China Catalyst E-Book

David M. Holloman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 281

Veröffentlichungsjahr: 2013

Beschreibung

Maximize your presence in the China market To drive the next round of global growth, companies will need to transition their operations and focus to one that serves the Chinese consumer. China Catalyst examines in-depth the transition currently underway in China from an export-led economic machine to a consumer-driven market. It outlines the economic imperative proving that greater consumer reach in China is a requirement in today's globally competitive market. China Catalyst also provides analysis that segments the market, helping you understand the hotbeds of emerging consumer demand helping prioritize your company's growth expansion in the market. * Provides a current view of the growth and channels of modern retail now growing across the entire market * Considers the importance of understanding China's 'Digital World,' the unique online universe that is critical to reaching new consumers * Explores the current distribution as well as the supply chain trends and challenges that will help form the basis of a distribution strategy fundamental to market expansion Leaders of Fortune 500 companies are beginning to realize that tapping the full growth opportunity in the China market is a requirement. Those companies that successfully make this transition will be among the winners in the next era of global competition. China Catalyst will enable you to be at the forefront in understanding this transition and capitalize on this historic shift.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface

Notes

Acknowledgments

Part I: The New Phase of Global Growth

Chapter 1: Into the Light: China's First Economic Miracle

A System Spirals Out of Control

Chaos Returns

Riding South to Reignite Reform

The Rise of Shenzhen and a New China

Notes

Chapter 2: Economic Transition

Wage Rates Are Increasing Significantly

Foreign Direct Investment Is Evolving

Export-Directed Growth Is Being Challenged

Demographic Megatrends

The Rise of the Chinese Consumer

Notes

Chapter 3: Catalysts for Consumption

Build It Quickly: The Physical Infrastructure to Move Goods and People

Incentives to Increase Consumption

The Free Flow of Capital

Notes

Part II: Markets, Channels, and Capabilities

Chapter 4: One Country, Many Markets

Disposable Income: Who's Got the Most?

Urban Income Growth Rates: Emerging Consumers

Getting a Fuller Picture

Consumer Demand Clusters

Notes

Chapter 5: Channels to a Growing Market

An Overview of China's Major Channels to Market

A Closer Look at China's Top Brick-and-Mortar Retailers

Notes

Chapter 6: Guan Xi Goes Online

An Overview of China's Digital World

The E-Commerce Rocket

E-Logistics: The New Core Capability

The Influence of Social Media

Go Where the People Are

Notes

Chapter 7: Distribution Issues and Trends

Overview of the Distribution Structure

Closing the Consumer Trust Gap

Distribution Trends

Retailer-Supplier Partnerships

Notes

Chapter 8: Hefei: Home of the World's Next-Generation Consumer

Life in the Middle

China's Sibling

Hefei Rises

Big Retail Moves In

Notes

Part III: Forging Ahead

Chapter 9: Go Deep: The Emerging Go-to-Market Retail Model

The Emerging Go-to-Market Model

Targeting Demand Clusters and Expanding Out

Expanding In

The Implications for Retailers and Manufacturers

IT as an Enabler

Notes

Chapter 10: The New Export Machine

Two Examples of China-Based Innovation: Kraft Foods and the Coca-Cola Company

Switching the Innovation Gear

Digital Culture

Multichannel Innovation

Notes

Chapter 11: The Path Forward

Challenges at a Crossroad

Final Thoughts on Strategy

Conclusion

Notes

About the Author

Index

Cover Design and Image: Wiley

Copyright © 2013 by Dave Holloman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Printed in the United States of America Holloman, Dave M., 1969– China catalyst : powering global growth by reaching the fastest growing consumer markets in the world / Dave M. Holloman. pages cm Includes bibliographical references and index. ISBN 978-1-118-41129-2 (cloth); ISBN 978-1-118-66127-7 (ebk.); ISBN 978-1-118-66127-7 (ebk.); ISBN 978-1-118-41770-6 (ebk.) 1. China—Commerce. 2. China—Foreign economic relations. 3. Investments, Foreign—China. 4. International business enterprises—China. 5. Economic development—China. I. Title. HF3836.5.H65 2013 382.0951—dc23

2013005967

Preface

Reaching the Chinese consumer will be one of the defining economic and business challenges of this decade.

