The Hindu Business Line : Enter the dragon?

As the Chinese economy explodes and Chinese exports to the US and EU boom, a question often asked in the region is whether China is a threat or an opportunity.

At a recent conference of economic editors convened in Singapore by MasterCard International, its economist Dr Yuwa Hedrick-Wong, author of the report China and the New Global Economy, gave an interesting example of how different countries benefit in different ways from China.

He said Vietnam was now benefiting from China in a different way. Earlier this year, the Mayor of Shanghai, to reduce pollution, sent notices to 500 companies asking them to reduce emission levels to international standards by end-2006, or face a shutdown. Later, Shanghai's municipal government sent two trade delegations to Vietnam. "Basically to tell these companies: we think you should move, and we are paying to take you on these trade missions to Vietnam. In Shanghai today, there is shortage of labour and to move up the value chain, they don't want labour intensive manufacturing. It's a financial, research and manufacturing centre and graduates from all over China are landing in Shanghai. Certainly they are not looking for jobs in polluting factories making shoes."

While asking polluting companies to shut down, the Shangai Mayor also dangled the Vietnam carrot to them. "And guess what? Vietnam is spreading the red carpet for them, because their workers will get jobs. While corporates from other nations might be apprehensive of the communist regime there, for "Chinese companies this is not a problem, they are already used to the communist ethos; they know how to deal with communist party cadres, bureaucrats, etc. So in the next 10 years you'll see China making big investments in Vietnam."

As the wages in coastal areas rise, low-end producers will shift either to Vietnam or interior China. For many MNCs too operating at the lower end, the option was the same. Also, many MNCs were moving to Vietnam "because they worry about the backlash on China's trade surplus with the US and would like to put their eggs in different baskets. Intel might think: `I'm exporting so much to the US, I don't want to export it all from China.' Tomorrow if the Congress passes some punitive measures on such issues, Intel wouldn't want to be caught in that. I don't see the political controversy in the US abating; as China gets bigger, it'll get worse," he said.

Leveraging China

But China's growth has been good news for East and South East Asian countries. Japan has benefited the most and has been quick to seize the advantage of cheap manpower and infrastructure to shift much of its manufacturing to China. To the extent that today for many of its products made in China, Japan has a large reverse export back to its domestic market.

While Japan, Korea and Taiwan had mainly benefited by having a comparative advantage in capital goods — heavy machinery and other allied items — countries like Malaysia, Thailand and Indonesia had benefited on the commodities side, exporting for the huge Chinese market products ranging from palm oil and other agricultural products to minerals. "Thailand's processed fruit industry is growing tremendously thanks to the Chinese market; from tropical fruits all the way to chicken soup and noodles, the Thai industry is expanding fast to cater to the expanding urban middle class of China," said Dr Yuwa.

That was at the macro level; at the micro level lay business decisions. And for that to happen countries need to become much more liberalised in terms of allowing companies to be domiciled where there is competitive advantage, he added. Taking the example of cereals and cornflakes, he said some companies even have a regional strategy, doing research on the local tastes!

At the macro level, all the countries in Asia would have to get knit into regional integration, there was no escape from it. At the micro level each country would have to open up and liberalise its marketplace.

Corruption

"How you make your domestic economy efficient for the integration process is very important," he said, adding, "A lot of times we say that the Indonesian economy is a `high cost' economy. Now that is really a euphemism. Why is it high cost when the labour is so cheap? Because everywhere you turn, you have to pay."

In emerging markets there are two types of corruption, organised and disorganised; and the difference is huge. "Japan is a very corrupt society, now and then in Japan big businessmen are caught, literally with suitcases carrying millions of dollars in cash. But the Japanese economy is highly efficient. Why? Because corruption is highly organised; and from a business point of view, in such cases, you can look at it simply as a tax. You ask: Can I afford it?' and then factor it into your business plan."

But unorganised corruption was a killer because of its `unpredictability.' Giving the example of a company in Bangladesh he said that a particular corporate paid a bribe for getting a licence, as there was no other option, and got it after two weeks. But the next day somebody showed up from the ministry of power supply. When the man said he's already got the licence, he said: `Sure, but you're going to use this much of power, and for that you need special permission.'

"That's when you realise what is going on, and that this is disorganised corruption. That's when you give up! The uncertainty associated with it is killing. In Korea too there is huge corruption, but it is highly efficient and organised. Once you pay the bribe, you know you are done, and that guy will distribute it down the line. You can make a rational business decision and ask can I afford it. Of course you can choose not to do it, but then you don't have a business. Indonesia today is a high cost economy because corruption is disorganised there."

India-China matrix

Interestingly, Dr Yuwa doesn't see India and China as rivals; on the contrary he sees a business synergy developing between the two. "A very common misconception about competitiveness of countries is that people think of countries as titanic operations competing in the global market. The economics I studied taught me that while companies compete, countries don't."

Maintaining that this was the most commonly misunderstood message, he gave the example of sub-Sahara Africa. "It has a record of declining per capita income for 15 years; and it's not because countries in sub-Sahara Africa lost in some international competition. They did not. They messed up in their domestic policies, misgoverned the people and regulated businesses."

He argued that economic growth is driven by domestic policies. People always focussed on competitive policies of countries, but the real competitive policy of any country was how they managed their domestic markets; how well they liberalised and opened up their markets to allow businesses to be truly competitive, both within and across boundaries.

Competitiveness has to be measured at company levels, he said. "I would say Indian and Chinese companies are mirror images of each other. In another report I've documented that while Chinese companies have higher labour efficiency, Indian companies are much more capital efficient. The Chinese are very good at turning peasants into good industrial workers. That option is not there in India for a variety of reasons; the infrastructure, the archaic labour law of 1949, etc."

Hence Indian companies are forced to become really, really capital efficient and devise competitive strategies. Chinese companies, when they compete, know only one strategy — cut prices.

"They haven't even started to learn in terms of brand building and how to differentiate in terms of quality. Today the tip of the iceberg is that the larger investors in China in IT and technology are all Indian companies; in the next decade, I believe that both Chinese and Indian companies with ambitions to go global will need each other when they do so. Each has exactly what the other needs. At the moment there is a lot of apprehension and even fear, but Indian executives operating in China will tell you that the potential for synergy is tremendous."

His message in the India-China report was that Indian and Chinese companies can get together and the virtue of global competition will force them to see the benefit of getting together. "And watch out, when that happens, you'll see a generation of companies in the global market that will be second to none; they will be so competitive. They can leverage on economy of scale, domestic marketing infrastructure, and the like. Everybody is talking of the manufacturing capabilities of China and the excellence of the knowledge workers, the competitive strategy and management thinking of India. The combined synergy will be mindboggling and will come in the next 10 to 20 years."

Giving an example from the IT sector, he said that even 10 years ago MNCs had operations in China and India; they would have a plant producing in China because of cheap labour, good ports, transportation etc. They'd do some of their research in Bangalore, but each would go back to the US for the critical components of their business.

"In the last five years the same companies have connected the two... whatever is happening on the factory floor in China, the information on the challenges or problems they face is transmitted to the research centre in India, and the feedback is sent to China to improve the production. They are no longer tapping into benefiting from cheap labour in China on one hand, and cheaper software engineers in India alone. They say: `I benefit so much more by actually connecting their operations seamlessly; major American industrial corporations are doing this already."

Response may be sent to rasheeda@thehindu.co.in

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