Going West and Climbing Higher?

Some recent evidence suggests that a profound transformation of the industrial landscape in China is under way. First of all, migration of mass manufacturing activities from traditional export centers in Southern and Eastern coastal cities to the inland is accelerating. The world’s largest PC makers and their contract manufacturers are establishing new factories in the Southwest: Hewlett-Packard (No.1 PC vendor by shipments), Acer (No. 2) and AsusTek (No. 6) have chosen Chongqing, while Dell (No. 2) and Lenovo (No. 4) have chosen Chengdu of Sichuan Province. When these new plants run at their full capacity, industrial analysts expect that Chongqing and Chengdu will become the world’s largest manufacturing base for notebook and tablet computers, respectively. China’s populous Chongqing and Sichuan Province, once characterized as poor and rural and the country’s major sources of migrant workers, are going to be transformed into immense industrial hubs.

The drivers of this large-scale industrial migration are a sharp rise in labor and land costs as well as labor shortages in established manufacturing centers in Eastern and Southern China. In addition, the new manufacturing locations are well-serviced by infrastructure after a decade of government investment under the campaign of “Developing the West”. This migration of mass manufacturing presents a new challenge of growth for the developed coastal cities. While shifting manufacturing to the inland, multinationals are also transferring more managerial and R&D functions to China, with some cities being better positioned than others to attract this high-end employment. Regional headquarters of multinationals in Shanghai rose to 305 in 2010, up from 224 in 2008, according to the Shanghai statistics bureau (Financial Times, May 25). Intel has just sent an executive vice-president to Beijing as chairman of its China operations, a clear sign of the expansion of higher-end activities in the country.

Other cities may not be so lucky. According to recent Chinese reports, eighty percent of the Shanzhai cell phone manufacturers in the Shenzhen area have gone bankrupt since the beginning of the financial crisis. Although started as local-made lookalikes of foreign brands as the Chinese characters suggested, some scholars of industry have characterized the Shanzhai cell phone makers as a “Chinese way of innovation”. Based on turnkey solutions for combined chip, platform and third-party apps (provided by Taiwanese company MTK), clusters of small cell phone suppliers had been very successful in making cheap phones with gaudy features and shiny looks that pleased low-income Chinese and foreign consumers. Some 200 million unbranded Shanzhai cell phones were sold in 2010, and a large portion went abroad. Yet the faster than expected conversion to 3G-capable smart phones has destroyed the Shanzhai business model; at this stage at least, it is difficult for chip suppliers to commoditize the sophisticated smart phone platforms. The small Shanzhai manufacturers that used to implement incremental innovations on less advanced technologies in the 2G era now have neither the capability nor the financial resources to develop 3G smart phones.

 

Can China innovate?

Yu Zhou
Professor of Geography, Vassar College
yuzhou@vassar.edu

Nowadays, it has become fashionable to talk about the technological potential of China. But unlike the case of the United States or other western countries, the question of China’s technological progress almost always revolves around the role of the Chinese state. Romo (2004), for example, credited the strategic emphasis of the Chinese state in innovation as the first of three theorems in his famous “Beijing Consensus.” China observers also routinely scrutinize Chinese governmental documents to foretell the changing directions of state industrial policy. Given China’s recent accomplishments on high speed rail and super computers, feats made through a centralized state-sponsored system, such discussion has a reasonable foundation. Within China, many intellectuals also see the role of the state as a decisive factor, although they disagree on the benefits and costs of state intervention. Some have argued that the Chinese state is at fault since it has not devoted sufficient resources to indigenous innovation so that China remains largely dependent on western technology, to the detriment of China’s long-term security. Others blame the Chinese political regime or governmental interference for creating a research culture that stifles creativity, diversity and dissidence (Shi and Rao 2010).

But is the role of the Chinese state really that decisive? After researching and writing my book Inside Story of China’s High-tech Industry: Making Silicon Valley in Beijing, I am convinced more than ever that the answer is no. To be sure, I do not believe that the state should be banished from the arena of business enterprise. Far from it, I feel that in China, as in other developing states, the question is never whether the state should play a role in technological development, but how. As I traced the emergence of China’s high-tech industry since the mid-1980s, examining the historical evolution of relationships among MNCs, domestic companies, research institutes, and the Chinese central and local states in Zhongguancun—China’s Silicon Valley— I concluded that the role of the state is essential, not as a leader, but as a reflective and flexible collaborator with multinational corporations (MNCs), indigenous companies and research institutes in the process of technological change. My findings can be summarized as follows:

The role of China’s state in technological change has been highly varied and experimental, and sometimes diametrically in opposition. There has not been a single unified model.

