What really made China the manufacturing superpower?

‘A riddle wrapped in a mystery inside an enigma’ can well describe the economic powerhouse that is China. It is often speculated that China succeeds because as a dictatorship, it enforces low wages, acquires land easily/cheaply, and subsidises its exporters i.e., it actually sells to the world at a loss. But the actual answers lie elsewhere.

Chinese wage rates, though lower than EU/US, have actually been higher than India’s for the last few decades. Also, China doesn’t allow freehold land, but only 40-year leases. Further, it is also not as if new Indian cities had not been set up in the 1950/60s, or that our capital cities have not acquired land to grow rapidly in recent years.

Further, if subsidies drove Chinese export growth from $45 billion in 1990 to the current $3.5 trillion, where did they get the money to subsidise such huge volumes and yet have rising reserves? China’s forex reserves in 1990 were $3.7 billion but now exceed $3 trillion.

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Additionally, the principal Chinese exports in the early years were traditional items such as textiles and garments, leather goods, pearls and precious stones, medicinal products, and consumer manufactures, somewhat similar to the Indian trade basket. Now, they are the global leaders in a variety of high-tech goods such as telecom equipment, drones, electrical machinery, computers, solar power diodes, EV batteries, etc., reducing the rest of the world to import dependence.

How did China secure such an array of cutting-edge technologies when our exporters, barring some exceptions, are still mostly oriented toward traditional exports? We need to answer such questions if we wish to compete with China in an increasingly turbulent world.

Unlike India, almost 50 per cent of Chinese exports arise from ‘wholly- owned foreign enterprises’ based in China. It was even higher earlier but now several Chinese companies have become export-competitive and world leaders. Thousands of foreign enterprises and foreigners operate in China. Interestingly, though US/EU companies dominate, there are also large numbers of Japanese, South Korean and Taiwanese companies, despite their fraught political relations with Beijing. What pulled them into China, and more importantly, what keeps them there despite the current political turbulence?

The internet revolution of the 1990s resulted in a large offshoring drive by US/EU multinationals searching for lower-cost solutions. India, with its large English-speaking, STEM-qualified workforce, did succeed in providing remotely managed services but could not succeed as a manufacturing centre, unlike China, though it is entirely Mandarin-speaking. Our complicated regulatory framework is cited as a reason. Accordingly, efforts at regulatory reform are often seen, albeit with heterogenous results. But was this the only reason? Why, then, did these MNCs not depend more on the ‘tiger’ economies of South-East Asia, which also did not have complicated regulatory frameworks? These are also erstwhile British colonies with some familiarity with English. What was China’s USP?

The reason is quite prosaic -- the economics of Reliance Ltd., also rests on it. It is the externalities created by size and scale. The modernisation drive started by Deng Xiaoping had not followed the traditional model of manufacturing focus. It instead focused on urban development, creating new modern cities and integrated industrial estates in very large, province-sized areas. Western quality benchmarks, laws and practices were used as the reference point. Alongside, considerable financial autonomy was granted to the provincial and city levels. Four provinces of South China, deemed ‘most likely to succeed’, were selected for this experiment and thus labelled SEZs, as they differed from the rest of China, which was governed traditionally.

The creation process took quite some time, often inviting criticism. However, these cities/industrial estates had a similar look and feel to EU/US benchmarks just in time to catch the offshoring drive of the 1990s. It was this ecosystem of attractively large industrial estates, easy living conditions, as also an array of urban public goods similar to EU/US, along with red-carpet treatment to all foreign companies/foreigners regardless of their politics, that made, and still does though with increasing uncertainty, the Chinese pull irresistible. Chinese exports and growth rates zoomed to unheard levels as foreign enterprises poured in and started operating out of these new cities/industrial areas which placed minimal entry conditions, though factory location was guided to secure homogeneity. Additional provinces were added once the initial centres reached critical mass. As these large, attractive, manufacturing-cum-living combos were created on a sequential basis, an intense clustering occurred, creating a magnetic ecosystem. This ‘force’ pulled in MNCs of even Japan, Korea and Taiwan that were looking to expand. Over time, an enormous transfer of technology in a variety of sectors occurred to huge cohorts of Chinese workers, engineers, supervisors working in these foreign-owned companies. This allowed subsequent creation of home-grown companies. This unwitting technology transfer, in essence, is what made China the prickly giant whom we have to import from despite its bad behaviour with us.