The Secret of China's Success

Culture and work ethic are fueling China's rise, not low wages or currency manipulation, says John Hancock.
By: /
February 22, 2012
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The U.S. is in denial. Alarmed by China's relentless economic rise and its own relative decline, the U.S. has convinced itself that China is cheating (through low wages, currency manipulation, technology theft, and "state-capitalism") and that only a get-tough policy will arrest its rise and put the U.S. back on top. As U.S. President Barack Obama warned while visiting China’s Vice-President Xi Jinping last week, China has to start playing by the economic rules. The reality that China is simply more competitive than the U.S. – that there's a mathematical inevitability about 1.3 billion educated, disciplined, hard-working Chinese overtaking the U.S., and that China's economic ascendency cannot be stopped – has yet to dawn on a political establishment that cannot imagine a world in which the U.S. is not on top.

Consider productivity. According to the U.S. Conference Board, China's productivity growth was the world's highest last year at 8.7 per cent – a position it's held since the mid-1990s. In comparison, productivity grew by just three per cent in rich countries in 2010, and will likely come in at 1.6 per cent in 2011. A recent New York Times article describes how, when Apple needed to quickly re-engineer its iPhone screens, it inevitably turned to Chinese factories because none in the U.S. could meet the necessary turn-around time:

New screens began arriving at the plant at midnight. A foreman immediately roused 8,000 workers inside the company's dormitories. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into bevelled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

A similar story could be told about almost any company outsourcing manufacturing to China.

The U.S. still tops the productivity league table. But it's competing against Chinese workers who are paid a fraction of what American workers are paid but whose productivity is getting closer and closer to U.S. levels – and, in some cases, exceeding them. The average Chinese manufacturing wage is $3.10 per hour – one-seventh of the $22.50-per-hour average in the United States. A Chinese engineer costs one-third his American counterpart. These basic competitive advantages explain why China was the second-biggest recipient of foreign investment last year – not just in labour-intensive sectors, but also increasingly in high-tech industries and services. The main competition for the U.S. comes not from China's "state-capitalism," but from American multinationals – Apple, GE, AT&T, General Motors, Merck, Coca Cola, P&G – that increasingly chase global growth by "outsourcing" production to China, and which, by building factories, transferring technology, and linking China to foreign markets, are further boosting Chinese productivity. The biggest "exporter" to the U.S., for example, is Wal-Mart and its suppliers. Caterpillar, a relative latecomer to the Chinese market, now has three of its four global research facilities in China, and its highest-quality equipment is no longer “Made in the U.S.A.” or even “Made in Japan,” but “Made in China.”

Consider education. The Organisation for Economic Co-operation and Development’s (OECD) latest Programme for International Student Assessment results, a comparison of worldwide education standards, placed Chinese high-school students on top in every category, while the U.S. ranked 17th out of 43 countries in reading, 23rd in science, and lower still in math. None of this would surprise anyone who's spent time in China, where family and state alike place huge emphasis on education, and where schools and universities are teeming with bright, competitive, and exceptionally hard-working students. Nor would the OECD results surprise anyone familiar with the state of the education system in the U.S., where decaying urban public schools – with their drug tests, metal detectors, dispirited teachers, and near-50-per-cent drop-out rates – can resemble penitentiaries more than places of learning. The Obama administration has quietly dropped the goal, under the "No Child Left Behind" initiative, that all students be proficient in reading and math by 2014, because tens of thousands can't meet it. The U.S. Education Department recently offered the shocking statistic that 32 million Americans – one in seven adults – are illiterate.

The U.S. finds consolation in the fact that its elite universities are still the world's best, and that it continues to lead in technological innovation. But for how long? Two-thirds of the 8,000 PhD engineers who graduated from U.S. universities last year were foreigners (mostly Chinese and Indian), the majority of whom were denied the opportunity to work in the U.S. – and thus "repay" the U.S.’s investment in their education – because of protectionist U.S. immigration laws. Meanwhile, Chinese universities graduated half a million engineers, scientists, and technologists last year – a figure that, even if officially exaggerated, easily dwarfs numbers in the U.S., where engineering and science enrolment has declined steadily since the mid-1980s, as more and more top students pursue business studies and the riches of banking or consulting careers. Almost half of Harvard's 2007 graduating class, for example, ended up on Wall Street. Not surprisingly, U.S. international patent filings dropped from 51,000 to 45,000 between 2006 and 2010, while China's filings tripled from 4,000 to over 12,000.

Consider scale. Although the U.S. has faced fierce competition from "newly industrializing" economies before – think Japan, Korea, Singapore, Taiwan – what's different this time is the sheer scale of the Chinese colossus and the speed of its transformation. China’s economy has grown at a rate of 10 per cent a year – without interruption – for the past three decades, a scale of industrialization that has never been seen before, and that will never be seen again. Giants India, Indonesia, and Brazil are not far behind. But while China's per-capita income has grown an astonishing 12-fold since 1980, it's still only a tenth of U.S. levels – roughly where the U.S. was a century ago – illustrating the enormous potential for catch-up. China is already the world's second-biggest economy, and its biggest exporter, car market, and consumer of grain, meat, coal, copper, and steel. And its "great leap forward" is just beginning. A fitting symbol of China's vast industrial machine is the Foxconn factory in Shenzhen – aptly named "Foxconn City" – within whose walls almost half a million people work, and a quarter of a million live.

Does China cheat? No question. As does almost every other country – whether it's promoting "strategic technologies," "safe domestic banks," "cultural industries," "family farms," or "buy American" products. But cheating is not the main reason China is succeeding so spectacularly. Any visitor to China cannot help but be struck (and even shocked) by the extraordinary work ethic, raw competition, and single-minded drive for material advancement, and not come away with a clear picture of why the country is booming. Just as unsettling is the mirror China holds up to us. The world was once in awe of the West for the same reasons we are now in awe of China – and many of the same values that underpin China's current success also made the West great (Max Weber labelled it the Protestant work ethic). But today, the rest of the world is more likely to view the U.S. and Europe as geriatric economies destined to fade. When European officials approached China last year to contribute to the euro's bailout, the chairman of the China Investment Corporation dismissed European workers as "indolent" and "slothful," more concerned with "languishing on beaches," and refused to consider rescuing Europe until it reformed its "worn out" labour laws and welfare state.

The good news is that – if history is any guide – China's competitive edge cannot last forever. Its single-minded focus on making existing products more cheaply – at low-wages, with borrowed technology, in mass factories – is ideally suited to the catch-up phase of economic development. It's less clear that China is well placed to innovate on its own, to invent the next iPhone or Adele. Besides, Chinese wages are gradually rising, inflation is eating away at its currency edge, and workers are beginning to demand a greater share of the fruits of their labour. One day, China may well resemble France – with a 35-hour work week, two-hour lunch breaks, and month-long congés d'étè on the Riviera. Until then, however, the West should get used to being in second place.

Photo courtesy of Reuters