Foreign companies that have been enjoying (some might say exploiting) the Chinese supply of labor will be surprised to find that in the near future, both the human and material capital that are so abundant in China will be taken advantage of by Chinese firms. Chinese firms will grow increasingly powerful as they utilize both the manpower and the brainpower of Chinese citizens. More and more profit will remain inside China.

Why is this happening? China as a nation has recently grown intelligent enough to encourage both education and enterprising in order to capitalize on the value their citizens provide and at the price they are willing to do so. This is huge.

The billion or so consumers that have attracted American and other foreign firms to China’s markets have not been ignored by Chinese production and service firms. Those firms, also recently freed from Communism, are just as poised as the market for a great deal of activity and productivity as the markets themselves. Foreign firms hoping to capitalize on the Chinese consumer market may be disappointed to find that Chinese firms have greater ability to take advantage of production, marketing, and distribution channels already in place in China.

We’ve seen from the Alliance Bernstein White Paper that, for example, consumer goods penetration among Chinese markets is the lowest among any of the countries compared. And so what type of foreign firms will most benefit from China’s growth and which will be most disrupted? And what Chinese companies will be able to disrupt foreign firms in other markets? The real answer to this question is highly unpredictable. However, it is safe to assume that the Chinese will recognize the magnitude of their own core competencies as high-tech components manufacturers, raw material providers, and financial service providers. It will be interesting to watch it all shift as the Chinese develop increasingly efficient distribution channels to reach these markets.

According to the article, China’s GDP per capita, Average Income of middle class citizens, number of middle class citizens, investment in R&D as a percentage of GDP, is really quite a ways back from our own. As stated by another posting, California’s GDP is greater than China’s GDP. And China’s population is approximately 34 times bigger than California’s! This leads me to believe that our dominance as the world’s economic super power is safer than what Tom Fieldman is leads us to believe. Yet, I must agree with Fieldman on his concern with the huge gap in the number of Engineers and Scientist that China is turning out verses our own. Our countries “bread and butter” has primarily been technology driven. We better step it up if we plan on maintaining our leadership in this area. Also, it seems as if more recent statistics show that the articles future predictions under predicted China’s ability and progress for growth.

I am personally concerned to see that our technology sectors future seems to be in trouble (according to the article). This is disturbing because this is where I and most all of my fellow Industrial Techs are heading. Yet after considering how long it has taken us to get where we are today, and the current progress of China, opportunities look extremely bright for our generation.

It actually makes much more sense that Chinese would gravitate towards Chinese produced products since we were the ones exploiting their low cost labor. Why wouldn’t they tap that resource themselves and start selling products in external markets?

I agree with Peter that the report is a bit insensitive to the human and ecological impact of exploiting this cheap source of production. Maybe the reprisal will be in the form of stiff international competition for the firms that at one time exploited China.

“Every morning in Africa a gazelle wakes up. It knows it must run faster than the lion or it will not survive. Every morning a lion wakes up and it knows it must run faster than the slowest gazelle or it will starve. It doesn’t matter if you are the lion or the gazelle, when the sun comes up, you better be running.”

For a long time foreign entities (including the U.S.) have been looking at China as the gazelle, and considering themselves the lions, meaning that China has been thought of as one billion customers, rather than a tremendous producing force to be reckoned with. What they have not been counting on are China’s brilliant strategies to make the country more competitive, including investing in education, infrastructure, and technology. The techniques employed help protect Chinese interests and secure their competitiveness. At the same time, the Chinese are leveraging their attractive markets to draw out technological advances, intellectual property, and company ownership from foreign firms wishing to do business there.

The evolution seems to be that as more affluent classes are created and expanded from within the Chinese population, rather than simply become worldwide consumers, the Chinese threaten to become global leaders in innovative and commercial practices.

If you’ve read my other comments, you know that I believe that globalization will be a rocky, but overall positive event in the history of mankind. It will lead to greater wealth, knowledge, and higher standards of living across the board. However, if the U.S. and other countries fail to recognize that China’s strategies are quickly making them the “lion” in the metaphor, they may find themselves waking up to a new day in which they are the gazelles. Or, at the very least, that there is a swift new lion out there with greater ability to catch the gazelles.

I don’t know if I’ll ever go to China to do business, but I do know that in the financial industry, where I frequently browse career openings, there have been an increasing number of listings in both Beijing and Shanghai. One thing I do know is that the changes felt in the Chinese economy will resonate around the world. So the goal for me and anyone else wishing to be successful should be to keep a close eye on the competition, and focus on continuous self-improvement to prepare for the new global economy that we have only just begun to observe.

