Chapter 4
Heavy Metal
Chinese authorities arrested Liu Zhijun on February 11, 2011 for “severe violation of discipline”—the Chinese Communist Party’s (CCP) code words for “corruption.”1 The 56-year-old Liu was found to have embezzled and accepted 187 million yuan (US$28.5 million) in bribes from the showcase Beijing-to-Shanghai portion of the high-speed railway project. Also, under Liu Zhijun’s tenure, the Ministry had racked up debts of RMB 1,980 billion ($307 billion).2 In contrast, the United States Congress in 2009 passed an economic stimulus package of nearly US$800 billion to stave off recession for the entire United States economy. Zhao Jian, a researcher at Beijing Jiaotong University, said that “the debt load had grown too large for the government to afford.”3 CCP minders replaced Liu Zhijun with Sheng Guangzu, 62, head of the general administration of customs. Hubris, corruption, and ineptitude would connive to create one of the worst train accidents in China’s history.
When high-speed bullet trains on China’s premiere Hangzhou-Wenzhou line collided at nearly 400-kilometers per hour five months after the arrest of Liu Zhijun,4 the nation’s grand plan to sell its own made-in-China bullet trains to other countries became as much a casualty as the dozens who lost their lives in the incident. The tragedy exposed the flaws of the country’s initiative of “indigenous innovation” to adopt the sophisticated technologies of other countries to adapt for use in domestic and export markets. The collision also spotlighted the deep international distrust countries harbored over China’s industrial model because of the nation’s weak enforcement of intellectual property protection. The indigenous innovation directive was actually retarding China’s efforts to acquire the state-of-the-art technology it needed to gain credibility in international markets for high-speed railways, automobiles, and ships, among others.5 Global markets also found that Chinese industry’s emphasis on market share over profits created deflationary pressures at home and abroad for supposedly high-value products. A rare set of conditions in China’s own society trumped economic principals and set the trajectory for its problematic heavy metal export model.
China’s greatest economic asset since its leadership approved of the country opening up to the world in 1980 was its large, relatively young population—the largest in the world. Though overwhelmingly from the countryside, the youth of China offered international manufacturers a ready, relatively docile, and hungry workforce and a willing army of potential consumers. Mobilized to use the latest equipment to produce low-cost products, China was able to kick-start its economy into modernity. Inflationary pressures, energy requirements, and environmental hazards made labor-intensive businesses increasingly difficult to maintain in the country. Beijing began shifting the nation’s policies in the mid-2000s to emphasize the development of more capital-intensive industries. The sectors required increasingly sophisticated technologies to become viable international players. The key to the strategy was, again, China’s large population of workers, who also represented the largest pool of consumers in the world.
China’s leadership had known for years that multinationals would bring their billions of dollars of investment and intellectual property to build and exploit the domestic market place. The scope of the potential market of nearly one-and-a-half billion consumers would cause international business leaders to make almost any deal to sell into China.
Nearly all of the technologies that China has used since it threw open its economy’s doors to the world in 1980 have been imported; the technologies it already had in hand were remnants of 1950s Soviet era central planning—great, hulking, inelegant equipment mostly oriented toward heavy industry applications. China needed the more efficient designs the West and Japan had to offer to heft the nation out of market purgatory. Without rapid adoption of the foreign technologies China would not have been able to “catch up” with the world technologically after having ignored the Industrial Revolution 400 years before. Drawn by the promise of riches “beyond compare,” foreign makers assisted in that technology transfer so they could profit during the nation’s economic growth spurt. Foreign investors already knew that the Chinese industry plan was to tweak the technology just enough to suit domestic demands, then to become a competitor with the very companies that had helped the Chinese companies become successful.
China started with low-end, low value products to begin its economic ascendancy: toys, textiles, shoes, and the like. Then on to more capital-intensive products like cargo ships, which required a great deal of financing to construct, but relatively little in the way of high technology. Kick-starting the automobile industry was also a capital-intensive exercise that required far greater technological sophistication, quality, and safety standards than shipping. High-speed trains represented the pinnacle of any modern society’s capability to mobilize capital and some of the most sophisticated technologies available in the world. Though relatively low-tech, however, ship building would prove the most important to the strategic interests of the country.
Ships Ahoy!
