Competitiveness of China: Of Talents and Innovation

Interestingly, in parusing the past articles of economist on the subject of China, I have found the topic of talent arbitrage, which is one of the reasons that prompted me to go abroad and explore the world. This topic leads me to reflect on the ultimate competitiveness of China and the questions as to how to maintain and develop competitiveness.  Admittedly, the talent arbitrage, and on a wider sense, labour force arbitrage is a reality in China and much of the booming manufacturing in South East China is based on this arbitrage opportunity. This arbitrage is created by the artificially low currency and high investments in education by the government. Yet is this arbitrage opportunity exploited by hundreds of thousands of corporations in China a sustainable advantage? According to the market economics and the current situation of the world free market, the answer is absolutely no!

In fact the first foremost exploiter of low-cost talents is the state. With thousands of state research facilities around the country, the government has a firm grip over the brains of the China. Corporations also move or outsource to China to exploit this arbitrage opportunity ( OK, there is not only the arbitrage, there is also the market). As is put in one of the reports I have read, Western corporations has an “imperialistic” attitude towards emerging countries. They consider that these countries represent low cost labour, consumers getting more wealth and huge market. The case of WuXi Pharmaceutical of the article of economist is an example of local company acting as a broker for exploitation of low cost talents.

Yet more outsourcing demand there is, supply is limited, this will inevitably lead to higher prices. In another light, people move directly abroad to counteract this arbitrage, so there are still less and less talents. In the end, the arbitrage opportunity will disappear or reach a kind of dynamic equilibrium if barriers to free movements of talents do not disappear completely. The government is also tilting towards closing this arbitrage opportunity by gradually letting RMB to appreciate and raising people’s purchasing power by urging companies to raise salaries.

And for local companies that relay more or less on low cost labour, what is the answer to the rising labours costs and a strong currency? Innovate or Die. The scale is a first problem with Chinese corporations. The lack of innovation firepower is another. There are way too many small businesses in China, consolidation is urgently needed to exploit the economies of scale now that economies of people are beginning to wane. With respect to innovation, companies still have to innovate in the products and , by all means, in the way they are run. Interestingly, there are Mckinsey consultants who point out that China might be the center of management innovation in the business processes, especially when he points out the motorcycle manufacturers in ChongQinq and Li Feng ‘s logistic empire. I would say that this is an effort to westernize a Chinese practice and to maintain the competitive advantages that Western multinationals now enjoy over the world market. The very fact that a Mckinsey consultant has spotted the innovation and urged Western companies to face the reality and adopt the new practice is a success of the rich world. With corporate China not at all well-versed in the procedure-oriented push model of resource allocation, I would doubt that it could leapfrog into a brave new world of “dynamic specialization”. Most urgently, corporate China need a group of savvy professional managers with international exposure, who are well-versed in Western practices and who can compete on a par with Western counterparts, to support the cadre of the millions of entreprises in China. With an international vision, this group could bring product and process innovation to new hights in this land of the dragon.

For state research facilities, they face even a bigger challenge in that they are far from market and often pays modestly. Undoubtedly restructuring of these institutes is necessary in order to streamline the process and eliminate the unnecessary fat. Although the upholding of shareholder’s value is not at all the priority for researchers, heavy and wasty processes certainly won’t benefit the innovations. Much of the lean process and ERP approaches could be adapted for these institutions in the same way these applications function for the R&D departments of multinationals. Further development into the pull model is also desirable.

In examining both the private and public sector of China who relies on low cost talents, I would say that both sectors lag far behind the rich countries in the level efficiency of processes and modernization of infrastructures. If the world is going to experience another paradigm shift, destined from the birth of microprocessors and communication networks, I am not sure if the country will be left further behind. You can argue that Internet is widely spread in China, but if you look at the internet clubs in big cities, you will find that most young people are indulged in zero-sum games that creates no value what so ever: online chat, online gaming, maybe some video sharing(creates some value). If they are instead indulged in enriching a Chinese wiki, I would say China has a little more of hope. But all that the crowd needs is a visionary, a prophet, a true leader … to properly guide the energies of the people into constructive jobs. The competiveness of China lies on us, the expatriates who can bring experience, vision and capabilities to our homeland. And we will CREATE THE HISTORY.

