Pivoting off of a post by China Law Blog from the other day, entitled The End of Cheap China, With a Giant Caveat, it is worth examining a few points about the relative decline of Chinese manufacturing output and the potential for these jobs to come back to America. But before I get started, consider this:

When it comes down to it, how many of you want your kids to work in a factory, mindlessly putting together toys, sewing socks, breathing in industrial pollutants and dreaming of a better life for $7.00 an hour and few, if any, benefits?

How many of you want your kids to enter fields where machinery, automation and robotics increase productivity at the cost of a shrinking and unneeded workforce? Is that the future you want for your kids and country?

Right. Wouldn’t you rather have them working in knowledge based jobs, or in high tech manufacturing jobs that require skill, ingenuity and which command premium salaries?

So, while the end of cheap china is here, it is relative, and China is still a relatively good bargain because:

1. It does not appear likely that China will make enough progress in building a service and consumer driven economy in the next five years to make up for a major loss or move away from manufacturing. It would be politically and economically impossible for the Government to allow that to happen.

2. China’s interior provinces are still a viable alternative to the more expensive and saturated coastal cities. The 12th Five Year Plan makes clear that more equal development and sharing of wealth is a priority. Companies can take advantage of lower costs and great incentives by producing/sourcing in non-traditional areas. Of course this needs the continued build-out of infrastructure and supporting services but Chongqing is a good example of how it can work and we believe the trend will continue.

3. America can not, and will not, win back the low value-add, commodity based manufacturing jobs it once had. If these jobs leave China, as some already are, they are going to SE Asia and South America. The US and Europe need to focus on the high-value add, technology driven export economy that Germany has perfected and which keeps it in the black.

4. China is working toward moving commodity based manufacturing inland, but is also developing higher value-add and higher technology manufacturing in the coastal areas. It is NOT abandoning manufacturing and has the money to support and subsidize it where needed. In other words China will move from selling toothpicks to the machines that make them (formerly bought from Germany).

5. China still has stellar infrastructure, with scale, built for manufacturing and export that the likes of India can’t compete with.

6. China for China – As more and more Western companies turn their focus to China as a market, they are shifting their in-country manufacturing and sourcing to creating products for China, as well as export. We expect that this will have a positive effect on China’s overall manufacturing out put in the next five years.

7. All things being equal, American retailers are not yet willing to pay the premium that MIA products command and will not be willing t pass those costs on to customers.

8. As a new generation of entrepreneurs and factory owners rises many of the old inefficiencies, quality problems and lack of understanding regarding the needs of Western markets will begin to fade providing a new advantage for China.

All this being said, it is likely that China’s economy will cool a bit in 2012 and there are major shifts taking place in the manufacturing sector, but China needs to employ a lot of people to stay afloat and for the Party to maintain legitimacy. Right now that still means a lot of manufacturing jobs, of both the commodity and high value add sort.

We see the rapid decline of China manufacturing and the rapid rise of Amero-European manufacturing to be highly exaggerated. In the end the likely and hopeful scenario is that America starts producing high-end products that produce high end wages and leave it to China and the rest of the developing world to provide the rest.

As with most things China there is a wide variety of views, statistics, proofs, forecasts etc. to choose from. The bottom line seems to be:

Sales of luxury products and services will continue to grow in 2012 as more Chinese consumers buy at home, in Hong Kong and further abroad. That said growth will be slower in the first two quarters of the year as uncertainty surrounding the capital and real estate markets on the mainland continues to fester.

But, over the next five years China and its consumers will continue their march toward being the #1 buyers of luxury products across a wide range of categories.

This article from Bloomberg Business Week is a good recap of the situation and summarizes what I have been seeing and hearing out there.

http://www.businessweek.com/news/2011-12-21/prada-poised-to-extend-slump-as-china-shoppers-cut-back-retail.html

What are you seeing?

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?

General Motors Co. (GM) will introduce its Chevrolet Volt plug-in hybrid car in China at an auto show on Nov. 21, and dealers will begin taking orders for the model “shortly,” the automaker said.

“This will be relatively low-volume,” Kevin Wale, president of the Detroit-based company’s China unit, said in a phone interview yesterday in Shanghai, declining to comment on specifics including pricing before the show in Guangzhou. “We’re trying to use this as a statement for technology and the beginning of the path towards electrification.”

GM will be first among the world’s largest automakers to sell a plug-in car in China, where rivals including Daimler AG (DAI) and Nissan Motor Co. also plan to introduce similar models. Electric-car sales in China are forecast to exceed those in the U.S. by 2020, helped by government subsidies and investment as the Asian nation, the world’s largest polluter, seeks to cut emissions, according to the Boston Consulting Group.

The Volt, which is powered by an electric battery for about 40 miles before a gasoline engine kicks in, retails in the U.S. for $39,995 before a federal tax credit.

The model will complement an all-electric car that GM is working to develop with its Chinese partner, SAIC Motor Corp., Wale said.

Daimler is working with Shenzhen-based carmaker BYD Co. to introduce an electric vehicle in China in 2013, the Stuttgart, Germany-based automaker said in April. Nissan plans to export its all-electric Leaf car to China for fleet sales, the Yokohama, Japan-based company said in September.
Toyota Prius

Toyota Motor Corp. (7203) started a yearlong test of its Prius plug-in hybrid in the city of Tianjin early this year, and the model isn’t being sold to consumers yet, said Niu Yu, a spokesman for the Toyota City, Japan-based automaker.

Electric cars may account for as much as 7 percent of total auto sales in China, the world’s largest vehicle market, by 2020, Boston Consulting said in a June 14 report. Chinese consumers are more receptive to the technology than their U.S. and European counterparts, with more than 90 percent showing interest, the report found.

“To achieve a breakthrough, carmakers must offer attractive mass-market vehicles, and the vehicles’ relatively high price and smaller driving range must be addressed,” said Marco Gerrits, a Beijing-based partner at the consulting company.

Currently, buyers of energy-efficient cars in Shanghai, Shenzhen and four other Chinese cities qualify for a 60,000 yuan ($9,450) subsidy. The government aims to have 1 million electric-powered vehicles on the road by 2015, according to the Ministry of Science.
Lower Parking Fees

State media have reported China would support the use of such vehicles through favorable policies and buying incentives. Alternative-energy cars will be exempt from current license- plate and traffic restrictions in some major cities, Xinhua News reported Nov. 12, citing a government notice.

There are 25 Chinese cities running trials for alternative- energy vehicles, and local authorities must develop policies to promote their adoption, including building charging points at government agencies, hospitals and shopping malls, Xinhua said.

The trial cities should also lower fees for parking, electricity and road use for such vehicles and adjust the purchase policies of government agencies and state-linked companies, according to the report, citing the National Development and Reform Commission and the ministries of science and technology, finance, and industry and information Technology.
China Demand

China’s auto demand may grow 5 to 10 percent next year, driven by demand for passenger cars, Wale said today. Sales of commercial vehicles, which have dipped this year, will grow 5 percent, he forecast.

