China’s Global Competitive Advantage: The Beginning of the End, or the End of the Beginning?

On August 5, 2010, I had a short note published in The Australian, entitled: "Why it's Time for China's Next Evolution: the Low Wage Advantage is Peaking." What follows is the original version that was edited for newspaper publication:

2010 is a milestone year for China. For three decades, China has grown into a world economic presence, if not powerhouse -- slowly, at first, and now full-fledged -- in an unprecedented, consistent, and consistently monotonic, success story. It is, to be sure, an extraordinary achievement; but, it’s also time for a change!

2010 also represents a major transition point in the China growth story. In fact, I am reminded of the metaphor of “shifting gears in a moving vehicle in order to adjust to a change in the road conditions”; will it work or won’t it? 2010 is the year that the traditional engine of China’s growth requires a “shifting of gears.” Let’s be sure that we understand what is happening on the path to continued Chinese growth, and why it matters. If we are sober and honest, China’s last three decades’ wildly successful [re-] debut onto the world economic stage has been all about cheaper labor; and lower costs. No doubt, there is an extraordinarily attractive domestic market, as well, but China’s real advantage in the global economy has been low-wage manufacturing labor. It has not been innovation! It has not been services! It has been single-focused on the advantages of making existing products cheaper; full stop! If we follow Deng Xiaoping’s admonition to “learn truth from facts,” we can answer a series of probing questions with the same response. Has there been a Chinese enterprise who has created a noteworthy new product innovation, such as: Xerox’s [PARC] personal computer? Kodak’s digital camera? Boeing’s 747? Philips’ CD? Sony’s walkman? The answer is “no.” A process innovation as noteworthy as Toyota’s production system, or IKEA’s shopping-maze design? No. An internet offering as noteworthy as Amazon or Facebook? No. A business model innovation as noteworthy as the iPod/iTunes rewiring of the customer listening experience, or Zara’s reinvention of the frequency of fashion offerings, or eBay’s community of members? Again, no! In truth, China’s growth has been powered by not by doing things -- any thing -- differently; but, by doing existing things less expensively; and that takes cheap labor.

Now, here’s why 2010 is so important. This year is the year in which China’s “working age” population reaches its highest level. In 2010, 71.9% of the Chinese population is between the ages of 15 to 64, which has been depicted by statisticians as the ages at which people make a net-positive contribution to economic value-creation. After this year, that proportion of the population will decline, and after 2015 the actual number of Chinese working-age people (15-64) will also begin to decline. As long-time China watcher Philip Bowring recently observed in The International Herald Tribune: “For China as a whole there are currently only 106 million workers in the 15-19 age group compared with 122 million in the 20-24 group. China now has 378 million in their 40s and 50s but only 273 million under 20. The decline, which is continuing, in the number of the young and mobile has been greatest in rural areas. So China will have to find other ways of sustaining economic growth and gains in worker productivity.” The obvious way for that to happen is through innovation, but here we have no reason to argue why the past -- i.e., no innovation -- will no longer be a good predictor for the future.

The conundrum underlying all of this is that there is lots of creativity in China today. The art scene; fashion; sculpture; music; cinema. China is awash with creativity. But, if you look closely, what you see is that this innovation is individual innovation, not organizational innovation. What sets the eBays and Amazons and Apples apart is that they are all “organizational” innovation. The iPod experience could not have been designed by one person; it needed a team, and a diverse team at that. Same is true behind most of the big innovations of recent times. Yet, what is it about Chinese organizations that they turn out to be so much less innovative than the sum of the people who are brought together under that organizational structure? Is it that the command & control approach to management which has characterized thousands of years of Chinese history is still hard to break? Or, is it Confucian respect for hierarchy and relational prerogatives? Is it not enough trust; or too much trust? Is it not enough diversity? Or, is it something else? This is China’s time to address the innovation issue, so that its prior successes represent the “end of the beginning” -- a period of time when China moved from being the factory of the world into a world-class innovator. If this does not happen, then we are likely looking at the “beginning of the end” of China’s distinctive competitive advantage; and a movement into a time when China is just another low-wage producer, bigger than most, but no longer either the biggest or the lowest priced.