The Daoda Heavy Industries shipbuilding port is easy to spot—once you’re on the correct road. It’s the shipyard with the wind turbine. Daoda is located on the Yangtze River, essentially at the mouth of the great waterway as it disgorges water born from glaciers in the Himalayas. It is about a twenty minute drive outside a small town called Qidong, in the Nantong municipality, an hour’s drive to the northwest of Shanghai. I found Qidong unusual in the number of motorcycles on the road and the high proportion of riders who wore safety helmets. Protection of any sort for riders in China was unusual. The few trees there were appeared sparse, wind-whipped. The area had a barren feel to it, despite the high density of bushes. It was mid-November 2010, and the wind was strong and cold.
Though ostensibly on a visit to Daoda to learn about how it was traversing the learning curve that bridged ship building and offshore wind turbine foundation manufacture, I still found myself drawn to the vessels in dry and wet dock under construction, snapping photos of ships under construction when the novelty of the lone wind turbine wore off. Surprisingly, the factory compound was emptier than I would have expected. The drive from the gate to the administrative office took several minutes. Large hangars dressed in corrugated steel painted white dotted the dockyard. Groups of workers in blue hard hats and pale green trousers and matching jackets with company logos stitched on their breasts moved in small herds. It was late morning.
One of the dry docks, along the concrete shoreline, encased the carcass of a ship under construction. It was splayed open, the double-walled hull cut cross-section. The main hull was a great black rectangle, the walls of its internal chambers painted the same color red as the hulking rectangular cranes perched on rails and framing the unfinished vessel. Silver-pipe scaffolding held the air in place within the chambers, like the small bones of a river fish.
Daoda was a typical Chinese business success story, the sort that the CCP is happy to air to show its citizens, and the world. Just ten years before a Chinese bridge builder named Li Aidong bought some land along the Yangtze River that he sold for a great profit. He started the shipyard in 2007, during the greatest boom in shipping—and shipbuilding—history, since seafaring records were started in 1774. The shipbuilder quickly picked up foreign customers, among them the German company Intersee Schiffahrts-Gesellschaft GmbH & Co (ISG). ISG’s order—christened the Pacific Tramp—was nearly complete when I visited that cold winter’s day. The pier along which the boat was moored was a beehive of activity. Construction workers ambled between the craft and a vessel on the opposite side of the pier, while forklifts careened down the boardwalk hefting all manner of fittings. Nine months later the craft was plying the South China Sea laden with cargo on its way to Ho Chi Min port in Vietnam.
Daoda was a small shipyard by the standards of the State-owned Enterprises (SOEs) that were deploying the central government’s plan for China to become the largest shipbuilder in the world. China’s prime manufacturers—the China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC)—dwarfed Daoda, a privately-owned entity. The ship building SOEs employ hundreds of thousands of workers who build seafaring craft for commercial and military use, and are tasked with construction of vessels up to 300 thousand DWT (dead-weight tons). DWT is a measure of the total amount of cargo, fuel, fresh water, ballast water, provisions, passengers, and crew. Daoda, at the time I visited the shipyard, was permitted by the government to only construct ships up to 35,000 DWT—one-tenth the size of the craft the SOEs produced. The two SOEs between them controlled nearly 70 percent of China’s shipbuilding capacity. The government, according to a Daoda manager, wanted to keep it that way. Government regulations restricted Daoda from expanding its footprint along the shore of the great river for shipbuilding purposes. The company hoped that in the near future it would be able to expand into building ships of 200,000 DWT. Companies like Daoda, however, would always remain bit players in the Chinese central government’s plan to own at least half of all the ships that supplied the country with oil.
China was the second largest net oil importer in the world in 2009, supplanting Japan during the global economic crisis of 2008–2009. In 2009 China imported 204 million tons of oil. In 2011 China was the second-largest consumer of oil, with more than half of its crude oil imported. China will likely be importing about 65 percent of its crude oil by 2020.6 China’s extreme dependence on imported oil is a recent development, forced by its society’s aggressive modernization drive.
The Chinese Communist Party (CCP) made it a main plank of its legitimacy in the 1940s to eject all foreigners and foreign influences in the country, including technology advances. However, insularity worked squarely against the country’s economic development. By the time Mao Zedong had died in 1976 the country was essentially bankrupt, without any convertible currency of its own with which to trade with other countries. Premiere Deng Xiao Ping’s policy in 1980 of opening the country up economically meant industry would require more oil to power its machinery. By the mid-1990s China was opening relations with oil-pumping countries that were neither aligned with China in terms of politics or religion (the CCP presents China as avowedly atheist). Oil and money—not ideology—had become the shared worldview. The sources of China’s imported oil quickly became diverse, nearly all of it arriving by sea.
