Excerpted from CHINAMERICA: THE UNEASY PARTNERSHIP THAT WILL CHANGE THE WORLD by Handel Jones, reprinted with permission from McGraw-Hill Professional, 2010.
The combination of the centralized planning and decentralized implementationhas been successful in China. China has well-defined top-level goals for many of its industries, and employment is still growing. While the challenges are becoming more rigorous as its industries attempt to compete in markets around the world, China's managementexpertise is also growing.
The manufacturing base in China will be a major source of strength because countries that do not have such low-cost manufacturing capabilities will opt to import goods from China. When China represented a small percentage of the global supply of products, the leverageof China was low. As China dominates markets, its leverage will increase. The United States and other countries are underestimating the long-term competitive threat from China in a number of business areas. While it is inevitable that China will become stronger and will increase market share in a range of industries, including electronics andautomobiles, the implications of these trends can be significant if China also controls the supply of raw materials. China started with industries that were low technology (such as clothing and shoes). Then it progressed to heavy industries (the initial processing of raw materials). Consider what has happened in the steel and aluminum industries. China has continued to build its steel and aluminum industries, even though there is excess capacity worldwide. China wants self-sufficiency in these vital products. To try to keep its steel and aluminum factories at or near high capacity, the government provides subsidies so the steel and aluminum companies can charge low prices for exports. This breeds increasingresentment in the United States, Japan and Germany. Competition from low-priced Chinese imports is crippling U.S., Japanese, and German domestic steel and aluminum companies, in some cases forcing factories to close or putting the companies out of business. In response, protective tariffs on the Chinese goods are beingincreased, which leads China to quickly impose or increase tariffs on imports from those countries. The strategies being demonstrated in the steel and aluminum industriesare harbingers of those that will be utilized in many industries in China in the future. If this is done systematically, industry by industry, the impact can be large over 10 to 20 years. When China produced a small percentage of the global output of such goods, its export strategies didn't antagonize many corporations in foreign countries. Now that China is producing a high percentage of global capacity -- for example, approximately 48.8% percent of global capacity for steel in July 2009 -- the impact of the Chinese strategies on competitors in other countries can be devastating. Not surprisingly, the competitors in other countries view China's pricing as predatory. But, like it or not, the alliance of Chinese corporations with the adroit support of their government is helping Chinese exports become increasinglycompetitive in foreign markets and gain market share. As we've seen, its latest initiatives are in high technology, including electronics, automobiles, and aircraft. The strategic threats from the high-technology businesses are much more concern-worthy to the United States than the leverage China had from supplying lo-technology merchandise.
China will become a high-technology society that is a formidablecompetitor in the global market. By having the large local market and competitiveness in manufacturing, the Chinese corporations will be able to gain high market share worldwide. The large market inside China and the methods used to protect this market will result in moreconflict with other countries. Local Chinese authorities have already been targeting Japanese companies. A few years ago, Zhejiang province publicized its finding that there were many quality defects in Sony ( SNE) digital cameras. Sony had not been criticized for quality problems in other regions, including the United States. The result: Sony has had disappointing sales of camerasin China. When Japanese companies have competitive strengths, such asToshiba in nuclear-powered electricity generating technologies, theycan establish joint ventures in China. As its homegrown capabilities rapidly increase, the challenge facingChina is to be viewed as providing open access to outsiders whileprotecting China's local markets. Many embryonic industries will require support from the governmentfor the next decade and probably longer. However, as its industriesbecome stronger, the amount of the government's direct involvementand support is expected to decrease, but top-level strategic direction willcontinue. The growth of a large entrepreneurial business class in China is expectedto result in conflicts over the control of the central government.How well the government manages that conflict will be one of the keyfactors that determine the success of industrialization. The challenges facing China include pressures from competitorsfor worldwide markets (factors from outside China) and problems inthe operations of industry and government (internal factors includinggovernment efficiency and corruption, among others). Industry in China is strengthening rapidly. While exports accountfor the bulk of the revenues from many products, many exports areproducts of foreign companies, such as Samsung, Toyota ( TM) and HP ( HPQ), thatare using China as a low-cost manufacturing base. The next phase ofthe export market development will be characterized by the inclusionof merchandise designed and developed, as well as manufactured, byChinese companies. Taiwanese companies are expected to succeed in the Chinese market.Certainly the common language will be an advantage. The finesseChina's government uses in managing the integration of Taiwan willaffect how well its products do and how much they contribute toChina's renaissance. Consumer preferences have been secondary to the top-level industrializationgoals in China, but that subordination will lessen as the middleclass grows, becomes more cosmopolitan, and has money to spend.Foreign companies are viewed as disposable if they are regarded asnot very useful for the long-term economic goals and initiatives inChina. This perspective applies to a range of industries. It's particularlyapplicable to the automotive industry.
China may view foreign governments as expendable too. In its military history China has shown a willingness to accept a large numberof casualties. In 1949, during the Huai-Hai Battle, 555,0005 people ofthe National Party died, and 110,000 people of the Communist Partydied, figures that dwarf the horrendous battlefield casualties during theAmerican Civil War. These large numbers of casualties show China'swillingness to sacrifice people to achieve its objectives. If China is willingto sacrifice its own people, it will be far more willing to view foreigncompanies or foreign governments as expendable. The United States as a market for Chinese products is important,especially because the U.S. market is wide open for so many products.So China's policymakers must balance the need for the United Statesas a market with its threat as a competitor for raw materials and otherstrategic resources. China's leaders also have to balance the use of its resources and rawmaterials for exports versus domestic consumption. As long as resourcesand raw materials are sufficient, the balance is easy to achieve.If shortages of raw materials occur, the decision processes can becomemore difficult. The effect in the short term can be to increase pricessomewhat for exports, but the impact over the long term is that the domesticmarket will be given priority. As China has been criticized increasingly for its contribution to pollution,it is significant that it is starting to blame the countries that buyits products as being partly responsible. As the political and financial power of China increases, China maybecome much more assertive and self-justifying about its conduct. Theleaders of China have inherited centuries of strategic thinking. Competitivepositioning and dealing from a position of strength are keyparts of the history of China.