Since the founding of the PRC, the Chinese state initially tried defense-led technological development strategies, then changed to focus on the civilian sectors. It tried self-sufficiency and import substitution behind closed doors, only then to pursue the transfer of western technology by opening China’s markets. It established a science and technology system within a centrally planned economy, but then embraced the neo-liberal model by introducing market forces and engaging in technology commercialization. It increased the size and competitiveness of the largest state-owned enterprises, then recognized the need to support small innovative firms and encourage the participation of non-state agents in high-tech industries. It managed to lure considerable western investment while attempting to issue technological standards to assist innovation by domestic firms. None of these efforts can be judged an unequivocal success. China continues to rely greatly on external technology to this day, and Chinese enterprises continue to rely on cheap labor rather than technological prowess. While no one can accuse the Chinese state of not trying, it is clear that it has yet to find a workable model for technological development. So China has not had one single approach to state involvement. Whatever strategies it has today will undoubtedly undergo change in the future.

A State-centered approach for Science & Technology has been tried and failed in most civilian areas.

Since 2003, the Chinese government has paid growing attention to Science & Technological (S&T) sectors. China’s Eleventh Five-Year Plan and its Plan for Medium and Long-Term Science and Technology Development (2006–2020) call for building an innovative society with heavier investment in domestic R&D. The increased investment is necessary, but given that China’s central state has a powerful tradition and bureaucratic interest in favor of a centralized approach, it is worrisome that some officials advocate the revival of a state-directed R&D program. In 2005 the head of the Ministry of Science and Technology cited China’s success in producing nuclear bombs and a satellite in the 1960s, products of state-directed research programs, as examples of strategic technological breakthroughs that could be emulated in other technological areas. Unfortunately, this argument shows little understanding of the difference between military and civilian technology, or of the reality of the global marketplace in which Chinese companies must operate. Although defense technology is utilized in the civilian sectors in the United States and China, a nuclear bomb does not have to stand the rigorous test of open global competition. Thus, China’s success with bombs proves nothing about the effectiveness of state-directed research programs in commercialized technology. In fact, China’s state-directed S&T research prior to the mid-1980s had a very poor record in responding to market needs. So what about high speed rail and super computers? As many have noted, both are built based on existing foreign technology and collaborations with other companies. Given the intensity of globalization today, a state-centered approach to R&D would be counterproductive, if not simply unfeasible. There will be sectors, defense and railroad, among others in which the existence of a natural monopoly may give the centralized approach a better chance of success. But it would be a major mistake to imagine that, in the absence of business competition and wide spread knowledge diffusion, state investment would result in sustained competiveness.

The most important role of the state is to be an honest and responsible collaborating partner with other technological agents.

So what should be the roles of the state? The Zhongguancun experience shows us that these roles are necessarily multi-faceted. Zhongguancun is better characterized as a result of institutional evolution under globalization, in part tolerated and assisted but largely unanticipated by the state. The state’s crucial roles are not just providing specific policies or R&D capital but collaborating effectively with other technological agents and learning to reform regional institutions under changed circumstances. Institutional transformation is necessary for the growth of China’s high-tech industry, but such transformation is a learned process, as entrepreneurs, businesspeople, professionals, bureaucrats, scientists, and consumers learn to work with each other while the new rules of the game are being negotiated, established, and observed.

Simply put, the accomplishments of China’s Silicon Valley thus far cannot be attributed primarily to the Chinese government. Domestic companies and MNCs alike have spent considerable energy pushing the state to change its resource allocation, ease its restrictions, and alter its regulations. Over the years, the Chinese state has largely been responsive to and tolerant of the various experiments in the regions, setbacks notwithstanding. But the state has not gone far enough. In the long run, genuine innovation can only come from freedom of thought, experimentation, collective effort, and frequent exchanges with advanced technological parties and marketplaces. All that will require the Chinese government to continue to collaborate with—rather than supervise or direct—other parties. Only then can a fairer and more open institutional structure for fostering innovation can be built.