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.
Natalie Behring/Aurora Photos

This article has been corrected since it was published in the print magazine.

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Our apartment in Beijing overlooks one of the city’s long-distance bus terminals, where people arrive from the countryside to find work or sell wares, and depart for visits or permanent returns to their home villages. Early last summer, the terminal was jammed, and most of the passengers were leaving town.

At the time, the outbound flow was taken as one more last-minute sign of China’s optimistic, all-fronts effort to spiff up Beijing for its role as Olympic host. Through the spring, construction workers had toiled round the clock on any building or public-works project (notably, new subway stations) that had a chance of being completed by the time of the Games. For projects with no hope of making the deadline, workers toiled instead to put up screening walls, or to neaten the piles of I-beams and rebar that normally littered the sites. In July the government ordered a halt to all building or demolition work anywhere near Beijing, as part of a security lockdown and in hopes that construction dust would settle out of the air. The workers, mostly migrants from poorer neighboring provinces, went home on (mostly unpaid) leave to see their families and watch the Games on village TVs.

In September, as Olympic spectators were leaving Beijing, migrant workers returned, via packed buses and trains. In the capital as in fast-growing cities all across China, country people stand out in the urban crowd. Their hands and faces are more weathered, their clothes simpler and more ragged. Often they move about town lugging unwieldy bundles of bedding and belongings wrapped in the plaid-patterned, woven-plastic fabric that somehow has become standard for such purposes in poor countries around the world.

This post-Olympic flow back into the city was expected—but what happened next was not. In mid-October, at about the time retail sales were collapsing in the United States, we started seeing extra buses muster each morning with full loads of migrants headed out of town again. On an icy afternoon in November, I passed a site where a huge new office complex was being built. Its towering construction cranes, which just a week earlier had been swinging loads of cement and steel so close to the sidewalk that passersby ducked, were motionless. The frontage road was lined with buses whose license plates were from Hebei province—the sticks. A driver told me that the convoy would take workers back to their home village—“For now, no work”—and then come back for another load as soon as it dropped this batch off.

Through the rest of the winter and early this spring, Beijing’s air stayed notably clearer than it had been at the same time a year ago. Part of that was because of unusually windy weather, and part may have been a residual benefit of Olympic cleanup measures. But it was also a sign that fewer factories were running in the heavy-industrial districts upwind of Beijing.

The outbound buses and the better air were our local indicators of the economic contraction being felt in practically every corner of the world. And there were signs of it everywhere in China. Container ships sitting, moored and idle, in the harbor of Hong Kong. Revenues down in Macau’s casinos. Seas of empty seats aboard a small Airbus on the Shanghai-Beijing shuttle flight. (The first time I took that trip, in 2006, it was aboard a 747 with every seat full.) A report that a million or more of this year’s university graduates were still looking for jobs. Protests across the country, as real-estate developers and small-factory owners went bankrupt—and disappeared without paying employees months of back wages. Thousands of factories in Dongguan, in Guangdong province just north of Hong Kong, had been the real-life incarnation of the world’s stereotype of low-wage Chinese workers turning out low-value goods—cheap dolls and toys, Halloween masks, the bulk of the world’s Christmas presents and decorations. Within months the area was transformed into China’s rust belt.

You never know which statistics to believe in China, but in January a local official in Dongguan told me that at least 1 million factory workers had recently lost their jobs within five miles of where I was, and probably another million in nearby manufacturing areas of Guangdong province. The electronics supplier Foxconn, whose gigantic compound in Shenzhen turns out components for Apple, Dell, HP, and countless other companies and which had recently employed more than 250,000 workers, sent all its employees on a one-month unpaid furlough late last year. Reports in the Chinese press said Foxconn might lay off 100,000 worldwide.

Is the “China story” as we’ve known it—the three-decade-long story of modernization and prosperity supervised by an authoritarian regime whose economic success excuses most complaints and failings—over? Has it reached its limits and exposed its contradictions? If China does not keep moving forward and growing, will it tear itself apart?

Observers outside China often compare its difficulties to Japan’s a generation earlier. Few people inside China think the two economies have much in common—one is full of impoverished peasants, while the other has practically eliminated poverty; one is rushing toward industrialization while the other has been an industrial power for more than a century. But in recent months, I’ve heard countless Americans and a few Europeans ask, “Isn’t this just like the ‘Japan scare’ of the 1980s?” The question is shorthand for saying: “Japan seemed unstoppable 20 years ago and has been a sick man ever since. Is ‘rising’ China perhaps due for a similar reassessment?”

