Out with the Old…
November 7th, 2008 by AdministratorOut with the Old…
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Well, the elections in the U.S. just came to a historic conclusion, and amidst those rejoicing and those preaching gloom and doom, there is a general agreement that the United States has done something “new.” What was once thought absolutely inconceivable just two generations ago is a reality. It doesn’t mean that the old racist attitudes and systems are a thing of the past (I think some unfortunate events during the campaign proved that this is not the case). However, everyone I have talked to — from all points on the political spectrum — feels that we have, to some extent, sloughed off the “old” way of thinking and are in some “new” territory.
In today’s podcast, I want to talk about this transition from the “old” to the “new” — but I would like to apply it to today’s environment of global business. And the subject was not originally inspired by the election, though I personally found it very inspiring. Rather, it came from a note sent to me by Scott Tong, a friend of mine who is a journalist with Marketplace at National Public Radio. He said he wanted to talk about “this big-picture existential conversation about the U.S.-China ‘global imbalance’ — Chinese oversave, Americans overconsume and it’s unhealthy for both sides. Do you ever think about that? Does it overlap with your work?”
I was going to send him back some piffle, but once I started writing, I just kept going. By the time I looked up, I had written some massive treatise to what was, possibly, just an interesting question on his part but from which I had departed on my own rant. It might still be piffle, and there is a lot of that, but I thought it would make an interesting and timely subject for this week’s podcast, given the global pondering of the old and the new. So if you hear Scott address this issue on his program, I would believe him before me (he has a much larger audience and gets paid to do that besides!). Anyway, here is what I wrote to him…
Hmmm… “Is there an unhealthy global imbalance between U.S. over-consumers and Chinese under-consumers?” Interesting question, but I think it is actually just as practical as it is existential, in part because it is using the language of an “old” way of thinking. In our business, we deal with this all the time in the microcosm of an individual company trying to balance out supply and demand in their own chain. The problem is that the road we took into this mess is not the one that will take us out, and we are always working with companies to get them to see this.
For example, a company might have built their current business structure (and size and profitability) on the foundation of a stable, predictable (and, typically, growing) U.S. demand. Sure, they might have international sales too, but their real bread and butter is their domestic market. Some of them have been doing this for generations and their company structure and culture is based on it. And its not just small companies — most of the bigger companies are still, by far, larger in their markets of origin than they are in other markets (there are a few exceptions like GE, but they are exceptions and not the rule).
Of course, this is logical: you would expect to be strongest in the market where you began. And when times are good, that’s not necessarily a bad thing. But fast forward to today where one of the most stable, predictable (and growing) markets is China — and the U.S. is unstable, wildly unpredictable and in recession (and Europe, in many ways, is even worse). Asking about U.S. vs. Chinese consumption in this environment always comes up with a messy answer, in part because it does not account for all the inputs of this new situation. And the typical company does not have the resources or the experience to deal with something like this.
This is a brand new machine, and they see all these buttons and levers in front of them and they don’t know which to push and pull (and in what order) for good things to happen. In fact, most American companies are still in denial and think global expansion is optional. Our European friends look at Americans and just shake their heads. They know that going global is not optional, and, in fact, many of them are here ahead of us. And most Asian economies were built on going global and, like China, have to learn how to rely more on their domestic markets.
Expand this out to the macro economies of the world and you see the problem magnified. We can talk about “U.S. consumption” and “Chinese savings,” but those are just broad (and fundamentally inaccurate) descriptions of a phenomenon that we really don’t have the language to describe yet. By calling it an “existential question,” you already know that to reduce the issue to a drop in U.S. consumption and “stuck” Chinese savings does not do justice to the problem. But we are talking two languages here: the first is the language of a business culture in which the West are consumers and Asia are producers — U.S. demand drives global markets and U.S. money funds global growth.
The second is the language of truly global commerce where supply and demand is not just filled — it is actually created and the people with the money could be anywhere. To introduce (and probably butcher) yet another metaphor, it’s like going from doing math to playing jazz. There are relationships between the two of them, and mathematic principles can be identified within jazz. But we know that to explain jazz using only mathematics does not do justice to what jazz really is.
So this is where the existentialism comes in — in that we are in the process of, literally, creating a new culture with different words, syntax, rules of behavior, and internal logic systems. Certainly, the new culture has its roots in the old, but there are fundamental ways of thinking that we are all catching up to. And, in the spirit of true existentialism, it trends toward the absurd.
The problem comes in our natural tendency to frame the question as Scott did (and as I would do): that the drop in U.S. consumption might be able to be counterbalanced by getting these Chinese people to stop saving so dang much money (on average 50 percent of their total incomes). But what we are saying is that, the way we got into this mess — by the U.S. consuming a basket of goods and services and driving the global economy — is the same way to get out, just replacing U.S. consumers with Chinese. But fundamentally, it’s the same old junk that we are consuming! This is the old way of thinking, not new.
I look at this as somewhat similar to the Internet economy created in the ’90s. The fuel of our growth was not an increase in consumption on one side and a decrease in savings on the other. We did not find new markets for our old products. Rather, we created a whole new economy with new products, services and ways of generating value (and money) that had never been dreamed of before — and this resulted in new markets and new consumers. In fact, we got so excited about this new thing that we got into trouble thinking that the “new” business culture so transcended its predecessor that it eradicated the “old” business culture’s stodgy views of business principles — pesky things like revenues and profits!
Thankfully, I think that we are beyond that now. The Internet did not re-divide the economic pie — it made the pie bigger and gave us a few cakes, cookies and kick-ass, double-fudge chocolate brownies to boot! The “new” global business culture, yet to be defined, is not a zero-sum game where an increase on one side means a necessary reduction on the other — where a U.S. company going global means that a guy named Wang in Guangzhou gets a job but a guy named Johnson in Chicago loses one.
If done correctly, and in thoughtful and careful response to real market conditions, a U.S. company expanding operations overseas can actually grow their base business at home. A client of mine who has opened a new factory in China went through this with their employees, dealing with the fear that expanding in China would mean that people in the U.S. would lose jobs. When the management did the analysis, they found that for every $1 of investment they made overseas, they grew by $2.17 in their home office. Certainly, they lost low-value manufacturing jobs but they hired a bunch more higher-value jobs (engineering, customer services, sales, etc.) to support that growth. In fact, they have had to hire so many people that they cannot keep up and are, in fact, “exporting jobs” to China because they cannot find enough people to fill them in the U.S. This is the absurdity of what is coming.
There is talk in the U.S. in some circles about the creation of an “Apollo Program” for environmental technologies — mirroring the moon program in the 1960s where massive amounts of public and private funding were invested into putting a man on the moon. Given the undisputed environmental mess we have foisted upon our planet through our “old” way of thinking, the idea is that the creation of new technologies and products to solve this mess will result in new markets and customers — growing the entire pie instead of arguing over who got the bigger piece.
There are some very exciting things happening here in China, not only in environmental technologies but in other areas as well: medical, energy, communications — the list goes on and on. But we can no longer talk about shifting consumption from the worn out husk of the U.S. to some other, fresher and more unsuspecting country. That will just dig us further deeper into a hole we already cannot get out of.
Thanks for listening to the China Business Podcast. Remember our motto: “In China, everything is possible, but nothing is easy.” We’ll see you next time.
