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China Inc.

Two Inc. writers look at China's new embrace of capitalism and its impact on the future of global economics.
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In the 1990s the world's most populous nation will emerge as a global economic empire -- that's the big picture, argues Joel Kotkin in commentaries on these pages. Meanwhile our man in China, Bo Burlingham, chronicles his firsthand view of a country embracing capitalism

Welcome to the new China.

This is not exactly what my wife and I had in mind when we signed up for the tour of southern China in mid-June. Like most Americans, we viewed China through the prism of two gloomy events: the crushing of the prodemocracy movement, in 1989, and the impending takeover of Hong Kong, in 1997. We had followed the repression of the dissidents, the controversy about China's export of goods produced by prison labor, the debate over most-favored-nation status for the People's Republic. We expected to find fear and loathing everywhere we went. What we didn't expect was to witness a revolution in progress, a market economy being born right before our eyes.

* * *

A scene from another century. Relaxing on the train from Shenzhen to Guangzhou, my wife and I gaze out at rice paddies, water buffalo, and peasants in straw hats who carry enormous watering cans suspended from wooden yokes across their necks. We can sit here and imagine we are traveling back in time to a different era, until we're startled by a sound behind us, brrrrn-bbrrrnn, followed by a voice jabbering in Chinese. The voice stops. We return to our reverie. More buffalo. More peasants. Brrrrn-bbrrrnn. Again the man starts yakking. I peer back, and there he is with a portable phone to his ear, doing what people usually do on portable phones -- making deals.

This morning we took a tour of Shenzhen, the special economic zone across the border from Hong Kong. I'd been here once before, in 1985. It's hard to imagine how a place could grow so fast. Shenzhen was like a frontier town back then -- a few assembly plants thrown together, dirt roads and clouds of dust, a pathetic gift shop, a restaurant swarming with flies. Less than seven years later, it's almost the size of Chicago, with 2.6 million people, most of whom appear to be under 30.

Forty-three years after the Chinese Revolution, it turns out that the New Socialist Man is . . . a consumer. Everywhere you go in southern China, billboards advertise Japanese electronic products -- watches, televisions, VCRs, fax machines. The American presence is mainly in the form of cigarettes, soft drinks, and food. There is a McDonald's in the center of Shenzhen, as well as a bustling pizza joint and air-conditioned hotels with revolving restaurants on top. They seem to be our primary contribution to architecture in the new China.

What overwhelms you is the sheer volume of trading going on. The streets are lined with shops and stalls. Their proprietors hawk cameras, video recorders and players, boom boxes, CD and cassette players, portable phones, watches, clothing, toys, plastic flowers, lingerie, pictures of Chairman Mao, parasols, you name it. Their main customers are the 25-year-old factory workers from up north who suddenly find themselves with more money than they know how to spend.

* * *

Can't seem to find any Communists here in the People's Republic of China. "The first thing everyone always asks me is, 'Are you a Communist?' " says our guide in Shenzhen, a sharp young fellow with a sunny disposition and a pair of expensive aviator-style designer-label sunglasses. His name is Wu. "No. I am not a Communist. OK? That is all I will say on this subject. I am happy to talk to you about anything else -- anything except politics."

Aside from the sunglasses, Wu's pants are Levi's and his shoes Nike Air. He wears a Seiko watch. A new Volvo passes our tour bus. "There are all kinds of fancy cars here," Wu says. "Volvos, BMWs, Mercedes, all kinds. I don't know where people get the money to buy them. I wish I did, because then I'd buy one, too." The New Socialist Man.

"That's the stock exchange," Wu says, pointing to a line of people waiting outside a nondescript building in the middle of town. "A lot of people have gotten rich by buying stock in companies, so now everyone wants to own some."

China doesn't have stock markets in the Western sense. From 1949 through 1990 it didn't have stock markets at all. Then the first one was created in Shanghai, but under a bizarre set of rules whereby would-be investors had to purchase applications to buy shares. The applications, costing about two weeks' wages, are entered into a lottery, from which 10% are chosen at random. The lucky 10% can buy up to 1,000 shares. The others go home empty-handed. This ingenious system has turned Chinese stock offerings into scenes of mayhem. People have been maimed, even killed, trying to get in on initial public offerings of construction companies and wire manufacturers. But you'd never know it by looking at the scraggly line at the Shenzhen stock exchange on a warm day in June.

