Photo by Thomas Depenbusch / Photo edited by Author via CC BY
China is known for having a strong central government. In many ways, this perception is very true. Unlike countries like the United States which clearly delineate federal and local (state) powers, all governmental authority in China flows from the central government. Over the past several decades, however, the central government has gradually delegated power down to local governments. Local governments now have significant decision-making authority when developing policies.
Though decentralization has spurred economic growth, it has also brought challenges. In particular, there has been a rise in local protectionism, with local government officials focusing on growth in their own municipalities at the expense of surrounding areas.
The Chinese government increasingly needs to balance the priorities of central and local governments. Furthermore, many problems, including environmental protection, are just handled better on a regional rather than city level. As such, there has been significant growth in the rise of regional plans over the past decade.
Benefits of Regional Plans
When developing regional plans, policymakers look at existing and projected resources within a region (including people, natural resources, infrastructure, and industries) and analyze the opportunities and challenges that will shape the region’s growth in the future. Both regional and local leaders use this information to develop policies that limit redundancies, encourage cooperation, and maximize the potential of regions. Regional governments can both help create these regional plans by bringing nearby city officials together and can, in theory, help implement these plans.
Regional planning can prevent a “race to the bottom.” For example, if one city implements environmental protection measures that increases the cost of development, neighboring cities may view this as an opportunity to attract developers with their lower environmental standards and costs. This can lead to a chilling effect for the implementation of environmental protection policies. Strong regional governance can limit this effect by ensuring that nearby cities implement similar policies and play by the same environmental rules.
Regional governments can handle problems at scales beyond the city level. If a major city like Beijing forces factories within its city limits to close because the factories produce too much air pollution, these factories don’t necessarily shut down forever. They may move to nearby cities with more lax air pollution policies. In cases like this, the net pollution produced in an area will not decrease; it moves to other areas. By tackling problems at the regional level, the Chinese government can make meaningful strides towards addressing larger goals.
Regional economic planning encourages the clustering of talent in ways that build the greatest economic good for an entire region rather than one area. When industrial clusters grow in a city, the cost of growth for companies decreases as the supply of trained workers and the infrastructure necessary for that industry to thrive increases. This theory has been used to explain the development of Silicon Valley and other major innovation hubs. By developing distinct roles for cities within a region and decreasing intra-regional competition for industries, Chinese regions can develop these specialized regions necessary to compete in the global marketplace.
Challenges to Regional Integration
There is growing evidence which indicates Chinese leadership understands the importance of regional governance. President Xi is a strong supporter of the Jing-Jin-Ji regional area (Beijing, Tianjin, and the surrounding Hebei region). Regional authorities in the Pearl River Delta and Yangtze River Delta also show that Chinese leaders are thinking regionally.
Though regional plans and regional governments are popping up across China, the authority of these organizations is still unclear. There is little evidence to suggest that these regional plans and regional governments possess the carrots and the sticks necessary to work effectively.
Regional plans are designed so that everyone in a region is better off for participating; however, these plans often require concessions from local governments. A city may benefit from improved air quality and interconnected transportation due to region-wide planning and policies; this same city may also be required to limit its recruitment of desirable industries so that other cities within the same region can develop economies of agglomeration. For many local governments, the incentives (i.e. carrots) for participating in these regional plans just aren’t great enough. Local officials may balk at policies that limit their cities’ growth potential despite the potential environmental and quality-of-life benefits of regional planning.
Perhaps more importantly, regional governments have few methods to punish cities and leaders who are unwilling to follow regional plans. If city officials refuse to follow regional plans, regional plans and the benefits that come with them will quickly fall apart. Without the tools necessary to keep cities in line, even the best regional plans will have very limited success.
Urbanization in China has brought about massive challenges that leaders across all levels of government will have to work together to resolve. Regional governments can play an important role in balancing conflicting goals between local governments. However, China will have to take major steps to empower these regional governments.
First, China needs to formally include regional governments in its governmental structure. Second, it must provide these regional governments with the authority to keep cities participating in regional plans.
Though the decentralization from central to local governments has spurred economic growth, cities aren’t capable of tackling large issues like environmental protection on their own. With the emergence of regional plans across China, the Chinese government has shown that it recognizes the importance of solving problems on a regional level. It remains an open question whether these regional governments possess the carrots and sticks necessary to implement these regional plans.
