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Old Sneakers

Written by Brian Hicks
Posted December 16, 2005

Some of you readers may have been wondering something since you started reading The Waking Dragon - why doesn't Sam talk about China as "the world's workbench" or recommend China plays that highlight the country's role as provider of low-cost labor to the world?

Why don't I push companies like Nike, who do well consistently and have long relied on cheap Chinese labor to sole Air Jordans and such?

Because that might be where China has been, but it's not where China is going.

This week, Nike announced that it would no longer be using the Chinese province of Guangdong to conduct most of its low-end manufacturing. Rather, Nike is turning to Vietnam in the next movement of what I call the Labor Wave.

China, for its part, is starting to treat low-end production like the old, stinky running shoes you keep in the back of the closet - you could wear them, but you'd rather not.

Upgrading the Shop

A recent editorial in China Times highlights the opportunities and challenges that confront China as it tries to shed its smog-ridden skin. The article notes that 80 percent of workers in the younger generation (i.e. those who have and will enter the workforce during China's boom decades) are more highly skilled than their forebears.

You've read in previous Waking Dragon reports that these days China is churning out high-level engineering graduates like they were sneakers. Hundreds of thousands of engineers emerge from their education every year looking for jobs that require skill and allow them to build a country whose wealth is not rooted in bottom-of-the-barrel wages alone.

Overseas firms have invested substantial amounts in research operations on the mainland, because the highly-skilled talent they need is still far cheaper in China than in the United States or the EU. The savings are there, but unlike the "sweatshops" we often hear about, R&D operations are helping to usher in a more educated, consumption-oriented Chinese middle class.

As recently as 1994, the National Science Foundation ranked China 30th in the world for U.S.-based R&D investment. By 2000, China had surged to #11 on the same list. And that doesn't even include more recent infusions of research capital by Cisco Systems, Nortel, and Google, among many others.

Self-Confidence

In 2004, Chinese domestic R&D expenditures (i.e. research conducted in China on behalf of Chinese sponsors) increased by 20% over the previous year. That means that Chinese businesses are eager to compete with the waiguoren (foreigners) for their own homegrown talent. The percentage of GDP that research operations account for is still short of the U.S. number, but only by a point or so.

This week, the Organization for Economic Cooperation and Development announced that China has surpassed the United States to become the world's largest exporter of information technology, or IT. So what does that say for the larger picture?

Ask Arthur Kobler, former president of AT&T's Chinese operations. He says, "It confirms that the Chinese economy is really moving up the value chain from simple manufactured goods like textiles, shoes and plastics to very sophisticated electronics."

Labor costs in China have been increasing by about 10 percent a year over the past couple of decades. This is where we get into the question of absolute vs. comparative advantage.

China does not have to set the limbo bar so low that it can't even bend underneath; it just has to be low enough to win the contest. Even then, the Chinese must ask themselves - as they are doing now - if aiming for the lowest common denominator really creates a society that is, in Chinese parlance, "harmonious."

As low-end factories have drawn sought-after capital, regional government officials have been prone to overlook environmental and human rights standards in their own zeal for personal advancement. The Communist Party meritocracy rewards economic growth heavily. But leaders at all levels, including Beijing, realize that sweat alone does not ensure stable growth.

It holds true in footwear and in macroeconomics: though your old shoes may be worn-in and comfortable, they smell like hell. Sometimes you have to grit your teeth and toss them out in favor of some bright, new kicks. You'll save your legs that way, and keep running far into the future.

- Sam Hopkins


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