China: A Third Generation Newly Industrialised Country
Abstract
The transformation of the Chinese economy over the last decade or so has been nothing
short of phenomenal, with the country now being referred to as ‘the workshop of the
world’. The scale and the pace of change are causing major adjustments both within
China and in the rest of the world. China’s car industry has been one of the major focal
points for foreign direct investment.
Levels of Economic Development in Asia: the Filter-down Theory
In Asia three generations of Newly Industrialised Country (NIC) have been
recognised. Within this world region only Japan is at a higher economic level than the
NICs but there are a number of countries at much lower levels of economic
development.
Figure 1 Asia: five levels of economic development
Level Countries
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MEDC e.g. Japan
2
First generation NICs e.g. South Korea, Taiwan
(Singapore is now reclassified as an MEDC; Hong Kong is part of China)
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4
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Second generation NICs e.g. Malaysia, Indonesia, Thailand
Third generation NICs e.g. India, China, Philippines
Least developed nations e.g. Nepal, Afghanistan, Cambodia
Nowhere else in the world is the filter-down (global shift) of industry better illustrated.
When Japanese companies first decided to locate abroad in the 1960s in the quest for
lower cost labour, they looked to the most developed of their neighbouring countries,
particularly South Korea and Taiwan. Most other countries in the region lacked the
physical infrastructure and skill levels required by Japanese companies. Companies
from elsewhere in the developed world, especially the United States also recognised the
advantages of locating branch plants in such countries. However, as the economies of
the first generation NICs (South Korea, Taiwan, Hong Kong and Singapore) grew
stronger and more diversified, the level of wages increased significantly resulting in:
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Japanese and Western transnational corporations (TNCs) seeking locations in
second generation NICs, e.g. Thailand, Malaysia, Indonesia, where recent
improvements in the physical and human infrastructures now satisfied their demands
but where wages were still low. The second generation NICs emerged in the mid-tolate 1970s.
Indigenous companies from the first generation NICs, which were now of a
significant size, also moving routine tasks to their cheaper labour neighbours.
With time, the process repeated itself to include a third generation of NICs whose
members include China, India and the Philippines. The third generation NICs emerged in
the late 1980s/early 1990s.
The Rapid Growth of the Chinese Economy in the 1990s
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In terms of W W Rostow’s model, with its five stages of economic development, it
would be reasonable to place China in stage 4 – the drive to maturity. When Rostow
originally applied his model to selected countries he saw China beginning take-off in the
late 1950s. However, due to the relatively closed nature of the economy it can be argued
that this third stage lasted for a number of decades with stage 4 beginning with the rapid
expansion of the economy in the 1990s as China opened up much more to the outside
world.
Figure 2: Rostow’s five stages of economic development
Such has been the rate of expansion over the last decade that China has been referred
to as “the new workshop of the world”, a phrase first applied to Britain during the height
of its industrial revolution in the 19th century. Prior to 1978 China had only limited
economic interaction with the outside world. The economic reforms that began in the late
1970s have resulted is a significant increase in GDP and in foreign direct investment,
particularly since the early 1990s:
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Since economic reform began in 1978, China’s economy has grown nine times
larger.
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In 2002 China overtook the USA to become the world’s largest recipient of
foreign direct investment, attracting $52.7 billion.
In 2002, China, which accounts for less than 5% of global trade, accounted for
one quarter of global trade expansion.
In the same year China became the fifth largest global trader. China now exports
more to the USA than Japan, and has also overtaken the USA as the largest
exporter to Japan.
China manufactures approximately half of the world’s computers, 60% of its
bicycles and over half of its shoes. Figure 5 shows China’s top exporting
companies.
China’s consumption of a number of significant raw materials such as steel and
copper is now greater than that of the USA. China is now the world’s second
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largest importer of oil after the USA, having just overtaken Japan. In 2003 China
consumed 55% of the world’s cement.
Membership of the World Trade Organisation from October 2001 confirmed the
significance of China’s position in the global economy.
