Urbanization, Consumer Power Shaping China

BEIJING — To better understand and predict China, we need to pay attention to six major factors shaping the country: urbanization, Chinese consumers, manufacturing scale, money, brainpower and the Internet, according to two Peking University professors.

Speaking to a group of journalists in Beijing on Friday, Jeffrey Towson and Jonathan Woetzel, professors at Peking University's Guanghua School of Management, said moving from farm to factory will triple the average income for the urban Chinese. Over the next decade, China plans to move 250 million rural dwellers to the city. Woetzel said Chinese migration will drive 70 percent of urban population growth by 2025. By this time, there will be over a billion urban Chinese.

China's urbanization plan will also help spur domestic consumption.

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"U.S. consumers are 68 or 69 percent of the US's GDP. In China, it's 20 or 30 percent. If the U.S. consumer drove the last century's economy globally, Chinese consumers will drive it the next 20 to 50 years. It's the biggest economic force that we know of," said Towson, who along with Woetzel, wrote the "The One Hour China Book." In the the next 10 to 15 years, 50 percent of the world's middle class will be Asian, particularly Chinese, he said.

China is unlike any emerging market, said Towson, who was nicknamed by Time magazine as the "Arabian Warren Buffet" when he was head of direct investments Middle East, North Africa and Asia for Prince Al Waleed of Saudi Arabia.

"In 1980, India and China's GDP per capita were about the same. You look at China's GDP growth from 2011 to today, just the growth, it's bigger than the entire Indian economy," Towson said.

"Most emerging economies are non-functional bureaucracies … they can't make a decision, they don't do anything," he said, explaining that China has its set of problems such as bad debt, but decisions are being made and the infrastructure is being built.
 
As some of China's manufacturers fight to survive, Towson said now is time to "get smart" and upgrade.

"[Manufacturers] have the hardware, now they need the software," he said.

"Chinese manufacturers have two main problems — they're export driven and that's been slowing. Two, their input costs are going up, their labor costs is going up, especially because a lot of these factories are based on the East coast," Towson said, warning that the era of cheap growth is over and now manufacturers are facing profitless growth with rising inputs and slowing revenue.

As a solution, Towson said there needs to be a shift in productivity, moving away from labor intensity to increasing brainpower.

Every year, China pumps out 7 million new college graduates, according to Woetzel.

"You got to have smarter workers, it's not about the cheapest anymore. You got to have machines, robots, management expertise," Towson said, explaining that companies are getting creative, moving their factories inland and opening R&D centers.

"Cheap labor got the ball rolling for China 10 to 15 years ago, but now it's about scale and brainpower, not cost," Towson said. "It's like what Warren Buffet calls 'survival of the fattest,' when you get to a certain scale, your fixed cost is a percentage of your overall cost — you can outspend everybody."