Thread: The rise of China's Communism 3.0

The rise of China's Communism 3.0 - International Herald Tribune


SHENZHEN, China: Few people have heard of the BYD Corp. - 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 by producing its own cars.

"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 150,000-square-meter, or 1.4 million-square-foot, auto assembly plant in this city next to Hong Kong, hired a team of Italian-trained car designers and plans to build a green hybrid by the end of the year.

Welcome to Communism 3.0. No longer content to be the home of low-skilled, low-cost, low-margin manufacturing for toys, pens, clothes and other good, Chinese companies are trying to move up the value chain, hoping to eventually challenge the world's biggest corporations for business, customers, power and recognition.

The Chinese 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 southeastern China, reversing one of the key engines of this country's spectacular economic rise.

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 desire to have Chinese companies move up the value chain, and also helped fuel an exodus of factories from an area long considered the world's shop floor.

President Hu Jintao hinted at the Olympic-sized Chinese ambitions during a meeting of the country'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 to control the scientific high ground and earn a seat on the world's high technology board," Hu said. "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 facility 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 China analyst at the investment bank CLSA. "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, biotechnology, automobiles, medical devices and supercomputers. Earlier this year, a government-backed corporation even rolled out 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 currents that come with strong economic development. For instance, many manufacturers in southeast China, the country's biggest export zone, are moving to the interior, where land and labor costs are cheaper, or expanding operations to 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 huge retailer Wal-Mart Stores, which moved its global procurement center to Shenzhen in 2002, is going to be forced to map out 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 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 the economic development of China is following in the footsteps of Japan and South Korea, which successfully shifted from low-skilled manufacturing to high technology, services and the creation of global brands.

There are still numerous obstacles here, including weak enforcement of intellectual property rights and a culture of copying or stealing technology from foreign companies or 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, challenges the notion that China doesn't have technological know-how.

"They are some of the biggest in launching satellites," said Williamson, co-author of "Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition." "They have a lot of technology locked up in the military, and now the government is reducing budgets and pressing agencies to privatize. 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, giving it 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 purchased a state-owned automaker to help make the transition.

Another company hoping to make the leap is Hasee Computer, a fast-growing computer maker also based in Shenzhen, in an area that is also home to Huawei, the giant Chinese telecom equipment maker.

Founded six years ago, Hasee is already selling 100,000 laptops a month and is the No.2 Chinese computer maker behind Lenovo, with revenues 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 is likely to 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. A study released in March by the American Chamber of Commerce in Shanghai and Booz & Company, the consulting firm, said foreign investors were growing bearish on China and that rising costs were driving some U.S. manufacturers out of the country.

For many Chinese economists, that's just fine.

"The low end industries used to make a great contribution to Guangdong" Province, said Liang Guiquan, an economist at the Guangdong Academy of Social Sciences, a government research institute in southeast China. "But an enterprise is like a creation. They must get used to changes in the environment. If the environment changes, they must die out."