China's economy is in the middle of a robust transition to an economy that is rapidly becoming consumer led. This book will cover the steps companies are taking to supply the Chinese consumer and fuel their next phase of growth. Corporate leaders have realized that tapping the full growth opportunity in the Chinese market is now a competitive requirement.

Before the 2007 recession, growth in emerging markets was often viewed as an opportunity for additional leverage—something that was viewed as a “nice to have.” Not anymore. Now, with U.S. consumer spending levels expected to remain low and western Europe's economic austerity projected to last years, capturing growth in the Chinese market is more important than ever. Some estimates indicate that the Chinese consumer will contribute more than a quarter of global consumption within the next 15 years.

Despite this opportunity, many companies are not yet fully equipped with the knowledge and organization to reach the Chinese consumer. Just how do you reach 1 billion consumers, anyway? The answer to that question involves a reconfiguration of many companies' approaches to the market across the full spectrum of their operations. Companies will need to transition from a primarily export-driven supply chain to a supply chain that both promotes and serves domestic demand. They will need to change their historical focus from a few regions of the country to its breadth and localize products not just for one market but for many.

It will not be easy; the journey will be full of challenges and hard choices. The purpose of this book is to outline the economic imperative, provide a baseline for the vast differences in the market, explore how the consumer market continues to evolve, and begin to outline strategies for how companies can successfully increase their market presence. The companies that successfully make this transition will be among the winners in the next phase of global growth. This new growth phase is just beginning, and this book will enable the reader to be at the forefront in understanding and taking advantage of this historic shift.

When was the last time you looked at a map of China? Do you know where the city of Chengdu is? Chengdu will have a population of more than 10 million people within 10 years or so. Do you know the difference between Sichuan and Shenzhen? The difference in income, consumer savings, the propensity to buy, and what consumers will buy is significant. In 2011–2012, the 10 fastest growing cities in the world by gross domestic product (GDP) were all in China. Beijing and Shanghai were not on the list. Instead, the 10 fastest growing cities in the world include Chongqing, Shenyang, Hefei, and Wuhan.1 All of them lie west of China's coast, the epicenter of the country's rise onto the world's economic stage. Increasingly, these cities will be where the competitive battles for global market share will be won and lost.

The odds are that you will be looking at a map of China a lot more in the coming years. The ability to comprehend the consumer opportunity it now represents and to help claim it will be an integral part of most companies' futures. This book is designed to provide that knowledge. It will help the reader gain the insights to deliver that growth and reach the consumers who will be a driving component in the global growth engine. It will enable supply chain executives, market planners, and business strategists with more tools to operate at the forefront of this market transition.

This book is organized into three distinct parts of discovery and learning:

Part I, “The New Phase of Global Growth,” provides historical context. Chapter 1 examines how China emerged from a state of turbulence in the twentieth century to its current state of economic ascendancy. In Chapter 2, the extraordinary transition currently underway is examined in depth, demonstrating how a consumer-led economy is becoming a reality. Current industry data and research along with demographic trends form the economic imperative for companies to act with a sense of urgency. Chapter 3 outlines the catalysts driving increased market access and growth across the country.Part II, “Markets, Channels, and Capabilities,” explores the new hot spots of demand as China's economic expansion broadens. Chapter 4 provides a fact-based geographical segmentation of the market. This segmentation helps to identify the demand hot spots and provides an example for how companies can effectively organize their strategies and operations. Chapter 5 outlines the consumer channels to market, highlighting the growth of modern retail alongside the institutions that are the legacies of a state-run economy. No survey of China's consumers can be complete without addressing the unique online world in the market. Chapter 6 provides an overview of China's digital world and how it uniquely influences how consumers search for, buy, and consume products. Distribution capability has often been a do-it-yourself proposition in the market, and its current trends and challenges are outlined in Chapter 7. Chapter 8 provides a deep profile of a high-growth city where the next round of consumer growth is occurring.Part III, “Forging Ahead,” provides a consolidation of market dynamics, evolution, and the future state of the retail model in the Chinese market. Chapter 9 discusses the fact that as emerging markets begin setting the global growth agenda, innovations created and proven in China will be increasingly exported abroad. China as a new center of innovation and its implications are covered in Chapter 10, and Chapter 11 provides some final thoughts on strategic options and the implications for companies seeking to reach more consumers in the market.

