The Kunshan Road

This week, I would like to take a break from the “how to do business in China” mode and consider how China evolved form a third-world country into its present form in just 30 years.

The conventional explanation is China transformed itself through “cheap labor.” The mantra of “cheap labor” does not adequately explain how a third-world economy rose from the bottom of the world’s economic ratings to being America’s banker and a leading player in the world economy. The fact is that “cheap labor” exists, and has existed, for years in abundance in various parts of the world, and yet few other than China, India and Brazil have been able to make much progress recently.

Globalization

Clearly, globalization has had profound, if somewhat unintended, consequences. Access to markets created big returns for international companies; goods produced cheaply in emerging markets and sold at “brand prices” in the developed world, fattened the bottom line. Brand euphoria, symbolized by companies like Nike, became the buzz theory of the moment. By outsourcing their production to Original Equipment Manufacturers (OEM’s), companies like Nike were able to distance themselves from the operational grind and responsibilities production entails and concentrate on advertising and sales. It led some to believe that branding by itself was the true value and production simply a component of brand development. But, the massive exodus of manufacturing to these emerging economies has, to an extent, undermined the economies of the developed world which lost jobs and economic capacity. The idea that you can have your cake and eat it too, by endlessly selling goods to those whose jobs have been displaced cannot be a long-term panacea unless you can find and exploit new economic roles.

For China, globalization has also had unintended consequences. The international companies who flocked to China, initially to benefit from lower cost production, brought with them jobs, technology and business methods, but the economic consequences of creating a hurry up economy also created social displacement and pollution. The rush to attract Foreign Direct Investment (FDI) in a country which 30 years ago had no business model or operations support, i.e. banks, lawyers, accountants, Uniform Commercial Code Registration System or a bureaucracy trained to handle these issues, was often chaotic.

Ideological perspectives

When the Deng Xiao Ping (he had Mao’s job after the Gang of Four was hustled off the stage) declared that “to be rich is glorious,” for many outside of China it signaled the triumph of capitalism, and the death knell of communism. Inside China, it was the beginning of a new era which mixed seemingly contrary practices and principles.

Many people saw China’s embrace of capitalist practices as the beginning of the end for its socialist communist ideology. For them, then and today, adherence to the postwar belief that capitalism and democracy are so inextricably intertwined, that they can never co-exist in any stable form with socialism or communism, is axiomatic. For these faithful, it was, and is, only a matter of time before the other shoe drops and socialist communism falls.

In China, the transition from a rigid ideological to a pragmatic approach was unexplored territory with only one constant: the Communist’s Party’s central role in government. But it was a government which had very limited experience or knowledge of how to implement capitalist systems (years of isolation and the cultural revolution were the main factors). For most Chinese, the world seemingly had turned upside down, as the embrace of capitalistic tools was a sharp reversal of practices and policies on which the republic was founded; practices and policies which had heaped scorn and punishment on those who had been involved, directly or indirectly with capitalism.

Cognitive dissonance

Today, while China seems to have developed a bustling capitalist market, recent times have seen the ideological standard bearers of democracy and capitalism embrace massive government intervention; in most instances to save the very institutions which were responsible for the market meltdown. “Too big to fail” has become the rationalization for disregarding the Darwinian market mechanism, which was supposed to safeguard commerce. History will judge whether taxing the individuals to prop up dinosaurs is a realistic policy.

In contrast, 30 years later, communism is alive and in charge of the world’s largest growth engine. Deng’s new direction unleashed untapped energy within China at the same time it changed the mosaic of its ideological principles, but the story is far from over, and China has 800 million people who are waiting for the economic miracle to touch them.

New directions

For both groups it may have been hard to imagine how an economy, which is centrally run by a governing party, could adapt a planned economy approach to embrace and encourage a market economy. So, how did they do it? The answer has less to do with ideology and more with the evolution of policies and practices that created a feedback and implementation system which seems to be the basis of China’s success. The system, while far from mature, has allowed China to quickly adjust its national policies based on what seems to be working at the local level. The key to this system has been the development initiatives of its cities and their participation in the process of national policies.

Kunshan, China’s best performing township, is an example of the national growth model. Located on the border of Shanghai, on the road to Suzhou, it is an area comprised of four villages which make up a township with a current population of 2 million. It is the No. 1 performing township in China and last year, in the midst of the global financial crisis, its GDP grew by 15 percent.

Looking at a Google map, you can see a medium density area which is rapidly expanding around a central business district. Forty percent of the world’s laptop computers are assembled here, by mostly Taiwanese Original Equipment Manufactures (OEM’s). Names like Dell, Acer, MSI and Toshiba are the brands they produce for. But this is not the only story. Interestingly, even as others are pulling back; Kunshan is in the midst of a rapid expansion into new areas like financial support systems and 7.5 generation LED manufacturing. These efforts have a dual purpose; they support their international trade base and connect them to the growing domestic market.

So how does a township which was the poorest area in the province become China’s leading economic powerhouse of its size in less than 20 years? The answer is a reflection of how it has been able to work within a central planning economy while developing market driven approaches.

Starting with little more than a recognition of its location advantage, its proximity to Shanghai, it looked inside and outside of China for strategies which would work for their area. They brought the strategies home, modified them for local conditions and then used old-fashioned elbow grease to create successes one project and initiative at a time. Yes, there were failures and missteps, but rather than retreating, they concentrated on learning from their mistakes and finding solutions.

Their service strategy is “Mashang Ban,” or “do it now,” which means if a company in Kunshan needs to get a rush order out of the economic duty free zone, and it calls at 3 a.m., it is done immediately, as in, it was in transit within 24 hours from the call. How is it possible? The factory manager has the personal cell phone number of his government project manager, and when the exigencies of a global economy call, it is used to get things done.