While Chinese cities are growing at an unprecedented pace, much of this growth isn’t what most city planners would consider “smart” — that is, growth that is efficient, equitable, and environmentally sustainable. Instead, most Chinese cities are experiencing high levels of sprawl. This has led both Chinese and international pundits to focus on the issue of Chinese sprawl, with some even asking why Chinese cities haven’t learned lessons from American cities. Is sprawl a sign that Chinese leaders don’t know what they’re doing?
In theory, sprawl can be limited by good planning. In practice, sprawl is an exceedingly challenging phenomenon to stop. Though there are numerous complex reasons for the growth of Chinese sprawl, there are three systemic factors driving Chinese cities’ expansive growth: unprecedented Chinese growth, local government budget dependence on land sales, and the importance of GDP growth in the Chinese political promotion system.
Unprecedented Chinese Growth
In a way, building cities is a lot like playing a game of Tetris — waves of incoming population and development fall like Tetris blocks. In theory, a player wants to pack in the shapes as tightly as possible, limiting gaps and completing as many full lines as possible. And that’s the strategy most players use at the beginning of a Tetris game when the pace is slow.
As the pace of the game increases, perfectly combining these blocks becomes a lot harder. The need to place blocks smartly is superseded by the need to respond quickly; players begin to haphazardly drop blocks to avoid disaster and keep playing as the pace of the game increases.
If you watch someone playing Tetris and they’re almost out of room to stack new blocks, it doesn’t necessarily mean the player didn’t have a strategy; it just means that they didn’t have time to respond, or didn’t correctly anticipate which pieces would actually appear.
City planners in major Chinese cities are playing a high-speed game of planning Tetris. They’re trying to place the metaphorical pieces as quickly and logically as possible. Like a Tetris player, they don’t always know which pieces will come next.
In a vacuum, some moves may look peculiar, but Chinese planners and local officials are often doing their best to keep “the game” going. In a game of Tetris, this means stacking blocks higher and less efficiently than you’d like; in Chinese cities, this means pushing development further away from the center of the city.
As of now, there isn’t an equivalent to a maximum number of rows in Tetris, so it makes sense to keep building Chinese cities outward. In this way, Chinese sprawl isn’t “dumb” growth; it is perhaps just “as smart as growth conditions will allow.”
Chinese Cities Depend on Growth
Cities throughout the world derive financial benefits from growth; however, tax structures benefit each place in different ways. One underrated but exceedingly important factor in the growth in Chinese cities is their land tax structure.
In many places (including the United States), cities have financial incentives for smart, compact development, particularly for property taxes. The higher quality of development, the higher the assessed value of the land that it sits on, and the higher level of property tax that a municipality collects from the property owner. These taxes are collected on an ongoing basis, giving municipalities strong incentives to provide quality services to these areas to keep them from losing value (and thus decreasing property tax collections).
Unlike places like the U.S., the Chinese government owns all land within its borders; to raise money, local Chinese governments divide up parcels of land and sell development rights to developers and investors. There is no post-development property tax. Therefore, Chinese cities receive a majority of their financial gain from growth at the beginning of the development process.
The money received from selling these development rights often make up close to 30% of a city’s income, so city officials face a tough decision: do they encourage smart, compact growth that limits the amount of land they sell, or do they chase short-term cash infusions by selling development rights to land further from the city center? Even if you’re a huge proponent of environmental protection, it is easy to understand why this is a hard choice for local officials.
The Chinese land tax structure also creates perverse incentives to investors to build in unnecessary places. In places with high property taxes, investors are discouraged from holding property for a long time, as they are required to continually pay taxes on this property. Over numerous years, tax payments add up and cut into overall profit when these developments are sold. In China, however, investors (particularly those with low financing costs) can sit back and (theoretically) wait for demand to pick back up again. While investors wait, buildings with unsold space sit empty; some pundits have speculated that this has fueled the growth of Chinese ghost cities.
The structure of the Chinese political system also encourages unchecked growth that results in sprawl. This is because the Chinese political system works a lot like the farm system in Major League Baseball, with most officials beginning at lower levels (county & city) and moving to higher levels (provincial and central). Officials with strong track records (and strong guanxi) have the best chance to rise within the party to higher levels of government with greater amounts of power.
