China Business Blog and Podcast

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Length – 14:00

In our recent Podcast series, we have been talking with Bill Powell, senior writer for Time and Fortune magazines, based in Shanghai.  In the last Podcast, we got into, what I thought, was a VERY interesting discussion about the uniqueness of what is going on in China these days.  Literally, what we are seeing in China is unprecedented … never before has an economy (and a society) grown and changed so much in such a short period of time.  Understanding it, let alone predicting it, is very difficult and we are all, in a sense, working without a script.  We talked earlier about what the U.S. and other Western economies could learn from China … to wrap up our conversation, I started by asking Bill what he thought China could (and should) learn from the West …

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Length – 6:43

Those who have been doing business in China for awhile are quite familiar with the differences between the State-Owned Enterprises (SOEs) and the Privately-Owned Enterprises (POEs).  For those of you not familiar with this distinction, let me break it down for you.  The POEs are just that, companies owned privately with little or no government involvement – they are often run by business-savvy executives with global business experience.  The SOEs, to put it succinctly, are seen as hulking, unprofitable behemoths chocked full of aging assets and run by 55 year old Party hacks in moth-eaten Mao suits and greasy comb-overs.  OK … maybe I am being a bit too hard on them, but the term “SOE” has been used as a pejorative descriptor more often that not.

After Liberation in 1949, the Chinese Communist Party brought all businesses under their control and POEs were, for all intents and purposes, completely eliminated in China (as was nearly all foreign investment when they were unceremoniously kicked out of China).  Through a series of disastrous events in the 50s through the 70s (the Great Leap Forward, the Cultural Revolution, etc.), the government proved that, not unlike their Soviet cousins, they were terrible CEOs – factories were inefficient, poorly run and churned out bad-quality junk that had no relationship to any market demands whatsoever.  That wasn’t as bad as it seemed because China retail and commercial trade was not yet standardized so bad products were also hard to purchase.  Go figure.

One of the many reforms that the Deng Xiao-ping administration started in the early 80s was captured under the Party phrase 民进国退 (min2 jin4 guo3 tui4): “POEs will advance; SOEs will retreat.”  What this meant, in effect, was that the Party wanted to get out of the business of being in business and started the long, mind-numbing, ulcer-inducing process of unwinding the complicated SOE culture … which included, for many people, guaranteed housing, education and healthcare.

Fast forward to the mid-2000s and you begin to see private Chinese companies really moving the market.  Thanks to China’s joining the WTO in the early part of this century, various sectors in the China market were opened to foreign investment, particularly retail and distribution/logistics.  This led to further (and more rapid) modernization of China’s business environment and it looked as if the SOEs were going to go the way of the dinosaur, only to be studied by business anthropologists who dug up their jerry-rigged balance sheets and padded expense accounts.

But don’t count the SOEs down for good … we see that there might be life in these old war horses yet, in part because the Chinese government and the Party (one in the same thing here) sees some advantages to keeping their fingers in the business world, particularly in areas that have remained the jurisdiction of the government such as automotive, oil & gas, media, etc.  Not to over-simplify things but these SOEs have two unique competitive advantages over their foreign competitors: first, the SOEs are not held to strict growth and profitability metrics and are encouraged by the State to get as big as possible, regardless of margin targets; and second, the government makes available an almost unlimited stock of growth capital through forced lending from the State-controlled banks.  Imagine if you, as a business executive, were told by your shareholders, “OK … here is the deal – we want you to grow this company.  Don’t worry about profits, just bring in the revenue … we have ways of dealing with the P&L.  And when you need money, just ask.  We’ve got plenty.”  Sounds like a dream scenario, right?

Well, it seems to be working and we are seeing a surge in some of these SOEs – in automotive, the so-called “Big Four” (First Auto Works, Shanghai Automotive, Dongfeng and Changan) are on a consolidation tear, encouraged by the government to acquire smaller, regional automotive companies, much like GM, Chrysler and Ford did in the early days of the U.S. auto industry.  The Chinese oil, gas and mining giants are actively looking outside of China for investment and, though they have been rebuffed by some foreign governments, are slowing expanding their global footprint.  Several of the larger SOE construction equipment companies are aggressively expanding, both inside and outside of China (as a side note, some say that this is why Carlyle’s acquisition attempt of construction giant XCMG did not go through last year … that the government wanted to maintain control in what they saw as a very strategic industry).  All of these SOEs – and many more besides – benefit from very easy capital lending requirements from State-run banks.

