The Chinese Achievement

If the 20th century was the American Century. Many economist predict the 21st century might be China. It has lifted more people from abject poverty in the fastest possible time. Cities like Shenzhen (China’s first SEZ) have grown from fishing hamlets to world class metropolises in 3 decades. Their growth rate has been staggering at double digits. Though the growth rate has slowed in recent years to 6.8% compared to India’s 7.1% (Reference). Though India should be cautious in its rejoicement over beating China in GDP growth rate as China’s 6.8% is on 11.2 Trillion USD economy, compared to India’s 7.1% on 2.264 Trillion USD economy, Since China grows on a larger principle, it is still growing faster than India adding more jobs ,enterprises and wealth to its economy.

How did they do it?

During the US-Vietnam conflict, Deng Xiaoping a high ranking member of the Communist Party visited Singapore to discuss on Cambodia’s involvement with the then Singapore Prime Minister Lee Kuan Yew. Deng Xiaoping expected to find another hamlet just like rest of Asia at that time but was surprised to find a developed city. He discussed the details with Lee Kuan Yew and was convinced capitalism was the way to build an egalitarian society (Reference). He went back and instead of attempting to redo the whole system which might not have been accepted by the Political system and population (Mikhail Gorbachev tried to open USSR up with Perestroika and Glasnost which failed miserably and led to the dissolution of USSR) . He set up a SEZ (Special Economic Zone) Shenzhen next to Hong Kong. To encourage Hong Kong entrepreneurs to set up enterprises there. The concept was a hit and many other SEZs were set up  to and China’s Economy grew rapidly.

Under the shiny coat?

Consider this sample situation to better understand the chinese economy.

A company say Nike opens a factory in China. It hires the local Chinese population who slowly rise through ranks in the organisation and now manage the entire factory. The shoes are designed in the Oregon, US design center or the Milan, Italy design center which provide the designs and blueprints for the manufacturing in Chinese factory. The Chinese employees in the factory take these designs and manufacture the shoes. To manufacture the shoes they using machines built in Germany, Japan, Korea, America, etc (The Chinese employees are capable of managing the entire factory including evaluating vendors from Germany and other countries for the machines and spare parts).

A couple of these employees are very entrepreneurial and feel they can do better and they start their own factory they are faced with three choices.

  1. They can manufacture designs whose patents have expired or difficult to enforce and sell under their own brand name. This works in case of raw materials industries (Chinese steel companies have managed to build a global presence in a short span out competing prices of local vendors in their respective countries), But in consumer goods they rarely succeed as they are considered cheap imitations. Even if they do they are valued only for their affordability a USP which is very hard to maintain (In, India Xiaomi built its reputation as an affordable phone with Hi end tech specs, they were able to maintain this reputation only for 3 years and were supplanted by One plus as affordable Hi spec brand).
  2. They can become an OEM manufacturer for Nike or other brands they would manufacture shoes at a price lower than Nike owned Chinese factory which would cause Nike to outsource manufacturing to them and reducing their overall investment in China. This would be good for the entrepreneurs but not for the Chinese Economy.
  3. They can manufacture the goods and spuriously brand them as Nike and attempt to sell them, As they won’t be able to use Nike’s authentic sales channel their goods will be sold as fakes and will never catch the large international market.
  4. They can try designing their own shoes this usually fails in established markets where players have existed for decades as the employees have very little design experience. Very few Chinese brands has global consumer appeal. Only Chinese brands in niche and new markets have little success (DJI which makes drones has good acceptance). This is China’s biggest problems for their economic size their Soft Power is almost negligible. This is why they may never become a superpower even if their economy grows to be multiples of the American economy. In the 21st century American soft power had a global reach be it their Jeans, Hamburgers or Hollywood Films, American hegemony always was a dominating influence.

Why India should find its own path

India and China posses many similarities both classical cultures with similar problems like overpopulation, poverty, poor rural development, etc. It is good to take inspiration from our Chinese counterparts but not advisable to imitate them.

Many argue that the Chinese environment is very conducive for entrepreneurs. It has been stated that even though India has a larger base of IT professionals. China has produced companies comparable on the global scale like Alibaba, Wechat, Baidu, Didi Chuxing, etc. While India has none.

The Chinese environment that has produced these companies are due to state protectionism .State protectionism is something that founders of Ola and Flipkart have been requesting the government to implement (Reference). It is true if that if India banned Amazon, Uber, Google and Whatsapp. Flipkart, Ola, Justdial and Hike probably would have become companies much larger than they are today.   

It should be noted that state owned or state protected enterprises do well only in the beginning in comparison to their free market counterparts. Example both North Korea and East Germany whose industries were state owned had better economies than South Korea or West Germany till the 1970s after which their free market counterparts. In fact South Korea’s largest Company Samsung Group has a Market Capitalization of $530 Billion USD which is 44 times larger than entire North Korean GDP of $12 Billion USD.

This is because in a free market environment forces companies to come up with products or services far superior to their global counterparts to survive. Out of the various Indian startups 99% of them may fail and only 1% succeeds. But they will be built in hot crucibles with the know how on how both in technological and business practices on how to beat their MNC counterparts and when they enter foreign markets they will succeed and become truly global MNCs. This is something lacking in China’s MNC’s as they are poor global competitor. Chinese MNCs like Wechat, Didi Chuxing or Baidu can’t truly be called Multinationals as they have poor usage outside China.

Hence it is advisable for us to continue on the path we are following now and not get influenced by Chinese state protected enterprises, and build our own Multinationals.