People's Republic of Products

Times Staff Writers

Ten years ago, this southern Chinese city was little more than vegetable farms and rice paddies. Today it is a teeming, smoggy monument to manufacturing. More than 4 million workers toil in 22,000 factories, churning out everything from patio chairs to power tools.

Rows of industrial buildings the size of airplane hangars stretch on for miles. Uniformed workers spill out of factory dormitories before dawn, stopping for a quick bite of porridge before heading to the assembly lines. Container trucks zip along modern superhighways to high-tech ports, where cargo is loaded around the clock onto ships bound for Los Angeles, Tokyo and Rotterdam.

Poor and isolated 30 years ago, China is emerging as the world's factory floor. The country's embrace of capitalism, coupled with an abundance of cheap labor, massive foreign investment and the collapse of international trade barriers, has sparked an explosion of manufacturing. The reverberations are being felt around the globe.

Shopping for a pair of shoes? Chances are that nimble Chinese hands sewed them, along with nearly 80% of the footwear purchased in the United States. That French provincial bedroom set on the showroom floor? It's probably part of the $4.6 billion in furniture that China shipped to the United States last year.

Computers? Factories here in Dongguan, 50 miles north of Hong Kong, produced 37% of the world's disk drives and 10% of its computer monitors last year -- not to mention tens of millions of scanners, printers and DVD players.

Though many of China's exports are familiar Western brands, made in factories owned or run by foreigners, home-grown Chinese enterprises are making refrigerators, microwave ovens and high-definition televisions for customers worldwide.

"They're going to be a force to be reckoned with," entrepreneur George Thomas said of the Chinese. Thomas heads an Illinois company that makes computer networking equipment. He recently moved his manufacturing operation to the Chinese city of Suzhou to take advantage of low wages, tax breaks and inexpensive supplies.

"They're going to drive standards," he said. "They're going to drive everything."

China is not the first developing country to become a center for low-cost production. But the speed and scale of its emergence set it apart. Until recently a minor player in the world economy, China now is the sixth-largest trading nation. Experts predict that it will rank second by the end of the decade, ahead of Germany and Japan and behind only the United States.

"The pace of China's industrial development and trade expansion is unparalleled in modern economic history," said Nicholas Lardy, a China expert at the Brookings Institution in Washington and author of several books on the Chinese economy. "While this has led to unprecedented improvements in Chinese incomes and living standards, it also poses challenges for other countries."

Despite its spectacular progress in recent years, China remains an impoverished country: Two-thirds of its people live on less than $1 a day. Its industries remain far behind their U.S. counterparts in technology, innovation, managerial expertise and marketing know-how.

But international economists say China is advancing steadily and eventually will compete with U.S. companies in making complex, high-value products such as aircraft and semiconductors. Whether this is to be encouraged or feared is a source of growing debate.

Some security experts, business leaders and members of Congress say that an economically powerful China will become a political and military rival. It is worrisome, they say, that an authoritarian country with a history of contentious relations with the U.S. has become a key source of all kinds of manufactured goods. If a political upheaval or a diplomatic dispute interrupted those supplies, the U.S. economy would suffer.

This vulnerability was underscored recently when a labor dispute shut West Coast ports, interrupting the flow of computer parts, Christmas toys and other products from China.

The skeptics would like to see China's rise slowed and its access to advanced U.S. technology limited.

"The economic growth of China is at least as potent a threat to U.S. security as the actual military power," said June Teufel Dreyer, a China specialist at the University of Miami. "Obviously, a strong economy can field a stronger military."

Advocates of free trade with China, who include President Bush, contend that economic engagement is the best way to foster a stable, prosperous China capable of buying U.S. airplanes, wheat and pharmaceuticals.

"The key is not to try to hold China back, because that in the long run is an exercise in futility and it's a political mistake. It breeds an enormous amount of resentment," said William Reinsch, a former top Commerce Department official who is president of the National Foreign Trade Council in Washington. "What makes more sense is to run faster because we can. We're an entrepreneurial society."

40 Cents an Hour

China's low wages have been the main catalyst for its manufacturing boom. The population of 1.3 billion, the world's largest, provides an almost inexhaustible supply of low-cost labor. The average factory wage is about 40 cents an hour -- one-sixth that of Mexico and one-fortieth what U.S. factory workers are paid.