By 2010, China was sourcing nearly half its oil from the Middle East, with more than a fifth of that amount from Saudi Arabia alone. Iran provided China a little less than Saudi Arabia at 15 percent of the total oil pumped out of the region going to China. Oman, Kuwait, the United Arab Emirates, and Yemen also provided China with the precious cargo.7 In 2011 China received about 30 percent of its oil from Africa. China had also developed cozy relations with a prickly Venezuela, based on shared oil interests. China had become beholden to the rest of the world for one of the most important sources of energy in its portfolio. The vulnerability rubbed sorely against the grain of the Chinese Communist Party (CCP), which had prided itself on the country’s self-sufficiency.
China’s leadership had realized by 2004, though, that it was making itself increasingly vulnerable to the vagaries of international politics and globalization by having all its oil brought to it on ships owned by other countries. The leadership published a series of proclamations making shipbuilding a pillar industry in China. The CPC designates an industry as a pillar when it becomes strategic to the economic and even defense interests of the country. China bought ships made in other countries and copied their designs to build their own cargo ships. China’s leadership set its sights for 2015 to have 50 percent of its oil shipped on boats the country would forge itself.8 It also aimed to become the largest ship builder in the world at the same time. Within a year of the leadership’s new policy, China’s fleet carried 20 percent of the country’s crude oil exports; in 2000 it had only carried 6 percent of its own imported oil.9 The global economic downturn of 2008, however, threatened to bring construction of China’s shipbuilding industry to a halt. The deep recession staunched the flow of international trade across sea lanes from a torrent to a trickle.
As part of the nearly US$600 billion China pledged to pump into its economy to keep its industries afloat during the crisis, the leadership strong-armed its SOEs into placing orders with Chinese shipbuilders to keep the industry afloat. As the shipping industry righted itself in 2010 the world found China had become the top shipbuilder. The nation had displaced the South Koreans and the Japanese as premiere contractors for constructing sailing vessels that are as long as the Eiffel Tower is high. Greek and German shippers lined up at Chinese shipyards to have their crafts built at a fraction of the time and cost as other shipbuilding countries. China’s lack of consideration for the fundamental economic principal of supply and demand, however, eventually cost shipping lines dearly.
The marketplace discovered by the end of 2011 that China had constructed far more ships than the market could use. Shipping rates again collapsed. Li Shenglin, China’s transport minister, said, “They [Chinese shipbuilders] have led the shipping industry to a situation that is more depressed now than in 2008. This state of affairs could persist for quite a long time.”10 Central planning also drove China’s automobile industry to the same dead end.
Fast Car
The Chery Automotive manufacturing plant was as modern as any I’d seen in China: a great cavernous space, brand spanking new, sparkling almost, with new equipment little touched by human hands. A stainless steel track snaked along the floor and then jutted upwards to the ceiling with half-finished chassis dangling from it. More than a hundred workers—all men, all outfitted in pale green slacks, matching light-weight jackets zipped almost to their chin—stood ready at their stations. The line was sparse, admittedly, but still impressive. The head of the operation—a middle-aged Chinese engineer with a PhD appended to the surname printed on his business card—was clearly proud of the facility. It was autumn 2004, and the plant was one of the newest and most sophisticated of its kind in China.
It was also one of the few that was not tied-up with a foreign auto maker, like Shanghai Automotive Industry Corporation (SAIC) had been with Volkswagen and General Motors; or Changan—out in Chongqing, in the interior of China—was with Ford.
In 2004 I was but one of half a dozen representatives from an American tier-1 automotive supplier invited to Chery’s headquarters in Wuhu, Anhui province. Wuhu is about an hour’s drive southwest of Nanjing, the provincial capital of Jiangsu province, and more than a 3-hour drive west of Shanghai. Wuhu at the time was a backwater town, without high-rises. Visits to the city over the years have always struck me as unique, as the city never really seemed to be well taken care of. Development in the city seemed to follow a different path than cities closer to the seacoast. The downtown area was the only one I’d ever seen in China in which buildings—a mere five stories at their highest—were actually shuttered in the manner of inner-city Detroit or Philadelphia. Sheets of plywood covered windows and newspapers taped to glass doors blocked investigations into the hollowed out structures. A visit nearly four years later, in 2008, would find a huge excavation near the eerie downtown for the construction of a dinosaur park. One part of the park was reserved for a giant spaceship in which children, their parents, and grandparents could walk through and enjoy alien sounds, lights, and rides.
