Wal-Mart is often demonized for its part in shipping U.S. manufacturing jobs overseas. It is difficult, however, to separate the role of Wal-Mart's thousands of suppliers in the migration of manufacturing out of the U.S. from the larger global trends realigning how and where the world makes things. If Wal-Mart has a unique part in the trend, it is in how expertly the company has managed that trend and, in so doing, accelerated it. China's low-cost manufacturing machine feeds Wal-Mart's critical mass by allowing companies to build assembly lines that are so huge that they achieve ever-greater economies of scale and drive prices downward all the more.
Wal-Mart's Chinese suppliers can achieve startling, market-shaking price cuts. By selling portable DVD players with seven-inch LCD screens from China for less than $160, for instance, Wal-Mart recently helped cut the price of these trendy devices in half. Even with superlow prices, Chinese factories can sell in such giant quantities that they willingly oblige. To get ready for its big Thanksgiving sale in 2002, Wal-Mart picked Sichuan Changhong Electric, one of the world's largest makers of televisions, to supply sets under the Apex Digital brand. Changhong makes 15 million TVs a year, most of them for export. Eight of 10 shipped overseas go to the U.S. In 2002, its sets at Wal-Mart sold for far less than comparable models from other makers, sometimes undercutting the competition by $100 or more. The models the company delivered for the sale helped the event net $1.4 billion.
In late December, state-owned Changhong reported nearly half a billion dollars in losses, purportedly linked to unpaid bills owed by Apex. The scandal, though mired in murky details, nevertheless highlights both the ability of China's big firms to sustain losses and keep running and their willingness to satisfy American retailers' demands for ever-lower prices.
11. There are hidden costs associated with doing business in China. Companies that engage with China must expect pressure to transfer their technology and thus create their own competition in the country. The Chinese use the carrot of their vast market to extract concessions from foreign firms that will help build China's industrial might. It is a policy worthy of grudging admiration. When viewed from the Chinese side, it has a long record of success.
Motorola virtually invented China's mobile-phone market. Its corporate archives show that the company knew that eventually the transfer of technology to China would sow formidable rivals. Nevertheless, Motorola decided its best strategy was to get into China early and to bring its best technology. The proof today is in the size and efficacy of the country's mobile communications network: Calls get through to phones in high-rises, subway cars, and distant hamlets -- connections that would stymie mobile phones in the U.S.
What no one at Motorola anticipated was how crowded the Chinese market would become. Nokia and Motorola now battle for market share in the Chinese handset business. German, Korean, and Taiwanese makers figure strongly. And all these foreign brands are now facing intense competition from indigenous Chinese phone makers. More than 40% of the Chinese domestic handset market now belongs to local companies such as Ningbo Bird, Nanjing Panda Electronics, Haier, and TCL Mobile. The domestic makers have become so strong that when Siemens found its mobile handset business in China wanting, it joined with Ningbo Bird to gain both low-cost manufacturing and a developed distribution channel. Yet Motorola can't exit the Chinese market. If it did, says Jim Gradoville, Motorola's vice president of Asia Pacific government relations, the Chinese companies that emerged would be the leanest and most aggressive in the world, and a company like his would have no idea what hit it. So Motorola stays. Already the largest foreign investor in China's electronics industry, Motorola plans to triple its stake there to more than $10 billion by 2006.
12. Piracy is a problem. Foreign companies have little defense against even outright theft of their technology in China. China's failure to police intellectual property, in effect, creates a massive global subsidy worth hundreds of billions of dollars to its businesses and people. By investing in the country's manufacturing infrastructure, by providing the expertise, machines, and software China needs to produce world-class products, the world is also helping assemble the biggest, most sophisticated, and most successful "illegal" manufacturing complex in the world.
Seen another way, China's loose intellectual property rules turn the tables on the Western colonial powers and the Japanese who throughout the nineteenth and early twentieth centuries violated China's land and people. As China grows into a great power, the wealth transferred into the country by expropriating intellectual property will propel it forward.
