China's hidden weaknesses

In recent months the mainstream media has been overflowing with articles discussing the economic threat that China poses to the global economy in industries ranging from textiles to autos. In response to these anxieties and fears, many politicians on both the left and right are pressing for ill—conceived tariffs on Chinese exports and limitations on Chinese investment into key industries.   

While it is true many Americans and Europeans face the possibility of layoffs and lower wages caused by intense Chinese competition, I have watched this growing backlash against China with a mixture concern and dismay.  As an American instructor of business management in Beijing and Shanghai for the last five years, I'm becoming increasing convinced that the Chinese economy in the years ahead will not be as strong as many so—called Western experts would like readers to believe.

Before Westerners get carried away with irrational exuberance about the number of new Shanghai skyscrapers going up or the millions of new cars clogging the streets of Beijing, foreigners would do well to gain a greater understanding of the massive economic challenges its Communist leaders need to tackle in the next few years.

The list of key internal weaknesses of China, Inc is growing with each passing day

First, there's the dysfunctional financial system with it's long history of mismanagement and corruption. While Chinese people, on average, save a high a percentage of their income, the major government—controlled banks often fail to allocate capital wisely to small and medium—sized businesses. And forget about the stock marke: attention all gamblers, the Shanghai and Shenzhen exchanges are just one big casino.      

In country where proper credit checks are often the exception and not the rule, some small business owners have avoided the official banking system and tried to obtain capital through friends or even by collaborating with criminals.  In a society where guanxi (personal connections) with the right person is often more important than profit growth, many small businesses are doomed to a premature death.

Second, Beijing's half—hearted enforcement of intellectual property laws is a well—documented headache that harms both foreign and domestic firms alike.  With so many fake products floating around, many Western CEOs in China are desperately trying to protect their hard—earned reputation for quality. 

Some Chinese have realized that fakes can also have a dangerous side.  A recent inspection conducted by the China Health Care Association showed that more than 25% of the health care products were fakes. With more medicine being sold over the Internet, some potential harmful pills with inevitably end up in American hands.    

Third, as BusinessWeek explained in a series of recent articles, with a population of 1.3 billion, there are a variety of social and educational challenges that threaten social stability in many rural areas.  Just this week, the China Daily, Beijing's official mouthpiece, admitted that China's growing income gap is likely to trigger social instability by 2010 if the government finds no effective solutions to end the disparity. 

And the problems may not always seem logical.  Even in a country with exploding university enrollment, worker shortages are popping up in the manufacturing strongholds in southeast China. Rising rural incomes mean fewer people are migrating into the major southern cities of Shenzhen and Guangzhou in search of work. After years of wage stagnation in the Pearl River Delta, salaries are starting to creep up and some firms in the most labor—intensive industries are starting to consider moving their factories farther inland. 

While Americans are often led to believe China has endless supply of labor, BusinessWeek reports in the city of Dongguan (near Hong Kong) alone, there are an estimated 267,000 unfilled jobs.  Of course, the underlying challenge is make sure more Chinese people have the right skills to fill these job openings.

The Chinese Dragon versus the Japanese Salaryman
  
Many Western commentators try to compare the economic rise of Japan in the late 1980's with China of today. While it is true both of Asian country share many cultural similarities, this analogy often falls flat.  For instance, while Japan often made foreign investment difficult, the Chinese are increasingly dependent on foreign direct investment of more than $50 billion per year to feed its export machine.  In fact, more than half of China's exports come from foreign—owned enterprises.         

And the differences often go deeper.  Unlike Japan in the 1980's, China suffers from a serious shortage of skilled business managers and researchers with international experience.  While the number of MBA programs in China has greatly increased, demand for talent greatly outstrips supply.  To understand the depth of this problem, consider the figures in the current issue of Newsweek International:

China faces a critical shortage: experienced, highly skilled managers. The numbers are astounding. The country has some 25,000 state companies, 4.3 million private firms and massive industrial overcapacity. But it has too few experienced managers for even the elite firms.  The consulting firm McKinsey & Co. estimates that even the relatively small number of Chinese companies trying to expand abroad will need up to 75,000 internationally experienced leaders if they want to continue to grow over the next 10 to 15 years. Currently, McKinsey estimates, there are only 3,000 to 5,000 such men and women in China. 

The traditional way of thinking continues to permeate many firms, especially in the inefficient state—run sector.  For many job seekers the key to success is not developing your personal skills and abilities, but building good guanxi with the human resource manager.  During my five years teaching business in China, many of my Chinese students (mostly gifted females from the countryside) have complained to me about the unfairness of the current situation. 

This is another reason why more foreign investment is so critical for China's future.  Along with sharing technology, the major multinationals bring a totally new mindset about the manager/employee relationship.
   
While millions of young Chinese were studying every word in Chairman Mao's Little Red Book during the 1970s, businesspeople in the Land of the Rising Sun were trying to learn how to improve quality standards, motivate workers to be more loyal to the organization, and redesign products for Western tastes.       

