China Business Blog and Podcast

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Over the past 4 years of the China Business Podcast we’ve done many interviews with business people in China, typically leaders of companies or operations.  We’ve talked about the intricacies of doing business here, the opportunities and challenges, and specific strategies and tactics that have worked for them.

Well, I would like to take a chance to back up a bit and view the China environment from a different perspective through an interview with someone who has been reporting on the action, not only in China but around the world.  Bill Powell is the senior writer for Time and Fortune magazines and is based in Shanghai.  We’ve known each other for a couple of years and he calls every now and then to bounce around some ideas and perspectives.  I have always appreciated his perspective and I thought he would make a great interview … and I was right.

Here is part one of that interview …

So it is finally confirmed: President Obama is coming to Shanghai.  Sure, it was rumored to be happening (and was probably always in the works with the event planners) but it was tough to get a confirmation from anyone these past few days.  I called a couple of journalist friends of mine, people who should know these things.  None of them could (or would?) confirm it.

But that was yesterday; this is today and all seems clear now.  President Obama will arrive in Shanghai on Monday.  Or maybe it is Sunday.  And he will have a town hall meeting here.  Or maybe he won’t.  He might also visit the new Disney site.  But maybe not.

I’m surprised that he could get a flight at this late date.  Usually I have to make a reservation a year in advance for my trips back to the U.S. to keep from getting stuck in the seat where the guy in front of you leans so far back you could do dental work on him.  But maybe the President has a better travel agent than I do.

Now that the trip is on, I want answers to the really important questions.  Ones like “Will Mr. Obama shoot some hoops while he is here?”  The Chinese LOVE basketball and not just because Yao Ming is their John Lennon minus the guitar and annoying wife.  His O-ness has got some game, or so they say.  Maybe he and President Hu can play a game of H-O-R-S-E to see who gets the comfy chair at the U.S. Security Council.  Or a gimmee on higher emission standards at the Copenhagen conference.  I’ve heard Mr. Hu has a mean skyhook so Mr. Obama should definitely take it downtown on a crucial point.  It looks like Hu has no vertical.

Another question: “Can the President use chopsticks?”  I am not trying to be smarmy here (its natural, I don’t have to try) but if he bellies up to the banquet table and is presented with a slimy plate of sea cucumber or duck tongue, he’s got to bring game there too.  And even more so … a sea cucumber splotch on a nice white shirt will be treated like a Rorshach test by the international media.  Glen Beck will see Elvis telling us to roll back health care reform.  Like The King could even benefit from it now (Elvis would have a hard time too).

But maybe the biggest question is: “What does President Obama’s China trip really mean?”  I’ve been polling my local staff and friends here in Shanghai and the general (yet non statistically-significant) opinion seems to be “so what?”  20 years ago, the President of a Super Power showing up in China gave Chinese leaders the vapors.  Heck, even Gorbachev stopped traffic back in the day, and not just because he was a natty dresser.  Now these trips are more like a weekend event between the Olympics and the Expo.  Most people here just complain that is going to further snarl traffic in a system that already looks like the Indy 500…if bicycles and pedestrians could cross the track at will.

When I ask locals how they think it will impact business, some have quoted the old Chinese saying, 天高皇帝远 (tian1 gao1 huang2 di4 yuan3), “Heaven is high and the Emperor is far away.”  Or “what happens at the seat of power has nothing to do with me down here.”  I would paraphrase (badly) Tip O’Neill, “All business is local” – if you are doing business here, you need to figure out how the game is played in your ‘hood, wherever that happens to be.  What happens in Beijing, stays in Beijing.

So while the China watchers will be analyzing to the nanosecond differences in handshake durations and depth of eye contact to interpret just what is “really going on”, I will continue to advocate that Western businesses spend their time finding out more about the activities of their competitors in China than their political leaders in same.  I am going to choose not read too much into this trip.  As Freud said, “sometimes a cigar is just a cigar.”  Now if Obama and Hu sit down over a Montecristo No. 4 and talk shop, we might have something to analyze!

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

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

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

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

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

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

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

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

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

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

Yea … maybe I will just stick to Podcasting.

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

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OK … we are on to Part 3 of our interview with the newest addition to the Technomic Asia team, Kim Woodard.  In this section, we get down into the nitty-gritty of doing deals in China.  Enjoy!

