REINTEGRATING GLOBAL INDUSTRY IN CHINA

The end of the Cold War seemingly liberated business from geopolitical constraints. The “global factory” disintegrated industrial complexes from their former national homes and scattered facilities across the planet in the pursuit of low-cost labor and efficient subcontractors. Many small states from the Caribbean to the Pacific Rim benefited from this process. But now that process may be turning full cycle as China’s vast resources give it a competitive advantage. New industrial centers are being built in China that will reintegrate technology and production in a setting with major geopolitical consequences.

In the June issue of Harper’s magazine, Barry Lynn, the former executive editor of Global Business magazine, shows how disintegrated the manufacturing process has become. A Dell computer, for example, may be assembled in Austin, Texas but uses 4,500 parts from hundreds of suppliers located from Malaysia to Korea–clustered especially in Taiwan and China. And Dell is more typical of the “global assembly lines” built in the 1990s than not.

The system of disintegrated business could only be built in a world assumed to be safe and stable. Terrorism is only the tip of the geopolitical iceberg that threatens this titanic misconception. Asia, after decades of rapid economic growth, is fraught with possible conflicts. China threatens Taiwan. The Korean peninsula is still divided. India and Pakistan confront each other over Kashmir.

In such a divided and dangerous world, Lynn wonders why “almost no one asks what would happen if just one of the still very sovereign nations that underlie this web were to grab hold of a few of the strands and start yanking.”[1] His concern is that China will be the state that makes the grab.

PRODUCTION CAPABILITIES
It is against this background that Jeffrey E. Garten’s column in the June 17 Business Week takes on strategic importance. Garten is now dean of the Yale School of Management. In the Clinton administration he was undersecretary of Commerce for International Trade. Garten notes that Intel has announced a US$100 million investment in Shanghai to assemble Pentium 4 microprocessors, Dell has moved its giant PC-making facility from Kuala Lumpur to Xiamen, and Shenzhen province has pledged US$5 billion to boost its integrated-circuit industry.

Garten’s examples only scratch the surface. On June 6, Motorola outlined its new strategy in Beijing, announcing plans to spend an additional US$1 billion on research and development, hire 4,000 more engineers and increase annual Chinese production to US$10 billion by 2006.

On June 27, software giant Microsoft announced that it would invest US$750 million in China over the next three years. Although no further details on how this money would be placed were immediately available, it was thought to involve an expansion of Microsoft’s already extensive production and research presence in China. A separate US$24.15 million three-year investment in Chinese educational and research institutions by Microsoft, plus a US$480,000 investment to set up a software college in Shanghai, was also announced. “The centerpiece of the plan is really about supporting the software colleges recently established at more than thirty-five universities,” Microsoft’s chief executive Steve Ballmer said while visiting Beijing.[2]

As American firms expand their operations in China, they want a better trained workforce available to meet their staffing needs. Honeywell Aerospace, for example, claims it provides extensive training for the “best engineers” working for Aviation Industries of China (AVIC), including bringing them to U.S. plants to learn about American technology firsthand.[3] AVIC is under the direct control of the State Council and is responsible for developing and manufacturing both military and civil aircraft, missiles, and engines. It also has extensive research capabilities in aerodynamics, materials and manufacturing technology.

From Singapore to Tokyo, voices have been warning that China will become “the production center of the world” if trends continue. Such a development would not only strengthen China, it would also weaken Beijing’s economic rivals in Asia, many of whom are political and military allies of the United States.

With wage rates one-third those of Mexico, Garten writes that “[t]he critical mass of factories, subcontractors and specialized vendors has created a manufacturing environment with which few can compete.” He then asks, “[t]he big question is whether the world economy is becoming so dependent on China as an industrial lifeline that it will soon be dangerously vulnerable to a major supply disruption caused by war, terrorism, social unrest or a natural disaster. In other words, will China’s importance to global manufacturing soon resemble Saudi Arabia’s position in world oil markets?”[4]

Garten confines his concerns to the security of supply chains for business firms, seemingly oblivious to the geopolitical impact of China’s rise.

THE HARMONIOUS WORLD FACTOR
Beijing never adopted the post-Cold War view of a harmonious world upon which corporate globalism was based. A defense white paper published in October 2000 argued that “in today’s world, factors that may cause instability and uncertainty have markedly increased. The world is far from peaceful…. Hegemonism and power politics still exist and are developing further in the international political, economic and security spheres….. As modern science and technology and economic globalization continue to develop, competition among countries has become fiercer than ever before. Financial and economic risks are increasing, and economic security has become a concern for all countries.”[5]

A U.S. Government Accounting Office report released in April of this year confirms that Beijing is not embracing the concepts of disintegration and interdependence popular in American circles. It found that “China’s stated goal is to become self-sufficient in the production of semiconductors for its domestic market and to develop technology that is competitive on the world market. This goal is being pursued for economic and national security reasons and is directed by a series of five-year economic plans, and projects focused on high-technology industries.”

The GAO believes that “China’s efforts to improve its semiconductor manufacturing capability have narrowed the gap between U.S. and Chinese semiconductor manufacturing technology from between seven to ten years to two years or less,” that this rapid progress “has improved its ability to develop more capable weapons systems and advanced consumer electronics.” The GAO concludes that “[t]he country’s improvements in semiconductor manufacturing capability are the direct result of the involvement of European, Japanese, and U.S. integrated circuit manufacturers in China, typically through joint ventures or wholly foreign owned manufacturing facilities.” [6]

Putting more strands of the global economy into Chinese hands may be a good outcome for Beijing, but it could create an increasingly dangerous situation for the United States and its allies in Asia. Private commerce alone does not constitute a framework for international security. It is states that integrate economic and cultural resources behind national power. And the technologies that underlie both economic prosperity and military capabilities are organized at the State level. In China, this means a regime still firmly in the hands of a Communist-trained elite that is fanning the flames of popular nationalism.

The American “enterprise” culture, with its governing elite focused on private wealth and consumption, does not seem to understand how the rise of China’s production capabilities may already be transforming the world in ways far more profound than the price of toys at Wal-Mart.

NOTES

1. Barry Lynn, “Unmade in America: The true cost of a global assembly line” Harper’s, June 2002, p. 35

2. Reuters, “Microsoft Says to Invest US$750 Million in China” June 28, 2002

3. Corporate Social Responsibility in China: Practices of U.S. Companies (Washington DC: Business Roundtable, 2000) p. 25

4. Jeffrey E. Garten, “When Everything Is Made In China,” Business Week, June 17, 2002, p. 20

5. China’s National Defense in 2000, (Beijing: The Information Office of the State Council, October 2000) [ http://www.chinaguide.org/e-white/2000/20-2.htm ]

6. Rapid Advances in China’s Semiconductor Industry Underscore Need for Fundamental U.S. Policy Review, U.S. Government Accounting Office, April 2002, Report GAO-02-620, pp. 9-11

William R. Hawkins is senior fellow for National Security Studies at the U.S. Business and Industry Council in Washington DC.