Seven Dominant Trends

The automotive investments, like those in the high-technology sectors, signal a new era for industrial manufacturing in China. To properly understand this shift and its impact on the global economy, says Dr. Lardy of Brookings, one must understand the dominant trends under way in China. He said there are seven:

• China is rapidly liberalizing its foreign direct investment environment.
• The introduction of competition has lowered prices for manufacturers in China.
• There are now no significant barriers to entry for international companies.
• China's work force is experiencing both increasing literacy and increasing wages.
• Resource allocation and logistics supply networks are becoming more efficient.
• High-tech manufacturers and their suppliers are increasingly clustering around three major areas: the Guangdong province and the cities of Shanghai and Suzhou.
• Chinese officials are cracking down on political and economic corruption.

        "The number one pre-condition for China's growth in advanced manufacturing is a liberalized environment for foreign direct investment," says Lardy. "Number two is the implementation of a very competitive environment. A good example is the fact that the country now has two major telecommunications providers. In 1990, China had the same number of phone lines per capita as India. Now China is far ahead of India. China's tele-density is six to eight times that of India. China now has 190 million mobile phone users, the largest population of mobile phone subscribers in the world. And I attribute that primarily to competition, which drove down the rates."
        Lardy says the big reason why global manufacturers are flocking to China is they can gain access much easier and quicker than before China joined the WTO. "Within manufacturing, there are very, very few barriers to entry in China now," says Lardy. "The most common investment today is the wholly owned foreign investor. Most foreign manufacturing companies no longer want joint-venture partners."
        Flextronics, the world's largest third-party electronics manufacturer, enjoys 100 percent ownership of every one of its China plants. Flextronics is closing plants in Malaysia and Singapore and replacing them with factories in China. Why? The company can hire an engineer in China -- a nation that is now graduating 465,000 engineering students from college every year -- at an annual salary of $15,000. Factory floor workers earn only pennies on the dollar compared to workers in developed countries.
        On the subject of pay scales, Lardy is quick to point out that China's workers may earn scant wages, but those wages are rising. "China is not the lowest-cost producer because its wages are low," he says. "China attracts more foreign investment per week than India attracts per year, and India is a much cheaper labor market. Everyone talks about the low wages in China, and they are much lower than in the U.S., but the wages in the steel industry in China are much higher [than wages in other industries in China]."
        As literacy continues to rise in China, says Lardy, so will the wages of workers -- especially women who are leaving their jobs on the farm and finding work in the city.
        The number of foreign-owned factories in China will only increase now that foreign businesses have been granted permission to buy shares of state-owned companies in China. Until recently, 65 percent of the shares in these companies were not publicly traded. Now, foreign firms have the right to buy the un-traded portions of those same state-owned companies.