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Best Business Books 2008: Globalization

Asia As It Is

(originally published by Booz & Company)

Kishore Mahbubani
The New Asian Hemisphere: The Irresistible Shift of Global Power to the East
(PublicAffairs, 2008)

Jimmy Hexter and Jonathan Woetzel
Operation China: From Strategy to Execution
(Harvard Business School Press, 2007)

Alexandra Harney
The China Price: The True Cost of Chinese Competitive Advantage (Penguin Press, 2008)

William J. Bernstein
A Splendid Exchange: How Trade Shaped the World
(Atlantic Monthly Press, 2008)

Let’s start with a very brief quiz. For simplicity, we’ll make it multiple choice.

Question 1: The world’s leading exporter in 2007 was: (A) China. (B) India. (C) Japan. (D) The United States.

Question 2: The top U.S. trading partner in 2007 was: (A) China. (B) India. (C) Japan. (D) Mexico.

The answer to both questions is: none of the above. The world’s leading exporter in 2007 was Germany, by quite a large margin. The top U.S. trading partner was Canada, as has been the case for many, many years. China, India, and Japan are not at the top of either list.

These facts are worth noting, because you won’t find them in the current crop of books about globalization. The massive flows of trade, investment, and labor across increasingly porous borders have become a highly sensitive issue in many corners of the world, but the remarkable revival of the German export machine and the startling transformation of the Canadian economy have not attracted literary chroniclers. When people say “globalization,” they typically are thinking of Asia. Asia’s vast populations, the suddenness of its rise, and its countries’ supposed propensity to play by different rules than other countries make the continent’s economic ascent a source of both wonder and worry.

No recent book captures this mix of feelings better than Kishore Mahbubani’s The New Asian Hemisphere: The Irresistible Shift of Global Power to the East, my pick as the standout in this category. This is not the best-written book on globalization, and certainly not the best argued. It is often redundant and frequently tendentious. But The New Asian Hemisphere is an important book for businesspeople to read, because it shines a light on how Asia’s new wealth is translating into new attitudes. The bottom line — West, move over — is one that every corporate executive should contemplate.

Mahbubani’s interest is geopolitics, not business. (See “Ambassador for the Asian Century,” by Sheridan Prasso, s+b, Spring 2008.) After a long career in Singapore’s diplomatic service, he became dean of the school of public policy at the National University of Singapore and a frequent commentator on international affairs. That school is named for Lee Kwan Yew, who became famous for leading Singapore’s transformation from an impoverished appendage of Malaysia to an enormously prosperous city-state, and infamous for promoting the notion that unique “Asian values” — a term widely translated to mean authoritarian government — were essential to Asia’s economic success. Lee is barely mentioned in Mahbubani’s book, but the book is permeated by the idea that rapidly emerging Asia has values different from, and as good as, those of the West.

The New Asian Hemisphere presents the case that globalization involves far more than the export of the fruits of cheap Asian labor. Asian societies, proud of their achievements and empowered by their new wealth, are regaining their historical roles as great civilizations. In the process, they are rejecting much of the influence of the West. Writes Mahbubani: “The West has to understand that this is the major historical trend of our time, that it defines our era‚Ķ. A steady delegitimization of Western power and influence is under way.”

Western Condescension
Mahbubani reveals a lengthy catalog of grievances against “the West,” grievances that are individually insignificant but collectively telling. These include the of­fenses of a Financial Times journalist who credits China with impressive execution but unoriginal thinking; Westerners who consider China “unfree” without appreciating that its people enjoy much greater freedom than they ever did in the past; Western domination of international organizations, such as the United Nations and the World Bank; and Americans who demand that India negotiate with Pakistan while themselves refusing to resolve differences face-to-face with Iran. These examples, and many others, are offered as evidence of the limitations of Western thought. Asia, with its deeper understanding and greater flexibility than the West, no longer need tolerate such condescension. Westerners “must stop believing they can remake the world in their own image,” Mahbubani tells us. “The world can no longer be Westernized.”

As a political analyst, Mahbu­bani can get a bit misty eyed. His India has no communal violence or caste discrimination; rather, “a spirit of inclusiveness and tolerance pervades the Indian spirit.” In his pacific, progressive China, “the concept of peaceful rise reflects a carefully thought-out consensus,” as if the man on the street in Chengdu were actually asked his views. “Contemporary Muslim societies remain committed to modernization,” Mahbubani writes, despite ample evidence to the contrary in Bangladesh and Pakistan, while Sri Lanka, rent by a long-standing civil war that has destroyed its status as a development model for the rest of Asia, barely rates a mention.

Such superficialities aside, The New Asian Hemisphere offers value for the business reader by challenging the geography of the mind. Asia has fast-growing economies, yes, but let’s face it: The big attraction for most American, European, and Japanese companies is the ability to serve customers in wealthy markets with labor costs more typical of poor markets. For Mahbubani, on the other hand, globalization represents a vehicle by which Asia will move from the periphery to the center of the universe. Asians, in his view, are on their way to becoming equal, or even dominant, partners in a world in which the West — a geography that encompasses Japan — no longer has control.

