The Broken Eggs of China's Business Omelette

Relying on inequality and corruption, China's rapidly growing economy may not be sustainable for much longer.

TIANJIN, China - "Something bad has been happening. My contemporaries want to leave the country. The trend has reversed. I feel that in the last year, bad things happening in the dark here have started to surface. The best people want out. They've lost hope. They suspect things are just going to get worse. They feel they've lost control over their lives and that things for their children will be even worse."

The young man who said that manages an investment firm in Beijing, the capital of what is still the world's fastest-growing economic power. But you could have heard much the same from his counterparts in Israel. This is not some local economic malaise. The whole world is changing.

I can't reveal the young man's name, nor his company's. He was speaking off-the-record, at an event we both attended. We made a date to continue the conversation, but when he learned I was a journalist he disappeared and has not responded to my emails.

That's how it is in China these days. The official version of developments is dramatically different from what is said behind closed doors. Young Chinese speak freely in private, but to get ahead or to do business there you'd best watch your tongue in public.

China is galloping ahead at a furious pace. With each visit I find it more modern, developed and intense. Three years ago I was astonished by the modern design and the sheer size of Beijing's new building complexes, and there are no signs this time that the Chinese are hitting the brakes. Nothing in the West compares to the magnitude and power of these buildings. Everything is expensive and over the top.

In the face of all this surface grandeur one wonders about the construction methods by which it was achieved, and about how these buildings will look 10 or 20 years down the road. Is the Chinese way sustainable? Is there a concomitant development of cultural and institutional infrastructure, as well as values, needed to support the country's tremendous economic progress over time?

China is a nation of stark contrasts: on one hand, millennia of Chinese culture, on the other the most brutal swinish capitalism imaginable. Tens of millions of Chinese accrue fabulous wealth, while hundreds of millions more live in the previous century.

Fiercer capitalists than Americans

The Chinese are far fiercer capitalists than the Americans. They're crazy for luxury brands. There is a street in Tianjin with Aston Martin, Bentley, Mercedes-Benz and Rolls Royce showrooms. Only London has a comparable density of upscale cars. While the number of millionaires in the United States is declining, in China it is growing and will soon surpass Japan to be second only to America in that respect.

Who is buying all these luxury cars? Successful entrepreneurs, many of whom have ties in government. China is an extreme example of cronyism. It is difficult to get rich without friends in the right places, and everyone knows it.

The giant aircraft manufacturer Airbus has only one final assembly plant outside Europe, and it's in Tianjin. This plant look nothing like China's infamous electronics and textile sweatshops, it looks like the Airbus plants in Toulouse and Hamburg. There are three jets in the middle of the enormous hangar. All is clean, neat and deceptively quiet: You would not believe the speed with which these planes are assembled.

It was not China's low labor costs that drew Airbus to Tianjin, the plant manager tells me. The quality of the work is equal to that at the Hamburg facility, "maybe even better," she adds proudly. So what was the attraction?

The plant serves mainly the Chinese market, she explains. She neglects to mention that it is a joint venture in which China owns 49%. That is often the only way to work in China, by engaging the cooperation of the authorities, which control most of the clientele.

But it does not have to be that way. Vestas, a Danish firm that is the world's largest wind energy company, built a gigantic turbine manufacturing plant in China that supplies the whole world. 

The plant manager is Danish. When pressed he admits that while a job at the company’s plants in Europe can be for life the churn rate in the Chinese plant is terrific despite the long, steep learning curve. Chinese workers always have an eye cocked on advancing, he says.

How does the factory protect its intellectual property?

Tight security in the lab, says the plant manager, who goes on to say that the company’s turbines are extremely difficult to reverse-engineer. That is not, however, the situation at most Western companies operating in China, whose products are reverse-engineered and then knocked off − not by fly-by-night upstarts but by the biggest companies, some of them government-owned.

Cisco gets wired

The CEO and chairman of the American Cisco Systems, John Chambers, came to China 12 years ago with the boast that the company would “wire China.” If anybody got wired, it was him. Cisco has been declining for a decade and China’s version of the company, Huawei, duplicated most of its services and products and is almost as big as Cisco itself.

A professor of marketing I studied with a decade ago moved to China some years ago to head a business school. For years he has insisted that people should look at the common denominators between the consumers and entrepreneurs of China and the rest of the world. But in private conversation he admits that Chinese students do things that would be unacceptable elsewhere.

It is very hard to do business in China. The market is vast, the potential tremendous and some places have very advanced infrastructure, but navigating between the authorities and ravenous local partners can be tricky indeed. Successes are trumpeted from the rooftops, but failures are more common. The Israeli blades maker Iscar has been treated like a king in China because of its affiliation with Warren Buffett; but one of its ventures there went down in a huge spat some years ago. The Israeli drugstore chain Super-Pharm has tried to make inroads into China, but has had precious little joy.

Grimmer mood at World Economic Forum

China’s power and size are awesome. World Economic Forum leader Klaus Schwab is received there with the honors usually reserved for visiting heads of superpowers. He moved the WEF summer session to China, bringing hundreds of industrial leaders and scientists to China each year, and the Chinese invest in him in return.

This year, while the forum hostesses smile with charm behind closed doors expressions are grimmer, including among China’s most successful businessmen. They’re perturbed about the state of Europe, and rightly so. China’s economy depends on exports.

Beijing managed to overcome the crises there and in the United States with remarkable skill and to protect growth during the last three years through huge investments in infrastructure, property and giant projects.

But questions are multiplying about the merit of these investments, the real estate bubble created by the government banks and the economic feasibility of the giant projects. Fear for China’s future growth is burgeoning.

In fact the economy may well be slowing badly. Official figures should be taken with a grain of salt. Theoretically China could slow to single-digit growth but still expand by 7%-8% a year. a rate the West would love to achieve.

But for the last two decades China’s social structure has been predicated on annual growth of nearly 10%. The moment China the rapid job-creation stops, leaving the tens of millions leaving their villages for the cities remain unemployed, and the ones already there can’t get decent pay for their work, the mother of all protests could erupt.

Hundreds of millions of Chinese struggling to make a living are still too cowed to kick up much of a fuss. But there’s a whole young generation, connected and informed, that could organize and make the protests in Spain, Greece and Israel look like child’s play.

The Chinese leadership is no longer obsessing over communism versus capitalism any more. That battle is over. The problem is that capitalism in China (and many other places) does not rely on talent and initiative alone, but also on corruption and income gaps.

Glossy brochures speak of the hundreds of millions rising from poverty in China. They don’t mention the mounting despair: not only among the poor, who are just one illness away from total ruin; but also among the middle class, who are increasingly doubtful about the government’s ability to rule the country, to protect the environment and to insure food safety.

Model is still working well

China’s macroeconomic model is still working well. The central government is remarkably good at pushing the economy and investment. China’s economic potential, for domestic entrepreneurs and foreign investors, cannot be ignored. But every passing day decreases the chance that economic growth can continue to mask the growing social discontent.

It may not be a matter of mere inequality and corruption; the underlying factor may be a global malaise. Governments the world wide, in Europe and in America and apparently even the fastest-growing economies on the planet, can’t keep their promises to the people. They are disappointing fond expectations.

Israelis will discover in the years to come that the social protests are not only about the cost of living in Israel. They mark a turning point in global economic, social and political structure. The models don’t work any more.