China

ENTER THE DRAGON

As the Asian giant opens for business, Canada in particular is feeling the impact,

JOEL BAGLOLE April 12 2004
China

ENTER THE DRAGON

As the Asian giant opens for business, Canada in particular is feeling the impact,

JOEL BAGLOLE April 12 2004

ENTER THE DRAGON

China

As the Asian giant opens for business, Canada in particular is feeling the impact,

JOEL BAGLOLE

China is moving away from a state-planned economy at breakneck speed. In just 25 years, rapid industrialization and cheap labour costs have transformed the country from a Communist agrarian nation of peasant farmers into what economists now call “the world’s factory floor.” The effect on the global economy has been profound—and is far from over. China, which joined the World Tirade Organization in 2001, must lower its protectionist tariffs on everything from cars to beef and open completely to foreign competition by 2007. As Maclean’s correspondent Joel Baglole notes, few countries are likely to feel the impact of this new world order as strongly as Canada. His report:

WHEN EVE YANG was considering where to obtain a master’s of business administration degree, she applied to some of the world’s top universities. The Beijing resident was accepted at Columbia University in New York City and the University of California, Berkeley. Yang, who worked in marketing at an information-technology company, chose McGill University in Montreal, where she enrolled last fall. “I wanted the McGill brand name on my resumé,” the 29year-old explains. “I felt that having a degree from this school would provide me with the best opportunities.” Her choice was also influenced, she says, by the positive image Canada has in China. “We’re told stories of Americans travelling around carrying Canadian flags on their bags,” Yang adds. “To us that says a lot. People say this proves Canada is a desirable place.”

BY THE NUMBERS

$5 BILLION Vaiue of Canadian goods exported to China in 2002

$19 BILLION Value of imports from China

100 Number of cities in China with more than one miilion people

3 Number in Canada

Yang is one of 38,000 Chinese who hold a permit to study at a university or college in Canada. The Chinese, in fact, comprise the largest group of foreign students studying in Canada. The experience can leave a lasting impression. Spencer Lee earned a law degree from the University of British Columbia in Vancouver in 1978. After graduation, he returned to Hong Kong and established his own law practice. He also co-founded a Chinese Canadian Association to foster ties between the two countries. “The years I spent in Canada were my formative years,” he says. “How could I forget?” The ties between the two countries extend well beyond the educational. Between 1997 and 2002, travel from mainland China increased by an average 7.3 per cent a year, to 215,600. The 35,000 Chinese who move to Canada each year account for 16 per cent of new immigrants, the single largest group. Then there are the economic bonds. China is now Canada’s third largest trading partner, after the U.S. and Japan. And analysts say the trade relationship can only grow as Beijing steadily loosens its grip on the economy. Joseph Caron, Canada’s ambassador to China, believes the impact of China on Canada will equal the impact of the 1988 Free Trade Agreement. “Every Canadian company, no matter how large, needs a China strategy,” Caron says. “And every Canadian citizen needs to be aware of what’s happening in China. There’s no hiding from China.”

TODAY in China there are 532 million subscribers to regular telephones and cellphones; 112 million of them signed up in the last year. And while that makes China the world’s biggest telecommunications market, more than half of the nation’s 1.3 billion citizens still don’t have a phone. And only 80 million use the Internet, according to China’s Ministry of Industry. But with the country quickly industrializing, the central government in Beijing is pushing to expand its communications infrastructure, particularly in rural areas. Enter Nortel Networks Corp. of Brampton, Ont. Whatever problems it’s having in the West dealing with the aftermath of the high-tech bubble bursting, it is thriving in China’s US$81.5-billion-andgrowing telecommunications market.

Nortel declines to provide a breakdown of the revenue it generates in China, but its activities are extensive. It is selling network components and telephone equipment to China’s biggest telecommunications companies, including China Telecom, China Mobile and China Unicom. It has helped build wireless networks in 17 of China’s 31 jurisdictions. Its four manufacturing plants ship parts to other Nortel operations around the world. Work done at its two research and development centres is tightly coordinated with Nortel’s main R & D centre in Ottawa. “China is an important and growing market,” says Robert Mao, chief executive of Nortel Networks China. “Its strategic importance to us can’t be overstated.”

The company, not surprisingly, has announced plans to invest a further US$200 million in the country by 2006. And Nortel is not alone in its charge into China. Montreal-based Bombardier Inc. builds bogies and outboard motors, while Toronto-based Celestica Inc. makes computer circuit boards. In all, some 400 Canadian companies have established a permanent presence. According to the Canadian embassy in Beijing, that’s more than double the number from just eight years ago. Canadian foreign direct investment in China has grown even more dramatically. Individuals and businesses had funnelled $667 million into China by 2002, a 1,450-per-cent increase from the $43 million that Canadians had invested in 1992.

Canadian jobs have followed. Part of the equation is low labour costs. The average Canadian autoworker, for example, can earn $70,000 a year, with overtime pay; the average Chinese autoworker earns less than the equivalent of $2,000 a year. (Chinese are considered wealthy if they earn $7,000 or more annually.) “Developed countries like Canada just can’t compete on price with China,” says Dong Tao, regional chief economist for Asia at investment bank Credit Suisse First Boston LLC in Hong Kong. “In comparison with China, even Mexico looks expensive.”

