Get set for a totally new China

The Straits Times (Singapore) ^ | 2002-08-09 | By KENICHI OHMAE

[Lessismore]

OVER the coming decades, China will become a thoroughly new form of political and economic entity. Brutally competitive in both politics and world markets, innovative and resilient, China will be more dominant than any nation except America.

Such a shift in the global balance of power occurs only about once every century and is comparable to the emergence of the United States as a world power a century ago.

The magnitude of this change is due, in part, to a radical and rapid shift in China's governance.

Because the shift has been so sudden, it is tempting to write it off as a fluke. But China's restructuring is permanent and will affect all aspects of national life, as well as its global standing.

The People's Republic now embodies two systems: the centralised, autocratic communist administration, dominated by an outdated ideology and military interests, and the decentralised, free-market economic regime.

Whether deliberately or not, China is reorganising itself to balance central authority and common purpose with decentralised freedom, in the same way that nimble companies balance home-office and divisional control.

The result is a new geopolitical model - the country as corporation.

Call the new China 'Chung-hua, Inc'. (Chunghua translates as 'China' and actually means 'the prosperous centre of the universe'.) Like many corporations, China is moving most decision-making to the 'business unit' level - semi-autonomous, self-governing economic region-states that compete fiercely against each other for capital, technology and human resources (just as American states do).

This new, decentralised free-market regime encompasses only a small part of China's vast territory, and many Chinese officials still refuse to acknowledge its existence.

Indeed, only seven years ago, the word 'federation' was banned from the Chinese language; companies like Federal Transport or Federation Merchants were required to change their names. Today, China has the most federal governance structure of any large nation except the US.

Two broad categories of region-states exist.

The first are relatively small, comprising cities and their surrounding areas, generally with a population of five to seven million people. Some of these - Shenzhen, Shanghai, Dalian, Tianjin, Shenyang, Xiamen, Qingdao and Suzhou - are now growing economically at a rate of 15-20 per cent a year - faster than such Asian 'tigers' as Malaysia, Taiwan, Thailand and Korea ever did. These smaller region-states, in turn, are propelling the growth of larger mega-regions, with populations approaching 100 million each.

The mega-regions, which tend to share common dialects, ethnic identities and histories, are becoming economic powerhouses in their own right. If they were separate nations, five of them - the Yangtze Delta, the Northeastern Tristates area (formerly known as Manchuria), the Pearl River Delta, the Beijing-Tianjin corridor and Shandong - would rank among Asia's 10 largest economies.

Regional governments also have been toughened up by the Chung-hua, Inc ethic. Most officials are appointed, not elected, but their posts are not sinecures. Not only are they held to targets of 7 per cent annual economic growth or better (like many corporate executives), but they must also improve environmental quality, build better infrastructure, and reduce local crime levels. Last October, a half-dozen bureaucrats were expelled from one of China's major cities for not meeting their economic-growth and security targets.

Local officials are often considered heroes, not oppressors. In January last year, Mr Bo Xhi Lai, then mayor of Dalian, was promoted to governor of Liaoning province. Thousands of women, many in tears, spontaneously came to a park to bid him farewell.

During Mr Bo's nine-year tenure, Dalian evolved from a ramshackle port into one of the cleanest and most prosperous cities in Asia. It now has a street life more vibrant than Singapore, a layout reminiscent of Paris before the car, and a reputation among Japanese tourists for high-quality hotels and restaurants.

All of this is taking place in a nation where communist ideology is still strong. Introduction of foreign companies, technologies, and unfettered mobility for corporations and people would be seen as a threat to the communist system if publicly acknowledged.

Instead, China's highest officials insist they run the most centrally controlled government in the world, with full authority to appoint or dismiss mayors, governments and bureaucrats.

Strictly speaking, they are right. But they dare not overrun the open, commercial ethic of China's region-states - the source of their country's prosperity.

So debates about China should not be cast as a simple matter of right or wrong, but of when and how.

A decade or two of economic freedom and growth will give China's people an appetite for self-determination and participation that may surprise the rest of us. Already, some village leaders are elected; this may slowly spread to regional officials, and then upwards to the central government.

