The Real Threat From Asia

Hong Kong and Singapore have seen their future, and it is not providing cheap labor for American know-how.
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Many American executives have come to regard Asia as something of their own personal sweatshop. Urged on by nearsighted futurists like John Naisbitt and the shortsighted analysts of Wall Street, scores of U.S. companies simply have given up on the manufacturing process. Their expectation is that the whole tiresome chore can be contracted out to the folks on the other side of the Pacific.

Indeed, over the years, this strategy has worked well for many U.S. and Asian companies. But more recently, success has spawned something of a revolution of rising expectations among Asian entrepreneurs. Throughout Asia, firms are moving -- at times with startling speed -- beyond the manufacturing process into the more creative tasks of product development and marketing that once were left to Americans and other foreigners. Dependency is giving way to independence, and with it collaboration to competition.

The Japanese, of course, were in the forefront of this movement up the valueadded curve. Japanese companies stand today among the world's leading innovators in everything from consumer products to fashion design and computer software. And with four of the world's five largest banks calling Tokyo their home, Japan is poised to replace the United States as the center for world finance sometime early in the twenty-first century.

Recently, the same process has begun to spread throughout the newly industrialized nations of Asia. From South Korea to Singapore, nations once thought of as mere manufacturing platforms are beginning to develop their own strong technology and service industries eager to compete for world markets. Many of these enterprises are financed by local banks, and most have the active cooperation of local governments, which, by American standards, take an activist role in managing national economies.

Nowhere is this shift more dramatic than in Singapore. For most of its 27 years of independence, the tiny Southeast Asian nation derived much of its economic sustenance from investment by foreign manufacturers. Today, multinational companies account for 70% of Singapore's industrial capacity and exports. And local service firms live largely by catering to the needs of overseas corporations.

Until recently, Singaporeans saw little reason to question their dependence on outsiders. Their country, after all, had enjoyed one of the fastest-rising standards of living in the world. But two years ago, all that came to a crashing halt. The recent slump in the American high-tech industry has cost thousands of Singaporean jobs. And Western trade barriers, combined with competition from lower-wage neighbors such as Thailand, have caused foreign investment to drop by almost a third. Now, a nation that for 20 years had been accustomed to annual growth rates approaching 10% finds that, since 1984, its economy is actually shrinking.

"We can't keep piggybacking on the multinations," complains Eddie Foo, managing director of Singatronics, a local electronics manufacturer. "They have no loyalty, no commitment to us. In the long run, there is no security producing parts for overseas companies. To survive, we must develop our own firms, our own technology, our own marketing."

In the past, few people, least of all Singapore's powerful government economic planners, paid much attention to local entrepreneurs such as Foo. But the well-worn strategy of using tax breaks and other incentives to attract overseas corporations no longer dominates government thinking. New government initiatives focus increasingly on such incentives as lower corporate taxes, venture capital funds, and low-interest loans, all targeted at local entrepreneurs.

"We are now trying to put ourselves in the front end of the business-development process by investing more in local companies," explains Ang Kong Hua, managing director of Singacon Investments, a local venture outfit with close ties to the government. "If you're a sweatshop, you're just an employee. You end up with no control over your own development. This used to be not recognized by the government. But it is now."

Eddie Foo is something of a hero in this move toward economic independence. When he took over Singatronics in 1980, the company was doing $2 million in sales, making such commonplace fare as electronic games and pocket calculators. And almost immediately he drove Singatronics upscale. A former Olivetti executive himself, Foo recruited top talent from the local operations of such other multinationals as Siemens and General Electric -- people who were able to win big, new contracts from several of the large foreign firms. With the proceeds from those contracts reinvested in a modernized manufacturing operation, Foo then turned loose his engineers and managers to develop a proprietary line of medical electronic instruments. As a result of this research and development and a strategic acquisition, the company's Healthcheck brand products -- including digital thermometers, blood pressure readers, and pregnancy tests -- today account for as much as one-quarter of the company's $33 million in sales.

