China's challenge to us

China Worldbest is just the vanguard of a merciless, advancing commercial army.

by Patience Wheatcroft, business and City editor of The Times
Last Updated: 31 Aug 2010

Since the immodestly titled China Worldbest Group was founded in 1992, it has striven to live up to its name. It started in textiles but spread into machinery manufacturing and real estate, electronics and now even pharmaceuticals and biotechnology. Its 60,000 employees are not only inundating the world's markets with goggle-eyed plush toys, they are also carrying out ground-breaking research in genetic engineering technology.

The extraordinary reach of China Worldbest sums up the challenge that the west faces in the 21st century. China is still a Communist country, with the state owning 178 of its largest firms, but its commercial ambitions are unlimited. And the Chinese government decided last month to recruit some top executives from the private sector to give an extra boost to these state-owned corporations.

The UK Government has acknowledged that China's march poses a challenge to our economy. Chancellor Gordon Brown presided over a conference last autumn that aimed to address how the country should respond to the perceived threats from China and India. But I'm not certain that the full scale of what is happening in Asia is truly appreciated in Britain.

A book by US economist Ted Fishman puts China's achievements into frightening perspective. China Inc: How the rise of the next superpower challenges America and the world is not suitable bedtime reading for nervous business people. Fishman's tome is littered with amazing statistics, including the estimate that China's economy, currently seventh largest in the world, could be 75% bigger than that of the US by 2050. He details how its combination of technological know-how and cheap labour has dictated world prices for a vast range of goods. He cites the DVD player that cropped up in US stores before Christmas 2003 with a price tag of just $30, a fraction of that of most players on the market. Shoppers handed over their cash, even though the brand name meant nothing to them.

This is the aspect of the China effect from which Brown and Blair have benefited, though they do not highlight it. 'China price' has been the agent fending off inflation in Britain. Retailers, which rather enjoy a spot of inflation, have been living in a largely deflationary environment for a couple of years now. Tesco reported in April that with petrol taken out of the equation, its prices were deflated across the board over the past year, and not just on the special offers.

The supermarkets have felt the benefit of China price: most of Tesco's clothing ranges are manufactured in that country. But for non-food retailers, the impact has been more dramatic. Argos has revealed that its average prices reduced by a hefty 6% over the past trading year. Yet the GUS subsidiary had to admit that even at those levels, consumers found some bargains resistible - like-for-like sales were actually down by 1%.

The consumer downturn feared by economists is beginning to bite in Britain, exacerbating the problems that are in part generated by the successes of China and India. Jobs are seeping away to Asia: low-grade manufacturing went first, then call-centre and back-office jobs started being outsourced to India; now the higher-grade manufacturing work is leaving. China World-best is creating jobs outside its own country, but the main investment is still going to help find work for the labour force at home. And it is far from alone: a Chinese firm looks set to be one of the beneficiaries of the BT contract that Marconi has lost, with a consequent loss of UK jobs.

The effects of China's entrepreneurial zeal are now felt in every corner of the British economy. The skilled labourers from eastern Europe that are being welcomed onto British building sites and into British homes have not yet been joined by teams from Shanghai: there is plenty to keep them busy on their own turf. Nevertheless, the imaginative smaller businesses now being established, often with the help of the one-stop shops the Chinese government has set up to make life easy for entrepreneurs, are looking beyond their own shores.

The founder of a specialist UK woodworking firm told me recently of his surprise at finding a Chinese business tendering against him for a contract to provide tailor-made fittings for a new British hotel. He had become accustomed to hotels having their furniture shipped in by the crate-load from China, but this was a new and highly disturbing development for him. The contract went to the Chinese, whose price was less than half that he had tendered.

But Chinese prices may not remain so low. There will come a time - and it may not be far off - when they edge upwards. The result to western economies that have become dependent on cheap imports will be a nasty jolt of inflation. The benefits from falling prices - some compensation for the inevitable job losses - will have come to an end. And China Worldbest will be among the organisations reaping the rewards.

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