CHINA

Regina Abrami, Global Program Director, writes

Having spent nearly two weeks immersing in the politics and history of the United States, including the role of slavery in U.S. economic history and business of politics in Washington, D.C., the group arrived to Beijing on June 15^th.  Over the next two weeks, students visited with many organizations, including Minmetals, one of China’s leading iron ore importers, Goldwind, a leading global wind turbine manufacturer, the Chinese Investment Corporation, a top sovereign wealth fund, and completed fieldwork in Shanghai on a range of leading issues.  They also attended lectures, and taught each other through peer-to-peer presentations.  A remarkable group, with their China-based reflections below,

Anirudh Rudrapatna Rajendraprasad, GP Class of 2015, making the first contribution through the lens of the Beijing International Airport, writes,

In 2008, the world stood mesmerized as China dazzled with an Olympian show of strength, culture and history – the Beijing Olympics. With the effusive praise however, came vociferous criticism of the China model – communist autocracy, human rights violations and environmental concerns. As an Indian looking through the Himalayan curtain, I too watched with mixed emotions; I was in awe of the grandeur; envious of the progress and perhaps pettily, gleeful of the criticisms. However, I wanted to see firsthand how China matched up to the wary Indian and western viewpoints. Little did I know that the very first outpost – Beijing International Airport – would offer a microcosm exemplifying my entire experience with China over the course of two weeks.

As our flight approached Beijing, I craned my neck in hopes of identifying the features of the dragon-shaped airport. Alas! The smog-filled visuals of Beijing were true and I discovered our plane enveloped all the way to the gate. Despite this initial hiccup, the engineer in me was still expecting to be wowed by the interiors that I had hitherto only seen on screens. Unfortunately, I came away underwhelmed by the airport. While undoubtedly an engineering marvel, its size was dwarfed by its dark and dingy appearance – there was none of the glamor that surrounded the airport’s inauguration. My disappointment was quelled by an unusual source – the immigration officers – generally one of the most feared and reviled groups at airports around the world. The officers here were not grumpy like the ones in the United States, nor were they indifferent like the ones in Europe – they were like a cup of green tea – warm and welcoming. I was mystified when I discovered that there was an option to provide feedback at the touch of a button. Was this the oft-maligned undemocratic China that purportedly abhors opinions, both internal and external?

Roberto Blum, GP Class of 2015, writes about the “invisible hand of government,” a phenomenon that he sees in licensing protocols:

The most blatant characteristic of the Chinese social contract is the presence of the state in every level of the Chinese society.  One of the most interesting examples of government control is the commerce and licensing of cars. From my experience in Beijing, I understood that the Chinese licensing model has two main purposes: (i) registration and traffic management; and (ii) social differentiation.

With the rise of the middle class in Chine, most cities have experienced a boom in car sales, resulting in a huge increase in the population of cars. Some cities like Beijing and Shanghai saw the number of cars skyrocket from 2 to 5 million units in a couple of years. This dramatic expansion of vehicle population is the cause of several negatives effects such as pollution and traffic jams. In order to cope with this problem, the Chinese government uses a complex system of licensing in which cars are classified in several groups according to their usage and social status of owners.

In Beijing, for instance, license plates are composed of a Chinese character identifying the city, followed by a Latin character and five numbers. The Latin character describes the economic activity or status of the owner. “B” cars are taxis while “A” are cars owned by government officials or state owned enterprise employees. Cars owned by military officials are identified by two Latin letters and five numbers and civil cars carry the letters C, E, F, H, J, K, L, M and Q.

In order to buy a car, Chinese individuals have to apply for a license and wait for months (sometimes years) for government approval.  While this system helps to control pollution and traffic in megacities, it also maintains a system of privileges as it differentiates the most prestigious groups in the Chinese society (state officials and army). A clear example of this differentiation is the fact that only part of these groups are required to respect certain traffic rules; traffic lights are only a suggestion for government officials and military officers, I’m told.

A second example of government control regards migration within China. During the 1950s, the hukou, or household registration system (deriving from an earlier pre-communist system) was implemented to prevent mass rural to urban migration. This system has been viewed as a source of political stability, but it did so by controlling the distribution of rationed food to one’s place of permanent residence. Today, its enforcement has lessened, the hukou system nonetheless remains a mechanism to prevent mass migration and maintain control within the country. Without a local hukou, for example, a Chinese citizen cannot access the few benefits of the Chinese welfare system such as elementary education or the opportunity to buy a house with some financial penalty.

