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China: Factory to the World
By
Rawlein G. Soberano, Ph.D. |
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China is emerging as the manufacturing giant of the world, which improves the living standards and quality of life of its people. It also helps multinationals, whether they come from the region or the West to hold down the cost of doing business. It is riling the global economy, taking away jobs and investments from other countries, straining political support for open trade and driving down the price of tradable goods in the midst of a global recession. Its admission to the WTO last month will only add to this trend, increasing its appeal by locking in lower duties for products its exports.
Earlier predictions that China would become an economic power were not realized because it has never been able to harness the economic potential of its vast and hard-working population. New companies from Taiwan, Japan, US and other countries are seeking the demand of their customers for lower prices. China, with its enormous pool of cheap labor, is fast becoming a factory to the world.
No one can miss China’s emergence as a manufacturing giant akin to Japan’s spectacular industrial boom after World War II, similar to the rise of the US economy in the early 1900s, or even the dawn of the Industrial Revolution in the UK. Japanese management consultant Kenichi Ohmae put it succinctly when he wrote of China recently that “the world has never seen an economy with these qualities before.”
A case in point is Mabuchi Motor Co. in Dalian, China. In an 8-hour workday, its production line of 6,000 workers, most of whom are women in their early twenties, repeat the same series of 2-second motions tens of thousands of times. It is a daunting labor that requires clear eyesight, nimble finders and the ability to concentrate for hours on end. Like tens of thousands of other manufacturing concerns, Mabuchi has discovered in China a nearly inexhaustible supply of workers capable of handling such assignments, willing to take them on for a fraction of the pay demanded by counterparts in more advanced economies.
For what a company would pay in Japan or the US for an entry-level employee, it can hire a dozen or more people in Dalian, many of whom do better work. It is no wonder that Mabuchi, the world leader for nearly every type of motor it sells, has moved 90% of its production of 1.7 billion micro-motors to China. As a matter of fact, it does not make anything anymore in Japan. The women on the assembly lines are the vanguard of what many experts predict will prove a very important economic development in the 21st century: the rise of China as an industrial powerhouse.
China’s share of the US import market has grown substantially over the last decade. Among other exporters in the region, the “tigers” include Hong Kong, South Korea, Singapore and Taiwan, while the “cubs” are identified as Indonesia, Malaysia, Philippines and Thailand. The “cubs” are pulled by various problems, e.g. government corruption, religious troubles, Islamic rebellion, labor uncertainties, growing unemployment, creeping deflation, and decreasing buying power.
The strength of China’s economy is most keenly felt in Asia where the Chinese mainland has garnered $321 billion, or 45% of the $719 billion in direct foreign investments going into the region since 1990. For example, General Motors Corp, the world’s largest automaker has invested $1.5 billion to build a manufacturing facility outside Shanghai. Motorola Inc. eliminated 40,000 jobs in the past year, but invested $4.3 billion into operations in China, making it the country’s largest investor.
It is beginning to undercut its neighbors in the crucial export market. Its exports soared 27.8% last year, outstripping export growth in the rest of the region. In 2000 Japan posted exports of $477 billion but its exports have fallen by 15% in the first 10 months of this year while China’s are up 6.4%. Andy Xie, an economist with Morgan Stanley Dean Witter & Co. in Hong Kong predicts that China will export a third more than Japan in the next five years.
China’s share of the total US imports has more than tripled to 8.4% since 1989. On the other hand, Japan’s share fell by almost half during that period to 11%, while the combined shares of Asia’s “tiger “ economies (Taiwan, S. Korea, Hong Kong & Singapore) shrank by a third to 8%. That of Southeast Asia’s other major exporters (Indonesia, Malaysia, Philippines & Thailand) rose only by a pittance. Analysts at Salomon Smith Barney calculate that if current growth rates continue, China’s high-tech export will overtake Japan’s within a decade.
To satisfy US consumers’ demand for lower prices, most of Taiwan’s leading makers of computer components have shifted production to the mainland. More than 40,000 Taiwanese firms have established operations in China, investing an estimated $60 billion. Taiwanese investors are providing the capital and technology for two ambitious semi-conductor manufacturing plants slated to start production before the end of the year in Shanghai.
China’s rise as a global producer is aggravating a tangle of homegrown problems that have dragged Japan into its worst recession since WW II. Competition from China has ravaged the Japanese textile industry and threatens to wipe out producers of several varieties of specialty farm goods. The government of Prime Minister Junichiro Koizumi, besieged by angry farmers last April, slapped temporary tariffs on Chinese-grown leeks, shiitake mushrooms and tatami rushes. China retaliated by imposing 100% punitive tariffs on Japanese cars, mobile phones and air conditioners. The dispute is still ongoing.
