The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (20 page)

Chapter 10

WHAT THE END OF CHEAP CHINA MEANS FOR THE REST OF THE WORLD

In September 2011, I flew to Paris to meet with the chief executive officers of some of the world’s leading luxury brands. They had all seen soaring sales to Chinese consumers, and were eager to know more about the habits of China’s ultrarich. In just a decade, China has emerged from being a money-losing backwater for luxury brands to become the world’s second-largest luxury market. Chinese consumers have become the Japanese of the 1980s; wherever they travel, they shop for Louis Vuitton, Gucci, and Chloé, as well as a taste of the high life. Whole industries developed alongside Japan’s rise—from duty-free shops in airports to sushi bars sprouting up wherever Japanese businessmen travelled—and fortunes were made. Traveling Chinese tourists and businessmen could inspire the same phenomena.

Even middle-class Chinese aspire to buy luxury products, as Japanese housewives did before. It is not uncommon to see secretaries who make $800 a month buying $1,000-dollar Gucci bags. They, too, will spark new cottage industries around the world for businesses smart enough to understand their needs.

As I walked along the Champs-Élysées, Chinese tourists were everywhere, rushing to Lancel and other elite brands’ flagship stores. Seemingly every other person in the Louis Vuitton store was Chinese. Sales clerks there told me that Chinese were driving so much of the sales of the most popular and expensive items, that they had to limit the number of best-selling items each person could buy. My hotel—the ultra-opulent Shangri-La, Paris’s latest five-star property—was full of Chinese businessmen and tourists with their hands full of shopping bags.

With the shadow of the debt crisis looming over Italy and Greece, people asked me during nearly every meeting I had while in Paris, “Will China save Europe?” At the time, investors were hoping China would be the white knight to bail Italy out by buying its bonds. Even the rumor that China might step in to buy them caused global equity markets to rebound.

Two camps have formed in world opinion on how to view China’s rise, especially since it has emerged relatively unscathed from the financial crisis. One camp—which would include most businessmen, like those senior executives I met in Paris, and investors hoping for a China-led bailout of Italy and the rest of Europe—views China’s rise as beneficial and a potential savior of the global economy and their own businesses. They want to make money, and do not really care about ideological battles. More economic integration is good, they reason, not only because it generates more profits, but it lessens the risk of tension and war, as interrelated economies and aligned interests force people to come together.

They remind others that international economic frameworks like the World Trade Organization minimize military conflicts like those that consumed the world just a few decades ago. They also adhere to the view that companies and countries constantly need to evolve and innovate to seize advantages in changes in the world, rather than erecting tariffs and other trade barriers in order to maintain their strength. This group tends to view China as a mix of white knight and mystical superhero who can magically save the world’s economy and increase global security.

The other camp views China’s rise as a zero-sum game that will negatively impact the Western world’s ideological and economic dominance. They fear that China is a job stealer that manipulates currency in a mercantilist economic policy, and that it is a potential military enemy, to the detriment of America. They also feel that the Communist ideological strain in China, and the nation’s stance on human rights, are misguided at best but most likely evil, and that both threaten the American way of life. The ranks of this group are a hodgepodge of differing ideologies, including leading liberal economists like Paul Krugman and union leaders along with more militant hawks.

Containing China’s growth and influence in global affairs forms the bedrock of these China hawks. They have always had a suspicious eye on China, but they were distracted by September 11 and leading the Afghan and Iraq wars. Now that those wars are coming to a close, or lingering with less importance, these hawks are refocusing their attentions on China.

People holding anti-China opinions are gaining more currency in influential U.S. circles, as people seek scapegoats for America’s economic and political ills. Anti-free-trade sentiment is gaining hold again, even among policy makers, as backward thinking people want to return to the old days of unchallenged American dominance rather than evolving to ensure continued strength. For instance, the U.S. Senate rejected President Obama’s job creation bill in October 2011, but approved one that allows the United States to slap tariffs on Chinese imports. Republican presidential candidate Mitt Romney has taken a particularly strident tone on China, saying it “cheats” the international system by systematically exploiting other economies, stealing intellectual property, and hacking into foreign corporate and government computers.

The real answer of how China’s rise will affect the world will be far more nuanced than either camps will admit, and will probably fall somewhere between the dovish and hawkish arguments. The philosophies of these two camps are largely shaped and perpetuated by people with very little on-the-ground knowledge of what China was and what it is becoming. Only rational thinking, based on objective and legitimate data about China, will ensure that corporations and countries properly understand how China’s disruptive rise will affect them.

