Setting the China trends – Shaun Rein

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Shaun Rein

Shaun Rein predicted in his two previous books The End of Cheap China and The End of Copycat China major trends in China’s development. While he is working on his third book , The War for China’s Wallets, he looks with Business Tianjin back at the effects of his first two bestsellers.

Business Tianjin:

You’re probably best known as the author of ‘The End of Cheap China’. What are the effects of the end of cheap labour pool and how do you think we’re seeing them being played out?

When it came out I was heavily criticized. People said that China was a cheap place and would always be, and I’ve been proven 100% right. Five years later salaries are still going up 10-15% a year, it’s only about 20% cheaper to manufacture in China than in the United States. People need to understand that China is no longer cheap for labour and that’s not going to change. Secondly, rents are soaring. So the only time you want to manufacture in China right now is if you’re trying to sell into the Chinese market or if you’re going into high-end value-added manufacturing, because it’s still cheaper to do high-end consumer electronics here than in the United States.

There are some things companies are doing to handle this. They’re moving west, into Sichuan or Chongqing. They’re expanding operations in the United States. And they’re working on worker efficiency and automation. Automation grew about 58% last year, there’s a lot of investment in robots and China is really leading the way in manufacturing innovation.

Your second book ‘The End of Copycat China’ was published in 2014. Your thesis was that Chinese companies did not innovate technologically because they didn’t have to but now they’re doing so. We’ve seen a huge wave of M&As – is that in pursuit of technology?

It’s hard for lots of Chinese companies to develop technology internally so they either buy technology from overseas or they buy the companies. Germany actually exports more to China than China exports to Germany. There is some technology innovation that’s taking place organically with companies like Alibaba and Tencent. But there’s definitely innovation in China. There has to be, because if companies don’t focus on innovation, they’re not going to be able to earn profits. Even SOEs understand this. A couple of weeks ago, I gave a keynote as the State-owned Assets Supervision and Administration Commission (SASAC). They brought me in to give a keynote to 200 leading cadres from SOEs to talk about how innovation is changing China and how they have to reform and recruit the right talent in order to keep innovating. Even the SOEs understand this.

The question is does the senior government get it? And because of the way SOEs are set up, where they are very risk-averse, how do you create the right incentives for SOEs and their executives to focus on innovation? If you are in an SOE, if you innovate but you lose a lot of money, you’re not going to get promoted. And if you lose your job you’ll probably never get a good job in an SOE. So they have to change the culture. And that’s what SASAC understands and why they brought me in to talk to the cadres. The private sector really gets it. They’re making tons of money and they understand that the SOEs are dinosaurs. If Bank of China was halfway decent, there’s no way anyone would have made AliPay.

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