It’s no small secret that China is the place to go if you want something made cheap and in mass quantities. I’m on a mission with my boss/CEO of chumby/venture capitalist–now venture communist (that’s him in the photo up there–no photoshopping, I took that photo of him standing underneath the portrait of Mao in Tiananmen square)–to figure out how to make chumbys cheap and on time. I know it’s a lame excuse, but this is why Name That Ware is late this month. I’ll get a new ware up early next week!

What is shocking is what China really is. China is all at once communist, capitalist, rude, and innocent. It’s the fearsome global economic powerhouse, yet shockingly third-world. It’s a people denied religion, yet cities festooned with Christmas decorations. Communism is essentially gone, and in its place has grown the most terrifyingly capitalistic place on Earth: I think they took Deng Xiaoping to the heart when he declared that “to become rich is glorious.” This blog post, and perhaps a couple more beyond it, are devoted to one American hacker’s view of China.

The most remarkable thing about China are its sheer numbers, and how it compares to America. Most of my numbers are based on what the factories there have told me, so maybe they aren’t correct, but it’s what I’m going by. Here are some of the most interesting ones:

Minimum wage In Shenzhen, the minimum wage is about $0.60/hour. However, there is a very competitive labor market in China–there is a shortage of workers and mobility between factories is unimpaired by employment agreements. Therefore, employers must provide a very competitive benefits package for their employees, which typically includes dormitory housing, food, medical care, schooling, and day care; there are no retirement or unemployment benefits. While technically required to pay tax, many minimum wage workers don’t pay any tax because first, they are migrant workers and the government has no way to find them, and second, their contribution to the tax base is minimal anyways, so why go after them? Also, most local officials can be easily bribed out of collecting full tax monies if you are caught. Furthermore, workers have an 8-hour day, 5 days a week, and employers are required to pay 1.5x overtime and 2x on weekends. As far as I can tell, employers honor this. So in the end, these laborers earn a discretionary income of at least $100 per month, or $1200 per year. This is surprisingly comparable to the $2,075/yr discretionary income of US households that earn under $50,000 (link), which is probably the correct reference point for comparing minimum wage workers in both countries. I haven’t even adjusted for the cost of living difference between China and the US–but let’s just say 100 RMB goes a loooong way if you are just buying food, and not to mention the whole copy-culture of China where you can get “Diesel” jeans for just US$10. Also, the finest hotel suites at the Sheraton Four points in FuTian ran us just over US$100, and includes free internet and water. I could barely get a shack of a room at a Holiday Inn in the Bay Area for US$120, and I had to pay US$12 for internet that night too, with US$5 bottles of water on the table next to me.

Also, minimum wage has increased by 30% per year for the past two years. It’s unclear how sustainable this is, but factory owners seem to see more increases down the pipe and 30% per year is a ridiculous CAGR. Compare this to the history of minimum wage in California.

The fully-burdened rate of a worker in China is around $1.80 it seems–this is the rate that the employer pays once all the benefits (free food, housing, medical care, day care, etc.) are factored in. At these wages, laborers are cheaper than pick-and-place machines. In the US, you typically pay between $0.05-$0.25 per component placed on a PCB with a pick and place machine in low volume (100’s to 1000’s). I saw several electronics lines where about ten workers are lined up on a bench, bending and stuffing resistors and transistors into a moderately complex circuit board, and hand-dipping them in a solder bath. They crank out about 100 boards per hour; each employee is stuffing about four components, so 400 components per hour at $1.80/hour is $0.0045 per component. Setup and training for the line I saw took about 2-3 hours. So even if you were to run a few hundred boards, this is a very cheap assembly method indeed, as long as you can keep good quality control over the process.

The amazing part is that the Shenzhen factories were complaining that labor rates were way too high. Apparently, minimum wage for factories in other regions is much less, so they are seeing contracts migrate away from their factories and inland where labor is cheaper. Think about it–Americans complain about work going to Hong Kong, Hong Kongers complain about work going to Shenzhen, Shenzheners complain about work going inland China, and to Vietnam (apparently Vietnam is the new hotness for cheap skilled labor).

