More on China’s Different Cost Perspective
In my recent post, “Industry Week: China’s Different Cost Perspective” and in the related article I wrote for the magazine, I discuss the fact that Chinese managers have a different, and much lower, cost perspective than managers from more developed countries. Briefly stated, when Americans look at a 100 yuan bill, their immediate reaction is to divide by eight, the approximate exchange rate that has been in effect for most of my time in China, and to see the equivalent of $12.50. When Chinese look at that same 100 yuan bill, however, they see the equivalent of $100. In other words, a $100 bill and a 100 yuan bill are looked at and treated exactly the same way in their respective countries, with very important implications for relative economics.
This explains why the Chinese can make things so cheaply, and also begins to explain why there are two markets for any product in China. See “China’s Two Markets.” It also is the single most important reason why companies need to localize their management in China. Quite simply, to have long term success in China, a company’s managers should have the same cost perspective as its customers and its competitors.
This is one of the themes I stress when speaking to various student and business groups in China and the United States in connection with the launch of my book, Managing the Dragon. As I explain to audiences how I came upon this insight and the many ways in which it impacts the daily operations of our business, I can literally see the heads nodding. The Chinese immediately recognize that this is in fact the way that they look at money, and non-Chinese begin to relate what I am saying to their own experiences.
I noticed that The Hindu, a news update service in India, devoted an entire article to this idea, quoting extensively from my book and finding the concept “immensely instructive” in their words. I suspect that a similar phenomenon exists in India and helps account for that country’s cost competitiveness.
Chris Devonshire-Ellis, a longtime friend from Beijing, also found this idea useful and saw fit to write it up in his China Briefing News. Chris had heard me explain my views on China’s lower cost perspective in a presentation I gave at a conference held recently by the Young Presidents Organization recently in Beijing.
One question naturally arises when I discuss this topic, though. Many are curious to know how long the Chinese will have this lower cost perspective, and wonder whether it will quickly go away with all of the wealth now being created in the country. My answer is that it is here for at least one or two generations, and perhaps longer. Once ingrained in an individual’s psyche, something this fundamental tends to remain for a long time. That is why even wealthy people in China still look at money differently than their foreign counterparts.
Also, 900 million people even today live in China’s countryside and subsist on substantially lower levels of annual income than the rest of the country. By definition, this group of people has a much lower cost perspective than individuals from wealthier economies. As China’s economic development continues in the years ahead, many more from this group will be drawn into the country’s economic mainstream. As they do, China’s lower-cost perspective will be constantly reinforced by a new group of participants who will keep it very much alive.
