Half the time I have spent in China I have spent in factories. At least thats
how it feelsand its a feeling I sought. The factories where more
than 100 million Chinese men and women toil, and from which cameras, clothes,
and every other sort of ware flow out to the world, are to me the most startling
and intense aspect of todays China. For now, they are also the most
important. They are startling above all in their scale. I was prepared for
the skyline of Shanghai and its 240-mph Maglev train to the airport, and for
the nonstop construction, dust, and bustle of Beijing. Every account of modern
China mentions them. But I had no concept of the sweep of what has become
the worlds manufacturing center: the Pearl River Delta of Guangdong
province (the old Canton region), just north of Hong Kong. That one province
might have a manufacturing workforce larger than Americas. Statistics
from China are largely guesses, but Guangdongs population is around
90 million. If even one-fifth of its people hold manufacturing jobs, as seems
likely in big cities, that would be 18 millionversus 14 million in the
entire United States.
Containers ready for ship from the port of Shenzhen.
in Guangdong province, the famous Foxconn works, sits in the middle of a conurbation
just outside Shenzhen, where it occupies roughly as much space as a major
airport. Some 240,000 people (the number I heard most often; estimates range
between 200,000 and 300,000) work on its assembly lines, sleep in its dormitories,
and eat in its company cafeterias. I was told that Foxconns caterers
kill 3,000 pigs each day to feed its employees. The number would make senseits
one pig per 80 people, in a country where pigs are relatively small and pork
is a staple meat (I heard no estimate for chickens). From the major ports
serving the area, Hong Kong and Shenzhen harbors, cargo ships left last year
carrying the equivalent of more than 40 million of the standard 20-foot-long
metal containers that end up on trucks or railroad cars. Thats one per
second, round the clock and year-roundand its less than half of
Chinas export total. Whats in the containers that come back from
America? My guess was, dollars; in fact, the two leading ship-borne
exports from the United States to China, by volume, are scrap paper and scrap
metal, for recycling.
And the factories
are important, for China and everyone else. Someday China may matter internationally
mainly for the nature of its political system or for its strategic ambitions.
Those are significant even now, of course, but Chinas success in manufacturing
is what has determined its place in the world. Most of what has been good
about China over the past generation has come directly or indirectly from
its factories. The country has public money with which to build roads, houses,
and schoolsespecially roads. The vast population in the countryside
has what their forebears acutely lacked, and peasants elsewhere today still
do: a chance at paying jobs, which means a chance to escape rural poverty.
Americans complain about cheap junk pouring out of Chinese mills, but they
rely on China for a lot that is not junk, and whose cheap price is important
to American industrial and domestic life. Modern consumer culture rests on
the assumption that the nicest, most advanced goodscomputers, audio
systems, wall-sized TVswill get cheaper year by year. Moores Law,
which in one version says that the price of computing power will be cut in
half every 18 months or so, is part of the reason, but Chinas factories
are a big part too.
Much of what
is threatening about todays China also comes from its factories. Many
people inside China, and nearly everyone outside, can avoid the direct effects
of the countrys political controls. It is much harder to avoid its pollution.
The air in Chinese cities is worse than I expected, and because the pollution
affects so many people in such a wide range of places, it is more damaging
than Londons, Manchesters, or Pittsburghs in their worst,
rapidly industrializing days. The air pollution comes directly from the steel
works, cement plants, and other heavy-industry facilities that are helping
the country prosper, and indirectly from the electric power plants that keep
everything running. (Plus more and more cars, though China still has barely
one-thirtieth as many per capita as the United States.) The sheer speed and
volume with which factories and power plants across China increase their output
of soot and gases make the countrys air-pollution problems the worlds.
The heightened competition for oil, ore, and other commodities to feed the
factories affects other nations, as do slapdash standards of food purity and
safety, which may have led to tainted worldwide supplies of animal food. The
ultimate fear in the developed world, of course, is that as China creates
millions of new factory jobs unknown millions will lose such jobs in America,
Canada, Germany, even Japan.
But these factories
are both surprising and important in a less obvious, though also fundamental,
way. Almost nothing about the way they work corresponds to the way they are
discussed in the United States. Americas political debates about the
China opportunity and, even more, the China threat
seem distant, theoretical, and imprecise from the perspective of the factories
where the outsourcing and exporting occur. The industrialists from the United
States, Europe, or Japan who are deciding how much of their production to
move to China talk about the process in very different terms from those used
in American political discussion. One illustration: The artificially low value
of Chinas currency, relative to the dollar, comes near the top of American
complaints about Chinese trade policy. (The currency is the yuan renminbiliterally,
peoples moneyor RMB). This is more like the eighth
or tenth issue that comes up when business officials discuss the factories
they are opening in one country and closing in another. And when it does come
up, the context is usually whether the RMBs rise will force a company
to put its next factory not in Chinas crowded coastal region but someplace
with even lower costs, like the remote interior provinces, where salaries
are lower and commercial space is cheaperor perhaps Vietnam or Cambodia.
So too with
complaints about Chinese government subsidies for exporting industries, widespread
abuse of intellectual property, and even slave labor inside the
vast factories. Some of these complaints are well-founded, others are not;
but even if all were true, they would misdescribe and undervalue what is going
on here. Talking about Chinese industrial growth, Americans are in the position
of 19th-century Europeans who acted as if Americas industrial rise could
be explained simply by its vast natural resources and its exploitation of
immigrant and slave labor, plus its very casual attitude toward copyright
and patent laws protecting foreign, mainly British, books and inventions.
(Today, Americans walk the streets of China and see their movies, music, software,
and books sold everywhere in cheap pirate versions. A century and a half ago,
Charles Dickens walked the streets of young America and fumed to see his novels
in cheap pirate versions.) All those factors played their part, but they were
not the full story of Americas risenor do the corresponding aspects
of modern Chinas behavior fully explain what China has achieved.
pretend to know the complete story of Chinas industrial rise. But I
can describe what I have seen, and the main way it has changed my mind.
shifts in economic power have effects beyond the purely economic. Americans
need not be hostile toward Chinas rise, but they should be wary about
its eventual effects. The United States is the only nation with the scale
and power to try to set the terms of its interaction with China rather than
just succumb. So starting now, Americans need to consider the economic, environmental,
political, and social goals they care about defending as Chinese influence
might best start from the point about which Ive changed my mind: So
far, Americas economic relationship with China has been successful and
beneficialand beneficial for both sides. Free trade may not always be
good for all participants, and in the long run trade with China may hold perils
for the United States. But based on what I have seen in China, and contrary
to what I expected before I came, so far it is working as advertised. Before
thinking about what should be changed, Americans should appreciate what has
gone right. A good place to begin that story is Shenzhen.