A recent article in the New York Times highlighted the pressures that Chinese banks are under to insure that they keep their lending capital accounts well-stocked and rumors are flying around China that the government is requiring China banks to raise their capital adequacy ratios.  Some might see this as a slowing down of lending.  However, I interpret it as just the opposite: the government wants the Chinese banks to keep good reserves of dry powder to be able to lend to those, predominantly, SOE companies that need growth capital.  It’s a “go slow to go fast” strategy if there ever was one.

All of this has led to private chats over dinners and drinks all over China that the government is trying to reverse their dictum of the 80s and say, rather, 国进民退 (guo3 jin4 min2 tui4): “SOEs will advance and POEs will retreat.”  While I seriously doubt we will ever see this in an official government document, the government’s practices are certainly encouraging this.  The SOEs are no longer run by Party hacks … their CEOs are often Western-business educated and understand very well both international commerce and the unique requirements of doing business in China.  They are dressed in Armani suits, have their hair styled and show up at the right parties, all the while maintaining their status in the Party-with-a-capital-P!

Just this past year, we’ve been involved in more competitive intelligence programs with our clients, helping them understand the ever-changing landscape around them.   It used to be that they were just interested in understanding their foreign competitors; however, more and more we see Chinese companies – and particularly SOEs – coming to the forefront of our clients’ concerns.  And given the competitive advantages these SOEs bring with them, everyone is very smart to be concerned about them.

So the question you need to answer is this – do you know your SOE competition?  Do you know who is backing them?  Who is running them?  Do you know what their growth strategies are and what their plans are to grow in the market?  Do you know what they think of you?!?  I can almost guarantee that they are no longer the lazy competitors you once knew.  You better understand them because they are a big threat, whether you know it or not.

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Length – 6:43

I was in Los Angeles a couple of weeks ago for a conference.  I flew from Shanghai to LAX, landing there at about 11:00 in the morning.  By noon I was on the road in my rental car.  But it wasn’t until about 12:45, driving 70 mph on the 405, when I remembered that, in the U.S., the lines on the road are more than just mere suggestions … you are expected to stay between them and other drivers get upset when you drift aimlessly.  And some of those other drivers are armed and in a very bad mood too!

My inability to cross traffic cultures aside, this raised in my mind an important point about safety in China … and frankly, things are still a bit loose here.  While it is better here in Shanghai than it used to be, cars don’t always stay between the lines, on their side of the street or even off the sidewalk.  If a driver doesn’t know where they are, they stop, wherever they happen to be, to consider their options.  They will stop in the middle of a street, an intersection or even the elevated highway.  They are not thinking about safety … they just don’t want to be lost.  While I admire their commitment to truth and knowledge, if they are not careful, they will soon know very well where they will end up … on a stainless steel table in the morgue!

Pedestrians here will only stop at a crosswalk when there is a traffic cop to shame them into waiting the 12 seconds required for the light to turn.  And if you are on a bicycle, scooter or motorcycle, you can – and will – just go right through any intersection and any light.  Apparently, no traffic rules apply to you and cops, in general, won’t even try to stop you.  Its as if the presence of two wheels under you gives you superpowers of invisibility, Kevlar underwear and a get-out-of-jail-free card.

So when I saw a New York Times article a couple of days ago titled “Salute All Cars, Kids. It’s a Rule in China”, I was intrigued.  In a nutshell, the article tells how Chinese education officials are encouraging children in the countryside to, literally, salute all cars on their walks to and from school … the purpose of which is to get these kids to pay attention to traffic and notice when cars are coming and to stay out of the way.  However, what I thought was going to be an article about improving traffic safety in China turned into a diatribe about the ridiculous edicts that come from the government here and the citizen outrage that often accompanies it.  The journalist cited numerous examples of silly government pronouncements – such as forcing people to purchase local cigarettes and liquor to inflate the state-owned enterprise sales figures – and the fact that ordinary Chinese are fighting back.  Fair enough … its good to see that voices are being raised against government silliness, something we’ve known how to do for a long time in the U.S. (however, we haven’t quite figured out how to actually END the government silliness).

Unfortunately, what gets lost in article, buried at the very end, is that this edict, no matter how silly it may seem, actually seems to be reducing traffic accidents, at least in the mountainous village where the journalist did their interviews.  And that, I think, should be the point … in Shanghai where I live in MORTAL fear of hitting some kid that runs out into traffic, finding some way … ANY way … of teaching kids to respect traffic is OK in my book.

Teaching civil behavior in China has been an issue ever since … well, ever since there was society here.  And China has one of the world’s oldest civilizations so you do the math … but its been awhile. Chinese leaders over the years, from Meng-zi to Mao, have been seen not only as political leaders, but social leaders as well.