GM will expand its luxury Cadillac brand and distribution network and broaden its range of sport-utility vehicles, he said.

“We’re seeing a much greater move to individuality in terms of colors and body styles,” said Wale, who aims for GM’s China sales to grow faster than the overall market in 2012.

The U.S. carmaker is counting on China to overtake Toyota in global sales this year. GM expanded deliveries in the Asian nation 6.9 percent from a year earlier to 2,113,274 vehicles in the first 10 months of 2011, according to the company.

Give me those nuts!

In my many years of living, working and doing business in China I have seen countless ways in which Chinese manufacturing and consumer consumption have changed the world.

Not just the obvious examples but the small, subtle ways as well.

Take for example the cobbler on the Upper West Side who I send my shoes to. Years ago he complained to me how badly his business had fallen off. He couldn’t understand why things had been going so poorly for him, so fast. “People still wore shoes? The hippies didn’t win on that one right?”

His problem, it turned out, was that shoes that used to be made in Europe or the US that retailed for $300 now cost only $75 at retail, thanks to Chinese production.

At $300 people would spend the money to resole and repair. At $70 they would be paying only slighlty more for a new pair. Thus my cobbler friend’s precipitous drop in business.

Which brings me to this headline from today’s Voice of America:

Chinese Taste for Pecans Raises Price in US

A holiday tradition in many parts of the United States will cost more than it has in many years this holiday season. It is pecan pie.

As far as the traditional holiday pecan pie in the United States, Worn says there is talk of price hikes from 20 to 25 percent due to the price hikes.

So there it is, China is changing the balance of econmic and political power in the world and while they are at it, grinching Americans on their beloved holiday season Pecan Pies.

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.

I did a Q/A with the always insightful, always entertaining and fantastic writer Benjamin Shobert of the Asia Healthcare Blog yesterday. Here is the article he published.

Ben Shobert: You make reference to what you call China’s policy of “health through wealth?” Can you explain where that comes from and what it means to companies looking at China as an opportunity for their healthcare business?

Michael Zakkour: That phrase came from my extensive and repeated readings of the Chinese government’s 12th five-year plan. I tried to formulate in my mind what the commonalities across sectors were as the country pursues growth. What I saw was an admission by China that to sustain growth and continue to move in the right direction they had to admit that the country has some unhealthy things happening. To address this, they see that they need to approach the health of the people, the country and the environment. I saw a really striking focus in that plan on improving the healthcare system – all aspects of it.

1. I spoke on the subject at FIT last week and I will be speaking to international marketers on the subject at “Inside the China Marketing Mindset” on Wed. the 19th

2. There is a lot to talk about on this subject at this time

Today’s announcement from THE GAP, the largest apparel retailer in the US, sums up everything I have been writing, talking and advising on for the last year:

From today’s AP wire.

Gap plans store closures in US, while opening new locations in China

By Associated Press, Published: October 13

NEW YORK — Gap Inc. plans to close stores in the U.S., while expanding in China.

The struggling retailer, which runs the Gap, Old Navy and Banana Republic chains, detailed plans on Thursday to close 189 locations, or 21 percent of its namesake Gap stores in the U.S., by the end of 2013. At the same time, the largest U.S. clothing chain said it plans to triple the number of Gap stores in China from about 15 by the end of the year to roughly 45 by the end of next year.

If you are a retailer or brand owner and you are not in China yet, what are you waiting for? For the market to be so saturated that you have no chance? To fall so far behind your competition that you won’t have to bother? To go out of business chasing zombie customers in the West?

New York, Monday, October 3, 2011 – Internationally known China business consultant Michael Zakkour of Technomic Asia, said the flood gates are open for foreign fashion brands in China. Speaking today at the Fashion Institute of Technology event entitled Fashion, Beauty, and Status, Zakkour highlighted his year long study “On The Frontline of China’s Apparel and Luxury Markets.“

China is the number one apparel market and the second largest fashion accessory market in the world. “The opportunities for established and independent fashion brands are opening up now in second and third tier China cities. We see accelerated investment in cities including Chongqing, Suzhou, and Qingdao,” said Zakkour.

Technomic Asia’s research showed Louis Vuitton, Burberry, Coach, and Ferragamo investing in these new fashion-conscious urban markets. “These are cities that every US business should become familiar with as they will be the new wave of dynamic consumer growth in China,” Zakkour added.

The boost in casual apparel sales, up 20 percent annually in China, is a strong indication of clothes becoming a fashion and status statement and less of a utility purchase. “We are in an era where a new generation of Chinese is purchasing more clothes for a variety of purposes, or even as a political statement,” said Zakkour. He added, “it’s a statement that says, ‘China has arrived to be noticed on the world stage as consumers and designers in their own right.’”

Lastly, Zakkour called specific attention to the average percentage of a women’s income, between 10 and 15 percent, spent on cosmetics and skin care. A large portion of that, approximately 45 percent, is dedicated to skin care and moisturizers as compared to heavy use of makeup. He called this an important distinction that reflects China as a unique consumer market.

“Our research shows it would be a mistake for foreign companies to market themselves in China as in other parts of the world; China’s consumers are unique and need to be understood by marketers before they try to replicate what worked in other countries here,” Zakkour said.

About Technomic Asia

Technomic Asia, a division of Tompkins International (www.tompkinsinc.com), is a business strategy and supply chain consultancy with more than 30 years of experience helping clients plan and execute Asian growth and operational strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential and assistance in designing the optimum strategy for success. Technomic Asia’s Michael Zakkour is a principal with the firm, is a resource on topics involving China’s economy and growth opportunities. He is a frequent speaker for business and international conferences.

The China Business Network has posted a podcast interview with me regarding China’s luxury, fashion and premium brand markets. This is, of course, in anticipation of my address at The Fashion Institute of Technology on Monday, October 3.

To wit:

Michael Zakkour, Principal at Technomic Asia and an expert on strategic market planning and trends in China, has spent the last year analyzing China’s new consumers. And what he has discovered is that many view fashion and luxury products in a very different way than they did even a couple of years ago.
His presentation, Fashion, Beauty and Status – One Year on the Front Lines of China’s Luxury and Apparel Markets, will detail a year-long study of what consumers want, who is selling it to them, and how they do it.

Also speaking will be Professor Mark Greiz, Fashion Institute of Technology, and Chief Consultant, MG Consulting; Professor Lawrence Delson, Fashion Institute of Technology and New York University and President, Delson International Inc., will moderate the session.

The event is being held Monday, October 3, 6:30 pm – 8:30 pm, at the Katie Murphy Amphitheater, Ground Floor, Fred Pomerantz “D” Building, Fashion Institute of Technology, Northwest corner of 27th Street and 7th Avenue, New York City.

The event is free. Please bring a picture ID to show security.

I’ve had a lot of names for it over the years but the most succinct one is – “EMPTY STORE SYNDROME”.

It is a phenomenon somewhat particular to China. If you have spent any time traveling or doing business in China you know the scene.

