In China, low-end industries give way to high-tech
By David Barboza
Friday, August 1, 2008
SHENZHEN, China: Few people have heard of the BYD Corporation — BYD for Build Your Dream — but this little-known company has grown into the world's second-largest battery producer in less than a decade of existence. Now it plans to make a great leap forward: "We'd like to make a green energy car, a plug-in," said Paul Lin, a BYD marketing executive. "We think we can do that."
Even in go-go China, such lofty aspirations may sound far-fetched. But BYD has built a 1.6-million-square-foot auto assembly plant here and hired a team of Italian-trained car designers; it plans to build a green hybrid by the end of the year.
No longer content to be the home of low-skilled, low-cost, low-margin manufacturing for toys, pens, clothes and other goods, Chinese companies are trying to move up the value chain, hoping eventually to challenge the world's biggest corporations for business, customers, power and recognition.
The government is backing the drive with a two-pronged approach: using incentives to encourage companies to innovate, but also moving to discourage low-end manufacturers from operating in southern China. That step would reverse one of the crucial engines of this country's spectacular economic rise.
But by introducing tougher labor and environmental standards and ending tax breaks for thousands of factories here, the government has sent a powerful signal about its global ambitions, and helped encourage an exodus of factories from an area long considered the world's shop floor.
President Hu Jintao hinted at China's Olympic-size ambitions during a meeting of China's scientific elite last June at the Chinese Academy of Sciences, where he called on scientists to challenge other countries in high technology. "We are ready for a fight," he said, "to control the scientific high ground and earn a seat on the world's high technology board. We will make some serious efforts to strengthen our nation's competence."
Government policies now favor high-tech economic zones, research and development centers and companies that promise higher salaries and more skills. A computer chip plant being built by Intel in the northern city of Dalian is welcomed; a textile mill churning out $1 pairs of socks is not.
"When a country is in its early stages of development, as China was 20 years ago, having an export processing center is good for growth," said Andy Rothman, a longtime China analyst at CLSA, the investment bank. "But there's a point when that's no longer appropriate. Now, China's saying, 'We don't want to be the world's sweatshop for junk any more."
Chinese firms are expanding into (or buying companies that work in) software and biotechnology, automobiles, medical devices and supercomputers. This year, a government-backed corporation even introduced its first commercial passenger jet, a move Beijing hopes will allow it to some day compete with Boeing and Airbus.
In some ways, the government is only riding the economic currents that come with development and high growth. For instance, many manufacturers in southern China — the country's biggest export zone — are moving to the interior because land and labor costs are cheaper, or expanding operations to include in lower-cost countries, like India, Vietnam or Bangladesh.
World-class brands that have grown dependent on outsourcing labor-intensive production to China are now searching for alternatives. Even the retail behemoth Wal-Mart, which moved its global procurement center here to Shenzhen in 2002, is going to be forced to find new sourcing channels to fill its 5,000 stores worldwide.
For millions of consumers around the world, experts say the policy shift could also mean higher prices for a broad array of goods, from pens and hammers to Barbie dolls and running shoes.
"Basically the cost of things China produces for Home Depot and Wal-Mart are going up," said Dong Tao, an economist at Credit Suisse. "But there is another side. In some areas that China's going to grab, like telecom equipment, they'll push prices lower."
Economists say China's development is following in the footsteps of Japan and South Korea, which successfully transitioned from low-skilled manufacturing to high technology, services and the creation of global brands.
There are still plenty of obstacles here, including weak intellectual property rights enforcement and a culture of copying or stealing technology from foreign companies or joint venture partners. But experts point to positives like a rising aggressive entrepreneurial class, legions of newly minted science and engineering graduates and a fiercely competitive domestic marketplace.
Peter Williamson, a professor of management at Cambridge University and co-author of "Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition," challenges the notion that China doesn't have technological know-how.
"They are some of the biggest in launching satellites. They have a lot of technology locked up in the military, and now the government is reducing budgets and pressing agencies to privatize," he said. "So suddenly, a lot of technology people thought didn't exist has come out from behind the curtain."
This is what China is betting on.
At BYD, executives are ramping up research and development spending, studying global marketing strategies. Founded in 1995 by a scientist who studied metallurgy, the company has made lithium batteries, cellphones, camera equipment, auto parts and other components for Nokia, Motorola and Sony, among others, gaining experience in producing high-quality goods.
"The technology for a car is not that sophisticated," Lin said. "It's big, but a lot of low technology." Five years ago BYD bought a state-owned carmaker to help make the transition.
Another company hoping to make the leap is Hasee, a fast-growing computer maker also based in Shenzhen, in an area that is home to Huawei, China's giant telecom equipment maker.
Founded just six years ago, Hasee is already selling 100,000 laptops a month and is the second biggest Chinese computer maker behind Lenovo, with revenue forecast to reach $800 million this year.
Hasee executives say the company is spending heavily on research and development, and that by focusing on innovative computers and laptops that now sell for just $370, it is on track to become the world's biggest computer maker within a decade.
"Our strategy in China is to always focus on innovation," said Zhang Xianyong, a Hasee vice president and sales manager for greater China. "We're now in the domestic market, but we'll spare no effort to grab overseas expansion."
Analysts say there are dozens of other little-known semiconductor, software and telecom equipment makers that could emerge as global companies over the next two decades.
The government is pressing companies to move up the value chain for economic, but also political reasons, analysts say. Promoting innovation and brand-name companies would probably bolster the economy and create better jobs.
The Hong Kong Small Business Association projects that by the end of the year, 20,000 factories in southern China will have closed or left China.
In April, Credit Suisse forecast that one-third of all export-oriented manufacturers could close within three years. And a study released in March by the American Chamber of Commerce Shanghai and Booz & Company, the consulting firm, says foreign investors are growing bearish on China and that rising costs are driving American manufacturing out of the country.
For many Chinese economists, that is just fine. "The low end industries used to make a great contribution to Guangdong," said Liang Guiquan, an economist at the Guangdong Academy of Social Sciences, a government think tank. "But an enterprise is like a creation. They must get used to changes in the environment. If the environment changes, they must die out."