In a way, the two examples cited above are just two points on an immense iceberg. If you visit China, you will notice that only a few individuals clearly mention the government and most of time they will do it evasively. But after a few interactions you come to ask yourself just how big the government actually is. And the answer is huge. Visiting China, I really felt that the government was hidden behind subtle signals but present everywhere.

Claudia Gutierrez, GP Class of 2015, writes about one of China’s most successful state-owned corporations, nicely paralleling its development to that of the country more generally.  Her title for this contribution says it all: “Minmetals Corporation: China’s Economic Self-Reflection”

Minmetals Corporation is a state-owned enterprise (SOE) focused primarily in metals and mining. Beyond being one of the most powerful and successful SOE’s in China, Minmetals is a reflection of the progress that China has made in the past half century. Sitting on lectures about China’s economic history and policies, the parallel with Minmetal’s own history was evident.

Starting in 1949, the People’s Republic of China was founded and China Metal’s Corp. (one of the predecessors of Minmetals) was established. In 1978, China started moving towards a more open economy by establishing the “open door policy” to encourage foreign direct investments and the development of a market economy. At the same time, Minmetals, which had focused entirely on trade of ferrous metals, started diversifying its business to target other competitive segments that were relevant in the global economy, such as real estate and finance. Between 1989 and 1996, China moved towards building its capital markets by opening up the Shanghai and Shenzhen Stock Exchanges. At Minmetals, the change in tide was reflected with the company raising capital on the international bond market and listing on the Shanghai Stock Exchange. In 2001, China became a member of the World Trade Organization (WTO) further opening up its economy to international trade and investments. Meanwhile, Minmetals continued its expansion and diversification by establishing joint ventures and partnerships outside of China. Today, we see both China and Minmetals thriving. China is the second largest economy in the world and Minmetals has made it to the Global Fortune 500.

Minmetals, as one of China’s “national champions,, now embodies the type of progress that China wants to see in its overall economy. Minmetals turned itself from a traditional commerce and trade company into a multinational metals and mining corporation with global prestige. As China continues it move away from light manufacturing to more higher-value, innovative products, I’m sure that we’ll see Minmetals also increase its investment on research & development.  Innovation is one the way.

Regina Abrami, Global Program Director writes,

Over the past few years, the question of whether China can make the transition from a low value-added production site to a high value-added goods base has been a headline item.  Global Program students had a chance to reflect on this issue through visits to a nanotechnology hub based in Suzhou and GE’s innovation center in Shanghai.  As the two contributions below indicate, they came to different conclusions.

Emilie Esposito, GP Class of 2015, sees changes ahead starting with the questions of whether “Made in China” will become a synonym for high technological content?  She writes,

The era of low-cost low-quality China is far behind us. Already in the Medium and Long Term Development Plan issued in 2006, the Chinese Government had clearly stated that China aimed at upgrading its economy and focusing on high value-add sectors such as new generation IT, biotech, clean energy and new materials. I was sceptical. How could China close such a huge technological gap so as to compete with the Old World’s cutting edge innovations? Our Suzhou trip – less than one hour from Shanghai with the high-speed train – showed us that not only China could do it, but that it had a fast-track action plan already partially implemented.

We met in Suzhou with a team of young professionals – fluent in English – promoting the Nanopolis project. The latter involves the building from scratch of a new city within the Suzhou Industrial Park (SIP)¹ dedicated to nano-technologies. 100,000sqm have already been developed; the second part of the 5-year US$1.5bn-worth project is expected to be completed by September 2013. The new city will host start-ups and offer cutting-edge labs and testing capabilities. It will be surrounded by university campuses from 18 Chinese and foreign universities (Renmin University, University of Liverpool, National University of Singapore…). A massive Government program aimed at providing funding and incentives for start-ups has been deployed. Should public funding be insufficient, venture capitalists are present in Nanopolis as well (and rather aggressive). And China is not short of Chinese currency to invest. Last but not least, there is special – and very favourable – treatment for foreigners willing to develop their technologies in Nanopolis.

