Last week, we exposed the myth about China's economy sparking worldwide deflation. Now it's time to tackle the technology bogeyman - the presumption that its vast army of smart engineers, financed by government capital, will turn it into the next great technological power. Remember that the vast majority of even remotely 'hi-tech' manufacturers on the mainland are foreign firms that use China as a low-cost base for production and a bit of research and development. China's principal role in the world's technology economy is as a provider of cheap contract labour to foreign firms. It is true that Chinese companies are good at reverse-engineering consumer products and producing low-cost versions suitable for the domestic market. Efforts to export this success, however, have fallen flat. Two years ago, Shenzhen-based TV-maker Konka trumpeted plans to invade America with high-definition TV sets made in Tijuana, Mexico. After badly misreading the market, Konka closed its Mexican plant last year. A plan to take over the Indian market for regular colour TVs foundered on marketing blunders. Attempts at reverse-engineering more sophisticated technology have produced no notable successes beyond the oft-cited example of Huawei Technologies, which produces switching equipment for fixed-line telephone systems. China has plenty of bright engineers. But building internationally competitive firms that are able to generate their own technological advances is not simply a matter of throwing a lot of cash at a bunch of smart technicians. It has a lot to do with complicated 'software': design, marketing, distribution and brand. Japanese firms like Toyota and Sony are global leaders thanks in small part to manufacturing efficiency and in large part to design and marketing skills. In all these areas China lags badly. It is obvious, for instance, that Chinese manufacturers have a lot to learn about designing consumer products that will appeal outside their home market. But the most interesting question is whether China's much-touted advantage in labour costs will prove a handicap in trying to develop internationally competitive firms. For many years to come, Chinese companies will be able to draw upon the world's largest source of good, cheap labour. But this means the incentive to innovate will always be depressed. When you can always beat your competitors on price, why bother investing in more efficient manufacturing processes, adventurous designs or expensive brand-building? Any firm that did so would risk being destroyed by price-conscious competitors before its investments paid off. So foreigners' dreams - or fears - of China becoming a technological superpower are overblown. Of more concern should be whether China's leaders risk frittering away too much of the family fortune on their infatuation with sexy hi-tech schemes, at the expense of duller projects that will generate more jobs for the growing army of the unemployed. On that question, more next week. Research by the China Economic Quarterly ( www.theceq.info )
