China Business Blog and Podcast

It’s not often in this China business that we get to say “I told you so” and actually have the proof that we did tell you so. Before I get to what I told you — check out this posting on a possible solution to GM and Chrysler’s troubles. In short, one of the leading business publications in China is running a story that two of China’s leading automotive conglomerates — SAIC and Dongfeng — are considering buying out some or all of GM (and maybe even Chrysler).

For those of you sputtering “When pigs fly!” or “Over my dead body” over the impossibility of this, check the sky for passing porcine and your wrist for a pulse. It is more than possible. In fact, it is probable.

It’s not just the fact that this opportunity is presenting itself — the Chinese government (and private Chinese companies) have a strategy to look for investment opportunities outside of China. And this is where the “I told you so” comes in. In a podcast a couple of weeks ago, I talked about “why China matters” in this time of global economic recession and — dare we say it — depression. This is what I said:

The third area in which China matters is in its very early stages and so is a bit tougher to pin down, but it should be on everyone’s radar screens, and that is China as an “investor.” For a couple of years now, the Chinese government has been quietly encouraging Chinese companies to look outward, to find markets and investment opportunities outside of China. Well, that quiet approach is now over, and the government is making their encouragement in very loud tones and is providing support to help them do so, organizing research delegations and providing cash grants and loans for overseas investments.

Wow. I don’t want to toot my own horn here and belie my humble Midwestern roots, but Jimmy the Greek couldn’t have been more accurate. I am getting the shivers!

Certainly, the details of the deal are going to take a while to fall together (and, this being China, they may even fall apart), but the one takeaway here is that we should not be surprised. And particularly in a global environment of troubled companies and cheap assets, Chinese companies — backed by a very supportive government — are going to be major players. Keep your eyes and ears open, people — there is a major economic shift taking place and the world is going to look much different when it is done!

Out 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.

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Why China Matters

These are tough times. Really tough. We have avoided going from talking about the possibility of the “R” word –- recession -– right to the “D” word –- depression. The news cycle has been a bit schizophrenic lately, too, and understandably so. Bouncing between the macro-economic crisis in the U.S. to how it is impacting the average citizen (using the well-worn phrase “Wall Street to Main Street”) and then flipping to the international situation — how the U.S. meltdown affects global markets and the ongoing war in the Middle East. Its enough to make you want to crawl in a hole and wait until its over. And depending on who you talk to, that could be quite a wait.

But even though climbing in a hole to avoid the whole mess sounds like a good idea, it isn’t. We all know that. However, just peering out of the hole and staring at our immediate surroundings is not going to help either. In this dawning age of globalization, when trouble hits, we all tend to turn inward and stare at our economic navels, shutting out the rest of the world that looks even more scary than our own, already petrifying situation.

But again, this is not the way to do it. To deftly switch metaphors, the financial crisis is not going to be solved by only getting under the hood and messing with the engine (although I think we all admit that this engine is long overdue for an overhaul). We need to not only fix our engine but we also need to look for new roads to drive on — and many of these roads are going to be outside our home markets.

In this podcast, I will talk about some reasons why China matters in our current situation. In coming weeks, we will pick apart some of these issues and dive down into the specific challenges and opportunities of each one. But for now, the challenge will be to ignore our inner scaredy-cat, jump out of the hole and look around.

A warning: I am not going to talk about how important China is because of their foreign currency reserves, their ownership of massive amounts of U.S. T-bills or their potential military might. These are issues much too big for my little brain and are –- to steal a phrase –- way above my pay grade. I am not going to talk about why China is important for our economy. I am going to talk about why China is important for our companies. For your company. OK? Cool. Here we go…

In times of economic crisis, our natural tendency is to look for ways to cut costs and maintain what we’ve worked so hard to build. Everyone is assessing the situation according to indicators of mass firings, retrenchment in capital spending and diminished acquisition activity. When times are tough, we tighten the belt and learn to go without. Or so we think.

Over the years of these podcasts, you have heard me say many times that our mantra should be “growth” –- growth of revenues, profits, market share and influence. It’s about growth, stupid! But when economists use oxymoronic terms like “negative growth” to describe the current environment in North America and Europe, where can we find positive growth opportunities?

A neighbor of mine is the regional CEO of one of the biggest foreign companies working in China –- they have tens of thousands of employees, over 30 factories and are doing billions of dollars in business. I asked him what the current mood was in his company, and he said, “Well, the executives in the U.S. are ready to jump off a building, but here in China, we’re feeling pretty good. Sure, things are slowing down a bit from what they were a year or two ago, but we are still seeing 12 or 13 percent growth here. Where else are you going to find that?”