Eventually I would learn from government officials at the promotion bureau of the economic development zone that supported Chery that the city government was an investor in the car maker. The provincial government of Anhui, as well as the central government itself, also had shares in the company. Chery was a national champion. Though smaller than SAIC and Changan, it was nonetheless an important component in China’s efforts to encourage development of automotive manufacturing as a pillar industry for the country. Eventually, the Chinese leadership envisioned, Chery and other indigenous Chinese manufacturers would become export giants in the world, just as the Japanese and South Korean car makers had.
Chery had received a sweet deal from the local government: the plot of land on which it had staked its claim had been all but free, while it also had no tax burden as an investment in the national interest. And just as most taxis in Germany are Mercedes brand, all the taxis and most of the other cars on the road in Wuhu were Chery manufactured. In 2004 Chery had become one of the best known brands in China; though, probably for the kinds of reasons that would one day make Chery blush: sub-compact, paper-thin bodies, and poor quality. In the mid-2000s, though, it was affordable to many Chinese families. Chery vehicles were the starter car for buyers who wanted to take a step up from the bicycle or electric bike as the primary mode of transportation to work and to the market.
Chery had invited the tier-1 automotive components manufacturer with which I was working to Wuhu to entice the foreign producer into a working relationship with the car maker. Tier-1 suppliers provide their products directly to manufacturers like Ford, GM, and Chrysler for final assembly. My client had decades-long relationships with each of the Big 3 auto makers. Chinese manufacturers in the mid-2000s were looking for the same sort of tie-ups with suppliers in the automotive industry. The Chinese were finding the learning curve for producing quality products difficult to ascend on their own. Auto makers and their government masters also wanted foreign suppliers to teach local suppliers the manufacturing processes the foreign producers had been using to reduce costs, waste, and time to delivery. In addition, they wanted Western vendors to transfer technology to their Chinese partners. For that purpose Chery and the Wuhu government had chosen a domestic company with which it had already been working, albeit with mixed results.
We had met the potential partners for the first time at the Nanjing airport, two brothers from Zhejiang province who had been supplying parts to Chery for the past year. The brothers were tall, swarthy chain smokers, the kind of country-folk who had struck it rich in a way that had become so common throughout China. Both were dressed in black slacks and black polo-style shirts with cheap black leather shoes. Their company had been open just a couple years. Chery was their shot at the big time, they understood—the account was theirs to lose. If the local government and Chery said they needed to work with foreigners to ensure their success, then they would grin and bear it.
The visit to the Chery plant later that day would confirm that the product the brothers were supplying to Chery did need help. One of the executives I accompanied on the trip was a South Korean who had returned to his home country from America. The stout, blunt-speaking executive opened a passenger door of a QQ car that had just rolled off the assembly line. He ran his hand along the rubber seam of the door, prodded the window, shook the door. He slammed the door shut. “No good,” he grunted. A year later Chery would be accused of taking bold shortcuts to upgrade technologies for its brand.
In 2005 a South Korean division of General Motors sued Chery for the wholesale copying of its Daewoo division’s Matiz. General Motors was able to prove without much effort that every part of the vehicle—from the frame through the engine as well as the chassis design—was exactly the same as the automobile the SAIC and GM were building under the GM brand for the Chinese market. A vice-minister of commerce and a vice-director of the State Intellectual Property (IP) Office publicly supported Chery, claiming GM did not properly patent its technology for the Matiz. Eventually, the companies came to a settlement on the dispute. The IP infraction did not thwart Chery’s plans to expand its market overseas. After all, the prize was a slice of the US$553 billion car export market.11
In 2007 American entrepreneur Malcolm Bricklin announced with great fanfare he had signed an agreement with Chery to distribute its QQ sub-compact in America. American consumers, however, gave the thumbs down to the light-weight vehicle. Bricklin quickly retreated from the United States marketplace. Chinese car companies, though, did not give up on partnerships with western groups as a way of entering hallowed foreign markets.12
China’s top five car makers during the first nine months of 2009 sold the European Union market a grand total of 745 vehicles, according to the European Automobile Manufacturers’ Association. Brilliance Auto, Chang’an, Great Wall Motors, Landwind, and Lifan Group hit great walls in the western marketplace involving safety standards and carbon dioxide emissions requirements.13 The companies simply could not meet the expectations of European regulators and consumers with products that were “good enough” for China’s emerging market. German impact tests on cars sold by Brilliance and Landwind ended in catastrophe for the companies in which their cars—rammed against German-made walls—folded like empty beer cans. German media declared the Chinese brands “bad quality,” tarring all Chinese auto exporters into the EU.
