There's no mistaking its arrival on the world stage. Just look at the following labels touting its present-day relevance: The workshop to the world. The Asian economic supernova. The Holy Grail of global businesses. On all counts, the Middle Kingdom is shedding 5,000 years of self-imposed isolation and xenophobic existence in a hurry. Still, two infamous images—one of a protestor standing in the path of army tanks at Tiananmen Square and the other of sweatshops manned by the underaged and the imprisoned—rankle and color our perception. Never mind that the Tiananmen brouhaha happened 13 years ago or that politically correct Disney and Hallmark have long patronized its manufacturing floors. Anyway, that's negative press for you: no expiration date.
The China of today operates on a different tangent, especially on economic matters, while its political stance and human rights-defying governance continue to alarm, perplex and frustrate everybody. And even though much of the West still isn't sure what to make of China, this it knows for certain: the land of 1.3 billion people is key to counteracting global economic gloom.
Number-crunching
In the next five years, China is predicted to become the world's second largest economy after the U.S. Its 2002 exports rocketed by 22%, to $320 billion, clocking an impressive 7.5% GDP growth. Its per-capita income has also increased 25% over the past four years, to $1,000. And while the accuracy of these statistics may be debatable, to anyone visiting the country, growth is apparent, rampant and undeniable.
Fourteen months after joining the World Trade Organization, Beijing has made major, and some say revolutionary, progress. Tariffs on more than one-third of its commodities have been reduced. In total, more than 190,000 laws and regulations have since been rewritten or consigned to the trash-bin. Print manufacturers now pay less tax for imported paper (reduced from 21%—25% to 6%—16%), enjoy significant tax incentives (especially for Hong Kong—owned companies/joint-ventures) and face fewer restrictions on imported printing equipment and supplies. At the same time, eradicating piracy and upholding intellectual property rights has gained an elevated urgency.
Beijing's latest move to open up its book distribution sector has publishers and booksellers drooling, not least because IDC (International Data Corporation) has valued the China book market at some $3.33 billion. Joint-venture bookstores on a 51%—49% basis are now allowed in some 14 major cities. Let's backtrack a bit: for decades, General Administration of Press Publications Agency decided what type of material to publish and the method of distribution. To illustrate, even its UFO (unidentified flying object) magazine—the first publication dedicated to topics once considered preposterous—is state-owned. Its distribution, including some 30,000 copies sold within the first few days of its 1981 launch, was handled by state-owned China Post and Xinhua bookstores. So, when the hegemonous agency divested its publishing, printing and distribution divisions in April 2002, the move was hailed as nothing short of miraculous.
Early news reports have it that Citic Group and two other Hong Kong investment companies have already set up publishing divisions in the mainland. One is Hang Seng—listed Global China Technology Group—publisher of the Standard and Sing Tao Daily newspapers—which has formed a $30-million joint-venture with the People's Daily. The other is Hutchison-Whampoa chairman Li Ka-shing, who teamed up with Chongqing-based Popular Computer Group to start distributing technology-based publications and later ventured into publishing of like materials.
For a well-entrenched domestic bookstore chain like Xishu, new opportunities are emerging while competition is heating up. Turnover at Xishu—privately owned with some 560 outlets operating in mostly small- and medium-sized provincial cities—topped $25 million in 2002. Twenty more stores are planned for the next 12 months. Xishu's owner predicts the mainland book trade will grow 50% within the next three years. Annual sales from larger nonstate bookstores in the more prosperous areas of Shanghai, Jiangsu, Zhejiang and Guangdong have already reached $24 million.
Meanwhile, rampant unethical publishing and copyright infringement have many publishers cringing. One example: Spencer Johnson's Who Moved My Cheese? topped China's 2002 bestseller list, sold more than two million copies and later spawned at least eight unauthorized sequels—all using the words "moved" and "cheese" to trigger subliminal associations. These fakes also crowded the bestseller list. Another example: many "unauthorized" Carnegie training programs have been established recently in answer to the latest craze for self-help classes. Generating knock-offs is now seen as a get-rich-quick scheme in China.
But clearly this is China's century. The world is dazzled by its capitalistic progress and by an economy that has quadrupled in size over the last 20 years. That it has managed to do so without a catastrophic Soviet-like shock therapy never fails to amaze economists. Beijing's decision to slowly liberalize its economy while iron-handing its legal and political systems has worked wonders. It's a given then that the new Politburo—the so-called fourth generation, in reference to Mao and subsequent leaders Deng, Jiang and now Hu Jintao—has vowed to follow through economic policies advocated by Deng in the late 1970s.
