海角大神

The land of Nike shoes and plastic Christmas trees 鈥� and 40 percent of China鈥檚 factories 鈥� has been battered by falling foreign demand. But that doesn鈥檛 mean Guangdong Province is sitting idle. A pioneer in 颁丑颈苍补鈥檚 capitalist experiments, it鈥檚 using the country鈥檚 worst slowdown in seven years to push ahead with a complete economic makeover.

Like Japan and the Asian tigers before it, China is moving to loosen the grip of high-volume, low-end manufacturing on its economy 鈥� and transform itself into a corner-office innovator that can dream up an idea and build it to exacting specifications.

Instead of just assembling iPods, in other words, China wants to invent the next 鈥渋t鈥� music player.
In an unusual silver lining, the economic crisis may be helping: By shaking out low-profit companies, it鈥檚 making room for more advanced ones.

The policy is known as 鈥渆mptying the cage, removing the bird,鈥� says Mei Xinyu, a senior researcher at the Ministry of Commerce in Beijing. The slowdown 鈥渟ped up the process.鈥�

颁丑颈苍补鈥檚 Silicon Valley?

Last month, the National Development and Reform Commission announced revised plans to transform Guangdong and neighboring Hong Kong and Macau into a 鈥渟ignificant innovation center鈥� by 2020.

One hundred R&D labs will be set up over the next three years. By 2012, per-capita output in the region should jump 50 percent from 2007, to 80,000 yuan ($11,700) And by 2020, the study predicts, 30 percent of all industrial output should come from high-tech manufacturing.

鈥淲hile some traditional competitive industries such as household appliances, textiles and garments, papermaking, and Chinese herbal medicine will be upgraded to increase competence, inefficient energy-consuming sectors will gradually be phased out,鈥� the plan states.

Low-end factories will have to relocate to cheaper provinces or countries.

For provincial officials, whose standing rises with Guangdong鈥檚 economic performance, that鈥檚 the only way forward. As global recession hit Chinese exports last year, growth in this region dropped to 10.1 percent, from 14.7 percent in 2007.

鈥淩estarting outdated capacities for the sake of growth would just be like drinking poison to quench thirst,鈥� Guangdong鈥檚 Communist Party boss Wang Yang, an advocate of upgrading, wrote in a recent opinion piece.

Still, the economic crisis has forced some compromise. To stem the troubling tide of millions of layoffs, officials decided to prop up the struggling companies they鈥檝e sought to run into the ground, by reinstating an export tax rebate to help them cut costs.

鈥淭hey鈥檙e trying to provide enough benefits to companies so they don鈥檛 go out of business, while at the same time not backtracking too much,鈥� says Arthur Kroeber, head of Dragonomics, a consultancy based in Beijing.

Stimulus measures aim to balance spurring the economy with not sacrificing hi-tech upgrading. The elimination last month of the value-added tax for capital equipment is a case in point, says Mr. Kroeber.

Greener autos

Another example is an auto-industry aid package that halves sales tax on certain cars and subsidizes owners of high-emission vehicles who exchange them for more fuel-efficient, cleaner ones. It also includes a 10 billion yuan ($1.5 billion) fund to promote new technology, including the mass production of electric vehicles.

The Chinese government has deep pockets to help push manufacturing up the value chain, says the Commerce Ministry鈥檚 Mr. Mei 鈥� tapping an array of perks from subsidized infrastructure, tax breaks, investment, and generous government contracts.

Favored companies, like Huawei Technologies, 颁丑颈苍补鈥檚 leading telecommunications equipmentmaker, got free or low-cost land and utilities, says Kroeber.

It also enjoyed liberal policies on resident permits for workers who had the right skills.

From Beijing鈥檚 perspective, the returns are worth the investment. The auto stimulus will benefit companies like BYD (鈥淏uild Your Dream鈥�), a battery manufacturer-turned-carmaker that has advanced 颁丑颈苍补鈥檚 green-car prospects and won it prestige as a globally recognized brand.

Already the world鈥檚 No. 2 batterymaker, it鈥檚 now the first company to have mass-produced hybrid, plug-in vehicles; it has also made an electric car.

鈥淏YD is a key player in the world market,鈥� says Duan Chengwu, an auto industry analyst with Global Insight, based in Shanghai.

The company鈥檚 international profile soared even higher last September when Warren Buffett bought a 10 percent stake in the company. At the Detroit Auto Show in January, BYD models got space on the main show floor 鈥� until then, Chinese carmakers had always been relegated to a basement or foyer.

Needed: workforce upgrade

In addition to putting massive resources into developing the infrastructure of high-tech upgrades, China needs to upgrade its workforce, says Liu Kaiming, head of the Shenzhen-based Institute for Contemporary Observation.

A lavish science park in Dongguan, a nearby factory city, illustrates the mismatch. The expansive campus 鈥� complete with apartments, hospital, school, mall, KFC, and a Hyatt hotel, all built around a natural lake and dotted with saplings and flower beds 鈥� is meant to impress.

But actually upgrading the 鈥渟oftware鈥� of manufacturing takes time. While some A-list companies like Huawei are setting up shop, many of the buildings remain uninhabited.

There are many 鈥渆mpty cages鈥� these days, especially due to the economic crisis, says Mr. Liu. 鈥淏ut they are still waiting for the birds to come.鈥