* * *

Rain. A real downpour. In some parts of China rain brings the entire economy to a standstill, or so says one of our fellow travelers, a tall, muscular young German named Derek. He's spent the past three months in a remote corner of the Hunan province teaching aluminum-factory workers to use welding equipment manufactured by his German employer.

"In China," he says, "if it is raining in the morning, everybody takes the day off. Everybody.

"And the work is very frustrating because you have to keep teaching people the same thing over and over. They don't talk to each other. Say you have 60 people doing one kind of job. Normally, you'd expect that they'd help each other out, right? Here, you have 60 people, you give 60 separate lessons. There is no teamwork, no camaraderie. No one cares.

"The problem is fundamentally political," he continues. "In China you get paid when you work and when you don't work. So people don't work if they don't feel like it. Oh, the quality is quite good when they actually work, but they don't work all that often."

Maybe they need performance-based compensation systems, I suggest. "Yes, like the farmers. If a farmer works hard, he is allowed to make money. That gets back to the political issue again. From what I can see, the farmers live much better than the workers, much better."

* * *

At last, the perfect souvenir of Shenzhen. I am looking through the posters at the museum gift shop when I remember one I saw during my previous visit, high on a billboard overlooking a dusty thoroughfare. Our guide at the time explained it was one of Chairman Deng Xiaoping's sayings, a slogan for the special economic zone. I asked if she could translate it.

"Certainly," she replied. "It says, 'Time is money.' "

I ask the woman behind the museum gift shop's counter if I can buy a copy of the poster. "We make you one," she says. "It cost you $80, Hong Kong. We make it right now."

The woman and I haggle over the price. She gets my order up to two posters, but I get her unit price down to $50 (Hong Kong). We shake hands. I'm shuffled into a dark hallway with a long table and offered a seat. I watch as the official calligrapher, who has appeared out of nowhere, paints the two posters in fluid strokes. I start to thank him, but he stops me and lays out paper for a third poster. When he is finished, he holds it up. Wu translates. "It pledges that you and he will be friends forever." I thank the calligrapher profusely and go back to the front desk to settle my account. Wu is nodding at the posters stretched out on the counter. "Very nice," he says. "Time is exactly the same as money."

The whole transaction has taken about 12 minutes.

* * *

The iron rice bowl. That's what the Chinese call the system of guaranteed compensation, under which people get paid no matter what they produce. I first heard the term when I visited the Capital Iron and Steel Corp., a Beijing steel mill, in 1985. According to our Chinese guide, it had been one of the first enterprises to smash the iron rice bowl in the late 1970s and institute a kind of gain-sharing system whereby workers receive a relatively low base salary but get to keep a significant proportion of any increase in the company's profits. The result: production and profits had gone through the roof.

Our guide credited the company's aging leader, Zhou Quan, who had run the factory since 1949, with pushing through the change in the compensation system. The guide said Zhou, a hero of the resistance to the Japanese in World War II, had always had such ideas about management, but he had not been allowed to implement them until the economic reforms of 1979. "Some people did not want to lose the iron rice bowl," said the guide, "and they fought hard to keep it. But later, when people saw how much more they could earn with the new system, they became very enthusiastic."

Now the company is back in the news. According to the New York Times, Deng visited Capital Iron and Steel in May as part of his campaign to push economic reform. He complained about the resistance he has been getting from hard-liners, particularly the group of powerful octogenarians who, with Deng, are known as the Immortals. "Everyone says that I am the master planner for economic reform," he reportedly said during the two-hour visit. "But no one seems to be carrying out anything." Managers of Capital Iron and Steel recorded Deng's comments on videotape. The following day, the tape was confiscated by a representative of the Central Committee of the Chinese Communist Party.

What I find fascinating is that such a historic drama is being played out against the backdrop of a compensation debate. Compensation philosophies lie at the heart of the disputes raging today in the world's most populous country. It's gain-sharing versus the iron rice bowl, a piece of the action versus "guaranteed" wages, pay-for-performance versus a binding contract and the illusion of job security. Sound familiar?

* * *

Lunch at the Sichuan Gardens Restaurant in Hong Kong. Our host, Carl Leung, asks us what we'll eat. We say we'll try anything once -- which is how we wind up talking about equity sharing over duck-tongue salad, crispy-fried eel, and sautÉed goose intestine.

