Chief executives of many major companies, ranging from General Motors to Citigroup and from Motorola to Lucent, are investing billions of dollars in China. To a large extent, they have learned how to engage with the Chinese leadership and, in many cases, to make serious money.
But as a journalist who has been watching China since being posted to Hong Kong in 1979 to chronicle Deng Xiaoping’s Four Modernizations and then moving to Beijing in 1981, I learned that China is capable of surprise. Current straight-line projections of China’s economic progress are almost certainly wrong because China rarely pursues a straight line. That means CEOs who, in a collective euphoria, have invested so heavily in China could one day face disappointment if they aren’t aware of the risks.
The fact that Beijing is hosting the Summer Olympics in 2008 will serve as a powerful rallying point for the Communist Party’s leadership because national pride is at stake€¦quot;and nationalism is a potent force today. But in the years after the Olympics, there is a risk that China will have difficulty sustaining its rate of economic growth. Because the very legitimacy of the 68-million member party is based on its ability to deliver 8 percent and 9 percent annual rates of growth (the ideology of Communism has all but disappeared), the risk of political and social instability could increase. Here is a short list of what could go wrong in China:
The Soft Infrastructure
One Chinese friend who is knowledgeable about official thinking made a revealing comment to me. “We Chinese know what it costs a Western company to make something and yet they want to charge so much money,” she said. “They have created an opportunity for arbitrage.” In other words, her thinking goes, “the Western companies are cheating us by demanding such high prices. We have every right to try to obtain those products at the best price.”
If China never chooses to protect intellectual property, that will hinder its own innovation. And Western CEOs will find newer, bolder threats to their brands. For example, General Motors’ Rick Wagoner has had to fend off a Chinese company trying to market the Chery, obviously based on a Chevrolet, and Cisco’s John Chambers is facing a similar challenge with Huawei, which attempted to sell routers based on Cisco designs.
Where does it all lead? China is making huge gains in manufacturing and that is going to continue. The country’s “hard” infrastructure of highways, factories and skyscrapers has made breathtaking progress. Beijing looks a great deal like Los Angeles. Shanghai’s Pudong District has exploded.
But the “soft” infrastructure necessary to emerge as a full-fledged, technology-based powerhouse has not made nearly as much progress. There may be political and cultural reasons why it never will. Obviously, no one can forecast the future. As the Chinese say, “meo yi ge ren zhidao,” or “not even one person knows.” But there’s a risk that the Chinese won’t be able to make it to the next level of economic development.
I realize this is a contrarian point of view and that not everyone in the world must embrace American views of economics; multiple models do work. Still, the Chinese could reach a plateau, and growth could slow, particularly if foreign investment slows. In many ways, this is a nation hooked on rapid growth. If growth were to slow, the party’s legitimacy would be undercut. In such an environment could lurk the seeds of trouble for investors who have not carefully hedged their bets.