As this book has shown, the End of Cheap China is creating an optimistic consumer class that is poised to fuel revenue growth for those brands that can evolve and cater to their tastes. Companies and countries that can adjust to this new world order—as luxury-brand executives, as well as brands like Nike and Starbucks, have done—will create new jobs and benefit from China’s growth. For them, China will likely become one of their largest markets (if not their largest) in the coming decade. They should stop calling China an “emerging market,” which underestimates the true power there, and instead view it as a changing market, one equally important as those in the Western world.

On the other hand, free trade and increased trade volume helps the world in the aggregate, but will naturally be painful for those companies and nations unable to evolve along with this new world order or adapt to global competition.

For example, consider what happened to the typewriter industry. Producers went out of business because consumers adopted the personal computer, whose development was driven by Steve Jobs at Apple, among others. Overall, consumers, producers of personal computers, and investors in these companies benefitted from the shift, while for those in the typewriter industry who fought this evolution, the pain was very real. Companies that taught typing realized their days were numbered; those that switched from training people how to use a typewriter to Computers 101 did well, while those unable to make the switch went extinct.

It’s understandable that America and other nations being outcompeted by China might grow anxious. But it is important for these countries to suppress the urge to lash out in fear and anger, and concentrate instead on staying ahead of the ensuing changes that will affect them.

A rising power will necessarily disrupt the status quo in political and economic affairs, and some nations and companies will decline, just as the typewriter industry did, or in the way the United Kingdom lost its dominance to America after World War II. This is Darwinism at its starkest.

Italy is a great case study of how a country could benefit from China’s rise, but also fall further into economic malaise, depending on how its business community reacts in the next several years. Unless Italy can modernize its production facilities, or convince consumers to pay even higher prices for items put together by Italian master craftspeople, brands like Zegna will shift more production to China, as they have been steadily doing since factories there began moving up the value stream.

Smarter Italian brands will see China’s rise as an opportunity rather than a threat. Some might keep manufacturing in Italy for some products, perhaps for more elite, handmade items, but also produce other, more mass-market product lines in China.

One Italian businessman I interviewed saved and even created jobs in Italy by building manufacturing operations in China for a fashion-accessories brand. He kept high-end production in Italy to emphasize brand heritage for marketing purposes, but started producing lower-end products in China. Originally the Italian arm tottered, but the influx of revenue from the cheaper product coming out of China saved the Italian operations. He was able to hire salespeople in Italy to sell the Chinese-made product in Europe, while Chinese customers often demanded the Italian-made products. He was able to take a proactive approach to making money on both sides. His example clearly shows that China’s rise can create jobs for evolving companies, rather stealing them as Paul Krugman argues.

One of the dangers bubbling up in the world is that American crusades against free trade are viewed by many in China and other non-Western markets with increasing anger. They believe America’s views are unjust and hypocritical. Chinese feel that Americans push for free trade only if it benefits them while being detrimental to China. In their view, Chinese are simply beating the competition, and they find it hypocritical that America is now trying to impose tariffs and other barriers to Chinese trade. Rather than seeing the situation as an undervalued currency granting their advantage, they believe they are winning in the market because they have a more efficient logistics system and workforce than America, and fewer restrictive workforce regulations than countries like France.

They feel that it is China’s turn to rise, because so much of America’s wealth has been due to Chinese labor. There is palpable anger for America’s perceived hypocrisy, a loss of faith in its moral compass in the wake of Guantánamo, and a feeling that America is trying to keep China down. One influential Chinese told me he believes the 2002–2003 SARS epidemic was an “intentional initiative by the Central Intelligence Agency to keep China impoverished.” Conspiracy theories aside, the tension between America and China will rise unless calmer heads can prevail, which likely will only happen if economic growth gets back on track.

In the coming years, China’s new leaders, especially those promoted during the 2012 leadership transition, will have to appease this current of anger within China. As they try to build and maintain their power base, they will necessarily have to incorporate growing anti-American sentiment within China’s military and political establishment, as well as in the general population. But they might not be able to keep as cool a head toward American anti-China rhetoric, as current and previous leaders have done.

As China takes on a larger economic role, will it be able to immediately assume a new global-superpower role and jumpstart the global economy, as those executives in Paris hoped? The reality is that China has far too many internal problems—from lack of affordable housing and medical care, to an educational system that will prevent the country from being innovative—to allow it to be the hoped-for global savior. With so many still living in subhuman conditions like Winnie and Karen, who we met in Chapter 7, the majority of Chinese think the government should save its money by spending it on the nation to protect its own citizens, rather than waste it saving richer people in the developed world.

China should be viewed more as a teenage superpower: displaying glimpses of future genius, but unable to maintain a consistent level of power. Like a teenager, it will need the training and cultivation that college, graduate school, and management training programs offer.

As China evolves, it will offer clues that companies and countries can use to adapt to the new role it plays in world affairs. These clues fall into three key areas: