China Business Blog and Podcast

Yesterday morning I spoke on a panel at the Confucius Institute for Business at SUNY Levin in Midtown Manhattan. The subject was fashion and luxury in China and how language and culture play a role. The event was a success thanks to the excellent panelists and the enthusiasm and participation of the audience.

One question stood out. I said “hopefully” China will be successful in its transition from a commodity/export based economy, lacking innovation, to an economy driven by innovation, consumer spending and services.

I was asked why I said “hopefully.” My answer. This type of transition is difficult under the best of circumstances. Never mind if: you have 1.3 billion people to employ, feed and take care of, an environment that is poisoned, a populace that needs to pay for its own health care and education, a looming change in leadership, shifting Geo-political winds, a neighborhood that is increasingly wary of your intentions, a need to keep growth at at least 8%, an educational and political system that discourages original thinking and risk taking, an aging population etc. etc. etc.

Many people in the Chinosphere are talking about these being particularly gloomy times for China and many others are questioning the sustainability of China’s rise. See Dan Harris’ post from the

I tend to balance the positives with the negatives and never get too high or too low on China’s prospects.

That said there are a few stories circulating now that I think businesses, governments, NGOs and all those who have an interest in China must pay attention to as they point to some worrying trends.

They are:

The Issue: Apple Loses the Right to use the name iPAd in China

What it Means for the Future: One of the great bugaboos of doing business in China is the lack of respect for intellectual property. In the past China’s trademark and copyright laws were to loose. They have come the other way now and are among the strictest, and most complicated on Earth.

One of the greatest challenges to doing business in a “first to file” country like China is protecting your IP. Chinese companies have every right to use the name of your company, product, slogan etc. if you do not file first. If Apple can’t keep the iPad name in China it does not bode well form smaller players. It also sends mixed signals on the sanctity as well as the disposable nature of IP in China.

Good coverage here:

The Issue: Beijing’s Polluted Air

The huge controversy developing around Beijing’s air quality and the government’s commitment to telling the truth and taking corrective actions. This has reached emergency proportions. The air in Beijing right now will actually take 6 years off of your life.

Please see James Fallows’ coverage of the story for The Atlantic. He has all the details and has been semi-obsessed with Beijing’s air for the better part of 5 years.

What it Means for The Future: As I have explained in my “Wealth Through Health” analysis of the 12th 5 Year Plan, cleaning up the environmental mess in China and preventing further degradation is a major focus of the the government. That said, one has to wonder how much of this is just talk if the air in the country’s capital is the most polluted on earth. The Chinese people cannot prosper, nor can foreign businesses, if the air, water and land are poisoned.

Fallows’ coverage is here:

The Issue: Companies Employing Foreigners in China To New Pay Taxes, Surcharges

Beijing seems to be tightening controls on foreign companies operating in China. These new regulations will make it much more expensive for local and foreign companies to employ foreigners in China.

What it Means for The Future: China still needs the experience, expertise, technologies and best practices that foreign companies bring with them. This may dissuade some companies from entering or expanding in China, thus depriving China of what it needs most. It also seems unfair that employers have to pay these taxes and charges for employees that will never collect the social benefits they are supposed to provide.

It may also signals that China may be “souring” on some foreign enterprises and FDI and that they want to concentrate ever more on “Going Global” with their companies and investments.

MSNBC covers the story well here

What are you seeing, hearing, feeling out there? Any stories that worry you?

From the Vancouver Sun

Chinese coin found in Yukon evidence of early east-west link

By Randy Boswell, Postmedia News November 1, 2011

A 340-year-old coin from China has been unearthed by archeologists near a planned Yukon gold mine, shedding fresh light on historic trade links between 17th-century Chinese merchants, Russian fur traders and first nations in the northwest corner of North America.

Great, now we have to worry we might “hurt the feelings of the Chinese people” by claiming Columbus discovered America.

In related and more serious news. Word coming out of France is that Sarkozy is being pilloried by the opposition, as well as some of his supporters (however few are left) for turning to China for help with the debt crisis.

This is a small tidbit all but buried in the news of the day but in my mind it’s an interesting peek in on how Europe and China may or may not get along in the coming years.

So much focus is always (and rightfully) put on the questions surrounding US/China relations, but Europe is 700 million strong and China’s single biggest customer. If Europe turns sour on China then China’s bargaining power and leverage with the US and others is weakened. Does China really want to have the US, Europe and India as well as SE Asia working against them?

I am not saying the Chinese have done anything wrong here but they need to play the game right and ditch the 10 ton tin ears they wear.