The big phrase in China over the past couple of years has been an encouragement from President Hu Jin-tao to work together to create a “he2 xie2 she4 hui4”, a “harmonious society.”  They started it leading up to the Olympics when they expected airplane loads of tourists to descend upon China and the leaders wanted to put on their best face … kind of like when you were a kid and were told to “go wash up, Aunt Marge will be here any minute” and you were dreading that dry, moth-bally kiss and the comments on how big you’d grown and isn’t it cute at how they grow up so fast, but really, can’t you do something about that acne and … well, no need to drag you into my adolescent nightmare.  Let’s just say that the Harmonious Society campaign has gone over about as well here.

So maybe teaching kids to salute cars isn’t so silly after all.  And c’mon, admit it … isn’t EVERY country’s teaching of civil society a bit ridiculous?  Imagine you are sitting in the pitch meeting for the Woodsy the Owl campaign … “OK, J.R., here is how I see it … we don’t want people to throw garbage on the ground, right?  Makes the place look like a dump, right?  OK … so picture this … a grown man, dressed in a cheesy owl costume … and he says ‘Hoo … Hoo … Give a Hoot, Don’t Pollute!’  Huh?  Huh? Is that great or what??”  Yea … I know I am guy of limited taste and erudition, but I don’t think I would have signed off on that one.

I think that China is reaching a tipping point in matters of public safety and I really think that the government should – and CAN – step in and start to move public opinion and behavior.  Private cars are proliferating like bunnies in the dark here, but car seats for children are not and Junior is playing Red Rover between the front and the back seat.  Start putting some pictures at the car dealerships of what happens if Junior goes through the front windshield … guaranteed there will be a lock down pretty fast.  And maybe adults will actually start using their own seatbelts as well instead of just draping them across their laps whenever they drive by a policeman.  Seriously, taxi drivers do this all the time!  And people are still dumping garbage out their windows here.  Sure, there are tons of municipal workers running around with brooms to sweep the streets, but polluting for the sake of fuller employment doesn’t make sense to me.

So I say, bring on the saluting if it helps teach kids to respect a ton of speeding death metal on the road.  Heck, get them to bow, curtsey and say “By your leave, m’lord”, I don’t care!  Just keep them from being human speed bumps!  And bring on the animals teaching moral lessons … in the U.S. we had our Woodsy, Smokey and G’ruff, China should have theirs.  Imagine the pitch meeting for that one, “OK … Wang … here’s how I see it.  We want to get people to stop throwing garbage on the ground … so let’s dress up some guy in a cheesy panda costume and have him say, ‘Polluters should be nearly extinct … like me!’  Huh?  Huh??  Is that great or what???”

Yea … maybe I will just stick to Podcasting.

Thanks again for listening … remember our motto: “In China, everything is possible but nothing is easy.”  We’ll see you next time on the China Business Podcast.

An article in CNN Money a couple of days ago was headlined “Mexico overtakes China as the number one location for manufacturing goods destined for the American market.” A survey was done among U.S. manufacturers who said that, on average, fully landed manufacturing costs on products manufactured in Mexico were cheaper than those from China.  OK … interesting so far as it goes.  But that is also like saying: “News Flash: Mexico is Geographically Closer to the U.S. than is China!!”

Maybe I am being unfairly smarmy, but smarmy is sometimes the only club I have in my bag.  However, there is a potential flaw here in that, in the interest of coming up with the Index That Explains All, we are missing a TON of subtlety.  And trust me, I do the same thing … it is very human to want to find a Unified Theory.  Oh … and I am usually not very subtle.

But I think there are a couple of things we should be thinking of here …

First of all, a single manufacturing index is potentially misleading because there is not a single manufacturing environment in the world.  Sure, saying that “in general” Mexico is cheaper than China is OK, but you start breaking this down by manufacturing sector and you’d start to see a lot of differences.  The article says that Mexico makes a lot of sense for things like automotive components being shipped to the U.S. … well, auto manufacturing in the U.S. just got the rug pulled out from under them and they DRASTICALLY cut all sourcing.  And it would make sense that the first cut sourcing from China because, for landed cost to the U.S., it is not as competitive.  Look at individual sectors: alternative energy; wafer fabrication; food and beverage.  We might find the same thing but we might not.