Three thousand square feet of retail space in a luxury mall staffed by pretty/handsome/fashionable young people. Every product looks perfect, the fixtures, lights and other aspects of merchandising are perfect and the tenant is a world famous top 50 brand, only…there is no one in the store. There never is. If you step into one of these stores you are either a. surrounded by five staffers eyeballing you suspiciously or b. ignored by the five sleeping, reading, dreaming staffers

In general the people are in the mall and they may pass through the store, but they NEVER BUY ANYTHING!!!! Or so it seems.

A recent Cushman and Wakefield report shows that rising rents, overcapacity and too much competition is exacerbating the problem in Beijing and other Tier 1 cities. Malls and stores that are either empty or just full of window shoppers.

This is an expensive problem for brands and the distributors who pay a lot of money for “counters” or stores in a mall.

Of course this flies in the face of my belief in the growth of the Chinese consumer market and the numbers that back it up. People in China are buying, they just don’t seem to be doing much of it in the malls.

So where are they buying? Our year-long study of Chinese consumer behavior, channels, distribution and merchandising shows us that:

-E-commerce (both legit and non legit) is taking a huge chunk out of retail sales of luxury, premium and specialty products

-FMCGs are seeing increased sales on the internet and supermarkets, hypermarkets and traditional markets still make up a huge chunk of sales

-The stranglehold of the “distribution” systems that permeate and rule over almost all consumer product sales is starting to wane. Foreign brands and retailers are growing tired of the expense (50% of sales for the distributor anyone?) unreliability and low sales volume that comes with the distributor mall and department store model and are seeking alternatives

-The economics, control and return on owner-operated, stand alone, stores is helping this model gain ground

-The street-level and invitation only multi-brand retailer and boutique models are starting to gain in importance as well

-The expansion of brands and retailers into 2nd and 3rd tier cities means Mr. Wu can buy his Prada briefcase in Suzhou and doesn’t need to go to Shanghai

So the paradox of robust consumer product sales and empty malls and stores can at least be partially explained by the above. What are you seeing out there? What is your view as a brand, retailer, distributor, shopper?

Is the China consumer market going to continue to expand exponentially or are we seeing “Peak Shop” in China?

It would seem to make sense. More IP, more brand recognition, more built-in trust and the ability to meet the demand in China with a “hometown” company.

Lenovo? A company from another industry? An SOE? We shall keep tabs on this and keep you posted.

…and be reborn as the local version.

Great piece by Wall Street Journal Beijing correspondent Loretta Chao on Groupon’s abrupt China closing (you’ll need a subscription to see the entire article).

Chao reported Groupon’s joint venture, Gaopeng.com “closed offices in some cities and laid off hundreds of employees, according to people familiar with the situation.”

To me it sounds like a familiar situation.

China probably overtook the U.S. as the largest personal-computer market last quarter, after three decades of American dominance in an industry pioneered by Apple Inc. and International Business Machines Corp.

Personal-computer shipments in China rose 14 percent to 18.5 million units during the second quarter, the first time they surpassed the number in the U.S., where they fell 4.8 percent to 17.7 million, Bryan Ma, an analyst at research firm IDC, said in an interview today. On a full-year basis, China will likely pass the U.S. in 2012, he said.

The estimates highlight the growing importance of China’s consumers to the global economy after the country passed the U.S. in 2009 as the largest auto market.

Ok, so two weeks ago we let you know that China is now the number one apparel market in the world. And we already know it is the fastest growing auto market in the world, so we add computers to the mix.

The good news is that the opportunity to sell to 1.5 billion people is there. But as we say in China. “Everything is possible but nothing is easy.”

The bad news is that there are still some very high hurdles and obstacles to overcome.

Take this fascinating story about groups of Chinese netizens petitioning Shanzai (counterfeit) factories to make custom made fake bags and apparel. So companies who do not even make or sell in China are getting ripped off by the very youth market they want to target. TIC.

From fashion icon to fake production in 5 easy steps!

by Jay Mark Caplan

Counterfeit designer goods are commonplace in China, but fakes don’t always match the hottest trends. After all, how can a middle- aged factory owner in Guangzhou keep up with what Kate Moss is wearing?

To remedy the situation, industrious Chinese fashionistas are using online forums and e- commerce to connect with factories and get exactly the fakes they want.

Just check out Hers.com, a popular fashion and beauty forum with hundreds of threads devoted to factory petitions.

Here’s how it works:

1. START A THREAD AND RECRUIT FOR A GROUP BUY

In late July, Hers.com user White Rose decided she simply had to have a copy of Danish model Freja Beha’s trademark Balenciaga biker jacket.

So she started a thread on Hers.com, posting photos of Freja with her jacket, and encouraging her ‘sisters’ to get on board and vote for production of designer fakes.

Bremmer’s basic precept is that in the future SOEs will challenge public and private companies for market domination, and will win.

Today an article ran on Reuters about the rise of Chinese SOEs and the concern it is causing among American business leaders.

And I quote: Given China’s rapid economic growth and its push for Chinese enterprises to “go global,” former Deputy Treasury Secretary Robert Kimmitt said it is certain the number of big Chinese companies will continue to rise.

But what American business finds disturbing is that most of the Chinese companies are state-owned, including the three in Fortune’s Top Ten — China Petroleum and Chemical Corp (also known as Sinopec) (600028.SS), China National Petroleum (CNPET.UL) and State Grid (STGRD.UL), which says it supplies energy to over 1 billion Chinese consumers.

“A new dynamic in the world economy threatens the competitiveness of American companies and workers in world markets and undermines our country’s core belief in market-based economy,” the U.S. Chamber of Commerce and the Coalition of Services Industries said in a joint report.

Strong stuff from some important corners.

We believe this concern is legitimate. As the idea of a “Beijing Consensus” grows as a model for developing countries, and as the Amer/Anglo/Euro model of capitalism and free markets are suffering grievously from greed, shortsightedness and self-destructiveness,the SOEs of China and others have risen to the challenge of competing on the world stage.

We advise companies around the world who are doing business in/with China or who are competing with Chinese companies abroad to be sure to have a complete understanding of these State players, how they operate, how they compete and what their plans are for the China and overseas markets. Because, despite pleas of unfairness and how it “undermines our country’s core belief in market-based economy” in the short term this dynamic is not going away. It’s long-term sustainability is another discussion altogether.

What are you seeing out there?

http://latestchina.com/news/?RID=43940

By Michael Zakkour

My son Julian is 21 months old. When he was born our immediate need for diapers and formula and our solution for buying it all led to me thinking about how technology and the modern supply chain are no longer just supports for business but in many cases they are the business.
In particular we discovered a company called Diapers.com, one of the fastest growing e-commerce companies in the world.
They don’t make anything, don’t design anything, and do not employ many people; but what they do do they do better than anyone else. That is, they offer thousands of baby items for sale on a slick web interface, delivered to your door in 24-48 hours, at discounted prices.

In other words they are a technology driven interface with a supply chain powered business model dependent on cheaply manufactured goods from China.

