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Excellent Background, July 9, 2010
Ho-fung Hung is an assistant professor of sociology at the University of Indiana. His collection of essays ("China and the Transformation of Global Capitalism") provides an excellent short background on the start of China's economic miracle, and then evolves into providing an eye-opening view of the current status of important Chinese clothes and shoe manufacturers.
China is anything but ideology-bound when it comes to economic policy. Recent astonishing rates of state-directed urbanization and huge mega-projects (airports, high-speed trains, roads, dams, canals, power generation) suggest China acts like a Keynesian state, contrary to the neoliberalism ('Chicago-school') associated with its earlier downsizing the size and role of the state. That period included the earlier corporatization of state-owned enterprises (SOEs) - telling them they no longer could depend on government for financing and eliminating deficits, and dismantling the welfare state (K-12 education, health care, pensions). Now it is moving back to a more balanced approach - providing minimum living allowances for farmers, increased health spending and establishing a national health insurance system, and increased K-12 and university spending. Further, K-9 education has been made both mandatory and free. However, China's government still plays a major leadership role in the economy - controlling access to cheap credit, providing protection from external competition, assisting access to export markets (includes not antagonizing/sanctioning others) and foreign technology, and discouraging 'excess' internal competition in areas requiring expensive R&D and/or equipment. Government's subordination of labor unrest in export-led areas (a tricky balancing act given constitutional text stating that workers are the masters of society) has also played a major role in making the nation more attractive for foreign investment. Public officials must receive periodic training from a network of 2,800 schools before becoming eligible for promotion. (An implicit assumption is that top-quality minds were recruited into economic analysis and policy-making - Korea and Japan select from the top 2% of exam-takers, Singapore identifies the best students in secondary school and provides them with college scholarships, Taiwan recruits from its leading university and requires graduate training abroad - it has also cut the number of agencies in half - "Transferable Lessons," Peter Evans; China has a long history of requiring high examination scores to qualify for government work, and the CCP actively recruits star students and wealthy entrepreneurs.) Finally, this all had to be followed up by insuring that profits were reinvested rather than channeled into speculation or consumption, and that policies did not work at cross-purposes.
China has largely followed the lessons of its Asian predecessors - Japan, Hong Kong, Taiwan, South Korea, and Singapore. Confucian values - starting with loyalty to and respect for leaders (presumed autocratic) provided the foundation. Each of these Asian entities, with the exception of Hong Kong, began its economic transformation under the leadership of a strong, long-term autocrat. Social harmony, another Confucian value, has been boosted by state-encouraged nationalism - regaining Hong Kong and Taiwan, international sports competition, the Beijing Olympics and the 2010 Shanghai World's Fair, religious limitations (eg. the head of China's Catholics must pledge allegiance to Beijing, not Rome), the secret police, severely restricting alternatives to the Chinese Communist Party (CCP), CCP control over the leadership and budgets of the 8 approved 'democratic parties,' selective CCP membership (5.6%) disciplined with the threat of explusion, CCP control over leadership of large businesses - include private, having judiciary and local government units subservient to CCP leadership, and censorship. Confucian-valued dedication to personal hard work, and respect for learning also helped, along with an approximately 50% savings rate. From its Russian comrades, China also learned that World-Bank, IMF, and American-prescribed 'shock-therapy' had brought the downfall of the prior communist states in Europe. Export-oriented industrialization has been China's emphasis until recently. Probably the most accurate description of China's economic transformation is that it has been a series of experiments, starting with testing the idea of restoring free enterprise (and self-responsibility) to farmers - a move that created a huge surplus of labor, establishing special economic zones in easily-accessed coastal areas, 'coordinating' (initially, Japan - advanced products, others - medium-level sophistication, China - high-labor content; now China = final assembler and exporter in an east Asian production network) product offerings with other Asian nations, and then allowing foreign firms, along with their capital, technology, and ideas to enter.