Throughout the book, sidebars will raise awareness about the actions that leading companies with long track records are taking to develop their markets. We will also explore how the flow of goods reaches the consumer.

In April 2012, China became the largest grocery market in the world.2 This follows what is becoming an increasingly familiar pattern of “largest market” awards. From cars to appliances, China is becoming the largest source of current and future growth. Yet the upside and vast potential of this is just now being tapped.

As of this writing, however, gray clouds are forming once again over the global economy. Unlike the financial crisis of 2007, the current economic slowdown has China in its crosshairs as well. This book is about the future that lies beyond the horizon of immediate concerns. A new era, dominated by the Chinese consumer, is beginning to take shape. Whether the process is slowed by economic austerity or accelerated, the emergence of China's consumer economy will happen, and it is time to prepare.

I hope you find that this book deepens your understanding of the vast opportunity at hand, the challenges presented by it, and the paths to seize and capture the next phase of global growth.

Notes

1. Derek Thompson, “2012's Fastest Growing (and Shrinking) Cities,” Atlantic Cities, December 1, 2012, www.theatlanticcities.com.

2. “Grocers' Green, China Overtakes America to Become the World's Largest Grocery Market,” Economist, April 10, 2012, www.economist.com/blogs/graphicdetail/2012/04/daily-chart-3.

Acknowledgments

I once heard a story about a grade school boy who was very late in starting a required research report on birds. He was panicking at the amount of work he needed to accomplish at the last hours prior to the assignment's deadine. His older sister calmed him down by advising him to think about the assignment in steps. “Take it bird by bird,” she said. This story, told to me as I started to write this book, is an example of the kind words and encouragement I received along the way. There are too many examples like this to count.

The vision, dedication, and perseverance it takes to finish a book is never a solo effort. It is the product of many people who encourage, review, suggest, edit, contribute, and plan. It is also the product of shared inspiration. I have been unbelievably fortunate to be affiliated with so many people in my career who have planted seeds of inspiration that ultimately led to this book. Although I cannot thank everyone who provided help along the way, certain people deserve a special note of thanks.

These thanks begin with the special folks at the Kellogg Graduate School of Management at Northwestern University. After being admitted into the university many years ago, the school has been a source of learning and pride. The professors who instructed me were the highest example of passion for the pursuit of new knowledge that continues to inspire. Dr. David Besanko, one of the brightest, committed professors anywhere, was always willing to offer advice and encouragement. Dr. Sunil Chopra welcomed me into his office to exchange ideas and provide connections to others who would help. Paul Christensen offered to review portions of the manuscript and was generous with his times and ideas. Amid a busy schedule teaching the next generation of business leaders, pushing the boundaries of research, and leading the school into new areas, each somehow found time to return my e-mails within a day, always with offers of advice and encouragement.

Fellow Kellogg alumnus Dan Frey, currently leading the China office at ZS Associates, was a wonderful source of feedback and ideas on the book. His time and perspective working with his clients in the market proved an invaluable contribution. Sundi Aiyer, an old colleague and friend, similarly provided long e-mails full of wonderful ideas. His many years of experience working across Asia served as an excellent sounding board. A special thanks to Anita Slomski, a friend and professional writer, for her encouragement, optimism, and can-do attitude when all I could see was the long road ahead.

