(This is a combined review of two articles (Here be Dragons: The emerging world is teeming with new business models Apr 15th 2010 and Socialist Workers: Is China’s labour market at a turning-point? Jun 10th 2010) from the Economist)
On one hand the emerging economies are being viewed as role models for the western market, on the other they are witnessing unfavourable labour market conditions. Whether the emerging economies will be able to tap its potentials due its typical business model and be able to weather out the labour problems is a matter of concern.
As per an article titled “Here be Dragons” of The Economist two typical business models are gaining grounds in Today’s emerging markets of Asia, Latin America and Middle East: the highly diversified conglomerates and the hybrid state-owned enterprises.
The diversified conglomerates are best reflected by the models of India’s Tata Group and Reliance Industries. Similar models are being followed by small and medium enterprises of China as they are gradually entering different domains. These large conglomerates are believed to be the best to utilise the limited resources of capital and talent in addition to tackle situations of political and financial risks. In a global marketplace, the Westerners see these firms as results of inefficient capital market that forces companies to diversify and such firms will cease to exist as the capital market improves. However, it is crucial to internalize that talent shortage and brand-building are also equally important reasons for existence of such large corporate. Hence, the model will survive even with an improved capital market.
State owned enterprises are typical hybrid forms of government and private business models. They are amphibious by nature- they borrow money from global markets in one moment and plunge money to global market the next moment. China and Russia are the homes to many such hybrids. Middle East and Latin America are also joining the league. Authoritarian governments can use these hybrids to direct economic activity and to maintain their economic influence. Local entrepreneurs can utilize them to explore new business opportunities. Western multinationals can gain access to new markets by help of such organisations. In a global market place such organisations could create confusion- an arm of government or an independent business. Political interference, commitments to state could hinder them to respond appropriately to the market.
The author of the article advises the Westerners to learn from both these typical forms of business models. The three most useful learning could be:
- Replacing scaling up with scaling out. This means participation of a wide range of people in the business processes. Clinics on wheels are examples of such scaling out.
- Replacing “push” model by “pull” model. In the “push” model resources are allocated to the areas of expected demand. In the “pull” model resources are mobilised only when the need arises. In the pull model firms that had fixed armies looking for opportunities become loose networks- reconfiguring themselves in response to a rapidly changing marketplace.
- Applying mass production techniques to sophisticated services. Services that are highly fragmented and geographically rooted could also harness the benefits of economies of scale and scope. This was demonstrated by India’s outsourcing firms. Indian consultancies are also bright example where complex services are delivered despite addressing the need to achieve economies of scale and scope. Henry Ford’s principles are being applied to health sector in India. Lifespring and Aravind eye hospitals are examples where mass production techniques are applied in specialised services.
Though the typical business models provide an advantage to the emerging economy, the article titled “Socialist Workers” describes how China- an emerging country is facing the issues related to labour market which could dampen its advantages in a global market.
China is known for its cost-effective and huge workforce. However, some recent issues related to labour market in China are indicating at a striking change. Recently strikers of a rubber factory in China clashed with the police on issues related to pungent smell of rubber. In the same day Honda faced a strike. Honda had settled the previous dispute with a 24% pay hike only a few days back. Foxconn had to raise its pay by 100% due to workers’ demand. Some economists believe that this indicates to an end of surplus worker in China. Many researchers have predicted that though China’s workforce is growing, the growth rate will be negative within a decade. Thus the faulty assumption that China has an unlimited supply of labour will get washed away.
In 1954 a development economist noted Asia’s overmanned farms, its surfeit of dockworkers and petty traders, and “the young men who rush forward asking to carry your bag”. It was concluded that “over the greater part of Asia, labour is unlimited in supply.” As a result the capitalists had an option to grow without any wage rise. But once the limits are reached the labour had to fall short. Further growth had to demand a wage raise.
Economist Mr Cai believes that China has reached this turning point. Assertive workers and wage rises are symptoms of the turning point. However, the author of the article feels it would be too early to conclude that such a point is reached. Unlike Mr Cai, he reasons the hike freeze of the recessionary market of 2009 for the big pay rises in 2010. He also argues that China has a vast labour force working in agriculture. Their productivity is one-sixth of the rest. Hence, China has a labour pool which could be used for a decade or more.
The wage rise being noticed could also be because of migrants that are less willing to leave home because conditions in China’s hinterland have improved. A government survey of returned migrants found that 30% were not sure whether to venture out again, compared with 24% two years ago.
If we take the case of India, it is also witnessing the wage hike despite a huge labour force. Extrapolating the logic applied by the author for China to India, India also has not reached the turning point where the labour force falls short of demand.
Emerging economies will continue to grow and its typical business models will be able to withstand the changing dynamics in labour market in short runs. But no doubt there is a long-run future where the labour force in the emerging economies will fall short of labour demand. At that time such economies will no longer remain as emerging economies. The capital will shift to new economies with abundant labour making them the new emerging economies.
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