Each time I
went to breakfast at the Sheraton Four Points in Shenzhen, I felt as if I
were in a movie. I had a specific scene in mind: the moments aboard a U.S.
aircraft carrier in a typical World War II movie when the flight crews gather
in the wardroom to discuss the mission on which theyre about to embark.
crowd at the Four Points has that same sort of anticipatory buzz. Shenzhen,
which is the part of China immediately north of Hong Kong and its New
Territories, did not exist as a city as recently as Ronald Reagans
time in the White House. It was a fishing town of 70,000 to 80,000 people,
practically unnoticeable by Chinese standards. Todays other big coastal
manufacturing centers, such as Xiamen, Guangzhou, Hangzhou, and Shanghai,
were for centuries consequential Chinese cities. Not Shenzhen. Its population
has grown at least a hundredfold in the past 25 yearsrather than merely
tripled or quadrupled, as in other cities. It is roughly as populous as New
York, like many Chinese cities I keep coming across. Shenzhen has scores
of skyscrapers and many, many hundreds of factories.
The story of
Shenzhens boom is in a sense the first chapter in modern Chinas
industrialization. During the founding period, Shenzhen people were
bold and resolute in smashing the trammels of the old ideas, says the
English version of the citys history, as recounted in Shenzhens
municipal museum in an odd, modern-Chinese combination of Maoist bombast and
supercapitalist perspective. With the market-oriented reforms as the
breakthrough point, they shook off the yoke of the planned economy, and gradually
built up new management systems.
What all this
refers to is the establishment, in the late summer of 1980, of Shenzhen as
a special economic zone, where few limits or controls would apply
and businesses from around the world would be invited to set up shop. Shenzhen
was attractive as an experimental locale, not just because it was so close
to Hong Kong, with its efficient harbor and airport, but also because it was
so far from Beijing. If the experiment went wrong, the consequences could
be more easily contained in this southern extremity of the country. Nearly
every rule that might restrict business development was changed or removed
in Shenzhen. Several free-trade processing zones were established, where materials
and machinery coming in and exports going out would be exempt from the usual
duties or taxes.
has traits that Americans would associate with a booming Sun Belt citytransient,
rough, unmannered, full of opportunityand that characterized Manchester,
Detroit, Chicago, Los Angeles at their times of fastest growth. Newspapers
that cover Shenzhen are full of stories of drugs, crime, and vice in the most
crowded tenement areas, where walls and sidewalks are covered with spray-painted
phone numbers. Some are for prostitutes, but many are for vendors who can
provide fake documentshealth certificates, diplomas, residence credentialsfor
those seeking work.
Four Points is part of the process that keeps Shenzhen growing. It is one
of the places foreigners go when they are ready to buy from China.
in their 30s through 50s who come to Shanghai are often financiers, consultants,
or lawyers. They tend to be lean, with good suits and haircuts. Those in Beijing
are often diplomats, academics, or from foundations or NGOs. They look a little
less polished. The scene in and around Shenzhen is different. It is an international
groupAmericans, Taiwanese, Europeans, Japaneseof a single class.
Virtually all of them are designers, engineers, or buyers from foreign companies
who have come to meet with Chinese factory owners. The Americans in the group
tend to be beefier than the Shanghai-Beijing crowd, and more Midwestern-looking.
Some wear company shirts or nylon jackets with their companys logo on
When the Four
Points restaurant opens at 6:30 in the morning, foreigners begin assembling
for breakfast, the meal when people most crave their native cuisine. It is
laid out for all comers on a huge buffet: for the Europeans, sliced meats
and cheese, good breads, strong coffee, muesli and yogurt. For the Japanese,
pickles, sushi, cold noodles, smoked eel over rice. For the Taiwanese and
other Chinese, steamed buns, dim sum, hot congee cereal. For the Americans,
the makings of a Dennys-style Slam breakfast: thick waffles,
eggs, hash-brown potatoes, sausage and bacon and ham. My wife finally accused
me of spending so much time in Shenzhen just for the breakfasts.
The room is
noisy, as people discuss their plans for the day or meet the Chinese factory
officials who will conduct them on their tours. The room empties dramatically
by nine oclock, as people go out to meet their drivers and vans, and
the days factory touring and contract signing begin. As best I could
tell from chatting with fellow guests, in all my trips to the Four Points,
I was the only person there not on a buying mission.
morning one man, a 41-year-old Irish bachelor, sits at the same table at the
Four Points. Very late in the evening, he is at that table for dinner too.
The table is near the entrance, from which the rest of the room can be surveyed.
On a typical night, the company he owns will have 10 to 15 rooms booked at
the hotel, for foreign visitors coming to do business with him. Often a few
will join him for dinner. When the waiters see this man coming, they bring
the plain Western foodmeat, potatoesthey know hes interested
in. Do you have the same thing every night? I asked him when I
saw the waiters reflexive response to his arrival. I didnt
come here for the food, he replied.
This man has
lived in an apartment at the Four Points for the last two years, and in other
hotels around Shenzhen for the previous eight. He makes a point of telling
people that he does not speak Chinesemost business visitors who try,
he says, have to work so hard to cope with the language that they forget what
theyre negotiating about. But at useful points in meetings he drops
in Chinese colloquialisms so that people must wonder whether in fact he has
understood everything that has been said. (He tells me he hasnt.) His
name is Liam Casey, and I have come to think of him as Mr. China.
is an established jokey honorific, like People magazines Sexiest
Man Alive2003. Since the days of Marco Polo, successive foreigners
have competed informally for recognition as the person who really understands
the country and can make things happen here. The hilarious 2005 memoir Mr.
China, by Tim Clissold, describes the heartbreak and frustration of a young
British financier who thought he could figure out the secrets of success in
China when it was first opening up to Western commerce.
Liam Casey has
succeeded where Tim Clissold was frustrated, but he is careful not to sound
overconfident. Just when you think you know whats happening here,
thats when youre in danger, he says. You see some
new product on the market, and you wonder where it was madeand it turns
out to be a factory you drove by every day for five years and never knew what
was going on inside! You can be here so long and know so little. But
for my purposes he is Mr. China, because he is at the center of the overlapping
flows of humanity bringing the worlds work to China.
