Levels of Economic Development in Asia: the Filter-down Theory

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1 China: A Third Generation Newly Industrialised Country Abstract The transformation of the Chinese economy over the last decade or so has been nothing short of phenomenal, with the country now being referred to as the workshop of the world. The scale and the pace of change are causing major adjustments both within China and in the rest of the world. China s car industry has been one of the major focal points for foreign direct investment. Levels of Economic Development in Asia: the Filter-down Theory In Asia three generations of Newly Industrialised Country (NIC) have been recognised. Within this world region only Japan is at a higher economic level than the NICs but there are a number of countries at much lower levels of economic development. Figure 1 Asia: five levels of economic development Level Countries 1 MEDC e.g. Japan 2 First generation NICs e.g. South Korea, Taiwan (Singapore is now reclassified as an MEDC; Hong Kong is part of China) 3 Second generation NICs e.g. Malaysia, Indonesia, Thailand 4 Third generation NICs e.g. India, China, Philippines 5 Least developed nations e.g. Nepal, Afghanistan, Cambodia Nowhere else in the world is the filter-down (global shift) of industry better illustrated. When Japanese companies first decided to locate abroad in the 1960s in the quest for lower cost labour, they looked to the most developed of their neighbouring countries, particularly South Korea and Taiwan. Most other countries in the region lacked the physical infrastructure and skill levels required by Japanese companies. Companies from elsewhere in the developed world, especially the United States also recognised the advantages of locating branch plants in such countries. However, as the economies of the first generation NICs (South Korea, Taiwan, Hong Kong and Singapore) grew stronger and more diversified, the level of wages increased significantly resulting in: Japanese and Western transnational corporations (TNCs) seeking locations in second generation NICs, e.g. Thailand, Malaysia, Indonesia, where recent improvements in the physical and human infrastructures now satisfied their demands but where wages were still low. The second generation NICs emerged in the mid-tolate 1970s. Indigenous companies from the first generation NICs, which were now of a significant size, also moving routine tasks to their cheaper labour neighbours. With time, the process repeated itself to include a third generation of NICs whose members include China, India and the Philippines. The third generation NICs emerged in the late 1980s/early 1990s. The Rapid Growth of the Chinese Economy in the 1990s 1

2 In terms of W W Rostow s model, with its five stages of economic development, it would be reasonable to place China in stage 4 the drive to maturity. When Rostow originally applied his model to selected countries he saw China beginning take-off in the late 1950s. However, due to the relatively closed nature of the economy it can be argued that this third stage lasted for a number of decades with stage 4 beginning with the rapid expansion of the economy in the 1990s as China opened up much more to the outside world. Figure 2: Rostow s five stages of economic development Such has been the rate of expansion over the last decade that China has been referred to as the new workshop of the world, a phrase first applied to Britain during the height of its industrial revolution in the 19 th century. Prior to 1978 China had only limited economic interaction with the outside world. The economic reforms that began in the late 1970s have resulted is a significant increase in GDP and in foreign direct investment, particularly since the early 1990s: Since economic reform began in 1978, China s economy has grown nine times larger. In 2002 China overtook the USA to become the world s largest recipient of foreign direct investment, attracting $52.7 billion. In 2002, China, which accounts for less than 5% of global trade, accounted for one quarter of global trade expansion. In the same year China became the fifth largest global trader. China now exports more to the USA than Japan, and has also overtaken the USA as the largest exporter to Japan. China manufactures approximately half of the world s computers, 60% of its bicycles and over half of its shoes. Figure 5 shows China s top exporting companies. China s consumption of a number of significant raw materials such as steel and copper is now greater than that of the USA. China is now the world s second 2

3 largest importer of oil after the USA, having just overtaken Japan. In 2003 China consumed 55% of the world s cement. Membership of the World Trade Organisation from October 2001 confirmed the significance of China s position in the global economy. Figure 3 Index of China s Real GDP growth Figure 4 Cumulative FDI in China, Figure 5 China s top exporters, 2002 (US$bn) 3