“It’s shocking,” Martine Aubry, the general secretary of the Socialist Party, said in the Sunday newspaper, Journal du Dimanche. “The Europeans, by turning to the Chinese, are showing their weakness. How will Europe be able to ask China to stop undervaluing its currency or to accept reciprocal commercial accords?” – Reuters, Nov. 1, 2011

Strange to see a Socialist worried about the Capitalist machinations of a Communist country.

Later in the story another French politician shows he has no grasp of history and very little sense of hypocrisy.

Nicolas Dupont-Aignan, a presidential candidate from the “Debout la Republique” Party, went further, calling it “dirty money.”

China Willingness

On France 3 television, he said China “has cheated on all the rules of the game: social slavery, pollution, environment, copying… It is now, after having cheated, telling us ‘we are going to buy you.’”

However wrong he may be, his quote does shine a light on the potential for Europe to turn its anger away from immigrants to China.

This should all make for an interesting G-20 Summit.

An interesting conversation between James Fallows and Damien Ma on political will and corruption China.

Fallows and Ma

It speaks to the sustainability of the Chinese model and tendency to push big ideas and changes off to the future. Good stuff.

We are very active in the fashion/accessory/luxury market in China. For a couple of years now I have been telling anyone who will listen that this is the hottest apparel market in the world. Well, we now have this A.T. Kearney report to back up what I have been talking about.

Hat tip to Mr. Robert Shecterle for the summary. To which I would add that in addition to the sales channels mentioned, we found that multi-brand stores, multi-brand boutiques and franchises are starting to creep their way into increasing importance in China. The dominance of the distributor, mall, department store and/or stand alone store model is starting to erode. Add to this the growing importance of e-commerce and concept stores. Part two of this post will discuss these new channels.

There is an an interesting top ten market list at the end as well.

China is now the most attractive emerging market for apparel retailers, according to A. T. Kearney’s latest Apparel Index, and already, several brands have aggressively entered the market.

PHV Apparel Group (perhaps best known for its signature brand, Izod) plans to open 3,000 stores in China over the next five years. Likewise, Italian retailer RDM has invested $910 million to develop five luxury outlet centers there, and Gap, Inc. opened stores in Beijing and Shanghai late last year.

According to A. T. Kearney, China’s growing middle class is expanding its buying behaviors beyond traditional venues.

“Retail formats in China are diversifying beyond traditional department stores. Chinese consumers are beginning to shop at venues such as hyper markets, specialty stores, outlets, discount stores and online,” Hana Ben-Shabat, a partner with A.T. Kearney and co-leader of the 2011 Apparel Index study, said.

The United Arab Emirates ranked second in the 2011 Apparel Index, driven by a population with a high disposable income and immense fashion consciousness. In addition, as A. T. Kearney points out, the expatriate populace and tourism also drive consumption in this market. Plus, the UAE is both a regional commerce center in the Middle East and a preferred market for entering the Middle East, as well as for testing new products and retail formats.

The Retail Apparel Index is calculated on a scale from 0 to 100. It includes analysis of the clothing market attractiveness (60 percent), levels of retail development (20 percent) and country risk (20 percent). Country risk indicators include political and financial risk, business readiness and business cost of crime, terrorism and corruption.

Here are the 2011 Apparel Index “top ten,” along with each country’s overall score:

1. China 61.4
2. UAE 58.9
3. Kuwait 48.6
4. Russia 46.4
5. Saudi Arabia 43.9
6. India 42.0
7. Brazil 40.1
8. Turkey 37.4
9. Vietnam 37.3
10. Chile 36.9

A full copy of the report is available at www.atkearney.com/grdi.

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In the news this week was the story of a jury award of $2.3 billion to a division of St. Jude Medical against a Chinese medial device company started by a former employee. The details are specific to the case, but the news was enough to get Technomic Asia principal Michael Zakkour on one of his favorite topics, protecting intellectual property. Zakkour was traveling in the US on his way to southern China, when the China Business Podcast caught up with him for an interview on IP security strategies.

There are two main components to IP strategy for companies considering China operations, 1) a significant vetting process, the cornerstone of which is based on relationships that are proven over time; 2) a regularly enforced process to know who is working on the key areas of your product. This means organizations are notified when personnel changes in specified roles among their vendors.

Both are easy to articulate and difficult to execute. As China races to leave its low-cost manufacturing brand in the dust in exchange for being a global economic power, protecting the design and engineering elements that set your product apart is likely the most important aspect of your China strategy.

