Feature - spring/summer 2007

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China Conundrums

Traveling with Notre Dame MBA students in Shanghai and Beijing, one confronts the contradictions, complexity and vitality that mark today’s China.

By Mary Hamann

Arriving in Shanghai at night was a feast of color. As our buses made their way along the huge elevated highways that sweep the city, we stared at seemingly endless rows of apartment buildings and skyscrapers, many adorned with lights. Blue. Red. Green. Gold. Lights scaled entire buildings and formed window-sized Chinese characters. Familiar American company names scrolled by the tops of skyscrapers. As the Notre Dame MBA students and I gaped out the windows of our bus, I was reminded of a fireworks celebration.

Later, Professor Jim McAdams, Ken Levine (MBA ’07) and I walked along the Huangpoo River and looked across at a skyline that did not even exist 15 years ago. Now, Shanghai has more than 3,000 high-rise buildings, reports China Daily. Along with other foreign visitors, we eased our way down to Nanjing Road, soaking in the sight of confident Asian businesspeople and wealthy young Chinese couples strolling arm in arm.

After a leisurely dinner, we traveled back the way we came. By now, it was around 10:30 p.m. All of the brilliant lights had been turned off. Walking down Nanjing Road, we noticed trash in the streets. In the shadows, we passed an old man sleeping in a doorway. Then, we saw a mother begging with her toddler daughter and a handful of teenagers cornering a rat.

Two hours earlier, gazing at the illuminated skyline, McAdams, a political science professor, had mused, “The Chinese will take over the world.” Later, gazing at the forlorn face of Shanghai in the dark, he talked about how corruption can pose seemingly insurmountable problems for communist countries transitioning to market economies.

Which view of China is true? Is the future bright or dark? The conundrums are inescapable and the questions daunting. What lies ahead for this ancient people—and for the United States and the rest of the world—as the Chinese economy moves forward with determined momentum on an uncharted path?

Putting students face to face with the opportunities and contradictions of China is the aim of “Close-Up on the New China,” a 10-day immersion program in Suzhou and Shanghai, China. The program, which has been offered every semester for the past two years and attracted 74 students in spring 2007, is presented by The Global EduTech Management Group, an organization which splits time between instructing Westerners on how to conduct business with, and in, China and educating Chinese nationals about western business practices.

“As important as China is becoming as a market and as a producer,” said Associate Dean Ed Conlon, “students need to become familiar with China, to see what’s going on, to understand and deal with these trends.”

An Economy in Fast Forward

In her presentation to the Notre Dame students, Laurie Underwood, director of external communications for China Europe International Business School, said, “China now has the fourth largest economy, and quite a number of analysts think that China and the United States could be tied for the size of the economy by 2050.” She related other key indicators. Gross domestic product growth has been rising at more than 10 percent for the past decade in China. Since joining the World Trade Organization in 2001, China has opened new markets, previously closed, with great rapidity. Foreign investment now employs 10 percent of China’s labor force. So, one in 10 adult Chinese is working for a multinational company.

“I am most surprised by the speed of development,” said Management Professor Jerry Wei, who was a faculty advisor to the China study program. “We see it in advanced countries, but not in 10 to 15 years.”

Notre Dame students entered the Suzhou Industrial Park (SIP), following in the footsteps of U.S. and European businesspersons weighing foreign investment in China. They received the same star treatment. Young Chinese men in blue uniforms greeted the buses and ushered the students inside where they were met by salespersons in black business suits. They escorted the students into a large conference room, decorated with bunting and pink orchids.

“Welcome new friends,” said Wu Shu Bai. He told the group that the SIP park was founded in 1994 and is a joint venture between China and the Singapore government. Formerly, the Suzhou area, which is located outside of Shanghai, consisted of farms and rice paddies. In the last decade, Suzhou has become an important economic engine of the new China. More than 110 companies from the Fortune 500 now operate in the city of Suzhou—66 in this single office park. In all, 2,642 foreign enterprises are set up here. An educated workforce, whose average age is 26, is rewarded with pay and benefit packages that rival almost any in China.

After the presentation, the students viewed the master plan for SIP. The room-sized diorama of lighted building models showed what the park will—or may—become in the next 15 years. Only about 15 percent of the buildings we see have been built, but construction is underway, we are told.

Wu has a vision for his country. When asked what concerns him most about the Chinese economy in the next 50 years, he leaned forward in his black swivel chair, dismissed any pessimistic thoughts, and said, “In 50 years, China will become a bigger SIP.”

But will it? Later, we drove down the industrial park’s enormous landscaped boulevards, home to huge office buildings, warehouses and rows of shiny new apartment buildings. It is an idyllic setting. But on closer inspection, many warehouses, office buildings and apartments are empty.