 

Cherry Pickers, History and Evolution

I have just read an interesting article on Economist about Cherry Picking, which is a strategy used by consumers as well as companies for different purposes. The very act of cherry picking, this mecanisme, favors the evolution of businesses and societies at large. And evolution is a history of the survivors.

“It refers, for example, to customers who ignore products that are bundled together by a manufacturer (who in the process may disguise cross-subsidies between high-margin and low-margin components of the bundle). ” This is the cherry picking of the consumers. The objective of the cherrypicking consumer, in the end, is to find a bundle of products at the lowest price with the highest quality. It makes manufacturers to compete over quality as well price, creating a competitive market. Only the fittest manufacturers will survive the tests of consumers. Thus the evolutionary power of this strategy over corporations.

In a similar way, corporations can also pick customers. New comers in an established industry can sometimes cherry pick their way to success.  “The term cherry-picking is also applied to the behaviour of new entrants into old industries, firms which try to choose their customers carefully. By calculating which consumers are profitable (and appealing to them while ignoring those who are not) such a firm can sometimes rapidly gain market share.” “In car insurance, for example, cherry-picking in the UK pushed up the price prohibitively for young male drivers, the highest-risk group.” This is a typical evolutionary force at work where cherry picking has put young male drivers out of the race… In a way, I begin to understand why French banks prefer to lend to clients with little financial dynamisme. They are also cherry picking their customers. Those with little financial knowledge could accept offers with more margin, they may also be reluctant to move from status quo, say repaying a 25-year mortgage. While financial savys are smart enough to avoid traps and moves fast when opportunities occur, like interest rate moves lower, huge equity market opportunities in emerging countries, things like that. They are also less likely to be attracted by bland, non performing funds proposed by the bank. It is the same principle with the global free cash flowing around the world finding a place to invest. They seek profits. Yet as soon as the macroeconomic contexts are gone, they are gone, leaving behind projects suspended and stock markets in panic. From a broader view, these are all cherry-picking behaviour. Banks select customers, cash select investments, logic. All these contribute the evolution of … economics. ( like proposed by the Mckinsey book “Origin of Wealth”)

Further reflection of cherry picking connect me to another article on Captital on Dartybox, which is said to be a failure because of the fierce competition on the ISP market in France. Obviously Darty tries to cherry pick its customers, with a failure. The strategy is a good one in that it is a good way to crack an established market, yet their problem is that their target customer is not very well defined, so they find themselves eating a little part of the cake of everybody, not enough to retribute the investments.

Last word about evolution and competition: the survivorship bias, which is also mentioned by the economist article. It probably means, history is defined by the winners. Yes, indeed it is. The winners can define history, because, by all means their is no loser around the contest the truth.

 

Talent competitivness and Equilibrium State

I have seen the economist debate on the permanent declining competitiveness of workers of rich countries. It is quite interesting. Overall, I quite agree with statements of Lynda Gratton, Professor of Management practice at LBS, the CON side. But overall, I think she is idealistic in assuming a world without boundaries.

The three points: rich countries can be viewed in isolation, performance of workers across a country or region is the same, and finally about the value of teams over individual heroisme of workers as the driving force of competitiveness are in fact all based on the assumption that the world is frictionless, in different domains.

The first point is that countries can not be viewd in isolation, they must join up, yet political struggles are fierce nowadays, international organizations are at a loss on how to run the world with the ever more powerful China, India and gulf states. Trade barriers and government subsidies exist in countries for goods ranging from food to oil. Nationalisme and proctectionisme are rampant all around the world.  In a world fraught with frictions and the notion of a nation, the rich countries can be viewed in isolation.  After all the multinationals have national origins. The idea of producing multinationals to conquer the world is a 20th century equivalent to producing armies to rule the world. (Too radical) The political frictionless world is far from reality.

The second point of performance of workers around the world is converging, true… Yet as long as there are country borders, there are administrative barriers, the costs of these workers will not converge to a single point. The competitiveness is the ratio of performance and cost. The economic frictionless world is barely the case.

