'Made in China' Produces no Threat: Analysis

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Last updated at: (Beijing Time) Saturday, June 22, 2002

'Made in China' Produces no Threat: Analysis

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In an age of globalization, it is natural that China, boasting rich and inexpensive labour resources, should become a popular destination for multinationals re-locating their production bases. However, the fact that many chief executive officers (CEO) favour China touches a nerve of some people.

In his article "When everything is made in China," carried on the June 17 issue of the US magazine Business Week, Jeffrey E. Garten, dean of the Yale School of Management, warned that the world economy is becoming more reliant on Chinese factories.

During the past few months, said the article, Intel announced a US$100 million investment in Shanghai to assemble Pentium 4 microprocessors. Dell Computer shifted its giant PC-making facility to Xiamen. Toshiba is making TVs and Sony is manufacturing Play Stations in China.

A long list. But it is more than that.

The article observed that among developing nations, China has been the largest recipient of foreign investment, averaging about US$40 billion per year in the late 1990s. And membership in the World Trade Organization will result in even higher levels.

Connecting these dots, Garten quoted Goldman Sachs's vice-chairman in Asia as saying that "China is becoming a manufacturing superpower."

What makes Garten uneasy is that when the world economy is becoming "so dependent on China as an industrial lifeline" that it will soon be "dangerously vulnerable to a major supply disruption caused by war, terrorism, social unrest, or a natural disaster."

Garten strikes a clear message here: it would be detrimental to continue to improve China's production capability and elevate it into a "world factory."

He complained that the potential threats to the global supply chains had failed to attract the attention of any national or international group, and the US national-security community is focused only on terrorism and weapons of mass destruction.

In Garten's view, having one giant supplier could mean a giant disruption. But a look into the history of the world economic development proves the assertion groundless.

Britain was the first to be dubbed as a "world factory." In 1860, British manufacturing products accounted for 19.9 per cent of the world's total. That year, it produced 53 per cent of the world's iron and 50 per cent of the world's coal.

Germany and Japan created a series of economic miracles after World War II. Today, German cars and Japanese cameras and electronics still take the lion's share in the world market.

Neither yesterday's "made in Britain" nor today's "made in Germany" and "made in Japan" have resulted in any unbearable negative consequences to the world economy.

On the contrary, it is the scale-production that has made commodities that used to be luxuries accessible for ordinary families.

Then why should things made in China constitute a threat?

Mr Garten also expressed worries about multinationals' increasing investment in China, and the wish to avert the trend. But we will have to wait and see whether a call against economic laws can get any resonance from the real world.

The ever-quickening pace in globalization will inevitably lead to the internalization of logistics. It is no surprise for global CEOs to lower production costs by outsourcing whatever they can to large-scale specialists.

In this regard, China's advantages are "numerous," as Mr Garten admitted.

Its wage rates are a third of Mexico's, and 5 per cent of those in the United States or Japan. China's enlarging investments in education and training are attracting research facilities from companies such as IBM, Motorola and Microsoft. Plus, "its large and expanding domestic market is another attraction."

In a hypercompetitive world, it is rightful for chief executives to seek the biggest profits possible, as said Garten himself.

Low production costs in China makes multinationals immediate beneficiaries. Furthermore, to shift some manufacturing industries also serves the need of developed countries in re-adjusting and upgrading their industrial structure.

Consumers, including those in the United States, are the final beneficiaries, who enjoy high-quality and inexpensive products made in China.

Isn't that a win-win outcome?

As to China's manufacturing capability, Mr Garten seems too rash to draw a conclusion. He, either out of ignorance or whatever other reasons, has apparently taken a lopsided approach to view China's manufacturing industry.

Despite the great progress achieved, China remains a developing country and is long way off from being a "manufacturing superpower."

It can be illustrated by the following facts.

The proportion of China's industrial output value among the world's total is still very low. In 1999, the figure was some US$500 billion, or 5 per cent of the world's total, ranking fourth behind the United States, 22 per cent, Japan, 15 per cent, and Germany.

Furthermore, Chinese industrial products are plagued by less variety and low grades, and Chinese enterprises' renovation capability is still weak.

Take steel as an example.

Since the late 1990s, China's steel output has topped the world. But what the country produced is mainly low-end steel used in architecture. High-end steel for IT and automobile industries have to be imported.

There are similar cases in the electronics sector. Though the country can be deemed a production base of electronics products, the core parts with high added-value mainly rely on imports.

The really competitive Chinese products that can bring about big favourable balance are labour-intensive sectors of clothes, shoes and toys.

In this sense, China is more like an assembly workshop of the world's manufacturing industry. In the chain of supply, the process of assembling is at a point which generates less profit, despite the fact that it has contributed greatly to the prosperity of world markets.

Mr Garten is not the first to point to China's growing national power.

American scholars had cried against "China threat" and, more recently, predicted China's collapse. But China has not been distracted from its set course towards prosperity. Neither have overseas investors been intimidated.

Ignorance and prejudice have prevented, and may continue to prevent, some Westerners from taking an objective assessment of what is happening in China.

Mr Garten may want to look back at his process of analysis and see whether his study is biased.

He may get rid of the fear once he learns more about China, or when he tries to appreciate China's progress in an unbiased manner.

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