The staff at John Wiley & Sons was superb. The editors' patience and collaborative style moved us steadily forward to a manuscript that is no doubt much better than anything I could have written alone.

I also owe a debt of gratitude to my colleagues at IBM, whose tireless energy and unswerving dedication to clients is a reservoir that never runs dry. Kris Pederson has always, throughout my career, encouraged me to push the boundaries of current thinking into new areas. This book would not have been possible without these colleagues' many examples and encouragement throughout the years.

This book would also not have been possible without the support of my family. My wonderful wife, Shan, generously looked the other way while I was sequestered in the home office for many weekends of writing. My son, Evan, who shares a passion for the creative process, always offered “cool” as a response to any report on the current ups and downs of book research and writing. My daughter, Kacey, with her broad smile and pure, unfiltered excitement, offered more encouragement than she knows and got me back on track when I needed it.

To those listed here and to all my other friends and colleagues who listened and encouraged, thank you. Each of you helped me make a small contribution and a dream come true.

PART I

The New Phase of Global Growth

CHAPTER 1

Into the Light: China's First Economic Miracle

It is better to let half of the people die so that the other half can eat their fill.

—Chairman Mao Zedong

Past is not always prologue. Poverty can turn into prosperity. Nations and people do change for the better and progress. For China, that progress has come in the last four decades. The growing middle class across the emerging world has been led in both pace and size by China. As incomes grow, middle-class aspirations are increasingly displacing more basic concerns.

It was not always this way. In fact, China's recent history in the last 100 years has been largely defined by the quest for individual survival. China rivals any country in the world for the amount of suffering its citizens endured during the twentieth century. Grim catastrophe is a description that seems to vastly understate the plight of the Chinese people at points in the last century.

At the hands of both its own rulers and occupiers, China's people were catapulted through multiple chaotic periods of oppression. The twentieth century began with revolution and the downfall of emperor-led rule. The 1911 revolution overthrew the Qing dynasty, which had ruled since the year 1644. After its overthrow, regional fiefdoms emerged ruled by warlords. China changed its head of state 6 times and its prime minister 22 times between 1917 and 1928.1 During the same time frame, hundreds of mutinies and interprovincial wars occurred. Anarchy often prevailed: whoever controlled the local army at any given time ruled the day. The stability of the country suffered.

The Kuomintang Party emerged to unify the country. By 1928, its armies fought their way to make it the recognized governing party of the country. Officially, the country had become unified. In reality, many factions of the warlord period remained and were stoked by another emerging force: the Communist Party of China. Founded in Shanghai in 1921 and supported by the new Soviet regime, the Communists challenged the Kuomintang's authority from the start. Ethnic rebellions started to occur as well. Banditry filled the vacuum created by the inability to implement the rule of law.

In response, the Kuomintang fed its totalitarian tendencies and cracked down hard. Self-labeled as the Nationalists, the Kuomintang developed a reputation for iron-fisted tactics and fascist rule. The Communists pushed back and moved the country yet again toward war. The darkness of warlord anarchy, replaced by totalitarian rule, was then followed by the prospect and onset of civil war.

Enter Japan. The Japanese ended the escalation toward civil war as they began their invasion and occupation throughout Asia. They added to the bloodshed and misery through their ruthless occupation of China during World War II. Their atrocities have been well documented: the Japanese army raped and pillaged its way across much of the country, perpetrating the mass murder of 4 million Chinese.

At the end of World War II, warlord rule, civil war, and foreign occupation had taken its toll on China. About 10 million Chinese had died fighting the Japanese occupation. In the years immediately after World War II, another 5 million died in a struggle to determine the country's rulers. Chiang Kai-shek and his authoritarian Kuomintang Party were chased to the island of Taiwan as the Communists prevailed, taking power in 1949.