Even top communists appear to acknowledge and embrace change. Recently, China's head of state, Mr Jiang Zemin, said that the Communist Party 'represents' every good aspect of China, including wealthy capitalists, not just the poor and the proletariat.

We should not be surprised if soon - perhaps at the party's 2002 General Assembly - China's leaders call for a new doctrine to match its new model.

The writer is one of the world's leading business strategists. He is President of Ohmae & Associates and has advised many of Japan's governments.

[blueriver]

Why would China want to crush America? America's corporations are helping China get rich.

And America's corporations are doing what for America? China has a plan and if you think that China cares about America's survival you are in dreamland. China is already dictating to America's corporations that if they want to manufacture a product in China they need to move the entire R&D to China. Pretty soon America's corporations will be so far in bed with China they wont even be America's corporations anymore. The problem is that the people running these corporations think like you. They see opportunity, they think greed, but they are not thinking it all the way through to the end game. Don't let money blind you perspective on what the Communist Chinese are doing.

[AIG]

It's ironic how America is turning more communist while China is turning more capitalist. Who would have thought it possible? Instead of abandoning capitalism, Americans should welcome the expansion of capitalism to new places in the world. Do I need to explain why capitalism is good in the first place? Capitalism is as much a part of the American way of life as apple pie and baseball. Capitalism supports America. America itself, in fact, is the pied piper and world headquarters of global capitalism and economic globalization. The First World's markets are saturated now, so there's no place to go except China.

[AIG]

And America's corporations are doing what for America? China has a plan and if you think that China cares about America's survival you are in dreamland. China is already dictating to America's corporations that if they want to manufacture a product in China they need to move the entire R&D to China. Pretty soon America's corporations will be so far in bed with China they wont even be America's corporations anymore.

America's corporations are the heart of America's capitalist system, the economic system which has made America the richest and most powerful nation on earth. America's corporations are the envy of the world and the foundation of America's prosperity, and you should not be dissing them for merely doing what they're supposed to be doing, which is making money

Capitalism is a two-way street. China benefits, but so does America. American consumers gets low-cost goods which keep US inflation down in America's economy and Americans' standard of living high, and American shareholders (including probably yourself) ultimately get richer. What would you have Coke and other US firms do? Not try to expand into China? Americans already drink 400 Cokes on average per-capita per year. Without new markets, America's corporations suffer and America ultimately suffers.

When China might become the biggest source of revenue for the Fortune 500 in a few decades, it's no wonder US firms want to set up R&D and other facilities in China. They want to be close to their market, which any smart businessman wants to be. Plus, you avoid shipping costs altogether by building your products on the mainland itself. Anti-capitalist like you would try to do business differently but ultimately just go bankrupt.

[AIG]

what the Communist Chinese are doing

What would you have China do? Stick to a communist economic system? Since when have adopting capitalism and trying to rise out of Third World living conditions become crimes in Americans' eyes?

[blueriver]

China benefits, but so does America. American consumers gets low-cost goods which keep US inflation down in America's economy and Americans' standard of living high, and American shareholders (including probably yourself) ultimately get richer.

How will Americans' standard of living remain high when American companies do not hire Americans? What is going to happen when a lot of Americans can not find a job? I do not blame Corporations for going to China, India, North Korea to get workers that work for $200 a month. I am sure there will be some Americans that will benefit greatly from this cheap source of labor but there will be many average working class Americans that will be out of work. I hope you are correct and I am wrong for the sake of the American middle class.

[AIG]

Despite Japan, S. Korea, Taiwan, Singapore, etc. producing low-priced goods for Americans over the past several decades, America's GDP, per-capita GDP, size of workforce, and standard of living are the biggest and best in the world. Since 1964, when America's GDP was only $641 bil., it has risen to over $10 bil. today. Likewise, America's per-capita GDP rose more than 10-fold, and America's got a huge 130 mil. workforce. Employment increased over the past several decades while Japanese and Korean made stuff for Americans and did not decrease. If any American really wants to work 12-hour days making Nike shoes in an un-air-conditioned room, they are welcome to do it. But most Americans prefer white-collar jobs to blue-collar or manual-labor jobs these days. Even in America itself, it's the poor Mexicans who do the jobs that middle-class Americans just don't want to do. Japan, Korea, etc.'s wages all rose gradually over the past several decades, so now China naturally and for the next several decades will simply take their place so that American consumers can continue to maintain their standard of living by buying low-cost goods.

