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When you hear ‘Made in China,’ what do you think of?

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I bet that most people in New Zealand associate ‘Made in China’ with products that are cheap, dodgy or a rip-off.

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That may have been mostly accurate 20 years ago, but in 2022? Not so much… The truth is that China is actually in a similar position to where Japan used to be.

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In today’s newsletter, I’m going to do a bit of a comparison between the two countries then talk about how it impacts us in New Zealand.

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“Made in Japan = cheap and nasty”

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^ That was the sentiment that most Westerners had about Japanese products a few generations ago.

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But what about today?

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That statement sounds ridiculous. For decades now Japan has been leading the way when it comes to manufacturing, technology, and effective business practices.

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It didn’t use to be that way, but after World War II, Japan transformed itself. They went through an ‘economic miracle’ and pulled themselves up to become the second-largest economy in the world (for a time).

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There were many reasons for this change, but one of the biggest drives came directly from entrepreneurs building great companies.

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That’s what I think a lot of people miss today. It’s easy to think that countries are ‘built’ by their governments, but often the practical, real-world growth comes from innovative companies that create value for their employees, shareholders, and customers. That’s what happened in Japan, and that’s what I see happening in China.

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One of the companies that changed what ‘made in Japan’ was Sony

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Sony was started after World War II by a group of engineers in Tokyo. The war had only recently finished, and the company’s first building actually had visible bomb damage on the outside.

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They started off doing radio repairs, then tried and failed to get into the home appliance market. One of their products was a rice-cooker that either overcooked or undercooked the rice. Not a great start.

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However, things changed when they started building transistor radios. Regular radios were larger in size and used a lot more power, but transistor radios were smaller, portable, and more energy-efficient.

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Sony’s original company name “Tokyo Tsushin Kenkyujo” alienated foreign markets, so they changed the name to ‘Sony,’ a combination of the Latin root word for sound and the term ‘sonny.’ From there they continued to create new lines of radios, got into television and sound systems, then grew into the multi-media company that it is today – creating TVs, gaming systems, cameras, audio systems, and films.

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Now the company makes a ridiculous amount of revenue. It was about $85 billion in 2021.

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During the 60s and 70s as Sony grew, it changed what ‘made in Japan’ meant. It wasn’t through a government policy put out by the Japanese Government; it was through making an impact on the lives of regular people by providing them with great products. They made consumer electronics that were reliable, innovative, and served a real need in the market. That’s how the perceptions changed.

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I think the reason Sony’s founders were so driven to keep going was because of their surroundings. They literally rose up out of the ashes of Japan. They’d seen where the cheapness had gotten their country and wanted to create something long-lasting and reliable. They wanted that for their company, and most importantly, for their country.

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How Sony’s growth relates to China today

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Now China hasn’t gone through any devastation like a World War in the past few decades, but it does have similarities to post-war Japan.

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Before the Communists took over in China, it went through ‘the century of humiliation,’ where it was constantly controlled, divided, and attacked by foreign powers. Then there was the disaster of the ‘Great Leap Forward’ where millions of peasants starved to death under Mao Zedong.

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It was only when China opened itself up to foreign investment and adopted more free-market policies that things started to change.

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You can see it on a graph of their GDP. It’d be obvious to a 5-year-old. Before the 2000s, China was relatively poor, but then it spikes.

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Not exactly ‘breaking news,’ but many people forget how dramatic the change has been and how recent as well. Hundreds of millions of people have been pulled up from poverty.

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So, in China, there’s a feeling that for decades they have been kept down (the CCP blames foreign countries of course) but now they can have their time in the sun. The country has a shared vision that’s further emphasized by the ruling party – that China can be #1. In the West, we don’t have that sort of vision.

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Most Western companies are focused on themselves, but in China, many of their companies naturally see themselves as a part of this rising tide of the country as a whole. Yes, they can be just as (or more) profit-driven as any other company, but it has more meaning because they’re a part of the overall growth of China.

