Capitalism with Chinese characteristics

Kenichi Ohmae President Ohmae & Associates Project Syndicate

Officially, China remains Communist. Yet companies in China face far fewer regulations than in Taiwan, Korea, Japan, Germany, France, and Sweden. Even in comparison with the U.S., China is a capitalist paradise -- so long as you steer clear of the central government. For example, tariffs (which are set by the central government, but administered locally) are low or nonexistent for companies that take advantage of China's regional systems of tax- free zones and tax benefits.

None of this was conceivable as recently as 1992, when Beijing's proclamation of "one country, two systems" -- and the decision to peg the mainland's currency, the Renminbi, to the Hong Kong dollar -- unleashed the floodgates of foreign investment. Money poured into the Shenzhen and Shanghai stock markets, as did direct investment to build factories and offices in tax-free zones.

The trappings of entrepreneurial culture are everywhere. The face of General Electric's longtime boss Jack Welch is in bookstore windows across China, although his latest book is probably a pirated edition because China still has a way to go on copyright protection.

Many managers attended China's elite foreign language schools (which trained spies during the Cold War era) and then headed to America for an MBA. Back home, they practice just-in-time manufacturing, 360-degree performance evaluations (including bosses reviewed by subordinates), and re-engineering -- all with unmatched resourcefulness and purposefulness.

In fact, more students than ever who left for universities in Japan, the U.S., and Europe are being lured back. The Dalian local government constructed an elaborate software development park a la Silicon Valley, where students returning from abroad can rent low-cost office space for startup companies. They benefit from broadband network environments, introductions to investors and financial angels, and exposure to each other. Like rival businesses in a single large corporation, other cities are creating their own incubators and lures for talent as well.

As a result, China's reputation for lackluster innovation is changing. Consider the story of Shenyang-based Neusoft Group, China's largest publicly traded software company, with sales of $134 million last year. Neusoft began as a low-cost competitor to the Oracle Corporation. After moving on to produce car audio equipment, Liu Jiren, Neusoft's CEO, began hearing complaints from local hospitals about the high cost of specialized X-ray, MRI, ultrasound, and CT-scanning machines (such as those made by GE, Philips, Siemens, and Toshiba).

Suddenly, a new business was born. Liu realized that Neusoft could link standard Intel chips and its own imaging software to a range of digital sensors. Neusoft's equipment looks like little personal computers with sensors attached. But it is inexpensive and adaptable enough that every hospital room can now have its own multipurpose scanner.

In the U.S. or Japan, facing entrenched industry opposition, such a startup might never have gotten off the ground. But by selling to Chinese hospitals first, Neusoft built up a customer base that will allow it to challenge the existing medical electronics industry worldwide, just as Honda and Toyota challenged the worldwide auto industry in the 1970s.

Nor is Neusoft alone. Little Swan sells washing machines in 40 countries, while Legend Group is now the world's largest manufacturer of personal computers (mostly sold under other brand names). Hua Wei, based in Shenzhen with 14,000 employees (70 percent of whom are engineers), makes routers and telecommunications switches at half the price of most global companies. Many leading American and European telephone equipment manufacturers fear Hua Wei more than Fujitsu or NEC.

The Chinese have grasped the hidden key to Japan's success in the 1970s and 1980s. Companies like Toshiba and Sony depended on two regions -- Otaku in Tokyo, and Higashi Osaka in Osaka Prefecture -- where thousands of manufacturers of precision mechanical and electronic components were clustered. Today, Otaku and Higashi Osaka are anachronisms.

With modern highways, port facilities, and communications links available, a cellular phone manufacturer in Shenzhen might receive just-in-time deliveries of parts several times a day from suppliers that are only hours away.

Similar manufacturing clusters are sprouting up everywhere in China. Dalian is becoming a center for software development and Japanese-language back-office work, such as insurance processing and call centers. Japanese companies also prefer Qingdao, on the Shandong Peninsula, which specializes in production of high- quality processed food.

More than 4,000 Taiwanese manufacturers have set up shop in Xiamen and Dongguan. Zhongguancun, a former military research zone in Beijing that houses half a million scientists and engineers, is popular with American high-tech companies.

All this clustering resulted in state-of-the-art production and cutting-edge business. Consider Japan's Fast Retailing Company, which retails high-quality clothing manufactured in China under the Uniqlo brand in its own Japanese outlets.

Fast Retailing charges one-third the price that competitors charge and earns nearly five times the margin. The verb "to uniqlo-ize" (to cut costs dramatically through Chinese production and eliminating intermediaries) has entered Japan's business vernacular, as in: "Can we uniqlo-ize the housing industry?"

The U.S. confronted something similar in the late 1980s. It responded by internalizing foreign competitors like Sony, Toyota, Bayer, Nestli, and DaimlerChrysler -- in effect turning them into U.S. companies with U.S. investors, loyalties, and even corporate cultures. The challenge for the U.S., Europe, and Japan will now be to internalize Chinese companies and methods in order to galvanize their own to higher levels of productivity and innovation.