In response to Peter’s comment, I have to say that I completely agree with what he had to say, especially about the auto industry given the financial situation that GM finds itself. However, regarding the Lenovo-IBM deal, I feel that you have to take into account the fact that IBM shifted its primary business focus away from personal computers and into severs and consulting some years ago. That being said, I have a hard time believing that an established company like Caterpillar would allow one of their designs to bear any other name on the product that the company is based upon. Nevertheless, the advantages of manufacturing in China are clear and I would not be surprised to see “Made in China” under the Caterpillar name in the future.

I found the overall tone of the paper to be somewhat unnerving. In particular, the passages that touched on the environment, cheap labor, and other like issues, seemed a bit too business-like. I’m aware of the scope of the document (and of white papers in general), but think that such passages would benefit from an additional paragraph on social responsibility or some other qualifier to indicate that the authors are in fact human.

The “Low-Cost Labor” section that spans pages 12 and 13 is particularly devoid of emotion:

“Even though the middle class is growing quickly, the average city dweller in 2002 earned just over $1,200 per year, or approximately $0.60 an hour. Peasants made about one-third of that, or about $.020 an hour, and are flooding into the cities.” [pg. 13]

The above statement precedes the following by a few paragraphs:

“The size of China’s population clearly ensures its status as a source of low-cost labor for years to come. In fact, many of China’s most effective companies have replaced capital with labor, reversing the historical trend in developed countries.” [pg. 13]

While the paper, as noted, effectively provides answers for anyone wishing to understand the nature and future opportunities that can be found in China, I would have appreciated more information on the current downsides of expansion. The massive use of natural resources, both as an environmental concern as well as ‘cost of resources’ concern for multinationals (e.g. the increasing cost of cement), was covered, but only lightly. The social effect of labor exploitation was pretty much ignored, though the paper does provide a few specific statistics that should give an observant reader a sense of the overwhelming size of China’s poor.

Only in combining the positive and negative sides of China’s opportunities can businesses and individuals truly make sound decisions. I would hope that anyone, whether as an executive in a multinational, an entrepreneur hoping to capitalize on the growing market, or any other combination of possibilities, would take the time to consider all of China’s realities. If a healthy majority chose to do so, China would still experience astronomical growth, yet perhaps so would her achievement of progressive reform.

I think many would have said the same about the computer industry prior to the Lenovo-IBM deal. The way things are unfolding, the auto industry is next.

While many people have many different theories on what ultimate affect China will have on the global economy, one thing is definitely true. China is a player and their role and level of importance in this game will continue to increase as time progresses. With their immense cheap and skilled labor pool, they will continue to attract foreign outsourcing and new technologies through these partnerships. One question that remains is that as these Chinese companies produce more sophisticated technologies and gain brand awareness internationally through those partnerships, what measures do these foreign companies have in place to prevent China from completely taking over these segments?

On a more personal note, I plan on focusing my career in the heavy civil construction industry. As far as I can see, this industry is relatively well shielded from Chinese competition, at least domestically. However, the article spoke about the relative explosion in Chinese companies that manufacture construction equipment in the not too distant past. Given the nature of the industry, it is hard to imagine a Chinese company posing much of a threat to the likes of Caterpillar or Case in the U.S., but one also has to be realistic. If one of these companies is able to produce equipment that is as reliable or more, at a much cheaper cost, even the most entrenched and stable companies will feel the global economic squeeze of China in the years to come.

I also find the massive use of natural resources quite troubling and have long wondered what kind of curbs the Chinese government, or businesses (Chinese or multinational), are putting on the consumption. More importantly, and in line with Azad’s final comments, I have been concerned with the long-term environmental effects of this consumption (pollution, sustainability, etc.).

Yesterday, while being directed to an online copy of the Constitution of the People’s Republic of China, I checked out the main website that was hosting the document (People’s Daily Online) and subsequently found a fairly deep section on Sustainable Development in China. There are a ton of articles listed in the section on topics ranging from energy and consumption to biodiversity to corporate social responsibility.

I’ve only read a few so far but was surprised to find any resources of this nature given the overall perception we have been presented regarding China’s environmental priorities. Whether these articles represent the majority of what is taking place in China’s economy, or are simply a roundup that represent the select few chosen for a positive PR campaign is a very important question that I am not sure can be answered without first-hand experience and research.