Though there are numerous ways to measure success for Chinese officials, traditionally the most important has been economic growth. Infrastructure investment and real estate development are major components of local GDP growth. Furthermore, spending on environmental improvements over transportation infrastructure has been found to have negative effects on promotion odds.
Encouraging smart, compact growth becomes a risky decision. If smart growth policies slow cities’ growth, they not only endanger municipal budgets but also jeopardize political careers. In this light, Chinese sprawl isn’t the result of incompetent technocrats who don’t know what they’re doing; instead, it’s the result of Chinese politicians recognizing the importance of this growth in progressing their political career.
There is reason for hope. Since coming into power, Chinese President Xi Jinping has pushed for reform in the Chinese political promotion system. Major news organizations like Bloomberg are reporting that “going green” is now as important of a metric as GDP growth for rising party officials. It’s still too early, however, to tell whether these reforms will have a meaningful effect on the Chinese political system.
So why are Chinese cities sprawling? It is not because local, provincial, and national officials don’t recognize that current growth patterns aren’t environmentally or financially sustainable. Instead, the financial and political incentives built into the Chinese system favor fast, “dumb” growth rather than slower, “smart” growth. The challenge of accommodating a large inflow of rural migrants is exacerbating these pressures.
Local government officials didn’t write the unofficial rules that dictate city growth. Sprawl isn’t necessarily a sign that they don’t know what they’re doing; rather, it’s potentially a sign that the “rules of the game” push them towards unsustainable policies. Chinese sprawl is not inevitable; rather, to push Chinese development towards a more sustainable path, officials at all levels of government will have to consider how they can reform the “rules of the game” to encourage smart, sustainable growth.
Beijing Subway Map
It is virtually impossible not to marvel at China’s new subway systems after spending some time in a city like Beijing or Shanghai. The relatively new subway systems allow for convenient and affordable (albeit crowded) way to travel around these cities. These infrastructure investments will certainly leave a lasting impact on Chinese cities for years to come, but what will this legacy be?
On one hand, this massive commitment to public transportation could be interpreted as China learning the lessons from American sprawl, suburbia, and private car ownership. On the other, we could be looking at the development of sprawl with Chinese characteristics, with subway systems playing the same role as the American interstate.
Urban planners generally consider sprawl to be bad- but why? Above all else, sprawl is environmentally and economically wasteful. By spreading out where people live, sprawl leads to infrastructure redundancy and the conversion of undeveloped land — land that could be used for agriculture or simply natural environment preservation (which provides a wealth of environmental services like improving air and water quality) — into developed land. Additionally, the further people live from where they work and play, the more likely they are to travel to those places by carbon-intensive modes of transportation (primarily the private automobile).
Sprawl is the major defining characteristic of 20th century American growth.While there are numerous reasons why this is the case (including Federal housing policy that encouraged home ownership), one theory that helps urban planners understand sprawl and suburbanization is the bid rent theory. At the heart of this theory is the idea that choosing where to live or set up a business is about balancing access to lots of people and rent prices; land users’ willingness to pay rent is dependent on their need for access to the central business district (i.e. downtown).
Figures 1 & 2. Bid-Rent Graph (left) and its Effect on City Structure (right)
Commercial services and retail (the blue line on the graph in Figure 1) benefit the most from close proximity to downtown, its density, and its high concentrations of people; therefore, commercial and retail entities are willing to pay the highest levels of rent, and the areas closest to downtown are generally dominated by commercial businesses.
Manufacturing and large retail (the green line) benefits some from access to people who work in factories and buy goods, but it also requires a greater area of land to set up production facilities; therefore, manufacturers and larger businesses often locate outside of expensive downtown areas but still somewhat close to the center.
Finally, though living in the center of a city is very convenient, housing prices (i.e. rent) are quite high. Residential uses (the red line) are generally seen to benefit the least from access to downtown, so people therefore are willing to live further away from the city center. The further one move out of the city center, the lower housing prices become; therefore, the outer regions of cities are usually dominated by residential development. When the lines on the graph are translated into a two-dimensional map, the city is divided into concentric zones. The spatial distribution of commercial, manufacturing, and residential areas under the bid rent theory can be seen in Figure 2.
