(Mr. Ben Mah is author of the books America and China, and America and the World.)
According to Sinomonitor International, an independent market research company in China, by 2004, merely three years after China’s WTO entry, Chinese brands is losing ground to international rivals in their domestic market.
The study covered 1,000 brands including “information technology, daily necessities, food and beverages, financial services, and textiles and garments.”1. International brands such as Sony, Nokia, Olay and KFC are most competitive, and this is a great change from the 2003 survey and, according to Sinomonitor, “International big brands are hastening their development in the domestic market and regaining lost ground”.1.
The hastening to develop and gain market share by the multinationals in China involve a massive advertising in China’s state T.V. For example, Procter & Gamble, the premier multinational consumer manufacturer, spent 385 million Yuan on China’s Central Television prime time advertising in 2004, more than double over the previous year. Another important factor for the emergence of foreign firms as the strong competitors in China are the conditions of China’s WTO entry, which remove trade barriers, enabling the Western multinational firms easy access to the Chinese market.1.
In China, the multinational corporations seem only interested in the upper end of the market, where margin are much higher. As a result of their successful penetration of the existing high-end consumers market, Chinese domestic firms are losing market shares and end up in a cutthroat competition against each other with razor thin profit margin, thus leaving little room for wage increase, research and development.2.
Consequently, Chinese domestic state industries experienced bankruptcy, privatizations, and the Chinese workers suffered from lay offs and relegated to work in the most miserable working conditions. Under the WTO rules, the massive imports of American subsidized agricultural products which include many potentially toxic GMO foods have devastated the Chinese countryside. The impoverishment of the workers and peasants in China led to insufficient demands, especially in the popular segment of the consumer markets. As a result, the “increased competition by national and foreign private capital has set in motion close to 100,000 mass demonstrations involving millions of workers and peasants protesting arbitrary firings, plant shutdowns, stolen pension and arbitrary seizure of property without compensation.”3.
It is not surprising that in the face of fierce onslaught by foreign capital, both the state and private sectors in China have lost dominance in the Chinese economy, and they have failed to develop the Chinese national brands. Although Chinese firms still control the highly labor-intensive business sectors, many of them act as subcontractors, depend on the export market, and are subject to profit squeeze by the Western multinational firms.
Under this kind of business arrangement, the multinationals control marketing, research and development, and most importantly, the international brands, while the Chinese are in charge of manufacturing, labor and governmental relations.
Consequently, there is the vexing international phenomenon as, while the Chinese are exhibiting their talents in many scientific endeavors such as space explorations, cutting edge technology, plus the overwhelming numbers of science and engineering graduates, who have excelled in many overseas research institutions, China still possesses only few global enterprises.
The United States, on the other hand, “remains the dominant power by far in terms of the number and percentage of multinationals among the top 500, with 227 (45 percent), followed by Western Europe with 141 (28 percent) and Asia with 92 (18 percent).”4. American multinationals such as General Electric, Exxon-Mobile, Microsoft, Pfizer, and Wal-Mart dominate their respective industrial and retail sectors.
To be sure China has one or two corporations such as Huawei, which supplies equipments to world’s telecom carriers. The company’s corporate objective seems to serve the industrial users by competing on price, rather than directly to the consumers. Lenovo is the world fourth largest personal computer manufacturers. It bought IBM’s personal computer division in 2006, but it is having difficulties expanding globally. Haier, a home appliance manufacturer is another Chinese global company, but it only specializes on low-end market.
In this regard, China could not even compare with South Korea, a much smaller newly industrialized country, whose global corporations such as Samsung Electric, Hyundai Motor and LG are well known, and their products are widely accepted by consumers all over the world.
Recognizing China’s lack of global brands and the deficiency of the Chinese industry, the Chinese Premier Wen Jiabao has called for Chinese companies to create Chinese brands “with reputations for quality, innovation, and service so strong that customers are willing to pay a premium for their products.”2.