China's total trade -- imports and exports -- was $510 billion last year, nearly 15 times greater than in 1980. Forty-one percent of the exports went to the United States. China recently supplanted Japan as the country with the largest trade surplus with the U.S. Last year American purchases of Chinese goods were $83 billion greater than Chinese purchases of U.S. products.

Wal-Mart Stores Inc., the world's largest retailer, bought $14 billion in merchandise from China last year -- 13% of all U.S. imports from the country. To be closer to its suppliers, the company recently opened a worldwide purchasing center with 300 employees in the southern city of Shenzhen.

On U.S. shores, the torrent of Chinese merchandise has been both bane and blessing.

To the delight of budget-conscious shoppers, retailers have filled their shelves with inexpensive Chinese-made goods, many of them bearing such brand names as Black & Decker, Stanley and Rubbermaid. The low prices of these products have helped keep inflation in check and bolstered the bottom line for many U.S. companies.

Trade with China has created millions of jobs for U.S. lawyers, marketers, shippers, truckers and others.

The trade-off is in U.S. factory jobs. In one industry after another -- clothing, furniture, light electronics -- domestic manufacturers unable to match Chinese prices have gone out of business or shifted production abroad. A recent study done for a congressional panel found that at least 760,000 U.S. manufacturing jobs have migrated to China since 1992.

Scheu Manufacturing Co. of Rancho Cucamonga sells portable industrial heaters. Until two years ago, it made all its products in Southern California. Today, it imports two-thirds of them from China. The change eliminated 130 seasonal jobs at Scheu.

"We've always prided ourselves on being a low-cost producer, because of the quality of our engineering," said Craig Scheu, a principal in the family-owned business. "The next thing we knew, not only were we not competitive, we weren't even in the ballpark. It's stunning the prices they can do."

China's emergence has been a mixed blessing for developing countries as well. Hong Kong, Taiwan, Singapore and the Philippines have lost thousands of jobs, in some cases entire industries, as production has moved to the Chinese mainland.

Mexican factories that once supplied the United States with golf clubs, blue jeans, door locks and other products have closed by the thousands over the last two years as China has taken their business.

At the same time, China's purchases of raw materials and equipment to power its export sector have bolstered Asian economies weakened by the slowdown in the U.S. and Europe.

The struggle for control of the U.S. bicycle market illustrates China's raw manufacturing muscle.

As recently as the mid-1990s, more than half the bicycles sold in the United States were made in U.S. factories. Manufacturers had survived low-cost competition from Taiwan, Japan and South Korea.

Then bicycle makers moved their assembly lines to China.

"Within a couple of years you had [factories in] what had been dirt fields churning out a half-million bicycles [each]," said Michael Kershow, a Washington attorney who represented major U.S. manufacturers in a failed attempt to secure trade protection.

U.S. companies could not match the Chinese prices. Chinese imports now dominate the market, accounting for nearly 85% of the 16.8 million bicycles sold in the U.S. last year. The share of U.S.-made models has dropped to 2%. Venerable American brands such as Huffy and Schwinn now are made abroad.

The U.S. bicycle industry lost an estimated 8,000 manufacturing jobs. Asian countries that saw their shares of the American market shrink also lost jobs. But U.S. consumers saved billions of dollars as the average price of bicycles sold through mass retailers such as Wal-Mart dropped from more than $100 to $77.

"I don't know how [Chinese manufacturers] deliver a ridable bicycle for 70 bucks, but they do," said Fred Clements, executive director of the National Bicycle Dealers Assn., a trade group with headquarters in Costa Mesa. "The low-end bikes are as good as they were when they were made in the United States. Only the prices have dropped."

Opening the Market

China's rise was made possible by a convergence of political and economic forces. Under Deng Xiaoping, China's Communist leaders began dismantling the centrally controlled economy and encouraging private enterprise in the late 1970s. The move toward a free market accelerated in the late 1980s as the Soviet Union teetered toward collapse.

China entered the global economy just as trade barriers were falling around the world and the Internet was making it easier to do business across borders. Like their Asian neighbors, China's leaders promoted exports as a way to spur economic growth. They also wanted to create jobs for a vast peasant population.

But in contrast to Japan, China welcomed foreign investors, particularly overseas Chinese. Entrepreneurs from Hong Kong and Taiwan whose families had fled the Communists decades earlier led the way in moving production to the mainland, making cheap clothing and plastic toys.