Needless to say, nothing goes letter-perfect according to the WTO script. Just recently, Beijing's new restriction on foreign stock ownership has many troubled. These measures, local officials insist, are meant to curb short-term capital inflow that landed many Asian economies in the 1996—1997 financial crisis. Granted, no one wishes to see a replay of the hot-money-induced Asian crisis, or a duplicate of the severe currency contagion that raged through much of South America. But we can't help but wonder if this is just a pretext to avoid full-body encroachment of its economy or if it is a legitimate claim.
Alpha Deltas
These days most commodities on shelves worldwide—ranging from electronics to toys to T-shirts—sport the "Made in China" label. Truth be told, it should read "Made in Pearl River Delta." As the mainland's light-industry manufacturing hub, the delta, with its eight core cities—Guangzhou, Shenzhen, Dongguan, Zhuhai, Huizhou, Foshan, Jiangmen and Zhongshan—accounts for a third of the country's overall export and absorbs 30% of its total FDI (foreign direct investment). It is estimated that between 2000 and 2001, $170 billion—about half of China's overall FDI during that period—poured in through Hong Kong and ventured no further than the Pearl River Delta borders. Presently, almost all Hong Kong manufacturing firms have factories across the border and, as a result, the province of Guangdong has more than 12 million migrant workers.
In the months preceding its WTO membership, expansion of Hong Kong— owned print manufacturing, color-separation and book-plus operations reached a feverish pitch. Some had their eyes fixed on the huge domestic market, while many more were keen to capitalize on the cheaper labor, land and shipping costs. The impact was immediate and direct: exports of printed matter originating from Hong Kong itself plunged by 12% in 2001 and a further 6% by the last quarter of 2002. In contrast, re-exports for the same category—mainly from Pearl River Delta, the indisputable printing hub of Asia, which churns out at least 60% of the world's reading materials—posted an 8% third-quarter increase in 2002.
The other region in China's growth equation is the Yangtze River Delta, with Shanghai as its financial gate and international face. The city—the so-called Paris of the East—has evolved from its former image as an exotic opium den into a haven for multinational companies such as IBM, Microsoft, Hewlett-Packard, GE, Siemens, Intel, Sony and Motorola. Exports, primarily from its Waigaoqiao Free Trade Zone, rose 14% year-on-year in 2002 to reach $31 billion. Many of these multinationals, no longer content with exploiting the low-cost labor and land advantages, are now hiring high-caliber graduates from prestigious Nanjing and Fudan universities for their mainland development centers.
Combined, Pearl River and Yangtze River deltas account for only 20% of China's total population, yet produce 75% of its total export. The areas in and around these deltas are sprouting like thickets of springtime bamboo shoots. Their infrastructure plans are ambitious; success, of course, remains to be seen.
Guangdong is pioneering China's first intercity light-rail network, aimed at reducing travel time to remote areas of Foshan and Dongguan. A 10-year plan to construct a deepwater port, a heavy industrial zone and an expansion of the hub further southward to Nansha is also underway. Over in the Yangtze River Delta, its 430-kilometer/hour maglev (magnetic levitation) train linking Shanghai to Pudong International Airport will be running commercially in the later part of 2003. Plans are afoot to build a huge deepwater port to house one of the world's biggest container-handling facilities, as well as to redevelop both sides of the Huangpu River.
In the last two years, Beijing has injected billions of dollars into the Yangtze River Delta in a bid to redistribute growth and wealth in other parts of the vast land. This means the Pearl River Delta will have to match Yangtze's aggressive leap or risk losing its status as China's preeminent region. Many thus view cash-rich Hong Kong as the solution, but the island first has to stop viewing the delta as its main competitor.
For major print manufacturers like Hung Hing and C&C Offset, mainland China represents big opportunities. Their focus centers on the big cities: Shanghai and Beijing. "Shanghai is a fast-growing metropolis of 100 million people served by only a handful of Hong Kong and Taiwan printers. The pie is big enough to go around," says Matthew Yum of Hung Hing. Its brand-new facility—constructed on a 1.5 million—sq.-ft. site and only a two-hour commute from the city center—will commence its consumer-goods packaging operations soon. For C&C's Shanghai plant, providing multinationals with security and financial printing services has been the main activity for the last three years. But the company is also expanding its portfolio to include high-end printing.
With more multinationals rushing into China, increased demand for new content—either Chinese content by companies seeking to understand its mindset, philosophy and culture, or in English for locals newly exposed to the Western world and its management styles—is fueling growth in the publishing and printing sectors. Suppliers like Everbest and Donnelley Bright Sun leverage their expertise and local knowledge by assisting overseas publishers wishing to publish, sell rights or do coeditions in China. At the same time, these suppliers facilitate negotiations on behalf of domestic publishers seeking to push their titles abroad. It's a win-win situation for all.
