China's Emergent Political Economy: Capitalism in the Dragon's Lair (Routledge Studies in the Growth Economies of Asia) Review

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China's Emergent Political Economy: Capitalism in the Dragon's Lair (Routledge Studies in the Growth Economies of Asia) ReviewMcnally's "China's Emergent Political Economy" provides an excellent overview of today's China - a nation often labeled as capitalist, but dominated by its state-owned enterprises (SOEs) that produce about 60% of GDP. Central government leadership in Beijing has created a powerful support mechanism that extends to every locale - economic performance has become the principal yardstick to evaluate cadre performance, as well as one of their major revenue sources.

The first tier of China's industrial economy consists of large, central-government controlled firms, primarily in sectors with some degree of natural monopoly or market power. (China had 3 companies in Fortune's 2010 Global Top Ten, 1 in 2009, and none prior. Overall, it had 46 in the Top 500 in 2010, and 16 in 2005.) Sectors considered vital to national security are also closely controlled (aluminum, auto manufacturing, aviation transport and manufacturing, construction, banks, electric power, petrochemicals, rail, steel, telecommunications). Control of these 152 firms (end of 2007) is consolidated in the State-owned Assets Supervision and Administration Commission (SASAC). Ownership of parts of these firms has been privatized, but not control. Thus, the firms can raise private capital without the government losing control, the firms becoming overly tied to market priorities and time-lines, or the state risking asset looting such as occurred in Russia. Smaller and less viable SASAC firms are usually absorbed by larger ones - the goal is 80-100 remaining in 2010. Managers of the larger entities are appointed directly by the Chinese Communist Party (CCP) and have ministry-level standing; the remaining managers are appointed by SASAC. These firms earned over 4% of GDP in 2007; Exxon's record 2007 profit was only 0.3% of U.S. GDP. (The Chinese corporate income tax rate became 25% in 2008.) SASAC is charged with managing these firms in the public interest; sometimes this consists of managing competition between firms - eg. China's four telecoms. (Imagine the savings if Verizon, Sprint, and drug-company advertising were limited in the U.S. China also bans political 'advertising' via dinners, gifts, arranging consumption activities, phone calls, text messages, paying visits - People's Daily, 7/30/2010.) Average SOE CEO pay is $87,000 - one-third salary, the rest bonus.
The second tier of industrial firms is made of medium-sized entities in competitive markets. Their origin may be the state sector or subsequent management buy-outs, foreign investment, or domestic start-up. Mcnally identifies this tier as the most dynamic sector, though it can be confusing since some straddle tiers 1-2 (eg. steel, autos). Examples follow -
Huawei is China's largest telecommunications and networking equipment manufacturer. Ninety-percent of its 30,000 employees hold at least a B.A. degree; engineers are paid 1/5 to 1/3 U.S. salaries. Its strategy is to provide no-frills products, aggressive service, and price 30% less than global leaders. Over 10% of revenues goes to R&D. Huawei worked with IBM consulting, Carnegie-Mellon University, and its own Indian affiliate to achieve state-of-the-art project management, product development, supply-chain management, and software development. Leading H.R. practices were also acquired via Hay & Mercer, and production-line layout and integrated solution supplier capabilities via KPMG and German firms.

Galanz (microwaves) bought technical support and an advanced production line from Toshiba in 1994 for $4 million. By 1997 it had 10% of the world market - French manufacturing business was captured with an offer to produce for 20% of existing costs. Galanz has also invested over $100 million in R&D since beginning microwave production.

Pearl River Piano was a small-time piano producer that began in 1956. In 1987 a new one-million square-foot factory was completed; when the founder's son took over in 1992 he committed to building the best and brought in ten world experts. A partnership with Yamaha led to additional production and equipment updates, and in 2001 another 500,000 square-feet was added for grand piano production. Later Pearl River also bought rights to two respected German brands. Today it has 40% of the U.S. market in upright pianos, manufactures some pianos for Steinway, produces top-of-the-line German-branded pianos, has the world's largest piano factory, and is the #1 producer in the world.

Haier (white goods) was taken over by the state in 1949 and was a failing enterprise by 1980. An assistant city manager was appointed manager in 1984, and immediately focused on improving quality. Partnering with a German firm, he returned it to profitability by 1986. In 1994 Haier entered the U.S. market, focusing on mini-bar refrigerators (also used in student dorms), and wine coolers - segments ignored by the major firms. Partnering with Sanyo, the two shared their distribution networks in China and Japan. Today it is the world's #4 white-goods producer, with a plant in South Carolina.

China's major production facilities are fairly new and well capitalized, allowing them to utilize leading equipment and methods, rather than hold on to outdated means because of large sunk costs. (This reticence to update helped sink American steel and other manufacturers.) Relative newness makes it difficult for western companies to see Chinese competitors coming. Recently some Chinese firms have decided that the best way to defend themselves from foreign competition on their home turf is to first attack those same companies overseas. This is officially backed by leadership's "Go Out" challenge, and backed by financial assistance in setting up foreign sites in western nations; China has also identified 22 companies intended to become global champions.

Tier three is the small scale sector - most are town/village enterprises (TVEs) that became privatized. Most are relatively low tech, and there is little government intervention. Some of these third-tier competitors are akin to armies of ants, with impressive collective power. For example, 700-some companies in Wanzhou control 70% of the world market for lighters - some create components, others do final assembly. Hangzhou has a network of 1,000-some tie producers, responsible for 33% of world production; 35% of the world's socks come from Zhuji, 95% of desktop computer components are produced within 50 miles of Dongguan. Industry clustering maximizes competition, encourages fast innovation, minimizes customer procurement costs, and allows achieving scale production economies at all levels, while also minimizing transportation costs. These local companies sometimes grow by following a strategy of building low-end volume in rural areas, then attacking urban centers.
Foreign direct investment (FDI) equates to about 4% ($60 billion) of China's GDP over recent years, vs. 0.5% in Japan and Korea. Foreign-invested enterprises created 58% of China's total exports in 2005, and 88% of its high-tech exports. Unfortunately for the U.S., this has led to deskilling, loss of initiative in new high-technologies such as solar and auto battery-power, massive job losses, and the loss of health care and pension benefits as well. Example: Contract manufacturer Foxconn has more employees than its customers Apple, Dell, Microsoft, H-P, Intel, and Sony, combined, per Andrew Grove. Lenin stated it well, at least ninety years ago: "The capitalists will sell us the rope with which we hang them."
Bottom-Line: "China's Emergent Political Economy" merits careful reading and consideration. China's 'capitalist' transition was almost universally welcomed when it began 31 years ago, says Mcnally. Many saw it as a windfall opening of a huge new market, others as leading inexorably to greater democracy in China. Today, many of those same western capitalists rue the unintended consequences, and the human rights advocates have been largely disappointed. The 'really bad news' for those same capitalists is that China's transition is far from complete - hundreds of millions wait in rural areas to join the global economy, and the government has committed to better developing the economies of those areas. We are now heading into 'Phase II,' this time with much more experienced government and enterprise leadership, a better-educated populace, and armed with trillions in new capital and liquid assets.
China's Emergent Political Economy: Capitalism in the Dragon's Lair (Routledge Studies in the Growth Economies of Asia) Overview

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