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We are in the middle of a Podcast interview with Dr. Kim Woodard, the newest addition to the Technomic Asia team here in Shanghai.  Kim’s background includes setting up A.T. Kearney in the early days of China business and running his own boutique M&A consulting firm.  We brought Kim into Technomic to fill out our ability to provide end-to-end services for our clients doing deals in China.  While we saw a bit slow-down in 2009 for M&A in China (and, in fact, around the world), we see that things are really going to pick up in 2010 as companies are looking for aggressive growth opportunities.

In this Podcast, I talk with Kim about the practical do’s and don’ts of doing deals in China …

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Unless you have been living in a hole or the dark side of the moon for the past year, your life has somehow been impacted by the global economic slowdown.  You, a friend or a family member have lost a job; your municipal budgets are being cut; heck, your OWN budget is being slashed.  It has not been a fun year, even here in China where things are still moving along at a pretty good clip.

Though there are signs that things are getting better, I am not convinced we are totally out of the woods yet.  But just because we have no guarantee of where things might be going, that doesn’t mean we can crawl back into our hole or retreat to the backside of the moon … no, we need to keep moving forward.

And at Technomic Asia, that is exactly what we are doing.  For many years, our consulting practice has been involved with foreign companies doing all kinds of alliances in China: from joint ventures to licensing to distribution to acquisitions, we have helped our clients put their alliance strategy together and then execute it.  Up until about a year ago, we had been seeing a real upturn in acquisitions in China: the government rules for acquiring companies were loosening up and foreign companies were looking to China for new growth opportunities.  Then the bottom fell out of the economy and companies put all that activity on hold.

However, as things settle around the globe, multinational companies are looking for ways to grow and China seems a very good place to look for that growth.  And one of the methods they are returning to is growth through acquisition.

To capture this wave, we have brought in a new team member to Technomic Asia: Dr. Kim Woodard.  Kim has had over 30 years of experience in China, first coming here in the 70s in the earliest stages of China’s opening to the West following Nixon’s “Ping Pong Diplomacy”.  Armed with a Ph.D. from Stanford, Kim was soon a respected leader of foreign companies’ earliest advances into China.  Kim helped establish A.T. Kearney’s China practice and then went on to help big names such as John Deere and AMP establish their China operations.

Most recently, Kim had his own firm, Javelin Investments, to assist Western multinationals with acquisitions in China.  We wanted to bring Kim in to Technomic Asia to give us the ability to provide a complete M&A advisory practice – from initial strategy development all the way through to negotiation, closing and integration.

Given the returning importance of M&A in China, I wanted to have a series of conversations with Kim about M&A and, in his experience, what makes for a successful acquisition in China.  Attached is the first in a series that we will roll out in the coming weeks.  I hope you enjoy it!

More not-so-random thoughts on China health insurance … I was just in the U.S., speaking at the Analytical and Life Sciences Systems Association annual senior management meeting on the China market for healthcare and food safety research.  In preparing for that talk and my most recent Podcast on China healthcare, I was struck again at how Westerners – particularly Americans – put health insurance at the heart of any discussion of healthcare reform.  But in China, health insurance – to use a more polite phrase – doesn’t mean JACK!  In the U.S., it is estimated that 15% don’t have insurance (and another 8% or so are under-insured) … but in China it is estimated that only 15% DO have it (and, as the last Podcast detailed, most of that is inadequate).

However, even if the task for “universal coverage” seems more daunting in China than the U.S., I wouldn’t bet against China to actually get there before the U.S. does.  Why?  Simply put, the Chinese government is starting to see that universal healthcare is a responsibility of the government to provide to all its citizens.  In other words, China seems to be looking at healthcare first as a right, and then as a business  This means that, while companies are invited to participate in healthcare and private companies can expect to make a profit, at the end of the day, healthcare is a right and it is a moral responsibility of the government to provide it, at the expense of business, if necessary.

Don’t get me wrong … the Chinese government is being pretty self-serving in considering healthcare as a right.  They know that, in order to maintain the support of the people, they need to provide for their basic needs.  The Party and the government (one in the same in China) knows that healthcare is an issue of national security, not just the health of its people.

But the U.S. is different.  Healthcare is not a right in the U.S., it is a “benefit” that only the employed (most of them) receive from their employer and many (but not all) elderly receive from the government.  If it were assumed to be a right – as it is in most of the rest of the developed world and much of the developing world (like China) – I think we would have a VERY different discussion on our hands.

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China’s rapid development in the past 15 years can leave one feeling a bit dizzy.  My first time in Shanghai in the late 80s – in town for an escape from the small central China city where I was living and teaching – was heady enough.  There were only 10 taxis in the entire city and you had to get around on diesel fume-belching busses or by foot (and it was a battle between the aerobic benefits of walking and the heart-stopping inhalation of diesel exhaust).  Now its tough to step in the street here and avoid getting hit by a cab (unless, of course, it is raining or you are late to a meeting or you have two heavy boxes you are trying to schlep to a client … and then there are NO taxis to be found in the entire city.  Go figure).

