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Learning from China and India

Oct 14, 2007 Strategy, Sunday Nation

China and India are undoubtedly the economic phenomena of this generation. Both are in the midst of an economic transformation that is startling in its scale and scope. Both are criticised – China, for still being an autocratic, undemocratic regime, India for not doing enough for its poor people – but there is no doubt that they are currently the most interesting (and for some, the most unnerving) economies in the world. Both countries are the subject of the moment in boardrooms and business schools around the globe.

What is China’s greatest achievement? It has become the workshop of the world, manufacturing pretty much anything you can think of. From the two major ports of Hong Kong and Shenzhen, one container leaves for export every second of the year – and that’s less than half of China’s export total. But China’s true triumph may lie in something else: in bringing hundreds of millions of people out of poverty.

The Atlantic Monthly magazine recently dedicated a special edition to understanding China. James Fallows, a top correspondent, spent a great deal of time in the economic heartland, visiting the factories where more than 100 million Chinese workers toil and talking to insiders about what China is really about.

One of his observations: “For all the billions of dollars given in foreign aid and supervised by the World Bank, the greatest good for the greatest number of the world’s impoverished people in at least the last half century has been achieved in China, thanks largely to the outsourcing boom.”

But let us be in no illusions: outsourcing is a capitalist phenomenon, and capitalism does not have great immediate rewards for those at the bottom of its food chain. In China’s factory towns, Fallows observed the monthly pay rates to be US$ 110-155. That may soon be one-tenth of America’s minimum wage.

The attraction to all the world’s brand-owners has been obvious: outsource your manufacturing to China and beat your costs into the ground. Does China get much out of this? Fallows estimates that a generic laptop costs US$ 1,000 in the US – but just $30-40 of that stays in China, with the factory owner and his workers. For a high-end Ethernet cable that retails for $30 in the US, the Chinese company gets just $2 per piece.

This, of course, is very good for America: for consumers (sometimes) and for shareholders (always). But is it also good for China? Fallows wrote that he was surprised to see that it is. True, the environmental problems created by the factory boom are enormous. True, millions of people earn seemingly very little and work long 12-hour shifts. But this was also the case with Britain and America when they built their great industries, their factory towns and, ultimately, their middle classes. Fallows noted that the Chinese woman working in a factory town may be better off than an American on minimum wage: she can save much of what she earns, and feels she is on the way up. The American can’t, and doesn’t.

So China, where the world outsources manufacturing, and India, where the same happens with services, are on an upward curve. Yet both would recognise that they can only truly benefit by bringing more high-value work within their borders. Here, India may have the advantage. China has some way to go in becoming world-class in high-end activities like management, design and branding; India is already there. Global companies are teeming with Indian CEOs and executives – but very few Chinese. It may be some time before China can come out of the low-wage low-cost model.

Yet a recent development highlights India’s own problems. India’s bureaucracy – its notorious ‘licence raj’ – is proving very difficult to dismantle, and analysts say this remains the biggest stumbling block to investment. In November 2006, Intel Corp said it was waiting for India to formulate a policy before deciding on plans to start manufacturing in the country. Four months later, it announced it was building a $2.5 billion microchip plant in north China instead. This is not just an assembly line: it will have many high-end engineering and design jobs, exactly what China and India need.

The lessons for Kenya? The key thing is obvious: we must stay engaged with the world at large. We must be open for business, and must provide a business-friendly environment that brings work to Kenya. The clever thing to do, as China and India are doing (and Singapore and South Korea did before them) is to use foreign technology and expertise to get on to the ladder.

How fast we move up that ladder is up to us. We need a generation of Kenyans who understand high-end work: engineering, finance, design, marketing and top management. For that, we need leading-edge education and exposure. We must in time be able to capture true value within our borders, not provide it for others. We must learn from the world, so that someday we can be the ones doing the teaching.

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