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Issue 35, June 2011

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

ChinaCompass - Going West and Climbing Higher?

Some recent evidence suggests that a profound transformation of the industrial landscape in China is under way. First of all, migration of mass manufacturing activities from traditional export centers in Southern and Eastern coastal cities to the inland is accelerating. The world’s largest PC makers and their contract manufacturers are establishing new factories in the Southwest: Hewlett-Packard (No.1 PC vendor by shipments), Acer (No. 2) and AsusTek (No. 6) have chosen Chongqing, while Dell (No. 2) and Lenovo (No. 4) have chosen Chengdu of Sichuan Province. When these new plants run at their full capacity, industrial analysts expect that Chongqing and Chengdu will become the world’s largest manufacturing base for notebook and tablet computers, respectively. China’s populous Chongqing and Sichuan Province, once characterized as poor and rural and the country’s major sources of migrant workers, are going to be transformed into immense industrial hubs.

The drivers of this large-scale industrial migration are a sharp rise in labor and land costs as well as labor shortages in established manufacturing centers in Eastern and Southern China. In addition, the new manufacturing locations are well-serviced by infrastructure after a decade of government investment under the campaign of “Developing the West”. This migration of mass manufacturing presents a new challenge of growth for the developed coastal cities. While shifting manufacturing to the inland, multinationals are also transferring more managerial and R&D functions to China, with some cities being better positioned than others to attract this high-end employment. Regional headquarters of multinationals in Shanghai rose to 305 in 2010, up from 224 in 2008, according to the Shanghai statistics bureau (Financial Times, May 25). Intel has just sent an executive vice-president to Beijing as chairman of its China operations, a clear sign of the expansion of higher-end activities in the country.

Other cities may not be so lucky. According to recent Chinese reports, eighty percent of the Shanzhai cell phone manufacturers in the Shenzhen area have gone bankrupt since the beginning of the financial crisis. Although started as local-made lookalikes of foreign brands as the Chinese characters suggested, some scholars of industry have characterized the Shanzhai cell phone makers as a “Chinese way of innovation”. Based on turnkey solutions for combined chip, platform and third-party apps (provided by Taiwanese company MTK), clusters of small cell phone suppliers had been very successful in making cheap phones with gaudy features and shiny looks that pleased low-income Chinese and foreign consumers. Some 200 million unbranded Shanzhai cell phones were sold in 2010, and a large portion went abroad. Yet the faster than expected conversion to 3G-capable smart phones has destroyed the Shanzhaibusiness model; at this stage at least, it is difficult for chip suppliers to commoditize the sophisticated smart phone platforms. The small Shanzhai manufacturers that used to implement incremental innovations on less advanced technologies in the 2G era now have neither the capability nor the financial resources to develop 3G smart phones.

Top News of Last Month
May 03 China wages rise by double digits in 2010
May 06 China's population 'aging worse' according to 10 year census
May 10 China urges US to lift export controls
May 10 US-China talks end with wide differences remaining
May 10 China's first space station: a new foothold in earth orbit
May 12 US-China talks aim for 100,000 US students to study in China
May 12 China raises bank reserve requirement ratio by 50 basis points
May 16 Pension program to cover 60 pct of China's rural areas this year
May 20 China admits to ''urgent'' problems at Three Gorges Dam
May 20 North Korean leader visiting China: reports
New Books
Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China

By Dan Breznitz and Michael Murphree

“Few observers are unimpressed by the economic ambition of China or by the nation’s remarkable rate of growth. But what does the future hold? This meticulously researched book closely examines the strengths and weaknesses of the Chinese economic system to discover where the nation may be headed and what the Chinese experience reveals about emerging market economies. The authors find that contrary to popular belief, cutting edge innovation is not a prerequisite for sustained economic vitality—and that China is a perfect case in point. ” – from Yale University Press, May 2011.

Related article: "Bamboo Innovation: Beware of Judging China's Innovation Engine by the Standards of Silicon Valley", by Schumpeter, from the Economist.com

By Kenneth G. Lieberthal

“‘Longtime China scholar Kenneth Lieberthal brings to bear a unique combination of experiences as former top government official, political scientist, professor of international corporate strategy, and consultant. In Managing the China Challenge, he draws on his deep understanding of China’s political and economic systems and the priorities of local and national leaders to illuminate the strategies foreign companies must master to succeed in the Middle Kingdom.” – from Brookings Institution Press, May 2011
Entrepreneurial and Business Elites of China: The Chinese Returnees Who Have Shaped Modern China

Edited by Wenxian Zhang, Huiyao Wang and Ilan Alon

“This important reference title focuses exclusively on the élite entrepreneurs of new China and contains 100 substantial profiles of top overseas returnees who have made noteworthy contributions to the Chinese economy since the reform era began in 1978. For the purpose of this book, a returnee is defined as a Chinese native who was born in China, left to study overseas as a student, visiting scholar or guest researcher for over one year, and has returned to China to work on a permanent basis. This edited book begins with an introduction outlining the common characteristics of the returnees, and their impacts on Chinese society in general and economic development in particular. The biographical work summarizes each individual’s life and business career, with a central focus on his/her accomplishments and the key roles played in the new Chinese economy. Also included are: references; a chronology of major events in Chinese business development and the new study abroad movement since the economic reform began in 1978; a bibliography of books, articles and related materials; a list of common abbreviations; and English-Chinese cross-references of individual and company names indexed in the book.” – from Emerald Group Publishing Limited, May 2011
Upcoming Events
Jun 20 - Jun 21 Global Business and Social Science Research Conference
Jun 22 - Jun 24 Clean Energy Expo
Jul 01 - Jul 03 Annual Conference of the Academy of Innovation and Entrepreneurship
Jul 02 - Jul 03 International Conference on Strategy Management and Research
Oct 06 - Oct 07 Workshop on “Chinese Ways of Innovation”

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