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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Following is part two of my interview with Steve Crandall, VP for Technomic Asia in charge of our small- and mid-sized enterprise (SME) practice.  Today we focus on the importance of hiring and retaining the right people in your China operations.

Here on the China Business Blog and Podcast, we focus on being very logical and very practical … at least as logical and practical as China allows one to be.  Over the 25 years we have been working in China, we’ve seen a lot of experimentation, trying this and that to see what works.  We’ve even done a fair amount of it ourselves … and that’s fine for many multinational companies with deep pockets who can afford to try this and, if it doesn’t work, try that.

However, there is a group of companies for which this experimentation approach doesn’t always work so well … the Small- and Mid-sized Enterprise or as they are commonly referred to, the SMEs.  And that is the theme for a new series here on the China Business Podcast – The SME.

To discuss this topic with me, we are going to bring in the newest member of the Technomic Asia team, Steve Crandall, who recently joined us as Vice President in our Implementation practice.  We have been seeing a need lately to increase our capabilities in helping our clients execute their organic strategies in China – setting up manufacturing, hiring, establishing sales teams and pipelines, executing a sourcing strategy etc.  Steve comes to us with a long history in China, starting in the 1980s when he was a student here.  Steve went on to set up the first foreign owned car dealership in China when he set up Crandall Ford up in Tianjin (Steve comes from several generations of Ford dealers back in Ohio).  He then went on to start up several manufacturing and sales operations for SMEs in China, incubating them until the client was ready to take over.  After a stint at Ernst and Young where he had to wear a tie to work everyday, he came to join us.  Steve has been a good friend for a number of years and we are thrilled to have him in the Technomic Asia family.

There is no standard definition of the SME, just as there is no standard definition of the Multinational Corporation, or MNC.  However, generally, the SMEs are defined by their size – less than 500 employees – and their ownership – privately held or invested by a private equity company or other financial backer.  Now I’m sure I’m going to get some letters about this … because some subsidiaries of MNCs essentially have to stand on their own and really act like SMEs.  As my teenagers say: “Whatever!”  The key commonality here is that an SME is facing the same challenges in China as any other company here but they often have less global experience to work from and they typically do not have such deep pockets to do a lot of experimentation.  They have to get it right the first time.

Over the coming weeks, we are going to explore some issues that impact SMEs in unique ways such as HR, manufacturing, sales, operations, etc.  You will be hearing many of the same themes that we’ve been hitting for years here on the China Business Podcast … but we will be discussing them as they impact the SME and will explore several unique ways that we’ve seen SMEs handle these issues.

We begin the series today with the age-old issue of market opportunity …

I am going to start this post out with a warning: in the world of global economic intrigue and gamesmanship, the following ranks rather low on the excitement scale … but on June 22nd, China announced that it would scrap the export tax rebate it gives to China producers of 406 categories of export products.  These products include steel, non-ferrous metals, fertilizers, chemicals, plastics, rubber, and glass.  This was the first adjustment in the export tax rebate since July 2009, when it was increased as part of China’s stimulus program.

Now I know that, for most of you, the phrase “export tax rebate” doesn’t send a thrilling chill down your spine … and if it DOES, then maybe you need to get out more.  But we think that there is something deeper here that is worth exploring just a bit further.

This policy announcement is coming at an interesting time.  The communication between the U.S. and China on the global economy and the RMB valuation has had more passive-aggressive subtext than a Midwestern family Thanksgiving – “PLEASE pass the SALT, DEAR!!” – so one rather hoped that any move by China would be attempt to alleviate some of the stress … as in “Please ADJUST your RMB rate, DEAR!!”.  However, at first blush, there is not a huge material impact to the trade imbalance as the policy change is not expected to make a major dent in exports, since it affects only $11 billion in exports, or about 1% of the total.

However, we think that the importance of this policy change goes beyond any material impact.  We think that China is trying to telegraph some very specific messages to two constituencies: the international community and its own people.