From Chinese intellectuals and officials I’ve more often heard a cautionary comparison to the old Soviet Union, implying that political control and territorial dominion could be undone by economic failure. By this logic, the Chinese Communist Party has no choice but to keep the country’s business growing as fast as possible, since a steady increase in material welfare is the real basis of the party’s legitimacy. If the economy were ever to stagnate—which is generally understood to mean a growth rate that falls below about 8 percent per year—then a larger share of the Chinese public might register dis content with Communist rule. And then anything could happen. The territorial contrast between the vast old Soviet empire and today’s shrunken Russian state may help explain the Chinese government’s intransigence about any threat of what it dismisses as “splittism” concerning Tibet, the Muslim region of Xinjiang, or Taiwan.

The Japanese and Soviet comparisons are awkward because of obvious differences from China. At no point in its history did the Soviet Union achieve anything like China’s sustained record of high-speed growth. So the “stagnation” that helped bring the Soviet regime down was in fact real, decades-long economic decline. Japan’s prolonged “sickness” is one most countries would envy: with half as many people as America and one-tenth as many as China, Japan still has the world’s second-largest economy and many of its strongest industrial brands, including the world’s largest carmaker, Toyota. Moreover, both Japan and the Soviet Union at times presented themselves as models of different paths toward modernity. Modern China is a force and a reality, but not a model or an idea that others might replicate. The Chinese system will remain unique. (The one nation that shares its scale, India, does not share its political precepts. No other nation that could build roads, airports, and industrial parks as modern as China’s could impose so repressive a political regime.)

Still, thinking of how previous models might apply to China raises a valid point. The Soviet Union’s political control was finally undone by its economic failures. And the parts of Japan’s system that truly don’t work—mainly the financial markets, which have yet to emerge from a 20-year slump—reflect its difficulty in adjusting to changes in the world economy. So if China’s rise is not undone by the risks that have been evident for years—pollution, water shortage, corruption, the widening rich-poor social gap, primitive safety standards*—might China prove vulnerable to Soviet-style discontent born of a slowing economy? Or to Japanese-style inability to understand how the world is changing all around it?

My guess is No. China faces big problems, and its modern history has been marked by the unforeseen. Perhaps we will look back at the spectacle and choreography of the Beijing Olympics opening ceremonies as the last time the world thought there was no limit to what China could achieve. But I am betting the other way.

Let’s begin by considering how bad things could get, for China and those it influences. The clearest approach I’ve heard to this question comes from Michael Pettis, the Beijing-based finance professor whose side business as a rock-music impresario I described in the March Atlantic. To think about China’s predicament in the late 2000s, he says, you should think about America’s in the 1920s.

Through the early 1900s, the United States played a role in the world economy surprisingly similar to China’s in recent years. Until the start of World War I, the United States had long been a “net debtor” country. It had relied on foreign loans and investments to build the factories and lay the railroads that ultimately made it an industrial titan. By the end of World War I, it had become a “net creditor,” as its undamaged industrial base supplied European combatants and the former customers of ruined European companies.

In the 1920s, its farms and industries made America the workshop of the world. It ran trade surpluses with most other economies, which meant that a disproportionate share of the world’s jobs were in America (it was doing work that other people consumed), and a disproportionate share of what it made went for other people’s use. Foreigners paid the difference by transferring gold reserves—John Maynard Keynes complained at the time that the United States was amassing “all the bullion in the world”—or taking on loans and investments from Americans. So far, this is like China’s story. And so far, so good.

This very role as global exporter made the United States unusually vulnerable when global demand collapsed in the 1930s. Having had more than its “fair” share of the world’s jobs to begin with, America had more of them to lose. This doesn’t mean that Americans suffered more deeply than Europeans. We got Franklin Roosevelt; they got Hitler, Stalin, Franco, and Mussolini. But as a matter of plain economics, the layoffs and unemployment of the Depression years were worse in the United States.

That is the problem for China now. Many Americans would assume that China’s recent history of trade surpluses would be its bulwark during a recession. In the long run, it will be, because it has provided a $2 trillion war chest in foreign holdings. But in the short run, China’s reliance on foreign customers turns out to be a serious vulnerability.

Pettis wrote recently that China’s worldwide trade surplus, “the cleanest measure of overcapacity”—factories that are running and workers who are employed only because of foreign customers—is by one measure at least as large as America’s was in 1929. China today, like America then, has a trade surplus equal to about 0.5 percent of global economic output. But as a proportion of its own economic output, China’s trade surplus is much bigger than America’s was. In proportional terms, today’s China is five times as reliant on foreign customers to create domestic jobs as America was in 1929. So unless China can find a way to keep selling when its customers have stopped buying, it will face a proportionately greater employment shock.

