China: Victim of its own success

China has marketed itself as an ideal place to do business, with light regulations and the world’s lowest-cost labour, that made it into the workshop of the world. But that image is changing as countries like India, Indonesia and even Laos become more attractive

China's growth over the past 20 years has been phenomenal. It has now surpassed Japan in dollar terms to become the world's second-largest economy. China's growth has created a perception of an unstoppable economic machine. It has carefully tailored its image as an ideal place to do business with light regulations and the world's lowest-cost labour that has made it into the workshop of the world. But things are changing.

China's image in the world is not something that has been left to chance. It is a brand subject to the same careful stewardship as any other corporate brand. President Hu's recent visit to the United States was preceded by a 60-second promotional video that was shown on giant screens in New York's Times Square. In addition to the video, there were other commercials that have been in the process of preparation for over six months. These commercials are designed by the State Council Information Office to promote a "prosperous, democratic, civilized and harmonious" image of China.

The information office's efforts have been successful at least in the US, where the image of China remains popular. Some 91% of Americans believe that China will exert strong leadership over the next five years and about half believe that the US and China have enough common values to cooperate on international problems. In contrast, the Europeans are skeptical. Only 68% agreed with China's strong leadership, and 63% felt that China and Europe had such different values that international cooperation would prove not only difficult, but impossible.

The problems of the marketing people at the information office are not just limited to Europe. China is now the largest trading partner of Brazil. It is also a source of many cheap imports that are undermining Brazil's domestic industry along with China's image. Even the Islamic Republic of Iran is having second thoughts. According to a recent editorial, "The market for Chinese products has gotten so hot that it is burning Iranian producers".

For most of the past decade China has been seen as the "workshop of the world". There was a time when the province of Guangdong held a firm grip on manufacturing for much of the world's products. This is changing. Countries like India, Vietnam, Indonesia, Cambodia and even Laos are becoming more attractive.

Coach Inc., the famous maker of handbags, is moving production out of China. Matt Rubel, CEO of the US shoe store chain, Payless, says his firm is also moving production from China. According to Mr. Rubel, "The utopia for one-stop sourcing for quality and low price has been China… but utopias never last."

It is not just shoes. An executive of Tal Apparel, a manufacturer of cloths in Hong Kong, said, "Five years ago, if you asked me the best place to set up a factory, first would be China, second would be China and third would be China. Today it's very different."

Even some of the Chinese are leaving. The head of Li & Fung, the world's biggest sourcing company, told reporters that some of his Chinese clients were requesting that products be sourced from other countries.

The main reason for this shift is that China has become a victim of its own success. The Chinese economy is dominated by the state. In the past this was considered an advantage. China could utilise its control over the financial system to warp its economy towards investment and discourage consumption. It made enormous efforts to limit wages, create infrastructure and an attractive business environment.

But as the economy of China has grown, the government's survival will depend on providing higher wages and not simply more jobs. Government-owned businesses no longer see foreigners as source of technology and skill, but as unnecessary and unwanted competition. The result is that foreign businesses in China are and will continue to be subjected to labour disruptions, regulatory impediments, industrial espionage and harassment.

For example, over-two thirds of the companies in the US Chamber of Commerce in Shanghai reported that problems with Chinese regulations and intellectual property enforcement are as bad, or worse than they were. Chinese provincial officials in Zhejiang in Shanghai took it upon themselves to slander such luxury brands as Hermès, Hugo Boss and Tommy Hilfiger. A US diplomatic cable revealed by WikiLeaks described a "hostile" and intrusive audit by a team of 40, on orders from the China Banking Regulatory Commission, against Citibank in Shanghai. Honda's labour troubles in Guangzhou have convinced Suzuki and Nissan to bypass China in favour of India where the wages are half as high.

Yet neither the government nor its policies change. Quite the reverse. Having ostensibly survived the global meltdown, Chinese leaders now feel justified in proselytizing the creed of governments over markets. No doubt, they will learn, like the Lords of Wall Street, not to mistake their marketing campaigns for the truth.

1 decade ago
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