The China Effect
Forget the future tense. It’s not that China is going to change the world of work as we know it. China is already changing it, a trend that will only intensify in coming decades.
It’s all about the human resources. “China now has close to 1.5 billion people – perhaps the greatest natural resource on the planet,” writes Ted Fishman, author of the recently released China Inc. But it’s not just about the sheer numbers of people. Some experts describe Chinese workers as exceptionally self-disciplined and able to adapt to new circumstances, reducing the need for supervision. Fishman states that in a Chinese manufacturing plant, the ratio of managers to workers can be as low as 3 to 1,000 (Fishman, 2005a).
This is a great advantage in a country where plant operations generally rely on inexpensive labor rather than robotics. The average Chinese employees earn about 64 cents per hour, according to the Bureau of Labor Statistics estimate (Fishman, 2005a). Meanwhile, people are flooding into Chinese cities every day looking for work. Over the next quarter century, more than three hundred million Chinese are projected to migrate from the rural areas into the urban centers (“Supersized,” 2005).
This doesn’t mean, however, that China is impervious to the laws of labor supply and demand. Indeed, some parts of China’s super-heated economy are already starting to feel the pinch of labor shortages. Guangdong and Fujian, where much of China’s business activity takes place, are experiencing shortfalls of nearly two million workers. This is a sign that China’s workers increasingly have choices about where they’re employed, requiring employers to pay greater attention to the work environment (Yardley and Barboza, 2005).
China is managing its economy in such a way that ultimately it won’t need to rely on cheap labor. In just a few years, the nation has raised the percentage of high school graduates who are able to find places in college from 4% to over 17%. And it has raised the number of college graduates from 1.5 million as recently as 2002 to a projected 3.5 million in 2005 (“R&D,” 2005).
Many of its students are graduating in the fields of science and engineering, potentially leading to greater innovation in the future. Although China is spending less than the U.S. on R&D, it may be getting a huge bang for its buck because Chinese engineers and scientists earn much less than their U.S. counterparts. China has 1.3 million researchers, compared with 743,000 in the U.S. (Fishman, 2005b).
Moreover, these researchers are not starting from ground zero in the design and development game. Many corporations have agreed to transfer their technological know-how to Chinese operations in exchange for receiving access to potentially enormous Chinese markets (Witty, 2005).
Companies are having a hard time keeping their technological secrets even if they don’t agree to share them. “I think Americans have grossly underestimated the problem of intellectual property rights as it applies to China,” warns Ohio State’s Prof. Oded Shenkar, author of a new book called The Chinese Century. “Until China emerged, the countries that tried to copyright technology had very limited capabilities. But for the first time, you have a country that has the capability to copy the technology developed by others, and also a disregard for intellectual property rights that allows them to do it” (Grabmeier, 2004).
For the U.S. and other developed nations, China’s influence has daunting implications. Workers as well as companies in those nations must increasingly compete with their Chinese counterparts head to head. Already, companies are referring to the lowest possible price available for a product as “the China price.” BusinessWeek notes, “In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials.” This price is one of the biggest reasons the U.S. has lost 2.7 million manufacturing jobs since 2000 (Engardio et al., 2004). It drives U.S.-based manufacturing plants to either become much more productive or give up on their current lines of business.
But even higher productivity won’t be enough to compete with China if the nation can maintain social and economic stability. The race for innovation is just beginning. If organizations in developed nations don’t excel in this area, then companies in China and India will simply overwhelm them with superior numbers of scientists and engineers. And organizations must be able to protect their intellectual property once they’ve created it. “Right now, U.S. companies have to start thinking from the design stages about how they can design products that are difficult to copy,” notes Prof. Shenkar (Grabmeier, 2004).
Ultimately, though, staying competitive will require a major shift in social assumptions. “The main challenge to America today is from those practicing extreme capitalism, namely China, India and South Korea,” writes New York Times columnist Thomas Friedman (2005). Not just businesses, but all of society must gear up to the challenge.
For an article about Oded Shenkar‘s The Chinese Century, click here.
For an excerpt from Shenkar’s book, click here.
For an Inc. magazine article by Ted C. Fishman, click here.
For a BusinessWeek article entitled “The China Price,” click here.
For graphs on China from a recent government study, click here.
For a Boston Consulting Group/Knowledge@Wharton special report called “Overcoming the Challenges in China Operations,” click here.
For more on a Deloitte Research article that describes the risks of doing business in China, click here.
Subscribers to the New York Times Web site can find an article on labor shortages in China by clicking here.
Subscribers to the New York Times Web site can find Thomas Friedman’s article “It's a Flat World, After All” by clicking here.
Documents used in the preparation of this TrendWatcher include:
“East, East, and Away: Will Your Job Move to China?” Knowledge@Wharton, November 17, 2004.
Engardio, Pete, Dexter Roberts and Brian Bremner. “The China Price.” BusinessWeek, December 6, 2004.
Fishman, Ted C. (2005a, January 10) “The Chinese Century.” New York Times Upfront, pp. 8-11.
Fishman, Ted C. (2005b, March) “How China Will Change Your Business.” Inc. WilsonWeb.
Friedman, Thomas L. “It’s a Flat World, After All.” New York Times Magazine, April 3, 2005.
Grabmeier, Jeff. “China Could One Day Pass U.S. as Major Economic Power, Book Says.” Research News, November 8, 2004.
“R&D in China: The Next Frontier or a Sure Bet to Squander Intellectual Property?” Knowledge@Wharton, Special Section, 2005.
“Supersized! China’s Economy Booms.” Current Events, February 11, 2005, p. A1.
Witty, Susan. “The Perils of Economic Glory.” Barron’s, March 7, 2005, p. T5.
