Challenges Remain for China

Despite the sudden progress being made in the Chinese economy, many experts add a word of caution to U.S. companies seeking to do business there. Just because China has entered the WTO doesn't mean that it has become a Jeffersonian democracy or even approached a free-enterprise system. Nor does it mean that China is suddenly exploding with high-end R&D. Annual high-tech R&D in China is still only $11 billion, compared to $233 billion in the U.S.
        "Everything that China is doing remains in the very labor-intensive end of the spectrum," notes Lardy. "All of the high-end R&D is still coming from outside the country. The most sophisticated computer chips going into the computers being made in China are still overwhelmingly imported. You can't judge where they are on the technology scale simply by looking at their final product.
        "But," adds Lardy, "that could change. In years to come, we will see a lot of R&D coming out of China."
        Foreign manufacturing firms not used to doing business in China also need to be aware of the country's transportation network. Despite new modern airports in Beijing and Shanghai, the country still has a shortage of modern airports and highways to connect eastern cities with places in the middle and western parts of China.
        "Resource allocation is getting more efficient in China, but it is still not up to the standards of Taiwan, Japan and the U.S.," Lardy says. "They now have T-plus-3 (three days delivery) for product shipping, but in Taiwan it is T-plus-2. Still, this is great progress. China has brought it down from T-plus-6."
        The best places for logistical support networks are Hong Kong and the Guangdong province. Sarah Wu, director of the Hong Kong Economic and Trade Office in New York, says that Hong Kong is emerging as the leading connecting point since China joined the WTO. She suggests that U.S. firms locate a regional office in Hong Kong, a factory in the Pearl River Delta region of mainland China, and a marketing, research and technology base at home.
        "Hong Kong is about location, location, location," she says, noting that the city is now known as a logistics hub for Asia-Pacific. "Hong Kong can be a useful catalyst and partner for doing business in Asia and, especially, in China."