Within the first 50 years of the twentieth century, more than 20 million Chinese had died prematurely. After so much carnage, the peasant army seized control and announced a strong, unified nation that would put the people in charge. The governing party promised to be the instrument for China's march toward an Eden of prosperity. It was, for the foreseeable future, not to be.

What followed was bloodier still. The proposed paradise soon turned into inescapable evil for China's inhabitants. Mao's fight for power over the next few decades ultimately destroyed the country's institutions and decimated the elements of civil society. Millions starved in one of the greatest famines ever known. Families were separated. People were beaten, tortured, and killed in untold numbers. The country spiraled into lawlessness and economic decline.

In the years immediately after the Communist revolution, Chairman Mao became determined to overtake the Soviet Union as the world's preeminent communist power. Mao had relied on Joseph Stalin and the Soviets for years for aid to his army. The quid pro quo for this aid was Soviet influence on the tactics and strategy Mao was pursuing. All too often, Mao thought he had to placate the Soviets. He finally became tired of playing the perceived second fiddle and saw the opportunity to lead the push toward a communist-dominated world.

But progress was slow in China. The early efforts to collectivize society met with meager results. The moderate elements within the Communist Party called for a more gradual and mixed path toward a centralized economy. But Mao's ambition continued to burn, and he viewed challenges to his economic plans as threats to his seat of power. He began purging those he viewed as threats from the party ranks. Any subordinate who offered anything other than unflinching support and admiration was labeled a “rightist.” Having this label stick meant the end of one's political career, political exile, and no options. Fearing for their jobs, Mao's lieutenants provided unswerving support, delivered as worship, of the country's leader.

Mao was determined to prove the communist model superior to Western capitalism, so he promised to overtake Britain in the industrial output of steel in a few years. His plan called for implementing radical changes down to the lowest levels of society. The country's citizens would be organized into one large, unified labor force. In the countryside, all aspects of farming would be collectivized. Individual lands would be confiscated to form large agricultural communes. People in the cities would be mobilized into industry. Large grand designs to dam and redirect rivers would be initiated to tap the power of nature and lead to newfound gains in energy and output.

Raising grain output was the linchpin of the strategy. Surplus grain output would feed the urban industrial workforce and would also be exported. Large volumes of grain would be sold to pay off the country's debt, which was viewed as a sign of dependency that should quickly be shed. Selling grain would also fund the central planning goal of building up the country's steel industry. Most important, surplus grain would serve as a beacon to the world, signaling the country's growing vitality and the superiority of the communist system. Grain output would be the litmus test of success.

Beginning in the late 1950s, Chairman Mao called for a plan he dubbed the Great Leap Forward to implement these strategies. The nation was militarized. Army uniforms became the regular dress. Kitchens were collectivized. Backyard furnaces were built to burn scrap metal in service to the state plan. Everyone carried their pots and pans to government collection points to be melted into steel. After that, people ate at the pleasure of the state, based on the government's definition of merit. A revolution had begun, but it would soon turn into horror.

A System Spirals Out of Control

Fear of persecution drove the country into a downward spiral. The initial months of the campaign filled Chairman Mao with increasing enthusiasm. Provinces kept reporting grain yields that exceeded the planned targets. Mao was overjoyed. A confident Mao boasted that the country would not know what to do with all of its excess grain. And much of the world believed it. Visiting dignitaries were taken to show villages, token communes full of happy workers producing a world full of joy and abundance.

In reality, mass starvation was beginning to take root. The reports of grain yields surpassing planned targets continued to be inflated as severe punishments were meted out to the provinces that failed to reach their assigned targets. The practice became rampant at every level in the reporting chain. The central government took its allotted amount, which continued to increase, and funneled it to the urban areas and for export, leaving little for the rural laborers to consume.