When not dining
or sleeping at the Four Points, Casey runs a company he owns outright, with
800 employees (50 of them are from Ireland, America, or one of a dozen other
nations; the rest are Chinese) and sales last year of about $125 million.
He is of medium height and fit-seeming in a compact way, with thick dark hair
and a long face that generally has an impish expression. He has a strong Irish
accent and dresses informally. He walks, talks, and moves so fast that I was
generally scrambling to keep up.
Casey grew up
on a farm outside Cork, had no formal education after high school, and first
worked as a salesman in garment shops in Cork and then Dublin. He got involved
in buying garments from Europe, with a friend set up a Crate & Barrelstyle
store in Ireland, then decided to travel. At age 29 he arrived in Southern
California and worked briefly for a trading company. He says he would be in
America stillLaguna, Newport Beach, ah, I luvved itbut
he could not get a green card or long-term work permit, and didnt want
to try to stay there under the radar.
as well say this in every article I write from overseas: The easier America
makes it for talented foreigners to work and study there, the richer, more
powerful, and more respected America will be. Americas ability to absorb
the worlds talent is the crucial advantage no other culture can matchas
long as America doesnt forfeit this advantage with visa rules written
mainly out of fear.)
So in 1996,
just after he turned 30, Casey went to Taipei for an electronics trade show.
It was his first trip to Asia, and, he says, I could see this is where
the opportunity was. Within a year, he had set up operations in the
Shenzhen area and started the company now known as PCH China Solutions. The
initials stand for Pacific Coast Highway, in honor of his happy Southern California
What does this
company do? The short answer is outsourcing, which in effect means matching
foreign companies that want to sell products with Chinese suppliers who can
make those products for them. Casey describes his mission as helping
innovators leverage the manufacturing supply chain here in China. To
see how this works, consider the great human flows that now converge in southern
China, which companies like Caseys help mediate.
One is the enormous
flow of people, mainly young and unschooled, from Chinas farms and villages
to Shenzhen and similar cities. Some arrive with a factory job already arranged
by relatives or fixers; some come to the cities and then look for work. In
the movie version of Balzac and the Little Chinese Seamstress, two teenaged
men from the city befriend a young woman in the mountain village where they
have been sent for rustication during the Cultural Revolution. One day the
young woman unexpectedly leaves. She has gone to try her luck in a big
city, her grandfather tells them. She said she wanted a new life.
The new life is in Shenzhen.
of times, and perhaps lacking the specific drama of the Balzac tale, this
is the story of the factory towns. As in the novel, many of the migrants are
young women. In the light-manufacturing operations I have seen in the Pearl
River Delta and around Shanghai, the workforce is predominantly female. Signing
on with a factory essentially means making your job your life. Workers who
come to the big coastal factory centers either arrive, like the little seamstress,
before they have a spouse or children, or leave their dependents at home with
grandparents, aunts, or uncles. At the electronics and household-goods factories,
including many Ive seen, the pay is between 900 and 1,200 RMB per month,
or about $115 to $155. In the villages the workers left, a farm familys
cash earnings might be a few thousand RMB per year. Pay is generally lowest,
and discipline toughest, at factories owned and managed by Taiwanese or mainland
Chinese companies. The gigantic Foxconn (run by its founder, Terry Guo of
Taiwan) is known for a militaristic organization and approach. Jobs with Western
firms are the cushiest but are also rare, since the big European and American
companies buy mainly from local subcontractors. Casey says that monthly pay
in some factories he owns is several hundred RMB more than the local average.
His goal is to retain workers for longer than the standard few-year stint,
allowing them to develop greater skills and a sense of company spirit.
A factory work
shift is typically 12 hours, usually with two breaks for meals (subsidized
or free), six or seven days per week. Whenever the action lets upif
the assembly line is down for some reason, if a worker has spare time at a
meal breakmany people place their heads down on the table in front of
them and appear to fall asleep instantly. Chinese law says that the standard
workweek is 40 hours, so this means a lot of overtime, which is included in
the pay rates above. Since their home village may be several days travel
by train and bus, workers from the hinterland usually go back only once a
year. They all go at the same timeduring the Spring Festival,
or Chinese New Year, when ports and factories effectively close for a week
or so and the nations transport system is choked. The people here
work hard, an American manager in a U.S.-owned plant told me. Theyre
young. Theyre quick. Theres none of this I have to go pick
up the kids nonsense you get in the States.
At every electronics
factory Ive seen, each person on an assembly line has a bunch of documents
posted by her workstation: her photo, name, and employee number, often the
instructions she is to follow in both English and Chinese. Often too theres
a visible sign of how well shes doing. For the production line as a
whole there are hourly totals of target and actual production, plus allowable
and actual defect levels. At several Taiwanese-owned factories Ive seen,
the indicator of individual performance is a childish outline drawing of a
tree with leaves. After each days shift one of the trees leaves
is filled in with a colored marker, either red or green. If the leaf is green,
the worker has met her quota and caused no problems. If its red, a defect
has been traced back to her workstation. One red leaf per month is within
tolerance; two is a problem.
As in all previous
great waves of industrialization, many people end up staying in town; thats
why Shenzhen has grown so large. But more than was the case during Americas
or Englands booms in factory work, many rural people, especially the
young women, work for two or three years and then go back to the country with
their savings. In their village they open a shop, marry a local man and start
a family, buy land, or use their earnings to help the relatives still at home.
Life in the
factories is obviously hard, and in the heavy- industry works it is very dangerous.
In the same week that 32 people were murdered at Virginia Tech, 32 Chinese
workers at a steel plant in the north were scalded to death when a ladleful
of molten steel was accidentally dumped on them. Even in Chinese papers, that
story got less play than the U.S. shootingand fatal coal-mine disasters
are so common that they are reported as if they were traffic deaths. By comparison,
the light industries that typify southern China are tedious but less overtly
hazardous. As the foreman of a Taiwanese electronics factory put it to me
when I asked him about rough working conditions, Have you ever seen
a Chinese farm? An American industrial designer who works in China told
me about a U.S. academic who toured his factory and was horrified to see young
female workers chained to their stations. What she saw was actually the grounding
wire that is mandatory in most electronics plants. Each person on the assembly
line has a Velcro band around her wrist, which is connected to the worktable
to avoid a static- electricity buildup that could destroy computer chips.