So when China seems like its returning to the bad old days, it is a bit shocking, particularly when this return is signaled by increased regulation from the Party.  There have been a series of steps over the past year that, in hindsight, are heading in a direction that could be of concern to everyone who does business in China, local and foreigner alike.  Late last year we saw the government put extra restrictions on Carlyle, the financial investor, as they sought to buy out XCMG, one of China’s leading heavy equipment manufacturers.  Carlyle eventually let the deal die because the limitations were so onerous.  At the time, everyone clucked about “protectionist policies” but eventually chalked it up to China wanting to guard an industry that could figure into national defense (ala the U.S. blocking the Chinese oil giant CNOOC from investing in a U.S. offshore oil company a couple of years ago).

The next big restriction was for visas for foreign visitors wanting to enter China just before the Olympics last year.  Thousands of businesses were impacted by this and many Olympic events were sparsely attended because people just could not get here.  Again, apologists for China cited so-called “legitimate” reasons for this … in this case there were serious security concerns.  The reality was that China was playing a game of CYA – “Cover Your Anterior-region” – and was willing to go overboard on restrictions in order to insure that nothing happened while the spotlight was shining so brightly on them.  Sure, it bothered me too but I guess I understand erring on the side of caution – my own country’s Transportation Safety Administration recently busted my daughter on a routine check at an airport … she was relieved of a fingernail clipper, ostensibly because she might use it to hijack the airplane to Cuba (where she would need said clipper because you simply cannot buy them there).  In the immortal words of Fleetwood Mac: “Oh well.”

But then this year, things have been getting even more tight, it seems.  We started the silly season off with Coke being denied their acquisition of the large Chinese juice manufacturer, Huiyuan.  The government was oddly silent on the specific reasons for the denial.  There were some mumblings of avoiding “monopolistic” practices which, in a way, was legitimate as the merger would create a beverage company that would rule in two key categories: sodas and juices.  But many legitimately pointed out that China’s industries are ripe for consolidation and that, following pretty much any other economy as its developed, there are, as time goes on, going to be fewer but larger players in the market.  There is speculation – no none of it published, as far as I have seen – that the government is pushing Huiyuan to themselves become more acquisitive … to go out and start buying up smaller beverage companies to grow larger themselves, in effect creating a competitor to Coke.  Typical of China, the old adage is flipped on its head: “if you can’t join them, beat them.”

Just this last week, two things have happened to make me even more concerned.  The first was the release last Friday of the new Postal Law in China which everyone in the logistics and delivery sector has been anticipating like Christmas morning at the Bill and Melinda Gates household.  However, much to the chagrin of foreign delivery companies like FedEx, UPS and DHL, the law bans foreign companies from participating in domestic express delivery, citing the original 1986 Postal Law that limits domestic delivery of regular mail to the government-owned China Post.

1986?  In China in 1986 it took an entire day to mail a letter!  We had to, literally, make our own envelopes, painstakingly cutting out a template from paper and then using paste thoughtfully provided by the post office to glue them together.  Then you had to let them dry before stuffing them with your letter.  You ended up with glue all over, trying to cram a sticky mess in a drop box with fingers webbed like Aquaman.  And if you wanted to send a parcel in China, fuggitaboutit!  You had to purchase white cloth and make your own bag in which to put your items.  Seriously, I am not making this up.  Around the post office were stores selling fabric, needles and thread and you had to form your own sweatshop on the steps outside the post office to assemble your package for mailing.  I had flashbacks to 7th grade home-economics class, nearly failing for improper needle threading and insufficient stitch tightness.  Who knew that I was actually learning life skills that would come in handy some day??

Anyway, I digress …  This new and unimproved interpretation of the Postal Law is going to be a serious setback to the entire postal system in China.  Plainly speaking, the foreign delivery companies have, for the most part, cracked the code in express delivery in their home markets.  Pretty much anywhere in Europe or North America, if I want something delivered by 10 a.m. tomorrow morning, its going to get there.  I might have to take out a second mortgage on my house to do it, but dang-it, its going to get done!  Now, I don’t for a minute think that any express delivery company would be able to quickly transplant their system in China … China is too big and too complex to do that simply.  But the China postal system could certainly use some external influence and best practices … mailing a letter by regular post is a hit-or-miss thing these days.  The Chinese authorities cited security reasons for keeping the foreigners out … I guess news of the express-delivered anthrax a couple of years ago in the U.S. freaked some people out here.  But seriously, can the Chinese postal system do any better??  I guess in one way they can – with such a dismal delivery rate for their mail the insidious package can’t do any damage if it never reaches the intended receiver.  Let’s hear it for incompetence!