A Japanese apparel chain, Fast Retailing Co, has doubled sales in the past three years by refusing to buy from costly domestic producers and importing directly from China instead. The company has recruited some of Japan’s most accomplished textile experts and sent them to instruct workers at more than 80 Chinese textile plants on Japanese weaving, dyeing and stitching techniques perfected over many decades. Japanese business leaders, especially the country’s textile lobby, lambasted Fast Retailing’s president for exporting jobs to China. However, in the depressed retail industry, his critics are trying to learn the blueprint of his success.
Electronics is the main threat of China to Japan, as it is the mainstay of the latter’s economy. Some of Japan’s electronic giants, including Toshiba Corp, Sony Corp, Matsushita Electric Industrial Co, and Canon Inc have announced plans to expand operations in China this year, even as the industry is letting go tens of thousands of workers at home. The current concern regarding job losses in Japan to China is similar to the American concern of job losses to Japan 15 ears ago. The die is cast, and this shift is inevitable! China is a huge market and it has a large pool of excellent workers.
This point is illustrated by Toshiba’s move to Dalian. By shifting production of digital television to China from its plant in Saitama, Japan this year, the company has cut labor costs by 90% per worker. Workers at Toshiba’s Saitama plant will be redeployed to manufacture liquid crystal displays. But many Toshiba employees believe that it is only a matter of time before the operations shift to China as well. With generous financial support from the Japanese government and major Japanese firms, around 40 Japanese companies, including Toshiba and Mabuchi, have built large-scale production facilities in a special export-processing zone established by Dalian in the early 1990s.
Why Dalian? It is a northern Chinese seaport, which was controlled by the Japanese army for nearly four decades before Japan’s WW II surrender. Aware of this cultural and linguistic link with Japan, local Communist Party leaders understand that Dalian is competing with other Chinese municipalities for foreign investment dollars and have downplayed colonial animosities. They have been successful in promoting Dalian as a natural Chinese hub for Japanese manufacturers. It has almost a dozen weekly air flights to Japan. The city maintains a trade promotion office in Tokyo’s expensive Aoyama district. Their effort is paying off. Dalian presently hosts operations of more than 1,800 Japanese companies. The trade zone is growing rapidly, and not one company has pulled out.
Another major attraction of Dalian for the Japanese executives of many manufacturing operations is the abundance of inexpensive, high quality labor from the rural villages that surround it. Recruiting is easy. When managers need new workers, they only have to ring the local labor officials. It is never short of workers. There are usually at least 10 candidates for every opening. Employers are choosy. Workers who tend to be slow are rare in the assembly lines in the Dalian export zone. In many plants, an observer can tour the whole plant without seeing a single worker wearing glasses or over the age of 30.
One sometimes wonders how un-Japanese many Japanese firms run their operations in Dalian. The manager at Mabuchi decided when he arrived in 1994 that it did not make sense to offer workers the sort of permanent employment assurances Japanese companies were obliged to promise back home. Mabuchi did not need lifetime loyalty from its employees. It needed young workers with quick fingers who would work cheap without complaint. The company placed the workers on one-year contracts. Lately, to adjust to fluctuations in global demand for micro-motors, Mabuchi has shifted 40% of its workforce to terms of just 120 days.
The plant of Mabuchi in Dalian is not a sweatshop. The facility has a solid safety record. The factory floor is immaculate. Take home pay, about $84 a month with overtime, is high by local standards. Discipline is strict. At regular intervals, the performance of each worker is evaluated with letter grades of A, B or C. Contracts of those rated C are not renewed. Competition for jobs is intense. Teizo Togawa, general manager of Japanese towel maker Ichihiro Co’s Dalian plant made this observation, “In Japan, we have to promise workers jobs for life and pay them based on seniority. But no one thinks about that here. Workers in China believe in merit.”
Some Hong Kong economists caution that China’s labor pool is not bottomless. Over the next decade, the government’s one-child quota is bound to tilt the ratio of young workers in China well below that of other highly populated nations, such as India and Indonesia. Competition for young workers has driven up wages in urban areas of China’s eastern coast. But executives at foreign manufacturing plants like those in Dalian are not gloomy about the prospect of recruiting inexpensive help in China. It is at least 20 years away.
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