Chinese Economic Weakness

Here is a heads up on a great article on the Economist website on the flaws in the Chinese economy. A couple of things pertinent to the topic of this blog include their comments on Hon Hai:

In 1988 a small, secretive, Taiwanese plastics manufacturer named Hon Hai opened a factory in Shenzhen that has since grown to the size of a city, with more than a quarter of a million employees. Little of what its Chinese subsidiary, Foxconn, produces is directly disclosed by the company but it is broadly believed to include iPods, Nintendo and Microsoft games consoles and laptops, either in whole or part, for most leading brands.

Because of the sheer number of people it employs, Hon Hai’s every move generates huge interest in local newspapers, although the firm itself says little. In 2007, presumably for much the same reason that it moved to China 20 years ago, it opened a facility in Vietnam which is said to be undergoing a large expansion. Last summer the Taiwanese press was abuzz about production moving back home. Now reports from Taiwan say that the Shenzhen workforce will be cut from 260,000 to 100,000 and that there will be more jobs inland. Whatever the figure turns out to be, Hon Hai is a nimble transnational company, able to move production around as circumstances change. And it is not alone.

A common feature of Taiwanese tech companies is their entrepreneurial bent. This makes even big companies like Hon Hai surprisingly agile and mobile. There are of course some downsides to this type of thinking, but the ability to move fast is a big advantage in any industry.

Something else which caught my eye and has been something we have commented on before here:

In Taiwan many of the companies that once were leaders in anonymous production have slowly developed high-quality products under their own names, notably Acer, Asus and HTC. The most glaring impediment to creating the same kind of operation in China is the country’s weak intellectual-property protection. Why invest in design or innovation when the results can be knocked off by competitors? Aware of this barrier, the government has passed new laws and has been vocal in supporting greater protection, but settlements remain trivial and enforcement patchy. Most Chinese patents granted to domestic applicants are still of a type known as “utility model” patents, mainly awarded for incremental improvements, rather than for innovation or new designs (see chart 3).

China must learn to respect the IP of other companies and countries. Until they do that they will never be seen as credible. Unfortunately they don't see it that way. And as the above notes this has not helped stimulat their abiity to innovate.

Anyway, its a good article. Link is below.

The Economist: Time to change the act