TCS Daily

Bulls in the China Shop are Running Amok

By Dominic Basulto - August 2, 2004 12:00 AM

Browse through almost any business or technology site on the Internet, and there's bound to be a breathless piece about the rapid pace of manufacturing and technological change in China. In early July, for example, the New York Times Magazine published a cover story on "The Chinese Century," arguing that China is poised to dominate the 21st century, just as the U.S. dominated the 20th century. By some accounts, the U.S. should just fold its cards and prepare for the inevitable, as China becomes the world's dominant economic power. After all, Wall Street investment banks are now busy offering China-specific analyst reports to optimistic investors -- and when was the last time that equity analysts and investment bankers failed to predict a bubble in the making?

Most disturbingly, this Chinese economic boom highlighted in the New York Times Magazine article presents a very different picture from the innovative, R&D-fueled booms of Silicon Valley. Without a doubt, China remains the destination of choice for low-cost manufacturing -- but the country could also be sowing the seeds of its own undoing. Consider the mounting evidence: factories without a "single robot in sight," the lack of an established managerial class (in some cases, only 15 managers per 5,000 workers), and an underlying reliance on low-skilled, low-wage Chinese labor (i.e. peasants and urban laborers).

Instead of relying on new machines and equipment for productivity gains, it seems, China is relying on harder-working employees. If Silicon Valley was guilty of recklessly throwing technology at a business problem, China appears to be guilty of throwing workers at the same types of problems. Why invest in brand-new, shiny machines or more powerful computers when you can just throw 5,000 workers at the problem? Add to that a "crazy quilt of state-owned, village-owned, private and hybrid businesses" and you get the picture. Quite simply, "China's size does not merely enable low-cost manufacturing, it forces it."

These problems are symptomatic of a culture that is urbanizing, modernizing and digitizing at a breakneck and unsustainable pace. Anyone who doubts this thesis should check out a series of photographic exhibitions ("China: Between Past and Future") in New York City which have been organized by the Asia Society and the International Center of Photography. These exhibitions make all-too-clear the painful effect of Chinese modernization. (For those attending the Republican convention this summer in New York, it is still possible to catch the Asia Society show until September 5.) Make no mistake about it -- China is still a society smoldering from the Cultural Revolution of 1966-1976, the Tiananmen Square protests of 1989, and the painful after-effects of authoritarian Communism. As program notes for the photographic exhibitions point out, the pace of urban modernization is leading to the disappearance of traditional landscapes and lifestyles, the large-scale internal immigration of entire populations and the creation of a global consumerist society that is at the same time fragile and ephemeral.

Moreover, it's easy to see how these sociological and psychological effects continue to manifest themselves within the fast-growing Chinese technology sector. The remnants of an authoritarian Communist state continue to stifle free discussion on the Internet, going so far as to ban specific Web sites or closely monitoring activity at Internet cafes. A Chinese bureaucracy eager to support domestic manufacturers does not blanch at the prospect of erecting de facto trade barriers, imposing onerous deal terms on Western competitors, or attempting to control new technological standards. A technology culture attempting to play catch-up with the West still dedicates too few resources to R&D investment: while the U.S. invests $282 billion a year in R&D investment, China invests a relatively paltry $60 billion.

Moreover, TCS contributors such as Alan Oxley ("China's Economic Rollercoaster") and Christopher Lingle ("China's Syndrome") have already pointed out that macroeconomic factors at work in China make a continued technological boom unlikely -- if not impossible. A fragile financial system that is burdened with nonperforming loans is only one of a myriad of problems facing China. Structural inefficiencies, widespread capital misallocation, reliance on deficit spending, an oversupply of cheap credit -- all of these factors must be addressed at some point in the near future if China is to avoid the classic cycle of boom and bust.

There is no doubt that the Chinese growth story over the past 25 years, and especially within the past five years, has been spectacularly impressive. China is now the world's sixth-largest economy, the third-largest active trading partner and one of the true growth engines of the global economy. By any yardstick -- such as the number of Internet users or the number of cell phone users -- China is creating the pre-conditions for a thriving, high-tech culture that could one day rival America's. But has the pace been too far, too fast? For China, is this new economic boom simply the case of another Great Leap Forward that turned out to be not so great or a Cultural Revolution that turned out to be not so revolutionary?


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