[AIG]

correction: it has risen to over $10 trillion today.

[AIG]

Every dollar an American saves by shopping at Wal-Mart is a dollar they can put to other uses, whether it's just buying more stuff or saving for a car or house or whatever. China's producing low-cost goods is the biggest "tax cut" imaginable for Americans. In this way, China helps Americans maintain their standard of living. No US politicians wants to change this situation either through a trade war because it would only hurt America's economy through higher prices/inflation and hurt Americans' purchasing power and standard of living. The US-China relationship is mutually beneficial to both. As US-China continue to develop economic ties, there's less motivation to have any conflict either. Even during the EP-3 incident, Pres. Bush did not even consider a trade war as an option. China makes all sorts of products that directly go into all sorts of US products, whether it's computers, car windshield, or whatever. Wal-Mart is also the US's biggest employer now.

[Charles_Bingley]

a new geopolitical model - the country as corporation

this phrase soounds like warmed over fascism.

[AIG]

One day, many US corporations will actually get the bulk of their revenues from China. This is even more incentive not to have a conflict (they don't want to destroy their own biggest market). This doesn't mean that US firms will abandon the US market. They will remain wherever there is money to be made. But China will just happen to be a bigger market for PC's, cell phones, cars, whatever, and capitalists will naturally gravitate towards it. Intel already gets 70% of its revenues from outside the US and China is its fastest-growing market. Both Intel and Microsoft predict that China will surpass Japan as the 2nd-biggest market for PC's sometime in the remainder of this year. The US PC market is saturated, so the US computer industry has no choice but to try to expand into China, especially when China's computer market is the only one in the world still growing by 20-30% a year.

[blueriver]

But most Americans prefer white-collar jobs to blue-collar or manual-labor jobs these days.

I was talking about the white-collar jobs. You must be aware that the jobs that are now leaving this country are the white-collar jobs, blue-collar jobs left during the time period when we were prospering and all a blue-collar worker had to due was get some education and move into a white-collar job. My question to you is what will happen when the white-collar working class people in America can not find work because the jobs are being shipped to Asia?

[AIG]

That would make America the global headquarters for fascism, as America is the main proselytizer and global headquarters of the economic globalization that is rapidly spreading to China. "Capitalism" has become a bad word in some Americans' eyes, but anyone who doesn't like capitalism can try Marxism. And capitalism necessarily requires global expansion because the First World's markets are saturated.

[Lessismore]

this phrase soounds like warmed over fascism.

Fascism has other characteristics, such as the "leadership principle", ultra-nationalism, and subordination of all other interests to that of the state.

[AIG]

In a capitalist system, there is no such thing as "guaranteed" employment, even for white collar workers. As Rush Limbaugh would say, this is part of the "creative destruction" of capitalism. White collar workers who lose their jobs simply have to retrain and find other jobs. The alternative is communistic "guaranteed" employment, which is a failed formula. China is as we speak laying off its state-sector workers who previously had "guaranteed" employment under China's centrally-planned economic system. It would be ironic if the US chose a communistic "guaranteed" employment system just as China abandons its own "guaranteed" employment system. There's no doubt that some white collar jobs will get destroyed. But so far, I don't see any evidence of America suffering a net outflow of white collar jobs. But even if that were to occur, that's all a part of the capitalist process. If Indian programmers an do a job more cheaply than American programmers, so be it. If Chinese chip designers can do a job more cheaply than American chip designers, so be it. That's the only way to go, because the alternative ("guaranteed" employment) eventually only leads to inefficiencies. But luckily for America, there's no evidence of America's white collar workforce getting shrunk in any substantial away.

Warren Buffett wrote two articles in Fortune in the past two years explaining how America's economy will actually soar through 2015. He outlined some "17-year cycles" in the US economy that have recurred regularly over the last 100 years. The 1998-2015 will be like the 1930-1947 period and the 1964-1981 period when US GDP climbed around 360-410% during these two periods (but also saw the Dow flatline due to rising interest rates). America's economy is cyclical, and by 2015 America's GDP will be around $40 tril. so don't worry about America's economy.