Yet China starts from very limited expertise in the nanotechnology field. So the question remains how long will it take to Nanopolis to attract Western entrepreneurs and researchers, many of whom are struggling to find funds in their own country to finalise their research and launch innovative products? Would it be so unconceivable that a number of them could choose the easy way sooner rather than later, especially when Nanopolis promises to provide IP protection similar to Singapore?  It should be added that Suzhou is also the Chinese town with the highest proportion of foreigners already.

One could bring a number of valid reasons to be much more pessimistic about the future of China, and this post is not meant to be naïve. However, we witnessed Nanopolis – or at least the part of it. We saw an entirely new neighbourhood with modern buildings, which had grown up in a record time from an empty land. And it is not a cathedral in the desert. Surrounding Nanopolis, SIP hosts more than 3,000 foreign enterprises, including operations run by one-fifth of the Fortune 500 top global companies.

Nanopolis may become in a handful of years away from emerging as a major nano-technology hub – and one day, we may be willing to buy an antibiotic spray for infants only if made in China!

1. An industrial park launched in 1994 by a Sino-Singaporean 51/49 JV and spread over a 288km² area.

Diego Rimoch, GP Class of 2015, offers a different view.  He writes,

Prior to this trip, I had only visited China once in 1997. A lot has happened since. At the time,

the press had yet to start harking about the rise of China and the decline of the West. Much has changed in 16 years and the Chinese development miracle is truly impressive. But the two weeks I spent in China have left me with a far more nuanced understanding of where China is at in its development. My impressions are informed both by what I saw and what I heard.

In several of the presentations we attended, it was made quite clear that China is facing formidable challenges and difficulties. The system’s obsession with political stability and self-preservation comes at the expense of needed reforms that make it very hard for the country to sustain the kind of growth it needs to reach new levels of economic development. China has been quite successful at growing its economy and becoming the world’s factory. But in order to go beyond that, it needs to move into higher added value sectors such as R&D. The Chinese leadership is aware of this and is putting a lot of effort and resources into achieving this.

We visited an R&D park in the city of Suzhou called Nanopolis which focused on nanotechnology. The scale of the project is breathtaking. The place is basically the size of a small town, filled with brand new and modern buildings. But when I looked more closely, I remained unconvinced. I like to look at the quality of construction and I have to say that while things looked flashy from a bird’s eye view, the closer one got, the less impressed I was with the actual finishes. Some of the “new” buildings, built less than a year ago, felt like they were over 10 years old already. There was also a small exhibit hall showcasing some of the projects that had been worked on, but it too failed to wow me.

If I had to sum it up, I would say it felt like a Hollywood Studio’s back lot.  It was great on screen but fake in reality. Does this mean that nothing will come out of these efforts? I can’t say that. China has managed titanic feats in the last 30 years. Only time will tell where Nanopolis, and China more generally, goes.

Diego Rimoch, GP Class of 2015, reflecting on innovation and business cultures, writes,

The day after our visit to Suzhou, we visited GE’s R&D center in Shanghai and what a difference that was. In contrast to Nanopolis, the GE buildings are actually over 10 years old but feel quite new. Their exhibition hall is beautifully set up and has all kinds of gadgets to touch and play with. Perhaps GE is better at putting on a show. Or maybe the private sector is just a better agent when it comes to innovating. But the presentation there was also a good one. I felt the presentation in Suzhou had been quite formal although Regina told us that compared to most official presentations, the Nanopolis team had actually been fairly unstructured and relaxed. In any case, it was very general in the information it provided and actual details felt scarce or vague. GE was dramatically different. We were given a lot of information about wind turbines and the history of GE in China. We were also able to ask pointed questions about why GE opened this center as well as others in China.

We learned that GE, unlike other foreign companies, chose to start significant R&D projects in China long before the Chinese government started requesting as much of MNCs. In many ways, GE was ahead of the curve. One of the rationales for this was that the company had to bring its R&D efforts closer to its customers and given the size of the Chinese market, it was only natural to set up R&D shops there. I think this is very revealing and a lesson the Chinese government might want to pay closer attention to. You can try and force companies to do R&D but they will look for ways to drag their feet or do non-essential research that does not expose their most valuable IPR to theft. Real and productive R&D will happen far more easily if the companies actually see a market need for it like GE did.  The Center has been a hotbed of innovation geared to serve the needs of its Chinese customer base.