Cost of life I don’t know if this is accurate, but I was told that in China, if you accidentally kill someone, you don’t go to jail. You are fined 50,000 RMB to the family (about USD 6,500) of the victim. Every time you kill someone, the fine goes up, until your fourth incident, where you will go to jail or be sentenced to death yourself, unless you pay off an official. It seems that if you intentionally kill someone, you have to face the Chinese criminal justice system, where essentially you are guilty until proven innocent and your default sentence is death or life in jail, and you have to argue with the judge as to why you deserve less. Not a pleasant system, but if you are consigned to this fate, it makes a little more sense why you see Chinese people nonchalantly walking across busy highways or into opposing traffic. If they get killed, at least their family gets the equivalent of about five years’ salary for their death. I know I saw at least one fatal accident while I was in China. Another interesting index is the price of sex. It seems that in a moral vacuum–remember, religion is not allowed in China–the equivalent of a girl coming up to you in the US and asking you to buy her a drink is for a girl to come up to you and asking you to buy her sex. While I was enjoying a beer at the Hard Rock cafe Beijing, several girls propositioned (of course I said no) but they were very forthright about what they wanted from you (1,000 RMB, or US$128) and what they wanted to do to you for that money (“I give you sex, normally 1,500 but for you 1,000! You very good man!…Why you no want me?”). These women seemed to be there of their own free will, as some were just sitting around doing nothing, just checking out guys, and others were aggressively pursuing men. I guess since the people are not allowed to have a religion, sleeping around has no taboo. Since even a human life has a price, I guess propositioning the relatively wealthy foreigners for sex (and the Hard Rock is sure to attract foreigners) is just par for the course. And despite the “higher morals” of the westerners, it seemed that several of the western-looking men there had no problem doing as the Chinese do when in China, and walking out with two or three women in tow.

This phenomon was a telling indicator of the way the winds are blowing on morality. In the absence of religion, what defines morality? On one side is the nuclear sense of morality that all humans are born with, and on the other side there is the fear of punishment by society/government, and in the middle there are the customs and ideals of society. For example, in America, I think morality is perhaps 5% instinctual morality, 80% customs and traditions, and 15% fear of law and loss. Of that 80% of customs and traditions, the bulk of it springs from the teachings found in the Bible and our Christian foundations. I was talking to some of the locals who were familiar with both Chinese and Western cultures, and it seems that in the absence of religion, the moral code is primarily enforced by family: loyalty, family reputation (or disgrace), and social status. In my naive view of the world, I would say it’s a rather Confucian, rather than Christian, ethic. The new China–with its one child per family policy, and massive emigration from villages to cities–has torn apart the fabric of family, thereby destroying the fabric of morality. Since there is no religion to fill the void, there seems to be a re-balancing of morality. In China’s case, I’d say morality is probably 5% instinctual, 20% customs and traditions, and 75% fear of law and loss, with an overall lower bar for morality. It is interesting to observe how this is very similar to how morality evolves in an MMORPG (Massively Multiplayer On Line Role Playing Game). Religion has nothing to say about how your Avatar’s life should be conducted (hah! What Would Arthas Do?), and there is little rule of law on the servers. Thus, if one was to take a walk through SecondLife, one would commonly find copious quantities of sex-related items for sale, and presumably there are many people who will also sell you virtual sex for Linden dollars. Maybe this is a stretch, but I think the underlying moral lessons are not too different from the scene I saw in the Hard Rock Cafe Beijing.

Consumate corruption Since life and morality both have a defined market price, it’s easy to see how politicians also have their price too. That’s not such a big surprise–corruption is not an uncommon theme about China–but what was interesting is how commoners flip the script on the politicians. In one instance, I saw a road being built, and in front of it I saw sapling banana trees and rice paddies. These weren’t planted in any agrigultural area–they were just these random fields planted in the path of the road. Why? because if the farmers that own the land plant crops in them, the government has to compensate them for the crops that were destroyed. So once the farmers knew a road was going to be built through a particular area, they immediately cultivated the area, knowing that the crops would be wiped out in a matter of months. In another instance, I saw a section of town where a subway was being planned. Once the subway plans were made public, the residents that would be displaced built extensions to their houses, so they could collect more money from the government as compensation for displacement–again, these extensions would never really be used. It seems that the extensions were being made so cheaply that one of them collapsed recently, and killed a worker; this lead to a government investigation, which then lead to the government demolishing all of the sub-standard construction in the area…presumably once the demolition work is done, there won’t be enough time left to rebuild before the subway takes over the residence so the owner(s) won’t gain from his scheme–and of course, a worker lost his life as collateral to all of this.

