Biotechnology/Management
of new drugs for people who are genetically suscep-
tible to bird flu, SARS or hepatitis. Indeed, there are
already a number of US companies and research
institutions expressing serious interest in working
with Berkeley Biotech.
Foreign observers do not doubt that the Taizhou
genome project will attract a lot of international
interest. “China has the size and [many] special eth-
nic groups that we don’t know much about,” says
Anders Ekbom, head of the clinical epidemiology
unit at the Karolinska Institutet in Stockholm. Others
like David Winickoff, a professor of bioethics at the
University of California, Berkeley, note that a key
advantage for the Chinese project may be the ability
to provide a lot of genetic samples quickly. “They can
develop large repositories without having to jump
through the regulatory hoops,” he says. “This might
be attractive to foreign investment firms.”
But foreign experts also foresee some potentially
thorny problems ahead for the Chinese. Mr
Winickoff warns that no genome project can main-
tain its integrity if it were to transpire that samples
were obtained without informed consent or without
“allowing people to know who the information is
going to be used by, what the project entails, what
information is going to be extracted and what kind
of institutions will have access”.
Disruptive dragons
For China’s most competitive companies, making things cheaper is just the starting point for global supremacy
Just how big a competitive threat are Chinese com-
panies to foreign multinationals? The standard view
is that there exist a handful with some significant
strengths: Huawei Technologies, with its heavy
emphasis on research and development (R&D);
Lenovo, helped by its purchase of IBM’s personal-
computing division; and perhaps Haier, which has
made a better stab at establishing itself overseas than
any other of China’s consumer-electronic brands.
But most Chinese companies have so far lacked the
proprietary knowledge, brands and marketing know-
how to make much of a global impact.
For sure, the country has some giants which rank
among the world’s biggest companies. Industrial and
Commercial Bank of China is currently the world’s
largest bank by market capitalisation and China
Mobile boasts the world’s largest mobile-phone sub-
scriber base. But again, the conventional view is that
these companies are big because of the privileges
they enjoy at home, where they operate in closed
markets with no real competition. Internationally,
these companies count for little, unless they are
scooping up resources in far-flung places to feed
China’s industrial engine.
Not so, say Ming Zeng and Peter Williamson in
their book “Dragons at Your Door”, published earlier
© The Economist Intelligence Unit Limited 2007
Unrealistic expectations
The CMC, for its part, says samples are collected
from people on a voluntary basis, and it has
obtained permission from housing committees in
different areas within Taizhou to visit residents to ask
for their participation. But by some foreign stan-
dards, getting 5m people out of a city of 5.03m to vol- Taizhou authorities must
untarily participate in a medical project could be be careful not to coerce
considered coercive. city residents
Apart from ethical issues, the Taizhou project’s
extremely short planning phase could also lead to
logistical difficulties later on, according to Mr Ekbom.
“They need to make a long-term economic commit-
ment, as these projects often turn out to be more
costly than expected,” he says. “Will they still have
the money to invest five years down the line?” For
instance, some equipment that is state of the art
today could be obsolete in five years.
Indeed, it seems safe to say the future success of
Berkeley Biotech is closely intertwined with the
speed with which Taizhou can be transformed as a
magnet for talented scientists and engineers, both
Chinese and foreign. But today, the city has neither
an airport nor a golf course. If some dreams are
more distant than others, Taizhou’s vision certainly
seems to be a fantastically forward-looking one.
this year by Harvard Business School Press. What the
best, most competitive Chinese companies do is
lower costs, not just at the manufacturing stage, but
at all points up and down the value chain—extend-
ing the cost advantage they have found in manufac-
turing to R&D at one extreme, and delivery services
at the other. Being cheaper, however, is only these
companies’ starting point. Once established, their
focus is less on cost and more on the disruptions
their practices are creating. These disruptions in turn
create opportunities to expand business—technologi-
cally, geographically and, of course, by volume.
Potent forces
Many of these firms exploit two potent forces.
Modularisation breaks the manufacturing of a single Modularisation and
product into separate units. Outsourcing then looks outsourcing create huge
wherever possible to distribute functions deemed opportunities for Chinese
non-core to companies which can handle them companies
more cheaply. Together, this pair has created huge
opportunities for Chinese companies to establish
themselves in the production chain. Such opportuni-
ties exist typically at the bottom, making a low-end,
usually commoditised product. These are precisely
the things that many developed-country companies,
especially listed firms constantly pressured to bolster
Business China September 24th 2007 5
Management/Investment
Flexibility is as important
as low cost for Chinese
manufacturers
Global FDI inflows should
grow steadily in 2009-11
6 Business China September 24th 2007
margins, are looking to stop making.
