China Business Blog and Podcast

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Technomic Asia is expanding the China Business Podcast to introduce you to
several of our consultants and analysts. In this segment you’ll meet Michael
Zakkour, a principal of Technomic Asia and veteran of 10 years and nearly 200
strategic market entry projects for products and services . Here he
highlights healthcare initiatives in China’s Five Year Plan. Among the
areas Zakkour touches on are:

1. Hospital supplies – improved healthcare for rural and second tier cities is a focus of the plan and the build-out is an opportunity for foreign equipment
   makers.
2. Pharmaceuticals – There is an increasing demand for Western pharmaceuticals in China. In addition, clinical trials in China, even those following the US FDA regulations will likely cost significantly less than those done in the US or Western Europe.
3. Health Care Insurance – As China moves to a large middle class and consumer
   economy, families will adopt their own personal savings choices to pay for health care to using health care insurance plans . This will open a whole new category of of medical insurance and services in the country.

Zakkour’s experience in the interior of China as well as its’ urban centers.
In this podcast Zakkour describes some of his experience from launching new
products to pig farms in Mongolia.

We look forward to your questions and comments in this blog.

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Length – 10:20

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As we’ve been saying on this Podcast for a month or so now, China had a really good 2009.  While most of the world is thrilled to send 2009 off to the Group Home for Annoying Old Years and welcome 2010 in diapers, China is still doing victory laps for their 2009 performance, even though it was down severely from previous years.  There is a lesson to be learned here … in a room of ugly people, the average schmuck is a supermodel.  And trust me … I know how to do schmuck.

But as we all know, there is the story of what is happening in China, and then there is the truth.  Not to go all post-modern on everyone here, but the truth – if there is one Truth with a capital T – is probably somewhere in between and pundits aplenty are rushing to fill the blogosphere with their version.   For some reason, every time a talking head heaves an opinion on China into the public sphere, I have this overwhelming need to comment on it, to give the general public the beneficent view of my own brilliance and expert insight.  I know, you don’t have to tell me, I need professional help, I am fully aware of that.  I’ve tried therapy, several mood-altering substances and, as a last gasp effort, producing this Podcast, but I it hasn’t helped much.  The end-of-the-decade articles on China were killers … everywhere I looked there seemed to be an opinion popping up that absolutely REQIRED my commentary!  I consider it a mark of my immense self control and budding maturity that I was actually able to lead a somewhat normal life in the midst of all of that and did not spend all my time blogging back.  Thank you in advance for your kind words of congratulations.  I just live one day at a time.

But there is one article published way last October that I keep coming back to and, finally, cannot help but comment on.  It is by Rana Foroohar in Newsweek International is tantalizingly titled, “Everything You Know About China Is Wrong”.  The title alone compelled me to read and comment on it since, as China market strategy consultants, we go to market with what we call a “correct” view of China based on 25 years of experience so I was anxious to read it.

Ms. Foroohar elucidates several reasons why China is not the economic miracle that everyone seems to think it is.  Her opinions are not rocket science nor are they all that original … over the years there have been China-doubters aplenty who look askance at the phenomenal growth in China and wondered two things: a) is it really possible; and b) is it really sustainable??  But just because something is not original does not mean that it is not worth listening to (I give you anything recently recorded by Lady Gaga and the Jonas Brothers as proof positive of this) and I would encourage you to read her article (those of you listening to this Podcast can go to our blog for the link).  Overall, I agree with most of the statements that Ms. Foroohar makes and, in fact, I think she makes them very well; however, I would like add a couple of perspectives from the cheap-seats…

One of the myths that Ms. Foroohar attempts to deflate is “The Communists are brilliant economic managers”.  The evidence in favor of this belief is that, in 2009, China was able to maintain an 8% growth in the face of what is arguably the world’s worst economic meltdown ever.  The criticism is that this growth is driven by government investment in infrastructure and that, some day, China will have all the roads, bridges, tunnels, telecommunications networks and subways that it needs and won’t be able to make the transition to a privately-driven economy.  And it is argued that this last round of economic stimulus spending in 2009 just further deepened this problem.

This is not a new criticism and, in fact, economists, China watchers and the rabble of doomsday pundits have been making this statement since China first started their massive investment campaign in the early 90s.  For the most part, I would agree … focused investment on infrastructure is, by definition, not sustainable and, someday, China is going to have to broaden their economy to bring in other, more sustainable engines of growth.  However, I would add two caveats that would argue against being too concerned about this right now.

First of all, despite nearly 20 years of infrastructure investment, China has just scratched the surface of their total need.  China is a MASSIVE place and, while the infrastructure in the big cities of Shanghai, Beijing and Guangzhou is quite good, there is SO much more to be done in China’s Tier 2, 3, 4 and smaller cities (remember that China has over 100 cities with over a million population plus a seemingly endless countryside).