Despite the consumate corruption, the government is scarily efficient and accomplishing its most important goals. Beijing is in the process of building an enormous Olympic park. They tear down whole neighborhoods and pave roads over them in a matter of weeks. They are building an 11 or 12-route subway system that promises to rival the subway system in Manhattan for connectivity and completeness. Watching this happen reminds me of how I play Sim City. If you’ve ever played the game, you’ve probably remorselessly bulldozed huge sections of Sim Cities that you messed up the planning on, and improved your city’s long-term productivity through doing that. The Beijing government seems to restructure the city with about the same attitude and efficiency…I can’t help but compare this to the Big Dig that I lived through in Boston, and wonder if one can really say that the US government is less corrupt than China, at least when it comes to urban renewal.

Huge population The Hong Kong area has about 7 million people, and Shenzhen has about 9 million. That’s a lot of people in an area comparable to the size of San Diego county. China has 1.3 billion people, or about 4.3 people for every person in the US. I guess that’s why life is so cheap out there, the market has an over-supply. According to the CIA world factbook, China has an excess of 44 million males in the age range of 0-64 years old; 17 million of them are in ages 0-14 alone. This is thanks to the one child per family policy, which is still in place. The ramifications of this are pretty astounding. 10 million military-aged men without spouses means 10 million men who have no obligations to a family or a loved one. Combined with the indoctrination of life being cheap, I suppose China has a pretty significant base of effective military mass to throw into a ground war. The other interesting question is what do these men resort to for entertainment. I’ve heard that drug use is fairly popular in the younger generations. It’s hard to say if homosexuality is common or not. Walking through Shenzhen, I saw at least five or six young men with their arms around each other. I’m cautious about assuming that means they are gay–some cultures endorse heterosexual male-male hugging and greeting kisses–but then again, you don’t see that much out here, and even the boy-girl couples rarely hold hands or put their arms around each other.

Interestingly, I saw factory floors with thousands of people on it, and the composition is about 95% female. I asked one of the factory owners out here, and he said that the women are the hardest working and most skilled component of China today. When I asked where all the men were, he said they were all either gambling or doing hard labor jobs, like construction and hauling. Looking around, that seemed to be about right–there is enormous amounts of construction in China and even a small construction site seemed to have 30-40 men busily working on it.

History and Direct Control In San Diego, a building is old if it’s aged 50 years. In China, bulidings that are 500 years old seem to be a dime a dozen, and they are being torn down as if the government really believed in that. For example, the Hutongs are a delightfully quaint area of the city. They are named as such because “hutong” is the Mongolian word for “water well”, and the ruling Mongols organized the city by the neighborhoods built around water wells. I learned a lot about Chinese history on my brief tour of the Hutongs–I’ll write about this perhaps in another blog post–but unfortunately much of the Hutongs are being demolished to make way for huge highways and modern buildings. It makes me feel sad to see these go away, but at the same time, next to these 500 year old shacks sits the 500 year old palaces of Emperors. It also seems that some of the Hutongs are being preserved.

The other interesting thing is that land is leased to the people–you can’t own land outright. The standard lease length is 70 years. So in general, buildings are built to be knocked down, and the rate of urban churn is fairly high. Buildings a dozen or so years old are routinely knocked down and replaced, as if they are somewhat expendible. The quality of construction also reflects this assumption.

Another thing that I heard which was fairly interesting is that because the government has so much control over its lands, cell phone service is apparently extremely good in this “third-world” country (infrastructure gets placed exactly where it needs to be, regardless of ownership, history or appearances). You can drive from northern Shenzhen to Shenzhen city (about an hour drive through some very rural and very urban areas) and have perfect voice quality on your call and it never drops. Comparatively, it’s a small miracle when I drive the stretch on I-5 from north county San Diego to central San Diego and I don’t drop a call–and this is Qualcomm’s home city, the city where CDMA was invented! (Okay, okay, I use a GSM phone, but the reason why is because Sprint PCS’ CDMA coverage in San Diego is abysmal compared to Cingular’s GSM).

Lack of civil liberties Of course, this is an issue that the international community harps on all the time. It’s hard to say if people are exaggerating things or not. I think as far as factory conditions go, all the ones I visited were decent and people were of an appropriate age to be working there (I’m sure there are sketchier ones but I also bet they don’t allow foreigners to tour them). Employment seems to be “at-will” by and large–hence the need for extensive benefits packages to lure in workers. As I mentioned earlier, it seems that the effective discretionary income of the average low-end Chinese worker is comparable to that of the US. Also, the currency is undervalued, thus making a direct comparison to the US look worse than it is. However, I did see a group of 30 to 40 policemen about to beat up a group of 3 or 4 women and drag them off to jail. It was unclear what their offense was–they looked like out-of-town travellers; they were wearing some rather fancy tribal outfits that were gilded, and their faces looked rough from sun, and they all carried things on their back. What was clear though is that they were not going to make it to their destination. As our car pulled around them, I could hear–almost feel–the electric snap of the tazer guns discharging in the air. The scene made the Rodney King video look farcical in comparison. I was tempted to take a photo but I realized that would be a bad, bad idea–several of the cops were eyeing my foreigner-filled van as we drove by.

