EDITOR'S note:

China has just completed 10 years of World Trade Organization (WTO) membership. How has China changed in the last decade? Here's an interview from Knowledge@Wharton with Wharton management professors Mauro Guillen and Marshall Meyer, and finance professor Franklin Allen.

Q: In the past decade, China has become an export powerhouse. Back in 2001, China's share in global exports was just 4 percent, but now it has become the world's top exporter with a share of 10 percent. How did this come about?

Mauro Guillen: As part of WTO membership, China got access to big global markets, including the US and Europe. This was in exchange for reducing its own trade barriers in the Chinese market.

The other important driver is that Chinese companies have become very competitive over the last 10 years.

They already were in the 1990s, but now they have entered new industries. They have invested in their capital equipment and created new distribution channels. We already see the first Chinese multinationals, like Lenovo or Haier, making progress in global markets. In fact, Haier has become the largest household appliances company in the world.

Franklin Allen: It's partly due to WTO, but a large part of it is just due to the growth of China, which since then has been phenomenal. It has gone from being quite a small economy at that stage in global terms to having overtaken Japan last year and become the second largest economy in the world.



Q: Haier and Lenovo have become global players. Do you see a difference between the way these Chinese multinationals have emerged and previous generations of Asian multinationals from Japan and Korea?

Guillen: There are some common patterns. The Japanese and South Korean - and now Chinese - companies had one advantage going their way, which was they had a protected domestic market while they were still learning how to compete.

So, for many years, Chinese firms had a captive domestic market and they learned how to make things they could see. Then they started to pursue foreign opportunities.

This was the case for Haier.

Haier grew first in the domestic market and then it started to pursue foreign markets - first, by selling products to Wal-Mart or to other American brands.

So, they would make the washing machines for them. Then they started to launch their own brands. That's the common pattern.

That also happened to the Japanese firms in the 1950s and 1960s, and the same thing was true of the Korean firms in the 1970s and 1980s. The big difference with China is ownership. Many of these firms in China have, at some point, at least, been state-owned. That wasn't the case of the Japanese firms or most of the Korean firms.



Q: What lessons can aspiring multinationals from Brazil or India learn from China's experience?

Guillen: One of the biggest lessons is the importance of scale.

Haier, Lenovo, BYD (one of the largest makers of rechargeable batteries in the world) and five or 10 other Chinese multinationals are making great inroads into the global economy. The big lesson, I think, is scale.

The other big lesson is learning the ropes - don't try to accomplish everything at once. First, study the domestic market, and then sell your products to somebody else to put their brand name on them in Europe and the US markets.



Q: Which industries are prime for acquisition by Chinese multinationals?

Guillen: The number one category will be commodified industries. Chinese companies as well as Brazilian and Indian firms will have an interest in buying such companies and divisions of companies.

Why? Because they like scale and they know how to operate on larger scales. Since margins are very low in a commodity industry, whoever is bigger wins.

This has happened in personal computers, which are a commodity. This has started to happen in many categories of electronics, which have also become commodities. This is going to happen also in the lower segments of the automobile industry, which are also very low-margin, very commoditized.

A little later, we will start seeing this in high-tech fields such as aircraft, biotech, possibly even pharmaceuticals - we will see more activity. This will not necessarily be only in the form of acquisitions but also as alliances.



Q: During the decade that China has been in the WTO, which areas have seen the most growth and success and which areas have been relative losers within the Chinese economy?

Guillen: Clearly, the manufacturing and the assembling of goods has been a major engine of growth in China. Chinese companies and manufacturing facilities, regardless of ownership, have become very sophisticated.

The two areas where Chinese firms are still lagging behind are consumer products and financial services. If they don't address that problem, I think it's going to be a bottleneck.

Marshall Meyer: The big winner is manufacturing. Within manufacturing, the big winner is electronics. China's biggest export is electronic goods, computers and the like, not needle goods anymore.

The next sector that has benefited is the automotive sector. Huge quantities of automotive components are coming out of China. Some could argue that the center of the auto industry has moved from Detroit to Shanghai. All this I think is a consequence of WTO.

Where have there been fewer benefits or even negative effects? The answer is the countryside of China. The migration has depleted the countryside of many working-age people. In the documentary film "The Last Train Home," the protagonists are a working couple who leave their children with the grandparents in Sichuan Pprovince and they migrate to work in Shenzhen in Guangdong Province.

Chinese agriculture is in a bind as a consequence of WTO. China has had a number of experiments with land reform.

The effort in 1978 under Deng Xiaoping was pretty successful. With the household responsibility system, they got productivity up.

Today, however, China is still struggling with further land reform.

There were some initiatives to give the peasants control over their land. But they've not really succeeded in assembling large enough plots of land to produce efficiently, even given the low labor cost.

Allen: Obviously, manufacturing has done very well in this environment. Services are still not as forward as manufacturing, so there's a ways to go in terms of globalization in the Chinese economy still.

Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/AE5IAU.