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How Deadly is the Dragon at Your Door?

President De Gaulle of France once derisively described a visiting Japanese prime minister as a “travelling transistor salesman.” Nearly two decades later, much of Europe, including France, and the US were reeling under the relentless onslaught of an economically resurgent Japan. Ironically, De Gaulle did not live to see the rise of the Asian power.

Replace Japan with China and you have the latest scenario. Like Japan in the fifties, China, till recently, was known for its cheap products. The stigma no longer sticks. It has grown into a major economic power, fourth in the hierarchy and frenetically edging towards the third slot presently held by Germany. No wonder, its incredible growth is as worrisomely discussed by economists and academics as they did the rise of Japan in the seventies and eighties.

Not a week passes by without a tome on China’s growth story surfacing much to the delight of an increasing tribe of China-watchers. Most are recycled quickies but a few are of class. One such – perhaps the best in recent times — is the book ominously titled, ‘Dragons At Your Door, How Chinese Cost Innovation is Disrupting Global Competition’ authored by Prof Ming Zeng and Prof Peter J Williamson(Harvard Business School Press,Boston, USA, 12 June 2007).

The book actually covers much wider ground than what the title suggests, though China’s uncanny ability to cut costs and innovate remains the central theme. It tells us how in a span of two decades or so, Chinese manufacturing industry not only took on the mighty multinationals but even beat them at their own game. Plentiful availability of cheap, skilled labour and an autocratic political system that bulldozes its way with incredible ease have indeed helped the economy leapfrog. But there are more to the success story than these seemingly facile explanations. What they are is what this book is all about.

Aside from the inherent capacities of the people to which we will come shortly, two external factors seem to have favoured China enormously. One was the easing of political tension with the end of the cold war following the collapse of the Soviet Union and the almost simultaneous opening up of the world market in the wake of globalization. The second was the return of millions of prodigal Chinese with money, machinery, management expertise and an entrepreneurial mindset that could match the best anywhere in the world.(One estimate is that nearly 90 per cent of the FDI that flowed into China was accounted for by the 45 million Chinese diaspora in Taiwan, Hong Kong and South-East Asia and the two million ethnic Chinese in the US). As the authors put it, “this wave of reverse migration boosted the capability of the Chinese competition to deliver high technology at low cost,” which, the authors remind us, turned out to be the most delicious of the Chinese growth recipe.

There are two other factors as well that helped Chinese entrepreneurs sharpen their competitive edge. One is the huge domestic market that had for long remained untapped. Many firms moved over to greener pastures abroad only after firming their foothold within thereby ensuring a strong enough buffer. The second factor, a significant one at that, is the manufacturing sector’s easy accessibility to state-owned R&D institutes and their intellectual property that would have cost a fortune if they were to be obtained from the open market, a privilege totally denied to companies in every other country.

The advantage reaped by the Chinese has been enormous. Nothing encapsulates this more tellingly than the emergence of Lenovo as a brand leader in world market. What is today Lenovo started way back in 1984 as a small outfit (it was called Legend) set up by eleven scientists of the state-owned Institute of Computing Technology (ICT) of the Chinese Academy of Sciences with a start-up loan of $ 25,000. It was permitted to use ICT’s name and reputation to get business, besides free access to the Institute’s rich science and technology resources, physical and human. It came out with a blockbuster product, an add-on card that could be inserted into a computer to make it capable of Chinese-character word processing. Several other products followed, each adding fame and fortune that in the event helped it take on the mighty IBM.

If excelling in technology acquisition and turning it to commercial success made Lenovo a legend, it is the application of a time-tested marketing technique in an ostensibly sophisticated market that helped Haier, a white goods major, break into the US mass market. Haier’s problem was that it had to reckon with such giants as General Electric, Whirlpool, Samsung and so on. The trick it did was to erect a huge billboard displaying its brand and products on the road just outside Wal-Mart’s headquarters at Arkansas. It attracted the attention of no less a person than the head of purchasing who was inquisitive enough to place a small order not realising that he was virtually opening the floodgate. Today, Haier has presence in as many ten top US supermarkets.

All this is very much part of a bigger strategy that has three elements. One is cost innovation through which Chinese firms could market high-tech production at affordable (read cheap) price. The second element is their ability to offer variety and customization at low cost, the best example being Haier’s successful marketing of a small refrigerator with a foldable top that turned into a computer desk when opened that became an instant hit with students living in dormitories. Presently it accounts for 50 per cent of the segment market. The third element is the policy of moving from the peripheral markets to core markets as seen in the way the Chinese firms began with the small margin, less sophisticated African continent only to end up in the US and Europe.

Is there’nt a flip side that ought to be of concern to India and the rest of the world? The authors are euphoric. Nonetheless, the Japanese parallel is once again relevant. Time was when Japan was seen invincible. But the sun, to quote the former Economist editor Bill Emmott, seems to have set as he has described in his remarkable book on the decline and fall of Japan. For China too, the roll cannot be for ever. There are chinks in its armour too.

For one cost innovation has limits. The twin advantage of cheap labour and ready availability of technology at no cost no longer holds good. In fact, the new labour contract law that came into force in January this year has already pushed up labour cost as it limits overtime, ensures minimum wages, guarantees job security and imposes severe restrictions on hiring and firing of employees. Multinationals and Chinese firms that capitalized on them are evidently upset and have threatened to move out. The worst affected are textiles, leather goods, particularly shoes and similar labour intensive industries. There is also the reverse offensive by competitors who too have by now learnt a trick or two from the Chinese.

Nonetheless, for the moment the dragon is certainly knocking quite ominously at all available doors. And that’s what is worrisome, particularly to us.

(The writer, Mr M.K.Das, is a columnist based at Cochin,Kerala,India. He is former Editor (Kerala) of the Indian Express and the New Indian Express).

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