Western Business is Shooting Itself in the Foot . . . Again.

By Richard Telofski , Contributor, US Daily Review

That China is a business competitor of the West is no secret.

But how China is getting the “brain gain” that can run its companies and factories more efficiently, taking business from Western companies, is not as well-known, nor are the causes of the brain gain or its ultimate consequences for the West.

From 1972 through 2009, China sent almost 1.4 million of its people overseas for the purpose of studying in Western universities. In that time period, only about 400,000 of them returned to China with advanced degrees and expertise in and knowledge of how businesses and research work in other parts of the world. 1 million foreign-educated Chinese chose to remain outside China. However, after 2008 that started to change.

The return of foreign-educated Chinese to their homeland became more of a factor in the competition of international business in 2008, partly because of the Great Recession, which was more pronounced in America and Europe than in China, and partly because of a Chinese government repatriation program named the “Thousand Talents” program. That program has been successful in inducing Western-educated Chinese to return to China.

Known as “haigui,” which in Mandarin means “to return from the ocean,” these “Sea Turtles,” as they are called colloquially in China, have because of the Thousand Talents program started to return to their native land, taking their Western-acquired knowledge with them. It is reported that that program has as a goal the attraction of 2,000 foreign-educated Chinese per year. As of late 2011, the program had successfully repatriated over 1,600 persons.

Now, these are not staggering numbers and certainly represent a very small percentage of the 1 million foreign-educated Chinese still outside of China. But if Western companies are concerned about China as a competitor, and Western companies need be especially concerned with this as the foreign-educated Chinese have been instructed in Western business and research methods, then there is a factor about which Western managers need be more concerned than the Thousand Talents program.

What is that factor?

Economics.

Because factories in China over the past couple of decades have become more intensively used by the world’s companies, the Chinese manufacturing processes have become more efficient. With efficiency comes productivity gains. And with productivity gains come higher wages and salaries. China’s wages and salaries are increasing. And increased compensation is something that can attract the Sea Turtles in much higher numbers than those targeted by the Thousand Talents program.

A study by University of California at Los Angeles (UCLA) researchers last year showed that a primary reason many foreign-educated Chinese remain in the United States is because of a large salary differential with China. But the UCLA research also demonstrates that because the return rate is quite sensitive to salary differential “many more graduates will return to China if the gap continues to narrow.”

Simple economics demands that because of success salaries will rise. The gap will narrow. It has already begun. The impetus for Sea Turtle attraction will occur naturally and will be more a factor in repatriating foreign-educated Chinese than likely will be the Thousand Talents program.

So as Western companies send business to China, seeking efficiency in manufacturing driven partly by lower labor costs, those same Western companies will be simultaneously fueling a repatriation movement or what amounts to a “brain gain” for Chinese business and on the flip-side a “brain drain” for Western companies. Yes, China will then start to become more of a “level-playing” field competitor in that labor costs will begin to equate with the West, albeit slowly. Chinese manufacturing cost advantages will begin to become less significant. But after the manufacturing cost differences are no longer considered attractive by Western companies, ultimately the economics will dictate that much of the brain power Western companies now enjoy from native Chinese will have been lost to the competitor in the Far East.

At that point Western companies will have a competitive problem more serious than a labor cost differential. The brain power problem that Western companies will experience will be significant and in nature similar to a self-inflicted wound, but on a much grander scale.

Yes, this wound will be inflicted by Western companies upon themselves. This won’t be the first time such short-sightedness has impaired Western business and, sadly, it probably won’t be the last.

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Richard Telofski is a competitive strategy and intelligence analyst. Formerly the president of one of the first competitive intelligence consultancies, Richard currently practices at The Kahuna Institute where he studies the effects upon business of non-traditional competitors. He blogs about “The War on Capitalism” at www.Telofski.com.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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