Peter Cochrane's Blog: China's a zero-sum game

Written in the coffee shop of my Beijing hotel and despatched via a free wi-fi service that sprang up from somewhere but was unrelated to the coffee shop

During the past few weeks I have travelled across China and seen evidence of the decline of the old state-run industries as well as the rapid growth of the new Western-style companies with their science and industrial parks.

The investment rate and growth is startling, unlike anything I have ever seen before, but it is all firmly founded on 'me too' principles and experience. All of it is tried and trusted, direct transplants from the West to the East.

Did I see anything at all radically new or different in my travels? No, not a thing! The buildings, production plant layouts, manufacturing techniques and processes, management structures and methods - everything was standard. Well, what would you expect? This nation is building a mega-economy from the bottom up and risk must surely be minimised.

The only criticism a Western eye might level is the abundance of people. There seem to be a lot of people at all levels and at all parts of the process in all companies and plants. But then again I suspect there is an overt education, training and experience-gaining process also underway to continually feed the demands of this extraordinary growth.

So where is the big gain for Western companies outsourcing or moving operations to China?

First, there is a significant cost reduction. Land, buildings, materials, energy, transport and labour costs are all significantly cheaper than anywhere in the West.

Second, a ready supply of eager, hard working and highly educated professionals, skilled and semi-skilled people.

Third, a sense of national pride and urgency. This is a coordinated and planned transformation of an entire society that can only occur if it is generating sufficient wealth.

Fourth, a clean sheet of paper. There is no old infrastructure or industry to get in the way of what is clearly a high-tech focus. Progress and growth seem unfettered by the past, rules, regulation and planning processes.

Is there an end game here? I think so! Any company manufacturing commodities in the West that doesn't export its production plants to the East will be hard pressed to compete against those that already have. Only very high levels of automation can compete against low-cost human labour.

And when everyone has moved all they can to China, and all the costs have been reduced to the bone, we will be back with the same competitive market position we started with in the West. That is, a zero-sum position. But for the consumer there will have been a drastic reduction in prices and a massively increased supply of everything imaginable.

So what is in store for China? If they continue to follow the Western model, they can expect: rapid growth followed by competitive pressures to continually cut costs; efficiency drives; process re-engineering; consolidation, mergers and acquisitions.

Recognize the pattern? And then perhaps China 2, another nation needing to bring the living standards of its people into the 21st century, will emerge and the process will start again. So far we have seen the industrial revolution spread from the UK to Europe to the US to Japan and now to China. Provided the planet can stand it - and that remains to be seen - it sounds like a good formula for extending and expanding peace and stability.

So what will be happening in the West? Might we expect even more production than ever before of new products, services and solutions based on new technologies and radically new production techniques involving very little or no human intervention?

If so, this will require massive amounts of innovation and investment. New technologies that are currently in their infancy will have to be brought to the fore. However, this is not the real challenge! The real challenge is the lack of highly educated professionals, skilled and semi-skilled people necessary to create these new industries and carry them forward to become a global success.

To be blunt, at a time when the West should be increasing the supply of good scientists, technologists and engineers, in order to power the next phase of industrial change, it is slowly turning the tap off through financial and other disincentives.

The worst of these has been a process of continual 'dumbing down' of most education systems, with qualifications significantly devalued, through unwarranted and (at best) misguided political interference.

This to me is the real threat to the West and not the moving of plants and jobs to the East per se.