He’s right. Where else are you going to find that? The simple fact is that markets are growing here in China and they are not growing elsewhere. Isn’t that enough to make you just the least bit curious about what China could mean for your business?

One of the challenges that China is going to face in the coming years is to move from an export-oriented economy to one that consumes a greater amount of what it produces. As they make this transition, the demand for everything here is going to increase. The challenges are going to be great and competing with local companies will not be easy. But if you are looking for growing markets and rising demand, China is the place to be looking.

If you are listening to this podcast, chances are you are already finding sales growth opportunities in China. So my challenge to you would be to look for more opportunities. Don’t rest on the laurels of what you have already done. Sure, be proud of it. Revel in its success (if, indeed, you have found success), but find a way to go further.

One of the best ways to do this is to consider tier 2 and tier 3 cities in China, the “smaller” cities of only 1 to 8 million in population. Remember that China has over 200 cities with over a million population and we are seeing growing demand in all of them. If you are already selling in the bigger cities of Beijing, Shanghai and Guangzhou, you will likely need a different distribution strategy to reach the other tiers, but the opportunities could be very, very good.

The next reason China matters is that it still is a great source for lower-cost goods and services. Notice I did not say “low cost” -– the distinction is important. You hear a lot of people decrying the fact that China is no longer the lowest cost source in the world. We have covered this in other podcasts so I won’t go into detail here, but suffice it to say that while, yes, prices for labor, raw materials, logistics, etc., have gone up in China, it still might be one of the best places to source product in the world.

But what about Vietnam? India? Other places where prices might not be rising so much? Certainly check them out and compare, but don’t ignore China. I was chairing a panel of procurement leaders a month or so ago and the question was asked if China was no longer interesting as a source and shouldn’t everyone start considering other countries. The procurement leader of a consumer products company that sources about $2 billion from China was on the panel, and he said that he was not really considering other countries besides China. He said, “We have not explored other cities in China. Why would we want to explore other countries?”

For those of you already sourcing in China, this could be some good advice. As you are looking at other countries, look at the tier 2 & 3 cities in China as well. Many of them have been improving their manufacturing capabilities and infrastructures at an amazing rate, and if you’ve already established an operation in China to support your current business, going deeper in China is just incremental.

The third area in which China matters is in its very early stages and so is a bit tougher to pin down, but it should be on everyone’s radar screens, and that is China as an “investor.” For a couple of years now, the Chinese government has been quietly encouraging Chinese companies to look outward, to find markets and investment opportunities outside of China. Well, that quiet approach is now over, and the government is making their encouragement in very loud tones and is providing support to help them do so, organizing research delegations and providing cash grants and loans for overseas investments.

The path is similar to how the West looked at China many years ago. The first companies to do so were the larger ones with the money and vision to go global. Then, as time went on, the smaller companies started investing in China as well. Same with Chinese companies — the larger, state-owned firm have been going global first. Lenovo bought IBM’s laptop division; Haier is selling their appliances aggressively into North America and is reportedly looking at buying GE’s appliance division; and the Chinese oil and gas giant CNOOC was blocked in their attempts to purchase assets in the U.S. but is still looking for opportunities.

But it is the smaller Chinese companies going global –- privately owned in the $50 to $100 million range –- that could really spark growth in this area. One of the practical ways we see this developing is in doing M&A deals here in China, where one of the primary motivations for the deal is to help the Chinese company go international at the same time that the Western company is coming into China. Chinese companies have the products and investment appetite and Western companies often have the channels. The combination is a very powerful one.

My last reason that China matters is pretty loose, I will admit, but I really believe that China should be on everyone’s radar screen because of the potentially new things that could come out of China. Now, that might sound a bit contradictory give what everyone (including me in the past) has been saying about China -– that they are great at copying ideas but not very good at inventing them. And historically, that has been true: Give an engineer here a blueprint or even a sample, and you’ll have a very good copy in a very short period of time (and at a pretty low price, too). But bring a Chinese engineer a problem and ask them to design a solution, well, you might have to wait around awhile.

This is changing, but maybe not for the reason that you might think — that engineers are getting better. While it certainly is true that technical and business education is growing exponentially in both quantity and quality, it’s the context of China that is going to motivate creativity. By context I mean it is the business, social, technical and environmental situation in China that is going to spawn creativity by necessity.

Take the environment: No where on earth is the environment more of an issue than in China. And it’s not just because there are incredibly polluted waters and skies here. Look at any developing country -– and some developed ones -– and you’ll find the same thing. No, it’s because the rate of development is so fast, and the expectations of the Chinese population to succeed are so high, that new ways are going to be found to overcome these challenges. Time and again, I have seen the creativity and entrepreneurial drive that seems resident in the Chinese cultural DNA rise to the surface.