Though China had outstripped the United States as the world’s largest car market by the end of 2010, China’s automobile export numbers remained negligible. Chinese car makers had exported about a half-million automobiles in the same period, against the nearly 10 million vehicles they had sold domestically.14 With an export value of about US$7 billion, about 60 percent of China’s automotive exports were to developing countries. Popular markets for Chinese auto exports included Brazil, Venezuela, Indonesia, Burma, Thailand, and the Middle East. China’s car makers also came under pressure in the same year for the same reasons as the country’s ship builders had at the end of the decade: manufacturers had made too many of their products for the market to support at profitable levels.
In 2011, the domestic market share for cars made by local players shrank from nearly 45 percent to 40 percent year-on-year.15 Perception problems involving the poor quality of Chinese-made automobiles prevented buyers at home from investing in the cars. At the same time, government subsidies to consumers to encourage them to buy Chinese models came to an end. In larger cities like Beijing and Shanghai, a government mandate made car ownership prohibitively expensive to a new middle class. Meanwhile, higher-than-average annual inflation rates decreased the purchasing power of middle income families. Domestic car makers responded by continuing to produce their automobiles in droves and by escalating their efforts to pry open the export markets. The railway tragedy involving two high-speed bullet trains in southern China during the summer of 2011 confirmed to consumers at home and abroad what they had wanted to believe all along about Chinese products: unsafe at any cost.
A Ticket to Ride
Just three weeks before the tragic mid-summer train crash in 2011, China and Japan were having a well-publicized shouting match about the bullet train technology China had transferred from foreign joint venture partners. The railway ministry’s spokesman Wang Yongping pontificated, “The Beijing-Shanghai high-speed railway and Japan’s Shinkansen cannot be mentioned in the same breath, as many of the technological indicators used by China’s high-speed railways are far better than those used in Japan’s Shinkansen.”16 Shinkansen is the name the Japanese have for their own high-speed rail network, inaugurated in 1964. The Japanese had had only one accident on their railway—someone had gotten their arm trapped in a closing door in 1985—and they had been vociferously warning the Chinese that the Chinese were running the trains too fast.
“The difference between China and Japan is that in Japan, if one passenger is injured or killed, the cost is prohibitively high,” Yoshiyuki Kasai told the Financial Times. Mr. Kasai was chairman of the Central Japan Railway. “It’s very serious. But China is a country where 10,000 passengers could die every year and no one would make a fuss,” he added.17 The Japanese were understandably distressed Chinese officials were pushing the trains to the safety limit the Japanese had placed on the technology. The Japanese operate their bullet trains some 20 percent under the same limit and did not want the Chinese pointing a finger at Japanese manufacturing prowess or holding the country liable for Chinese hubris.
The Japanese would not have been particularly concerned about the specific number of Chinese casualties in train wrecks but for the inconvenient fact that the Chinese had copied or incorporated Japanese technology into their own shiny new trains. In the case of the Hangzhou-Wenzhou rail line—the scene of the bullet train tragedy—Beijing-based Hollysys Automation Technologies Ltd. had adapted the signal systems equipment Japanese maker Hitachi had made to order for a different rail line in China. Hollysys had expanded the Hitachi equipment to work across much of China, without Hitachi’s knowledge or permission. Hitachi, however, as a matter of company policy, had placed some of the inner workings of the signal system in a “black box.” Black boxes hide the most intimate details of a technology design to make it difficult for buyers to understand and to copy. A senior Hitachi executive said, “It’s still generally a mystery how a company like Hollysys could integrate our equipment into a broader safety-signaling system without intimate knowledge of our know-how.”18 Commercial interests, as well, strained relations between the rail ministries of the two countries.