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We are in the middle of a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  We’ve addressed a wide variety of topics, from setting up your company in China to HR issues to dealing with the China Price Syndrome.  In today’s conversation, we are talking about probably the most important topic a company could face in China: building a sales pipeline.  And I start off with a very basic question for Steve …

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We are working through a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  In Steve’s nearly 20 years of working in China, he has helped many foreign companies – primarily small and mid-sized ones – to establish operations in China.  We’ve been addressing a number of topics in this series, but today’s hits very close to home for a number of companies as Steve and I talk about the “China Price” syndrome …

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For those who live or travel regularly to Shanghai, you have been the victim of the city’s wild abandon to prepare for the World Expo – new roads, bridges, tunnels, metro lines, bus lines, bike lanes, stoplights, security cameras … the list of infrastructure and hardware upgrades goes on and on.  Well, now that the Expo is finally here, many of us have been able to take advantage of that infrastructure … I, for one, am quite pleased with the new subway lines, making it much more convenient to get around the city.  However, the 9 squillion visitors a day to the Expo mean that there are just more people riding the subways and driving on the roads so a bit of the allure has rubbed off.

But all of these so-called improvements remind me of an old joke: a city slicker is lost in the countryside; eventually, he happens upon a local walking along the dirt road. The guy asks for directions back to the city and the local makes several unsuccessful attempts to explain the route. Finally, the local gives up and says to the city slicker: “Well, I guess you can’t get there from here.”

Needless to add, the point of this little jest is that there is always a way to get from point A to point B.

But not necessarily so in China. We may be all-too-familiar with the Confucian saying: “A journey of a thousand li begins with a single step.” Which is good advice (provided you know what the heck a li is), but it omits a crucial precondition. There first must be a road to walk on. Put another way, you may know your destination, but finding the path to get there is a whole ‘nuther matter.

Case in point: The Shanghai Pudong airport opened to much fanfare in 1999. Its size, capacity and architectural splendor was (and still is) truly world class. Anyone that calls Shanghai home can be proud of it … and even more so since they completed Terminal 2. What’s more, it was built in record time. However, the highway to the airport took a lot longer to complete. For the first year or two one had to pass through an obstacle course called Pudong, dodging pre-modern horse carts on the way to the post-modern airport. So while the destination was ready and waiting, there wasn’t a decent road to reach it.

Excepting the Maglev train, of course. Another marvelous example of modernity, which, unfortunately, had its own destination issues. True, on arrival at the airport the train seemed a welcome alternative to the long taxi line; one could whizz along at speeds of more than 400 km per hour all the way to Jinqiao, where … you waited in another long line for a taxi to get you home! Now don’t start writing me nasty letters. I am aware that the Maglev has since been connected to the #2 subway line and that getting to downtown from Pudong airport is now a breeze. But note the year: this happened in 2006, roughly six years after the airport opened.

The drive to modernize has had similar results in other areas. In keeping with the WTO provisions, China is opening up new forms of investment for foreign companies, though the process is frustratingly familiar.

Step One: The new rules are announced with much fanfare and praise from global punditry.

Step Two: One year later, the application procedures are announced, again with much fanfare and more punditing from the pundits;

Step Three: One year after that, applications are actually accepted by the government, with very little fanfare (by now the pundits have moved on to touting new developments, see Step One).

As I was saying, this process causes foreigners much rending of hair. Which in my case, I cannot afford because I cannot find my hair. For those of us that value convenience, efficiency and modernity, new forms of investment are useless unless we have means to access them.  Most foreigners (particularly Americans) have acquired the detritus of efficiency: daily planners, PDAs, alarm clocks, etc., all of which calculate time to the nanosecond. As such, a beautiful airport, or a beautiful new business opportunity, are anathema — without a means to reach them.

But before we get too huffy, keep in mind that we were warned of the dangers. Way back in the early 90s, Deng Xiaoping said that development in China would be “like crossing the river by feeling for stones.”

Today, we are standing on the banks of the rushing river we call Chinese Development looking across to the land of riches and eternal happiness on the other side. There are a couple of stones peeking out from the rushing rapids, but they look a bit slippery. So we need to tread carefully. Better still, we should watch while someone else crosses the river before us, to see where he steps. One day, there will be a solid bridge to cross, but in the meantime, many will fall in the water and be swept away.

Be that as it may, it’s silly to think that China should build roads (or bridges) for the convenience of foreigners. Like I said, no one made us any promises and if the existing road takes it toll on you, well, it tolls for all of us. In the meantime, buy a compass and a pair of hip-waders.

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On his first trip to China, one of my clients reacted to this country, as most foreigners do, with a mixture of fascination and utter dread. He was overwhelmed by the size of the country and its dynamic (one might say, hyper-dynamic) society. Over dinner one night, he asked me my opinion on the fundamental difference between China and other cultures. Now, I never miss the opportunity to pontificate on any subject, especially one that I don’t understand completely (see any of my previous columns). So I offered him my view: The fundamental difference between China and the rest of the world, I said, is that Chinese people are born entrepreneurs; they have an near manic compulsion to start their own business.