Secondly, the business press tends to gloss over a key point of international business by focusing on EITHER cost savings OR growth, but never in combination.  The simple fact remains that, while China might be getting more expensive on a bill of material line-item basis, the pull of its growing markets is enough for companies to ignore one-sided thinking about costs and, instead, consider their entire businesses.  If I am an auto parts manufacturer and am thinking about the sales from a factory, I am going to look at my global sales opportunities … and if I am located in China where the auto market is still growing at double digits, I might be willing to trade a few points of manufacturing cost over a plant in Mexico where the markets in their sphere are receding faster than my hairline.  As we’ve said before in these pages, cost cutting will only get you to business heaven … all companies need to find a way to GROW!  And China is leading on the growth index in almost every sector, far greater than anything in North America.  I’d rather see an index on manufacturing costs to products shipped to China … this is where the growth is and where our eyes should be also.

Third, I don’t think we should be looking at this as a competition, a horse-race between nations where we identify winners and runners-up.  Some very grave errors have been made over the last 30 years by companies swinging on the Manufacturing Pendulum — first we move everything to Taiwan (and close down the U.S.), then we move it to China (and close down Taiwan) and finally back to Mexico (where we close down everything else and start all over again).  A mature global business thinks in terms of “and”, not “or”.  We should ALWAYS be thinking “China and Mexico” (and Poland and Russia and Brazil and…).

Fourth, I am very hesitant to base any view of global business on a survey done this year.  We are in the Twilight Zone in terms of our understanding of the puts and takes of the global economy … the floor has dropped out and we are suspended in mid-air, Wiley Coyote-like with an “Acme” anvil in our hands an a panicked look on our face.  Any survey of ANYTHING this year should have a big ‘ol asterisk on it making a disclaimer that the results may not have any relationship to a future reality.  Based on points 1-3 noted above, I think we are going to be seeing a lot of changes in these numbers in the very near future.

In no way do I want to minimize the findings here … it is very true that manufacturing costs have been on the rise in China for a number of years.  It is a fact of life.  But as those costs have risen, the world in and around China has changed drastically and companies should not only look at raw manufacturing costs to plan their global strategies.  First ask the question “How can we grow?” and then (and only then) decide where to put your operations.

Technomic Asia’s Kent Kedl was interviewed on Marketplace Radio on Tuesday, May 26. The story focuses on GM producing cars in China, not only for the China market, but perhaps to export to the US. It’s a story that illustrates the interdependence of global supply chains. The piece is reported by Marketplace reporter, Scott Tong

Is it over?  And by “it” I mean the economic tsunami wreaking disaster to the very ends of the earth – when Iceland is the hardest hit, you KNOW it must be bad (maybe I can buy a few vowels from their names … they seem to have a LOT of them and I sure need a few more!).  Well, we are not sure if its over. Heck, we were not even aware of when it “started” so how can we be sure when it is “over”?

Some are calling the Chinese economy “the canary in the coal mine”, a harbinger of the near future (and a kick-butt song by The Police!).  As well they might…things have been moving along OK here lately.  Q1 ended at, I think, the 6.5% growth that the government was predicting – but, then again, it is the government that determines this number so they had a pretty good chance of it being close!  But in March, the Purchasing Managers Index (PMI) in China rose to 52.4%, over a 4% increase over the previous month.  Pointy-headed economists tell us that any PMI reading over 50 suggests that the manufacturing sector is growing again.  This makes China the first major country to record such a good number since the global economy went in the crapper last September.

However, I think we need to be careful here.  Saying that China is a predictor of good things for the global economy suggests a cause and effect relationship that might not be there.  Remember that, because it has been so reliant on exports, China’s economy followed those of the West down the tubes – water skiing behind a speedboat is fun until that boat heads for the bottom of the lake and you can’t let go fast enough!  For China to be a predictor of the global economy’s slow return to health means that China is now the speedboat and everyone else is the hapless skier tied on back.

To a certain extent this might be true.  For example, General Motors – which is now, for all intents and purposes, a State-owned company in the U.S. – is going gang-busters here in China where total car sales reached another record in March.  GM might still be making your grandfather’s Oldsmobile, but that’s what folks are buying here – in fact, GM just announced that they plan on doubling their sales in China in the next five years.  Many of my friends who work at GM are very thankful that they are working here for the company, and not back in the United States of Depression.  But GM’s success in China is not going to prevent them from going into selective receivership in the U.S.  They are not doing THAT well here!

The question is how “deep” are foreign companies augured in here and will they be in a position to catch the China helium-lift as it hits?  For years, we have been preaching that, for many companies, some of their best opportunities for growth are in China.  This was certainly the case when the economy here was growing at a neck-snapping 13% annually.  But the halo factor is still possible, for those that were able to get in and get established.  I have been talking to several companies these last few weeks who have seen NO drop in their business throughout the downturn, even though their parent companies in the U.S. are going through terrible times.  China has been able to sustain through it all!

