Exploring "The China Price"

Scratch a China critic, and the first response you're likely to get is: "China cheats." China steals software and reengineers everything from autos to golf clubs. China sells to the world aided by a woefully undervalued currency. China uses sweatshop workers. The list goes on, and all of the points are, in part, valid. But cheating alone doesn't explain China's global competitiveness, and we've all known that for some time. Last year we decided to dispatch Senior Writer Pete Engardio, an Asia specialist, and Beijing Bureau Chief Dexter Roberts to look behind the veil of criticism. What they found after three months of sleuthing was that companies on the receiving end of the China onslaught had a standard phrase for their dilemma. They called it the "China price." China has become the price-setter for the world in so many industries that it's becoming difficult to find exceptions. As Engardio and Roberts discovered, whether you're making a bedroom set in Virginia, circuit boards in Ohio, or telecom gear in California with the most automated factory imaginable, you're under pressure every day to match a price 30% to 50% lower that a Chinese factory is offering. The gap is usually so large that you either have to shut down your plant or move a large share of your work to China, costing hundreds of jobs.

The key to the China price, notes Engardio, is more than skilled workers and automation. That makes China seem like a Japan, but with lower wages. What makes China's dominance unprecedented is its humongous scale, a supply infrastructure that enables you to buy every widget and raw material from hundreds of vendors within easy driving distance of your factory, feverish domestic competition, and an entrepreneurial zeal by factories to satisfy a customer's every desire.

On the rural outskirts of Hangzhou, near Shanghai, notes Roberts, "I met a cheerful former rice farmer who now runs one of China's most successful private companies, an auto components maker. He's buying up ailing U.S. parts makers around Chicago, keeping some of the high-end work there, but moving a good chunk of it to his factories in China. That way, he gets access to the U.S. companies' technology and markets."

Since we published "The China Price" (Dec. 6), the article has helped reshape the debate over the causes of America's weakening manufacturing competitiveness. We've also gotten professional recognition. Earlier this month the New York- based Overseas Press Club of America honored Engardio and Roberts for Best Business Reporting from Abroad in Magazines. "The judges felt that the reporting and interpretation in this piece was outstanding," said the citation. "The conclusion: American manufacturers -- even when fine-tuning productivity in highly mechanized plants -- may not be able to compete with Chinese companies. An outstanding look at perhaps the world's most important business story this year."

There aren't any simple answers. Yes, China does cheat. But as bad as that is, and in many cases it is grievous, it doesn't come close to explaining the competitive economic force China has unleashed on the world. For some, it has even given staunch free-traders new doubts. In a story accompanying the cover, Washington-based Senior Writer Aaron Bernstein showed how a group of free-trade intellectuals are starting to question whether the comparative advantage theory -- an idea that has had near-universal backing from economists for 200 years -- still applies, and whether the fundamental comparative advantages from free trade will produce the same gains in this new China-centric world. It's a debate that Pete, Dexter, Aaron, and many other BusinessWeek writers will be covering intensely in the months ahead.

By Bob Dowling, Managing Editor, International

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