They are a perfect example of the three major trends shaping the world of commerce today.
E-commerce, Supply Chain as Business Cornerstone and The Rise of China.
They have all contributed to creating new types of companies and require business owners across industries to thinkabout their operations in new ways.

E-commerce

Over the last twenty five years advances in the technologies that gave rise to the e-commerce revolution have shaped the way every one of us perceives and engages in the shopping experience. Luxury items, bathroom items, movies, music, medical advice, daily deals and almost every other form of commerce has moved online.
And if people are buying, that means someone else is making, storing, moving and delivering. True, some purchases remain in the digital realm, but tangible items are the backbone of the Amazon Empire and the growing trend to buy it all online remains a constant challenge to traditional retailers and brands.

Supply Chain as Cornerstone

Helping fuel this burst of consumerism around the world is the modern supply chain. Everything from supersize container shipping, to Supply Chain IT, and material handling integration to complex distribution centers that pick and sort thousands of SKUs, the movement of goods by land, air, sea and rail and the vehicles and facilities that make it all possible are what define our 21st century commercial lives.
As with Diapers.com, Amazon.com, Ebay, Wal-Mart and so many more, the supply chain is no longer a support system but an integral driver of savings, revenue and growth. In some cases your supply chain will help define who you are with both

your customers and your suppliers.
Technology in the supply chain and technology as an interface have changed the way we sell and buy goods. But those goods have to come from somewhere.

Rounding out the three trends is the rise of China

With China having served as factory to the world since the early 90s, North Americans, Europeans and many others around the world suddenly had access to a number and quantity of goods like never before.
Put simply, China made it possible for more people to buy more stuff, in more places. Things that people only twenty years earlier saved up to buy (like a good vacuum cleaner) became disposable and replaceable based on price.

While it’s true that China is transitioning a good portion of its manufacturing to higher value, higher margin goods and focusing more on services, it will remain for the near future the go to nation for a huge number of categories in the low to mid range and will bring more higher tech capabilities to bear every year.

We recommend that every business think about how the rise of e-commerce, the new importance of supply chain as a growth driver and a rising and changing China affect their business and how they could benefit by stronger strategies for each.

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.

The job of educating Westerners about the realities of China (good, bad and ugly) is still a big one.  Cliches aside, you do not need to walk a mile in a Chinese native’s shoes to understand his plight.

Andrew Sullivan’s The Dish (in my opinion the best blog in the world)  recently ran a piece on why public works and infrastructure jobs always run over budget.  This led to a sidebar argument about China and the US and their respective abilities to get big projects done. During the discourse one reader ranted on China and in only four paragraphs got about 10 things wrong.

Sullivan published my rebuttal.  Do you agree with my points?  The original post?  The reader’s opinion?

China imposes “Harmony” tax on foreign companies

Beijing declares talk of Inflation a “thought crime”

When in doubt, blame foreigners

China fines Unilever $300,000 for talk of possible price increases

The last one is the actual headline but the first three could have been the subheads. Inflation has risen 5.4% in China this year and keeping prices under control is a top priority for 2011. Patrick Chovanec, an economics professor at Tsinghua University in Beijing said today that China’s leaders are “trying to put out fires and the fire of the day is inflation…” If you were wondering, yes, the government can impose these fines. The only constant in China is finding out how much you don’t know, no matter how long you have been here.

Under China’s “Price Law” companies can be fined for “spreading rumors about price increases.” Who knew? So Unilever, which only suggested verbally that they might, possibly, are considering, about to mull, perhaps dreamed about, could, may, raise prices to deal with rising raw material and labor costs, brings down the “hammer of harmony” upon themselves. And they were thus smote: “Severe punishment was meted out this time to break ugly habits and build new rules, said the National Development and Reform Commission, warning other firms to “absorb the lesson.”

I urge all regional heads, C-suite suits, brand managers and companies selling products in China to take note.
This is a blunt proclamation aimed at keeping a “Harmonious society” – China-speak for keeping the people happy, healthy, fed and paid so that protests and social unrest leading to a questioning of Party rule do not develop. Right now inflation is the threat and your company needs to be aware of the social and political context in which pricing your products takes place.

To be clear: Inflation threatens harmony, social unrest threatens the government, and that could be a threat to your business in China. It is unlikely that these fines will become a major trend. Enforcement is difficult and the PR message would be bad for China Inc. (although that doesn’t always stop cases of “tin ear syndrome” on the Mainland).*  Nonetheless it is an example of why companies in China need to be constantly evaluating the political as well as social trends that impact business.

In the end China needs to solve the real causes of inflation:

• -Oversupply of money post-2009 stimulus
• -Rising cost of raw materials and commodities
• -Continued Urbanization
• -Need for further Yuan appreciation (note this is happening now and the RMB hit an all-time high against the dollar as I am writing this)

Make no mistake, the Government has problems that are in many ways common with other countries but are uniquely large in scale and cultural import.  They are usually adept at navigating dark waters.  As short and long term programs and policies are put in place to deal with the big picture problems it would still be wise to take stock of where your company, products and prices fit in. Hell, if I knew I wouldn’t sound so cynical I might even suggest, if I were your consultant, that you create messaging/take actions to address this issue and work it to your advantage. After all, working with government initiatives and goals in mind , and never against them, is a sure path to…Harmony.

Updated: Tuesday, May 10, 2:13 New York Time

I just read my good friend Dan Harris’ post at the China Law Blog on the same topic Unilever fined for mentioning the I (inflation) word. I recommend his insightful post about what it means for you.

*H/T to JF

Pay Up OK?

In the wake of the great global recession there has been a “bad debt” explosion in China. It is estimated that the number of debts owed to Chinese exporters by US companies has increased 80% over the last two years. It is estimated that 5%-10% of all of purchase orders placed with Chinese manufacturers end up as unpaid bills/bad debt. Furthermore the China Chamber of International Commerce estimates outstanding debt owed to Chinese exporters at $150 billion with an annual increase of $15 billion. At most, only 5% of this debt is currently being recovered.

So why does so much of this debt get written off, uncollected and forgotten about in China? Why are so many US and European companies getting away with not paying what they owe, with no effect on their credit rating?  Chinese companies tend to keep pushing bad debt off sometimes as long as two or three years, hoping for payment, by which time it is all but unrecoverable. Chinese companies accustomed to doing business by Guanxi (relationships) negotiate with their debtors in person, usually yielding some result, but this does not work internationally.

Collections is a new element of business for many Chinese companies.  Some Chinese companies fear losing “face” if others find out they were not paid. Big State Owned Enterprises tend to push bad debt under the rug because they can, and because no one wants their career ruined by “bad debt” – it’s easier to put it off as “still outstanding”.

Many Chinese exporters do business based on credit, but do not have credit check and ratings regimes in place to make informed decisions. Chinese companies think that debt collection is a racket and that if they hand over their case to a debt collector the collector will keep the money.