“At SIP, you see the Chinese preoccupation with infrastructure,” explained economist Foong Wai Fong, a program instructor and director of Megatrends Asia. “Government builds and builds. Too many high rent apartments stand empty. [There are] not enough apartments workers can afford.”

As the Chinese government and Suzhou officials bet on continued unprecedented economic growth, some experts caution that economic slowdowns are inevitable and that there may be other roadblocks ahead. Economist Harvey Chen, a program instructor, fears that Chinese officials lack the technical expertise to steer a sound financial course as the country deals with currency issues, capital markets and the banking industry. When market fluctuations occur, he is concerned that the government will overreact and seek a short-term solution that could undermine credibility in the government’s policies and cause long-term damage to the markets.

Yet, as the world watches, China is investing in astounding infrastructure projects. According to Foong, the country is a massive construction zone: 300 cities are currently under construction. About 500,000 miles of highway have been laid in the last 15 years; the Three Gorges Dam, which is being built on the Yangtze River, is projected to light up one half of China when it is completed in a few years.

“Given the logistics of organizing these projects, no other country but a communist country could do this,” she added.

 

Discontent in the Countryside


But there is an underside to this economic boom and the infrastructure improvements. Foong said more than 1 million farmers have been resettled to build the dam on the Yangtze River. The vast construction crews are comprised of desperately poor workers living in barracks, whom she described as “floating people coming to build the new China.”

Repeatedly, economist Chen reminded the students that the coastal cities are only one side of China. In the countryside, he said, about 800 million farmers live without health insurance, the majority of them on less than $2 a day. These conditions have led 150 million itinerant workers to migrate to the coastal cities in search of work.

Foong told the students that the wealthy concentrated on the coast now earn 3.2 times more than the poor in the countryside, up from 2.5 times more just 10 years ago. In fact, 1 percent of the people own 49 percent of China’s wealth. She said the rising income gap is fueling discontent in the countryside, as is the seizing of farmland for public projects. She reported that more than 3 million Chinese were involved in protests last year alone.

Deyun Wu (Ph.D. ’94, M.A. ’97), a Shanghai business professor, grew up in Jiangxi, a village along the Yangtze River. Most people in his hometown do not have running water or gas heat, but they recently obtained electricity. He said villagers experience water shortages in the winter. He also worries about the gap between rich and poor and the rising number of unskilled workers who can’t find jobs in the cities.

Observing this disparity firsthand is jarring, said Underwood, a U.S. expatriate. “Where I live in the Pudong district of Shanghai, when I got here five years ago, it was a village of migrant workers. They had shared public bathrooms and shops without electricity. And right next to it, they built villa compounds. You look outside the beautiful expatriate homes—three-story, five-bedroom, two car garage—and right outside the compound wall is a village of migrant workers.”

One force that may improve conditions for farmers in the countryside, said Underwood, is the infusion of new manufacturing jobs. As labor costs in Shanghai and Suzhou rise, manufacturers are beginning to move operations to smaller cities in the countryside. Underwood reported that 25 percent of American Chamber of Commerce Shanghai members surveyed in 2006 expected to move some operations to smaller cities in the coming year.

A native of Taiwan, Professor Wei reconnected with several college classmates in Shanghai and Suzhou who are now leading multinational corporations there. While some of these businessmen told him they will be moving manufacturing operations into the Chinese countryside to cut costs, others said they plan to move to Vietnam for the same reason. A challenge for China in the coming years will be how to improve conditions for its people without losing many low-paying, but badly needed, manufacturing jobs to other locations in Asia or Africa.

The Wild West on China’s East Coast

laundryweddingpuzzleAfter studying in Shanghai, several Notre Dame students and I traveled to Beijing for four days. I went to Beijing’s Silk Market, a six-story building, jam-packed with upscale products from recognizable designer labels: Gucci bags, Rolex watches, North Face jackets, Montblanc pens. Except they’re not. Most, if not all, of these designer products are fakes of varying quality. As I walked among the crowded stalls, sales girls called, “Hi, lady, look here,” and grabbed at my coat to get my attention.

Despite earnest sales pleas about “best quality,” it seemed almost impossible to judge what anything was worth. I watched a middle-aged American tourist pay eight times more than a young Asian man did for the same “Ralph Lauren” sweater. Yet, truth be told, neither paid very much.

Businesses seeking to invest and operate in China face similar difficulties as they try to determine value and to protect their companies’ proprietary information. According to economist Chen, analyzing government data can be problematic. In surveys he has conducted, for instance, he said the Suzhou and Shanghai officials have routinely understated annual growth percentages for political reasons in order not to outshine the reports coming from Beijing.

Ben Jiang’s (MBA ’01) job is to sift through data from Chinese companies for The Jordan Company-China, an investment firm which is seeking to put 10 percent of its holdings into Chinese companies. “Ninety percent of financial statements (from Chinese companies) are unreliable,” said Jiang, a financial analyst, “but it’s improving. Maybe in five years or so that number will drop to 50 percent.” His company’s strategy is to focus on private Chinese companies, which tend to be more transparent than state-owned enterprises; to stick with the manufacturing sector where comparisons are more readily available; and to invest heavily in due diligence services.