As other outsiders set up factories, the trickle of low-margin export goods turned into a flood of increasingly sophisticated products.

Multinational companies had been chasing cheap labor around the globe for decades. But the outcome was more impressive in China, for a variety of reasons.

Foreign firms, eager to establish a presence in China, brought valuable technology and built some of the world's most modern and efficient factories. The Communist regime provided tax breaks, cheap land and other inducements and spent billions of dollars on highways, ports, fiber-optic networks and other infrastructure.

At first, foreigners were required to take on a Chinese partner to share the wealth. They were free to export their products, but the government severely limited what they could sell in China to protect domestic companies. The regime also tightly restricted foreign investment in key industries such as autos, steel and telecommunications.

Those restrictions gradually were eased. To qualify for entry to the World Trade Organization last year, Beijing agreed to open its economy still further.

The growing concentration of manufacturers and suppliers became a spur to further development. China developed into a place for one-stop shopping, where companies could obtain everything from raw materials to packaging and get their products to customers in record time.

The potential to sell their products to Chinese consumers and industries, as well as to export them, was another powerful incentive for foreign companies to invest in China. Wal-Mart, in addition to stocking its U.S. stores with Chinese goods, operates 15 stores in China and plans to open more.

The country's middle class, though just a sliver of the population, is estimated at more than 100 million and is growing rapidly. Even now, China buys more cell phones than any other country. Its expanding industrial sector is becoming a major buyer of raw materials, machinery and high-tech equipment.

China faces formidable barriers to further development. Its financial markets are small and poorly regulated. The closure of unprofitable state-owned companies has put millions of people out of work and left the country's banks with massive debts. Government and judicial institutions are rife with cronyism and corruption.

Yet the industrial transformation of recent years is nothing short of startling.

The Pearl River Delta in southern China is a center of the manufacturing explosion, producing ceiling fans, lightbulbs, pianos and other products by the container load. In less than a decade, farmland has been overrun by concrete, steel and smokestacks across an area five times the size of Los Angeles.

Dongguan, Shenzhen and Guangzhou (formerly Canton) have been transformed into giant industrial zones, linked to Hong Kong, the region's major port, by expressways more modern and less congested than those in Los Angeles.

Dongguan, which is divided into 32 districts, each specializing in its own slice of the global industrial pie, has become one of the country's wealthiest cities. Giant factories bearing names such as Nokia and Sony sit side by side with luxury housing developments for Chinese entrepreneurs and foreign managers.

"What is happening is a huge, unprecedented shift of trade flow from ... other places into China," said Craig Pepples, chief operating officer of Global Sources Ltd., an online trading network based in Hong Kong that matches suppliers in Asia with customers around the world.

Chinese suppliers now represent 34% of Global Sources' business, a level twice as high as three years ago. "It's really quite shocking," Pepples said. "You see the export figures in Taiwan and Hong Kong, which have dropped in double digits, while China is increasing even in a bad economy."

Doubts Dispelled

George Thomas, the Illinois entrepreneur, can attest to the advantages of manufacturing in China. His 40-employee company, Contemporary Controls, in Downers Grove, Ill., near Chicago, makes computer networking equipment used to automate factories.

Thomas, 58, became interested in China several years ago after getting orders from factory managers there. He was buying most of his components from China because prices were so low. After attending several trade shows in China, he realized there was strong demand for his products in that country and that he could make them much more cheaply there.

Thomas did the math. Production workers were paid $1 an hour in China and $12 an hour in Illinois. Factory lease: $2 per square foot in China, $8.50 in Illinois. Once in China, the company would be close to its suppliers and no longer would have to pay to ship components across the globe.

Yet Thomas had doubts about whether Chinese workers could meet his standards for quality. As a test, he sent a Chinese factory instructions for making a piece of customized networking equipment. Within days, he had a sample that worked flawlessly.

"I was fairly flabbergasted," he said.

Contemporary Controls began looking for a location in China and found one in Suzhou, an ancient city of canals and exquisite formal gardens near Shanghai that has become one of China's busiest manufacturing zones. The company agreed to spend $200,000 on a production facility and began operations last summer, with 13 Chinese employees.

In addition to low labor costs, Suzhou offered a two-year tax holiday, cheap real estate and a ready network of suppliers and customers.