What I am saying is that the need for this spending – and the associated support it gives to the broader economy in terms of employment and supply infrastructure – is not going to end any time soon.  In fact, its probably going to continue strong for the next 20 years or more.  Yes, there are many associated problems with such infrastructure investment – the housing and real estate bubble is probably the most concerning – and China is going to have its ups and downs.  But this is not a small country we are talking about where you work hard for 10 years and everything is built.

My friends and colleagues in India only WISH that their government would have a similar commitment and authority to build infrastructure in their country … if they could, then I think India’s growth would quickly catch up to China’s.  But as it stands, there are so many internal politics in India that infrastructure projects often get stalled and never completed (there is a highway construction project in Chennai that I see when visiting clients there … and for over 5 years it has remained in the same state of incompletion.  There are people at the site and they look like they are doing something … but nothing seems to get done!).

Spending on infrastructure is not going to end any time soon … but the government can do something about the types of infrastructure they invest in.  The 2009 economic stimulus package of over $600 billion from the China government earmarked over $100 billion for what is called “social infrastructure” … hospitals, schools, etc. In the long run, the return on this type of infrastructural investment can be huge … and as I’ve addressed many times before in these Podcasts, China healthcare is in desperate need of life support itself and sustained investment here will do wonders.

Secondly, we need to understand – and even appreciate – the investment perspective that the China government takes in these projects.  Ms. Foroohar quotes a business professor who observed that, although there was a nice new highway built between two rural areas in China, there was no traffic on the road.

[let me just stop for a moment and ponder what it would be like to have a road somewhere in China without an immense amount of traffic on it … living in Shanghai where traffic is so bad we actually USE our fenders, that is a nice thought . OK … I am better now.  Thank you].

A couple of quick responses to this: is there infrastructure in China that is built without any thought to its eventual use – what in the U.S. has been called the “bridge to nowhere”?  Yes, definitely.  The number of pork-barrel projects here are directly proportional to the number of people schlepping the barrels … and we have nearly 5 times that number in China than they have in the U.S.  So yes, nosy business professors are going to be able to observe such examples of poor use of capital resources.

However, I think that the professor should relish in the fact that he can stand on that highway in complete safety.  Fast forward 10 years and I would venture to guess that this same professor would not be willing to stand in the middle of that road – there will be SO much traffic on it so as to turn him into a human speed bump.  In any environment, the population expands to fit the capacity provided and in China, this is doubly true.  Where I live in Shanghai, on the Pudong side, this was just rice fields a few years ago and now it is bucking to be a leading financial capital of the world.  There are putting up an 80-story building where just 20 years ago water buffalo grazed (giving a whole new meaning to the phrase “a bullish market”, I suppose).  The primary reason behind the real estate bubble here is that people are SO confident in their speculation that they are willing to bet large sums of money on property that will quote-unquote “some day” actually be worth more than the exorbitant price they just paid for it.  Oh, that and the fact that much of the real estate investment is being driven by people not using their own money but the government’s … but that is an issue for another Podcast.

So we should not be asking the question: “Is China’s spending on infrastructure sustainable in the long term” because it is, by definition, NOT sustainable.  Of course it isn’t.  We should, on the other hand, be asking the more difficult-to-answer question “what do you mean by ‘long term’”?  We are only 20 years into a modern business environment in China, and look how far we’ve come.  Of course, you don’t drive well by admiring the view in your rearview mirror (although that might explain some of the traffic problem here) so we need to look ahead.  My point is that, barring disasters of all types, China’s near to mid term looks pretty good and very sustainable.

Of course, there is a LOT that I do not understand about macro-economics and I am sure that I will get nasty letters from the Association of Super Smart Economists of just how wrong I am.  But to be honest, how accurate are those Super Smart Economists?  They are working off of models developed in other economies in other cultures at other times and have been woefully inaccurate in predicting even the things they supposedly understand well (ala the mortgage crisis).  The fact remains that we don’t have ANY case studies to guide us as to what might happen here in China … there has never been a country in history that is this large and has made this big of an investment in their infrastructure and government spending.  The U.S. and Japan are in the same direction, but they did theirs at very different times in history when the world was a VERY different place.  Yes, China will eventually have to pull out of this model … it cannot continue forever.  But we don’t have any good examples of a situation of this scale where this has happened.  As I have said before, in China, we are working without a script AND we are working without a net!

Twenty five years ago, when I first came to China, if someone were to show me a picture of what Shanghai would look like in 2010, I’d think they were smoking something.  NO ONE could have – or would have – predicted this.  Indeed, there were multiple doomsday preachers talking about the immanent collapse of “Red China” (I love that term, Red China … like it’s a theme color for the day!).  But here we are, still technically “Red” but, so far, no collapse.  Could it happen?  You bet.  But I assume that the only completely untrue statement is “I am 100% right” so it could also not happen.  And I am betting on the latter.