Figure 3 Index of China’s Real GDP growth 1978-2002
Figure 4 Cumulative FDI in China, 1982-2002
Figure 5 China’s top exporters, 2002 (US$bn)
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The huge concentration of investment in China has pulled investment away from
industrial centres in the rest of Asia and elsewhere. For example 23,000 Japanese
companies are now operating in China. To remain competitive they have to manufacture
where production costs are lowest. Matsushita has invested $558 million in 31 joint
ventures in China. A number of important high technology nuclei have been developed
to concentrate the investment of foreign and indigenous companies in this important and
expanding business sector. A major example is Zhongguancun, Beijing’s high tech
nucleus
Figure 6: Zhongguancun: Beijing’s High-Tech Nucleus
Zhongguancun: Beijing’s High-Tech Nucleus
Zhongguancun is located in northwest Beijing among China’s most prestigious
universities. The largest concentrations of students and millionaires in China are found
here. More than 4000 companies, including transnational giants Motorola, Nokia and
IBM and major Chinese companies such as Legend and Founder, are already resident
here. New firms are constantly arriving to take advantage of the low cost but well
educated workforce. In 2002 the government estimated new investment at $600 million.
The development of high technology industry here was spontaneous and very small
scale in origin. However, today the national government plays a significant role in
Zhongguancun’s development, seeing the area as crucial to China’s aspirations to a
major role in the high technology sector. Zhongguancun is now a special development
zone, attracting companies with tax incentives, reduced rents and rapid processing of
operating permits. Infrastructure has been considerably upgraded and entire
neighbourhoods cleared to make way for new building.
Some Chinese companies are now buying up distressed businesses in Japan where the
long-running economic slump has caused major problems. In most cases the Chinese
company has relocated manufacturing to China where wages are as little as one-tenth of
their Japanese equivalents.
Regional Imbalance
Figure 7 shows the wide variation in GDP per person in China. In terms of China’s three
regions (East, Middle, West) the scale of economic activity and the affluence of the
population generally decline from the coastal regions into the interior. The recent rapid
growth of the economy has widened the gap between core and periphery in the
country.
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Figure 7 Gross domestic product per person by province 2002 (US$)
The bulk of foreign investment is in China’s dynamic coastal region, which includes 5
Special Economic Zones, 14 Open Cities, and 36 Economic and Technological
Development Regions. China’s economic reforms began in the coastal region. The initial
opening up of the economy attracted a foundation of large overseas investors. Their
presence led to a kind of “critical mass” which has acted as a magnet for an increasing
number of foreign investors. The Special Economic Zones have led the process of
privatisation in China. The location factors that have attracted foreign investment to the
coastal areas are;
• favourable government policies: central government policies have empowered
the coastal regions to attract foreign investment, import advanced technologies
and participate in international trade projects.
• Labour cost and productivity: labour is relatively inexpensive throughout China.
Although the cost benefit is even greater in the Middle and West of China, the
labour force in the coastal areas is better educated, more skilled and boasts
significantly higher productivity.
• Superior infrastructure: all aspects of infrastructure (rail, road, air transport,
telecommunications etc) are more highly developed in the coastal region
compared to the Middle and West of China.
• Geographical advantages: 90% of China’s international trade passes through its
seaports. Production facilities located at or near the ports are likely to encounter
fewer delivery delays and lower domestic transportation costs.
The Pearl River delta region, an area the size of Belgium in southeast China is the focal
point of a massive wave of foreign investment into China. This is the heart of China’s
new industrial revolution. In early 2003 it was estimated that the region was attracting $1
5
billion of investment and producing $10 billion worth of exports a month in one of the
fastest bursts of economic development in history. The Pearl River drains into the South
China Sea. Hong Kong is located at the eastern extent of the delta, with Macau situated
at the western entrance. Within the region the main centres of industrial expansion are:
Shunde, Shenzhen, Dongguan, Zhuhai, Zhongshan and Guangzhou. The region’s
manufacturing industries already employ 30 million people but this will undoubtedly
increase in the future.
Although early investment in the region focussed mainly on routine products, more and
more foreign companies are now manufacturing higher level products in the region. For
example the Japanese company Ricoh which makes most of its photocopiers in
Shenzhen now produces models in China months after they are first make in Japan.
Urban residents (heavily concentrated in the east) now earn an average three times as
much as those in the countryside.
Figure 8 Average income for rural and urban dwellers
A similarly sharp divide is evident between the wealthy coastal provinces and the
backward interior. The income inequalities in China are among the fastest growing in the
world. Due to a system that until recent years barred rural dwellers from moving to cities,
China’s rural population is unusually large for a country at its stage of development.
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Figure 8b Geographical distribution of Internet users in China December 2002
The Rapid Expansion of the Car Industry
The motor vehicle industry is viewed as a key industry in China’s economic
development. Because of (a) the significant workforce and (b) the considerable number
of components required. Car assembly attracts a large number of suppliers (wheels,
tyres, lights, etc), which set off a chain of cumulative causation in the economy.
China is now the fastest growing vehicle market in the world and it has become the
fourth largest car manufacture.