Exporting Deflation
It's a recurring issue: What to do with the yuan, which has been pegged at 8.28 to the U.S. dollar since 1995? Right now, China's trading partners want to see the currency appreciate. The all-important reason? The Chinese tsunamis of cheap consumer goods sweeping across the U.S., Europe and Japan are wreaking havoc and making everybody nervous.
The impact is even more serious in neighboring countries still struggling to regain pre-1996—1997 crisis footing. In general, these countries are unable to match the mainland's low production cost or manufacturing efficiency. China's prices are now global prices; its costs a yardstick in budgeting exercises. For many CEOs, shifting manufacturing operations from Mexico, Indonesia, Thailand and Malaysia to China is a proactive measure and an astute business decision critical to long-term success and survival. Even Japan—the Godzilla of the region—threw in the towel when its many blue-chip manufacturers moved to the mainland. The figures are telling: in 2002, China reported an unprecedented container traffic increase, with Shenzhen ports posting a 50% increase and Shanghai, 35%.
Wage-wise, the average Chinese factory worker makes about $180 per month, while an engineer earns three times as much. That is still less than 7% of the wages in the U.S. or Japan and 40% lower than those in Mexico. In short, you won't be able to match the Chinese wage scale anywhere else in the world. Naturally, Taiwan's high-tech industry moves en masse to the mainland, despite over-the-straits tension and fierce political debates; Dell Computer decides to relocate its main manufacturing facility from Malaysia to Xiamen; Intel considers Shanghai for its brand-new $100-million Pentium 4 microprocessor manufacturing facility; and Swedish furniture giant Ikea expands its Beijing operations.
For these multinationals, China has a dual allure: it's good for making things and an equally great place to sell them. That potential consumer market has attracted giant retailers like Wal-Mart and French-owned Carrefour. The World Bank estimates that 60 million people in China now live in households with annual incomes exceeding $12,000, providing them with enormous purchasing power. The population in this income strata is predicted to more than double in the next decade. Given these statistics, if a multinational does not consider China as its top strategic market, it has fatal myopia. Naturally, Beijing propoganda now reads: Want market access to 1.3 billion people? Show us the money and the technology. Multinationals are now busy partnering domestic companies and sharing their technological know-how, giving rise to speculation that China's latent ambition is to replace Silicon Valley as the preeminent tech/research hub.
But the major issue confronting everybody now is the negative byproduct of cheap and efficient manufacturing: oversupply. This imbalance has helped lower Chinese retail prices by as much as 10% and industrial prices by 7%. Its domestic inflation has dropped to negative numbers since its 25% peak in 1994. To consumers enjoying cheaper goods, this is a blessing. To economies like the U.S., this has kept inflation at bay. To manufacturers operating outside of China, profit is being eroded and survival means pricing themselves out of markets, or worse, out of business. A higher yuan, is therefore, seen by some as the way out of this undesirable situation. But this may be a simplistic view. If the yuan is more expensive, Chinese manufacturers will be able to import cheaper materials and equipment, which in turn will push up production levels. At the end, additional cost-savings enjoyed by mainland manufacturers will be transferred back to end consumers. And the pegging debate will continue....
In the meantime, we are seeing major expansion and unabated flow of capital from small- and medium-sized Hong Kong print manufacturers to the mainland. It's the new reality. And those not of the same mind previously are fast changing their strategies. Publishers are flocking to Hong Kong/China because the cost of production is fast becoming uncompetitive and irrelevant elsewhere. The manufacturing question nowadays is about increasing profit without increasing price—and the solution seems to lie in low-cost China.
Hong Kong Repackaged
Amid all the hoopla over the mainland, it's just too easy and tempting to write off Hong Kong as a has-been. But let's not be hasty. Just recently, the former colony has been voted, for the ninth straight year, the world's freest economy, despite five years of anemic growth, deflation, record unemployment (7.2%), a property bust and escalating fears of Beijing intervention brought on by recently introduced anti-subversion/national security laws.
The property free-fall—prices down 60% from the 1997 peak—is the crux of Hong Kong's nightmare, since real estate and construction sectors account for 15% of its GDP. Unemployment figures don't show any sign of improvement, and the current trend of "hiring in China, firing in Hong Kong" isn't helping either. But there is a glimmer of light at the end of this dark tunnel: in the second half of 2002, its economy expanded 4% compared to the same quarter a year earlier. Exports also rose 7%, beating government forecasts by a good margin. Unfortunately, taxes have been increased for the first time in two decades to offset a $7-billion trade deficit.
