There is a turning point in the development of emerging economies at which the supply of surplus rural labor available to low-cost export manufacturers dries up and real wages start to rise. At that point industrial production becomes more capital and IP intensive, exports move up the value chain and domestic demand becomes more important for the economy overall as the society urbanizes. Japan and South Korea passed through that turning point; now China, too, is reaching it. Another way of putting it is that the era of manufacturing in China for export is coming to a close, and the era of manufacturing in China for Chinese consumers is getting underway.
For foreign multinationals, it marks a sea change in the reasons for them to be operating in the country. Change can always be uncomfortable, both for those that see it and those that don’t. To this Bystander that explains some of the concerns being voiced by executives at foreign multinationals about what they see as growing barriers to market entry and unfair treatment, intended to give domestic companies an edge as the economy changes.
Most of this criticism has been made privately, as is the custom, but the heads of companies like General Electric, BASF and Siemens have stuck their heads above the parapets of if briefly. All three companies have been working cooperatively in China for at least two decades so may have a degree of seniority that allows them to express frankly the wider view, but the level of concern has been sufficient for Chen Deming, China’s Minister of Commerce, to defend China’s foreign investment environment in a signed piece in the Financial Times.
Foreign direct investment in China was up 19.6% in the first half of this year compared to the same period a year earlier, but last year’s number was low so don’t set too much store by that. National tax breaks and provincial incentives for multinationals to invest have been significantly reduced. Wages have risen and employment regulations become tougher. Furthermore, China is upgrading its own industries in areas such as high-end manufacturing and environmental goods and services. To do this, as Chen pointed out, “China wants to make better use of the knowledge and expertise of multinationals.” That sounds more take than give, to foreign ears.
At the same time export markets in Europe and the U.S. have cooled whereas China’s domestic market has continued to expand, even though consumption rates in China are still far below those in Europe and the U.S. That doubles the vexation for foreign multinationals. A potentially huge and increasingly important market is in sight for but it remains frustratingly out of reach.
Changing that will require policy decisions in Beijing to raise the consumption rate further and to allow the greater internationalization of the economy, which will mean making the currency convertible. Meeting both those challenges are part of the rite of passage of economic development. Smart multinationals will align themselves with helping Beijing push forward change on those two fronts.
Smart multinationals will also realize that they will eventually change in the light of all this and will become more Chinese as the proportion of their sales, employees and assets in China increases, just as Sony is no longer a Japanese multinational in anything but name.