Others view the difficulties of creating Chinese brands differently, and it is not just simply calling for innovation. For example, Professor Nan Zhou of City University of Hong Kong gives the reasons for China’s difficulties in creating international brands. According to the professor, one of the important factors is that China inherited the socialist economy, which was used to mass production on managing supply-side rather than product differentiation. Product differentiation is important for the creation of the brands. Moreover, Chinese business entrepreneurs, for economic reasons, do not venture to invest in product development and build brands, as there is little incentive to do so.5.
Unfortunately, both the premier and the professor completely ignore the history of the industrial development in the advanced industrial countries. History shows that today’s economic super powers that possess the vast multinational corporations with global brands all became successful and rich by employing protectionism to protect their infant industries.
While Britain was the first industrial power to use protectionism to safeguard her infant industry, it is the United States which is called “the mother country and bastion of modern protectionism.”6. It was Alexander Hamilton, the first U.S. Secretary of Treasury, who argued strongly for the protection of infant industries. Accordingly, under the 1816 tariff law, “almost all manufactured goods were subject to tariff of around 35 percent.”6. The United States “remained the most ardent practitioner of infant industry protection until the First World War and even until the Second World War”6. It is not a co-incidence that during the 19th century and up to the 1920s, America experienced the fast growing economy in the world.
As a matter of fact, it was only after the Second World War, when her industries achieved world supremacy did the United States advocated free trade. However, much of the slogan of free trade was only rhetoric, as quotas, voluntary export restraints, agricultural subsidies, and trade sanctions were often employed by America.6.
In addition to tariff protection, other state interventions greatly accelerated the American economic development in the late 19th and early 20th century. These measures include the support of agricultural research, the establishment of agricultural colleges and government research institutions, the investment in public education, the promotion, development of transportation infrastructure, and the subsidies to the railway companies.6.
Even in the period after the Second World War, when the U.S. industries were strong enough to withstand any international competition, “the share of U.S. federal government in total R&D spending, which was only 16 per cent in 1930, remained between one-half and two-thirds during the postwar years. Industries such as computers, aerospace and the internet, where the U.S.A. still maintains an international edge despite the decline in its overall technological leadership, would not have existed without defense-related R&D funding by the country’s federal government.”6. Similarly, this can also be said about the pharmaceutical and biotechnology industries.6.
Other rich industrial countries which are well known for the use of protection of infant industry and the use of industrial policy to direct key industries include Germany and France. In Germany, the government provided key industries with “monopoly rights, trade protection, export subsidies, capital investments, and skilled workers from abroad.”7.
Copying Germany, Japan established state-owned model factories in such industries as shipbuilding, mining and military industries. State subsidized shipyards, railway companies and are involved in infrastructure projects. State hired foreign technical advisers and are heavily involved in education. It initiated tariff reform to protect the infant industries after the ending of the unequal treaties in 1911. It discouraged “wasteful competition” and encouraged mergers. Japan experienced astonishing per capita GDP growth between 1950 and 1973, and it is generally acknowledged this is due to “activist industrial, trade and technology (ITT) policies by the state.”8.
These industrial, trade and technology (ITT) policies were followed by other East Asian countries with miraculous result. Moreover, the East Asian governments undertook skill training together with human resource development, regulated technology licensing, and more importantly, tightly controlled foreign direct investments.9.
In Japan, foreign direct investments were banned in most key industries. “Even when it was allowed, there were strict ceilings on foreign ownership, usually a maximum of 49%. Foreign companies were required to transfer technology and buy at least specified proportions of their inputs locally. The Japanese government also regulated the inflow of technologies, to make sure that obsolete or over-priced technologies were not imported.”10.
