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Business Insight: Ballpoint pens and the danger of China's 'one-dragon' policy

In manufacturing, doing it all yourself isn't always the smart choice

Nothing to write home about: China has finally obtained the technology to manufacture ballpoint pen tips.   © Getty Images

On the Chinese corporate scene, "one dragon" refers to an integrated, self-sufficient supply chain. Everything from parts production to assembly and sales is handled within the country, perhaps even by a single company. The term may have been coined because, if you were to sketch out the upstream, midstream and downstream links in the chain, it would resemble a long Chinese dragon.

These days, many are calling for spreading the one-dragon model to more corners of China's economy. So it was no small thing when, in January, Taiyuan Iron & Steel (Group) announced that it had succeeded in producing the necessary materials for the tips of ballpoint pens.

Although China churns out some 38 billion ballpoint pens each year, the metal balls and the tiny sockets that hold them could not be produced domestically. Since Chinese companies lacked the necessary microfabrication technology, these specialty stainless steel parts had to be imported from Japan and Europe.

Now, the Shanxi-based steelmaker has cleared that hurdle. But in focusing on ballpoint parts -- this was a government priority, after all -- is China missing the point?

STUCK IN THE MIDDLE In the division of labor brought on by globalization, China has long played the role of the world's assembler. Deploying its cheap labor, it has turned imported materials and parts into finished products for export. But as labor costs rise in line with economic growth, that role is becoming less and less profitable.

Midstream operations are not that lucrative in the first place. While Apple's iPhones are put together in China, the country retains only 1.8% of the profit, according to local media.

The same dilemma applies to ballpoint pens: No matter how many are produced, China loses much of the profit to other countries as long as it relies on imported parts.

The Chinese government thus launched a project in 2011 to produce the key pen parts domestically, setting aside 60 million yuan ($8.7 million at current rates) for research and development. At a gathering of steelmakers in January 2016, Premier Li Keqiang urged them to rethink their operations, saying, "The materials to produce balls and holding points for ballpoint pens are imported while excess production of steel continues."

Besides pens, another sore spot for China is the QR code system. Japanese autoparts maker Denso created the two-dimensional bar codes for automated sorting and tracing of parts. The codes have spread to product management, ticket sales and payment systems, since they can be read with a smartphone camera. Chinese online payment platforms Alipay and WeChat Pay adopted the codes, too, making them an indispensable tool for e-commerce and retail players in the country.

A recent case involving Shanghai Disneyland tickets, however, has fueled arguments that China should not depend on imported bar code technology -- and that doing so might even undermine national security. An engineer at a company operating the theme park's ticket management system was found to have stolen the code and sold bogus passes.

QR codes are hardly the only option. China has a few systems of its own: the Han Xin code, the Grid Matrix code and the Compact Matrix code, but none have caught on.

The Economic Information Daily quoted Xu Shuncheng, chairman of a Chinese industry alliance of 2-D codes, who blamed a lack of government support for the failure of the domestic systems. The newspaper also pointed out that QR code equipment and technology remain under the control of Japanese companies.

All of this feeds the argument that China is at a disadvantage -- economically as well as in terms of security -- without "one dragon" supply chains.

Ideally, China should produce materials, parts and manufacturing equipment to shift from a low-margin, mass-production economy to a high-profit industrial power. It currently relies on imports or foreign-run plants for aircraft and automobile engines, cameras and semiconductors. For advanced machine tools and medical equipment, it depends on imports almost exclusively.

The same is true for operating systems and other software.

The sense of crisis over China's heavy reliance on imported technology is logical, to an extent. But the country's modern history also shows that riding "one dragon" can be risky.

DRAGONS OR DINOSAURS? When China was isolated from the rest of the world in the 1960s and 1970s, it sought to industrialize under a slogan of "self-reliance." Huge state-owned enterprises were developed, each employing hundreds of thousands of workers. Their operations ran the gamut -- materials procurement, parts production, assembly and sales.

Yet, there was something missing from this model, with its gigantic self-reliant companies: a functioning market mechanism. The resulting inefficiencies and a lack of fresh technology kept the quality of many Chinese products years, even decades, behind those of other countries.

A prime example was the Hongqi luxury car, which China began producing in 1958. But over the next 23 years -- until production of the first-generation vehicle ceased in 1981 due to poor fuel economy and high costs -- only 1,540 units were made.

In contrast to the self-reliant approach, cross-border supply chains have produced some of the world's biggest business success stories.

To make iPhones, for example, Apple gathers high-quality parts wherever it can find them, such as cameras from Sony, display panels from Sharp and chips from Samsung Electronics. It then has Hon Hai Precision Industry, the Taiwanese company better known as Foxconn, and other contract manufacturers assemble the handsets at low cost in China. Apple, meanwhile, develops software and works with other U.S. companies to build apps.

The result: iPhones are stuffed with efficient, cutting-edge tech.

Trade and the division of labor have advanced, in part, because of the realization that specialization and partnerships pay dividends.

This much seems clear: Pen tips are not items that must be produced domestically at any price.

It is hard to say whether homegrown 2-D bar codes are much more important. It might be more useful to spend time and money on, say, new information management systems and security technologies.

Setting priorities is an important part of promoting domestic production. China's drive should start with engines, semiconductors and other products it really needs.

Integrated yet bloated and inefficient state-owned enterprises are more akin to giant dinosaurs than dragons. And like those prehistoric creatures, such systems are vulnerable to changing circumstances.

Hiroshi Murayama is a former correspondent of The Nikkei in Hong Kong, Taipei and Bangkok, who covered politics, economy, and society. He studied in mainland China.

In this "Business Insight" column, we track business activity in Asia, shedding light on changes and structural problems in the region's economy, politics and society.

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