So while the signs of life in China are good news – particularly for those of us here! – I am going to hold out on saying that this is a broader sign that the global economy is following hot on China’s heels.  We have a saying in the U.S. that “the opera ain’t over ‘till the fat lady sings”.  So far, she is tuning up, but the curtain has yet to rise.

No More Vacations For Me

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Sheesh … can’t a guy get away for holiday without the world falling apart??  I go for 10 days of sun, sand and minimal Internet and come back to find the world upside down.  AIG needs more money (to fund bonuses? foreign banks? Liddy’s baseball card collection?) and President Obama is firing CEOs (not that many others have wanted to do the same in the past but lacked the political will and cajones).  China dope-slapping Coke in its attempted acquisition of Huiyuan is counter-slapped by Australia for Minmetals attempted investment in OZ Minerals.  An apt description from Dr. Venkman in Ghostbusters: “Cats and dogs living together!  Real wrath-of-God stuff!!”

Not that the situation would be any different if I would have been on the frontlines last week, bravely Podcasting and blogging about the world from my 5th floor Shanghai office … but I do have a bit of a Rip VanWinkle feeling about it all.  To have so much happen in the space of just over a week makes my head spin (causing the too-small brain inside my rather large cranial capacity sound like some Cinco de Mayo maraca jam session).

The suddenness of all this – and too much free time on a beach – has led me to think of three deep thoughts:

Deep Thought Number One: the age of dominance of the western multinational company (MNC) is over. Actually, I think this dominance has been over for some time but we’ve been so busy kicking the body and yelling “Look!  Its moving!” that we’ve not realized its dead.  Certainly this is true in manufacturing … that happened some time ago when we started worshiping at the alter of the god Wal-Mart to receive the deity’s blessings that came from cheap products manufactured in low-cost countries.  I am not saying we would/could/should have done anything differently, but we are where we are.

So maybe the proper way to say this is that we Westerners need to lose the illusion that we are in total control of the world.  We are not.  And the last stand where at least Americans could claim dominance – the financial sector – has completely lost its mojo (and most of its money).  The title “Bank Manager” has become the new oxymoron replacing “student-athlete” and “country-music”.

Practically speaking, this means that Western companies will now be the seller as often (or even MORE often) than they are the buyer.  For every Coke-Huiyuan situation we will find Chinese companies buying medical companies (ala Mindray), mining rights (ala Minmetals) or car companies (ala a billion rumors in the market about various GM divisions being schlepped to the Chinese ).  Certainly, there are massive financial and cultural hurdles to overcome for Chinese companies and institutions to become major buyers, but there is definitely the motivation here and there are certainly enough Western assets – distressed and otherwise – for them to pursue.

Deep Thought Number Two: China WILL become a stronger global player in several sectors. This is a natural result of the first … if there is a leadership vacuum created by the decline of Western firms, someone will step into their place.  And the Chinese seem to be the most likely to come off the bench and make the winning basket.  I see three sectors to keep our eyes on – two are no-brainers and one might be a long-shot.

The first sector where China will begin to gain global leadership is, obviously, automotive.  Already the second-largest auto market in the world, China is also the leading supplier of auto parts and components to the world.  China will begin to leverage this supply chain dominance into actually creating cars to sell into other markets.  It is already happening in southeast Asia where a number of Chinese suppliers are exporting cars.  And Chery attempted a distribution agreement for small cars with Chrysler in the U.S. before the U.S. auto world turned upside down.  Finally, China has declared that they WILL be the global leaders in electric cars and technology – in the next three years.  That is very aggressive but it seems the entire economic and political system is focused on doing this.  Look for the leading China auto companies – SAIC, FAW, Dongfang, Changan, Chery and the cheeky BYD – to flex their muscles internationally.

The second sector is medical device.  Again, China is a leading player in the supply chain of components to the global medical industry but strict regulatory requirements have kept them largely from being very strong in Western medical markets.  The Mindray acquisition of Datascope last year was their attempt to change that – Mindray is the biggest Chinese medical device company, competing against the big boys of GE, Philips, Toshiba and Siemens.  Their acquisition of Datascope, a mid-sized U.S. player in the patient monitoring device sector, was Mindray’s first entry point into the U.S. market.  Look for them and others to follow. But look particularly at China becoming an even stronger growth market for medical companies of all kinds.  China will be investing a big chunk of their economic stimulus package in their medical sector in an attempt to rapidly upgrade the penetration and quality level of medical care for their 1.3 billion population.  As they do this, there is going to be a lot of money out there to purchase medical devices, pharmaceuticals, lab equipment and even healthcare management solutions.  Any medical company of any size should be looking at China as their key growth market in the mid-term.