Yardley, Jim and David Barboza. “Help Wanted: China Finds Itself w ith a Labor Shortage.” New York Times, April 3, 2005.
It’s all about the human resources. “China now has close to 1.5 billion people – perhaps the greatest natural resource on the planet,” writes Ted Fishman, author of the recently released China Inc. But it’s not just about the sheer numbers of people. Some experts describe Chinese workers as exceptionally self-disciplined and able to adapt to new circumstances, reducing the need for supervision. Fishman states that in a Chinese manufacturing plant, the ratio of managers to workers can be as low as 3 to 1,000 (Fishman, 2005a).
This is a great advantage in a country where plant operations generally rely on inexpensive labor rather than robotics. The average Chinese employees earn about 64 cents per hour, according to the Bureau of Labor Statistics estimate (Fishman, 2005a). Meanwhile, people are flooding into Chinese cities every day looking for work. Over the next quarter century, more than three hundred million Chinese are projected to migrate from the rural areas into the urban centers (“Supersized,” 2005).
This doesn’t mean, however, that China is impervious to the laws of labor supply and demand. Indeed, some parts of China’s super-heated economy are already starting to feel the pinch of labor shortages. Guangdong and Fujian, where much of China’s business activity takes place, are experiencing shortfalls of nearly two million workers. This is a sign that China’s workers increasingly have choices about where they’re employed, requiring employers to pay greater attention to the work environment (Yardley and Barboza, 2005).
China is managing its economy in such a way that ultimately it won’t need to rely on cheap labor. In just a few years, the nation has raised the percentage of high school graduates who are able to find places in college from 4% to over 17%. And it has raised the number of college graduates from 1.5 million as recently as 2002 to a projected 3.5 million in 2005 (“R&D,” 2005).
Many of its students are graduating in the fields of science and engineering, potentially leading to greater innovation in the future. Although China is spending less than the U.S. on R&D, it may be getting a huge bang for its buck because Chinese engineers and scientists earn much less than their U.S. counterparts. China has 1.3 million researchers, compared with 743,000 in the U.S. (Fishman, 2005b).
Moreover, these researchers are not starting from ground zero in the design and development game. Many corporations have agreed to transfer their technological know-how to Chinese operations in exchange for receiving access to potentially enormous Chinese markets (Witty, 2005).
Companies are having a hard time keeping their technological secrets even if they don’t agree to share them. “I think Americans have grossly underestimated the problem of intellectual property rights as it applies to China,” warns Ohio State’s Prof. Oded Shenkar, author of a new book called The Chinese Century. “Until China emerged, the countries that tried to copyright technology had very limited capabilities. But for the first time, you have a country that has the capability to copy the technology developed by others, and also a disregard for intellectual property rights that allows them to do it” (Grabmeier, 2004).
For the U.S. and other developed nations, China’s influence has daunting implications. Workers as well as companies in those nations must increasingly compete with their Chinese counterparts head to head. Already, companies are referring to the lowest possible price available for a product as “the China price.” BusinessWeek notes, “In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials.” This price is one of the biggest reasons the U.S. has lost 2.7 million manufacturing jobs since 2000 (Engardio et al., 2004). It drives U.S.-based manufacturing plants to either become much more productive or give up on their current lines of business.
But even higher productivity won’t be enough to compete with China if the nation can maintain social and economic stability. The race for innovation is just beginning. If organizations in developed nations don’t excel in this area, then companies in China and India will simply overwhelm them with superior numbers of scientists and engineers. And organizations must be able to protect their intellectual property once they’ve created it. “Right now, U.S. companies have to start thinking from the design stages about how they can design products that are difficult to copy,” notes Prof. Shenkar (Grabmeier, 2004).
Ultimately, though, staying competitive will require a major shift in social assumptions. “The main challenge to America today is from those practicing extreme capitalism, namely China, India and South Korea,” writes New York Times columnist Thomas Friedman (2005). Not just businesses, but all of society must gear up to the challenge.
For an article about Oded Shenkar‘s The Chinese Century, click here.
For an excerpt from Shenkar’s book, click here.
For an Inc. magazine article by Ted C. Fishman, click here.
For a BusinessWeek article entitled “The China Price,” click here.
For graphs on China from a recent government study, click here.
For a Boston Consulting Group/Knowledge@Wharton special report called “Overcoming the Challenges in China Operations,” click here.
For more on a Deloitte Research article that describes the risks of doing business in China, click here.
Subscribers to the New York Times Web site can find an article on labor shortages in China by clicking here.
Subscribers to the New York Times Web site can find Thomas Friedman’s article “It's a Flat World, After All” by clicking here.
Documents used in the preparation of this TrendWatcher include:
“East, East, and Away: Will Your Job Move to China?” Knowledge@Wharton, November 17, 2004.
Engardio, Pete, Dexter Roberts and Brian Bremner. “The China Price.” BusinessWeek, December 6, 2004.
Fishman, Ted C. (2005a, January 10) “The Chinese Century.” New York Times Upfront, pp. 8-11.
Fishman, Ted C. (2005b, March) “How China Will Change Your Business.” Inc. WilsonWeb.
Friedman, Thomas L. “It’s a Flat World, After All.” New York Times Magazine, April 3, 2005.
Grabmeier, Jeff. “China Could One Day Pass U.S. as Major Economic Power, Book Says.” Research News, November 8, 2004.
“R&D in China: The Next Frontier or a Sure Bet to Squander Intellectual Property?” Knowledge@Wharton, Special Section, 2005.
“Supersized! China’s Economy Booms.” Current Events, February 11, 2005, p. A1.
Witty, Susan. “The Perils of Economic Glory.” Barron’s, March 7, 2005, p. T5.
Yardley, Jim and David Barboza. “Help Wanted: China Finds Itself w ith a Labor Shortage.” New York Times, April 3, 2005.