The Toyota Way

Led by global giants like Toyota and Honda, the Japanese have made key contributions to the field of business management since the 1960's with innovative ideas related to just—in—time (JIT) delivery, total quality management (TQM), and continuous improvement (kaizen).  As a university student in Osaka in 1994, I had the chance to study these concepts and tour Toyota's Motomachi plant near Nagoya. 

As explained by Jeffery Liker, a researcher at the University of Michigan, in his book The Toyota Way, many other firms in a variety of industries can adopt these principles and enhance their competitiveness. 

While they have come to dominate many industries, the Japanese also have made their share of mistakes.  When Honda first entered the American motorcycle market in the late 1960's, they mistakenly thought American consumers would prefer larger 250cc gas—guzzlers.  With oil prices soaring upwards in the in 1970's, they quickly had to change course and start promoting their smaller, more fuel—efficient, 50cc model.

And as I have experienced firsthand in the classroom, Japanese students seem to have more difficulty mastering English conversation than the Chinese.  In a society that has traditionally emphasized perfection in everything they do, many Japanese can't seem to get over their fear of making a mistake and losing face.  
 
Except for applying Sun Tzu's tactics used in The Art of War to business strategy, China has yet to make a major contribution to how modern businesses should operate and improve their efficiency.   

Overseas Chinese Return to Help Their Motherland
 
Because of their lack of international business experience, mainland firms have come to depend a network of overseas Chinese for management expertise.  Creating a massive brain drain, many of the most talented businesspeople immigrated to other parts of Asia after the Communist takeover in 1949 or the tragic decade—long Cultural Revolution. 

For instance, the Hong Kong—based multinational Li & Fung has connected Chinese businesspeople to the rest of the world.  Over the years, in the former British colony, Li & Fung has advised many Western electronics manufacturers and clothing retailers and helped them manage their complex supply chains on the mainland and across Southeast Asia.   

While China depended on their guanxi with their ethic—brothers and sisters overseas, Japanese manufacturers cooperated with giant trading companies (sogo shosha) to handle international transactions.  These sogo shosha were a key member of Japan's so—called keiretsu groupings with Mitsubishi and Mitsui two well—known examples.   

Conclusion

While it is undeniably true that China's rise creates a major challenge for the Western economies, it is important for us to keep this major power shift in perspective. 

Raised in educational system that emphasizes root memorization with little independent thought, it will many years before China has the pool of skilled business managers it needs to lead its companies in a world where creative thinking and innovation are of paramount importance.    

Instead of trying to isolate China and limit trade and investment, it is in America's best long—term interests to promote more cooperation and keep China moving on a path toward greater peace and prosperity.         

Brian Schwarz lives in China. His blog site is found here.

In recent months the mainstream media has been overflowing with articles discussing the economic threat that China poses to the global economy in industries ranging from textiles to autos. In response to these anxieties and fears, many politicians on both the left and right are pressing for ill—conceived tariffs on Chinese exports and limitations on Chinese investment into key industries.   

While it is true many Americans and Europeans face the possibility of layoffs and lower wages caused by intense Chinese competition, I have watched this growing backlash against China with a mixture concern and dismay.  As an American instructor of business management in Beijing and Shanghai for the last five years, I'm becoming increasing convinced that the Chinese economy in the years ahead will not be as strong as many so—called Western experts would like readers to believe.

Before Westerners get carried away with irrational exuberance about the number of new Shanghai skyscrapers going up or the millions of new cars clogging the streets of Beijing, foreigners would do well to gain a greater understanding of the massive economic challenges its Communist leaders need to tackle in the next few years.

The list of key internal weaknesses of China, Inc is growing with each passing day

First, there's the dysfunctional financial system with it's long history of mismanagement and corruption. While Chinese people, on average, save a high a percentage of their income, the major government—controlled banks often fail to allocate capital wisely to small and medium—sized businesses. And forget about the stock marke: attention all gamblers, the Shanghai and Shenzhen exchanges are just one big casino.      

In country where proper credit checks are often the exception and not the rule, some small business owners have avoided the official banking system and tried to obtain capital through friends or even by collaborating with criminals.  In a society where guanxi (personal connections) with the right person is often more important than profit growth, many small businesses are doomed to a premature death.

Second, Beijing's half—hearted enforcement of intellectual property laws is a well—documented headache that harms both foreign and domestic firms alike.  With so many fake products floating around, many Western CEOs in China are desperately trying to protect their hard—earned reputation for quality. 

Some Chinese have realized that fakes can also have a dangerous side.  A recent inspection conducted by the China Health Care Association showed that more than 25% of the health care products were fakes. With more medicine being sold over the Internet, some potential harmful pills with inevitably end up in American hands.    

Third, as BusinessWeek explained in a series of recent articles, with a population of 1.3 billion, there are a variety of social and educational challenges that threaten social stability in many rural areas.  Just this week, the China Daily, Beijing's official mouthpiece, admitted that China's growing income gap is likely to trigger social instability by 2010 if the government finds no effective solutions to end the disparity. 