Pan Asian Commercial Consulting Group, a US based corporate debt recovery firm and a new client of ours, has entered China to try and change all of this. They believe that there is a great business opportunity but also believe there is an ethical and moral component to helping these Chinese companies.

They are offering a straightforward approach. They have agents and lawyers in all 50 states (because statutes and laws vary by state). Once they receive a file from a Chinese company they will send the appropriate documentation and letters to the debtor company. If this fails the legal process begins. Once the debt is collected, Pan Asian earns its commission and the Chinese company recovers part or all of its money.

It will be interesting to see how this industry develops in China as more and more Chinese companies assert their rights and gain a better understanding. Do you have any experiences in this arena? Positive, negative? Opinions on the business as a whole in China? What are your thoughts?

A typical headline was the BBC’s Foreign Firms Complain of China Favoritism. This is a highly selective reading, since more than half of U.S. companies in China see regulations as neutral or favorable to foreign companies. Another characteristic headline was Reuters’ U.S. Firms in China See Regulation as Top Hurdle. Of course, regulations are a top hurdle, but according to our survey data, U.S. companies were just as concerned with regulation last year, and there was essentially no change from 2009. In fact, the greatest business challenge reported by U.S. companies was HR constraints, which have nothing to do with the regulatory environment. The main takeaway from this year’s survey was that profits and revenues were up sharply over 2009, and that U.S. companies turned in record performance in 2010, regardless of the regulatory environment.

The Hu-Obama summit has brought a great deal of attention to the AmCham survey, perhaps it was this political climate in Washington, D.C. that masked the facts we uncovered on the ground in China with US business leaders. An article that we believe was most reflective of the research we conducted was the Shanghai Daily’s U.S. Firms Find China Profitable.

Our press release in this blog has already gone over the record 2010 profits and revenue growth among U.S. companies in China. These were both up sharply over 2009, but were also markedly higher than 2008, which was already a strong year. Not mentioned in our press release is that operating margins were also up, and have risen steadily since 2008. In 2010, fully 66% improved their operating margins, rising from 45% in 2009 and 33% in 2008, suggesting that U.S. companies have internalized efficiencies wrung from the relatively “bad” year of 2009.

An unreported area of “positive news” revolved around U.S.-China trade. Fully 58% of AmCham Shanghai member companies import finished goods or parts from the U.S. which has positive contributions to US jobs. Even if U.S. companies are producing goods in China for export, only some portion of that is Chinese value-added (e.g. the IPhone), and some portion of that is usually imported U.S. components that support U.S. jobs. Our data show that the U.S. value-added of imports from the U.S. to U.S. companies in China accounts for about 20% of their sales in the China market.

As for the “bad news,” it was often reported that “63% of U.S. companies think that the regulatory environment in their industry is not changing or getting worse.” What the foreign press ignored, however, is that 37% think that it’s improving, and that this was more than the 15% who think it’s getting worse. While it is true that “80% think that the regulatory environment is not transparent,” fully 25% think that this still doesn’t hinder business. This underscores our point that U.S. companies now have a more seasoned or mature confidence about business in China. They know that they are great challenges, but they have learned to profit despite them.

The hottest topic among the “bad” news was China’s Indigenous Innovation Policy, which got a lot of coverage partly because Hu agreed to delink government procurement from domestic industrial policy. Some articles cited the 47% of U.S. companies that are “concerned” about the Indigenous Innovation Policy. Yet, more significant is that only 10% report a tangible negative impact so far, and that those suffering the most are in predictable industries: healthcare (25%), Chemicals (21%), and Energy (18%). (These numbers are all significantly higher, in statistical terms, than the 10% average.) What’s most revealing is that we don’t see this kind of entirely predictable variation across industries among the 47% who are just “concerned” about indigenous innovation. Why is that? The most likely explanation is that they are reporting a fuzzier feeling of unease about the future, which may or may not impact their businesses.

Not mentioned at all in the China Business Report (because it didn’t make the final draft) was our statistical modeling of our three indices: business success and confidence, and the degree to which China’s regulatory environment is welcoming to foreign businesses. These indices each aggregate several questions in the survey, so as to measure broad business concepts and avoid idiosyncrasies in the wording of any one question, thus making them more objective. From our modeling, we discovered that there was a strong causal relationship between pairings of each of these indices, except for confidence and welcoming. Put differently, a friendly or fair regulatory environment doesn’t make U.S. companies significantly more confident about the future, since China’s regulatory environment is only one part of the evaluation of long-term opportunities and market potential in China. Statistically speaking, our analysis confirms what we have learned from our work at Technomic — that opportunities for our clients in China justify a high degree of confidence, and that U.S. companies have found ways to succeed despite the challenges.

From our perspective at Technomic Asia, there are at least three takeaways from the survey data relevant to U.S. companies thinking about entering China, especially SMEs.

First, they should keep in mind two kinds of risk. There are certainly risks that China-entry could result in IP infringements, shifting interpretations of regulations, and policy changes favoring local competitors. Our data confirm that these are concerns for U.S. businesses here in China (as they always have been). Potential China-entrants should also keep in mind, however, the risk not coming to China. Especially since the 2008-2009 recession, our SME clients have found that they have little choice but to have a China play, if they want long-term growth.

Second, do not be daunted by the China market. Most of the business news coming out of the summit headlined how the China market is getting more onerous in terms of regulation, indigenous innovation policy, and favoritism toward local companies. This completely ignores the good news in the report. The fact is that U.S. companies in China are thriving in China, and confidence in the China market – and the investment based on that confidence – is not directly related to how welcome U.S. businesses feel in their specific industries and product categories. At Technomic Asia, we can help China-entrants, especially SMEs, navigate the complexities of their specific industries, and arrive at the performance U.S. companies reported in 2010.

Third, an objective picture of the China market is necessary. Although reports of solar panel makers, wind turbine makers, and other U.S. businesses hurt by domestic protectionism are certainly a cause for concern, they are not necessarily representative of all U.S. businesses in China. Our rigorous, representative survey data show that this is not the whole picture. Again, while about half of U.S. companies were “concerned” about indigenous innovation, only 10% report negative impact, and there was no variation among those who just feel “concerned.” There are large swathes of the China market where government policy is not nearly as relevant and growth potential remains enormous, and Technomic Asia can help identify these opportunities.

This Bloomberg report on Chanos’ comments is the latest prognostication on China’s property bubble from a respected Wall Street financial guru. The article cites supporting forecasts from Mark Faber and Kenneth Rogoff, also highly respected financial economists who were on the right side regarding the U.S. economic meltdown. We have actually heard this forecast for China before and you will see more items like this in the U.S. business media over the next few months. Even Charles Evans, the unflappable president of the Chicago Fed, raised a question about China’s property bubble when he recently visited Shanghai and Beijing.