Though the bid rent theory has its own limitations, it still provides a helpful way to understand American cities. In addition to the obvious information on willingness to pay rent for access to downtown by sector, bid rent graphs contain another important piece of information about consumer preference: the point at which each line crosses the x-axis (or where the rent becomes 0). The residential line is particularly important, as it shows the distance away from downtown where developing residential land becomes impractical (i.e. the land is worthless); in practice, this represents the outer boundary of cities.
Before the development of interstates, city size was greatly limited by travel time. Even though land exists beyond where the residential line reaches the x-axis, additional non-financial costs (particularly commute time) made living in these areas impractical. The American interstate system had a profound effect on the slope of the residential line on the bid-rent curve. Interstates, with higher speed limits and limited stops, significantly reduced travel times from employment in city centers to housing miles away, thus reducing the non-financial cost of living far away from downtown. As the residential line became flatter, and the x-intercept moved further away from downtown (see Figures 3 & 4); this means that previously impractical land became a viable option for some individuals. Cities, once limited in size by travel time, were able to expand far further than they were before interstates. Fifty years later, interstates have allowed cities like Atlanta and Houston to sprawl to incredible levels.
Figures 3 & 4. Pre & Post-Interstate Bid-Rent Lines (left) and its Effect on City Structure (right)
It’s easy to dismiss sprawling Chinese cities as inevitable, due to the large size of the population in an average Chinese city. However, the same factors that led to American sprawl (particularly a strong desire for homeownership) are also very important parts of Chinese culture. If homeownership is a significant priority yet housing prices remain unaffordable, the only option is to move further away from the city center.
If an individual’s only transportation options are buses, bikes, or even cars, non-financial costs like travel time would effectively limit the size of Chinese cities; however, land further from the center becomes more attractive when citizens have access to high-speed transportation options like subway.
Much like interstates did to their American counterparts, Chinese subways will flatten the residential bid-rent curve and allow for Chinese cities to grow increasingly expansive. Though this may not seem like a major problem, increasing the distance from downtown to city borders by 25% means increasing the total developed area by 65%. That’s a huge amount of land that could be used for other purposes like farming and environmental services.
There is a very compelling case for building these subways. The most compelling case is that China’s major cities are inevitably going to continue to grow. If Chinese cities do not develop extensive transportation infrastructure, then they may pay a major price in the future as they battle traffic congestion, environmental degradation, and high real estate prices (due to limited housing supply).
Alternatively, one could also argue that outward urban growth is not inevitable; in its place, cities would either become increasingly dense or people would just choose to move to smaller, less expensive cities. Some urban planners argue that American cities are reaching “peak sprawl” due to suburban developments reaching reasonable limits on individual travel time from job centers; is it possible that Chinese cities would reach the same point?
By increasing the area where city residents can reasonably commute to the city center, local governments are making land that was previously unappealing due to its distance from the city center more appealing (i.e. inducing demand). Rather than reducing traffic congestion, it could instead be enabling more people to move to these cities than would otherwise be feasible. This would put significant stress on existing infrastructure, encourage redundant infrastructure, and decreases green space surrounding cities.
Building these major subway systems can also pose major systemic issues to Chinese cities over the upcoming years and decades. Over the past decade, China has been grappling with high real estate prices. In the short-term, the government decreases the necessity of dealing with high real estate prices in city centers by increasing the overall supply of developable land through subways. Long term, as individual purchasing power increases and more people buy cars, more individuals may transition from public transit like subways to personal cars.
Chinese cities face problems that are unprecedented in both size and scale. Planning cities under these conditions is extremely challenging, and building massive transportation infrastructure is a logical way to manage the challenges that come with massive growth.
It’s easy to marvel at the sheer size and speed of growth of Chinese transportation systems. That said, the growth of Chinese subway systems isn’t necessarily a sign that China is fighting off American-style sprawl and suburbia; rather, it may setting the foundation for sprawl with Chinese characteristics.
Nothing threatens the stability of China’s economic miracle more than the hazardous levels of pollution generated by rapid development. The rise of the private automobile, unregulated toxic factories, and the widespread use of coal-burning as an energy source have all contributed to environmental degradation across China’s cities. While in the past, these issues were swept under the rug in favor of economic growth at all costs, the rise in living standards means that China’s leadership can no longer ignore the concerns of the people they serve.