That so many
people are in motion gives Shenzhen and surrounding areas a rootless, transient
quality. The natural language of southern China is Cantonese, but in the factory
cities the lingua franca is Mandarin, the language that people from different
parts of China are likeliest to share. I dont like it here,
a Chinese manager originally from Beijing told me, three years into a work
assignment to Shenzhen. There are no roots or culture. For
the first few weeks I was here, I thought it was soulless, Liam Casey
says of the town that has been his home for 10 years. But like any fast-moving
place, the activity is the character. Its like New York. You arrive
at the airport and go downtown, and when you get out of that cab, no one knows
where you came from. You could have been there one hour, you could have been
there 10 yearsno one can tell. Its similar here, which makes it
exciting. Casey told me that, to him, Shanghai felt slow and made
for tourists. Indeed, I am regularly surprised to find that people stroll
rather than stride along the sidewalks of Shanghai: Its a busy city
with slow pedestrians. Or maybe Caseys outlook is contagious.
flow into Shenzhen and similar cities is of entrepreneurs who have come and
set up factories. The point of the Shenzhen liberalizations was less to foster
any one industry than to make it easy for businesses in general to get a start.
attracted by the offer came from Taiwan, whose economy is characterized by
small, mainly family-owned firms like those that now abound in southern China.
Overall, mainland Chinas development model is closer to Taiwans
than to Japans or Koreas. In all these countries and throughout
East Asia, governments use many tools to maximize industrial output: tax policy,
trading rules, currency values, and so on. But Japanese and Korean policy
has tended to emphasize the welfare of large, national-champion firmsMitsubishi
and Toyota, Lucky Gold Star and Samsungwhereas Taiwans exporters
have been thousands of small firms, a few of which grew large. China is, of
course, vaster than the other countries combined, but its export-oriented
companies are small. One reason for the atomization is pervasive mistrust
and corruption, plus a shaky rule of law. Even Foxconn, Chinas largest
exporter, was only No. 206 on last years Fortune Global 500 list of
the biggest companies in the world. When foreigners have trouble entering
the Japanese or Korean markets, it is often because they run up against barriers
protecting big, well-known local interests. The problem in China is typically
the opposite: Foreigners dont know where to start or whom to deal with
in the chaos of small, indistinguishable firms.
For me, the
fragmented nature of the Chinese system is symbolized by yet another of the
stunning sights in Shenzhen: the SEG Electronics Market, a seven-story downtown
structure whose every inch is crammed with the sales booths of hundreds of
mom-and-pop electronics dealers. Chips that I couldnt dream of
buying in the U.S., reels of rare ceramic capacitors that I only dream about
at night! Andrew Bunnie Huang, a Chinese-American electronics
Ph.D. from MIT, wrote in his blog after a visit. My senses tingle, my
head spins. I cant suppress a smirk of anticipation as I walk around
the next corner, to see shops stacked floor to ceiling with probably a hundred
million resistors and capacitors. As he noted, within an hours
drive north were hundreds of factories that could take any electronics
ideas and pump them out by the literal boatload. The market is part
permanent trade show, part supply stop for people who suddenly need some capacitors
or connectors for a prototype or last-minute project, part swap meet where
traders unload surplus components.
One last flow
coming into Shenzhen, which makes the other flows possible, is represented
by the people at the Four Points: buyers from high-wage countries who have
decided that they want to take advantage of, rather than compete with, low-cost
Chinese manufacturers. This is where our Mr. China, and others like him, fit
This is also
where a veil falls. In decades of reporting on military matters, I have rarely
encountered people as concerned about keeping secrets as the buyers and suppliers
who meet in Shenzhen and similar cities. What information are they committed
to protect? Names, places, and product numbers that would reveal which Western
companies obtain which exact products from which Chinese suppliers. There
are high- and low-road reasons for their concern.
reason is the Nike problem. This is the buyers wish to minimize
their brands association with outsourcing in general and Asian sweatshops
in particular, named for Nikes PR problems because of its factories
in Indonesia. By Chinese standards, the most successful exporting factories
are tough rather than abusive, but those are not the standards Western customers
reason involves the crucial operational importance of the supply chain.
It is not easy to find the right factory, work out the right manufacturing
system, ensure the right supply of parts and raw material, impose the right
quality standards, and develop the right relationship of trust and reliability.
Companies that have solved these problems dont want to tell their competitors
how they did so. Supply chain is intellectual property, is the
way Liam Casey put it. Asking a Western company to specify its Chinese suppliers
is like asking a reporter to hand over a list of his best sources.
the supply chain confidential is so important to buyers, they try to impose
confidentiality on their suppliers. When an outside companys reputation
for design and quality is strongSony, Braun, Applemany Chinese
contractors like to drop hints that they are part of its supply chain. But
the ones who really are part of it must be more discreet if they want to retain
the buying companys trust (and business).
So I will withhold
details, but ask you to take this leap: If you think of major U.S. or European
brand names in the following businesses, odds are their products come from
factories like those Im about to describe. The businesses are: computers,
including desktops, laptops, and servers; telecom equipment, from routers
to mobile phones; audio equipment, including anything MP3-related, home stereo
systems, most portable devices, and headsets; video equipment of all sorts,
from cameras and camcorders to replay devices; personal-care items and high-end
specialty-catalog goods; medical devices; sporting goods and exercise equipment;
any kind of electronic goods or accessories; and, for that matter, just about
anything else you can think of. Some of the examples Ill give come from
sites in Shenzhen, but others are from facilities near Shanghai, Hangzhou,
Guangzhou, Xiamen, and elsewhere.
Why does a foreign
company come to our Mr. China? I asked Casey what he would tell me if I were
in, say, some branch of the steel industry in Pittsburgh and was looking to
cut costs. Not interested, he said. The products too
heavy, and youve probably already automated the process, so one person
is pushing a button. It would cost you almost as much to have someone push
the button in China.
is of intense interest to him, he said, is a company that has built up a brand
name and relationships with retailers, and knows what it wants to promote
and sell nextand needs to save time and money in manufacturing a product
that requires a fair amount of assembly. That is where we can help,
because you will come here and see factories that are better than the ones
youve been working with in America or Germany.