[AIG]

Another thing to consider is that, unlike Taiwan, America is basically not an export-driven economy. America has a large domestic economy of its own to be the primary driver of America's economic growth. So America is not nearly as threatened as Taiwan is by the export of both blue- and white-collar jobs to the mainland.

[AIG]

Another thing Buffett said is that the "nature of the business" of service sector firms is inherently more profitable than that of manufacturing sector firms. The reason is that manufacturing firms require huge, ongoing, expensive capital expenditures in plant and equipment just to maintain their ability to do business. Buffett says plant and equipment are the "worst kind of costs" because they experience heavy depreciation and are vulnerable during periods of rising inflation. On the other hand, service sector firms usually have much lower capital expenditure requirements, if at all, and are generally more profitable. Advanced economies like the US naturally gravitate toward more profitable ventures like the service sector and leave low-profit manufacturing to Third World countries like China. Service jobs generally also require higher levels of education than manufacturing jobs, and advanced economies like the US tend to have better education systems and more highly educated people. The ultimate service sector industry is the financial services industry. They don't sell any actual, tangible product. Nevertheless, it is a highly profitable industry. Real profits, real wealth generation. Service firms wouldn't be engaged in service businesses in the first place if it wasn't profitable. Buffett's big holdings don't include any firms involved in heavy manufacturing.

[blueriver]

Just little humor for you:

Finding a Job

Joe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 AM While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE IN TAIWAN) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) and continued his search for a good paying AMERICAN JOB. At the end of yet another discouraging and fruitless day, Joe decided to relax for a while. He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in ... AMERICA ...

[blueriver]

Sorry for the delay in responding.

In a capitalist system, there is no such thing as "guaranteed" employment, even for white collar workers. As Rush Limbaugh would say, this is part of the "creative destruction" of capitalism. ...The alternative is communistic "guaranteed" employment, which is a failed formula.

There is a big difference between "guaranteed" employment and solid available employment. I never once indicated that I am in favor of State "guaranteed" employment. I am however saying that job opportunities are an essential element to a sound economy. America has enjoyed prosperity because there was always a huge supply of job opportunities. Remember the slogan, the land of opportunity? Once that tide turns and Americans can no longer find jobs because the jobs are being moved to India, China, etc. than I believe the American economy will be negatively impacted.

White collar workers who lose their jobs simply have to retrain and find other jobs.

This is a lot easier said than done. Many people in white collor jobs spent time and money going to college to get degrees in a specific profession. Going back to college again is not as easy once you have a mortgage & bills to pay and no job. Also, how would you go about picking a second profession, theoretically you picked the first one under the impression that you were picking a lifetime career. So maybe today there is a demand for nurses so you go back to school to be a nurse, then what happens if they start importing nurses from 3rd world countries, and now you find yourself unable to get a job in the second profession. After all there is no guarantee of another professional job.

There's no doubt that some white collar jobs will get destroyed. But so far, I don't see any evidence of America suffering a net outflow of white collar jobs. But even if that were to occur, that's all a part of the capitalist process. If Indian programmers an do a job more cheaply than American programmers, so be it. If Chinese chip designers can do a job more cheaply than American chip designers, so be it. That's the only way to go, because the alternative ("guaranteed" employment) eventually only leads to inefficiencies. But luckily for America, there's no evidence of America's white collar workforce getting shrunk in any substantial away.

I think you are wrong. A lot of white collar jobs are leaving this country. I always said that I do not blame companies for finding the cheapest workforce available. I am sure that people in India and other 3rd world countries will benefit substantially from the globalization of the economy. My contention is that America and specifically middle class America will loose. I think you have misunderstood my assertions. I am simply asserting that AMERICA will not benefit. And maybe the philosphy I should start to take is "so be it".

[AIG]

Again, capitalism has its own logic, regardless of whether "solid employment" opportunities are available or not, how difficult it is to retrain for a new job, etc. That's life.

[blueriver]

Would you say that Feudalism is a form of Capitolism?