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Asia Meets the Other Tiger

Will China become the biggest Asian tiger of them all?

May 22, 2003

Will China become the biggest Asian tiger of them all?

It took the Asian tigers — Taiwan, the Philippines, Malaysia, Singapore, Thailand, and Korea — more than 15 years to build their economies into symbols of new development. It is taking China only a few years to supplant them.

Thus far, whenever China has competed directly with another nation's industries, China has won. Malaysia and Thailand spent 10 years building the expertise, production base and infrastructure for a precision metal works that could sell components to Swiss watch manufacturers.

The Chinese took over that business in only a year. The same is happening with electronics and machinery.

Some countries, like Japan, Singapore and Taiwan, suffer more from Chinese competition today than they suffered from the 1997 Asian economic crisis.

That currency crisis, triggered by such noted speculators as Julian Robertson, the former head of the now-defunct Tiger Management Group, and George Soros, a founder of the Quantum Fund, was simple and short-lived.

The second Asian economic crisis, just beginning in 2001, will not go away so easily. China is doing to the rest of the Asian economy what Japan did to the West 20 years ago. Each of the Asian tigers has its own tale of woe.

Singapore and Taiwan, for example, came through the 1997 turmoil relatively unscathed, but now their manufacturers simply cannot compete with China's.

Singapore is thus becoming a kind of Asian Switzerland, betting its prosperity on investments in China's growth.

Significantly, Singapore's former Prime Minister Lee Kwan Yew has become the chairman of the government pension fund, a major investor in China. His is now the most powerful position in the country.

Indonesia, the Philippines and Thailand have been equally hard-hit, but they lack Singapore's resources and imaginative strategy.

They are likely to suffer deprivation, fragmentation and unrest, with perhaps some resentment brewing toward the people of Chinese descent within their borders.

Vietnam would seem able to compete. After all, its labor costs are even lower than China's.

But the country's government is so corrupt, the business regulations so onerous and the infrastructure still so poor that it is rapidly being deserted by foreign investors.

Malaysia is keeping its well-established electronics industry — but losing its newer businesses in electronics and machinery.

India will lose some of its software business to Chinese companies (whose employees also speak English, the language of software development). However, it will retain its lead in highly complex architecture and applications programming.

Other Asian countries that might have become tigers — such as Laos, Cambodia and Myanmar — will no longer have the chance.

And then there is Taiwan, formerly one of the most prosperous countries in Asia. Despite restrictions on direct contact with China, many Taiwanese businesses are quietly relocating their factories and wealth there.

Sooner or later, Taiwan may find itself forced to reconcile with China — not for military reasons, but because Taiwan will want to participate in the many opportunities on the mainland.

What then does the new Chinese juggernaut mean for Japan, Europe, the United States and other wealthy regions?

For consumers, it is an unalloyed boon. Chinese industries will cut costs, raise quality and propel innovation for most consumer and industrial products.

This is happening not just because of their own efforts — but because global companies vying for position in China are putting their own best practices to use there.

Japan is already discovering the bitter truth. It is suddenly extremely difficult for a non-Chinese company to compete in any worldwide market with a strategy of low-cost, low-price commodities — even if those commodities are precision electronics components.

Very few commodities are out of reach for Chinese industry, which — unlike that of any other nation — can marshal low-cost labor and high-tech automation at the same time.

Successful businesses henceforth will be those that establish and maintain highly reputable brand names. Japan will orient itself toward research and development, software, design and its unique high-precision robotics and machinery.

The Japanese "look and feel" will undoubtedly sell well to the vast new Chinese middle class, which will view Japan as Americans view France, Italy and Germany.

That is as sources of high-quality and luxury goods that confer status upon their owners. Honda is already discovering that the Accord sells at a premium in China.

Because the Chinese are neither skilled nor experienced at marketing, it will take at least five or 10 years for them to develop global brands for their best goods — specifically, appliances, electronics, processed food, possibly automobiles and perhaps new technological innovations in energy or materials.

In the meantime, the Chinese will take over many commodity, industrial supply, and nonconsumer-brand industries.

Like the United States in the early 20th century and Japan in the 1980s, China will overcome protectionist efforts against its companies. People around the world will demand the goods China can provide at a lower cost — and higher quality — than any other nation can.

This will lead to a frenetic new wave of competition, but not between China, the United States, and Japan as monolithic entities.

In each industry and region, there will be a race to see which companies can most effectively internalize China's new methods and approaches to beat its local and immediate competitors.