The trend to outsourcing will continue to escalate, observers say. “Ten years from now, I would imagine that every Canadian manufacturer in every sector that has managed to survive will be doing some or all of their manufacturing in China,” says Anthony Burger, Canada’s consul general in Hong Kong. Burger and others say the challenge for Canada will be to move away from lowskilled labour jobs and concentrate on higher-skilled, value-added work. And outsourcing isn’t all bad. China’s factories work round-the-clock churning out everything from baseball hats to toothbrushes to TVs and DVD players for shipment around the globe. The result: lower retail prices for Canadian consumers.

China’s cheap labour appeals, of course, to more than just manufacturers. Business executives say they expect to see companies move call centres, payroll departments, data processing, even technical support operations to China. Some Canadian firms are already there, winning government contracts or selling financial services. Toronto-based landscape company Hanfeng Evergreen Inc., for one, has been awarded a $ 50-million government contract to prepare part of the grounds for the 2008 Summer Olympics in Beijing. And Manulife Financial Corp. has 3,800 insurance agents criss-crossing the country trying to sell life insurance policies to the Chinese. With offices in Shanghai and the southern city of Guangzhou, the company has just been granted a government licence to open a third office in Beijing this spring. “China is the world’s largest untapped insurance market,” says Victor Apps, general manager for Asia at Manulife in Hong Kong. “Ifyou’re in the insurance business, China’s where you want to be.”

55 Percentage of the world’s cement output used in China in 2003

$410 MILLION Amount being spent on track and related facilities so Shanghai can host China’s first Formula One event in September

8,000 Number of corrupt officials China’s state media accused of absconding with government funds in the first half of 2003

WITH THE WTO’s 2007 deadline looming, China is pushing its industrialization efforts into overdrive. According to official estimates, the economy grew by 9.1 per cent last year. Its gross domestic product was US$1.4 trillion, making it the world’s sixth-largest economy, and at least one projection has it overtaking the U.S. as the biggest by 2040. China is already the largest producer of steel, textiles and clothing. It’s the second-largest consumer of oil, and its network of expressways rivals that of the United States. China has started construction on several new international airports, and last fall it became only the third country, after Russia and the U.S., to launch a man into space. “China has done in 25 years what it took the Industrial Revolution 200 years to accomplish,” says Geng Xiao, an economics professor at the University of Hong Kong. “It’s staggering.” Credit Suisse’s Tao is equally effusive: “China is moving faster than any country this size in recorded history.”

Such rapid growth, though, comes at a price. China’s power supply cannot keep up with demand. Rolling blackouts have forced such foreign manufacturers as Coca-Cola and Volkswagen to scale back or temporarily halt production. Coal-fired power plants are China’s major source of electricity and the government now says it needs to build 110 more over the next three years just to meet the current industrial demand.

By far, its largest—and most controversial-energy project is the Three Gorges Dam, a US$22-billion hydroelectric project on the Yangtze River in south-central China. When completed in 2009, the 60-storeyhigh behemoth will generate as much energy as 25 CANDU 6 nuclear power plants. Even so, critics claim that the dam—and the resulting 600-km-long reservoir—is not worth all the harm it’s causing. Certainly not, they say, for the 1.3 million people, many of them peasant farmers, the Chinese government has forcibly relocated from the area to date. Environmentalists the wo rld over have also condemned the project, saying it will clog the river with silt, threaten rare freshwater dolphins, trap pollutants and change global weather patterns. Beijing dismisses all such criticism.

For foreigners trying to come to terms with China’s political climate, that imperviousness to others’ opinions is a fact of life—a reminder that China remains an authoritarian nation. It may be opening for business, but it has one of the world’s worst human rights records. And it’s a country where politicians and business executives accused of wrongdoing can face dire penalties. Cheng Kejie, a vice-chairman of the national parliament, was executed in 2000 over a US$5-million bribery scandal. He is the highest-ranking official to date to be put to death for corruption. So when government officials told a room full of reporters that former Bank of China president Wang Xuebing had “disappeared” following an embezzlement scandal, they feared the worst. In the end, Xuebing was sentenced to 12 years in prison—a relative slap on the wrist.

YET CHINA represents a huge opportunity for Canada. For all its natural resources, the Asian giant has insufficient quantities of some or doesn’t have the infrastructure to exploit them. Add in its enormous industrial demand and China has a seemingly insatiable appetite for Canadian grains, timber, precious metals and oil and natural gas.

Even so, Canada—like the U.S.—is running a trade deficit with China. In 2003, that number stood at $14 billion. However, unlike their Washington counterparts, officials in Ottawa aren’t very concerned. (The reason: Canada enjoys a large overall trade surplus with the rest of the world, while the U.S. is running a hefty global trade deficit.) Still, according to Jim Stanford, an economist with the Canadian Auto Workers, that deficit translates into approximately 50,000 jobs lost to China. And the southern Ontario auto worker whose job has been outsourced won’t be the only one to feel China’s growing economic clout. Sooner or later, a Saskatchewan farmer may be paid more for his wheat as demand from China elevates world grain prices, or vacationers in New Brunswick may share the beaches with Chinese tourists. The made-in-China label Canadians see on so many of their purchases tells just part of the story. ['ll