Factory of the World

When Deng Xiaoping opened China for reform in 1978, the country had just gotten over the cultural revolution which had pulled back the economy by two decades. The GDP per Capital and GDP were barely US$229 and US$218.5 billion respectively. The same indexes in 2016 were US$8,126 and US$11,203 billion. Life was miserable, and the majority of the population was impoverished. The nation was a socialist state and factories were inefficient with low productivity. Technologies were backward. Nevertheless, I am sure the Chinese were happy that the revolution was finally over. Life had returned to normal and everyone was looking to move forward. The reform allowed people to enjoy small freedoms from the rigid economy control and planning. Farmers were the first group to experience the fruits of the reform. They were allowed selling excess produce in the market. The extra income immediately made them the envy of others. Then came the workers who would work as shoe-shine peddlers or hawkers on the street at night and seamstresses working at home at night to make some extra income. After a period of time, some workers made enough money to rent small shops. They were slowly adopting capitalism in their economy development and becoming their own bosses. The change was positive as the Chinese had quickly learned that you had to work hard if you wanted to make extra money. Gone were the days with iron rice bowl! Clinching that PO Shortly thereafter, in the 1990s, the central Chinese government allowed state owned factories to be bought over by the management team and workers. The managers saw the opportunity and pooled money from friends, relatives, and coworkers to buy over factories or companies at a very low price. After that happened, attention was immediately focused on improving productivity and quality. The managers put in hard work to keep the factory running. With the sudden surge of economic activities, the demand went up and factories began making good profits which benefitted the managers and workers. More factories wanted to join the ranks and immediately, the snowball effect had factories booming with phenomenal growth. I remember that when I first visited Shenzhen in 1993, I hardly saw any family cars on the road. I was utterly surprised to see many big Mercedes Benzes, BMWs and Lexus cars instead. After careful observation of the cars which were mostly chauffeur driven, I believed the cars were actually company cars. Now, major cities are clogged with all kind of vehicles. Many middle-income families are driving sedans and SUVs. The central and local government provided many incentives in term of tax rebates to local factories clinching foreign purchased orders (PO). More incentives and preferential treatments were also provided to foreign companies to set up factories and companies in China. All these help the nation to earn U.S. dollars, beefing up the treasury. The government needed the revenue to improve infrastructure development (such as highways, airports, seaports, housings, schools, hospitals, etc.), research and development centers, test centers, military, and so on. The Canton Fair which has been held twice yearly (April and October) since 1957 attracts thousands of foreign buyers flocking to the mega fair in Guangzhou to source products. Previously, not all factories had import and export licenses to trade. All trading with foreign countries had to be managed by state owned Import/Export (I/E) enterprises so that all foreign currencies could be controlled by the Foreign Exchange Bureau. Thus, the foreign buyers were actually dealing with these I/E Enterprises at the Canton Fair. These enterprises represented the factories from their own town or county. In early 2000, some large Chinese companies and corporations were given import and export licenses to manage their own trading. In a short period of time, the restrictions were completely lifted and any factory today can now apply for an I/E license. There are still some factories that prefer the trading company to act as middleman when dealing with foreign buyers. The main reasons are to avoid currency exchange rate risk (they are paid by the I/E Enterprise in RMB and usual have 30-day credit terms); bank interest due to long payment (credit) terms demanded by foreign buyers (usually 60 days or more); and the hiring of English speaker staff to deal with the buyers. The whole nation has gone full steam ahead to focus on business development. Government officials’ priority is to bring in more direct foreign investments and some cities are offering very attractive incentives and preferential treatments to entice foreign enterprises and factories. Officials believe these foreign companies offer a good salary to local workers thus bringing more income to residents and improving living standards, increasing GDP, and generating revenues that can be spent on the development of the city. The zeal to do business and make money became a formidable force. All tactics were applied to please the buyers. Chinese companies provided their foreign counterparts with outstanding service, immediate replies, committed quality and delivery, engineering and administrative support, cost reduction programs, continuous quality improvement programs, etc. Unscrupulous manufacturers offered forgeries, bribery, expensive gifts, extravagant banquets, KTV (karaoke TV), special “leisure” hotel rooms where prostitutes were provided, etc. It was a Wild Wild West in China during the two decades after 1990! Fortunately, these practices have now been outlawed and curbed!

Excerpt from "Understanding China" (www.understandingchina.net)