hong, the share of domestic brands in the Chinese market rose from less than 20 per cent in 1983 to 90 per cent last year.
'We have flourished thanks to the strong domestic demand of the past two decades. But our competitive advantage will weaken after entry into WTO,' said Tomson Li Dongsheng, president of TCL, one of China's biggest manufacturers of colour televisions.
'In terms of efficiency and level of management, we are still far behind the multinationals. Our research and development accounts for 2 per cent of sales, against 6-8 per cent in multinationals. Many of our products use patents and technology belonging to someone else.
'In the first half of this year, Sony and Matsushita announced losses. But their financial strength is such that they can absorb losses of hundreds of millions of dollars. But Chinese firms, including mine, could not deal with such heavy losses. WTO entry will erode our competitive advantage. More foreign companies will come in and localise, cutting their costs and becoming more competitive. With globalisation, brands will disappear.'