Regina Abrami, Global Program Director, writes,

Food is culture, and perhaps there is no better place to experience that fact than in China.  The Global Program students made their way from street foods to fancy pleasures in some of the best restaurants, but did they really know much about where their food had originated, or what challenges remain in the Chinese food system. 

Stephenson Cherng, GP Class of 2015, had a chance to understand a bit more about food supply chains during our visit to Shanghai.  He writes,

As someone who learned about Chinese culture from his family, I believe that Chinese food is one of the most established and profound cuisines of the world. In fact, trying out various dishes from different regions of China (noodles of the north, spicy food of the west, etc) may be the most effective and delicious way of understanding the country's diverse culture. Nowadays, however, it saddens me to see how food in China has also come to represent risk due to food safety concerns.

As a fieldwork assignment, my fellow classmate and I visited food institutions in Shanghai to gain a backstage perspective on the subject. What we discovered, on our first stop, was unsavory. 

We first visited a food distribution center, where ingredients (dead or alive) are prepared and delivered to retailers, supermarkets, and other distribution centers in the region. The center also included a "wet market," where raw meats were uncovered, in the open, and a feast for flies. What's more, the butchers either handled the meats in their bare hands or used a single pair of gloves for everything, protecting themselves more than the meat. To say the least, we were not surprised to hear that a poultry flu outbreak killing 30 people in March originated from this center.

The only encouraging find came from our local guide, who told us of alternative methods by which consumers now obtain their food, and all the more so as they become more aware of food safety issues.   Our next two stops, a modern supermarket and a Japanese restaurant, illustrated her point. The modern market was indoors, with individually-wrapped vegetables that suggested cleanliness. In the meat section, a national brand kept a video on loop to show its sanitary treatment of animals. The Japanese restaurant made an effort to ease consumer concerns.  It not only imported key ingredients from overseas, but also displayed six different food licenses to indicate sanitary food preparation methods were underway.

The most radical evolution that we saw in China's food industry came by way of our final destination, Tony's Farm.  This organic farm sold and delivered its products direct to consumers and businesses throughout Shanghai and Beijing, much as you might see in major U.S. cities.

We ended our day with some informal conversations with local taxi drivers and restaurant staff members. Through these exchanges we realized that Chinese nationals were well aware of food safety problems in their country.  According to them, however, they lack trustworthy knowledge and resources to tackle the problem.  The restaurants that they can afford, for example, often never list their licenses, so they eat at their own risk. Foreign food restaurants and modern supermarkets also can cost up to triple the price of traditional food supply venues and dining places.   As a result, the majority of consumers in China manage food safety issues by shopping at markets run by known acquaintances or by eating at chain restaurants, both of which are presumed to be safer bets.  As China’s middle class continues to grow, so too will demand for a safer food sector.  This trend may just be the most delicious business opportunity in China!

As the program’s two week visit to China came to an end, Anirudh Rudrapatna Rajendraprasad, GP Class of 2015, reflected on his experience.  He writes,

The tripartite nature of China – massive infrastructure, barely obscured deficiencies and the warm people – persisted throughout my stay. While it is easy to be taken in by the surreal skyscrapers and the Audi-littered roads sneaking through them; it doesn’t take much effort to discover the Hutongs (alleys) that are crowded, polluted and need of urgent repair. While the poor and unattractive have been banished from plain sight, they have not been culled as is often depicted.

The people that we interacted with were not mousy individuals scurrying away from the wrath of the Communist government. Instead, they were busy with their lives, happy with the improvements and not afraid to criticize or support their country. The world likes to believe that the banning of facebook and google automatically amounts to restrictions on personal liberty. In my experience, however, I discovered that people used Weibo or VPN or even personal conversations to voice their opinions and even protest when required. The people didn’t seem bothered by the big brother state and even justified the use of central command. At the end of the day, one might argue that China is doing openly, what democratic countries do in the dark of night (a.k.a Prism).   As a result, I came away from China with the same mixture of awe, envy and glee.  I was envious of the progress they have made in eradicating poverty and urbanizing their population; awed by the lack of complete authoritarianism and gleeful to have met wonderful genial people who are aspiring to the same goal as the rest of us – a better life.