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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Length – 17:55

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One of our themes for 2010 here at the China Business Blog and Podcast is “acquisitions”.  A typical market sector in China is very fragmented and very crowded – there are many players working in their own local areas.  From automotive, to healthcare to consumer products … they are all this way.  Both foreign and local companies will be looking to strengthen their positions in these markets by acquiring smaller players, bringing products, brands and distribution together to gain scale and more power in the market.

In early 2009, the global economic crisis knocked the wind out of the M&A market all over the world, and here in China, it was no exception.  Transaction volume fell off significantly as companies hunkered down to wait out the storm.  Well, though for many individuals around the world, the storm is still blowing, for companies and investors here in China, it is prime time to move … they have motivation to grow and cash to invest.  The challenge, as we will explore today, is managing risk.

Here at Technomic Asia, we have strengthened our M&A practice to include end-to-end transaction services and have brought in to the Technomic family one of the preeminent deal guys in China, Dr. Kim Woodard.  When Kim joined us late last year, we started a Podcast series on M&A in China.  Today we are going to continue that series as Kim and I talk about managing risk in China M&A.  And we start off discussing a very shocking statistic …

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We are at the end of a two-part interview with David Thomas, Founder and Managing Director of Think Global Consulting, based in Sydney, Australia.  In the first part of our interview, we explored the long – and often complicated – relationship between Australia and China.  As members of the Asia-Pacific Rim group of nations, there is a lot of activity going on between the two countries … and, as we’ve seen in the media this past year, not all of it has been smooth sailing.  I started off this last part of the interview by asking David to talk a bit about some of the Australian firms that are finding success in China and what their attitudes are today…

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My mother told me that its not polite to say “I told you so”, but I can’t help it.  From the start of the global economic crisis last year, we’ve been blogging and Podcasting like maniacs saying, “Yea … I know it is rough out there.  But China could be a shining light at the end of the tunnel for companies going through the rough stuff.  If the rest of your world is crumbling, now might be the time to really look at China.”

And now, no less an august body than the U.S.-China Business Council is saying just this.  In their recent survey, released on October 7^th and highlighted in this article from Industry Week, they say, and I quote, “Most U.S. companies doing business in China are profitable and many want to step up investments despite fears on the economy, protectionism and intellectual property rights.”

Yep, I told you so.

The USCBC survey is quite revealing.  51% of the 100 respondents projected that their revenues in China will grow in 2009, and 84% said their China operations remain profitable.  How many of you can say that about your U.S. operations?

A year ago, when the nasty stuff hit the fan, the one question we asked was “Where are you going to look for growth?”  We received a number of comments using words that my mother would never approve of … but all of them were along the lines of, “Are you nuts???  Growth?? Who can look for growth?  We are only interested in survival at this point!”  Yea, I get it … when you are shedding employees and operations faster than an Eskimo stripping on a Miami beach, its tough – maybe even unnatural – to ask about growth opportunities.  But that’s what separates the men from the goats, isn’t it … asking questions and using different words from what your competition is asking.  They say “tomato”, you say “kumquat”.

So I am going to go out on a limb here and repeat what I said a year ago … in 2010, companies should be looking to China for new growth opportunities.  I’m talking blue ocean, limited competition, boldly-going-where-no-person-has-gone-before stuff.  Seriously, most market sectors are still doing double-digit growth in China, more than the existing suppliers can supply.

Yes, the signs in the U.S. and Europe seem better … capital markets are improving a bit, money is starting to flow and buyers are starting to buy.  But recovery is going to be slow … slow like glacial slow … slow like the speed of mammal evolution slow.  Dollars to donuts, you are not going to be able to sustain your company waiting for your domestic markets to come back.  China could be part of your answer.

Now I know my smarmy tone is probably not appropriate … going after China is NOT easy.  We’ve never said it was … in fact, this blog and Podcast is dedicated to exploring just what a royal pain in the backside China is to succeed in.  But the difficulty of success here should not be confused with the importance of the pursuit.

Everyone is deep into planning for 2010 so you are setting priorities and budgets.  If China is not among your top priorities, then it probably should be.  Almost 90% of USCBC’s members surveyed indicated that China remains the top or among the top five priorities for their global investment plans.  Is it yours?

Now, my momma done raised me right.  I try to keep my elbows off the table when I eat, say “excuse me” when I sneeze and open doors for people when I can.  Mom also told me its not right to say “I told you so.”  So do it right this year … listen to what everyone is saying and get things in gear for China.  Get your team together Monday and ask yourself a simple question: “What are we going to do in 2010 to grow in China?”  Don’t make me have to say “I told you so” again next year.  I am already in enough hot water with Mom over missing holidays, birthdays and not writing as often as I should … and I don’t want to make it worse.

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.