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Then there’s Toyota

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The second company from Japan’s history I want to quickly look at is Toyota.

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There used to be a time when Americans bought mostly American cars, and imports were treated with suspicion. American cars were loud, bulky, powerful, but notorious for ‘guzzling gas.’

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Then there was the energy crisis of the 70s, and suddenly people wanted cars that were smaller and energy-efficient – and Toyota was poised to take that share of the market. While American companies struggled to make their cars profitable under the new demands and regulations, Toyota was able to deliver what people wanted.

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Why?

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There are two main reasons.

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First is that Toyota had an incredibly effective production system. It was consciously developed from 1948 onwards and was focused on reducing waste, preventing overwhelm, and increasing efficiency.

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It was a precursor to ‘just-in-time’ style of manufacturing, that’s become common practice all over the world.

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That meant when consumers wanted more energy-efficient cars and when governments made more regulations, Toyota was able to deliver and still earn a profit, while those American car companies and others struggled to meet the demand and make money.

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The second reason is the company’s business philosophy known as the ‘Toyota Way.’

One of the basic ideas at Toyota is never to give in to short-term gain at the expense of long-term growth. This was not how American car companies thought at the time. They were notorious for going after profits first rather than making quality products.

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So, the culture changed, from Americans (and Westerners) being sceptical of Japanese vehicles to preferring them to cars made in their own country. That’s the short version of how Toyota helped changed what ‘made in Japan’ meant.

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DJI drones represent the new ‘made in China.’

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10 years ago, most people didn’t know anything about drones. Now they are used across many different industries and are a popular consumer product. The company that made this possible was DJI drones, which have about 70% share of the drone market worldwide and were the first drone company to hit the 1 billion revenue mark.

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These drones aren’t cheap or poorly made, but rather represent the cutting edge of the available technology. DJI’s drones have been used by police, film companies, hobbyists, photographers, and even the military. Even a few of our clients have used DJI drones for projects on their farms.

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If you have a look at some of these drones, it’s pretty mind-blowing what they can do and how quickly they’ve advanced over the past years.

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Their first consumer drone was released in 2013, so in less than 10 years the company has become the leader in the industry. With every year they’ve come out with new models that push the available technology to the limits, with better cameras, longer battery life etc.

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To me, DJI is an example of how rapidly companies can grow in China. Think of it, from basically 0 to 1 billion dollars in revenue in less than 10 years. Some Kiwis who have worked in China have complained that our business culture is a bit too ‘slow and steady,’ whereas in China you either keep up or go out of business.

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Another thing about DJI is the fact they are innovators. ‘Made in China’ didn’t just use to mean cheap. The term was also associated with copycats. A company builds something revolutionary, then a Chinese company copies that product and builds a more affordable version that’s pretty much the same in everything except the name.

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Well, that’s not how it is with DJI. They’re the ones doing the innovating, with other companies copying them. They aren’t just a manufacturer taking orders from an overseas company, they are the ones coming up with the new drones as well as building them.

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Where that leaves us – the ‘new’ China

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In many ways, I think China is where Japan was a few decades ago.

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If we look at the economies of the two countries on a basic growth cycle, then Japan seems to have already hit its peak, while China is still growing.

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Since the 90s, Japan has been going through the ‘lost decades,’ where the economy has stagnated. That’s not to say great stuff isn’t still being done there, but it no longer has the ‘blue skies’ like China has.

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Even with the restrictions and dangers that come with a One-Party Government, more and more leading companies are being found in China rather than in other parts of the world. The situation you get is a classic high-risk, high-growth market, where there’s lots of potential but less predictability.

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Whether you’re ‘pro-China,’ neutral, apathetic, or you don’t like anything about that country, for effective decision-making, you must have an accurate mental model of what’s going on in the country. If New Zealand is running on old data, then our political and economic decisions to do with China will be misguided.