Figure 9 China’s passenger car market
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Car sales increased by 55% in 2002 while sales of all vehicles rose by more than 30%,
the result of:
• increasing incomes – China’s average income is $1000 a head and rising. Over 300
million earn over $2000. Economic growth has created a growing middle and upper
class that are buying cars.
• lower tariffs and higher quotas for imported vehicles. As part of the agreement on
China’s entry into the World Trade Organisation, car import tariffs will fall from more
than 80% to 25% or less by 2006.
• An ambitious road-building programme, making car ownership much more useful.
• A move by urban areas to provide more parking spaces. At present, Beijing has
parking spaces for only 12% of the city’s cars.
• Easier to obtain car loans from both Chinese banks and Western car companies.
In order to foster a strong domestic industry, China has always required foreign investors
to partner with local firms. Recent developments include:
• Ford launched its first China model in January 2003, a four-door Fiesta sedan.
• In the same month GM announced the acquisition of a fourth car plant in China.
• Honda has taken a majority stake in a new factory in southern China for export
• VW, the market leader in China, launched new models in 2003. China is already
VW’s biggest market outside Germany.
• Toyota, Nissan and Hyundai announced investments totalling $3.4 billion in late
2002. Collectively they will build 2 million cars by 2010.
Fleet purchases dominate sales in China. In 2002 they accounted for 70% of all sales,
down from over 90% in 1999. Almost one in every 100 Chinese people now owns a car
compared with one in two in the USA. However, there are huge regional variations in car
ownership with the highest figures are recorded in the coastal cities.
Between 1996 and 2002 the length of China’s highway network increased from 3,000 km
to 20,000 km. In December 2001 the 1,262 km Beijing-Shanghai expressway opened,
reducing journey time between the two cities from 20 to 12 hours.
Figure 10 Expressways in China
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There are a surprisingly large number of Chinese-owned car plants in the country. Under
the Mao regime most regions lobbied to get car factories and nearly all did. There are
currently 120 car plants nationwide, most are unprofitable and only a few produce more
than 100,000 vehicles a year. The industry will need radical consolidation, following the
pattern of the US car industry in the early part of the 20th century.
The largest car producers are:
• Shanghai Automotive Industry Corporation (SAIC) and its joint ventures with GM,
and VW. Between them they control nearly half the market
• The Jilin-based First Automobile Group (also partners with VW)
• Dongfeng-Citroen in Hubei province
Chinese companies depend on their foreign partners for high technology and R&D.
Surprisingly, because of the highly capital intensive nature of the industry, making a car
in China costs more than in the US. Thus, foreign car investment is attracted more by
the rapidly expanding market than by low cost labour.
Although the Chinese government recognise motor vehicles as a key industry, they are
also aware of the negative aspects of increasing car ownership:
• rising levels of pollution [up to ten times the Western average in places
• growing urban traffic jams
• the high investment in road infrastructure required to keep pace with increasing
personal mobility
• urban sprawl
The considerable increase in car sales is, according to some commentators, evidence of
a third consumer revolution. Bicycles and household electrical goods were at the
forefront of the first revolution more than twenty years ago. Electronic goods led the
second consumer revolution in the 1990s.
Increasing personal mobility has had a number of consequences:
• several big shopping centres with large car parks have been built in suburban areas
• in villages around Beijing an increasing number of farmers are offering bed and
breakfast.
• Almost as fast as Beijing constructs new urban highways they become clogged with
traffic.
In September 2004 Shanghai will host China’s first Formula One car-racing event. $310
million has been spent on the 5.5 km circuit and related facilities on the western outskirts
of the city. The objective is for the track to become the centre-piece of a new ‘auto city’,
encompassing all aspects of the industry from manufacturing to sales.
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Figure 11 Formula 1 2004 – Chinese Grand Prix
Pressure on Resources
Rapid growth is placing intense pressure on infrastructure and resources. In heavily
industrialised southern and eastern regions, electricity shortages have resulted in rolling
blackouts. Across the country, the supply of electricity rose 5% slower than demand in
2003. Twenty-one of China’s 31 regions have already faced shortages caused by lack of
fuel or by poor government planning.
Under intense demand in China, prices for oil, coal and steel are rising as fast as 10% a
year. Water resources are also under pressure. The World Bank estimates that China’s
per capita water resources are about a quarter of the world average. Already the
government has forced some companies in northern China to abandon water-intensive
factories.
Just over a decade ago China was a net exporter of oil, now it is a major importer. In the
next few years it may become a net importer of coal, which accounts for more than 70%
of its primary energy use.
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