That China might indeed try to keep selling is the concluding part of Pettis’s cautionary analogy to the Depression era. As stock markets crashed and economies collapsed, the U.S. trade surplus nearly disappeared. American businesses, desperate to preserve markets and jobs, lobbied for passage of the infamous Smoot-Hawley Tariff, which increased duties on a list of some 20,000 imported goods. Soon afterward, other countries retaliated with similar tariffs; world trade dried up, and the Great Depression was on. When people use the words “Smoot-Hawley” today, they usually mean them as a warning that any interference with trade, especially by the United States, could again prove disastrous.

Pettis’s point is different, and in a way more worrisome. The real damage of Smoot-Hawley, he says, was less economic than political. Other countries understood that the United States was trying to protect its trade surplus and therefore its workforce. They didn’t like it as a political matter, and they struck back.

If that were to happen again, would it be because of “Buy American” provisions or other forms of American “protectionism” editorial pages so often warn against? That’s the wrong thing to worry about, according to this logic. The real counterpart to Smoot-Hawley would be Chinese protectionism—or rather, any effort by China to defend its huge trade surpluses, as the U.S. once did. China’s government is unlikely to rely on outright Smoot-Hawley–style tariffs. Instead it could increase subsidies to exporters; it could try to push the RMB’s value back down, after three years of letting the currency rise; it could encourage manufacturers to restrain wages; it could impose indirect barriers to imports, as with its recent pressure on China’s airlines to cancel outstanding orders for Boeing and Airbus airplanes. By early this year, China’s government was in fact doing every one of these things. As a result its global trade surplus, instead of shrinking as expected when the world economy deteriorated, grew dramatically. Exports fell, but imports fell much more: in January, exports declined by 17 percent and imports by more than twice as much—by 43 percent. This is an economic problem for other countries. But it could be an even more serious political provocation, if China is seen as forcing its share of unemployment problems onto everyone else. And thus, to bring this scenario to a close, the best China can expect from today’s shocks might be unemployment rates higher than America’s in the ’30s. The worst would be for China to start a trade war that makes things even harder for itself.

China’s emergence as America’s financier has steadily increased its leverage over the United States. But in the short run—rather, for however long the current crisis lasts—the two countries really are codependent in a way neither fully anticipated. Early this year, Chinese officials began saying more and more bluntly what Gao Xiqing, who manages some $200 billion of Chinese holdings in the United States, conveyed artfully in an interview in our pages in December 2008: that if America wants to keep using China’s money, it had better put its economy back on track. It should be saving and investing more, borrowing and consuming less. At the Davos conference in January, Premier Wen Jiabao made the point by outright scolding America for dragging down everyone with its excesses.

Okay already! But the more Americans obey these orders, the worse things look for China in the short run, since American overconsumption is exactly what has kept those Chinese factories a-hum. Americans are in a similar bind with their complaints about China. U.S. officials want China to reduce its trade surplus—while also hoping that China’s financiers will keep buying U.S. Treasury notes and stocks in U.S. companies with the dollars they get from that very trade surplus. We can’t have it both ways. The Chinese can give us money, or they can give us back some jobs, but not both.

So America will keep looking for the bottom of its economic descent, while Chinese businesses and workers endure a severe blow—one China’s leaders can’t really change by lecturing Americans. Why do I think the Chinese have good reasons for hope?

One answer lies in the realm of straight economics. Some of the lost demand is sure to be picked up within China itself, thanks to a stimulus plan that, at some 4 trillion RMB (about $600 billion), is proportionately much larger than the one proposed by the Obama administration, because the Chinese economy is so much smaller than America’s. Yes, there are grounds for skepticism about the Chinese plan. Some of the total represents a new label for projects already approved or begun. Some of the 4 trillion RMB is supposed to come not from the central government but from local and provincial authorities, who have no obvious way to raise it during a recession. Although one important element will be basic health-care coverage for average Chinese citizens, most of the money will be spent on construction projects, especially for transportation and infrastructure: more highways, an expanded high-speed railroad system, scores of new airports all across the country. Construction is the Chinese government’s first response to most problems—if it is worried that its universities are weak by international standards, it approves a plan to build new research centers—and the construction projects are subject to insider deals and kickbacks like those in most of the world. But laying concrete and raising girders employs a lot of people, especially the way those tasks are done in China, so this will be an option for some of the migrant workers now being sent home from factories.

Heaped on my desk are other sector-by-sector analyses suggesting that the rebound may come more quickly than the gross-demand figures indicate. “When can we expect to see signs of life in the mainland economy?” asked Andy Rothman, of CLSA Asia-Pacific Markets, in one such report, about the cement and steel industries. “Our answer is, March or April 2009,” when the first orders from the stimulus program will reach steel and cement companies.

