Asia April 2009

China's Way Forward

Idle factories, moored container ships, widespread bankruptcies, massive migration back to the hinterlands, strangely clean air—the signs of depression are everywhere in China. Because it makes so many of the goods the world isn’t buying now, China stands to be worse hit than the rest of the world —just as America was during the Depression, when it was the world’s sweatshop. But like America then, China will use tough times to design innovative products that will get it the high profits and the high-value jobs Americans kept to themselves for decades. And that is very bad news for the United States, unless it uses tough times to reinvent itself, too.
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There is one more part of the big picture: the opportunities that today’s disruption may be opening for future Chinese growth.

Nearly 30 years ago, during another big worldwide downturn, I went to Silicon Valley and to Detroit for this magazine, to compare the way two different industrial cultures coped with economic hardship. Many of the companies I visited in each place are still with us—GM and Ford in Detroit; Apple, Intel, and HP in Silicon Valley. But quite a few I visited in California have now vanished. (Remember Eagle Computer Company, or Osborne?) We know that the high-tech industry is a source of growth, but—unless you work in it—you can easily forget that it’s extremely volatile. Then as now, people in the high-tech business emphasized that even though no one likes being disrupted, the volatility of America’s industrial culture is a necessary part of its success. It couldn’t produce so many new companies with new technologies if it weren’t so ruthless at eliminating old ones.

Chinese industry has also been volatile, but in a way that has done less good for China’s economy as a whole. The small-business culture of China is one of the few parts of the world where Americans are considered sluggish and hyper-deliberative. As small companies scramble against each other to cut pennies from costs and minutes from schedules, they have become more nimble as subcontractors. But they still don’t keep much of the final rewards for themselves. Thus today’s shock is more than such companies can offset just by cutting costs.

In Beijing, in Shanghai, in Shenzhen, and elsewhere, I’ve recently visited companies that are trying to use the disruption of this moment to enter wholly new markets and do what so few Chinese firms have yet done: make high-tech, high-value products that bring high rewards. In a country as big and chaotic as China, you can find illustrations of any “trend” you want. But in only a few weeks of asking, I found indications of companies that were growing rather than shrinking, and of corporate leaders who were pouring in money based on their belief that now, when competitors are at their weakest and talent and assets could be snapped up cheap, is the time to prepare for their next big advance.

In Shenzhen, north of Hong Kong, I went to see Liam Casey, the Irish entrepreneur I described two years ago as “Mr. China” for his success in matching big, famous foreign companies with small, obscure Chinese factories that can produce brand-name products quickly and well. Casey said that of the top 100 Chinese companies he works with regularly, not one had gone out of business. While many were struggling, some viewed the recession as a chance to move into higher-value work and introduce their own advanced products rather than serving strictly as subcontractors. (Several such items, like new tablet computers and handheld GPS devices, were displayed at the latest Consumer Electronics Show in Las Vegas.)

In a far-southern suburb of Beijing, I visited a new “retail research center” being built by a very large Chinese retail company I agreed not to name. Chinese retailers have at least as many problems as their counterparts overseas. Apart from the global falloff in demand, their customers recognize the difference between modern, efficient operators like Carrefour, Wal-Mart, Best Buy, and IKEA, all well-established in China, and the local department stores that bring a Soviet-era touch to convenience and customer care. Traditional Chinese-owned grocery and department stores can be dirty and dark; at some, you need to queue in one line to choose a product, another to pay, and yet another to show the receipt and pick up your item.

The CEO of one of the antiquated operators spent a week at a major U.S. consumer-goods company and became a convert to the idea that stores should be laid out for the customer’s convenience and interest. And with the zeal of a convert, he hired an American hotshot as his adviser and is now building a research center next to the “corporate learning center” he recently completed. At the learning center, employees take classes on international standards of service, cleanliness, and convenience, and act out drills of how to handle customers. In the new research center, the company will try out different floor plans, displays, and sale offers for its stores, and then see which ones appeal to focus groups of Chinese shoppers. The whole approach could turn out to be a boondoggle. But the American adviser, who showed me around, had moved his young family to Beijing because he believed the company was sincere about learning to meet the likes of Carrefour on their own terms.