China is now at a crucial turning point where economic goals must be balanced with considerations for the environment going forward. This is not an easy problem to tackle and the solution will require a global effort.
The new book The People’s Republic of Chemicals serves as an excellent starting point in understanding how China’s pollution problem got so out of hand in the first place and what can be done to stop it (or at least slow it down). The book’s co-authors, William Kelly and Chip Jacobs, are appropriate storytellers having together written the 2008 book Smogtown about the rise and fall of pollution in mid-century Los Angeles.
William took the time to answer some questions for us about their new book:
Adam Mayer (AM): As you observe in your previous book, Smogtown, Los Angeles has done a good job of cleaning up its air in a relatively short amount of time. Aside from the rise of use of catalytic converters for cars, how much does this have to do with the fact that L.A. is no longer a manufacturing powerhouse for the aerospace industry? Using L.A. as an example to learn from, how can China move away from manufacturing to services without sending shockwaves through its economy?
William Kelly (WK): In history, sixty years seems like a short time, but for those who lived it in Los Angeles it seemed like forever, especially for the roughly 10 percent of the population that suffers from asthma and other chronic respiratory diseases. And bear in mind the air in Los Angeles is still unhealthful, though much less so than even in the 1990s.
Aerospace really was a fairly minor source of air pollution in Los Angeles and its downsizing had more to do with the end of the Cold War, consolidation in the industry and the rise of Airbus and other competitors around the world. However, like virtually every other source of air pollution it was regulated and required to follow best practices and use the cleanest technology available. The fact is that around 1990, the LA area needed to cut emissions about 80 percent to meet health standards and to do that all sources had to be controlled. So the effort went far beyond the catalytic converter which was first required in the 1970s.
But without digressing, China can learn much from Los Angeles and California, but replacing manufacturing with services is not the answer. Instead, cleaning up the sources of energy in China is the key task that will bring the biggest environmental improvements, as well as much better control and treatment of waste byproducts from manufacturing that also pollute water, soil, and air.
The tragic thing we’re seeing now is that with the U.S. pushing the TransPacific Partnership trade agreement, we may replicate what happened environmentally in China in the 1990s in Vietnam, Malaysia, and other underdeveloped nations by helping to set up manufacturing that will be all coal powered. The coal plants in those nations already are being built in anticipation of the trade agreement.
AM: One of the more recent developments in China is the proliferation of citizen protests against new chemical factories. In your research, did you find this phenomenon to be widespread? How is the government (both local governments and the central government) reacting to these protests?
WK: The protests have been widespread, persistent, and often violent. The reason stems from fear of releases, particularly potentially catastrophic releases from chemical plants, but at the root is distrust of the public officials charged with regulating these plants.
Here’s a fact Americans might find hard to believe. In a nation with more than three times as many people as in the U.S., the Chinese equivalent to the U.S. Environmental Protection Agency has fewer people than work at the Natural Resources Defense Council, a few hundred. That’s in a nation that covers more land area than the U.S. too. Obviously that’s inadequate.
So as a result, the enforcement of standards largely falls on local and provincial government personnel, who are under the thumb of local and provincial Communist Party officials who are constantly wined and dined, if not controlled by industrialists. The common people know this, so they feel left to their own devices when these plants come to town.
The key to gaining trust here is for the national government to build up its capacity to enforce environmental laws and standards and for the national government to exert more control over provincial and local party officials by making their compensation and promotion contingent on environmental as well as economic performance.
AM: Perhaps most detrimental to China’s air quality is the widespread use of coal-burning as a power source. Given China’s growing demand for energy, and the cheap cost of coal as a resource, what are the necessary steps that the country needs to take to incentivize cleaner sources of energy? Is this already happening? If so, how?
WK: First, coal is the biggest cause of air pollution in China, particularly the terrible particle pollution we see in the pictures.
Solving the problem, therefore, is easy as ABC, anything but coal. Fortunately, China’s historic strength is in bringing technologies to scale, from the canals and roads of the dynastic days, to the great outpouring of digital devices we see today.