Singapore's strategy is also to make itself a gateway for foreign companies looking to do business elsewhere in Southeast Asia, where the tropical conditions and feewheeling business environment can be difficult for westerners to negotiate. Tony Chi's Chi and Associates, for instance, a 30-person engineering-consulting firm, recently won several large contracts from American and Japanese companies with projects in Indonesia. Chi's task is to adapt his customers' plans and designs to the realities of Indonesian labor and materials.

"Americans and Japanese don't know how to build in this kind of environment," explains Chi, a 1970 graduate of Pennsylvania State University. "You might design a steel building in Los Angeles that, in Indonesia, is actually cheaper to build with concrete. We know better how to employ cheap labor and technical skills in this part of the world."

Of course, you cannot talk about "this part of the world" without talking about China. And nowhere has China's gravitational tug become stronger than in Hong Kong, where a prototypical manufacturing platform is now being rapidly transformed into a technical, design, and service center. Between 1978 and 1985, Hong Kong's domestic exports to China have jumped 14-fold, with reexports multiplying 131 times. As a result, the mainland is now Hong Kong's second most important trading partner after the United States. And the aggressive Hong Kong entrepreneurs regard reunification with China, scheduled for 1997, as the basis for their own move into higher-value products and services.

Take the garment and textile industries, for example, now a source of more than 40% of Hong Kong's industrial employment and export. For decades, the bargain basements of America have been stocked with clothes labeled Made in Hong Kong. But today, it is just as likely those garments were made in China, where labor rates are as little as one-third those of the British crown colony. Many of these Chinese factories were started in collaboration with Hong Kong manufacturers, financed through Hong Kong banks, and sold through Hong Kong agents. Indeed, by some accounts, Hong Kong today is the source for roughly 60% of the direct foreign investment in China.

While Chinese manufacturers are moving into the low end of the garment trade, Hong Kong is moving upscale. Today, Hong Kong manufactures high fashion for the likes of Giorgio Armani, Abercrombie & Fitch, and Christian Dior. And like Japan in the late 1970s, it is also developing its own fashion designers and stylists.

Eddie Lau is one of them. Born into a working-class family, Lau left school at 13 to work in one of the city's garment factories, but by his early twenties, he was designing and sewing clothes for Hong Kong's secretaries from his own 100-square-foot studio. Now 34, Lau designs high-fashion clothes, manufactured in local factories, for trendy boutiques as far away as Europe and Japan. But increasingly his most important client is the Chinese government, which is seeking to develop an original look for its own burgeoning garment industry.

"Together, Hong Kong and China will emerge as the new fashion center," predicts Lau as he sits in his posh Kowloon boutique. "When China takes over, we will have an identity to match with our skills. China will need designers to reach out to the world, and they will find them here."

As with garments, so too technology. Like their rag-business cousins, Hong Kong's electronics manufacturers also see China as the natural base for their own move into higher-value production and services. "We are perfectly placed to provide the interface between China and the West," notes Stephen Cheong, one of Hong Kong's leading political figures. "For 30 years, we have developed and absorbed modern technology while China was cut off. Now, we have the educated people, the technicians, and the managers to tap China's resources and markets. This is our future role."

Cheong is already busy building that future. Along with his associate Allen Lee -- a former high-ranking executive with Ampex Corp., in the Far East -- Cheong is building a new factory in Dongguan, in South China, to produce laminates for printed circuit boards. When it is completed early this year, this $8-million factory will, for the first time, give the People's Republic of China a capacity to produce materials for printed circuit boards that meet IBM's standards. And with it, China and its Hong Kong partners will gain entry to a huge potential market -- a $300-million market in the Far East alone.

Perhaps even more than the people of Hong Kong and Singapore, the Chinese are sensitive to issues of economic imperialism, especially from Japan and the West. In the short run, the new entrepreneurial managers of the Chinese economy will probably be content to offer a manufacturing platform for more developed trading partners, both in Asia and in the West. But like the entrepreneurs of Singapore and Hong Kong, they look confidently to the day when the Chinese will design, develop, and market their own product lines -- for internal consumption and eventually for export.

"We will start with just the assembly, the simple part," predicts Wang Guorun, vice-mayor of Dongguan. "Then we will move on. We are building the firm foundation for a major electronics industry here. We want to produce it and design it all right here. We will make that leap in a very short time."

Last updated: Jan 1, 1987




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