The major thrust of "China and the Transformation of Global Capitalism" is to show how its suppliers have grown in size and scope to better serve and counter large U.S. retailers such as Wal-Mart, JCPenney, Target, etc., allowing major increases in China's market share since the 2005 expiration of the 'Multi-Fiber Agreement' that limited each nation's exports to developed nations. These developments have reduced the market-making power of large foreign firms to now dominate or even move into China's retail market, and increasingly threatens their long-term home-base strength as Chinese firms acquire more indigenous innovation, and bricks-and-mortar and Internet marketing skills.
Appreciating the muscle of large Chinese clothing manufacturers first requires unlearning many lessons of modern American manufacturing management. Contrary to our experience that the era of gigantic company towns (Cannon Mills, Fordlandia), and facilities (River Rouge) is over, replaced by decentralized, 'mass-customization' production, China has numerous very large production centers, some employing hundreds of thousands, with company-supplied room-and-board. These allow employers to achieve scale economies, not only in manufacturing, but also in the provision of room-and-board and transportation to work - 'passed on' to workers and customers in the form of lower wages than otherwise. Critical functions such as inventory management, sales forecasting, design, and logistics control often migrate to these Chinese firms - in some instances with extensive IT capabilities as well. Job enrichment (eg. job rotation, using higher-level skills) and job enlargement (broadening the number of steps performed) receive little/no attention - specialization and learning-curve maximization rule. Another major difference - vertical integration is common. Unfortunately, so are Dickensian working conditions (especially outside China), abetted by the ability to move production among a number of factories located in several poor nations.
Examples: Nien Hsing Textile is the world's largest denim manufacturer (18,000+ workers, 11 factories), serving fashionistas through Calvin Klein, DKNY, Hilfinger, Nautica, and GAP, as well as plebeian private-label shoppers at JCPenney, Wal-Mart, Target, and Sears. Esquel Group, 47,000 employees, is one of the world's leading producers of premium cotton shirts. It not only grows its own cotton, but does its own ginning and seed production, and operates stores in China as well. TAL produces 12+% of U.S. dress shirts for high-level vendors such as Brooks Bros. and Lands' end, as well as JCPenney. TAL synchronizes production with Penneys' store-level demand - bypassing both JCPenney warehousing and corporate decision-making. Liz Claiborne designers meet directly with Luen Thai Holdings at its 2 million square-feet factory to reduce their combined R&D and design staff; Luen Thai also makes back packs and PC carriers, and arranges store-direct delivery.
Li and Fung Group (35,000 employees in 40 countries; $17 billion in 2008 revenues) has nearly 900 retail outlets in China and other Asian nations that it operates for Circle K, Toys "R" Us, high-end men's clothiers (including its own), and others. Some of its marketing entities include Internet marketing. Its main activity is contract manufacturing - drawing upon a network of 10,000-some manufacturers, its own staff, and others to design, manufacture, and deliver. Yue Yuen/Pou Chen Industrial Holdings is the world's largest maker of branded athletic and casual footwear (280,000 employees, about $5 billion/year revenues), with 434 footwear lines - now expanded into safety-shoes. Other products include jackets and back packs. Customers include Nike, Reebok, Adidas, New Balance, Puma, Timberland, and Rockport. The firm produces its own machinery, and manages over 640 stores and 2,100 distributors in China; it does not, however, produce shoes with its own or a private-label.
Side Note: It is often difficult to determine ownership of firms operating in China, thanks to confusing levels and regulations. Sometimes what appears to be privately owned is actually majority-owned by the government, and often indigenous firms are disguised through exporting capital to Hong Kong where it is re-imported through a 'foreign-investment entity' (at least 25% foreign owned) to create 'foreign direct investment' and receive preferential regulatory, banking and tax treatment.
Bottom-Line: Ho-fung Hung's "China and the Transformation of Global Capitalism" is a wake-up call for American businesses and political leaders about the need to consider the implications of China's ascendancy for global capitalism. His book reveals that much 'soft-goods' production in China takes place on a very large scale, utilizing considerable years of experience, sophistication, capital, and personnel. Further, many of...
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