The third sector to keep your eyes on – and I know I am out on a limb here – is the financial sector.  What?, you say.  A centrally-controlled, socialist system with a partially convertible currency is going to become a leader in global finance??  Yes, that is exactly what I am saying.  I am not saying “tomorrow” or even “in the next 20 years”, but all you have to do is follow the money and the motivation.  China certainly has the money – both in cash and U.S. T-bills – and their motivation is repeatedly being articulated – the latest has China’s leadership saying that they hope to build Shanghai into a major financial sector by 2020 and that “the Chinese Yuan will become a new world-favored currency by then”.  Gutsy?  Sure.  Possible?  Maybe.  But are they going to work on it?  You can bet on it!

This all leads us to my Third Deep Thought:  When it comes to the future, we don’t know JACK!! I know … as the proprietor of a leading market strategy consulting company in China whose very JOB it is to predict market futures for our clients, it is counter productive to admit this.  But c’mon … consider the situation.  If, 18 months ago, you would have told anyone with half a brain and a cable TV subscription that Lehman Brothers, Bear Sterns and AIG would be toast at the start of 2009, we would have assumed you had only a quarter of a brain.  Two years ago – even in the midst of big changes already happening in the automotive market – if you would have said that the U.S. Big Three would be on the edge of global collapse and that BYD (hitherto known as a battery maker) would make the biggest splash at the Detroit Auto Show, we would have taken away the last 25% and made you ride the little bus.

The truth of the matter is that we – meaning pundits, consultants, politicians, TV news anchors, banking regulators (if there are any left) – have NO idea what is going to happen next.  Sure, we know that “down” is still the trend and that “flat” is the new “growth”, but the details of which movers and shakers will actually be the ones shaking and moving is a complete mystery.  So let’s give up trying to predict where things are going and start act like they are going to go somewhere.

This means that we – and by “we” I mean “we Westerners” – get it through our neatly coiffed (but thick) skulls that we are not going to be returning to “normal”.  This economic crisis is not just a speed bump on the journey that we’ve been on since the dawn of the industrial age … it is a fork in the road with a car-swallowing pothole in it, at the bottom of which is a pack of very hungry lions who have been subsisting only on lettuce and Fruit Roll-ups.  OK … that metaphor needs a bit more work, but the bottom line is that EVERYTHING has changed!  The products, pricing, distribution, supply chain, competitors and even regulatory environments of your business are changing radically.  New players – many of them Chinese – are not just playing in the shallow end of the business pool; they are swimming in the deep end and, frankly, many of them look pretty good.

What has not changed is the advice for Western companies regarding China – we have been saying this for a LONG time and, in fact, we can maybe put a sharper point on that advice which is: your company’s future WILL be involved somehow with China so find out what it is now and start working on it.  In the midst of the global economic meltdown, China is still one of the best places for pure growth in most sectors.  You are probably not going to find growth in your home markets in the U.S. or Europe so why keep banging your head against that wall?  Net-net: if China is not at the top of your list of “Ways to save your corporate ass and position yourself for the future”, then you are missing the boat.  That is a fact that I feel 100% confident in predicting.

It seems like the world has pretty much given up on the automotive industry.  Watching economic gravity suck down the Big Three is the new spectator sport in the U.S., the Ultimate Fighter Smackdown with four-on-the-floor.  The U.S. consumer is actually saving money (or at least is not spending it so quickly) and the money they are saving seems to be coming from NOT purchasing a new car every time the ashtrays fill up.  I’m just waiting for “Pimp My Ride – The Repo Season” to start up on MTV.

But, like many things in the global economy, the China auto industry is still coming along OK.  GM just upped their forecast for sales for this year (not that this will reduce the more-gruel-sir handout they are getting from the U.S. government).  In fact, China’s vehicle sales accelerated 25 percent in February, reversing from a 14-percent drop a month earlier, as demand for small cars surged after the government launched stimulus measures.  It is reported that was the first year-on-year gain since last October when the financial crisis began to take its toll.

It was also just announced that China’s second largest auto firm – inappropriately named “First Auto Works” or FAW – is working with a Mexican group to build China-designed cars for the North American market.  After Chery and Chrysler pulled back from their sales agreement, this could be the biggest chance for a China auto group to penetrate the U.S. market.  China is also being lauded as the next place for auto innovation as Chery is developing their new battery powered car.   Several years ago Chinese designers were winning the Yugo Award for Crappy Auto Design and now they are ripping up Motown.  Go figure.