4 The huge concentration of investment in China has pulled investment away from industrial centres in the rest of Asia and elsewhere. For example 23,000 Japanese companies are now operating in China. To remain competitive they have to manufacture where production costs are lowest. Matsushita has invested $558 million in 31 joint ventures in China. A number of important high technology nuclei have been developed to concentrate the investment of foreign and indigenous companies in this important and expanding business sector. A major example is Zhongguancun, Beijing s high tech nucleus Figure 6: Zhongguancun: Beijing s High-Tech Nucleus Zhongguancun: Beijing s High-Tech Nucleus Zhongguancun is located in northwest Beijing among China s most prestigious universities. The largest concentrations of students and millionaires in China are found here. More than 4000 companies, including transnational giants Motorola, Nokia and IBM and major Chinese companies such as Legend and Founder, are already resident here. New firms are constantly arriving to take advantage of the low cost but well educated workforce. In 2002 the government estimated new investment at $600 million. The development of high technology industry here was spontaneous and very small scale in origin. However, today the national government plays a significant role in Zhongguancun s development, seeing the area as crucial to China s aspirations to a major role in the high technology sector. Zhongguancun is now a special development zone, attracting companies with tax incentives, reduced rents and rapid processing of operating permits. Infrastructure has been considerably upgraded and entire neighbourhoods cleared to make way for new building. Some Chinese companies are now buying up distressed businesses in Japan where the long-running economic slump has caused major problems. In most cases the Chinese company has relocated manufacturing to China where wages are as little as one-tenth of their Japanese equivalents. Regional Imbalance Figure 7 shows the wide variation in GDP per person in China. In terms of China s three regions (East, Middle, West) the scale of economic activity and the affluence of the population generally decline from the coastal regions into the interior. The recent rapid growth of the economy has widened the gap between core and periphery in the country. 4

5 Figure 7 Gross domestic product per person by province 2002 (US$) The bulk of foreign investment is in China s dynamic coastal region, which includes 5 Special Economic Zones, 14 Open Cities, and 36 Economic and Technological Development Regions. China s economic reforms began in the coastal region. The initial opening up of the economy attracted a foundation of large overseas investors. Their presence led to a kind of critical mass which has acted as a magnet for an increasing number of foreign investors. The Special Economic Zones have led the process of privatisation in China. The location factors that have attracted foreign investment to the coastal areas are; favourable government policies: central government policies have empowered the coastal regions to attract foreign investment, import advanced technologies and participate in international trade projects. Labour cost and productivity: labour is relatively inexpensive throughout China. Although the cost benefit is even greater in the Middle and West of China, the labour force in the coastal areas is better educated, more skilled and boasts significantly higher productivity. Superior infrastructure: all aspects of infrastructure (rail, road, air transport, telecommunications etc) are more highly developed in the coastal region compared to the Middle and West of China. Geographical advantages: 90% of China s international trade passes through its seaports. Production facilities located at or near the ports are likely to encounter fewer delivery delays and lower domestic transportation costs. The Pearl River delta region, an area the size of Belgium in southeast China is the focal point of a massive wave of foreign investment into China. This is the heart of China s new industrial revolution. In early 2003 it was estimated that the region was attracting $1 5

6 billion of investment and producing $10 billion worth of exports a month in one of the fastest bursts of economic development in history. The Pearl River drains into the South China Sea. Hong Kong is located at the eastern extent of the delta, with Macau situated at the western entrance. Within the region the main centres of industrial expansion are: Shunde, Shenzhen, Dongguan, Zhuhai, Zhongshan and Guangzhou. The region s manufacturing industries already employ 30 million people but this will undoubtedly increase in the future. Although early investment in the region focussed mainly on routine products, more and more foreign companies are now manufacturing higher level products in the region. For example the Japanese company Ricoh which makes most of its photocopiers in Shenzhen now produces models in China months after they are first make in Japan. Urban residents (heavily concentrated in the east) now earn an average three times as much as those in the countryside. Figure 8 Average income for rural and urban dwellers A similarly sharp divide is evident between the wealthy coastal provinces and the backward interior. The income inequalities in China are among the fastest growing in the world. Due to a system that until recent years barred rural dwellers from moving to cities, China s rural population is unusually large for a country at its stage of development. 6

7 Figure 8b Geographical distribution of Internet users in China December 2002 The Rapid Expansion of the Car Industry The motor vehicle industry is viewed as a key industry in China s economic development. Because of (a) the significant workforce and (b) the considerable number of components required. Car assembly attracts a large number of suppliers (wheels, tyres, lights, etc), which set off a chain of cumulative causation in the economy. China is now the fastest growing vehicle market in the world and it has become the fourth largest car manufacture. Figure 9 China s passenger car market 7

