October 5

MY COLLEAGUE Toh Han Shih raises an interesting point. The brand names associated with the industrial emergence of the United States are still known round the world - Ford, Standard Oil etc. They are known for Japan - Sony, Honda etc. We know them even for South Korea's more recent emergence - Hyundai, Samsung etc.

But think of China and the most that comes to mind are names such as Haier, a struggling manufacturer of white goods and Lenovo, which paid billions to buy a red nipple on a keyboard and now has trouble digesting this acquisition of IBM's ThinkPad operations. These are not names known around the world, nor do they show any real promise of turning into giants.

One reason for this is quickly stated. China's industrial emergence is still too recent for big brand names to have evolved. They will come with time.

It is a matter of some urgency, however. As one toy company executive whom Han Shih interviewed observed, China makes 75 per cent of the world's toys but collects only 20 per cent of the revenues. I have heard even lower figures and unless they start to rise, building brand names will be even more difficult. In fact, the trend is in some ways going in the opposite direction. As the chart shows, almost 60 per cent of the country's exports now come from foreign invested enterprises and this figure has risen steadily over the past 10 years.

The basic problem is that there are many stages in getting consumer gadgets from the drafting board to consumers and modern communications technology along with low shipping costs mean that they do not all have to be carried out in one location.

Unpalatable as it may be, the rest of the world tends to treat China only as an assembly shop in manufacturing. This is only one of the stages and it is not even the most profitable. Most of the money is made in design, licensing, financing, shipping and retailing. The sweat shop gets little more than the sweat.

It could not happen that way more than a century ago in the industrial emergence of the US. International communications and shipping networks had not yet been built up to the stage they have now reached. What was made in the US back then was designed, owned and financed as well as manufactured in the US. Even in the 1960s this was still true of Japan's industrial emergence.

It is true no longer. The character of China's industrial revolution is different from that of the US and Japan. It is one of producing everyday appliances and gadgets at prices no one else can match. China's achievement lies not so much in technological advances as in making conventional consumer goods affordable to almost everyone in the world.

Unfortunately, China has made itself hostage to others in order to achieve this. When Wal-Mart is the customer Wal-Mart calls the shots. It is hard for a country to break out of a mould like this and establish its own brand names, much harder than it was for the US and Japan.

And it is particularly hard because one crucial requirement for doing it is still not present. Creativity is not normally seen as dependent on finance but in the wide sense of economic creativity, the sort that encourages domestic invention and ownership, a viable market financial system is absolutely essential.

In my view, the biggest single reason that foreign corporations have come to dominate China's export industries so heavily and to take so much of the earnings from them is that it is still not possible to price entrepreneurial risk properly within China's borders.

It is still largely done abroad, much of it from Hong Kong which is one reason that we have grown so wealthy. Inevitably this means that the earnings from financing China's industrial activity also largely go abroad. This will remain the case for as long as Beijing continues to exert tight control of the country's capital markets and maintains a closed capital account.

It has nothing to do with race or culture. It is a matter of economic structure alone. China will be on its way to creating its own brand names and keeping the earnings from them only when its entrepreneurs are allowed full access to free capital markets within their own borders. Until it happens there will continue to be more Wal-slaves in China than there are in the US.