Contemporary Controls can buy just about everything it needs within a 20-mile radius. Semiconductors are the one component it must import; the chips now made in China are not sophisticated enough. But some of the world's leading chip makers, including Fairchild Semiconductor International Inc., are opening factories in China and the company hopes to be able to buy all its chips locally within a few years.

Thomas expects difficulties operating in China, given the horror stories he has heard about customs delays, unreliable suppliers, corrupt officials and theft of designs and techniques.

But he is optimistic, because his customers are factories and China is building more of them than any other country. Thomas plans to keep his 28 U.S. workers busy with research and development, design work and manufacturing for the U.S. market. The Suzhou facility will supply the rapidly growing Asian market.

Moving Up a Level

Beijing's leaders know that being the cheapest assembly line in the world will not keep their people fed forever; too many other countries are vying to fill the same role. So China is working hard to reach the next level of industrial sophistication.

This will require more than foreign money and technology. Though its factories excel at producing foreign-designed goods, China has yet to develop a cadre of industrial innovators comparable to those in the U.S., Japan or Germany. Its ranks of skilled managers are thin, its command of marketing weak.

The result is that though the Chinese can make high-quality cars for Volkswagen, Toyota and General Motors, they have yet to develop a model of their own with a recognizable brand and an international market.

Chinese officials are striving to change that. They are trying to develop their own global brands in electronics, home appliances and personal computers -- Chinese versions of Sony, General Electric and Dell. Some of these products -- Legend computers, Haier refrigerators and Konka televisions -- already are well-established in developing countries and are making inroads in the U.S. and other industrialized nations.

The government also is spending heavily to develop the highly sophisticated industries that could propel China into the first rank of economic powers -- aerospace, semiconductors and biotechnology.

China has built dozens of high-tech research centers, mounted a campaign to lure ethnic Chinese scientists living abroad and overhauled its higher-education system, with a focus on training first-rate scientists and engineers.

Gary Hufbauer, a senior fellow at the Institute for International Economics in Washington, said he would not be surprised if Chinese workers were assembling commercial aircraft within a decade.

China's move into industries traditionally dominated by the U.S. will lead to greater tension, much as Japan's economic ascent did in the 1980s.

"China will become more prosperous and we will have more trade battles," Hufbauer said. "But they will be battles of prosperity."

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China's march toward capitalism

1972: President Richard M. Nixon visits China and the United States establishes diplomatic relations with the Communist

government, reopening the mainland to U.S. firms.

1978: Deng Xiaoping becomes China's "paramount leader" and launches a campaign to open the economy to competition and foreign investment. Australia becomes the first country to

grant China favored trade status.

1980: China establishes four special economic zones offering tax breaks and other incentives for foreign investment.

1984: Beijing Jeep, a joint venture of a state-owned Chinese firm and American Motors, is launched.

1985: Hong Kong & Shanghai Banking Corp. opens the first foreign bank branch in China.

1989: The Chinese military crushes anti-government protests in Tiananmen Square in Beijing, killing hundreds of people and injuring thousands. The bloodshed unsettles foreign investors, triggers U.S. economic sanctions and creates uncertainty about whether economic reforms will continue.

1990: Chinese officials open a stock exchange in Shanghai, the country's first since the Communist revolution

of 1949.

1992: Deng tours the Pearl River Delta by train, touting economic reform and foreign investment as "good for socialism." Chinese entrepreneurship takes off and the number of foreign investment zones jumps from 100 to 8,700.

1997: Deng dies. Chinese President Jiang Zemin announces a plan to sell thousands of state-owned businesses to private investors.

1999: China's parliament amends the constitution to include private industry as an "important component" of the

nation's economy.

2000: The government announces that private businesses should be considered equal to state-run companies. The U.S. Congress grants China permanent normal trade status.

2001: The Chinese Communist Party invites capitalist entrepreneurs to join its ranks. China is admitted to the World Trade Organization after agreeing to further open its economy. China becomes the sixth-largest trading nation.

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Sources: Facts on File, Times research. Compiled by Times librarian John Jackson

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A Giant Awakes

About This Series

This is the first of three articles on China's emergence as a global manufacturing power.

Monday: How Chinese-made furniture is winning customers worldwide.

Tuesday: Semiconductors, China's next frontier.

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