Here are a few
examples, all based on real-world cases: You have announced a major new product,
which has gotten great buzz in the press. But close to release time, you discover
a design problem that must be fixedand no U.S. factory can adjust
its production process in time.
factories can respond more quickly, and not simply because of 12-hour workdays.
Anyplace else, youd have to import different raw materials and
components, Casey told me. Here, youve got nine different
suppliers within a mile, and they can bring a sample over that afternoon.
People think China is cheap, but really, its fast. Moreover, the
Chinese factories use more human labor, and fewer expensive robots or assembly
machines, than their counterparts in rich countries. People are the
most adaptable machines, an American industrial designer who works in
China told me. Machines need to be reprogrammed. You can have people
doing something entirely different next week.
Or: You are
an American inventor with a product you think has green potential
for household energy savings. But you need to get it to market fast, because
you think big companies may be trying the same thing, and you need to meet
a target retail price of $100. No place but China to do this,
Mr. China said, as he showed me the finished product.
Or: You are
a very famous American company, and you worry that youve tied up too
much capital keeping inventory for retail stores at several supply depots
in America. With Mr. Chinas help, you start emphasizing direct retail
sales on your Web siteand do all the shipping and fulfillment from one
supply depot, run by young Chinese women in Shenzhen, who can ship directly
to specific retail stores.
Over the course
of repeated visits to Shenzhenthe breakfasts!and visits to other
manufacturing regions, I heard about many similar cases and saw some of the
tools that have made it possible for Western countries to view China as their
computerized knowledge. Caseys PCH has a Google Earthlike system
that incorporates what he has learned in 10 years of dealing with Chinese
subcontractors. You name a product you want to makesay, a new case or
headset for a mobile phone. Casey clicks on the map and shows the companies
that can produce the necessary componentsand exactly how far they are
from each other in travel time. This is hard-won knowledge in an area where
city maps are out of date as soon as they are published and addresses are
approximate. (Caseys are keyed in with GPS coordinates, discreetly read
from his GPS-equipped mobile phone when he visits each factory.) If a factory
looks promising, you click again and get interior and exterior photos, a rundown
on the management, in some cases videos of the assembly line in action, plus
spec sheets and engineering drawings for orders they have already filled.
Similar programs allow Casey and his clients to see which ship, plane, or
truck their products are on anywhere in the world, and the amount of stock
on hand in any warehouse or depot. (How do they know? Each finished piece
and almost every component has an individual bar code that is scanned practically
every time it is touched.)
whose workflow Casey monitors vary tremendously, though not in their looks.
Ive come to think that there is only one set of blueprints for factories
in China: a big, boxy, warehouse-looking structure, usually made of concrete
and usually five stories; white or gray outside; relatively large windows,
which is how you can tell it from the workers dormitories; high ceilings,
to accommodate machines. But inside, some are highly automated while some
are amazingly reliant on hand labor. Im not even speaking of the bad,
dangerous, and out-of-date factories frequently found in the north of China,
where leftover Maoist-era heavy-industry hulks abound. Even some newly built
facilities leave to human hands work that has been done in the West for many
decades by machines. Imagine opening a consumer producta mobile phone,
an electric toothbrush, a wireless routerand finding a part that was
snapped on or glued into place. It was probably put there by a young Chinese
woman who did the same thing many times per minute throughout her 12-hour
I could describe
many installations, but I was fascinated by two. The first represents one
extreme in automation. It is owned and operated by Inventec, one of five companies
based in Taiwan that together produce the vast majority of laptop and notebook
computers sold under any brand anywhere in the world. Everyone in America
has heard of Dell, Sony, Compaq, HP, Lenovo-IBM ThinkPad, Apple, NEC, Gateway,
Toshiba. Almost no one has heard of Quanta, Compal, Inventec, Wistron, Asustek.
Yet nearly 90 percent of laptops and notebooks sold under the famous brand
names are actually made by one of these five companies in their factories
in mainland China. I have seen a factory with three competing
brand names coming off the same line.
installation I saw was in an export-processing zone in Shanghai specially
created for the company, in which imported components for manufacturing and
finished products for export were free of the usual duties or taxes. It turns
out more than 30,000 notebook computers per day, under one of the brand names
listed above. Each day, an Inventec plant on the same campus produces hundreds
of large, famous-brand-name server computers to run Internet traffic.
This is todays
rough counterpart to the Ford Motor Companys old River Rouge works.
In the heyday of The Rouge, rubber, steel, and other raw materials would come
into the plant, and finished autos would come out. Here, naked green circuit
boards, capacitors, chip sets, and other components come in each day, and
notebook computers come out. Some advanced components arrive already assembled:
disk drives from Taiwan or Singapore, LCD screens from Korea or Japan, keyboards
and power supplies from other plants in China.
process looks the way you would expect a high-tech assembly line to. Conveyers
and robots take the evolving computer from station to station; each unit arrives
in front of a worker a split second after she has finished with the previous
one. Before a component goes into a machine, its bar code is scanned to be
sure it is the right part; after it is added, the machine is check-weighed
to see that its new weight is correct. Hundreds of tiny transistors, chips,
and other electronic parts are attached to each circuit board by pick
and place robots, whose multiple arms move almost too fast to follow.
The welds on the board are scanned with lasers for defects. Any with problems
are set aside for women specialists, looking through huge magnifying glasses,
to reweld. Why did this factory invest so much in robots and machine tools?
I asked a supervisor from Taiwan. People cant do it precisely
enough, was his answer. These factories automate not whats too
expensive but whats too delicate for human beings to perform.
Many of the
notebook computers have been ordered online, and as they near completion each
is flavored for its destination. The day I visited, one was going
to Tokyo, with a Japanese keyboard installed and Japanese logos snapped into
the right places on the case; the next one was headed for the United States.