In the 80s when things were just beginning to take off, I saw farmers in the countryside where I lived literally create markets out of nothing in an attempt to sell their extra produce. They had to skirt some very restrictive rules to do this, but they did it. Look at the annoying DVD sellers, the impromptu street markets, the guys on the side of the road with a bucket of warm water and a screwdriver, marketing themselves in “Car Repair and Beautification”!

Sure, there is a vast difference between selling fake DVDs and inventing a new solar energy technology, but the creative and entrepreneurial underpinnings in China are the same. There is a vast amount of creative energy here that is looking for new outlets, and now that the core technology here is improving, I think we are going to see some explosive growth in this area.

To see where a market is going, follow the money. And there is a lot of money changing hands here these days –- a lot of people are looking around for interesting things to invest in. We are working with several local investment funds to sniff out new opportunities. They are all small and in their very early stages, but they all have big dreams and a big field to play in. And they are going to matter some day.

So as you are struggling with your own investment portfolio and your company’s bottom line, resist the urge to stare at your navel and block out the outside world. There are some incredible opportunities still available in China –- and, in some ways, are even MORE attractive given the depressive nature of the rest of the world.

None of this is low-hanging fruit and exacting due diligence here is still the watchword. But new top-line growth opportunities and bottom line cost savings are real opportunities here. And China is looking to invest outward and seems to have the cash to do so. Also, there is a legacy of creativity here and a strong motivation to do something new.

One of my early mentors emphasized the old saw about “keeping your head when others about you are losing theirs.” At no other time in recent history do we need to dust this off and begin to apply it –- and if we do, we will find that China matters a great deal.

“Great Wall of China” courtesy of SmokingPermitted on Flickr

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Full transcript of today’s podcast:

How the past few years in China will be described later in history is anyone’s guess. It is likely that variations on phrases like “the go-go years,” “economic renaissance,” and “Years of Plenty” will be thrown around with the sage-like wisdom that comes from perfect hindsight. However, this era in China is much more difficult to define from the inside looking out and, too often, voices of gloom, doom and panic rise above the din.

A recent article in the New York Times posits whether “Booming China Suddenly Worries That a Slowdown Is Taking Hold” and says that “Economists expect growth to slip from its recent pace of 11 percent or more annually to as low as 9 or 9.5 percent over the coming year.” The author goes on to note, correctly, that most countries in the world would give their left economic indicator for 9.5% growth (the U.S. didn’t even reach 2% growth in 2007 and, in 2008, is drifting into the oxymoronic “negative growth” territory). However, the several point drop is a reflection of reality in China – exports here are slowing, some factories are closing and people are losing jobs. So what is one country’s Dream Scheme is another’s nightmare scenario.

I think, though, that is critical that we fully admit that China is in a very different place from where it was 10 years ago. In 1998, China was coming up on the 10th anniversary of Tiananmen Square and, although the nation had made immense strides since the tragedy, the end game as a “world power” was not yet apparent. Investment in infrastructure was ramping up at an amazing speed and we had just started using the first elevated highway here in Shanghai – the lack of cars on the road made an incredibly smooth trip … until the highway unceremoniously ended and one was forced to dive back down into the sea of bicycles and horse carts. The auto boom had not started and personal purchasing power was still far from the tipping point of an average of $1,000 per person. Color TVs were a big deal as were VCRs, the 8-track tape of the X-generation.

Remember that we were still seeing double-digit growth here and, depending on which figures you believe, China was growing between 10% and 13% per year. However, that was growth off of a smaller base and, as an “emerging market”, we kind of expected it to grow like that. It was – in its own odd way – “normal.” We expected it. China’s stock market was not yet the butterfly who, when its wings flapped 9 years later, would cause a 2% drop in the U.S. markets and send Asian stocks into cardiac arrest. No, it was normal; small town of a billion people normal; cute, emerging market normal.

Now the time has come to recalibrate “normal.” China is no longer an “emerging market.” You can call it “developing,” “modernizing,” “maturing,” but the dragon is no longer a cute lizard, peering out from its den – it has emerged, full grown and breathing fire (as a side note, in over 20 years of writing about China, I have avoided using a dragon metaphor – now I am not sure why I was so reticent … that felt pretty good!).

China is the world’s 4th largest economy. Number one in population, internet uses and cell phone subscribers. It has more roads and rails than the U.S. and its newly-built Beijing airport puts the new Heathrow terminal to shame. It was built at China prices – 50% of what Heathrow cost to build – and, if my sources are correct, has more and better signs in English!

