China’s Evolution: From Sweatshops to Innovation

Two stories relating to technology and China prompted some dark thoughts, not that I need much help on that front.

First, I read the story about the deplorable working conditions and objectionable treatment of workers who manufacture peripherals and other PC hardware for Microsoft, HP, and other technology mainstays. That item tells us a lot about the China of today, the China whose contract manufacturers have attracted Western patronage with low costs predicated on cheap labor and a lax regulatory regime.

It’s unconscionable that such manufacturers treat their employees so abysmally, but, as Paul Thurrott writes, nothing is likely to change. Microsoft HP, and others will continue to manufacture in China, occasionally dealing with dubious contract-manufacturing partners, as long as the cost of producing goods in China remains low and helps to fatten profit margins.

Corporations are abstract entities, not individual human beings. A corporation, especially one on the public markets, doesn’t think, breathe, feel, or have a conscience. It functions as an amoral business entity, for the purposes of growing revenue, boosting profits, and producing a return on investment for shareholders. As they say in the mob movies, it’s nothing personal, it’s just business.

But the thing is, China won’t always be the place it is today, which brings me to the other story I read, online at the Wall Street Journal. In that piece, John Deng, chairman of Nasdaq-listed Vimicro, makes a convoluted and unconvincing argument that regulatory and other barriers to foreign firms operating in China will somehow be beneficial to worldwide innovation.

I’m not sure I follow his sashaying, weaving logic, but he makes other points that are less disputable. He points out, for instance, that innovation in China heretofore has been done “through collaboration,” in which Chinese companies (like the aforementioned contract manufacturers) have adhered to U.S. and international standards and built business models on the modest foundation of low labor and environmental costs rather than on the elevated pedestal of high-value innovation.

Citing Huawei and Lenovo as examples, he says the situation is changing. Just as Japan and South Korea outgrew their humble manufacturing origins and became innovation powerhouses, Deng sees a similar but even bigger evolution for China. Unlike those countries, China can leverage unique attributes (namely its size, power, and influence) to set its own technological standards. Deng believes it should do just that to encourage the development and growth of indigenous technology companies.

He’d also like to see China get better at commercializing university research and development. He also would like the country to develop improved legal protections for intellectual property.

In China’s earlier (still current) stage of industrial development, the defense of intellectual property wasn’t a priority for the country’s leaders. With most of the innovation being brought into the country by foreign companies — and technology transfer, from Western to Chinese companies, being the strategic imperative — China and Chinese companies weren’t as concerned with the unassailable integrity of intellectual property.

As China innovates, and develops competitive differentiation and business value from those efforts, Chinese companies and authorities will have a newfound appreciation for intellectual property. At that point, China will enact legal and regulatory reforms that will strengthen protections for intellectual property. By then, though, China will have more to protect, and more to lose.

If one views the evolution of China in this context, the country looks like the ultimate honey trap for Western technology concerns. Western companies could not resist what the country offered — low-cost manufacturing operations and a vast market for commodities and consumer goods. Even though these foreign companies knew that doing business in China entailed significant risks, including the loss of valuable intellectual property, they took the plunge because their greed outweighed their fear, the temptation was too great.

In the future, we probably won’t see many stories about execrable working conditions at Chinese contract manufacturers. At some point, low-cost manufacturing sweatshops will move elsewhere, and the bad news coming from China will be on a different scale entirely.

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