After display screens are installed, each computer rides on a kind of racetrack
along the ceiling of the factory, where it runs for several hours to make
sure that all components work. Then the conveyers carry it to the final flavoring
stepthe burn in of the operating system, which on my visit
was Windows Vista, in many languages. One engineer pointed out that because
Vista requires up to 10 times as much disk space as Windows XP, the assembly
line had to be altered to allow a much longer, slower passage through the
The other facility
that intrigued me, one of Liam Caseys in Shenzhen, handled online orders
for a different well-known American company. I was there around dawn, which
was crunch time. Because of the 12-hour time difference from the U.S. East
Coast, orders Americans place in the late afternoon arrive in China in the
dead of night. As I watched, a customer in Palatine, Illinois, perhaps shopping
from his office, clicked on the American companys Web site to order
two $25 accessories. A few seconds later, the order appeared on the screen
7,800 miles away in Shenzhen. It automatically generated a packing and address
slip and several bar-code labels. One young woman put the address label on
a brown cardboard shipping box and the packing slip inside. The box moved
down a conveyer belt to another woman working a pick to light
system: She stood in front of a kind of cupboard with a separate open-fronted
bin for each item customers might order from the Web site; a light turned
on over each bin holding a part specified in the latest order. She picked
the item out of that bin, ran it past a scanner that checked its number (and
signaled the light to go off), and put it in the box. More check- weighing
and rescanning followed, and when the box was sealed, young men added it to
a shipping pallet.
By the time
the night shift was ready to leave8 a.m. China time, 7 p.m. in Palatine,
8 p.m. on the U.S. East Coastthe volume of orders from America was tapering
off. More important, the FedEx pickup time was drawing near. At 9 a.m. couriers
would arrive and rush the pallets to the Hong Kong airport. The FedEx flight
to Anchorage would leave by 6 p.m., and when it got there, the goods on this
companys pallets would be combined with other Chinese exports and re-sorted
for destinations in America. Forty-eight hours after the man in Palatine clicked
Buy it now! on his computer, the item showed up at his door. Its
return address was a company warehouse in the United States; a small Made
in China label was on the bottom of the box.
At 8 a.m. in
Shenzhen, the young women on the night shift got up from the assembly line,
took off the hats and hairnets they had been wearing, and shook out their
dark hair. They passed through the metal detector at the door to their workroom
(they pass through it going in and coming out) and walked downstairs to the
racks where they had left their bikes. They wore red company jackets, as part
of their working uniformand, as an informal uniform, virtually every
one wore tight, low-rise blue jeans with embroidery or sequins on the seams.
Most of them rode their bikes back to the dormitory; others walked, or walked
their bikes, chatting with each other. That evening they would be back at
work. Meanwhile, flocks of red-topped, blue-bottomed young women on the day
shift filled the road, riding their bikes in.
W hat should
we make of this? The evidence suggests what I hadnt expected: that the
interaction has been good for most participantsso far.
Has the factory
boom been good for China? Of course it has. Yes, it creates environmental
pressures that, if not controlled, could pollute China and the world out of
existence. The national governments current Five Year Planthe
11th, running through 2010has as its central theme Chinas development
as a harmonious society, or hexie shehui, a phrase heard about
as often from Chinas leadership as global war on terror
has been heard from Americas. In China, the phrase is code for attempting
to deal with income inequalities, especially the hardships of farmers and
millions of migrant laborers. But it is also code for at least talking about
protecting the environment.
And, yes, throughout
Chinas boom many people have been mistreated, oppressed, sometimes worked
to death in factories. Even those not abused may be lonely and lost, with
damaging effects on the countrys social fabric. But this was also the
story of Britain and America when they built their great industries, their
great turbulent industrial cities, and ultimately their great industrial middle
classes. For China, it is far from the worst social disruption the country
has endured in the last 50 years. At least this upheaval, unlike the disastrous
Great Leap Forward of the 1950s and Cultural Revolution of the 60s and
early 70s, has some benefits for individuals and the nation.
may feel that even todays normal Chinese working conditions
amount to slave labor$100 a month, no life outside the factory, work
shifts so long theres barely time to do more than try to sleep in a
jam-packed dormitory. Here is an uncomfortable truth Im waiting for
some Chinese official to point out: The woman from the hinterland working
in Shenzhen is arguably better off economically than an American in Chicago
living on minimum wage. She can save most of what she makes and feel she is
on the way up; the American cant and doesnt. Over the next two
years, the minimum wage in the United States is expected to rise to $7.25
an hour. Assuming a 40-hour week, thats just under $1,200 per month,
or about 10 times the Chinese factory wage. But thats before payroll
deductions and the cost of food and housing, which are free or subsidized
in Chinas factory towns.
do make a different point about their economy, and they rattle it off so frequently
that Western audiences are tempted to dismiss it. They say, Whatever
else we have done, we have brought hundreds of millions of people out of poverty.
That is true, it is important, and the manufacturing export boom has been
a significant part of how China has done it. This economic success obviously
does not justify everything the regime has done, especially its crushing of
any challenge to one-party rule. But the magnitude of the achievement cant
be ignored. For all of the billions of dollars given in foreign aid and supervised
by the World Bank, the greatest good for the greatest number of the worlds
previously impoverished people in at least the last half century has been
achieved in China, thanks largely to the outsourcing boom.
Has the move
to China been good for American companies? The answer would seemingly have
to be yesotherwise, why would they go there? It is conceivable that
bad partnerships, stolen intellectual property, dilution of brand name, logistics
nightmares, or other difficulties have given many companies a sour view of
outsourcing; I have heard examples in each category from foreign executives.
But the more interesting theme I have heard from them, which explains why
they are willing to surmount the inconveniences, involves something called
the smiley curve.
The curve is
named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs
from the beginning to the end of a products creation and sale. At the
beginning is the companys brand: HP, Siemens, Dell, Nokia, Apple. Next
comes the idea for the product: an iPod, a new computer, a camera phone. After
that is high-level industrial designthe conceiving of how the product
will look and work. Then the detailed engineering design for how it will be
made. Then the necessary components. Then the actual manufacture and assembly.
Then the shipping and distribution. Then retail sales. And, finally, service
contracts and sales of parts and accessories.
is that Chinas activity is in the middle stagesmanufacturing,
plus some component supply and engineering designbut Americas
is at the two ends, and those are where the money is. The smiley curve, which
shows the profitability or value added at each stage, starts high for branding
and product concept, swoops down for manufacturing, and rises again in the
retail and servicing stages. The simple way to put thisthat the real
money is in brand name, plus retailmay sound obvious, but its implications
At each factory
I visited, I asked managers to estimate how much of a products sales
price ended up in whose hands. The strength of the brand name was the most
important variable. If a product is unusual enough and its brand name attractive
enough, it could command so high a price that the retailer might keep half
the revenue. (Think: an Armani suit, a Starbucks latte.) Most electronics
products are now subject to much fiercer price competition, since it is so
easy for shoppers to find bargains on the Internet. Therefore the generic
Windows-style laptops I saw in one modern factory might go for around $1,000
in the United States, with the retailer keeping less than $50.