Whether Mahbubani is correct matters less than whether others in Asia share his views. I suspect that many do, for he gives voice to a deep-seated resentment of the second-class status associated with belonging to a poor and dependent nation.

Up the Value Chain
Just as economic and political successes are allowing Asian governments to assert themselves in international affairs, so, too, are Asian entrepreneurs seeking far more than dependence on the multinational corporations of the West. Anonymously assembling other companies’ products or answering other companies’ phone calls is not much of a ticket to prosperity in the modern world, and the Asian businesspeople whose firms currently conduct such work are acutely aware of that. Foreign companies that source from the Asian mainland should not be surprised when their Asian partners lose interest in performing low-value, low-profit tasks. Those partners increasingly view themselves as competent and sophisticated, and they rightly expect to capture a greater share of the profits and the high-wage jobs that come from supplying high-value goods and services.

Two very different books on China agree that this shift is already well under way. At first glance, Operation China: From Strategy to Execution, by Jimmy Hexter and Jonathan Woetzel, and The China Price: The True Cost of Chinese Competitive Advantage, by Alexandra Harney, don’t seem to be talking about the same country. A more careful reading, however, suggests that their views about China are quite similar — and quite consistent with the picture of an increasingly self-confident Asia painted by Mahbubani.

Hexter and Woetzel are consultants for McKinsey & Company, and their book has all the charm to be expected of a consultant study. Their message is important nonetheless: China is starting to look a lot like a developed country. Chinese consumers increasingly share the preferences and expectations of consumers elsewhere, even if they cannot always afford the products they covet. The country’s businesses are quickly gaining technological sophistication and becoming more adept at meeting local consumers’ needs. Government agencies are becoming more transparent and less inclined to bend or ignore labor laws, environmental regulations, and property rights. China is not what it was a decade ago.

The implications for business are substantial. Hexter and Woetzel argue that the days of using China as a low-wage workshop and a dumping ground for cheap goods are waning. A company that wants to be successful globally must succeed in China, because of the sheer size of its market, but that success will require firms to adopt the same stringent performance standards for China that they use in the world’s most advanced markets. At the same time, however, China is not like other markets: Its economic and social conditions may require products and services quite different from those that multinationals sell in their home countries. The trick, Hexter and Woetzel say, is to figure out how to sell high-quality products that meet Chinese needs and fit Chinese pocketbooks while still being profitable — a point they drive home with a memorable anecdote about Haier, the Chinese appliance maker, gaining rural market share after introducing a machine designed to wash potatoes as well as clothes.

Inevitably, a period of breakneck growth is followed by a period of consolidation. In the face of excess capacity, rising labor costs, and falling output prices, profitability in China is under pressure. “We expect market-driven M&A deals to take off like a rocket,” Hexter and Woetzel write. Not that this will be easy: Stock market valuations are unreliable, discounted cash-flow models dubious given the great regulatory and competitive uncertainties that underlie them, and due diligence extremely difficult to perform. Assets often have to be reshuffled to satisfy government agencies that hold stakes in acquisition targets. “You’re driving in more fog than would envelop you in deals in the developed market,” they caution. Yet there is no choice but to merge and acquire and grow, because China is moving to a modern industrial structure very quickly.

Outsourcing’s Underside
Hexter and Woetzel don’t appear to have visited the same companies as Alexandra Harney. Their China is filled with reputable firms trying to meet world-class standards. Hers is populated by factories whose main business is subterfuge, skirting both laws and contrac­tual obligations in hopes of making a profit from supplying inexpensive goods to the world’s largest manufacturers and retailers.

The China Price is a work of reporting, and the reporting is extremely good. Harney takes us into clean, ultramodern, by-the-books factories that companies operate for the benefit of buyers and inspectors from foreign customer businesses — and the less salubrious unmarked buildings nearby where the customers’ products are actually manufactured once the inspectors depart. We meet auditors who at­tempt to monitor compliance with the labor standards of European and American retailers, and workers who shun those well-managed factories because their compliance with rules and regulations means they offer less overtime work. Memorable participants in the quest to get rich gloriously, from the owner of an un­licensed coal mine to workers who have lost limbs in unsafe factories, appear across her pages.

Harney carefully destroys many foreign fantasies about doing business in China. Foreign companies sourcing from Chinese contractors may not even know where their goods are being made, much less whether the working conditions are actually those described in their glossy social responsibility reports. The demand that Chinese suppliers comply with labor laws and safety regulations clashes with both workers’ desire to make as much money as they can and customers’ incessant demand for even lower prices. The auditors employed by the owners of some of the world’s best-known brands are constantly criticizing factories for violating ethical norms, but the auditors don’t seem to talk with their colleagues in the procurement department, whose job is to minimize costs. “Customers believe they are reasonable, but to us the price is not reasonable,” a factory owner tells Harney. “So we have to think of other ways to make our profits reasonable.”