It is absolutely true that (1) residential property prices in major urban centers have more than doubled in the last couple of years and (2) the recovery in China was driven by massive bank lending (some US$1.5 trillion in 2009) that was largely soaked up into the property sector. High-end residential real estate prices in Shanghai jumped 60% in 2009 alone. Average residential real estate prices were up 10% year-on-year in February 2010. Furthermore, Chanos is also correct that China’s still hot economic growth is primarily driven by investment, not consumption. Investment is well over 50% of GDP, certainly the highest investment/GDP ratio in the world for major economies. To kick the economy back up to speed, Beijing just slammed the investment pedal to the metal once again, injecting massive liquidity through the State-owned banking system last year, in addition to the $585 billion Chinese stimulus program.

However, I do not buy the forecast that there will be a sudden real estate price deflation, particularly in residential property prices. The government routinely manipulates property price levels, using transaction taxes and access to bank lending to either stimulate or cool the property market. Right now, we are in a cooling phase, with the government raising real estate sales and business taxes, doubling mortgage down payment requirements, and dampening speculative buying dampened with local rules limiting the number of apartments that can be purchased by a single owner. But the government can just as easily reverse these levers, as it did in 2008 when property prices briefly showed negative growth.

Chanos and the other pundits who expect a property market crash in China have missed the invisible elephant in China’s “socialist market economy.” The simple fact of the matter is that there are about 10 million active Communist Party members who control the government, the banks, the State-owned sector, land allocation and development, and many other elements of the economy. Guess what – they are all residential property owners, in many cases of multiple residential properties and in some cases of commercial property! The levers of political and economic power are in the hands of the same relatively small group that benefits from rising, or at least stable, real estate prices. They will continue to pull those levers in a way that maintains the value of their assets. They would lose substantial personal wealth from a sharp decline in the residential property market. Given low bank interest rates and highly volatile domestic stock exchanges, real estate is the primary reservoir of personal wealth.

This is why urban real estate prices in China appear to defy the laws of economic gravity and will probably continue to do so for the foreseeable future. There is more potential volatility in commercial property prices than in residential prices, but this volatility will be largely local in nature and will depend on the supply/demand situation in different urban areas. China has a real estate market that is driven by the lack of other personal investment opportunities and that is controlled within parameters that are set by the same people that own the assets. That is a market reality that will not change later this year or sometime in 2011.

But Wal-Mart is not necessarily cutting staff … they are “relocating” them.  This might not be such a big deal in the U.S. where white collar management in retail is somewhat used to being moved about like pawns on a national chess board (a friend of ours with Best Buy was relocated 5 times in 11 years).  But in China, this is a big deal.  The hukou system – whereby everyone has a city “residence permit” that gives them and their families access to cit services such as education – is still alive and well in China.  It used to be (10+ years ago) that the hukou system would keep people from moving at all because you could not get healthcare or education in a city in which you did not have your hukou.  Many of those restrictions, particularly for white collar workers, have been lifted.  A lot of people now living in the big cities (i.e. Beijing, Shanghai, Guangzhou) are not originally from here, but many of them sure hope to get their hukou here some day.  For instance, of the 20 people in our Shanghai office, only 6 are from Shanghai itself; the rest are wai di ren, or “outsiders”, in a polite way of speaking.

So when Wal-Mart says they are going to relocate people, this – in and of itself – is not a shocking thing.  Lots of people in modern China are from “somewhere else”.  The problem is where Wal-Mart will likely relocate them to.  The vast majority of Wal-Mart’s recently-opened stores are not in the big cities.  Ammend that: they ARE in big cities, just not THE big cities of Shanghai, Beijing and Guangzhou.  They are in smaller cities like Wuhu (in Anhui province with 2.3 million people) or in Maoming, a prefecture-level city in southwestern Guangdong province with a population of “only” 6.8 million.

“There are no layoffs,” said Jonathan Dong, a spokesman for Wal-Mart China. “If someone wants to go somewhere else [outside Wal-Mart], that is their decision.”  Right.  The “choice” they are offered will be moving to Maoming and keep your job or stay in Shanghai and lose it.  If true, it is an ingenious play…Wal-Mart is able to stay within the strict confines of the labor law that makes it difficult to let workers go and still effectively reduce their workforce.  If my way IS the highway, the choice is easy.

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.

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.

But stay tuned … I am sure that the financial world will be chatting this one up big-time.  It’s a whole lot more fun talking about this than writing yet another story about throwing a bazillion dollar life-ring to yet another bank.

Say what you want about the Chinese authorities, but when they are determined to build something, it can usually get it done fast.  Go to a rural township one year and it’s a patchwork of dirt roads and asphalt.  Go there the next year, and not only are all the roads paved, but they’re lined by trees of all the same breed, shape, and height.  Ask around, and a peasant points into the distance and says that the government “uprooted all those trees from that mountain over there” (behind that river, across that valley!).  The irony of a lush roadside next to a naked mountainside is not addressed.

Pundits in the U.S. applaud the billions in infrastructure investment in Obama’s stimulus plan, but keep in mind that at 10 to 20 times the wages of those peasant tree-movers, we’re getting a lot less investment bang for our stimulus buck.  This has been the “miracle” of China’s breakneck infrastructure development (wowing first-time travelers to China, serious business people and casual tourists alike) in miniature: cheap labor.  Combine this with the “P&L impact” of the China stimulus plan we blogged about the other day, and it makes for some potentially interesting outcomes.

Given the easy mobilization of unskilled labor in China, to say nothing of China’s lack of pesky checks, balances, and legislative mud-fights, it stands to reason that their $586 billion stimulus plan is getting off the ground much faster and with much greater effect than all of the “shovel-ready” projects in Obama’s stimulus plan.  So, how fast has it been going?

According to the Chinese government, $57 billion (or one-tenth of the total stimulus) has already been spent as of the end of 2008.  Of this…

• about 69 percent ($39 billion) has been spent on rural infrastructure, roads, railroads, and housing construction
• an astonishing $90 billion has been budgeted for next year to more than double China’s rail network over the next decade, adding 25,000km of track
• construction has already started on a $13 billion gas pipeline from Xinjiang to Shanghai, and there are plans to start building at least four nuclear power plants this year.

As a result of these and other mega-projects, Yangtze River cargo throughput of steel, coal, and cement ticked up in January after suffering declines since last August, despite steep declines in manufacturing production.  Clearly, the stimulus is already affecting the real economy.  And, we would venture to say, its effect will be an order of magnitude greater than the $400 million for highway overpasses and upgrades in Kansas, or the proposed $3 billion just for a four-lane tunnel in downtown Seattle (Ed note: not that one might NOT want to be high above Kansas or far below Seattle!).

Aside from basic infrastructure, China’s stimulus will be spent in a variety of other ways, some familiar in the U.S. and others not so familiar.  Ten industries have been designated as stimulus beneficiaries: automobiles, steel, textiles, shipbuilding, petrochemicals, light industry, electronics, nonferrous metals, equipment manufacturing, and logistics.  Some will benefit from consumption subsidies, such as 13% off for peasants to buy mobile phones, computers, and home appliances.  Others, such as textiles and light industry, will get bigger export tax rebates.  Almost all of the industries will benefit from government commitments to invest in innovation and new technology, with multi-billion dollar funds already announced for the auto and steel industries.