It’s also obvious (to an outsider) that the press is government controlled and biased. The writing style and headlining of the China Daily reminds me a lot of The Onion. I think people in China are generally aware that there is propaganda everywhere, but few are willing to confess that openly. However, the people also vote with their feet: it turns out that the Chinese do not trust any media that looks over-produced. Websites that look too slick are discredited; the preferred source of information is from BBSes, websites that look home-made, and home videos shot with Handycams and shared on the web.

Minimal taxes I alluded to this earlier in this (now much longer than I had intended) post, but it’s worth explicitly pointing this out. The facts I’m quoting are based on conversations in Hong Kong, but I’m assuming they are common in China. The maximum tax rate is 17.5%; it’s less if you make less (minimum wage workers generally can dodge taxes it seems). There are no local taxes, no social security tax, no medicare tax, no sales taxes, no alternative minimum tax. There are no capital gains tax, although you pay a minimal tax (I don’t remember exactly what, but I seem to recall about 0.3%) when you buy a stock. If you know the right guy in the goverment, you can get your tax rate lowered if you bribe the official. Thus, there is almost nothing to limit the rate at which you can acquire personal wealth in China, if you are smart about managing your money. This is in stark contrast in the US where it is virtually impossible to break free of the ranks of the upper-middle class into the true upper-class; you pretty much have to win the lottery or have your company go public (also basically winning the lottery) to get past the enormous tax burdens. Remarkably, the infrastructure in China seems pretty robust, although everything is being privatized, including the schools, and if you’re cynical, the local goverment is effectively privatized thanks to the bribing system. While this low-tax system is creating a widening gap between the upper and the lower classes in China, it seems that there is a relatively high rate of people “living the American dream” in China and breaking free of the lower class and making it big–there is a preponderance of mom and pop shops starting up. I presume if you are a native in China, since land is cheap, labor is cheap, and equipment is cheap (you can buy knock-off industrial equipment at low prices), and foreign demand is high, you can start a company for very little coin. It seems that as long as the economy keeps on booming in China, everyone is happy; minimum wages go up by 30% per year and there are ample opportunities to work your way up to being rich.

In the end, I guess the trillion-dollar question is: will the Chinese economy surpass the US? I think, after being on the ground there and seeing where things are going, the answer is an unequivocal yes. While their current position is beneath the US, the first derivative is positive, the second derivative is also positive. Even if the economy were to start cooling down today (second derivative goes negative), I think they have enough inertia to soundly position themselves above the US for total GDP in about a decade or two. Now, the question is, can they accomplish this growth and remain stable? It’s possible, but I think their leadership needs to be very careful. There is definitely a risk of significant social problems for China in the future that could lead to unrest and destabilization of their economy. At least one opinion I heard has it that China is in for big problems as soon as shortly after the 2008 Olympics. If you drive around Beijing, the government is pushing the Olympics everywhere–there are signs, countdown posters, propaganda of all types. You’d think it was just rampant commercialism until you realize the government is behind it, and then all of a sudden it feels almost like war propaganda and jingoism. It’s effective though–the population seems to be rallying behind it–and I have little doubt that Beijing will produce the most fabulous Olympic villiage every created (I saw a scale model in the Beijing city planning office and it’s…huge…). However, once the Olympics are over, there will be a line of people with their hands out waiting to be compensated for their efforts and sacrifices, and the government might not be able to pay up. Also, the influx of foreign money and exposure to foreign spending habits may raise the awareness of the population about how badly China’s fixed currency policy is hurting the common person. The RMB is sorely undervalued; most people in China don’t realize that because they just haven’t been exposed to the buying power of the dollar in China. Should be interesting to see what happens, but at any rate I need to make sure Chumby has some kind of contingency plan just in case we can’t get chumbys made in China anymore due to political unrest.

[editorial note: please also read my follow-up post to address the fair objections to my framework of discussing morality in the context of religion]