Leung is a salesman for Sunpac Orient Tours Ltd., working mainly with U.S. travel agencies to organize trips to Hong Kong and China. He says he's been with the company for almost 10 years. I ask how he is treated there. "Very well," he says. Does he own stock in the business? "Yes, the owner gave me and my colleague some stock about five years ago. He sensed we were getting bored and he wanted to keep us, so he made us part owners." Could Leung sell the stock if he wanted to? "Certainly. I could sell it to anyone. I could sell it to you." There must be some restrictions, I suggest. "No, not that I know of. You just need to find a buyer." You'd think the owner would be concerned about ending up with outside shareholders he didn't know or want. "That's why he keeps more than 50% of the stock for himself." Oh.

By the way, the food was terrific.

* * *

An Immortal died yesterday. His passing was marked with banner headlines in the Hong Kong newspapers. Of course, it's always big news when an Immortal dies, no matter where he or she may be living at the time. But the death of an Immortal is particularly big news in China, since there are so few Immortals left -- seven, to be exact -- and they rule the country. Like Immortals everywhere, moreover, they are pretty much dead set against change, or so it seems from today's obituary in the Standard. The newpaper's coverage includes a rundown of the surviving Immortals, with particular emphasis on their views about the current wave of economic reform. Never before had I realized just how isolated Deng Xiaoping is among his peers. Virtually all the other Immortals oppose the move toward a market economy, although one or two have allied themselves with Deng for political reasons.

So an awful lot seems to be riding on Deng these days, or perhaps on his daughters. Deng is 88 and in poor health, so his words often have to be interpreted by his daughters, who always accompany him. These same daughters keep him well stocked with books like Megatrends 2000. Weird.

Driving along a winding road on a wooded Hong Kong hillside, we pass a gorgeous mansion overlooking the bay. A silver Rolls Royce with the license-plate number 8888 is parked in the courtyard. The mansion belongs to a wildly successful entrepreneur who was born a peasant in China and became a shipping magnate in Hong Kong. He is said to have paid $1 million (HK) for the Rolls. That's barely half what he reportedly paid to acquire the license plate from its previous owner. The number 8, I'm told, is considered lucky in Chinese numerology, signifying wealth.

Unlike Americans, the Chinese are acutely aware of the importance of luck in the affairs of mankind. That's why they face their houses toward the sea, design buildings with large holes in the center to let the evil spirits pass through, and pay close attention to every conceivable number in their lives. I suspect this character trait works to their benefit in business. Without an adequate appreciation of luck, after all, you run the risk of thinking your successes are the direct result of your own brilliance. In business, such arrogance is usually fatal.

* * *

POSTSCRIPTS
From New York Newsday, August 9, 1992

China Laying Off in a Big Way

* * *


Attention government employees: Think you got it bad here? You could be in China.

Since January, 1 million people have been laid off from state-run companies, China's labor minister said.

Veteran leader Deng Xiaoping has pushed ahead with reforms aimed at raising the efficiency of money-losing state enterprises. One key reform is dismissals -- a daring move in a land where lifetime employment was a tenet of the communist system.

Some laid-off workers have managed to find work in the private sector, which generally pays better but does not provide the perks or the security of the state sector.

Ruan Chongwu, the labor minister, said dismissals were causing some discontent among workers but ruled out the formation of independent trade unions to defend workers' interests.

-- Reuters

* * *

In August the U.S. news media reported that a million people had converged on Shenzhen for a two-day sale of stock-application forms. The would-be investors came by train, bus, and plane from all over China, some with pockets crammed full of money collected from entire villages, hoping to win a chance to buy shares in a soft-drink manufacturer, a glass company, and an electronics producer.

The application sale was scheduled to start on Sunday, August 9. People began lining up on Friday. By Saturday the city was jammed, and fights were breaking out. Police used electric cattle prods, whips, and clubs to keep order. When that failed, they fired warning shots in the air. On Sunday the sale began -- and ended. Officials announced that all 5 million applications had been sold, but word on the street was that corrupt bureaucrats were keeping applications for themselves.