At the same time, because most Chinese compa-
nies rely primarily on labour rather than technology
for their cost advantage, they can look at ways of
developing production lines that are flexible as well
as cheap. Messrs Zeng and Williamson cite Chint, an
electrical-equipment maker, as an example. It oper-
ates both fully automated and manual production
lines. But the company found that its automated pro-
duction lines had maintenance costs four times that
of the manual ones they were meant to replace. The
automated lines were also far less efficient for small-
batch orders with customer-specific features. So
Chint opted to put its high-volume products on the
automated lines, while keeping the rest—some 70%
of its range—on manual lines. Building upon advan-
tages like this, Chinese companies are able to offer
larger product ranges at a lower cost than their com-
petitors. Foreign competitors find it hard to retreat
into product differentiation as a way of maintaining
the distinctiveness of their products.
What is more, given their limited technological
resources, Chinese manufacturers concentrate on
product refinement and extension rather than com-
ing up with radically new goods. This enhances their
ability to both expand and customise their product
ranges, focusing on improving the goods people buy
now rather than on next-generation goods with
uncertain consumer appeal. That is why markets
such as those for consumer electronics are flooded
with cheaper options coming out of China, often
with newer features. While these goods remain low-
margin products for their producers, they have the
effect of shortening the technology-migration cycle.
Still a preferred destination
The Economist Intelligence Unit’s latest report on world foreign-direct-investment trends to 2011 says China will
continue to attract tens of billions of dollars a year—despite a choosier government
Global foreign-direct-investment (FDI) flows over the
next five years will be pushed upwards by buoyant
growth, competitive pressures and improvements in
business environments in most countries. Global
FDI recovered strongly in 2004-06 after a deep three-
year slump. Following a further increase in FDI
inflows in 2007, a modest and temporary decline in
global FDI inflows is expected in 2008. Global FDI
inflows are projected to return to steady growth in
2009-11 and to reach US$1.6trn by 2011. There are a
number of reasons to be optimistic about the medi-
um-term prospects for FDI. These include the ongo-
ing global trend towards better business environ-
ments, technological change and the search for com-
petitively priced skills, and sharper global competi-
tion pushing companies to seek lower-cost destina-
tions. On balance, most host and home governments
Last year’s high-end goods, such as LCD screens,
become this year’s mass consumer items. This in
turn creates headaches for the established consumer-
goods manufacturers, which have historically seen
prices for new products come down more slowly.
Once established as integral players in this game,
Chinese firms have found that opportunities for
acquisition start to present themselves. As interna-
tional competitors are undercut on price, they
become more willing to sell their know-how and
consider exiting a business segment. For Chinese
companies, acquisitions can lead to bigger
economies of scale and further lowering of costs.
The sector then becomes even less attractive to
other companies still in the market. But for Chinese
buyers of foreign technology, acquisitions allow
them to enhance their understanding of a product
and how it is manufactured. This is the break-
through moment for Chinese companies to start
moving up the value chain.
There are, of course, limits to what can be done
with the strategy described by Messrs Zeng and
Williamson. Developing any compelling new prod-
uct from scratch remains highly challenging for
Chinese firms. As the Chinese economy itself grows,
rising costs at home will also be a major constraint.
But as “Dragons at Your Door” makes clear, the
notion that it is possible for established foreign com-
panies to defend themselves against Chinese
upstarts by simply retreating up the value chain is
unlikely to prove sufficient. Why? Because Chinese
companies will simply follow them there, causing as
much disruption as possible along the way.
will continue to encourage FDI.
In absolute terms at least, China is one of the
world’s largest hosts of FDI—and will remain so. In
2006 FDI inflows totalled US$78.1bn (in balance-of-
payments terms). FDI inflows into China have gen-
erally been increasing over the past two decades,
with annual average inflows rising from US$3.9bn
(again in balance-of-payments terms) in 1985-92 to
US$37.8bn in 1993-2000 and US$59bn for 2001-06.
FDI inflows are forecast to stay high and to increase
gradually throughout the forecast period, averaging
US$87bn in 2007-11. The stock of inward FDI reached
US$699.5bn by end-2006, although it has actually
been falling as a share of GDP in recent years (large-
ly because the economy has been growing faster
than FDI inflows). FDI data for China should, how-
ever, be treated with caution. FDI inflows are
© The Economist Intelligence Unit Limited 2007