The government is also taking industrial policy one step further, guiding consolidation in the fragmented auto and logistics sectors, and getting rid of excess capacity in steel, metals, and equipment manufacturing.  Industrial policy is not always spending per se (and it is important to keep in mind that the Chinese term for the stimulus, 振兴计划 (zhenxing jihua) or “rejuvenation plan,” does not necessarily imply spending), but China is clearly committed to a degree of market guidance that the Obama administration, even with rumors of bank nationalization, would never touch.  The Chinese authorities are thinking of the global crisis as an opportunity to enhance their industrial competitiveness.

So, it’s never surprising that things are built fast in China, and the ambition of government planners has never been in doubt – but how much of what has been announced is really part of the stimulus, and not accounting magic?  We’ve all heard in the Western press that a big item in the stimulus is “earthquake reconstruction,” which clearly would have gone forward regardless of the financial crisis (though at a slower pace).  It’s easy to suspect that some big-ticket projects and industrial policies are “piggy-backing” on the stimulus to give their proponents bureaucratic momentum, thus greatly exaggerating the headline figure of $586 billion.  When the government officially allocates only $23 billion to “industrial restructuring” while sources from within various departments announce stimulus spending whose total far exceeds that amount, we know that something fishy is going on.  Despite the anemic pace of U.S. stimulus spending, there might yet then be something to be said for our own small-bore, yet essentially transparent approach.

For decades – at least since the “opening up” of China in the early 90s – China’s focus on an export driven economy has paid HUGE dividends.  The amount of foreign currency hoarded by the government is quite large.  I am not sure how big (nor is anyone, really) but I estimate it at about 1 Squillion.  I know that this is, technically, not a real number; but I think it should be.  It represents a number that is not infinite, but for all intents and purposes it might as well be.  It means, roughly, “enough money to keep officials in brand new Mercedes for decades to come.”  Or something like that.

And not only is the government good at saving … the Chinese population, on average, has a savings rate of over 50%!  My grandmother – who lived through two World Wars and a depression – was spending like an extra on Entourage compared to the average Chinese.

So if the government is saving so much and the people are saving so much, why is there a deficit in China?  I have admitted in these pages to my nearly total lack of understanding of macro-economic concepts, but don’t you think that they could dip into the buffet of cash reserves and just swat that pesky deficit away?  I mean, c’mon, do the math: 1 Squillion minus $139 billion = 1 Squillion take away a teeny-tiny bit.

The National Debt Clock estimates that the U.S. deficit stands at over $10.8 trillion and that each citizen’s share of that debt is about $35,000.  For the average Chinese, however, their share of their own national debt is about $107.00 (notice the lack of commas and zeroes in that number).

According to economists, until December of last year, the average U.S. citizen saved –2% (Ed. Note: I am  not sure how a negative number can be “saved” but these are the same people that talk about “negative growth”, so take that with a grain of salt).  The good news is that they think this savings rate has moved north of zero.  But still, let’s say that, on a good day with a tailwind, Americans are now saving +2% of their income … how long will it be until we can all afford to contribute to chipping away at the national debt?  Do we need to send children out on Halloween with little cans in their hands, “Trick or Treat for the National Debt!!”?  No, my friends, we are in deep doo-doo.  And it is even more apparent when you compare our debt to that of the Chinese.

So Americans have two choices … we can whine and moan that our deficit is so huge and that there seems to be no way out.  Or we can follow the immortal teachings of Luther who said “Sin and sin boldly” and be loud and proud about it.  Unlike China’s pansy $139 billion, ours is a macho deficit.  A manly deficit.  Heck, we drop $139 billion in the hole in the average WEEK in the U.S.!  And we are proud of it, dammit!  Heroic odes to our debt should be penned some day and its glories sung to succeeding generations.  I can’t wait for the day when one of my great grandchildren says to me, “Grandpa, tell me again how your generation dropped my generation into a morass of a deficit so deep that we will have to seek developing nation debt relief to even think about getting out of it … and yet you still held your heads high!”  I get teary just thinking about it.

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…

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!

U.S. economists and politicians are greeting this news with the appropriate amounts of hand wringing and brow-furrowing – depending on the economist, consumer spending represents around 70% of the total U.S. GDP so a drop in what people are buying in the U.S. means that absolute U.S. economic growth takes a big hit.  When people stop trying to keep up with the Joneses, the domino effect impacts the entire U.S. economy.

Although difficult to determine with any confidence at this point, while the Chinese economy is certainly slowing, consumer spending seems to be going along quite nicely.  I say this is difficult to determine for two reasons: #1, we are just coming out of the Chinese New Year holiday when Chinese citizens tend to spend like inebriated sailors on shore leave, thus skewing the data towards the positive; and #2, it is very difficult to determine the accuracy of ANY data here that might reflect poorly on the country’s leadership.  Reuters reports that consumer spending over the CNY holiday was up 13.8% from last year.  This is a drop in the growth of consumer spending from 19% last December, but still, it is a respectable number.  Let’s see what the numbers look like in February.

But we are not doing back flips here quite yet, mainly because consumer spending still does not represent as large a portion of GDP, estimated to be about 38% in China.  So while people here are still trying to keep up with the Wangs, this activity is not going to be as big of a boost to the Chinese economy as one would hope.

However, this might not hold true in Tier 3 & 4 cities in China – the “smaller” cities of only 1 million people.  We don’t have any good data available yet (if we ever will) but I would suggest that increasing consumer spending in the T3/4 cities in China might be a significant boost to the overall economy, more than it has been in the past.  Chinese commercial activity is still very local, with many manufacturers and brands having a very local impact.  National distribution is very difficult to do well and national brands, while certainly present, are not as strong in some of the T3/4 markets.  In these cities, people tend to buy local.  So if they are increasing their spending, then local manufacturers might be able to increase their production and maybe – just maybe – take up some of the slack we are seeing in soft employment figures, particularly in southern China.  This “trickle up” from T3/4 cities could be an important story in 2009.

Numbers, schmumbers. What is so surprising here? Given the global financial meltdown, were we expecting any less? The United Nations Development Program (UNDP) had already predicted that China would come in at 9.1% growth in 2008. Others had it higher, but what did they know? And prognostications for China’s GDP growth in 2009 are all over the map: A quick search found estimations from 5% up to 9.3%. Maybe “estimates” is too strong a word: how about “wild-arse guesses based on sketchy data and yet-to-be-proven models”? Too harsh? Sorry.

I don’t want to make light of this because this is some serious stuff. China’s growth is slowing, and this means that factories are closing and jobs are going away. An estimated 10 million migrant workers are out of a job. Imagine all of New York City and the surrounding boroughs standing in job fair lines and surfing Monster.com. But white-collar employment is, for the moment, pretty stable. In fact, it is even more stable than normal for this time when, typically, a sizeable portion of the workforce has received their year end bonuses and make a jump to another, better-paying position. People are nervous about the economy so they are not jumping for fear of losing what they might already have.

