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How did China and Shenzhen entrepreneurs grow to be one of the leading economic superpowers?

They chose manufacturing.

They started with being better and efficient at copying other countries’s products. That led to them being dubbed the kings of “knock-offs.”

Does copying other people’s products work?

Copying with a strategy seemed to worked.

Copying and producing products has taught them to understand how products are made.

They invested in and perfect the manufacturing process.

They became the manufacturing backroom of the world.

By opening up an iPhone and seeing how it is configured, wired and how it works, they were able to learn how to make a phone and use that blueprint to make your phone.

It is easier to learn from other’s products than start from scratch learning how to make a product from no product at all.

This process short-circuit your learning process, because you don’t have to reinvent something that has already been done, and you also don’t have to make the same mistakes that were made by the initial producers of a product.

They started making knock-off phones and slowly grew to come up with competitive products such as Huawie, Samsung.

Here is a ranking of the global smartphone industry globally:

  1. Iphone
  2. Samsung
  3. Huawei
  4. Xiaomi
  5. Others

Moving from kings of “knock-offs” to transforming to be the top 3 in the top 4 global brands in market share is nothing to laugh at. Huawei is a Shenzhen brand.

How did Shenzhen entrepreneurs grew to be millionaires in the absence of a heritage of rich parents like Silicon Valley entrepreneurs did?

Their government was Shenzhen entrepreneurs’s rich parent.

China’s government played a pivotal role in building the Chinese economy and using that strength to support their local entrepreneurs.

Here is a three step approach:

  • Encourage local manufacturing;
  • Support local entrepreneurs in manufacturing;
  • Protect local industries by blocking or discouraging foreign products through high import tariffs; and
  • Like Silicon Valley’s mantra Go Big or Go Home, Shenzhen’s mantra manufacture big and export or go home.

In his amazing and provocative book How Asia Works: Success and Failure of the World’s Most Dynamic Regions, Joe Studwell makes the case that by closing off their economies to foreign products, and encouraging and supporting local entrepreneurs, Asian countries were able to rise to be competitive players globally.

So here is the paraphrased thesis of Joe Studwell’s book.

China has a 1,4 billion population. China has managed to lift about 80% of it’s population out of extreme poverty. So you have a say 1 billion people market that has buying power. So what China do? Close off the market and block foreign products, encourage local entrepreneurs to replicate foreign products and then sell to 1 billion of the locals.

There is no Facebook, Google, Amazon, ebay, Uber, or YouTube just mention a few in China. These are not accessible in China, or have been blocked.

Instead what the Chinese government encouraged through it’s local entrepreneurs is Tencent [Facebook], Baidu [Google], Didi [Uber], Alibaba [Amazon], Youku [YouTube].

It took Uber five years to get to a billion rides, and it took Didi, it’s Chinese rival just one year [2015] to get a billion rides.

Everything is bigger in China.

Some of the American companies tried to enter the Chinese market and were either outright blocked, or those who made it, were someone chocked or made it hard for them to operate profitably they ended up closing doors.

In 2004, eBay had just entered China and was planning to dominate the China market. Alibaba was a local Chinese company that helped small- and medium-sized enterprises conducting business online. Most people in the West had barely heard about it.

Through some serious business wars between ebay and Jack Ma’s Alibaba, ebay made some serious mistakes and ended up pulling out of China.

First, eBay failed to recognise that the Chinese market and the business environment are very different from that of the West. EBay sent a German manager to lead the China operation and brought in a chief technology officer from the United States. Neither one spoke Chinese or understood the local market. It was eBay’s biggest mistake.

Second, because the top management team did not understand the local market, they spent a lot of money doing the wrong things, such as advertising on the Internet in a country where small businesses did not use the Internet. The fact that eBay had a strong brand in the United States did not mean it would be a strong brand in China.

Third, rather than adapt products and services to local customers, eBay stuck to its “global platform,” which again did not fit local customers’ tastes and preferences.

So protecting local entrepreneurs against foreign competitors proved to work well in China and most Asian countries.

In his book How Asia Work, Joe Studwell says the following:

“What created the Canons, the Samsungs, the Acers and so on in Japan, Korea and Taiwan was the marriage of infant industry protection and market forces, involving [initially] subsidised exports and competition between manufacturers that vied for state support.”

To discourage foreign products to enter the local market this is what he says:

“Imported consumer goods were either banned or enormously expensive due to high tariffs.”

There is a huge backlash against what Joe Studwell is saying. A number of papers and arguments have been made about why economic protectionism is bad for global economies.

The World Economic Forum in their article Why protectionism spells trouble for global economic growth argues that protectionism results in local economies being inefficient.

“Since the time of Adam Smith [or maybe even before], open and competitive markets have been seen as most likely to maximize output by directing resources more productively. Tariffs, on the other hand, encourage both the deflection of trade to inefficient producers and smuggling in order to evade them; such distortions reduce any beneficial effects. Further, consumers lose more from tariffs than producers gain, so there is deadweight loss.”

Harvard Business Review, in their article titled Why Protectionism Doesn’t Pay say:

“Protection is an extremely costly, unpredictable, and inefficient device for saving jobs. Indeed, by encouraging relocation and automation, by screening domestic producers from competition, and by raising production costs, it may actually reduce the number of jobs in some industries. And even if protection temporarily preserves jobs, the effects wane with time while workers elsewhere in the economy may actually be harmed.”

So why is Joe Studwell arguing for something that according to economist results in inefficiencies?

There is a slight difference here.

According to Joe, in order to develop a country, you need to protect it from foreign competitors. This is like a premature baby. You need to put a premature baby in an incubator, feed them until they are strong enough to breathe on their own.

Government, especially in Africa will have to consider this. But don’t just protect for the sake of protecting.

Protect and encourage local innovators and entrepreneurs to build capacity and compete among themselves.

This way you are able to develop local entrepreneurs and grow them to a point that they are able to compete with foreign companies.

Like a premature baby who leaves the incubator, once the local entrepreneurs have been strengthen and have capacity, unleash them to fend for themselves in the global market.

According to Joe Studwell, it is unfair to say developing countries must not protect their economies, when in fact first world developed countries protected their economies when they were still not developed.

The USA did apply protectionism during the 19th century

What can Africa learn from Shenzhen entrepreneurs?

Can the Asian miracle as spelled out in How Asia Work happen in Africa?

So what are Studwell’s answers to the multi-trillion-rand question of why some Asian countries developed rapidly and others [Philippines, Indonesia, Thailand] did not? He offers a simple, three-part formula:

  1. Create conditions for small farmers to thrive.
  2. Use the proceeds from agricultural surpluses to build a manufacturing base that is tooled from the start to produce exports.
  3. Nurture both these sectors [small farming and export-oriented manufacturing] with financial institutions closely controlled by the government.

This is how USA developed it is Silicon Valley through protecting and supporting entrepreneurs, this is how China developed it is Shenzhen entrepreneurs through manufacturing and protecting it is market and this his how Africa can develop, vigorously support entrepreneurs, protect infant industries, encourage your entrepreneurs to export vigorously.

Don’t support entrepreneurs who are not willing to export, successful Asian countries became successful because they vigorously encouraged and supported to export.

Go big or home.

In South Africa, we don’t have the rich entrepreneurship heritage that Silicon Valley entrepreneurs has, how will we get around that? I will discuss this in my last article on this series.

 

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