Despite these problems and concerns about intellectual property rights, Underwood said that more and more companies view the enormous benefits of entering the China market to be worth the risk. After all, China is home to 1.3 billion potential consumers, a number about five times greater than in the United States. Underwood noted that multinational companies are not only expanding operations, but also increasingly bringing sensitive research and development activities into China.

William Noonan, vice president, Asia Pacific Development for the multinational supply company W.W. Grainger Inc., urged caution, however, saying that the Chinese market is becoming very competitive. “Don’t come to China unless you have a well-thought-out strategy,” he added.

Environmental Concerns

Touring Beijing in March 2007, the Olympic clock ticked off the remaining days and minutes until the 2008 Summer Games—511 days. Despite the shiny red billboards and the presence of cranes and scaffolding at every turn, though, the question of air quality looms large. How will anyone be able to compete in soccer matches or run a marathon through a city with such dense, gray smog?

As China prepares to take the world stage, the clock may serve as an unintended metaphor for the impending environmental crisis facing this country. According to the World Bank, China is home to 16 of the 20 most polluted cities in the world. Recent World Bank reports discuss the public health consequences of contaminated water supplies, growing levels of toxins in the rivers, farmland erosion and rapid deforestation.

While instructor Foong pointed out that the central government is beginning to focus attention on environmental issues, as evidenced by new energy efficiency standards for buildings, enforcement efforts are lax in the provinces and inconsistencies abound. When we toured the Little Swan Company, for instance, she explained that there are lower environmental standards for washing machines sold in China than for exports.

The environmental issues will surely grow as China strives to lift people out of poverty quickly. Foong asked the students, what will happen to the environment in the next 10 years when 200 million more Chinese adopt a middle-class lifestyle and begin buying refrigerators and driving cars?

Communism

Another conundrum for the Chinese is how to reconcile their political and economic systems. Professor Wu said he dislikes listening to American media refer to Red China and the communist threat. He described the current situation as a dual system, including an unfettered capitalism which is more open than in many Western countries and a communist system which is becoming more open and wiser.

Notre Dame Professor Georges Enderle, who has taught business ethics at China Europe International Business School in Shanghai for several years, holds a different view. “While the government’s role may seem benign on the surface,” he said, “a culture of fear exists in China because people who dare to speak out are carefully watched and possibly punished.” The role of the government in the lives of Chinese people is wide-ranging, with the restriction against bearing more than one child being the most apparent to foreign observers.

Communist officials hold positions in factories, in universities, in provincial governments, in agencies and in the central government. Dealing with the maze of relationships within the government and its many agencies is confusing and time-consuming for business persons. Noonan, who has headed startup operations for supplier W.W. Grainger in China, said he devotes at least 30 percent of his time to interacting with government officials.

Wang Xin, deputy party secretary and vice dean of the School of Political and Public Management at Soochow University, addressed Notre Dame MBA students from a classroom. Dressed in a tweed jacket, the 38-year-old professor had a thoughtful demeanor as he methodically went through PowerPoint slides presenting the fundamentals of the Communist Party of China to a skeptical audience.

Through an interpreter, he explained how a troubled history and agricultural heritage have led to the need for a centralized government in which people do not have the right to elect their own leaders.

When questioned about this, he explained: “Ordinary people may not be aware what is their fundamental interests. Chinese people regard themselves as children, while the government are their parents. So based on common sense, the parents will know what are needs of the children.”

But what if the children have other ideas? The young professionals in Shanghai and Suzhou text-messaging on their cell phones and eating in noodle shops are celebrating a unique moment of history, a period of astounding personal opportunity, economic freedom and prosperity. And they seem to be enjoying their moment immensely. “Right now, everybody is worshipping money,” said Professor Wu.

What will the Chinese people value in the years to come?

“National pride, even today,” said Professor Wei. “Chinese recognize most people have lost interest in spiritual things or communism; few will die for it. But the whole nation is looking forward; they want to catch up with the world and move ahead of it. They are very diligent, hard working. They will take any hardship.”

Daily, I watched gutsy young people confront rush hour traffic in Shanghai. It’s an overwhelming scene. A sea of buses, taxis, scooters, bicycles and pedestrians converge on intersections from all directions. Motorists, and those riding scooters, honk their horns incessantly, creating a chaotic soundtrack. Yet these young Chinese glide into the fray and dart straight across the heart of every crossroad. The question remains. Where will this generation, moving ahead so rapidly, lead China and the world in the years to come?

 

—Mary Hamann is the editor of Notre Dame Business.

 

 

 
 
© 2007 University of Notre Dame
Last Updated: May 14, 2007