According to the Japanese, the Chinese had been, for years, exporting high-speed railway technology off the backs of foreign companies forced into joint-venture arrangements and technology-transfer agreements with Chinese State-owned Enterprises. Yuriko Koike, Japan’s former Minister of Defense and National Security Adviser and chairman of the executive council of the Liberal Democratic Party wrote, “Immediately before the Beijing-Shanghai railway was built, the Chinese Ministry for Railways initiated international patent claims concerning the technology used in the CRH380A. It is believed that China has now filed for 21 patents in accordance with the Patent Cooperation Treaty (PCT), with the aim of obtaining patents in Japan, the United States, Brazil, Europe, and Russia.”19 She went on to say, “Since 2003, China has filed for 1,902 patents related to high-speed railways, with 1,421 approved and 481 still being examined. But the 21 recent applications are the first based upon Japanese Shinkansen technology.”20 The Chinese State-owned Enterprise CSR Qingdao Sifang Co. had co-opted its motive technology from the Japanese manufacturer Kawasaki Heavy Industries Ltd. and was going overseas with the technology to under-bid Kawasaki for railway projects. Kawasaki, however, was not the only jilted bride.
Chinese railway SOEs also formed joint ventures with Germany’s Siemens, France’s Alstom, and Canada’s Bombardier, only to become a competitor on the world market against them. Ma Yunshuang, a deputy general manager at CSR Qingdao Sifang, claimed “Our technologies may originate from foreign countries, but it doesn’t mean that what we have now all belongs to them.”21 The technologies China had co-opted from other countries had been instrumental in developing a railway network that was the world’s largest in 2011. By 2020 the railway would stretch some 16,000 kilometers (about 10,000 miles), at an estimated total cost of more than $300 billion.22 In 2011 the Chinese rail system carried about a quarter of global freight and passenger traffic on 6 percent of the world’s lines.23
Some of the largest companies in China related to the railway industry directly benefited from technology transfers from foreign partners: China Railway Construction Co., Ltd.; China Railway Construction (Number 384 on the Fortune 500 list, 2006); MTR Corporation (Number 832 on the Forbes Global 2000 list); and Daqin Railway (Number 1209 on the Forbes Global 2000 list, 2006).
One of the highest profile attempts cited of Chinese re-introducing heavy metal technology into the international market as their own is the case of the bid for the high-speed rail system linking San Francisco and Los Angeles. In 2010 China signed a cooperation agreement with the state of California and General Electric (GE) to build the bullet train route. Japan, Germany, South Korea, Spain, France, and Italy are all interested in getting a piece of the California gold, as well. The Chinese pledged to finance a part of the US$43 billion project, which appealed to California, which has for decades been creaking under the weight of debt.24 The potential tie-up between the Chinese and the Californians was one of the main reasons then Governor Arnold Schwarzenegger visited China in 2010—to add some stardust to the final stamp of approval. The appeal of a Chinese-led rail project in California came down to simple math: it cost about $15 million to put in place a mile of rail-related infrastructure in China; whereas in the United States, costs may run between $40 million to $80 million.25 But California was not China’s first international train stop.
Chinese railway company authorities could have also showcased projects they were already working on in Turkey, Venezuela, and Saudi Arabia. The Saudi Arabia project was launched and completed more as a political gesture to one of the largest suppliers of oil to China than as an infrastructure project that would improve the lives of citizens or the economy. The state-owned China Railway Construction Company Ltd. completed the 20-kilometer long project in 16 months, in November 2010, to ferry nearly 75,000 pilgrims from Mecca to Medina during the annual Hajj. Millions of Muslims travel between the two cities to reinforce their devotion to their faith. The construction company, which was listed in Shanghai and Hong Kong, lost US$600 million on the US$1.2 billion deal. The Economic Observer—a Chinese financial magazine with a streak of independence—professed the Saudi project to have been the worst financial loss by any Chinese company going abroad.26 Hong Kong investors knocked 14 percent off China Railway’s valuation in a single day after the company announced the budget overrun.
Losses, however, were of little concern to SOEs in China. They were too big to fail: The companies commanded industries the leadership deemed strategic—key to the country’s survival and dominance in the world. SOEs performed more of a geopolitical role in international markets than one of profitability.
As a result, Southeast Asian countries were less inclined to press the Chinese on questions of quality, transparency, and accountability, as their governments tended to be more beholden to the economic largesse China provided their exporters and tax collectors.
In 2010 China signed agreements with Laos and Thailand to construct high-speed railways in the southeast Asian countries. The US$7 billion Laotian line would continue to run northward from its capital Vientiane over the Chinese border into Kunming, in China’s southern province of Yunnan.27 In August 2011, Beijing announced that Malaysia would buy 228 trains, the first export deal for Chinese-made bullet trains.28 The CPC’s long-term vision saw high-speed rails connecting Shanghai with Singapore and New Delhi. Passengers would travel between China and India through Burma.29 China’s intentions to expand railway infrastructure throughout the developing countries of Asia reflected the more practical side of its plans to move up the value curve of manufacturing production—and the greatest threat of incursion into markets the West had considered secure.