Now the nation is successfully turning to solar and wind power, where it’s become a leading nation both in manufacturing solar panels and wind turbines, and also deploying them in its grid. Indeed, China is the world’s biggest solar panel manufacturer.
Now, it’s beginning to do the same by turning to advanced batteries to store intermittent renewable power so it will be there at night and when the air is still. Coupled with the energy efficiency inherent in denser, urban living in small quarters we can hardly fathom in the U.S., China could be the next nation after Germany to get huge amounts of energy from renewable sources. In fact, it’s happening most energy analysts agree.
All that the Chinese have to do is follow Deng’s advice, to “be brave” and “walk with faster steps” when it comes to moving to renewable energy and to drop further development of coal.
AM: Looking ahead, do you think that urbanization will eventually lead to a better environment in China? In other words, once the new cities are built and the infrastructure is in place, will we look back on the last 3 decades as a small sacrifice paid for what could ultimately be a sustainable urban future with an intelligent grid, efficient public transit and green buildings? Or has the pace and scale of urbanization taken a toll on the environment that can never be rectified?
WK: When it comes to what China is doing with public transit, housing, and amenities for its people, one could argue it puts the U.S. to shame. In many ways, we have much to learn.
Clearly, even the casual visitor can see China is making a lot of the right moves on transportation and urbanization, moves that are setting it on a path when it’s fully developed toward much lower emissions per capita than in the U.S.
The danger is, however, that continuing to rely on coal to build out its cities will do irreparable harm to the world’s atmosphere by pushing up carbon levels to the point that triggers runaway global warming. The Chinese leadership ultimately is coming to grips with this, but needs to embark on a crash program to transition to clean energy.
Given their great communitarian tradition and amazing technical ingenuity—remember they had vastly superior technology to Europe even at the time of Marco Polo—the Chinese are fully capable of doing this, in fact leading the world on it. The ability is there, all they need to do is muster the resolve.
Many thanks to William Kelly for taking the time to answer these questions for us. Please be sure to read their new book The People’s Republic of Chemicals.
More can happen in two years in a developing country like China than can happen in a decade or more in developed countries. And given this high speed of change, the information in business books about China’s economy can go out of date really fast.
That is why it is not surprising that although it has only been a little over two years since China analyst Shaun Rein released his first book, The End of Cheap China, he is back with another one. In that time span, China got a new leader in Xi Jinping, the one-child policy was significantly reformed, and Alibaba, the country’s biggest internet company, went public on the New York Stock Exchange.
The End of Copycat China is a natural follow up to End of Cheap China (which we featured a review of on this blog not long ago) and looks to build upon the research he’s been doing for the past decade on the ground in China.
I recently had a chance to chat with Rein about his new book and ask some questions about what he’s seen change in the past two years and, more importantly, the trends he sees influencing China’s development in the near future.
Adam Mayer (AM): Your previous book The End of Cheap China asserted that China is moving up the value chain from a land of cheap manufacturing to higher-end manufacturing and services. Since then, how have your initial observations been validated? Where is China today versus when you were doing research for your first book?
Shaun Rein (SR): When End of Cheap China first was released, many critics pounced on me and said that China would always be a low-cost manufacturing center. Over the last three years, however, my thesis has been proven right as labor and rents have gone up in double digits year on year in the manufacturing sector — China no longer is a cheap place to produce products. Companies like Nike have started sourcing more from even cheaper markets like Vietnam and Chinese footwear manufacturers like Huajian have opened factories in Africa. When even the Chinese relocate to Africa in search of lower costs, that is when you know there is a tectonic shift in supply chains needed.
I also argued in End of Cheap China that China would not lose its manufacturing dominance because it has superior infrastructure and the necessary eco-system for manufacturing — I said that Chinese firms would move up the value chain which they have done. What might surprise people is just how fast many companies moved up the value chain. They are no longer transferring technology from western nations like Germany and the U.S. but actually focused on innovation which is where my new book begins.
AM: The title of your new book The End of Copycat China also suggests the ‘end’ of something China is known for (intellectual property transfer in this case) as a signal for its next phase of development. Is the perception of China as a land of copycats still a reality?