8 Car sales increased by 55% in 2002 while sales of all vehicles rose by more than 30%, the result of: increasing incomes China s average income is $1000 a head and rising. Over 300 million earn over $2000. Economic growth has created a growing middle and upper class that are buying cars. lower tariffs and higher quotas for imported vehicles. As part of the agreement on China s entry into the World Trade Organisation, car import tariffs will fall from more than 80% to 25% or less by An ambitious road-building programme, making car ownership much more useful. A move by urban areas to provide more parking spaces. At present, Beijing has parking spaces for only 12% of the city s cars. Easier to obtain car loans from both Chinese banks and Western car companies. In order to foster a strong domestic industry, China has always required foreign investors to partner with local firms. Recent developments include: Ford launched its first China model in January 2003, a four-door Fiesta sedan. In the same month GM announced the acquisition of a fourth car plant in China. Honda has taken a majority stake in a new factory in southern China for export VW, the market leader in China, launched new models in China is already VW s biggest market outside Germany. Toyota, Nissan and Hyundai announced investments totalling $3.4 billion in late Collectively they will build 2 million cars by Fleet purchases dominate sales in China. In 2002 they accounted for 70% of all sales, down from over 90% in Almost one in every 100 Chinese people now owns a car compared with one in two in the USA. However, there are huge regional variations in car ownership with the highest figures are recorded in the coastal cities. Between 1996 and 2002 the length of China s highway network increased from 3,000 km to 20,000 km. In December 2001 the 1,262 km Beijing-Shanghai expressway opened, reducing journey time between the two cities from 20 to 12 hours. Figure 10 Expressways in China 8

9 There are a surprisingly large number of Chinese-owned car plants in the country. Under the Mao regime most regions lobbied to get car factories and nearly all did. There are currently 120 car plants nationwide, most are unprofitable and only a few produce more than 100,000 vehicles a year. The industry will need radical consolidation, following the pattern of the US car industry in the early part of the 20 th century. The largest car producers are: Shanghai Automotive Industry Corporation (SAIC) and its joint ventures with GM, and VW. Between them they control nearly half the market The Jilin-based First Automobile Group (also partners with VW) Dongfeng-Citroen in Hubei province Chinese companies depend on their foreign partners for high technology and R&D. Surprisingly, because of the highly capital intensive nature of the industry, making a car in China costs more than in the US. Thus, foreign car investment is attracted more by the rapidly expanding market than by low cost labour. Although the Chinese government recognise motor vehicles as a key industry, they are also aware of the negative aspects of increasing car ownership: rising levels of pollution [up to ten times the Western average in places growing urban traffic jams the high investment in road infrastructure required to keep pace with increasing personal mobility urban sprawl The considerable increase in car sales is, according to some commentators, evidence of a third consumer revolution. Bicycles and household electrical goods were at the forefront of the first revolution more than twenty years ago. Electronic goods led the second consumer revolution in the 1990s. Increasing personal mobility has had a number of consequences: several big shopping centres with large car parks have been built in suburban areas in villages around Beijing an increasing number of farmers are offering bed and breakfast. Almost as fast as Beijing constructs new urban highways they become clogged with traffic. In September 2004 Shanghai will host China s first Formula One car-racing event. $310 million has been spent on the 5.5 km circuit and related facilities on the western outskirts of the city. The objective is for the track to become the centre-piece of a new auto city, encompassing all aspects of the industry from manufacturing to sales. 9

10 Figure 11 Formula Chinese Grand Prix Pressure on Resources Rapid growth is placing intense pressure on infrastructure and resources. In heavily industrialised southern and eastern regions, electricity shortages have resulted in rolling blackouts. Across the country, the supply of electricity rose 5% slower than demand in Twenty-one of China s 31 regions have already faced shortages caused by lack of fuel or by poor government planning. Under intense demand in China, prices for oil, coal and steel are rising as fast as 10% a year. Water resources are also under pressure. The World Bank estimates that China s per capita water resources are about a quarter of the world average. Already the government has forced some companies in northern China to abandon water-intensive factories. Just over a decade ago China was a net exporter of oil, now it is a major importer. In the next few years it may become a net importer of coal, which accounts for more than 70% of its primary energy use. 10