Selling into Developing Countries
China’s aim to scale the product value ladder by adopting and adapting foreign technologies for domestic use and then to export manufactures was not limited to ships, automobiles, and trains. By the end of 2010 Chinese companies were also busy manufacturing trucks, steam turbines, buses, motorcycles, cruise ships, tractors, cranes, and machines that lift and load goods. Though the central government tenet of indigenous innovation coupled with a lack of adequate governance placed constraints on how far up the ladder of technological sophistication the country could go, huge markets awaited the sort of capital intensive, low-cost heavy metal that was developing China’s interior.
While the global economic downturn of 2008 nearly brought China’s ship-building activities to a halt, it turned out to present an opportunity of a lifetime to heavy vehicle and construction manufacturers in China’s interior. The relatively poor landlocked provinces suffered from a dearth of infrastructure that would create a base for industry in otherwise remote parts of the country. Roads, railways, and airports would also help tie the roughed regions to richer east coast cities and to southeast Asia. National policy would enrich the heavy metal entrepreneurs who would provide the equipment the country required to normalize the economies of the east coast and the rest of China. Most of the manufacturers would be found in the interior, near the lucrative work sites. In 2010 China’s production of construction-related equipment represented as much as 20 percent of global production.30 As the domestic market for the big machines neared saturation in 2011 and as the first wave of many of the largest infrastructure projects launched during the Great Recession neared an end, the machinists turned their sights to the markets of other developing nations.
The economies of the developing countries had been buoyed by China’s and the West’s growing needs for their natural resources. Russian, Middle Eastern, and African oil, as well as Brazilian wood and soy beans brought the regions much needed capital with which to develop their own infrastructures. India, as it continued to liberalize its economy, also became a major purchaser of Chinese construction-related equipment. Cranes, cement trucks, and earth-moving equipment the Chinese sold developing countries were less technologically complex than those of more established multinationals. However, Chinese-made equipment completed the jobs for which they were bought without the additional costs of service contracts and trained maintenance staff. South Korean, Japanese, and American heavy machinery manufacturers saw their leads dwindle dramatically in Brazilian and Russian markets from 2010 onward. Chinese heavy construction products met requirements less exacting than those of sophisticated producers at price points developing nations could afford. The approach permitted the Chinese to create markets for their equipment in the Muslim countries of the Middle East and in Africa.
China’s efforts to conquer export markets for low-cost, technologically sophisticated products—like high-speed trains—may have been misplaced. The indigenous innovation initiative and CCP gerrymandering of domestic industries to meet political (and sometimes personal) expediencies hamstrung the country’s ability to acquire the latest, cutting-edge technologies. Multinationals and national governments understandably resisted transferring such intellectual property. Foreign enterprises understood how Chinese policy would turn their technology contributions against them in the international marketplace. By the time of the tragic train accident of mid-2011, China was hitting a self-imposed ceiling to technological prowess that low price points alone would not be able to breach. Indeed, the low-cost proposition was cementing an image of the country that worked against its efforts to gain credibility in high-end equipment markets. Without positive brand recognition, Chinese companies—no matter how technologically sophisticated the product—would only be able to superficially penetrate western markets. Brand China needed a remake.
Notes
1. Edward Wong, “China’s Railway Minister Loses Post in Corruption Inquiry,” New York Times, February 12, 2011. Available online at www.nytimes.com/2011/02/13/world/asia/13china.html.
2. Simon Rabinovitch, “Crash Threatens China’s High-speed Ambitions,” The Financial Times, July 24, 2011. Available online at www.ft.com/intl/.cms/s/0/f978586e-b5e3–11e0–8bed-00144feabdc0.html#axzz1TBZrNeHZ.
3. Jonathan Shieber, “New Revelations in China’s Railway Corruption Scandal,” Wall Street Journal, China Realtime, March 23, 2011. Available online at http://blogs.wsj.com/chinarealtime/2011/03/23/new-revelations-in-chinas-railway-corruption-scandal/.
4. Li Jing, “Relatives Sorrow Amid Claims and Doubts,” Xinhua, July 28, 2011. Available online at www.ecns.cn/2011/07–28/1154.shtml.
5. James T. Areddy and Norihiko Shirouzu, “China Bullet Trains Trip on Technology,” Wall Street Journal, October 3, 2011. Available online at http://online.wsj.com/article/SB10001424053111904353504576568983658561372.html.