Where does the
rest of the money go? The manager of that factory guessed that Intel and Microsoft
together would collect about $300, and that the makers of the display screen,
the disk-storage devices, and other electronic components might get $150 or
so apiece. The keyboard makers would get $15 or $20; FedEx or UPS would get
slightly less. When all other costs were accounted for, perhaps $30 to $403
to 4 percent of the totalwould stay in China with the factory owners
and the young women on the assembly lines.
A carrying case for an audio device from a big-name Western company retails
for just under $30. That company pays the Chinese supplier $6 per case, of
which about half goes for materials. The other $24 stays with the big-name
company. An earphone-like accessory for another U.S.-brand audio device also
retails for about $30. Of this, I was told, $3 stayed in China. I saw a set
of high-end Ethernet connecting cables. The cables are sold, with identical
specifications but in three different kinds of packaging, in three forms in
the United States: as a specialty product, as a house brand in a nationwide
office-supply store, and with no brand over eBay. The retail prices are $29.95
for the specialty brand, $19.95 in the chain store, and $15.95 on eBay. The
Shenzhen-area company that makes them gets $2 apiece.
In case the
point isnt clear: Chinese workers making $1,000 a year have been helping
American designers, marketers, engineers, and retailers making $1,000 a week
(and up) earn even more. Plus, they have helped shareholders of U.S.-based
All this is
apart from a phenomenon that will be the subject of a future article: Chinas
conversion of its trade surpluses into a vast hoard of dollar-denominated
reserves. Everyone understands that in the short run Chinas handling
of its reserves has been a convenience to the United States. By placing more
than $1 trillion in U.S. stock and bond markets, it has propped up the U.S.
economy. Asset prices are higher than they would otherwise be; interest rates
are lower, whether for American families taking out mortgages or for American
taxpayers financing the ever-mounting federal debt. The dollar has also fallen
less than it otherwise would havewhich in the short run helps American
consumers keep buying Chinese goods.
understands that in the long run China must change this policy. Its own people
need too many thingsschools, hospitals, railroadsfor it to keep
sending its profits to America. It wont forever sink its savings into
a currency, the dollar, virtually guaranteed to keep falling against the RMB.
This year the central government created a commission to consider the right
long-term use for Chinas reserves. No one expects the recommendation
to be: Keep buying dollars. How and when the change will occur, what it will
be, and what consequences it will have, is what everyone would like to know.
One other aspect
of Chinas development to date has helped American companies in their
dealings with it. This is the fact that China, so far, has been different
in crucial ways from Americas previous great Asian challenger: Japan.
Americans have come to view the Japanese economy as a kind of joke, mainly
because the Tokyo Stock Exchange has been in a slump for nearly 20 years.
Nonetheless, Japan remains the worlds second-largest economy. Toyota
has overtaken General Motors to become the largest automaker; Japans
exporters have continually increased their sales of electronics and other
high-value goods; and the long-standing logic of the Japanese system, in which
consumers and investors suffer so that producers may thrive, remains intact.
Japan was already
a rich and modern country, as China still is not, by the time trade friction
intensified, in the 1980s. More important, its leading companies were often
competing head-to-head with established high-value, high-tech companies in
the United States: Fujitsu against IBM, Toshiba against Intel, Fuji against
Kodak, Sony and Matsushita against Motorola, and on down the list. Gains for
Japanese companies often meant direct losses for companies in Americawhether
those companies were seen as stodgy and noninnovative, like the Detroit firms,
or technologically agile and advanced, like the semiconductor makers.
For the moment,
Chinas situation is different. Its companies are numerous but small.
Lenovo and Qingdao are its two globally recognized brand names. But Lenovo
is known mainly because it bought the ThinkPad brand from IBM, and a quarter
of Qingdao Beer is owned by Anheuser-Busch. Chinese exporters have done best
when working for, rather than against, Western companies, as Foxconn (like
numerous smaller firms) has in working with Apple. While the Chinese government
obviously wants to strengthen the countrys brandsfor instance,
with an aircraft company it hopes will compete with Boeing and Airbusits
industrial planning has mainly taken the form not of specific
targeting but of general business promotion, as with the incentives that brought
companies to Shenzhen.
economy, technically still socialist, has also been strangely more open than
Japans. Through its first four decades of growth after World War II,
Japan was essentially closed to foreign ownership and investment. (Texas Instruments
and IBM were two highly publicized exceptions to the rule.) Chinas industrial
boom, by contrast, is occurring during the age of the World Trade Organization,
to which it was admitted in 2001. Under WTO rules, China is obliged to open
itself to foreign investment and ownership at a much earlier stage of its
development than Japan did. Its export boom has been led by foreign firms.
China is rife with intellectual piracy, hidden trade barriers, and other impediments.
But overall it is harder for foreign economies or foreign companies to claim
damage from Chinas trade policies than from Japans.
When I was living
in Japan through its boom of the late 80s, I argued in this magazine
that its behavior illustrated some great historic truths that economic models
cannot easily include. Sometimes societies pursue goals other than the one
economists consider rational: the greatest possible growth of consumer well-being.
This has been true of America mainly during wartime, but also when it has
pursued martial-toned projects thought to be in the nations interest:
building interstate highways, sending men into space, perhaps someday developing
alternative energy supplies. In a more consistent way, over decades, this
has been true of Japan.
For anyone who
has taken Ec 101, the natural response would be: Thats their problem!
Theyre making high-quality products for everyone else, so whats
not to like? But in the past decade, a growing number of respectable economists
have argued that the situation is not that simple. If one nation deliberately
promotes high-tech and high-value industries, it can end up with more of those
industries, and more of the high-wage jobs that go with them, than it would
have otherwise. This is not economically rationalEuropean
countries have paid heavily for each job they have created through Airbus.
But Boeing sells fewer airplanes and employs fewer engineers than it presumably
would without competition from Airbus. The United States does not have to
emulate Europes approach, or Japans. But it needs to be aware
of them, and of the possible consequences. (With different emphases, Paul
Samuelson of MIT, Alan Blinder and William Baumol of Princeton, and Ralph
Gomory, head of the Alfred P. Sloan Foundation, have advanced this argument.)
behavior, and that of its companies, is easier to match with standard economic
theories than Japans. So far, deals like those struck at the Sheraton
Four Points have been mainly good for all parties. Chinese families have new
opportunities in life. American customers have wider choices. American investors
have better returns. But, of course, there are complications.