With the two China deltas fighting for preeminence, Hong Kong is very much down to two choices: to be an integral part of the Pearl River Delta or to be nothing. It can no longer claim to be China's sole gateway or its financial center. Now it has to carve its place and build its competitive edge among the mainland's many booming areas or risk being put on the back-burner by Beijing. In recent months, the island has been busy promoting itself as part and parcel of the Pearl River Delta, forming a region that stretches from Hong Kong and Shenzhen in the southeast to Guangzhou in the north, and Macau and Zhuhai in the southwest. Macroeconomic proposals abound: a $1.9-billion, 29-km bridge linking the island to Zhuhai and Macau, a 24-hour border-crossing facility at Lo Wu, integration of the delta's five airports and numerous seaports, and major rail/subway links for the whole area.
It is estimated that Hong Kong has 10 times the wealth of Shanghai and, therefore, requires no additional FDI injection to match Yangtze's deep pocket. But positive key indicators from Shanghai—a 10% surge in the economy, a $10.5-billion FDI and a 14% export increase—is dulling Hong Kong's appeal as a world-class city for business. High government spending, mostly used to prop up property prices, has drastically reduced its cash reserves. Now, it's up to Hong Kong to seal its own fate. But it looks like turbulence ahead.
Print manufacturing has a special place in Hong Kong. It's the biggest manufacturing industry in terms of establishment units, as well as being its fifth biggest money-earning sector. With so many printers fleeing the coop, so to speak, the island is determined to hang on to its re-export business. Shoring up its flagging entrepot status is crucial, and a recent terminal-handling fee (THF) reduction is seen as a major step forward.
The Great March
On Beijing's table is an integration plan for a Greater China region that includes Taiwan in the fast-growing Chinese economy. Presently, its combined exports have already surpassed Japan's and will soon eclipse the European Union's.
Elsewhere in the mainland, the domestic call to "go west" is getting louder. The government is trying to shift its economic fulcrum away from the richer and more developed eastern and southern shores to its vast western interior. In the municipality of Chongqing, for example, $200 billion is being used to build new infrastructure—expressways, a new bridge over the Yangtze River, a high-speed train (to be completed in 2005) and a $360-million road-building scheme—for the city of 31 million people. In a nutshell, if Shanghai is China's financial heart (its New York), then Chongqing is envisioned to be its Chicago. Replicating Shanghai's success—some 1,500-km to the west—it is currently netting some big fish like Ford Motor and various automobile suppliers. Meanwhile, in Jiangsu province, mostly in the Kunshan region, Taiwanese investors are pumping in millions of dollars to duplicate their success back home. It is predicted that by 2004, production of notebook PCs from Kunshan will eclipse that from Taiwan.
For the printing industry, prosperity of the multinationals is crucial. Segments like packaging, cartoning and printing of glossy brochures and high-end materials will flourish for as long as these companies exceed year-end forecasts and exhibit healthy overheads. The demand for high-quality printing—from these global companies used to having the best—will force domestic printers to innovate and to invest. We will see long-entrenched Hong Kong—owned printers on one side and fast-rising domestic ones on the other. In the long run, only the best and biggest will survive, but for now, it's everybody's game.
Scaling the Wall
Despite all that has been said, China is very much just a factory to the world. Its technology is purely in the original equipment manufacturing (OEM) category, making high-quality products for worldwide consumption while (as some have accused) dumping inferior ones on its domestic market. We have seen OEM-accelerated economy in Asia's four dragons—Japan, Taiwan, Singapore and South Korea—and the limited impact it has on continual growth. For China to sustain its growth and to become a formidable economy, it needs to go beyond the factory mentality to fuel creativity and innovation it can call its own.
Overall, China's road to capitalism doesn't come easy or cheap. Industry-watchers and economists worry that its aggressive fiscal spending may worsen a deficit problem that was predicted to hit 3% of its 2002 GDP but overshot the 4% mark instead. Nipping at Beijing's heels is also its rotten banking system, in which loans totaling $450 billion to state-owned companies will have to be written off. Swelling labor unrest, growing income inequality and corruption have also created a social nightmare for Chinese bureaucrats and chronic ulcers for those betting on the country.
But the nation of 55 ethnic groups held together by a party of one is doing pretty well indeed. It has taken over the spot previously held by South Korea and Japan as the country to watch and back with high stakes. While it may be a stretch to think of China as the savior of the world economy, it's clear that Asian economic revival now rests solely on its shoulders. Its importance as a manufacturing hub is fast approaching that of Saudi Arabia's hold on the world oil market.
The sleeping giant has awakened—with the exuberance of a child—and now all of us have to grapple with the consequences, good or bad, and whether we are ready or not. But come what may, of this we are certain: the world is witnessing a seismic upheaval in the global industrial landscape.