Harney sees herself as a muckraker. “The aim behind this book is to uncover the true cost of China’s competitive advantage,” she writes. Yet the lesson of The China Price is not at all the one she touts.

Even as she vividly reveals the human damage done by China’s double-time march to capitalism, Harney also describes a rapidly changing society in which the abuses of early industrialization are no longer tolerated. Young workers increasingly shun dirty factories with mandatory overtime; they want healthy workplaces and free time in which to enjoy their earnings. Local governments that once pulled out all the stops to attract factories no longer want polluters or labor-intensive industry; now, they want providers of good jobs with good wages, and will use their power to drive undesirable enterprises away. A more modern legal system and an increasingly vibrant civil society have not put an end to abuse and deception, but they are beginning to turn a society based on corruption and connections into one that is subject to the rule of law.

In short, where Harney thinks China is headed is quite similar to where Hexter and Woetzel think China is headed, which is pretty much in the same direction that Mahbubani thinks all of Asia is headed. All three books describe a rapidly modernizing part of the world that is on its way to dominating the world economy.

In these works, there is a certain inevitability to this trajectory. Asia is big. It’s growing fast. It is managed well, both politically and economically. As these books agree, nothing can hold it back.

Nothing Is Inevitable
William J. Bernstein’s A Splendid Exchange: How Trade Shaped the World is a useful corrective to this blind enthusiasm. Bernstein offers a lively and colorful account of world trade from 3000 BC to the end of the 19th century. Its particular virtue is that, unlike much writing on international economic history, it is not Eurocentric. People across much of Asia and parts of Africa figured out how to enjoy gains from trading with one another back when Europe was still a thinly settled wilderness. International trade was important long before Columbus and Vasco da Gama.

One of the lessons of Bernstein’s book is that trade patterns are anything but inevitable. In their day, Malabar, Aden, and Constantinople were all hubs of the world economy. Kaffa, now a Ukrainian city called Feodosiya, was one of the world’s preeminent ports, and the lonely island of Socotra, 300 miles off the coast of Yemen, was fiercely contested territory thanks to its commanding position at the entrance to the Red Sea.

All these important centers became backwaters. Wars closed some borders and opened others, complicating trade along the Silk Route through Asia. New products appeared, flourished, and foundered; Yemen, in the early 1700s, grew wealthy on the export of coffee, which had been introduced from Ethiopia, then withered as its European customers figured out how to cut costs by cultivating coffee elsewhere. Governments raised or lowered trade barriers and taxes, altering trade flows in the process; rulers in Japan and China removed their countries from the world economy for centuries. Transportation costs and technologies changed, making entirely new trade patterns economically feasible; half a century ago, no one imagined that the United States would obtain most of its apparel from Asia.

This historical perspective offers a useful counterpoint to the current giddiness about Asia. Just because China and India are enjoying trade-fueled booms does not mean they will boom forever. As Japan, South Korea, and Taiwan have demonstrated in recent decades, even well-managed economies confront obstacles, and in the face of obstacles societies tend to turn inward. Will China be so eager to project power globally as it deals with what may be massive overcapacity in manufacturing, office buildings, and high-end urban apartments?

It is unlikely that the conditions that have facili­tated the explosive growth of China, India, and other Asian economies will persist. The apparently bottomless supplies of cheap labor have turned out not to be so bottomless; India, by all accounts, is already running up against severe shortages of skilled workers fluent in English. Asia’s growth was also built on cheap transportation, which has allowed it to ship even the lowest-value products to wealthier markets in North America and Europe. But the days of cheap freight may be over, as higher energy prices, environmental and security concerns, and overburdened infrastructure have combined to make it much more costly to move goods around the world. As a result, Asian manufacturers will lose an important edge in export markets.

None of this denies Asia’s hugely impressive economic achievements. But it does suggest caution in projecting them into the future.

Amid the awe at Asia’s remarkable economic success, an equally remarkable story has all but escaped notice. How is it that a country such as Germany, with its high wages, six-week vacations, strict environmental laws, and heavy pension burdens, managed to export more in 2007 than China, a country whose labor force is 20 times larger? How did a country regarded a decade ago as a victim of globalization emerge as a victor? Germany’s is a story not about raw size and scale, but about adaptability, ingenuity, and the ability of a democratic society to achieve compromise among powerful interest groups in the face of global economic change. Those are likely to be the preconditions for success in the world economy of the 21st century, and Asia has yet to prove that it can meet them. 

Author profile:

Marc Levinson, an economist in New York, is author of The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (Princeton University Press, 2006). He was formerly finance and economics editor of the Economist.
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