So “normal” can no longer be 11% growth. 11% is not sustainable. China has already been sprinting several marathons and is beginning to show signs of strain. Cities are bursting with a migrant population said by some to be as many as 200 million people. The 20 year old factories – many of them in southern China, the first area to reap the benefits of economic reform – are showing their age and, because they are making low cost, low quality goods, they are being shut down. Like the U.S. shipped commodity manufacturing to Japan who sent it to Taiwan who sent it to China, so China is passing it along to Vietnam and Cambodia.

You know what? This is “normal.” This is what SHOULD happen. There was a hue and cry last year when, in an onslaught of regulatory fisticuffs, the Chinese government pulled back VAT rebates, instituted a new labor law and raised the tax rates on foreign companies doing all but the highest value manufacturing in China. This is what the “Four Tigers” of Taiwan, S. Korea, Singapore and Hong Kong did in the 80s, shipping manufacturing off to China and started it growing in the 90s. And now that their GDP per capita numbers are nearing or even above the U.S. and several orders of magnitude above China, their average GDP growth numbers are many points below China’s. They have had their challenges in the last few years – closing factories, inflation, social unrest. And that is … well … “normal.”

The biggest question, then, is: “Can we all handle ‘normal’?” In a future Podcast, I will address what we see the Chinese government and private Chinese business doing here to get to normal. But what about foreign investors in China.? Should this “slowdown” be a cause for concern and, if so, what should we all be doing about it?

First of all, I think it is a mistake to think that the shuttering of low-value-add factories in southern China somehow constitutes a referendum on China, that it is no longer an attractive place in which to invest production assets. The growth that we are seeing in Shanghai, up north around Beijing and out in Western China – particularly around Chengdu and Wuhan – would suggest that we need to look a bit more carefully on just where the growth is happening and what “kind” of growth it is.

I was meeting with a client the other day for whom we are doing some market entry strategy work. In our day long session, we looked at the market intelligence we had been gathering for several months and some of the conclusions we had drawn. Our client is in a rather traditional consumer market which is quite large in China – nearly 20 billion US dollars. Our forecast of the market size said that the growth would be slowing down, from a rapid 12% to less than 5% in the coming five years. That was a sign, we said, of a “maturing” market – the outside of the pie chart would not be expanding all that fast any more. However, the interesting part – particularly for our client, a supplier of high-value and design-intensive products – was that the inside of the pie chart would see very rapid and dramatic changes with a large, high-value segment becoming very apparent as Chinese consumers started to gain experience, feeling more comfortable choosing between alternatives and forming strong opinions and brand loyalty.

In the same way, while the overall Chinese economy might be “slowing” (again, if 9.5% growth can be called “slow”), then foreign companies need to look to what is happening inside the market and spend the time parsing out the segments in which they can find some real and sustainable growth. In most cases, these are segments that are moving up the value- and quality curve. China is no longer willing to be the manufacturing capital of the world – rather, they want to be the value added production capital of the world . If foreign companies have products, technology, processes, distribution channels and customers that they are willing to invest, there are plenty of opportunities here to invest it. Don’t get me wrong, there are also plenty of opportunities here to LOSE it and, we foreigners being the naïve and power-of-positive-thinking people that we are, we are going to get suckered. But do your homework, identify that specific part of the market that needs what you have, and, with hard work, blood, sweat, tears and a few starter ulcers, you should be just fine.

So should, as some suggest, that we respond to this so-called “slowdown” by moving manufacturing from China to other, lower-cost environments? I tell you, I get asked this question EVERY day (journalists love the yes-no dichotomy of it). However, it is not that simple. I hate to sound like such a consultant, but my answer is “it depends.” It depends on where your products are being shipped to. If you are going after those segments of the China market that are still growing at unbelievable rates (like automotive, aerospace, chemical, medical products of all kind, some consumer segments) then you are going to want to be producing in China – what is often called “local for local.”

However, if your operation is going to be primarily for export, then looking outside of China might not be a bad idea. A client of ours – in the home furnishings space – did the calculations on a new export-only facility originally intended for China and we are thinking now that Vietnam might be a good opportunity – it is still hungry for low-value manufacturing, has good investment incentives, a cheap labor force (you see, Vietnam is still an emerging market … they are just like that!). The factories that are closing here in China are those that are already export oriented and are so inefficient and poor quality that they could not survive without being propped up by preferable VAT rates and a regulatory environment that would turn a blind eye to employee abuse.

