'Le difi Chinois' -- the global challenge

Kenichi Ohmae, President, Ohmae & Associates, Project Syndicate

Thirty-five years ago Jean-Jacques Servan-Schreiber's Le Difi Americain (The American Challenge) claimed that Europe was in danger of becoming a branch office for American multinationals. A decade later, Japan's rising commercial challenge seemed paramount. Now China makes people nervous. But today's responses to China's economic challenge may be as misbegotten as yesterday's answers to le difi Americain.

China in 2002 resembles nothing so much as Japan in the 1960s, when it was preparing to become a global competitor, with echoes of Dickensian England and America's "robber baron" era of the late 1800s, when the US first rose to global economic power. What is unprecedented is that something similar should occur in a Communist nation, or in one with such a massive population.

The new China is symbolized by an electronics components factory in Shenzhen in the Pearl River (Zhu Jiang) Delta. When I visited it, the factory had 10,000 workers, each earning about $80 per month. All were young women. None wore eyeglasses. "Don't you have employees with bad eyesight?" I asked. The manager replied, "We fire them when their eyes go bad. They can find another job -- that's not my problem." Indeed, those laid off generally do not return to peasant life, but become urban entrepreneurs in the service industries of China's new cities.

China owes its growing dynamism partly to the central authorities' shrewd pursuit of well-timed and complementary development strategies. Less noticed than the 15-year process of gaining admission to the World Trade Organization has been the stabilization of the currency, the renminbi (RMB), pegged to the Hong Kong dollar since 1997, when the territory reverted to Chinese rule. By prohibiting exchange of RMB abroad, the central authorities prevented the currency fluctuations that in recent years wreaked havoc in other developing nations.

But the real key to China's success is not found in Beijing, but at lower levels of government. In most regions, officials welcome foreign businesses -- offering tax-free zones and other benefits -- and unfettered competition as a means of strengthening their industries. More than 100,000 component manufacturers, mostly from Japan or Taiwan, have relocated to China's Pearl River and Yangtze River Delta regions, which always had cheap labor but now also have modern highways, port facilities, and communications links.

Nearly $45 billion in foreign direct investment entered China in 2000, compared with about $10 billion for Japan and even less for Asia's tigers. Much of that money went directly into raising industrial productivity. A typical Chinese factory once consisted of rows of women at workbenches. Today factories are as modern, sophisticated, and automated as their Japanese counterparts, and their managers are mastering the skills needed to compete globally faster than in any other nation I have studied.

China's regions learned to specialize by competing fiercely for foreign investors. Each has its cluster of component suppliers and professional service providers, with an infrastructure of transportation lines, communications networks, and research laboratories to support them. They are also developing links to the outside world independent of China's central government.

Because China's domestic market is so huge, many companies have not yet turned their attention overseas. But they are poised to become the most capable and competitive original equipment manufacturers -- producers of goods sold under other brand names -- that the world has ever seen. Malaysia and Thailand spent ten years building the expertise, production base, and infrastructure for precision metalworks that could sell components to Swiss watch manufacturers. Chinese firms took over that business in only a year. The same is happening with electronics and machinery.

China is now doing to Asia what Japan did to the West 20 years ago. Suddenly, it is extremely difficult for a non-Chinese company to compete in any worldwide market with a strategy of low-cost, low-price commodities, even if those commodities are precision electronics components. Few commodities are out of reach for Chinese industry, because, unlike any other nation, it can simultaneously mobilize low-cost labor and high-tech automation.

Singapore and Taiwan weathered Asia's 1997 financial crisis relatively unscathed, but their manufacturers are suffering now. Much of Taiwan's manufacturing sector has migrated across the Taiwan Strait -- despite restrictions on direct contacts with the mainland -- and Singapore is becoming a kind of Asian Switzerland, betting its prosperity on investments in China. Indonesia, the Philippines, and Thailand, which lack Singapore's resources, are likely to suffer deprivation, fragmentation, and unrest, to say nothing of countries such as Laos, Cambodia, and Myanmar.

What does this Chinese juggernaut mean for Japan, Europe, the US, and other wealthy regions? For consumers, it is an unalloyed boon. Chinese industries will cut costs, raise quality, and propel innovation for most consumer and industrial products -- not just because of their own efforts, but because global companies vying for position in China are putting their own best practices to use there.

This will lead to a frenetic new wave of competition, but not between China, America, and Japan as monolithic entities. In each industry and region, companies will race to internalize China's new methods in order to beat their local and immediate competitors -- just as US management methods have been internalized by companies around the world, including within China.

Meanwhile, China's growth will pose a greater challenge to the global status quo, both diplomatically and economically, than, say, Islamic extremism. Politicians and businesspeople will complain. But consumers will have never had it so good, and they will demand the goods that China can provide better than any other nation. When we meet the enemy, we will discover that it is us.