On Monday more than 50,000 disappointed investors gathered in a heavy rain outside the Shenzhen municipal offices, carrying signs demanding an end to corruption. The demonstration got out of hand. Stones were thrown. Government cars were overturned and set on fire. Plainclothes police officers were kicked and beaten. Finally, the riot police were called in to disperse the crowd with tear gas. The government denied reports that two people had been killed.


THE EMERGENCE OF A CHINESE ECONOMIC EMPIRE

Economic success is more than a matter of good government policy, brilliant management, or superior education. In virtually every corner of the world, there are some groups -- Indians in Britain, Armenians in France, Koreans in Los Angeles, Scots in Hong Kong -- who have a flair for entrepreneurship. Even when their numbers are small, their impact on local economies can be enormous.

Successful ethnic groups usually share certain characteristics -- a strong identity, communal self-help, a thirst for information and technology -- that are most effective when a group develops its networks across countries and continents, thus becoming a global tribe. The 1980s witnessed the Japanese's global reach. But the 1990s are destined to belong to another Asian group: the Chinese.

The emergence of the Chinese is already reshaping the world economy in everything from technology to manufacturing to finance. In America their impact will be felt as foreign competitors and partners and as one of our fastest-growing groups of immigrants. Like the Japanese, the Chinese have spread their operations around the world, but because of massive immigration, they have also become an intrinsic part of local economies from Indonesia to Manhattan.

Made up predominantly of small family-owned companies -- many of them with members on both sides of the Pacific -- Chinese-owned businesses can provide American businesses with critical access to markets, particularly in East Asia, which now boasts the world's fastest-growing economies. They can also help link Americans with some of the most effective manufacturing platforms in the world, from the ultra-low-cost regions of mainland China to the sophisticated producers of Taiwan and Hong Kong.

Perhaps the most important contributions of the Chinese can be found in the United States. Chinese-owned businesses such as Solectron, Everex Systems, and Kingston Technologies are among the most efficient U.S. manufacturers. And Chinese financial institutions, whose resources are rapidly outstripping those of the Japanese, increasingly seek out customers among non-Asian small businesses. Indeed, virtually everywhere they have settled in North America, from Silicon Valley to Flushing, N.Y., the Chinese have brought prosperity and a resurgence of entrepreneurial energy.

-- Joel Kotkin


A NETWORK OF SMALL FAMILY-OWNED COMPANIES

Emigrants, colonials, and residents of small, isolated states such as Taiwan and Singapore -- the overseas Chinese -- have eschewed Western-style capitalism and Japanese "companyism," developing a unique transnational economy relying largely on informal ties among its disparate members instead.

The Chinese businesspeople's progress stems largely from their ability to gain the confidence of others who can provide connections (or guanxi), as well as capital and other assistance needed to launch their entrepreneurial ventures. The most important network among the Chinese is the family, long the basis for Chinese society. Concern for the family and its long-term assets, not the company or the country, stands at the apex of priorities. The family also fulfills the practical need for reliable, motivated, and trustworthy workers.

Perhaps in no other segment has the effectiveness of family-based enterprise been more evident than in the garment industry. The Chinese role in garment production was greatly spurred by the influx into Hong Kong, Singapore, and other diaspora centers following the Communist takeover of the mainland, in 1947. Lacking the capital to revive their old businesses, the emigrants gravitated to garments, which required relatively small amounts of capital and a large supply of cheap, disciplined labor.

Today the Chinese model of family-based, widely dispersed enterprise has achieved global preeminence in the garment and textile industries. As early as the 1970s, Hong Kong had surpassed Italy as the world's largest exporter of clothing. Textile-production centers in China, Taiwan, and Hong Kong exported as much as those in Germany and Italy combined, and three times as much as those in Japan or the United States. And by the early 1990s many of the leading-edge producers from California, such as PCH and Bugle Boy, were owned by Chinese entrepreneurs who employed a network of production facilities, designers, shippers, and agents around the Pacific Basin and California.

The Chinese-based economy's market share in garments and textiles has grown far faster than any other economy's, more than doubling in size between 1982 and 1988, a trend expected to continue well into the next century. -- Joel Kotkin


CHINESE ENTREPRENEURIAL ENERGY IN THE UNITED STATES

California's roughly 1 million Chinese residents represent the largest diaspora settlement outside Asia. Many of the state's top engineers and scientists -- at least 12,000 in Silicon Valley alone -- are of Chinese descent. Increasingly, those engineers are emerging as more than just technological fodder for American companies. Hundreds of them have formed companies, often, like Denny Ko's Dynamics Technology, with financial links and production facilities within East Asia and mainland China.

