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 / First Quarter 2002 / Issue 26(originally published by Booz & Company)


Profits and Perils in China, Inc.

The world’s most populous nation has become a capitalist’s paradise, supplanting Asia’s “tiger economies” — and soon, perhaps, the West.

During the next two decades, China will become a thoroughly new type of political and economic entity. It will be brutally competitive in both the political sphere and the marketplace, innovative and resilient in the face of turbulence, and more dominant as an international political and economic power than any nation except the United States.

This is the sort of change that takes place about once every century — comparable to the emergence of the United States as a world power at the beginning of the 20th century, or even to the rise of the Mongol, Incan, Alexandrian, and Ottoman empires. The magnitude of change in China is happening now, in part, because of a radical and rapid shift in its governance structure that has come to a head during the past few years. Because it has happened so suddenly, the temptation is strong to write this shift off as a fluke, or as just another temporary realignment of China’s business environment. But it is not. China’s restructuring is permanent and will affect every aspect of the country, from its microeconomics to its global identity.

In name and in many of its policies, China is still a Communist country. But the famous phrase “one country, two systems” (coined by China’s post-Mao premier Deng Xiaoping in 1992 to describe how Taiwan and Hong Kong could be assimilated into the People’s Republic but keep their economic systems intact) is more applicable than ever before. The People’s Republic now embodies two systems: the centralized autocratic Communist administration, dominated by outdated ideology and military interests, and the decentralized free-market economic regime.

Whether deliberately or not, China is reorganizing itself to balance central control and common purpose with decentralized freedom, in the same way that nimble corporations balance central and divisional control. The result is an entirely new geopolitical model — the country as corporation.

Chung-hua Inc.
One could call the new China Chung-hua Inc. (Chung-hua, or Zhong Hua, as it is spelled in Beijing, translates into English as “China,” and actually means “the prosperous center of the universe.”) One could also call it the United States of Chung-hua. For like many corporations, China is moving most of its decision making to the “business unit” level — only Chung-hua Inc.’s business units are semiautonomous region-states. Encouraged by the free-market system, smaller government bodies associated with China’s cities, regions, and “mega-regions” have become China’s new state equivalents. In a transformation largely unnoticed outside its borders, China is becoming an assemblage of economically autonomous regions, which compete fiercely against each other for capital, technology, and human resources (just as the states of the U.S. do).

To be sure, this new decentralized free-market regime has far to go before it encompasses all of China’s vast territory (and many Chinese officials still refuse to acknowledge its existence). But it is already dramatically changing the economic balance throughout Asia. It will do the same, eventually, in the rest of the world.

In the meantime, China’s renaissance is calling into question some of our prevailing assumptions about the most effective way to run a business, a consumer market, and a national economy.

I caught my first glimpse of this new China in the summer of 2000, on a visit to a three-year-old electronics components manufacturing plant in the city of Shenzhen in the Pearl River (Zhu Jiang) Delta. Located on the southern coastline near Hong Kong, the delta is one of the fastest-growing regions in China. This plant had 10,000 workers, earning about $80 per month each. They were all young women, and none of them wore eyeglasses. “Don’t you have any employees with bad eyesight?” I asked the manager. He replied, “We fire them when their eyes go bad. They can find another job — that’s not my problem. There are plenty of people who want to work for us.”

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  1. Kenichi Ohmae, “The Godzilla Companies of the New Economy,” s+b, First Quarter 2000; Click here.
  2. “Zhu Rongji, Premier State Council, Biographic Profile,” Click here.
  3. Jane Jacobs, Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics (Random House Inc., 1992)
  4. Nicholas Lardy, Integrating China into the Global Economy (Brookings Institution Press, expected 2002)
  5. Kenichi Ohmae, The Invisible Continent: Four Strategic Imperatives of the New Economy (HarperCollins Publishers, HarperBusiness, 2000)
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