First of all, the Chinese government is signaling to its own domestic manufacturers that it wants them to curb overcapacity, move up the value chain, and turn away from the export-driven model of growth.  In this new policy, the government has focused on the environmental benefits of discouraging the production and export of these 406 products, which are highly energy-intensive and polluting, thereby scoring a point with the Greens, both domestic and international.  Lower production will save energy and reduce greenhouse emissions, in line with China’s stated promise of reducing energy consumption per unit of GDP by 20% from 2005 to 2010.  Again, this move is not going to get China all the way to environmentally friendly heaven, but it’s a step in the right direction.

At the same time, this move is a response to recent global pressures on the RMB and non-tariff trade barriers, trying to get China to be an engine of global recovery, rather than continuing its export-driven model.  Europe and the US are trying to export their way to recovery, so someone’s exports have got to go down.  By partially eliminating the export rebate, in line with RMB revaluation, China can better claim that it’s pulling its weight globally.  Given that this is a partial rollback of the stimulus package, China can also claim that it’s dealing with stimulus-induced preferences for domestic industry, further reducing what some say is over-investment by the Chinese government in their own infrastructure which has led to an over-inflation of China’s GDP growth.  So that’s quieting 4 squawking birds of international conscience with one stone of administrative action … not bad at all.  The tortured metaphor of that last sentence does not give enough Kudos to China for this move … China is definitely starting to understand that, for its policy changes to have impact, symbolism – properly spun – can have more power than substance in the world of international diplomacy.

However, of the two possible audiences for this move – internal and external – we fall on the side of this being a stronger message to its own domestic producers, an encouragement to move up the value-chain and pursue domestic innovation, not just be the manufacturer for the world.  Steel is a good example.  48 of the 406 affected products are made, at least in part, from steel that, until this action, had enjoyed a 9 percent rebate.  Steel exports from China have grown 127% year-on-year, and 266% alone just this past May.  However, along with this growth have been the installation of new steel-making facilities in China … despite a general ban on adding more capacity, Chinese companies found a way to build 40 new steel plants in this past year.  This has resulted in the overproduction of low value-added steel which means that China’s steel industry profits have come almost entirely from the 9% rebate.

But this new ruling makes a fine distinction between the two types of steel products. The rebate on the commodity steel goes away but the higher value-added steel products such as cold-rolled and galvanized steel – which many US buyers are more interested in anyway – still enjoy a 13% export rebate.  So, by getting rid of only the rebates on low-valued added products, the government is sending a signal to the domestic industry: “Start moving up the value chain, and stop building so bloody much capacity.  Move away from the low-cost export model and start innovating.”

After over 20 years of concerted effort on building their economy through exports, China is going to take awhile to turn this ship around.  In other words, China is not going to becoming a domestically-driven (and particularly a consumer-driven) economy any time soon … I don’t even think the next 20 years is going to get them there.  But bit by bit, they are moving that direction … and this recent policy change is one of those bits.  And keep your eyes and ears open for future policy announcements … more and more you are going to see the double purposes behind policy changes as China navigates the dangerous waters between both the internal and external constituencies most impacted by such changes.

I’ve been hearing from listeners that our last post cut out in the middle of the Podcast.  Sorry ’bout that!

Here is the re-post.  If you still find trouble, please email me at kkedl@technomicasia.com

Thanks!

Kent

I would like to begin this post with an apology … its been awhile since we checked in here on the China Business Blog and Podcast!  Thankfully, it seems we have not been forgotten as we’ve received many notes from loyal listeners asking how we are doing … if everything is ok.  I can assure you that, yes, things are just fine here in Shanghai, China … in fact, its because things are going so well that I just have not had the time to get these Podcasts recorded and posted.

We’ve been working on a series of discussions on mergers and acquisitions in China with Dr. Kim Woodard, one of the leaders of Technomic Asia’s M&A practice here in China, and we are continuing that today.  It is appropriate that one of the reasons we’ve been so busy lately is that we’ve seen a big upswing in M&A activity for clients here in China … lots of strategy development and target identification, the early stages of an M&A program.

Well, today, we are going to talk about a stage of the M&A process that, we believe, is unique in China – we call it “deal cultivation”.   Remember that we’ve been talking about the relatively “young” market for M&A in China … we are still in our first generation of doing deals here and there is not a lot of experience floating around.  Therefore, it is critical that we help bring the Chinese companies along in the process, helping them feel OK about it while, at the same time, doing what we call “discovery” – finding out as much about the target as we can ahead of the more formal legal and financial due diligence process.

