The Midea Group is one of those remarkable rags-to-riches stories that explains a lot about how this booming area of southeast China has become the workshop for the global economy -- and why it was on the itinerary for visiting U.S. journalists sponsored by the nonprofit East-West Center.
Started as a communal enterprise in 1968 by a group of farmers with less than $1,000 and a plan to make plastic bottle caps, it has grown into a powerhouse with $3.5 billion in annual sales, 35,000 employees and a share price that has increased by 20 times in a decade. From a modern, 600-acre complex, it provides the burgeoning Chinese middle class with rice cookers, refrigerators and air conditioners while making vacuum cleaners for Electrolux and appliance parts for General Electric, Sanyo and Toshiba.
But what struck me as I listened to Midea's 32-year-old director of administration is how China's "private sector" is developing along the lines of Japanese and Korean business, with their heavy reliance on diversified conglomerates and cozy relationships with banks and government. His confident assertion that Midea will hit $6 billion in sales by 2006 had more the feel of a state economic plan than an enterprise dependent on unpredictable markets. That Midea's strategy involves buying into the overcrowded auto business and launching a financial-services division in the face of a banking crisis also suggests that this is a company driven more by sales growth than profitability and global competitiveness.
Because of its history, Midea is still classified as a village enterprise -- and what a village it is. Flush with corporate tax revenue, the Shunde district has just completed a $700 million municipal complex that includes an office tower worthy of Citigroup and an Italian-inspired guest house surrounded by reflecting pools and formal gardens. A conversation there with the No. 2 official shattered any notion about a bright line between government and industry in Shunde, where everything from land use to the minimum wage is managed with an eye toward boosting local GDP per person, the measure by which China's communists now keep score.
Then there are the giant, state-owned enterprises, many inefficient and in the red. Last week in Beijing, the deputy chairman of China's central bank was adamant that less-than-creditworthy state enterprises would no longer receive loans at discounted rates now that banks are subject to market discipline from new outside investors. The outlines of this recapitalization became clear the next day when it was announced that the new investors in one of the biggest banks were -- you guessed it -- a trio of state enterprises.
We got another glimpse of how these things work in the western city of Chengdu, where Corning has a joint venture making fiber optic cables. Because Chengdu CCS buys its fiber components from a high-priced U.S. producer (that would be Corning), it struggles to compete against a state-owned company with its own fiber plant. To win customers, Chengdu CCS relies on the quality image that goes with the Corning brand, along with the connections brought by its 49 percent partner, a state-owned enterprise that uses its political connections to win orders from other state-owned enterprises such as China Telecom and China Power.
I mention all this not to be critical. The overwhelming impression after 10 days here is of a country doing a remarkable job providing 50 million new jobs each year, lifting millions out of poverty, building the infrastructure for a modern economy and training an impressive new cadre of professionals.
But in following Japan and Korea, China risks squandering the natural entrepreneurial bent of its people and leaving itself more vulnerable to financial crises while insulating its firms from the market discipline necessary to become truly competitive.
As for Americans, let's not kid ourselves. China is not yet a market economy. Up to a point, there are benefits to importing more Chinese goods and selling them more of our higher-value products. But relying only on market mechanisms is folly. It also requires more active management by the U.S. government, using temporary tariffs, quotas and currency management to ensure that trade is more balanced.