Yet the output targets kept increasing. Faced with the fear of their own persecution, government officials escalated the harsh treatment of rural workers, determined to reach ever-rising targets with fewer resources. People forced into labor were eating less and working more in the harshest of conditions. As food production continued to plummet, starvation became a decision made by the government officials in the field. Women, children, and the elderly were often fed last, since they were either unable to work or less productive. Those who did not pull their weight or who fell out of favor were denied food. When the food ran out, the citizens were left to forage, feeding on roots and mud to stay alive.

China's landscape became barren. People's homes were torn down to feed the backyard furnaces designed to boost steel production. Anything melted in the furnaces was largely useless for producing industrial-grade steel, but targets and the threat of persecution drove collective madness. Any structure that could burn was burned, and anything that could be melted went into the furnace. Those who resisted were tortured. Imagine a group of people working under armed guard across a barren landscape, and you will start to grasp the desolation unfolding across China during this time. There were no houses; they had been torn down and burned. There were no trees. There was only the promise of gruel coming from work and unswerving obedience. Chaos set in.

After nearly four years, as the evidence finally came to light, the Great Leap Forward came to an end. Current estimates suggest that more than 45 million people died in four years from unnatural causes. Most died in the famine. Millions died in the struggles that preceded the mass starvation, including through suicide and torture. “It is impossible not to beat people to death,” a county leader said during the campaign.

The true size of the catastrophe would remain unknown to the world for decades, and it still remains little-known relative to the other great famines and genocides of comparable size in world history. It was not until the late 1990s that accounts and facts began to surface suggesting the massive scale of the disaster. Even today, there is no recognition or trace of the Great Leap Forward in China. The government denies many of the facts; it admits that a famine occurred but says it was caused by natural forces.

The Great Leap Forward is a ghost, but a young one. Only 60 years old, this and the other campaigns have left a shadow over the country, and many wonder whether the nation has fully come to grips with its recent tragic history.2

Chaos Returns

After the Great Leap Forward's disastrous results, Chairman Mao was challenged by moderates in the governing Communist Party, who emerged to take a more prominent role in determining the country's economic direction. Simultaneously, Mao began laying the groundwork for “continuous revolution,” which would ultimately lead the country back into chaos. Fearing his continued political vulnerability, Mao worked to reestablish his power base in the years after the Great Leap Forward.

Quietly, he purged his enemies from the governing ranks and laid the foundation for a political campaign that would once again give rise to his absolute power. He did so by enlisting the country's youth in loose organizations that became known as the Red Guards. This political campaign, starting in 1966 and lasting through 1976, became known as the Cultural Revolution. Universities closed and industry shut down as millions were sent to the countryside for “education through labor.”

The Red Guards became increasingly empowered and accountable to no one. Their passion was used to bully and abuse those who threatened the chairman's power. The Red Guards set about destroying the country's cultural relics that competed with the philosophical primacy of communism. Those who were branded as “bourgeois” or “intellectuals”—basically, anyone with more than a middle school education or a background that suggested anything other than total allegiance to the Communist Party—could be, and were, targeted for brutal public harassment and reeducation in the labor camps.

The nation was turned upside down, with its citizens more concerned again about daily survival than the pursuit of any kind of standard of living associated with the modern world. With a 1966 dictate from Mao prohibiting the police from intervening in Red Guard actions, society descended into lawlessness. Chairman Mao's death in 1976 closed the chapter on this awful period. Persecuted moderates reestablished their power and began to pick up the pieces of a broken society.3

Once the nation started rebuilding itself, it did so under the economic and governing control of the state-run, Stalinist model. People's housing was controlled by their employers, who administered almost every aspect of people's lives. This was referred to at the time by the Chinese term danwei, which means “work unit.” This economic structure, composed of the central planning of industry down to the day-to-day administration of the workers, ensured a draconian control of party doctrine. For example, the requirement that Chinese citizens obtain the permission of their state-run employers to marry officially ended only in 2003.

