Monday, October 03, 2005

China: Understanding the Opportunities

There have been a lot of people wondering about China as a place for business. While there is money to be made, people should go into the place with their eyes wide open about what it is all about.
While China may call itself "communist", that really isn't true any more. A simple definition of communism is a totalitarian system with means of production controlled by the State. With the large number of businesses now in existence, it has become a totalitarian state with the means of production owned by non-public enterprises. In addition, the state has become glorified, with a heavy emphasis placed on nationalism, and it has embarked on a large military build-up in order to gain control in the region. What you have in China today is a classic case of fascism. And in a classic fascist society, the government will do business with private individuals and foreigners as long as it advances its causes, and in China's case this means helping them in three main areas:
  • Economic Development - While people in the West see the large number of factories and shiny, towering buildings, the fact of the matter is that China has a severe unemployment problem. The Rand Corporation estimates the real unemployment rate in China is 23% of the total work force. That would be on the order of 150 million people who are unemployed. Read that number again. That is about the same number as the entire population of Japan, or the size of the entire U.S. work force. Another interesting data point in the WSJ today (paid link) is that only 5 million people (in a country of 1.1 billion) have incomes over $5,000 a year, or have any sort of disposable income.

    It doesn't get a lot of play over here, but this economic situation is bad enough that China has been experiencing a growing number of protests, which The Economist numbers at 74,000 last year. In fact, the Chinese Government recently issued an edict calling for the reduction in the gap between rich and poor in the country. This in a self-proclaimed "socialist paradise", mind you.

    So in order to maintain social stability and keep their grip on power, the Communist party needs economic development. Badly. And it will bend over backwards to get outside companies to set up factories there : tax holidays, trade credits, low wages, buildings, infrastructure, whatever you need to make a buck. Just hire some of their people and you're in.
  • Control of its Population - In order to push economic development, the company needs a modern infrastructure, including internet. The problem with the internet is that it is probably the greatest invention since the printing press for spreading information and reducing government control. So the Chinese government needs help from companies willing to help it with its broadband infrastructure, but at the same time provide censorship and control.

    Cisco, Microsoft, Yahoo, and "Do no Evil" Google have all obliged. They recognize the vast opportunities available in China, as long as they help the government suppress it's people.
  • Military Development - The third way to make money in China is to help them develop their military capability. The easiest way to do this is to sell "dual use" technologies, which our "allies" in Europe are trying desperately to do. But U.S. companies are not blameless as Loral, Hughes and others have been under congressional investigation or fined for dubious sales on the Mainland.
So opportunities exist there, just understand what you are getting into and how far you are willing to stretch your ethics in order to make a buck. In my opinion the ethical curve goes from highest to lowest in the order presented above, since it could be argued that helping people economically is a proven path to democracy, while helping China militarily will ultimately create more dissension in the region.
In a somewhat related note on China economic development, Electronics Today has started an interesting blog called The Silicon Road, which has views and news on electronics manufacturing infrastructure being set up in China.

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