If you have already read Ted C. Fishman's comprehensive tome, "China, Inc.: How the Rise of the Next Superpower Challenges America and the World", then you may feel author Oded Shenkar may not have that much more to offer on the topic of Chinese economic dominance in the new millennium. That was certainly my excuse for delaying my attention to this book. My assumption, however, turns out to be unfounded, as Shenkar's book takes a more incisive look into not only the business dynamics of China but also what price the country seems to be paying to seize a sustainable global competitive advantage in the future. The author, a global business management professor at Ohio State University, pulls few punches in showing how China benefits from its unique positioning without paying comparable attention to ethical concerns around the environment, piracy and other "hot button" topics which understandably compromise our efforts here.
Shenkar points out how many multinational industries and firms, especially US-based ones, have been caught unprepared, failing to realize the threat to their current business model or the sudden acceleration of structural shifts that in the past took decades to consummate. The author doesn't hold severe judgment against the US policymakers, but he focuses quite a bit on the lax controls on intellectual property rights that make it risky for outside companies to do business there, even while China negotiates (and apparently steals, per Shenkar) technology knowledge from the U.S. and elsewhere. It is this blind spot where he puts the US to task, and were it not for the constant turmoil in the Middle East, this would be more likely a front page topic. As it stands, the expedient Chinese economic advances are only starting to send shockwaves stateside.
As Fishman makes clear in his book as well, China is already the dominant manufacturer and exporter in labor-intensive industries thanks to its abundant and inexpensive supply of labor, and it's moving quickly to establish dominance in technology-driven industries. Shenkar lists some startling statistics - China currently builds half of the world's microwave ovens, one-third of the television sets and air conditioners, a quarter of the washers and one-fifth of the refrigerators. These products represent their fastest-growing exports, but the buck doesn't stop with the manufacturing sector. Although China doesn't have a history of supporting entrepreneurial activities or a strong service sector, it's getting heavily involved in a broad range of industries, which allows them a broad net for development given the size of their labor force. The author also accurately points out that China is not a standalone in its development and that other economies are also increasing in dominance and integrating with China's juggernaut approach.
The book's real eye-opener is not so much the degree of piracy occurring in China but the fact that as much as one-third of China's GDP comes from piracy and counterfeiting, including more than 90 percent of the country's software and 95 percent of its video games. The reason pirated products are so wildly popular is that customers love their value proposition. After all, it comes down to a basic economic tenet - products are not worth what the manufacturers say they are worth but what customers are willing to pay for them. Shenkar says that five of six of Yamaha motorcycles in China are indeed fake. Yamaha's parts suppliers apparently sell real Yamaha parts to fake-Yamaha assemblers. No stone appears unturned, as the same counterfeiting goes on for products as diverse as razor blades, cell phones, drugs, chewing gum, and shampoo. Most intriguingly, electronic chips are reverse-engineered and modified to allow third parties to write add-ons, creating fake chip value chains. Fake car parts are unwittingly built into real cars which ironically exposes the real manufacturers to liability. In some cases, the craftsmanship behind the fakes is so good that even the manufacturers can't tell the difference. Outgrowing the usefulness of pirated products within their own boundaries, China, as Shenkar accurately assesses, sees the new frontier for piracy is export.
Even with all the foreboding information, Shenkar is insightful enough to see China's emergence as a great opportunity and offers some strategies and tactics for companies to be successful in this new economy. For example, he asserts that American companies use copy-proof design methods in the creation of their projects. He thinks this is long overdue as multinational companies need to come to terms with the fact that the value (or at least life span) of intellectual property may be less in the future than it has been in the past. Once the unique circumstances of each product and industry are clearly delineated, Shenkar says companies need to seal all the exits by spending more on litigators who can make it painful for pirates to fake products and thus encourage the Chinese companies to steal their ideas elsewhere. Multinationals can also concurrently redesign business processes to make it more difficult to steal. With a certain amount of boldness, Shenkar recommends not doing China joint-ventures, which function as a springboard for stolen ideas, technology, and products. Instead, he recommends focusing on products with shorter life cycles which would leave pirates stuck with warehouses full of outdated products. Price slashing is yet another way to minimize Chinese leverage and make piracy less profitable.
The beneficiary of all this concentrated activity may be the US consumer since it looks like China's piracy epidemic may prove to be the great profit-margin equalizer. Shenkar's book is invaluable in showing how to refocus strategies toward the Chinese economic juggernaut and leverage what they are already doing so well. He convincingly shows how misguided it is for the U.S. government to pressure China to let the value of its currency float upward. Bottom line, a significant increase in the value of the yuan still does not offset the price advantage of China's labor-intensive products. His recommendation to make our own value proposition unique and non-duplicative is the most credible strategy I have heard on the topic. This is strongly recommended reading.