Outside working hours, individual lives were watched closely by street committees. The head of each local street committee lived in an apartment provided by the government. A network of informers updated the head of the street committee about people's whereabouts. These informers knew who received visitors. Apartment inspections were instigated at a moment's notice, on a whim, without any oversight. The street committee granted the right of a married couple to have a family.

Political sessions were yet another element of the state-designed system of control, and they were usually dominated by coercion and mental abuse. There was no escaping the prying eyes of the state. Perceived violations, which could happen simply by falling out of favor with the head of one's street committee or work unit supervisor, could mean imprisonment, coercion, bad work assignments, and family separations through work assignments.

These times of political campaigns and political control gave way to the modern rise of guan xi. The Chinese concept of guan xi has been written about extensively. In recent years, it has often been presented as a gateway to understanding Chinese culture and an insight to doing business in the country. Loosely translated as “connections” and “relationships,” guan xi is a central organizing premise of Chinese culture. Its cultural understanding is deep, and it taps into a system of personal connections that is the lubricant of Chinese society. Before it became fashionable, guan xi's practice formed an underground economy that enabled people to survive through favor and exchange in such a draconian system and a society marked by scarcity. In those days, currency was not widely available, and a barter economy developed. Usually, what was bartered was access to scarce resources or influence within the control apparatus of the state.

The oppressive implementation of Mao's political campaigns virtually eliminated the consumer economy. In 1957, just before the launch of the Great Leap Forward, about 1 million retail outlets existed in the country. By 1981, at the close of the Great Leap Forward and the Cultural Revolution, the number of stores had shrunk to 190,000. At the same time, China's population had increased from 600 million to 1 billion. In the capital city, the number of restaurants had plummeted from more than 10,000 to fewer than 700.4

Life had turned dark. The Communist regime's emphasis on heavy industry through central planning gutted the consumer market. Scarcity was rampant across all categories, which resulted in the rationing of consumer goods like food, furniture, and housing. The practice of using connections became a substitute for a just and equitable system in a society of scarcity. Though unwritten, it became the primary organizing premise of society. Things like marriage approvals, work unit assignments, and housing all operated in politicized, bureaucratic structures. Generations of favor exchanges between people were called on to inject personal connections into these structures. All the practical considerations of life were accomplished by subverting the current system through personal connections that enabled one to go “through the back door.”5

A country in economic tatters was what moderate Communist Party member Deng Xiaoping inherited after his reemergence as a party leader at the end of the Cultural Revolution. In the generation that endured the Great Leap Forward and the Cultural Revolution, the economic results reveal the tragedy of lost time and ruined lives. During the two decades of political campaigns, the standard of living for urban citizens stagnated. Rural citizens' standard of living remained at the same level as in the 1930s.

As other Asian countries, such as Japan and South Korea, emerged in the late 1970s with thriving economies, China remained economically static and poor. The nation's economic infrastructure was also splintered. After years of neglect of education, illiteracy was rampant; some estimates are that 45 percent of the population was illiterate. The collectivization of agriculture had resulted in a food supply insufficient to meet the needs of the country.

Figure 1.1 outlines the economic contraction during the two political campaigns. In the years preceding the death of Mao Zedong, the influences driving the chaos of the Cultural Revolution waned, moderates like Deng Xiaoping were restored to power, and a more rapid pace of economic growth began. As the era of political campaigns ended and reform began, China's economy, despite the country's great size and resources, was roughly only the size of Italy's.

Figure 1.1 People's Republic of China, Gross Domestic Product (1952–1976)

This backdrop and economic inheritance drove Deng's actions as he took the reins of power. Starting in 1978, Deng unfurled a set of economic reforms that laid the foundation for dramatic change. This included the privatization of agriculture, the legalization of private enterprise, the loosening of the production of state-run firms from government-imposed quotas, and invitations to foreign investors. “Socialism does not mean shared poverty,” he once said.6