At the far-opposite end of Greater Beijing, in a special government-sponsored research park, I visited the China Research Lab of IBM. The lab’s director, Thomas Li, has a life story like those I have heard at many successful tech and manufacturing companies. He was raised in Taiwan, by parents who had grown up on the mainland. He went to America for his doctorate, had a successful career with a U.S. firm—and then decided, for reasons of opportunity and sentiment, to be part of everything going on in mainland China. In 2002 Li moved with his family to Beijing, where he directs a 200-person team of mainly Chinese-trained computer scientists.

One product demo made me wish I could get out a checkbook on the spot. It addressed two of the real-world problems most difficult for computers to handle: converting spoken language to written text, and converting written text from one language to another. Computers have “done” both of these tasks for years, but they have not done them accurately enough to be worth the bother. Having watched many similar demonstrations, I was startled by this one. My wife and I were the only native speakers of English in the room. But when each of us spoke into the voice-recognition system, it produced nearly perfect real-time versions of what we said. I had been speaking with deliberate clarity, so as a test I said the following words at fast conversational speed: “I never worry that my apartment is bugged in Beijing, because I figure there aren’t that many non-native speakers who can understand high-speed slangy American speech.” Those very words, except “slangy” (which had become “slinky”), were on the screen. Hmmmm.

Although everyone in Li’s lab speaks English, differences in accent can be a barrier in discussions with native speakers. So on video conference calls with their IBM colleagues in Armonk, New York, the Chinese scientists listen to what is said in English—and see a nearly real-time English transcription running across the bottom of the screen, which greatly aids their comprehension. I am sure it is not perfect, but I have seen enough such projects through the decades to be impressed with this one. Based on another demo I saw, it is already mature enough to allow spoken words—from TV, radio, commercials, YouTube—to be indexed and therefore retrieved as accurately as ordinary text. The words could then be translated and searched, in the original language or others, so that video clips, say, would be easy to find by a phrase (“axis of evil”) someone says in them.

Two other projects directly addressed the opportunities created by hard times. One, with the internal working name Pangoo, is meant for the millions of family businesses too big to continue keeping their accounts and records by hand, and too small to afford regular business-management software. It is a suite of business applications—account management, billing, Web design—tailored by Chinese-trained computer scientists for Chinese companies that need to save money. Another allows Chinese companies to minimize power use and other sources of pollution when determining how to time their production schedules and obtain supplies. Other companies in other countries are working toward similar goals. This project impressed me because a fairly autonomous, Chinese-run and -staffed division of a major global company was acting as if today’s economic turmoil was an opportunity.

The most dramatic illustration of a Chinese firm trying to capitalize on this moment occurred in the far-eastern corner of Shenzhen. There, a purely Chinese startup firm called BYD has announced plans that would seem laughable were it not for what the company has already achieved.

In 1987, Wang Chuanfu got his bachelor’s degree in metallurgy from Central South University, in Changsha. Eight years later, in his early 30s, he founded the BYD Company with a cousin and a friend, to specialize in battery development. Seven years after that, in 2002, the company went public on the Hong Kong stock exchange. By 2005, BYD was the leading small-battery company in the world. If you use a cell phone, a digital camera, an iPod, an electric toothbrush, a portable vacuum cleaner, you’re probably using one of its batteries. It employs some 130,000 people at seven main facilities in China. I spent an afternoon touring its Shenzhen works, complete with soccer stadium for employee games, extensive apartment complexes for employees’ families and schools for their children, and gardens with the palm trees that Shenzhen’s tropical climate permits.