SR: Chinese firms were copycats for the most part of the last thirty years. The main reason was that there was so much low-hanging fruit to simply transfer technology from the West directly into China and to customize if needed for local markets. It was easy for well-connected (and corrupt) people to get land on the cheap and put up skyscrapers or secure long-term monopolies supplying various government agencies. But now that costs are so high and the public equity markets are giving high valuations to innovative Chinese firms like Alibaba and Tencent, Chinese companies are focusing on innovation more and more — it would be a mistake to discount their ability to innovate. This is a natural progression to what happening in South Korea and Japan.
Yesterday I was at Lotte World Amusement Park in Seoul. From the term ‘cast members’ to Indiana Jones look-alikes, even Lotte is seemingly knocking off Disney and the George Lucas/ Stephen Spielberg franchise.
Intellectual property was and remains a concern so it did not make sense for companies to invest millions of dollars in innovation because someone would likely steal it. When I interviewed top entrepreneurs in the book — and I interviewed the founders of JD.com, Qunar, Tudou for instance as well as the former CEO of Alibaba.com and an angel investor in Xiaomi — property rights and lack of enforced was an issue many brought up towards a barrier for innovation in China. That said, the situation is getting better as the government is more likely to move to protect the interests of domestic Chinese firms hurt by copyright infringement than western players.
AM: Is there now a broad consensus among policymakers and business leaders in China that the country must innovate in order to continue on its path of economic reform? What are some examples of businesses or policies you’ve come across in your research that align with this goal?
SR: The Chinese government has definitely set the goal of innovative businesses taking up a larger part of the economy. Local governments are setting up innovation parks, like they did with the IT parks a business generation ago. Frankly, I am not sure that these initiatives will work as great innovation tends to occur in the private sector, often in small teams of entrepreneurs who think they can change the world. Chinese bureaucrats despite good intentions often do not understand and thus do not support new technologies which can hamper innovation.
That said, one sector that the government actively supports for innovation and which is seeing great growth is the bio-tech sector. Probably more than any sector I interviewed, except maybe mobile, biotech entrepreneurs were the most optimistic in China precisely because of the support the Chinese government is giving the sector from funding, equipment and opportunity to cooperate with academic institutions. Many said that the climate is better in China than in the US because of Obama administration funding cutbacks.
AM: Apple famously touts its products as “Designed in California, Assembled in China”. This statement implies superior innovation power over Chinese counterparts. Yet with domestic Chinese businesses such as Tencent and Alibaba becoming more confident as innovators in their own right, what are the implications for Western businesses who have always felt safe in their role as the ‘innovators’ while using China as a factory?
SR: For years the ‘Made in China’ label had negative connotations as being cheap, dangerous. For much of the market that is true but can no longer work going forward. The first half of my book is focused on innovation — the second half is looking at consumer trends and how Chinese are moving away from copycatting the western dream of beauty and life as they define the new Chinese dream.
Importantly, there is a new found pride in Chinese-ness. Top Chinese firms like Xiaomi and Tencent are not hiding their Chinese heritage — Chinese consumers love it, support that move. For western companies, they need to understand that top Chinese firms are going to become global players competing on innovation and no longer the cheap but good enough positioning many Chinese companies competed with before.
AM: Your last book devoted an entire chapter to the real estate industry in China. To what extent does your new book discuss this topic and what are the implications for real estate as China’s economy shifts from one of manufacturing to services?
SR: Real estate plays a key theme in my book — including the high rents that are forcing retailers to think about e-commerce. The real estate sector in China obviously has some issues but they are not as serious as many analysts seem to fret. Prices might soften in the residential sector but there is little leverage in the marketplace. I am more concerned about some of the commercial developments that have gone up in the past few years because developers put too many Louis Vuitton stores as the anchors. The market can only sustain so many LV stores, especially with the anti-corruption crackdown.
But real estate is actually pushing forward a lot of innovation. I had an interview set up with Zhang Xin the CEO of Soho but it got cancelled last minute so I wasn’t able to include anything on Soho in the new book. But pollution has become such a problem in China that it is developers like Soho that are investing in the newest forms of technology for cleaning air, reducing carbon footprints. Chinese real estate developers are really at the clean technology forefront.
Thanks to Shaun Rein for taking the time to answer some questions for us. Please be sure to check out his new book The End of Copycat China.