China HR issues aside, for the average foreign investor, what does China’s GDP growth number matter? Three things to pay attention to here:

1.  China is STILL growing. Maybe not as fast, but it IS growing. What part of this are we missing here? The United Nations — the same organization that correctly predicted the 2008 growth number — estimates that China will contribute more than 50% of the world’s total growth in 2009. Did you get that? One country, over half of the globe’s total growth in one year. If we weren’t looking wistfully in the rearview mirror at the wild-yet-fundamentally-unsustainable growth in China of the past couple of years, we’d be pretty excited about 2009.

One of my early mentors in China told me, “Kent, if you want to get hit by a car, go play on the highway.” Now, apart from the questionable safety of his chosen metaphor, the fundamental principle is this: Go to where the action is! And in a global environment sliding into gridlock, China is a veritable super speedway of activity. Perk up, people — growth is growth and China is where its at.

2. The GDP growth number means ABSOLUTELY NOTHING to the average international business person. Sure, if you are one of the three hedge fund managers still standing and are placing bets based on global economic growth numbers, then a few percentage points of swing in the China macro GDP number would matter. But down here where real people live and work, the GDP number is just a distraction. The key is getting to the number for YOUR particular business.

Example: A client of ours is a supplier of building materials to construction companies in China. Despite the announcements of an economic stimulus plan to dump squillions of RMB into the Chinese construction sector, we estimated for our  client that construction, overall, will remain flat. Further, the category of product that they sell will be flat to even down a bit; however, our client’s best product line — one that focuses on increasing the energy efficiency of buildings — is going to be up this year because “green” is the new “growth” in China and our client is perfectly positioned to go gangbusters in this sector.  If they were to look only at the macro GDP number or even the construction number, they’d miss their opportunity — they (and you!) need to dig down to the details of your industry and product sector to find out what is really going on.

3. The China GDP number is, to a great extent, manufactured and, recently, is being strategically communicated to the rest of the world. I refer you to my blog post of a few days ago where I so wittily expounded on the Chinese authorities’ growing sophistication in not only managing their economy but in communicating it to the rest of the world.

Think about the story arc here for a moment: It was just announced that China’s economy actually grew 1.1% MORE in 2007 than we originally thought; and then, before we have had a chance to catch our breath, the announcement comes out that China’s growth for 2008 is a percentage point LESS THAN double digits. In a year where the world’s largest economy went up in flames of Armageddon-like proportions, China still had enough going for it to take a hit of only a few points. Once the collective hand wringing and brow-furrowing subsides, China is uniquely positioned to grow at their minimum of 8% in 2009.

And mark my words — you heard it here first — at the end of 2009 when all the tallies are done, China WILL have grown at a minimum of 8%. The Chinese authorities have their hands on both the controls (to juice the economy as they see fit) and the intercom (to communicate whatever they want to the global public). Who is going to contradict them? Economists? Put three economists in a room and you’ll get 5 opinions — and they are all using the same data. Other governments? Everyone else has too much of their own stuff to worry about to mess around with the macro numbers of China.

Despite the “dire” circumstances of China, there will be winners this year. Big winners. These are the companies that will ignore the macro numbers and will dive deep into the minutiae of what China means for their particular products, customers, channels and competitors. Leave the macro numbers to professionals who don’t seem to know any more than the rest of us do — theirs is fantasy football to the “real” game that the rest of us play every day.

Now, I am not economist.  Have never have claimed to be.  My grade in Macro Econ 101 was, I believe, the lowest ever recorded at a land grant university.  It was enough to make the teaching assistant responsible for the course, Ms. Gonzales, second guess her very reason for going into the discipline and whether or not she had a future molding young minds into an Economic frame (or at least a macro economic one).   To be the catalyst for such epistemological angst in another human convinced me that I can never fully understand the Beautiful Science.  So I comment on this story with more than a little fear that it all really DOES make sense, just not to me.  But I live in China.  I’m kinda used to that feeling.

But let’s just look at this like regular humans: you know, people with checking accounts, credit cards and, when we are desperate, actual cash.  Can I go back to my 2007 income and say, “Oops … so sorry … but it seems that I made a few trillion dollars more than I originally thought”?  And, like I didn’t notice that I was pretty flush back then, turning out my pockets before tossing the jeans in the laundry: “Oh, look, a wad of cash and executed U.S. treasury bonds.  Where did those come from?”  Financial assets were breeding like randy bunnies in the dark, I guess.

I am not surprised, however.  Financial accounting in China, though improving, is still more art than science (or maybe more science fiction).  Ask a Chinese company to show you their books and they’ll say, “sure, which ones?”.   Many companies here would be an easy runner-up in the race for the Enron Financial Noodling Award (pronounced “Effin-A”).  So the government declaring a do-over, Ollie Ollie In-come Free on their books is not shocking (but isn’t there some sort of statue of limitations on that kind of thing??  I’m just askin’…).  In fact, there were other so-called experts that felt that the growth was even higher than 13% at the time.

What is a bit puzzling is why they are choosing to release this information now.  The Chinese government is becoming much more sophisticated in the subtle manipulation of information foisted upon the public – certainly not in the rare-air of Rovian WMDs, but they are certainly playing triple A ball.  So releasing this information now has to have a reason behind it.  What could that be?  I think there are two possible motivations:

Firstly, I believe that if the final tally of 2007 would have come out at an official 13%, the Chinese government would have been in a situation where they would have had to defend against an accusation that the economy was overheating, that a come-to-Keynes moment was inevitable.  As it was, the government could look at the skyrocketing consumer, commodity and real estate prices in 2007 and say, “Um… no, its OK.  We are ‘only’ at 11.9% growth.  We’re cool.  Move along…nothing to see here.”  They could build a convincing story around 11.9% but felt they couldn’t around 13%.

Secondly, by releasing the information now, China gets the “bump” of suddenly becoming the world’s third largest economy – in your strudel, Germany!! – without paying any additional price for the much lower figure that is certain come out this year.  Think about it…the global media has been giving China the spanking of its life because it is “only” going to be growing at about 8% this year – I think, for much of the Western media, that’s just sour grapes, compensating for a performance anxiety because China’s 8% is still about 9% higher than what the rest of the world is going to be this year.  But if you are going to be “down” to 8%, you don’t get dope-slapped being down from 13% any more than you’d get for the gap from 11.9%.  The result from falling 23 stories and 33 stories is about the same – no one cares about the slight difference in air time.  So China gets the Bronze Medal in the Global Economy Para-Olympics by re-jiggering 2007, a subtle finger on the scales at the weigh-in before the race.

The practical result for me?  First, I am going to take any economic data from China this year with a grain of salt and two litres of wait-and-see.  I know this is frustrating for all the quant jocks out there whose neck hairs tingle at newly released data, but they should dump ice water down their shorts, take a seat and wait for the reruns, just like the rest of us.

Secondly, I am going to go track down Ms. Gonzales.  I think my Macro Econ 101 grade was quite a few percentage points better than she originally recorded…

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!