This is all well and good.  But have any of these journalists actually DRIVEN on Chinese roads lately and seen how cars are used?  I mean, c’mon!  China has over 100 car manufacturers churning out ever more makes and models of cars and its tough to tell your QQ from your Spark these days (Hint: look for the annoying logo of the hydrocephalic penguin to find the QQ).  In the pre-consolidation dawn of the China auto industry, there are going to be some winners and losers, so instead of using brand names to identify cars – brands which may or may not be around in a few years – I like to identify cars on China’s roads by their function – how they are actually used by their drivers.  I have come up with several types:

The In-Santana-ty: these are typically ancient model VW Santana cars, often purchased used and driven by individuals who have NO business operating any road vehicle, let alone a car.  You can trust these vehicles to be weaving between lanes, braking for no apparent reason and stopping in the middle of the street.  These cars typically have major dents on them as living proof of the driver’s lack of skills.  When one encounters such a vehicle, give it wide berth because, sure as they don’t wash their car, they don’t give a rat’s hind end about yours either.

The next type is what I call the Speed Bump and it refers to any of the mini-sized vehicles on the road in China, so easily trampled underneath the treads of other cars.  The leader of these is the QQ – of the aforementioned penguin brand – and they look like Matchbox cars on the road compared to real sedans.  These things cost something like $49.95 plus tax and I think you can buy them in a gumball machine, packaged in a plastic bubble [I always get the cheap plastic ring when I try, but I am just an unlucky person].  Speed Bumps are often manual transmission and are powered by an engine measured in hamster- (not horse-) power.  I think they even squeak when you squeeze them.  In developed nations these engines power riding lawnmowers in the suburbs, hauling around overweight, middle-aged men in shorts, black socks and sandals.  Here they haul extended families of seven with one child and a nephew in the glove compartment.

A third type are those owned by young parents who liberally affix “Baby On-Board” stickers to their rear bumpers … and then refuse to use car seats to strap in said precious cargo.  Many is the time that I see a parent driving and a 3 year old child running laps in the back seat, occasionally dong the Fossbury Flop over the front passenger headrest to land in the lap of the other over-indulgent parent riding shotgun.  Just imagine the horrendous results of an accident … the kid will be bouncing around the car’s interior like a ping-pong ball in a Lotto draw.  I call these cars, sadly, a Baby Rattle.

So yes, let us now praise the China auto industry.  It is on life support and yet is the clear global winner in the Global Automotive Zombie-fest. But let’s also admit that, for every cool new battery powered car being developed in China, there are 3 million people driving backwards down the freeway because they missed their exit.

Quick.  Look out your window.  Do you see any flying pigs?  Talking elephants?  Politicians confidently making decisions and executing them?  Do you see ANYTHING out of the ordinary?

No?  Really?  That is strange … because here in China, we are seeing some really weird stuff.  A report came out yesterday announcing that, in January of 2009, monthly automobile sales in China surpassed monthly auto sales in the U.S. — 735,000 new cars were sold in China last month against 656,976 vehicles sold in the U.S. (note the specificity in the U.S. numbers and the more general numbers in China … get used to it!).  Experts far and wide were very quick to point out that this is an anomaly and that, while China is the world’s #2 market for car sales, it has historically been far behind the U.S. market and still will need some time to catch up.  The overly-depressed market in the U.S. (last month’s car sales were down 37% from the year before) and the bleak consumer spending outlook contributed to last month’s perfect storm.  Net-net: we don’t have a new champion yet.

So when I say something “weird” is happening, I am not referring to the data – what is shocking is that we are talking about this at ALL; that we feel compelled to say “though the data is right, its not what you might think”.  To even voice the position that China’s car market could even THINK of surpassing the mighty United States of Automobiles is just crazy talk!  When I first came to China in the mid-80s, there were so few cars on the street that you’d have to work really hard to get hit by one.  Bikes?  They were like mosquitoes and you were constantly slapping them away when they buzzed near you.  I am sure they had taxis, but I don’t think I even saw my first one in Shanghai until the early 90s (and being a dirt-poor teacher at the time, didn’t ride in one until much later!).  And now, here we are, talking about even the POSSIBILITY that China could overtake the U.S. in car sales.

These are CARS we are talking about, the very essence of what it means to be an American!  Baseball, hot dogs, apple pie and behemoths burning fossil fuels – those are almost constitutional guarantees if you are Born in the U.S.A.  An entire generation in the 50s grew up in automobiles (and some of their children were conceived in them).  Songs were written, movies made, books published about cars.  A national highway system cemented the American psyche as Big, Bad and Bold and the open road and cheap gas fueled a uniquely American sense of freedom – be anything, go anywhere, do anything.  To say that Highway 61 led to a neo-con Iraq policy might be hyperbolic, but it is not necessarily untrue.