Linguists believe that language is an accurate reflection of what a given culture considers important. For example, the Inuit are said to have 14 different words for snow – and so would you if you were knee-deep in the white stuff for most of your life. [Author’s note: I am from Minnesota, a state in the US where, for a good portion of the year, we, too, are surrounded by snow. However, unlike the Inuit, we do not have 14 words for snow; rather we have over 14 swear words for snow as in “that %$@# *&%$ &^%$# snow is so %$#! deep I cannot get my *&^% *&^$# car out of the *&^% driveway!!”.]

The preceding sentence reveals that Americans attach great cultural importance to the vice of impatience. Indeed, we are a deeply disturbed people, and pity the person (the next guy that cuts me off on the Yannan Expressway) who pushes us beyond our limit, which, quite obviously, is way below the world norm.

But I digress. The Chinese language reflects the entrepreneurial spirit of the people in a variety of ways. For instance, the term “start up”, referring to opening a business, can be expressed, alternately, as: 成立 (cheng li), 建立 (jian li), 开 (kai), 设立 (she li), 办 (ban), 创立 (chuang li), 创办 (chuang ban). There are more ways to express this sentiment, but I have forgotten them. What’s more, I cannot distinguish between the phrases; their subtleties are lost upon a lout like me. But one thing I do know, they all mean: “Let’s make some money!”

Should you remain unconvinced by the linguistic proof of China’s entrepreneurial obsession offered above, well, just step out on into the street. You’ll be instantly bombarded with pitches to purchase just about anything you’ll ever need (and much that you’ll never need). If you happen to be driving and happen to stop at a stoplight (unlikely, I know), then you’ll be assaulted by a dozen guys loaded with all things automotive: newspapers, lighters, phone chargers, steering wheel covers, Shanghai maps (because you look lost) and even world maps (because you really look lost). Now, I’m not saying that the Chinese are the only people with excessive entrepreneurial drive. But they do bring a degree of optimism and can-do spirit to the idea that most others cannot match. Indeed, they sometimes bring too much.

Awhile ago, I was walking through a street market with my kids. Within seconds, we were surrounded by hawkers. Now the interesting feature of street market vendors in China is the aggression with which they pursue their trade.  As you walk by the stalls, they will yell out “HELLO!!” followed by a recitation of what they are selling.  To wit: “Hello DVD!!”, “Hello CD!!”, “Hello T-shirt!!!”.  It can be a bit disconcerting, but one gets used to it … I suppose as one eventually gets used to a root canal or open heart surgery if one has had enough of them.

Anyway, one merchant was touting figurines of a little boy, who, after pouring hot water on his head, tinkles. The hawker shouted at me in the template style: “Hello, Pee-pee boy!”. Many heads turned, I assuming, hoping to see some tall foreigner in Depends fighting valiantly against incontinence problem. The man’s sales tactic might be a tad suspect, but there was no denying his enthusiasm. He knew that I wanted and needed a statuette of a small boy relieving himself. What he didn’t know is that his remark would take on a life of its own. When someone calls for me at home and one of my teenage daughters answers the phone, they have been known to shout: “Hey, Pee-pee Boy … phone!”

Of course, the entrepreneurial spirit exhibits itself in other ways, the notorious gauntlet tactic, for example. This ploy is based on the theory of sales by attrition. Street vendors seems convinced that you will buy from them if they form a gauntlet that you cannot avoid. By the time you reach the forty-seventh guy, you will be so worn down that you will purchase a DVD, CD or fake watch because you are finally convinced that life is not worth living without one.

Westerners believe that China’s low cost labor provides it with a global competitive advantage. While it helps, I believe that it is China’s drive to start new ventures – and to do so with such wild abandon – that presents a greater challenge to other economies.

The Pee-pee Boy tinkling on my desk is proof positive.

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In our last Podcast, I had a conversation with Steve Crandall, Vice President in charge of Implementation Services here at Technomic Asia.  We talked about how important people are to a winning China strategy … how to look for them, recruit them, train them and keep them.  After we were done recording it, I asked Steve if he thought that maybe we were being too “basic” … that this was stuff that people already know.  He said, “People might know this stuff, but its always good to be reminded of it … knowing and doing are two different things.”

Well, it turns out that Steve was right … because since we posted that Podcast, we have had LOTS of comments on how useful the information was and how important it was to revisit the basics.  So to that end, we are going to go “back to the basics” again in terms of thinking about China and building your China strategy.  This is particularly critical during these times in the corporate business planning cycle … the silly season where bold strategies are considered and aggressive plans developed.  And China – given its centrality to most global business plans – is susceptible to such ridiculous hopes, dreams and schemes.  So let’s go “back to the future”, if you will, and think about our China strategies from the beginning.

Click on the links to listen to today’s Podcast …