Month: March 2013

China #1? Not for a while…

It certainly is a feasible scenario. A civilisation state that has undergone a transformation of tremendous proportions in every sense of the word, China has grown from a weak and humiliated child into an exceptionally rich and powerful dragon, making itself known across the world. Academics, businessmen and China watchers debate endlessly over if and when China will replace the US as the global hegemon, but there are more than just a few things it needs to get better at if it even has a hope of inheriting that status.

Shanghai, courtesy of Dainis Matison

Shanghai, courtesy of Dainis Matison

One inevitable consequence of China’s economic rise is a burgeoning middle class. While this presents opportunities such as increased domestic consumption, it is also completely changing China’s socio-economic landscape. While it still has a largely rural population, this is decreasing fairly rapidly. Michael J. Silverstein, senior partner and fellow of The Boston Consulting Group estimated that by 2020 the rural population would have dropped to just 45% as a result of increasing economic activities outside of the agricultural sector and the growth of jobs in the technology and finance sector. The struggle to get a job after graduating has become a very serious issue for families of students who in some cases spend their entire life savings to send their son or daughter to university. Add to this the fact that there is no state support for the poorest people to send their children to university or some cases even secondary school, and the picture is still quite miserable.

In the past ten years, the number of Chinese graduates has increased from one to six million. Competition for places at the best institutions is extremely intense and those students who do get a place and can afford it often come out of university unable to find a well paid job. In a society where people generally take care of their parents once they are retired, it can prove a nasty headache for parents with one child.

University students at Hangzhou, Zhejiang, courtesy of Laurence Whang

University students at Hangzhou, Zhejiang, courtesy of Laurence Whang

On a visit to Chengdu, Sichuan province last year, I spoke to a representative of the UKTI who said that while China is producing vast numbers of highly qualified recruits, graduates are more focussed on gaining employment inside government, preferring to reduce risk by avoiding the smaller privately owned businesses or tiny start-ups that don’t have the same intrinsic link to the state. This damages China’s global competitiveness and doesn’t encourage individualism, something that I believe leads to great inventions and business minds.

Another interesting trend is the reshoring of manufacturing jobs from Asian countries like China to the countries where the company originated from, or where its headquarters and research base is. In the US, with the shale gas boom in full swing, the increasing usage of automation systems and rising wages for factory workers in China, energy-intensive manufacturers are now investing in huge new facilities close to the oil and gas production facilities. Companies like US Steel and Chevron are spending many millions of dollars on brand new steel mills and chemical processing plants to take advantage of the cheap and plentiful energy supply.

Being located closer to customers is hugely beneficial to companies that outsource their production not just because of rising minimum wages in countries like China and the ever-rising costs of shipping, but also because of the possible theft or compromise of security of intellectual property. R&D into the newest projects happens largely at facilities located inside the US, but a highly skilled technician and a knack for reverse engineering could damage the interests of not just a business, but an entire country.

A Pennslyvanian fracking station, courtesy of Jeremy Bucking MLC

A Pennslyvanian fracking station, courtesy of Jeremy Bucking MLC

So, despite China growing fatter than the US, it is not yet smarter. The US and countries inside the EU still lead the way in terms of soft power (or cultural influence), technological and scientific capability and have long-established and stable political systems which allow for freedom of speech and encourage entrepreneurialism, one of the fundamental concepts that supports capitalism. Chinese films may not have their own aisle at John Lewis for another hundred, if not a thousand years yet.

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