First is the
social effect visible around the world, which in homage to Chinas Communist
past we can call intensifying the contradictions. Global trade
involves one great contradiction: The lower the barriers to the flow of money,
products, and ideas, the less it matters where people live. But because most
people cannot move from one country to another, it will always matter where
people live. In a world of frictionless, completely globalized trade, people
on average would all be richerbut every society would include a wider
range of class, comfort, and well-being than it now does. Those with the most
marketable global talents would be richer, because they could sell to the
largest possible market. Everyone else would be poorer, because of competition
from a billions-strong labor pool. With no trade barriers, there would be
no reason why the average person in, say, Holland would be better off than
the average one in India. Each society would contain a cross section of the
worlds whole income distributionyet its people would have to live
within the same national borders.
near that point. But the increasing integration of the American and Chinese
economies pushes both countries toward it. This is more or less all good for
China, but not all good for America. It means economic benefits mainly for
those who have already succeeded, a harder path up for those who are already
at a disadvantage, and further strain on the already weakened sense of fellow
feeling and shared opportunity that allows a society as diverse and unequal
as Americas to cohere.
A further problem
is that Chinas business and governmental leaders are all too aware of
how the smiley curve affects them. Yes, its better to have jobs that
pay $1,000 a year than none at all. But it would be better still to have jobs
that pay many times as much and are at more desirable positions along the
curve. If the United States were in Chinas position, it would be doing
everything possible to bring more high-value work within its bordersand
that, of course, is what China is trying to do. Everywhere you turn you see
Just a few:
In the far north of China, Intel has just agreed to build a major chip-fabrication
plant, with high-end engineering and design jobs, not just seats on the assembly
line. In Beijing, both Microsoft and Google have opened genuine research centers,
not just offices to serve the local market. Down in Shenzhen, Liam Caseys
company is creating industrial-design centers, where products will be conceived,
not just snapped together. What was recently a factory zone in Shanghai is
being gentrified; local authorities are pushing factories to relocate 10 miles
away, so their buildings can be turned into white-collar engineering and design
At the moment,
most jobs Ive seen the young women in the factories perform have not
been taken from America, because in America these assembly-type
tasks would be done by machines. But the Chinese goal is, of course, to build
toward something more lucrative.
I have spoken with say that the climb will be slow for Chinese industries,
because they have so far to go in bringing their design, management, and branding
efforts up to world standards. Think about itglobal companies
are full of CEOs and executives from India, but very few Chinese, Dominic
Barton, the chairman of McKinseys Asia Pacific practice, told me.
The main reason, he said, is Chinas limited pool of executives with
adequate foreign-language skills and experience working abroad. Andy Switky,
the managing directorAsia Pacific for the famed California design firm
IDEO, described a frequent Chinese outlook toward quality control as happy
with crappy. This makes it hard for them to move beyond the local, low-value
market. Even now in China, most people dont have an iPod or a
notebook computer, the manager of a Taiwanese-owned audio-device factory
told me. So its harder for them to think up improvements, or even
tell a good one from a bad one. These and other factors may slow Chinas
progress. But thats a feeble basis for American hopes.
Americans most often discuss for dealing with China are not much better as
a long-term basis for hope. Yes, the RMB is now undervalued against the dollar.
Yes, that makes Chinese exports cheaper than they would otherwise be. And
yes, the RMBs value should riseand it will. But at no conceivable
level would it bring those Shenzhen jobs back to Ohio. At best it would make
U.S. exports, from locomotives and high-tech medical equipment to wine and
software, more attractive. Such commercial victories are important, but they
are unlikely to be advanced by threats of retaliatory tariffs if China does
not speed the RMBs climb. Also, the faster the dollar falls against
the RMB, the faster Chinese authorities might move their assets out of dollars
to stronger currencies.
This year the
U.S. government imposed special tariffs, called countervailing duties, on
imports of glossy paper from China. This is the kind of paper used to print
magazines and catalogs, and Chinese exports of it to the United States rose
tenfold from 2004 to 2006. The U.S. government said the duties were necessary
to offset the export subsidies Chinese manufacturers receive via low-cost
loans, tax breaks, and other benefits. Under WTO rules, export subsidies of
all sorts are prohibited; U.S. officials, academics, and trade groups have
prepared lists of de facto subsidies that cut the price of Chinese goods to
U.S. consumers by 25 percent, 40 percent, and even more. (The Chineselike
the Europeans, Australians, and othersare quick to retort that the United
States subsidizes many products too, especially exports from large-scale farms.)
This is obviously
significant. But think again of those Ethernet connectors that retail for
$29.95 and cost only $2 to make. Removing all imaginable subsidies might push
the manufacturing cost to $3. Suppose it went to $4. That would have a big
effect on decisions made by corporations that outsource to ChinaCan
they raise the retail price? Must they just accept a lower margin? Should
they build the next factory in Vietnam?but it would not make anyone
bring production back to the United States.
and favoritism may play a big role in Chinas huge road-building and
land-development policies, but they seem to be secondary factors in the outsourcing
boom. For instance, when I asked Mr. China which officials I should try to
interview in the local Shenzhen government to understand how they worked with
companies, he said he didnt know. Hed never met any.
about the RMB, about subsidies, and about other Chinese practices have this
in common: They assume that the solution to long-term tensions in the trading
relationship lies in changes on Chinas side. I think that assumption
is naive. If the United States is unhappy with the effects of its interaction
with China, thats Americas problem, not Chinas. To imagine
that the United States can stop China from pursuing its own economic ambitions
through nagging, threats, or enticement is to fool ourselves. If a country
does not like the terms of its business dealings with the world, it needs
to change its own policies, not expect the world to change. China has done
just that, to its own benefitand, up until now, to Americas.
Are we uncomfortable
with the America that is being shaped by global economic forces? The inequality?
The sense of entitlement for some? Of stifled opportunity for others? The
widespread fear that todays trendsborrowing, consuming, looking
inward, using up infrastructurewill make it hard to stay ahead tomorrow,
particularly in regard to China? If so, those trends themselves, and the American
choices behind them, are what Americans can address. Theyre not Chinas
problem, and theyre not the fault of anyone in Shenzhen.