In the emerging market days in China, we were operating in a zero-gravity environment and congratulating each other on how high we could jump! Now China has been moving towards a “normal” environment – albeit a “China normal” – and our feet feel like two slabs of cement bolted on to our ankles. The one thing that “reduces gravity”, if you will, is to find a local market for your products, so not only are you getting a lower manufacturing cost when compared to the developed markets of the U.S. and Europe, but you are also getting some “lift” from the local sales. In previous Podcasts we have called this the “dual strategy” – to look at a market as both a site for low cost production AND as a place to grow your top line revenue through new sales – and this is never more crucial to adopt than in a “normal” environment.

So, to return to our original question: should the so-called “slow down” be a cause for concern and is it a signal for something – maybe an ominous something – on the horizon? I would answer a qualified “yes” to both halves of that question. Yes, it is a cause for concern, both for the Chinese government and companies here, because factories closing and consumer costs rising have a real impact on real lives. And no one can afford the ramifications of social unrest should things get out of hand. It is also a cause for concern for foreign investors to have been so used to zero gravity that they feel like a lead balloon.

And yes, it is a signal for something – but that something should be called “normal.” This is what China should be doing as it matures and changes. We should not be surprised. Does it bode ill for the future? Well, remember that so-called “normal” in China is still a 9.5% annual growth with a population of over 1.3 billion people and a middle class of a quarter billion people with an increasing global consciousness and money to burn. That “normal” still swings a pretty big stick in global markets and, if not met head-on and with deep intelligence to its inner workings, could cause companies in the West some major trouble.

Will China be able to make this transition successfully? Will we foreigners provide the proper mix of encouragement and in-your-face pressure to help them along this path. I don’t know. Ask me in 10 years and I recount, in minute detail, what happened and will assure you that I knew that it would happen this way.

Thanks for listening. Remember, in China everything is possible, but nothing is easy. We’ll see you next time on the China Business Podcast.

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Rumors. We all love them — when they are about someone else. In China rumors are called “xiao dao xiao xi” — back-alley news. The Chinese phrase evokes people leaning over backyard walls to share the latest titillating news gathered on a nearby neighbor or peering over walls to gather such intelligence. In an ancient culture fueled more by relationships than first amendment rights, the course of Chinese history has been determined by the potency, longevity and geographical reach of rumors.

There have been a lot of rumors about China lately, masking themselves as “facts” in the international media. For those of us who live this stuff every day, it has been rather frustrating swatting down these buzzing insects of misinformation, trying to calm our clients’ (and our own) fears and understand what is really going on.

In this podcast, we are going to consider some of the more prevalent China rumors flying about and try to add some perspective. I caution the listener that I am NOT an economist and I am sure there are deeper economic algorithms at play of which I am not aware. Fine. But get three economists in a room and you’ll get five opinions. I am just relating what we are hearing on the streets here in China.

Rumor #1: China’s exports are drying up.

Rumor #2: China is manipulating its currency, the RMB.

Rumor #3: China is no longer THE low-cost country for sourcing and is, in fact, losing manufacturing business to other Asian markets such as Vietnam.

For deeper discussion of these rumors, give a listen to today’s podcast.

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The world has been riveted by the tragedy that struck Western China several weeks ago — the earthquake centered in Sichuan province. At the time of this writing, the death toll is well over 60,000, and there are tens of thousands still missing. Millions of people are homeless and many of these people come from regions of China already just barely scraping by. Those of us in China have been spending all of our free time — and some of our work time — scanning the news for updates on the situation there. The entire country is in mourning.

Once the dust (literally) settled and the quake’s initial, awesome toll on human life was better known, many of us here have been asking about the longer-term impact of the quake on China’s economy and society. We were asked by a U.S. based think tank to provide a perspective on this and I thought I would share that with you.

In short, the government here is being very careful to say that the earthquake will not fundamentally affect the Chinese economy; however, some observers estimate that the earthquake might reduce China’s 2008 GDP growth rate by half a percentage point.

The province of Sichuan, where the earthquake was centered, contributes some 3% to China’s total GDP. The specific region impacted by the quake contributes about 50% of Sichuan’s GDP. Since Chengdu, the capital of the province and Mianyang proper, two major urban centers in the regions, were not severely impacted, disruption to China’s economy will be minimal in our view (though fixed asset losses are huge).

China’s Premier Wen Jia-bao, who has been personally involved in the post-quake rescue and relief efforts, announced last week that total government spending would be reduced 5% in order to divert those funds to the relief efforts. Wen specifically said that government bodies should reduce travel and entertainment expenses. In other words, the government is taking this all very seriously and, though we feel the economic impact on the whole of China will be quite small, the relief efforts certainly are taking a large share of the government’s focus, the impact of which remains to be seen.