[SCMP Column] Time for Wimps to Lead

December 14, 2015

For most of my life, there has been a prevailing view that “real men” don’t do services. Real men “make stuff”. They wear protective boots, and lumberjack shirts, and tinker on Saturdays under the hood of a sports car, or over a motorbike. From this world view, guys who do services are wimps. They are guys that can’t get real jobs. Or they are women.

Until recently, this macho world view prevailed in China too. It is not an accident that Beijing’s government is dominated by engineers. China’s “real men” build dams, or high speed trains, or melt steel. And they make “stuff” for the rest of the world to consume, from industrial chemicals to manhole covers.

As someone who has raised two daughters on the back of a life in services – as a journalist and more recently as a trade policy consultant – I find this prevailing view threatening and offensive. It is time to fight back – perhaps along with the 94% of Hong Kong people who, as wimps or women, who also provide services.

And it seems that at last China’s engineer-dominated government is beginning to discover the value of services. From about two years ago, Beijing officials began to acknowledge the importance of developing services if the economy as a whole was going to continue to grow strongly – and generate middle class incomes for families across the country.

By this year, services are claimed to account for 51% of China’s GDP, up from 44% in 2011. The government says that key drivers have been financial services, education services and healthcare services. I noticed last week that China is also set soon to become the world’s biggest movie market. The Martian, from 21st Century Fox, opened in China last month with first-weekend box-office takings of $50 million – compared with just over $54 million in the US. The country added more than 1,000 cinemas and almost 5,400 screens this year – taking the national total to 23,600 . That is lower than 40,000 in the US, but growing at such a clip that it is soon expected to overtake the US. Entertainment services are clearly a good place to be.

I sense China’s officials first sniffed the importance of the “non-macho” services world in 2010 with the publication by the Tokyo-based ADB Institute of a study that broke down the value chain of an iPhone. At that point, there was great pride in the fact that Foxconn’s Dongguan factories produced literally all of the world’s iPhones. But what the ADBI study showed was that out of the US$500 final retail value of an iPhone, just $7 of that value was earned or retained inside China. It was clear that China was at a very bad place in the iPhone value chain, and that the real money was being earned and retained in many services that sat elsewhere along the iPhone supply chain. If China was to shift to a better place on the value chain, then its “real men” had to learn new skills, and those skills had to be in services. Services providers may be wimps, but they were better paid wimps.

Since this discovery, China has moved hard and fast to build its services economy. Recent research driven by former WTO Chief Economist Patrick Low and a team in Hong Kong, along with researchers in APEC’s Policy Support Unit, has provided even more provocative food for thought. In researching over 40 manufacturing industry case studies, they have found consistently that even manufactured goods are mainly services. One fresh cherry exporter from Chile had 72 services embedded in its value chain. A Chilean wine exporter had 70. A Hong Kong watch exporter had 43. A Mexican company that made brake hose end fittings had 54 services in its value chain.

The studies showed that if a manufacturer wanted to be locally or internationally competitive then the services it consumed had to be cheap and efficient. In particular, competitively delivered financial services, IT services, and logistics services were crucial. A government that protected local service suppliers from international competition critically weakened its manufacturers.

Few companies actually even “discovered” or recognized these services embedded in their manufacturing value chains until they for one reason or another had to outsource them. And once they did outsource them, thousands of local SMEs benefited.

For many in government – and China’s leaders have been no exception – this discovery has been a revelation. It is like looking across a breakfast table at your wife and realizing she is not just your wife, but a prettily packaged container of water. After all, humans are about 65% water. For water, read services: that glistening Mercedes sports is not a car, but a bundle of hundreds of services. Its price difference compared with a Toyota Camry is all attributable to quality-generating services.

Another good thing about services is that they tend to be non-polluting, and generate rather little CO2. That perhaps explains why officials at the Paris COP21 talks have been so stunned to discover that CO2 emissions may have fallen in the past year (by an estimated 0.6%) compared with the 2 to 3% annual growth recorded since 2000. As they have groped for an explanation, it seems the main reason for the fall is the collapse in coal-burning over the past year in China. From an average 6.7% emissions growth over the past decade, China’s CO2 emissions grew at barely 1% last year, and may have fallen by nearly 4% this year. Chinese growth built on making “stuff” for world markets carried a high price in terms of emissions and pollution.

Growth based on services – whether health care or education or entertainment services, or services embedded in a bottle of wine – is clearly good for global warming, and good for the environment, and delivers higher value, and higher incomes at the same time. No wonder China’s leaders have recently become such passionate advocates for services-based growth. We wimps may win the day yet.
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