The China puzzle

A few years ago, before the Beijing Olympics, I wrote about the prospect of the Chinese people rejecting the life they were feverishly building because it was too unevenly rewarding and not sustainable. I was wrong about the timing, but I still think the country faces a serious reckoning for sins committed in the frenzied run up to economic gigantism.

The trigger for me today is Thomas Friedman’s New York Times editorial about pollution in the Middle Kingdom. He quotes Peggy Liu, founder of the Joint US-China Collaboration on Clean Energy organisation, saying: “China doesn’t have to have rivers that run bright red with industrial waste or lakes and beaches smothered by thick, green algae, or 18,000 dead, virused pigs floating down the Huangpu River.”

Friedman also cites NASA data that shows the northeastern Chinese city of Harbin suffering with air particulate concentrations that are 30 times what the US Environmental Protection Agency allows as a maximum for safe air in the US. Even in Seoul it’s obvious from the brown cloud blown across the border that China’s environmental practices are unsustainable.

Trust and the supply chain

Growing pains are also evident in sloppy, unaccountable supply chains. Having recently flown out of Hong Kong I noticed the signage in airport shops limiting sales of dried milk powder, which are needed to control a busy flow of “safe” food for children across the nearby border. Protests are increasingly common and incidents occur almost daily. Food supply chain integrity is hard enough in slow-growing, heavily regulated Europe; China’s situation makes the horsemeat scandal seem almost quaint by comparison.

The food safety issue is related to the even bigger problem of intellectual property security and the integrity of supply chains, whether in terms of ingredients or components that go into products or branding and labels that go on to products. Trust falters when businesses feel they cannot rely on promises made up and down the supply chain. China is still the land of IP anarchy.

Trust also underpins another challenge to working with China’s massive and diverse supply chain, which is the management of people and talent. Data we collected last year on Chinese workforces showed much worse retention problems among skilled staff than in other regions. Of course, this is happening at the same time that wage and benefit costs are rising rapidly. Building business for the long term is increasingly risky when the human foundation is unstable.

Too big to fail

Despite all of these risk factors, China is still the number one choice for new manufacturing plants. Almost half of the practitioners we surveyed back in April expected to add new capacity there in the next three years. Much, if not most, of this capacity is targeting domestic Chinese markets, not exports. More interesting, perhaps, is the fact that investments in labour-saving capital equipment appear to be proportionally greater in China than in the US. For all the signs of warning, global business is continuing to bet big on China.

Betting on China may be risky, but on balance most global supply chain strategists consider it a bet they have to make. Data collected in the same survey on manufacturing plans showed that perceptions of risk in China are by no means naïve. We know there is danger, but we march on.

To me, this is evidence less of desperation than of confidence. Supply chain plans built around China may once have been fundamentally extractive, and perhaps even exploitative. But increasingly they are collaborative, with expectations of long, profitable relationships built to serve customers and consumers for decades. Objections remain, particularly as regards the rule of law around IP, but global businesses clearly see enough to justify working through the problems.

The endgame is huge with a post-boom China integrated (one hopes) on equal terms with the rest of the world economy. Peggy Liu (cited above) said of the environmental future: “China needs to carve… a path that is a sustainable path. If we don’t do this soon, we will end up with a China Nightmare. And there’s no escaping that a China Nightmare is a global nightmare.”

The point is fair, but extends well beyond environmental worries. China is simply too big to fail.

Please contact me directly with any comments, questions or suggestions. I welcome your feedback.

Kevin O’Marah
Chief Content Officer
SCM World