'The End of Cheap China' -- A Review

An inside look at how rapid economic development is changing China and its relations with America and the world.

China's middle class now numbers more than 350 million people. By 2030, China is expected to have a middle class twice the size of that in the United States and Western Europe combined.

The sheer size of China's population, combined with the breathtaking rate of economic development in the country, in no small measure contributes to the difficulty Americans have in understanding what is going on in this distant colossus.

But Shaun Rein, who has lived in China since the late 1990s and runs China Market Research Group, says the rise of a second superpower makes it vital that Americans understand China. In his new book, "The End of Cheap China" (John Wiley & Sons 2012), he worries that "Fear mongering, misinformation and hysterics about China's rise are hitting the American airwaves on a daily basis, clouding rational discourse."

Rein argues China has become an "easy scapegoat" for the United States' economic troubles. "It is far easier to blame China than to take responsibility for profligate spending by everyday Americans, poor oversight by regulators, irresponsible risk-taking by Wall Street financial institutions and a bickering political class."

Some manufacturers who have been coping with rising labor costs in China will nod appreciatively as Rein observes in "The End of Cheap China" that companies "can no longer manufacture cheaply in China, and may need to rethink their strategies and shift manufacturing to lower-cost production centers like Vietnam or Indonesia-or even back to the United States in some cases."

Why is China no longer a land of limitless cheap labor? In just a decade, he observes, jobs have become abundant and younger Chinese in particular are in hot pursuit of prosperity and the creature comforts that come with it. They are no longer willing, he says, to "slave away in factories thousands of miles away from homes and families or toil in jobs that do not empower them to achieve their white-collar dreams."

That mobility is often a headache for factory managers. One Italian general manager told Rein that 50% of his plant workers leave within two months, "no matter how much training and pay he offered them." Another factory owner took 10 employees to Dubai as part of a retention strategy. Within three months, three had left, in part by touting their globe-trotting experience.

But a growing middle class also signals opportunity. China is Nike's second largest market and Buick's largest market. And China has become the world's largest market for luxury goods, Rein notes, buying $15.6 billion worth in 2011.

Rein says U.S. firms should not repeat the mistakes of the 1970s when they believed that Japanese companies like Toyota (IW 1000/5) and Sony (IW 1000/33) could not build international brands and quality products. He argues that the Chinese have deliberately avoided attacking the highly competitive U.S. market, prefering instead to pursue the higher-growth domestic market. But he believes the Chinese are savvy and tenacious businesspeople and will soon begin establishing their brands in the West.

With labor costs rising, many believe U.S. manufacturing wil enjoy a reshoring trend. Rein, for one, is skeptical. "What is more likely is that China's economic rise will create more job opportunities and profits for American companies that can evolve with the new status quo instead of holding onto the past."

Does China have problems? You bet. Rein outlines the "massive challenges" facing the nation in terms of "providing adequate housing, stamping out corruption, ensuring healthy food supplies and improving the educational system." For instance, he notes that the biggest problem multinationals face in China is "recruiting and retaining labor, in part because of the weak talent pool." Schools are teaching students "how to memorize the right answer," he observes, but not how to "develop a new right answer."

One thing Rein does not expect is for China to emulate the United States as it evolves politically and economically. He paints a largely positive picture of China's central government and seems to accept the high value that Chinese government officials put on stability at the expense of personal freedoms. He notes the horrors of the Cultural Revolution and posits that "government actions that seem thuggish to Western observers are actually protective measures to ensure that the country never faces instability again...." That would be a very hard sell to make to someone like Chen Guangcheng.

Will this wise oligarchy Rein portrays be able to continue steering China toward greater wealth and influence in the world without provoking a groundswell of rebellion? He clearly opts for the view that the government will "create peace and stability, stay out of the lives of everyday Chinese as much as possible (unlike the early decades of the Party when it infiltrated everything) and thus allow business opportunities to develop."

TAGS: Trade
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