6. Shelly Zhao, “The Politics of China-Africa Oil,” The China Briefing, April 13, 2011. Available online at www.china-briefing.com/news/2011/04/13/the-geopolitics-of-china-african-oil.html.
7. Sam Chambers and Paul French, Oil on Water (London: Zed Books, 2010), 60.
8. Ibid, 39.
9. Ibid.
10. Robert Wright and Simon Rabinovitch, “China Vows to Turn Tide on Flood of Ships,” The Financial Times, November 3, 2011.
11. “Heavy Duty: China’s Next Wave of Exports,” Economist Intelligence Unit Whitepaper, August 2011, 6.
12. “China Cars Face Hurdles to Sell Abroad,” China Daily, April 18, 2007.
13. Qiang Xiaoji, “China’s Automobiles Struggling to Enter EU Market,” China Daily, December 12, 2009.
14. Xu Xiao, “Auto Exports Rise, but Numbers Still Modest,” China Daily, August 22, 2011. Available online at www.chinadaily.com.cn/bizchina/2011–08/22/content_13164406.htm.
15. Wang Chao, “European Cars Boost Sales in Sluggish Chinese Market,” China Daily, July 15, 2011. Available online at http://europe.chinadaily.com.cn/epaper/2011–07/15/content_12910598.htm.
16. Brian Spegle, “Train Spat With China Heats Up,” Wall Street Journal, July 11, 2011. Available online at http://blogs.wsj.com/chinarealtime/2011/07/08/train-spat-with-japan-heats-up/?mod=WSJBlog&mod=chinablog.
17. Jonathan Soble, “Japanese Rail Chief Hits at Beijing,” The Financial Times, April 5, 2010. Available online at www.ft.com/cms/s/0/b2ebd992–40dd-11df-94c2–00144feabdc0.html#ixzz1VuqszJyh.
18. James T. Areddy and Norihiko Shirouzu, “China Bullet Trains Trip on Technology,” Wall Street Journal, October 3, 2011. Available online at http://online.wsj.com/article/SB10001424053111904353504576568983658561372.html.
19. Yuriko Koike, “Unsafe at Any Speed,” TODAYOnline, July 29, 2011. Available online at www.todayonline.com/Commentary/EDC110729–0000049/Unsafe-at-any-speed.
20. Ibid.
21. Brian Spegle, “Train Spat with China Heats Up,” Wall Street Journal, July 11, 2011. Available online at http://blogs.wsj.com/chinarealtime/2011/07/08/train-spat-with-japan-heats-up/?mod=WSJBlog&mod=chinablog.
22. Jason Dean and Jeremy Page, “Trouble on the China Express,” Wall Street Journal, August 1, 2011. Available online at http://online.wsj.com/article/SB10001424053111904800304576474373989319028.html.
23. Simon Rabinovitch, “Crash Threatens China’s High-Speed Ambitions,” The Financial Times, July 24, 2011.
24. Keith Bradsher, “China Is Eager to Bring High-Speed Rail Expertise to the U.S.,” New York Times, April 7, 2010. Available online at www.nytimes.com/2010/04/08/business/global/08rail.html.
25. Michael Wines and Keith Bradsher, “China Rail Chief’s Firing Hints at Trouble,” New York Times, February 17, 2011. Available online at www.nytimes.com/2011/02/18/world/asia/18rail.html?_r=1&pagewanted=all.
26. John Garnaut, “China Inc Goes Off the Rails in Saudi Arabia While Building Mecca Monorail,” November 16, 2010. Available online at www.smh.com.au/business/china-inc-goes-off-the-rails-in-saudi-arabia-while-building-mecca-monorail-20101115–17ud1.html.
27. “China Coming Down the Tracks,” The Economist, January 28, 2011. Available online at www.economist.com/node/17965601.
28. Simon Rabinovitch, “Crash Threatens China’s High-speed Ambitions,” The Financial Times, July 24, 2011. Available online at www.ft.com/intl/cms/s/0/f978586e-b5e3–11e0–8bed-00144feabdc0.html#axzz1TBZrNeHZ.
29. Keith Bradsher, “China Is Eager to Bring High-Speed Rail Expertise to the U.S.,” New York Times, April 7, 2010. www.nytimes.com/2010/04/08/business/global/08rail.html.
30. “Heavy Duty: China’s Next Wave of Exports,” Economist Intelligence Unit Whitepaper, August 2011, 6.