The The final point about the value of team over individuals is true and the frictionless paradigm worldwide cooperation works in is the internet and web 2.0. The free flow of capital, goods and people is far a perfect equilibrium. The information frictionless world is more or less true.

Of the assumptions that the three points she makes, only the last one with the internet is true. Yet overall I like her bold idealisme because she really puts out an enchanting blueprint for the world. In her rebuttal statement, she stated “We live in a joined-up world with global systems of climate and demography. ”  Challenges that mankind faces can only be solved with joined up efforts, we should behave with good will and cooperation rather than mean-spirited fear and rage.

In my view, the trends of the world are the following:

• The world is the transition from one previous equilibrium state(US Soviet bipolar situation) to a future equilibrium state(a joined up world as Mr. Gratton proposes).
• During this stage political strifes will give way to common causes like energy crisis, global warming and meteorological disasters.
• Technology transfers in all domains, especially in energy efficiecy and production, CＯ２　ｒｅｄｕｃｔｉｏｎ　ｍｅａｓｕｒｅｓ，will be blessed by governments. 
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The Turn of the Century and the Rise of Emerging Economies

We are in a great age with many changes. We are faced with quadrupling oil prices and ever increasing commodity prices, strong recessions in United States and hot emerging economies in Middle East, Asia and Latin America. It seems the world order is beginning to change. There are at least the following processes that are going on.

• Sustaining high oil prices and insatiable oil and commodities needs of emerging economies will inevitably lead industries to alternative energy and food sources, thus creating new industry leaders while crushing old ones like Ford, GM.
• The oil economy is on the demise, new unpredictable energy source is on the way to glory. It might well be that there will be no dominant force, much like the world’s multilateral politics today. The future is hybrid.
• The euro is becoming stronger and stronger, with a potential to replace the dollar as a world currency. Much of the emphasis of the rate hike of ECB is in the maintenance of a strong euro to combat inflation so that oil and foods remain affordable for Europeans.
• The emerging economy is striving to ascend up to the living standards of the few hundred million souls in the West, in which process, a degradation of Western living standards might be under way. In my view, this whole process is a redistribution of wealth among nations. Living standards of West and East will inevitably converge.

And with all these radical changes and problems on the development, the international organizations are also experiencing a difficult time: tie or die. The G8 meeting a an example how useless the discussions and the decisions are regarded by the world community in the face of oil shock, rising food price and the credit crunch. The organization needs serious restructuring or it will die, as posed by the economist.

 

Thoughts on Value and the Wealth of Nations

What is my value? I ask myself. From an economic point of view, I sell my labour, my intellectual labour.

What are the factors that decide the value of my labour? Ahead of everything else, I would say it is education, which is ahead of everything, which cultivates my abilities in every aspect: language, communication, reasoning, systematic thinking. The very ability of communicating in this language, English, is a product of education. This ability adds to my value, undoubtedly. It opens a road to sell my labour to people speaking the language. But what is the ultimate value of my intellectual labour? Why the costs of labour are so different from country to country? I would say that because GDP per head differs greatly from country to country, the costs of labour are disparate. But with the globalization, the world is like being connected by little tunnels of water, thereby leveling more even the costs of labour around the globe. The only thing that US people, or French people could argue against the case of their excessive labour costs in comparaison to Chinese or Indian labour is that French or Americans are more proficient in the language and culture and that  the proficiency facilitates the understanding of specification. The point is:         V=f(E)   where  V: Value; E: Education.

Education is a ladder towards progress in individual life and social life. Education is the gateway to business expertise, managerial experience and international exposure, but also plays an important role in cultivating intelligence and disemminating knowledge. Without education, people just doesn’t have any chance to act in the corporate stage. Education could also be viewed as an entry barrier that is created by people in the high walks of life to prevent the huge influx of labour if not for the education. Education is like quick downloading the principal knowledge of 10000 years of human history, thereby making sensible decisions in today’s world. It is the education that promotes innovation– we are simply much better off than our predessessors because we know much more! Sometimes it could also create the stereotypes in our paradigm, which renders revolution difficult. But overall education has greatly promoted innovation in the 20th century.