“Dr. Wang was trained in material sciences, and our senior leaders are expert in material sciences,” Stella Li, the company’s senior vice president, told me. “We feel that if you understand materials very well, many things are possible.” In particular she meant the development that propelled BYD into international news late last year: its unveiling of the world’s first mass-produced battery-powered hybrid car that could be recharged on normal household current. The new F3DM model, which I drove around a parking lot, can run for at least 60 miles purely on battery power, after which a gasoline engine kicks in. The iron-based battery recharges fully in seven hours; it is said to be good for well over 1,000 charge/recharge cycles, an unusually high number. When I pressed the “gas”—and I was alone in the car, with no minder—I was pushed back in the seat as far as I am with my normal car. The announced retail price for the car is $22,000—expensive in China, cheap in the U.S. or European market, where no comparable plug-in cars are yet on the market.

Whether BYD will eventually be known only for producing the first such electric car (as Osborne Computer was known for producing the first, suitcase-size “portable” in the early 1980s) or instead becomes the leading producer, no one can tell. When Wang unveiled the car at the Detroit Auto Show a month after I saw it in Shenzhen, much of the U.S. press tittered about mistranslations in the BYD promotional material and the stodginess of the car’s design. “Oh, we can always make the car look better!” Stella Li told me when I asked her about that. “Designing the car, building the car, that is the easy part.” She was being deliberately breezy: she went on to explain the company’s faith that its demonstrated edge in battery technology, plus its engineering skills and “vertically integrated” manufacturing system—it builds almost all of the car’s components itself—will give it a long-term advantage. And against the snickering of the U.S. auto press was Warren Buffett’s purchase of 10 percent of the company, for $230 million, late last year.

The company’s official goal is to be the biggest automaker in China by 2015, and the biggest in the world by 2025. Wang’s unveiling of the car in Shenzhen coincided with U.S. congressional debate about emergency aid to GM and Chrysler. I asked Wang if he had any tips for the U.S. companies. He is a quiet, nerdish man who seemed to blanch as he heard the question translated. “For 100 years, nothing has changed in Detroit,” he finally said (through the interpreter). “I think they need to reconsider their product lines.”

China is down. It is not out. This has important implications for America.

If China were truly like the old Soviet Union, the coming mass unemployment might be the shock that finally turned the people against their rulers. If it were truly like Japan, it might spend a decade or two chugging along but not aligning its systems to new international realities. In either case, Americans might feel sorry for China’s still-impoverished masses—but less worried about its competitive challenge.

I suspect that China will be like neither. Most of its people will still be very poor. Most of the jobs they hold—when they have jobs—will still be near the bottom of the global value chain. But they will not, I believe, be in fundamental revolt against the country’s governing system. And the companies they create, manage, and work for will be constantly trying to improve their position on that value chain. Two years ago, after reporting on factories in Shenzhen, I described an economic symbiosis in which Chinese workers assembled many of the world’s products—while inventors, designers, shareholders, and consumers from America or other rich countries got the lion’s share of the financial returns. It is the announced policy of the Chinese government, and of many Chinese companies, to keep more of the rewards in China.

Outsiders can rightly criticize the Chinese government if it tries to sneak in new export subsidies or push the RMB’s value back down. But no one can criticize its ambition to increase the rewards for its people’s work. Many Chinese companies will fail or make mistakes under today’s intense pressure. But many are using the moment to prepare for their next advance. The question for Americans to think about is how we are using the same moment.

Correction: The print version of this piece incorrectly reported that 250 people die each day in Chinese coal-mining accidents. This figure was drawn from a release by the government-controlled Xinhua news agency, which issued its own correction after the Atlantic piece had already gone to press. Based on the updated information from Xinhua, the number of people who die in Chinese coal-mining accidents each day is in fact about nine. A total of 250 people a day die from accidents of all sorts. For a more detailed explanation, see James Fallows' blog post on this subject.

James Fallows is an Atlantic national correspondent; his blog is at jamesfallows.theatlantic.com.
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James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.
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