[Viewpoint]Riding the Chinese dragon

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[Viewpoint]Riding the Chinese dragon

China’s economy has enjoyed annual growth of more than 10 percent during the past four years (2003-06), with 11.4 percent growth in the first quarter of 2007. China’s trade surplus also continues to post record highs. This has been achieved even though only a handful of Chinese companies are globally competitive. In a borderless world, a nation’s industrial structure will be determined more by where it lies in the value chain, no matter how many high-tech industries it may have.
In this sense, China’s industrial structure can hardly be said to be “advanced,” at least for now. For example, China’s high-tech industries, such as semiconductors and liquid-crystal display panels, are focused on assembly rather than research and development or parts production. However, Chinese industries have recently been quickly upgrading. In the IT sector, major multinational corporations such as Sony, Intel and Microsoft are strengthening their research and development in China, suggesting production in China is headed up the value chain. Sony let its Shanghai Technology Center, opened in 2005, cover the whole process of planning, design and production of its MP4 players before releasing them on the global market. Intel invested $2.5 billion to build a semiconductor plant in Dalian, also the location of its research and development center.
On the heavy industrial front, China’s shipbuilding industry, which had virtually no presence at all 10 years ago, replaced Korea as No. 1 in new ship orders in the first quarter of 2007. The Chinese shipbuilding industry’s future is also bright. China has 31 shipbuilding companies listed among the world’s top 100, with Dalian Shipbuilding at No. 5 in the amount of backlog orders. This compares quite favorably with Korea’s 15 shipbuilders, and Japan’s 30. All these events imply China is experiencing improvements not only in quantitative terms, but also in quality. Of course that does not mean that China is ready to surpass Korea within a year or two, let alone Japan. For example, China’s shipbuilding industry still focuses on low value-added vessels such as cargo carriers, bulk carriers and small and medium container ships, whereas Korean shipbuilders lead in producing high-value-added vessels such as large container ships and liquefied natural gas tankers.
But things will surely be different in three to five years. The Chinese government is stepping up research and development support. Multinational corporations are continuing to expand R&D facilities and are deepening R&D in China. Assuming those trends will not slow and the Chinese economy keeps its robust growth, nobody can be sure Korea will be able to maintain its current technological edge over China.
The recent trend for more Korean students to avoid the natural sciences and engineering in college also does not bode well for the mid- to long-term future of Korea’s industry, as does the continuing problem of sluggish corporate investment. If China catches up with Korea, it could spell very bad news for Korea’s economic future.
However, there is no need for any undue pessimism regarding China’s industrial upgrades. And in any case, China’s changing industrial structure is an issue that affects many countries other than Korea. Rather, China’s industrial upgrade can serve as a substantial opportunity for Korean companies, depending on how they approach the issue.
An effective use of China’s industrial upgrade process can indeed be a very good chance to substantially strengthen its foothold in the Chinese market while simultaneously enhancing global competitiveness.
For example, Korean companies could collaborate with their Chinese counterparts to develop global technology standards, through which they could establish a firm foothold in China’s huge market. If those standards were adopted by other developing countries, Korean companies would naturally be big beneficiaries. There is already a case in hand. For example, Korean mobile giant SK Telecom is helping China develop its own third-generation standard for handsets.
If Korean companies do not use such opportunities arising from China’ industrial upgrade, other companies from fully industrialized countries will.
If that is the case, China will choose a path toward industrial upgrades that excludes Korea. Therefore, the crucial issue here is to form a virtuous cycle in which China’s growth complements Korea’s. This will be possible only when Korean companies make more solid inroads into China. Previous business strategies that treat China as a place for the simple assemblies of products or to gain short-term profits will no longer guarantee success. Only companies that invest deeper (i.e. strengthen R&D) and longer (long-term investment for higher value-added production) will reap the sweet fruits of their efforts.

*The writer is a research fellow at Samsung Economic Research Institute. Inquiries on this article should be addressed to sangeun.chung@samsung.com.

by Chung Sang-eun
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