As in America, real-estate values have fallen throughout China; but China’s bad-loan problem is nothing like America’s subprime-loan disaster. America’s banks have too little money. China’s have a lot, and the main reason they have not been lending is that until very recently the government was more worried about inflation than anything else. “Chinese banks are not only very liquid, they will lend when directed by the Party, which appoints all senior bankers,” Rothman wrote. They are being so directed now.

I have a lot more reports from a lot more sectors, but all lead toward the same conclusion: China’s economy may suffer more than most others, but it also has more tools and resources in reserve than most others.

Beyond straight economics, the “China is over” hypothesis seems to miss important cultural and political realities. Its unspoken premise is that average Chinese people just barely tolerate the social bargain the government now offers—limited freedom, potentially unlimited wealth. So if the regime ever falls short on its material promises, the deal will be off and people will rebel.

This does not square with what I have seen. I have often wondered why so many people in different roles and regions in China seem vivid. The answer has to be more than contrast with my own blandness. I think it is because being in China today is like being in Western Europe in the 1950s. No one’s family story is dull or uneventful. People doing routine jobs have been through great hardships and dramatic swings of fate. Last year I interviewed a party official in Shanxi province who was laying out his regional-development plans. Every 10 or 15 minutes, he would stop and say (through an interpreter), “Do you understand? If it had not been for Deng Xiaoping, I would be behind an ox in a field right now. I would not be sitting here wearing a necktie and talking to a foreigner.” Or, “Do you understand how different this is? My mother has bound feet!” A scholar I know in Beijing once offhandedly remarked that he had developed self-confidence when learning that he could survive for four years as a teenager on a labor gang during the Cultural Revolution. People in their teens and 20s were not on the labor gangs—kids today!—but they have heard the stories.

Layoffs and stagnant wages? People have seen worse. Last summer my wife and I went through villages in Sichuan province where refugees from earthquakes prepared for the next few years of residence in temporary shelters and tents. Laid-off migrant workers are returning to many of these same villages now. This is terribly hard, but in the same villages, grandparents remember when half the local population starved to death during the famines of Mao’s disastrous “Great Leap Forward” in the 1950s.

When my wife and I first visited China in the mid-1980s, most people with paying jobs toiled in big, primitive, inefficient factories for the so-called state-owned enterprises, or SOEs. In one unheated, acres-wide factory in Hangzhou, we saw some 5,000 women attending old-fashioned looms to make hangings and tapestries of traditional Chinese scenes, with no indication that anyone ever bought them. Some SOEs persist—most of the very biggest companies in China, from the oil and telecom firms to the major airlines, are their spin-offs or descendants. But when Deng Xiaoping’s economic reforms began in earnest in the 1990s, the most wasteful SOEs were closed down—eliminating many tens of millions of jobs in just a few years. Chinese social-realist novels set in the 1990s are about people laid off from the SOEs. Those set in the 2000s are about migrant workers—or urban professionals. The SOE recession was a major social strain, but it did not come close to bringing the government down. The Chinese people weathered that downturn—and more significant, so did the system that rules the country. People in China are as demanding as anyone else, and expectations have risen. But it is hard to see why the hardships just ahead will be the ones the Chinese public finds intolerable or that push the system toward Soviet-style collapse.

Westerners who have not traveled in China might be surprised at how outspoken ordinary Chinese people can be. When cars or bicycles collide (often), the parties involved get out to yell at each other and at the cops, and plead their case to the gathering crowd. Workers complain about bosses who have cheated them. Residents complain about the landlord. In Western China my wife and I met families from villages that were being flooded by new dam projects. They showed us around the new quarters they’d been assigned, pointing out the cracks and defects and itemizing the ways it was worse than where they used to live. It all seems normal to an American.

But when people complain, it is usually about those crooked bosses, reporters, mayors, or bureaucrats—not about the system or its rulers. Principled protests against the system and its repression certainly do exist, as with the daring “Charter 08” petition for civil liberties signed by more than 300 intellectuals late last year. But that is not the norm. Ten years ago, when the Asian financial crisis drove China’s unemployment rate above 10 percent, demonstrations broke out across the country. “But the laid-off workers were almost always fighting for their rights—unemployment benefits that they believed were stolen by local officials—rather than fighting against the central government policies that led to the job loss,” Andy Rothman of CLSA wrote recently. Perhaps these workers are missing the big picture, but for now they generally act as if they expect the national system to protect them against lapses at the local level.

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.

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James Fallows is an Atlantic national correspondent; his blog is at 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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