And the problems may not always seem logical.  Even in a country with exploding university enrollment, worker shortages are popping up in the manufacturing strongholds in southeast China. Rising rural incomes mean fewer people are migrating into the major southern cities of Shenzhen and Guangzhou in search of work. After years of wage stagnation in the Pearl River Delta, salaries are starting to creep up and some firms in the most labor—intensive industries are starting to consider moving their factories farther inland. 

While Americans are often led to believe China has endless supply of labor, BusinessWeek reports in the city of Dongguan (near Hong Kong) alone, there are an estimated 267,000 unfilled jobs.  Of course, the underlying challenge is make sure more Chinese people have the right skills to fill these job openings.

The Chinese Dragon versus the Japanese Salaryman
  
Many Western commentators try to compare the economic rise of Japan in the late 1980's with China of today. While it is true both of Asian country share many cultural similarities, this analogy often falls flat.  For instance, while Japan often made foreign investment difficult, the Chinese are increasingly dependent on foreign direct investment of more than $50 billion per year to feed its export machine.  In fact, more than half of China's exports come from foreign—owned enterprises.         

And the differences often go deeper.  Unlike Japan in the 1980's, China suffers from a serious shortage of skilled business managers and researchers with international experience.  While the number of MBA programs in China has greatly increased, demand for talent greatly outstrips supply.  To understand the depth of this problem, consider the figures in the current issue of Newsweek International:

China faces a critical shortage: experienced, highly skilled managers. The numbers are astounding. The country has some 25,000 state companies, 4.3 million private firms and massive industrial overcapacity. But it has too few experienced managers for even the elite firms.  The consulting firm McKinsey & Co. estimates that even the relatively small number of Chinese companies trying to expand abroad will need up to 75,000 internationally experienced leaders if they want to continue to grow over the next 10 to 15 years. Currently, McKinsey estimates, there are only 3,000 to 5,000 such men and women in China. 

The traditional way of thinking continues to permeate many firms, especially in the inefficient state—run sector.  For many job seekers the key to success is not developing your personal skills and abilities, but building good guanxi with the human resource manager.  During my five years teaching business in China, many of my Chinese students (mostly gifted females from the countryside) have complained to me about the unfairness of the current situation. 

This is another reason why more foreign investment is so critical for China's future.  Along with sharing technology, the major multinationals bring a totally new mindset about the manager/employee relationship.
   
While millions of young Chinese were studying every word in Chairman Mao's Little Red Book during the 1970s, businesspeople in the Land of the Rising Sun were trying to learn how to improve quality standards, motivate workers to be more loyal to the organization, and redesign products for Western tastes.       

The Toyota Way

Led by global giants like Toyota and Honda, the Japanese have made key contributions to the field of business management since the 1960's with innovative ideas related to just—in—time (JIT) delivery, total quality management (TQM), and continuous improvement (kaizen).  As a university student in Osaka in 1994, I had the chance to study these concepts and tour Toyota's Motomachi plant near Nagoya. 

As explained by Jeffery Liker, a researcher at the University of Michigan, in his book The Toyota Way, many other firms in a variety of industries can adopt these principles and enhance their competitiveness. 

While they have come to dominate many industries, the Japanese also have made their share of mistakes.  When Honda first entered the American motorcycle market in the late 1960's, they mistakenly thought American consumers would prefer larger 250cc gas—guzzlers.  With oil prices soaring upwards in the in 1970's, they quickly had to change course and start promoting their smaller, more fuel—efficient, 50cc model.

And as I have experienced firsthand in the classroom, Japanese students seem to have more difficulty mastering English conversation than the Chinese.  In a society that has traditionally emphasized perfection in everything they do, many Japanese can't seem to get over their fear of making a mistake and losing face.  
 
Except for applying Sun Tzu's tactics used in The Art of War to business strategy, China has yet to make a major contribution to how modern businesses should operate and improve their efficiency.   

Overseas Chinese Return to Help Their Motherland
 
Because of their lack of international business experience, mainland firms have come to depend a network of overseas Chinese for management expertise.  Creating a massive brain drain, many of the most talented businesspeople immigrated to other parts of Asia after the Communist takeover in 1949 or the tragic decade—long Cultural Revolution. 

For instance, the Hong Kong—based multinational Li & Fung has connected Chinese businesspeople to the rest of the world.  Over the years, in the former British colony, Li & Fung has advised many Western electronics manufacturers and clothing retailers and helped them manage their complex supply chains on the mainland and across Southeast Asia.   

While China depended on their guanxi with their ethic—brothers and sisters overseas, Japanese manufacturers cooperated with giant trading companies (sogo shosha) to handle international transactions.  These sogo shosha were a key member of Japan's so—called keiretsu groupings with Mitsubishi and Mitsui two well—known examples.   

Conclusion

While it is undeniably true that China's rise creates a major challenge for the Western economies, it is important for us to keep this major power shift in perspective. 

Raised in educational system that emphasizes root memorization with little independent thought, it will many years before China has the pool of skilled business managers it needs to lead its companies in a world where creative thinking and innovation are of paramount importance.    

Instead of trying to isolate China and limit trade and investment, it is in America's best long—term interests to promote more cooperation and keep China moving on a path toward greater peace and prosperity.         

Brian Schwarz lives in China. His blog site is found here.