To think that – at some point in the future – the U.S. will lose bragging rights as the “owner” of car culture is, to me, quite shocking.   If you would have asked me 20 years ago when this would have happened, I would have thought you were completely nuts – heck, even 10 years ago I would have thought you loopy.  But now, not so much.

Ultimately, though, this is not about cars.  This is about the phenomenon that is China and what the rapid growth of the auto industry here indicates – that, given time, China will be a global leader in just about any industry or business you could possibly imagine.  End of story.  Think about the most unlikely product or service for China to be a global leader – hair gel, pain relievers, financial services, basketball.   EVERY one of those is nearly guaranteed to have a huge market here (whether or not one can create a BUSINESS around that market is another question altogether).  And foreign companies that are waffling now on “shall we, shan’t we?” do something about China, to find their place here, mark their territory and start growing– well, these companies will soon find themselves pushed off to the side as the Chinese Monster Truck starts to really roll.

The crisis of both economy and faith that hangs over the U.S. now makes it even more imperative that companies figure out what to do about China, because it is only going to get more challenging.  Yes, China still has HUGE problems and MASSIVE gaps in their economy and the way they do business here – but they ARE growing and will continue to do so.   And like the foreign auto companies (GM, VW, Toyota) whose only bright spot is their China business, they had to get in 10 years ago to take advantage of the market now.

So the world is not completely crazy yet.  Pigs are not flying.  But give it time and they just might be driving…

To say that “price is King” in China is like saying its crowded here.  In China, price is King … it is also Queen, Jack and Ace.  Known for its street markets where buyer and seller are in a locked cage match over an item of purchase, only the strong negotiators survive.   You can talk all you want about a product’s features and functions … but in China, you will soon get to the price.  I was walking through a Shanghai street market once when a proprietor tried to get my attention, yelling in Chinglish, “Hello, how much??”  The recovering sales manager in me had to stop and say, “Listen, dude … first you establish a product and then a price!”  Price is so important in China that it is not rude to ask someone how much they paid for something – a coat, a car or a house.  There is probably a privacy law in the U.S. that would prevent this from happening.

So when the Chinese government wants to encourage consumer spending, they are up against some interesting challenges.  Remember that only 34% of China’s GDP is supplied by consumer spending (in the United States of Easy Credit, it is over 70%).  China is a land of savers, of people who don’t trust the social security network and figure they will need to foot the bill for their parents’ and their own retirement.  Kinda limits your spending at present when you are your 401(K)  for the future – but I bet these personal 401(K) did better than mine last year!

Last week, one of my senior managers and I had lunch with a professor at a local business school whose expertise is in automotive.  We were talking about the dismal state of the car market in China where sales have dropped precipitously over the go-go years in recent history.  We pondered when and how the market could come back and, as with all consumer purchases, the conversation quickly turned to price.

As we discussed the importance of price, my senior manager made a very good point.  She said, “You know, in the West, you have a price in your minds that you are willing to pay and, if you can find it, you buy it.  But in China, our price comparisons are always against our friends and neighbors and we are always afraid that we will pay more than others will.”  In other words, in the West, something is a good price if it meets our own expectations; in China the price is good if it beats what my neighbor just paid.  Suddenly, it made sense to me – I thought that, when people ask how much I paid for something, they are just being nosy (like when they ask how old you are, what your salary is or how much you weigh!), but really, they are gathering market intelligence.

So the logical result of this intra-societal comparison shopping is that when prices are falling, everyone in China stops buying because they are waiting for the market to hit rock-bottom.  Everyone’s Pay-dar is on the Super Sensitive setting and the rumor mill runs rampant with pricing alerts.  We are seeing this, in particular, with the big-ticket items such as cars and real estate.  In the West, the auto market stinks because people can’t get financing.  In China, they don’t need financing because everyone pays cash – but what they can’t find is the confidence that they are paying “The Lowest Price.”

That said, the China retail market is doing OK, thank you very much.  Reports say that China retail sales reached RMB 290 bln (US$ 42.6 bln) during the Spring Festival Holiday this year.  It was also just announced that retail sales in Shanghai reached RMB 453.7 bln (US$ 66.7 bln).  Both of these figures are double digit growth over the previous year – again, compare that to ANY other part of the world at this time and China is a superstar.

But the lift off point is still some ways out.  The indicators will be rising Consumer Price Indices, an improving stock market and rising (or at least stable) housing prices.  Until then, look for China retail tactics that include massive sales and price-slashing.  People will likely be pretty open to buying something that says “NEW PRICE TODAY – DRASTICALLY REDUCED FROM YESTERDAY” because everyone knows someone who bought one yesterday!