MysteriousFaith

China as Something More Than a Low-Cost Producer

For too long, the world’s understanding of China’s contribution to the global economy has been almost entirely based on China maintaining its position as a low-cost producer. A few multi-nationals have taken a wise and longer-term approach by working to develop brand awareness at the level of the average Chinese consumer. But a great disconnect looms between both ideas – namely, an appreciation for the innovative capacity that China will soon begin to realize.

Much has been made of the one million engineers, scientists and skilled technicians that China graduates every year. A Duke University study has recently challenged this number; but the underlying truth should not be overlooked – China’s growth is creating a wave of technically educated people eager to impact their lives, their country and their world. To many foreign economies, this statistic serves to represent the underlying Chinese threat their domestic firms must anticipate and respond to. While certainly one dimension of the global economy, these graduates represent something much more profound – new eyes, ears and abilities entering the global markets in an effort to find and create new technology and new applications for existing technology. Developed economies offer technology the infrastructure and stable cultural systems which allow new technology to be introduced; but in many cases, this stability comes at a price – the developed economies can not react to changes, or may resist new developments because they threaten the status-quo. It is economies with little to lose and much to gain that more readily develop and embrace new technologies – and it is this potential that China has yet to realize, but no doubt soon will.

For those companies who recognize that China’s potential is not entirely captured either by its status as a source for low-cost, semi-skilled labor or on the basis of the potential of its domestic economy, the opportunity to tap into China’s innovative capacity remains one of the resonating values that will keep people focused on China for decades to come. Many developed economies in America and Europe have yet to realize that their pursuit of short term profitability has cost them the ability to look at opportunities with longer term paybacks and greater up-front risks. But for a still-developing economy like China, these risks are much more palatable.

Where will this take China? It is a mistake to believe that China will forever be a low-cost manufacturing driven economy. Soon, more than likely at the other side of an economic consolidation, difficulties in the banking sector and the market bleeding off excess capacity in every sector, Chinese entrepreneurs will begin to break out of the copy paradigm and create new technologies. Gone will be the time when leaders and business owners from developed economies hop on a plane to come into Shanghai to locate the next vendor who can shave 15% off of their product’s price. Instead will come a next generation of new businessmen, new government leaders, new entrepreneurs looking to see for themselves what the innovative capacity of the Chinese economy has created.

No doubt China’s position as a global manufacturing giant will continue for the foreseeable future. But its success will not be forever tied to being the low-cost leader. Instead, the best case future for China is to take the risks in the area of aviation, automobiles, biotechnology and computers that developed economies are unwilling to embrace. As new technologies in each of these sectors is realized, China will complete its transition and join the long succession of economies the world has produced that have matured from low-cost producer to leader of a global economic and technological renaissance. It is perhaps for the latter that we all hold such hope in China, with an implicit realization that our own society and culture may be overlooking long-term benefits for short-term gains; a human frailty that is best remedied by people with more to prove and less to lose.

Benjamin Shobert is Managing Director at Teleos, Inc., a North American consulting and technology commercialization firm specializing in the bringing Asian businesses into North America. His firm’s site is www.teleos-inc.com and his email is bshobert@teleos-inc.com.

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• November 17, 2006

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