"There are a lot of $30-million or $50-million companies that want to work with Americans and, unlike the Japanese, don't want to bite the hand that feeds them," says Ko, whose 70-person company garnered $7 million in sales last year. Perhaps equally important, Taiwanese like Ko bring with them skills often lacking in American companies. In a computer industry in which small upstart businesses often outperform large established companies, entrepreneurially oriented Taiwan possesses highly flexible, sophisticated prowess in manufacturing, an area where Japanese competitors have clobbered U.S. companies. It is likely no coincidence that at a time when many local companies are abandoning the grunt work of manufacturing, many businesses that were founded and are largely led by Chinese, such as computer makers Everex Systems and Solectron, havemade a point of maintaining strong local manufacturing presences.

Clearly, Ko's ventures have benefited both U.S. and Chinese companies. One of his companies, California Microwave, remains deeply entrenched in and controlled from Silicon Valley, employing hundreds of people there. His latest entrepreneurial venture, Dyna-Image Corp., a company that designs image processors for fax machines, does much of its research-and-development work in Sunnyvale, Calif., and provides U.S. companies with a much-needed alternative to Japanese suppliers.

Indeed, many, if not most, of Taiwan's leading computer and information-technology companies have established significant research-and-development pres-ences in the United States, usually in California. By the end of this year more than 200 Taiwanese companies, according to the Taiwan government's own estimates, will have invested nearly $1 billion in Silicon Valley, creating upwards of 16,000 jobs in the hard-hit electronics industry.

To Denny Ko, this relationship benefits both sides, providing Silicon Valley with needed capital and the incentive to cultivate new skills needed in world markets. It's more of a merger, he suggests, than a conflict.

-- Joel Kotkin


A GLOBAL NETWORK

Instead of following the strategic decisions of large institutions, Chinese capital tends to come from private investors and circulates freely from country to country, often through various branches of the same family. Members of the Chinese diaspora think not so much in terms of nations or states but of a seamless global network connecting communities united by a common ethnic identity. Chinese entrepreneurs remain, in essence, arbitrageurs, using their widespread international presence to identify critical business opportunities and develop the means to exploit them.

Overseas Chinese -- who account for the vast majority of foreign investment in China -- already have transformed the mainland's southern coastal provinces of Guandong and Fukien, the ancestral homes of most Chinese abroad, into arguably the world's most rapidly growing economic region. Capitalists from Hong Kong employ more than 2 million workers in Guandong alone. With economic growth there averaging better than 12% annually in the 1980s, exports more than tripled. Per capita output reached as high as four times the national average.

Besides absorbing roughly half of China's foreign investment, Guandong, with more than 70 million people, also has developed its own network of small private companies, which has helped reduce the share of the economy run by central planning to a mere 15%. Here local officials increasingly place greater emphasis on cultivating their overseas capitalist brethren than on pleasing their masters in faraway Beijing.

This slow process of economic integration with their capitalist cousins over time may do more damage to the Communists than the democracy movement itself could do. In the '80s China saw, in addition to its emergence as an economic power, the precipitous decline of its socialist structures, as the state-owned share of industry nationwide dropped from more than four-fifths of industrial production to barely half. In 1990 non-state-owned factories accounted for 70% of all industrial growth; the output from factories involving foreign investors, mostly Chinese ÉmigrÉs, grew at nearly 20 times the rate for government-owned plants.

The increasing personal contact between mainlanders and their diaspora brethren could prove equally corrosive to the Communist order. With more than 300,000 Taiwanese alone visiting the mainland every year, more and more mainlanders have become aware of the enormous strides made by Chinese who live in places like Taiwan or North America, whose governments generations of mainlanders have been brought up to revile.

If willing to capitalize upon their global experience, the Chinese, with their enormous human resources, historic flexibility, and entrepreneurial skills, have the potential to develop a worldwide presence not seen since the hegemony of the British. -- Joel Kotkin

The four excerpts are from the forthcoming book Tribes , by Joel Kotkin. Copyright © 1992 by Joel Kotkin. Used by permission of Melanie Jackson Agency. n

Last updated: Dec 1, 1992




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