The last indicator that something’s up is the rumor – at this point unsubstantiated – that China is going to once again be very restrictive in issuing visas this summer and into the fall.  This year marks two very important anniversaries in China: the 20 years this June since the Tiananmen Square movement and 60 years this October since the founding of the People’s Republic.  Like with the Olympics last year, China wants to keep out anyone who might make a placard and march on the streets, shouting their support of any one of a number of banned issues.  Hong Kong’s South China Morning Post published a story last Thursday saying that Beijing has said that all “F” business visas issued after April 15th will expire on September 15th.  An F visa is for short-term stays of less than 6 months.  The paper quoted several China visa agents who said that applications for F visas beyond September 15th would be put on hold until there were more clarifications from the government (who, like any government, avoids clarity like the plague).  Again, there have been no confirmed announcements of this, just newspaper articles … so let’s not wig out until we have to.

But shy of wigging out, I think there is some indication for concern here. There is DEFINITELY a protectionist wind blowing in China and with it could come a storm that could hit us all.  There are two sides of this coin here:

First, remember that Chinese regulations are often published but never – or are selectively – enforced (on a side note, the converse is also true … China has been known to enforce rules for which they do not allow the publishing of the official law … I have heard stories of people being prosecuted for breaking a law and were refused the request to actually read the law on the basis that the law was a state secret).  What this means is that there are varying levels of sensitivity in China – if you are a big company and are doing big things in China, the light shines more brightly on you and you have to take more care to cover your bases.  All the big Fortune 500 companies working in China spend squillions of dollars each year in lobbying efforts in Beijing and in the various localities in which they do business.  This is just good business practice (hey, they even do it in Washington!).

But for many companies, they work hard at doing a series of smaller things in order to stay below that radar and to not attract attention.  In any M&A deal we do in China, one of the biggest commercial due diligence questions to probe is how the regulating authorities will treat the new entity once it has foreign ownership.  Chinese companies can get away with things that foreign companies cannot, simply because they are foreign companies (and, contrary to popular practice, having local staff often does not protect you … the spotlight is just brighter on you when you are a foreign company).  So the lesson here is to explore all the possible regulatory implications of what you are doing in China … not just the laws on the books but to talk to all the authorities who touch your business to get their read on what might actually be enforced.  Your business leaders here – your general managers and CEOs – should be spending a large amount of their time schmoozing with the authorities here.  If they are not, you are exposed.

The second thing to remember is, simply, that China is different – it is a one-Party system and that Party is primarily concerned with maintaining their singular hold on power. On a global scale, it is not the riskiest place to do business – that honor is held with dictatorial grip by some southeast and African nations.  But it is comparatively riskier than doing business in the West.  Walk the streets of Shanghai and you can often forget that – the signs for Western products and services make it seem like New York with a really big Chinatown.  But its not.  China is different from other markets.

And, truthfully speaking, I often forget this.  Therefore, I have made myself a May Day resolution (my New Years resolutions having drowned in the Ocean of Poor Self Discipline long ago) – I resolve to be more observant of some of the macro-regulatory moves here and to not be so flip and dismissive of them when they do happen.  I firmly believe that China is moving towards more openness … my last quarter century hanging around here is proof of that.  However, these changes progress at glacial speed with short-term freezes and retreats in the midst of forward movement.  Whether what we have been seeing recently is such a momentary freeze or the tip of a larger iceberg remains to be seen.

No More Vacations For Me

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Follow the Money, Most of it Will Stimulate

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There has been a lot of press, not to mention moaning and groaning, about stimulus packages in the last few months. Many countries have put forth their genius to turn their economies around…but we haven’t seen much fruit yet to be sure, and their remains a high dose of skepticism out there on virtually everybodies stimulus approach. This skeptical view even exists with China, the global champion in actually getting things done. As usual, there is a lot of noise in the media about anything to do with China and the ever present political filters that tend to bias realities. In this podcast, I will try to cut through this static and identify what we think is really happening with China’s stimulus plan and how western companies can benefit. I’ll cover the current status of the plan, what forms the various stimuli are taking, some key themes that underly the programs and the industry sectors that will benefit most. In this horrible economic environment there are few places one can go for revenue growth. China is one of those places… so companies with the intent to find growth despite the current pain they are experiencing in their home markets, will do well to take a hard look at what is happening in China.

