China: Outsourcing Giant or Global Business Empire?

By Warren McFarlan  |  Posted 08-14-2008 Print Email
Legendary Harvard professor Warren McFarlan examines the conundrum of China’s business potential: will it be the world’s sweatshop or the next great global competitor?

The chief economist and personal financial advisor to the president of China was in one of our programs. His perspective on China's future was extremely interesting: he says, basically, it's more of the same. China winds up being the sweatshop of the world. That doesn't improve the quality of life for anyone. He pointed out very clearly that the key to their success lay in the combination of information technology services and the ability to climb up the value chain on the services side.

That's where the Chinese are really scrambling today. They've allowed their currency to roll up about 20 percent. Inflation is pretty high in southern China. As a result, a number of textile factories have shut down, and the work goes off the Cambodia, Laos, and generally the cheapest parts of the world.

We know that IBM has about 6,000 people in China. Hewlett-Packard has a huge presence. Tata and Infosys are spreading there very rapidly. The language is the challenge. There's a lot of outsourcing being done to Japan (instead of China) because they have a history of adapting to English. But the Chinese are a very technologically adept and friendly group. They're willing to work very hard for vastly different compensation numbers than we'd pay them if they were here.

China has a huge population (1.3 billion people). And they're an intellectually able population. Literacy rates are at 90 percent, contrasted with 60 percent in India. They've put a lot of resources into developing universities and are beginning to climb up the curve there. They're hard working. They're very comfortable with technology. They've made huge investments in infrastructure; their highways, railroads and electricity simply operate at another level than they do in India, for example. China also has a deeper pool and much broader, deeper technology infrastructure than India does.

For China, though, they don't have the safety valves to let the pressure out, so you're always worrying that the political pressures will build. Traditionally, China solved the problem: dynasties fall, either by war or by death and the replacement of leadership by less competent leadership.

China has had an incredible emergence in the last 30 years. There's no place that's had a sustained 11 percent growth rate per year they've had for the last 30 years. This has, on the one hand, led to glittering things like roads, automobile congestion, stadia and buildings. On the surface, it looks very exciting.

But there are all kinds of gaps in the infrastructure. In many ways, they're 50 to 75 years behind us. But China has 20 percent of the world's population, and we at Harvard think the country is going to be a huge force, and very likely our dominant trading partner--and competitor--40 years from now. So whatever we can do to understand and find peaceful ways to collaborate is going to be very helpful.

F. Warren McFarlan is the T.J. Dermot Dunphy Baker Foundation professor of business administration and Albert H. Gordon professor of business administration, emeritus, at the Harvard Business School. This article was adapted from a wide-ranging discussion between McFarlan and CIO Insight Online Editor Brian P. Watson.

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