It is not surprising that under this kind of protectionism that Japan developed world class companies with global brands. Toyota was originally a manufacturer of textile machinery and it started car production in 1938, but it met with dismal failure after 25 years of trying, even when the government protected the car market in Japan with high tariff and restricted foreign investments by General Motors and Ford. It finally bailed out Toyota in 1949 with loan from Bank of Japan. Had the Japanese government embraced neoliberalism by deregulating foreign investments and abandoning the protection of national industries, Toyota would not be the world’s number one car company. “Toyota today would, at best, be a junior partner to some western car manufacturer, or worse, have been wiped out. The same would have been true for the entire Japanese economy.”11.
Similarly, South Korea followed the Japan model of protecting national industry, and was able to foster a global corporation like Samsung, the leading manufacturer of mobile phones, semiconductors and computers.
In Europe, Finland, still a relatively backward industrial country by the end of Second World War, was able to advance its industrial competitiveness by using strategies similar to that of Japan by tight control of foreign investments, state owned enterprise to upgrade industry and direct credits to strategic industry. Above all, it recognized that there will be no independent technological development of domestic firms if one liberalized foreign investments too early. As a result, it nurtured one of most successful global corporation—Nokia.12.
Nokia, with annual sales of over $50 billion, has been ranked as Finland’s best brand and best employer. Nokia brand, valued at more than $35 billion, is the number one brand in Asia and Europe as of 2008. Nokia is the 85th company by revenue in the Fortune Global 500, and 42nd most admirable company as ranked by the same magazine.
However, Nokia was an industrial conglomerate involved in paper, rubber, footwear and consumer electronic. It almost went bankrupt after the First World War. It took 17 years before the electronic subsidiary was profitable. Had Finland opened her door by welcoming foreign investments like China, it can be said with certainty that will be no Nokia today. Like many state enterprises in China, Nokia will probably be auctioned off to the foreigners or gone into bankruptcy with lay-off of thousands of employees.
It is no mystery that in order to procreate world class corporations with global brands, nations must first protect their own industry by restricting foreign investments.
The developments of Toyota, Samsung and Nokia clearly demonstrate that nations cannot welcome multinationals with open arms and expect to create corporations with global brands, as unrestricted foreign investments will inevitably result in the dismantling of their national industry. If the Chinese policy makers are genuinely interested in having Chinese global brands, it cannot be done with the present neoliberal policy of embracing free trade, globalization and implementation of the terms of WTO entry agreement. Chinese leaders must recognize the predatory nature of Western multinational corporations. China must preserve their huge domestic market for Chinese companies and nurture them until her industries are ready to compete internationally.
The possibility of the emergence of global brands in China has already been raised by The Economist with these words: “Might a relatively unknown electronics manufacturer somewhere in China decide that, if Samsung was able to move from the darkest shadows to the top of the tree, then perhaps it could too?”15. This question leads one to wonder how many of these Chinese companies have been buried with the present day Opening Door Policy. Obviously, the answer to this question raised by The Economist should be astounding “Yes”, as China, with the most creative and ingenious people in the world would certainly be able to carry on her inventive tradition in science and technology by creating global companies with Chinese brands.
Notes:
1. Asia Pulse: “Chinese brands losing ground”, January 22, 2005 Asia Times
2. Simmons, Craig: “Generic Giants”, July 18, 2009 Newsweek
3. Petras, James: “Rulers and Rule in the U.S. Empire” PP 162-163
4. Petras, James Veltmyer, Henry: “Empire with Imperialism”, P 27 Zed Book 2005
5. Lyenger, Jayanthi: “China strives for its global mega-brands”, October 5, 2004 Asia Times
6. Chang, Ha-Joon: “Kicking Away the Ladder”, PP 26-29 Anthem Press 2006
7. Ibid: P 33
8. Ibid: P 49
9. Ibid: P 50
10. Chang, Ha-Joon: “Bad Samarithans” PP 59-60 Bloomsbury Press 2008
11. Ibid: PP 19-20
12. Ibid: P 60
13. Ibid: P101
14. Wikepedia: “Nokia”
15. The Economist: “As good as it gets?” January 13, 2005 The Economist
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