Before China signed on to the WTO, there was a sense that, while China had opened up to get the advantages of trade with the West, the government and the banks would protect Chinese businesses from any crushing foreign competition, said Jack Perkowski of ASIMCO. “China's entry into the WTO was a signal to the community outside of China that it was now on the capitalist track for good,” he added. “Before, you had the thought in the back of your mind that there could be a turning back to state communism. With WTO, China said, 'We are on one course.'”
Because China can amass so many low-wage workers at the unskilled, semiskilled, and skilled levels, because it has such a voracious appetite for factory, equipment, and knowledge jobs to keep its people employed, and because it has such a massive and burgeoning consumer market, it has become an unparalleled zone for offshoring. China has more than 160 cities with a population of 1 million or more. You can go to towns on the east coast of China today that you have never heard of and discover that this one town manufacturers most of the eyeglass frames in the world, while the town next door manufacturers most of the portable cigarette lighters in the world, and the one next to that is doing most of the computer screens for Dell, and another is specializing in mobile phones. Kenichi Ohmae, the Japanese business consultant, estimates in his book The United States of China that in the Zhu Jiang Delta area alone, north of Hong Kong, there are fifty thousand Chinese electronics component suppliers.
“China is a threat, China is a customer, and China is an opportunity,” Ohmae remarked to me one day in Tokyo. “You have to internalize China to succeed. You cannot ignore it.” Instead of competing with China as an enemy, argues Ohmae, you break down your business and think about which part of the business you would like to do in China, which part you would like to sell to China, and which part you want to buy from China.
Here we get to the real flattening aspect of China's opening to the world market. The more attractive China makes itself as a base for off-shoring, the more attractive other developed and developing countries competing with it, like Malaysia, Thailand, Ireland, Mexico, Brazil, and Vietnam, have to make themselves. They all look at what is going on in China and the jobs moving there and say to themselves, “Holy catfish, we had better start offering these same incentives.” This has created a process of competitive flattening, in which countries scramble to see who can give companies the best tax breaks, education incentives, and subsidies, on top of their cheap labor, to encourage offshoring to their shores.
Ohio State University business professor Oded Shenkar, author of the book The Chinese Century, told BusinessWeek (December 6, 2004) that he gives it to American companies straight: “If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won't work.” Chinese producers can make the same adjustments. “You need an entirely new business model to compete,” he said.
China's flattening power is also fueled by the fact that it is developing a huge domestic market of its own. The same BusinessWeek article noted that this brings economies of scale, intense local rivalries that keep prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in twelve-hour days, an unparalleled component base in electronics and light industry, “and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores, Target, Best Buy and J.C. Penney.”
Critics of China's business practices say that its size and economic power mean that it will soon be setting the global floor not only for low wages but also for lax labor laws and workplace standards. This is known in the business as “the China price.”
But what is really scary is that China is not attracting so much global investment by simply racing everyone to the bottom. That is just a short-term strategy. The biggest mistake any business can make when it comes to China is thinking that it is only winning on wages and not improving quality and productivity. In the private, non-state-owned sector of Chinese industry, productivity increased 17 percent annually-I repeat, 17 percent annually-between 1995 and 2002, according to a study by the U.S. Conference Board. This is due to China's absorption of both new technologies and modern business practices, starting from a very low base. Incidentally, the Conference Board study noted, China lost 15 million manufacturing jobs during this period, compared with 2 million in the United States. “As its manufacturing productivity accelerates, China is losing jobs in manufacturing-many more than the United States is-and gaining them in services, a pattern that has been playing out in the developed world for many years,” the study said.