So let’s set the context a bit before getting into specifics on the stimulus plan. It should be clear to us by now that when the Chinese government is determined to get something done, it usually happens… and it happens fast, and often in a big way as we saw with the Olympics last year. 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 are lined by quaint looking 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”.

The Chinese government has, to date, earmarked (can I use that word?) some US$ 584 billion to stimulate things in the economy. By our US standards of throwing trillions at a problem in the hopes of overwhelming it, this figure may seem a bit paltry. 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 here. Further, the actual usefulness of the monies spent almost embarrases our US program (most pork bellies in China are served with a nice Maotai). There is some opaqueness to the source of these funds (about 25% is slated to come from the central government and the balance from provincial and local government sources). Yet China’s track record when it comes to stimulus spending is pretty stellar so we have confidence this level of resource will indeed find its way in to the market…eventually.

Best estimates say that about $57 billion (or one-tenth of the total package) has already been spent as of the end of 2008. Of this, about $39 billion has been spent on rural infrastructure, roads, railroads, and housing construction. 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. A sign of the stimulus at work!

I was in a meeting with China’s largest grocery chain a couple weeks ago and they were describing their brand new 1.3 mm sq ft., state of the art distribution center being developed…with monies from the stimulus. Our stimulus activities in the US seem like taking a couple advil to ease the pain of a heel spur versus China’s shot of cortisone right into the ­­­affected area.

In these types of programs, we see the Chinese government taking more of a long-term, strategic view of the investment. The goal is not only to address the short-term pain, but to build the country’s overall health and competitiveness. In this regard, it is interesting to note some of the main themes of the stimulus package…

1. Upgrading technology through forced obsolescence and replacement of outdated, energy intensive and polluting processes & equipment
2. Upgrading/expanding capacities e.g. an astonishing $90 billion has been budgeted to more than double China’s rail network over the next decade, adding 25,000km of track.
3. Providing rural development/support, as in offering coupons to get discounts on purchasing durable goods
4. Providing investment and incentives for innovation and expansion of R&D
5. Implementing industry consolidation
6. Spurring export promotion and competitiveness via putting back some of the VAT tax refunds
7. Expanding energy sources including nuclear, coal and renewable energy

We also see the government using a creative mix of methods to stimulate the market using both direct and indirect tactics…it’s not all about spending cash.

1. Tax rebates/cuts
2. Direct investment
3. Policies e.g. consolidation, financing terms
4. Technology funds
5. Direct subsidies

Ten industries have been designated as direct stimulus beneficiaries: automobiles, steel, textiles, shipbuilding, petrochemicals, light industry, electronics, nonferrous metals, equipment manufacturing, and logistics. Not many areas will be unaffected. The government will employ a mix of the methods I just mentioned to bring help to these sectors. Some will benefit from consumption subsidies, e.g. 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. The auto industry will get some help through tax reduction, e.g. going from a 10% to 5% purchase tax to buy a car.

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 “stimulus,” zhenxing jihua or “rejuvenation plan,” does not necessarily imply spending), but China is clearly thinking of the global crisis as an opportunity to enhance its industrial competitiveness.

While the ambition of government planners has never been in doubt, there is always some concern for the reality of things in China given that the government always retains a level of opaqueness in its announced programs. So we do need to take some of these specifics with a grain of salt. There certainly will be some, how shall we say “leakage” as the money flows into the system (or the pockets of some politicians). It’s easy to suspect that some big-ticket projects and industrial policies are simply “piggy-backing” on the stimulus to give their proponents bureaucratic momentum, thus exaggerating the headline figure of $586 billion. My litmus test for the reality of these types of things in China is simply to look out my apartment window to see if I can see tangible evidence of activity. I recall during China’s boom periods in the 1990s and early 2000s when many economists doubted the reality of China’s double digit GDP growth. Yet the fact that 50% of the world’s construction cranes were operating in China at the time presented a pretty compelling case for the reality of China’s growth.

So, bottom line? China’s stimulus package is real and its impact will not only spur more economic growth in China’s domestic market but will take China to the next level of global competitiveness as we have seen happen before. The plan is not without its faults and false advertising but don’t doubt its real impact on the economy. Foreign companies, with smart and targeted growth initiatives, can take advantage of this stimulus package to obtain some added growth. You need to be proactive and aggressive to exploit these opportunities. They won’t just fall in your lap!

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