I started today’s conversation with Kim by asking him about deal cultivation and why it is so critical in China…

Well … its been awhile since we’ve posted a Podcast.  Sorry ‘bout that!  I took the week of Chinese New Year off and tried to ignore my computer and email.  That was nice … but then I really paid for it coming back to work afterwards.  Now I have been able to dig out from everything and get back to our series of Podcasts on China M&A.

If you recall, I have been having a series of conversations about China mergers and acquisitions with Kim Woodard – a vice president here at Technomic Asia and one of the leaders of our M&A practice.  The theme we have been orbiting around is “reducing risk” … this is because the failure rate for China M&A deals is quite high.  We estimate that fully three quarters – that ‘s 75% for the CPAs in the crowd – of deals that reach the letter of intent stage fail to close.  So that means, for successful M&A, we need to focus on reducing risk at each stage of the process.

Today, we go back to the beginning and talk about, what we feel, is the most important stage in China M&A … target selection.  Here is a conversation that Kim and I had just this afternoon in our Shanghai office…

We just received a comment from a faithful Podcast listener which spawned some interesting ideas here at China Business Podcast World Domination Headquarters (located in beautiful downtown Shanghai).  Full disclosure here … the “faithful listener” that made the comment, Dave, is actually a good friend of mine.  So I guess this is kind of like responding to a review of an elementary school play made by your mother … but I will take it where I can get it!

In any case, the question was a good one.  Dave asked, “Tell me this, as you think about the last 20 years, do you see a noticeable shift in the energy and excitement the Chinese Governments (local and central) have for recruiting western companies to expand their businesses to China? In the collection of articles I see, and recent business development work, I get the sense that there is a growing indifference. Is the China domestic growth ‘engine’ becoming so strong that western investments have become ‘ho hum’?”

Great question and good timing, Dave.  Because not only is this a topic of conversation among foreign companies here, but the Chinese leadership is talking about it as well, although in somewhat less-than-direct terms.  Chinese President Hu Jin-tao just this last week made a speech that, I think, is going to be referred back to in years to come as marking a turning point in Chinese economic development.  As far as speeches by politicians go, it was … well … a speech by a politician, and a lame-duck politician at that.  Remember that President Hu is expected to step down in 2012 and hand over the reigns to new leadership.  The leading candidate is Xi Jin-ping, one of China’s “princelings” with a significant political pedigree here, but a lot can happen in the next two years so stand by for further updates.  So President Hu is looking down the road at early retirement and he is trying to find ways to cement his legacy.  He’s already tried a couple of things.  Mr. Hu was behind the tepidly-received 和谐社会 or “Harmonious Society” campaign leading up to the Olympics which attempted to get people to stop spitting on the streets and be nicer to each other in public.  No one here has paid much attention to this – as evidenced by my messy shoes and bruised body from riding the subway to work every morning.

So this past week, President Hu had a chance to speak at the Party School of the Chinese Communist Party … now when I say “Party School”, I am not talking about the University of Wisconsin or Bowling Green.  This “Party School” is the institution that trains all up and coming cadres in the Communist Party of China, or CPC.  They used to teach these cadres how to wear musty wool Mao suits and engineer their comb-overs to cover bald spots … but now, they have more serious things on their minds.  The topic of President Hu’s speech – oddly, not covered much by the mainstream Western media – was on economic development in China.  Here is the English synopsis from the CPC website:

“General Secretary of the CPC Central Committee, Chinese President and Chairman of the Military Commission of the CPC Central Committee Hu Jintao delivered an important speech, stressing that we shall seize the opportunity to undertake the historic mission to take speeding up the transformation of economic growth mode as the important target and strategic measure to deeply carry out and implement the scientific outlook on development to unswervingly accelerate the transformation of economic growth mode and constantly improve the quality and efficiency of economic growth and increasingly raise the international competitiveness and the risk resistance capacity of Chinese economy in a bid to get higher quality, larger space and broader road of development.”

Got that?  Yea … no wonder this was not picked up by mainstream media.  I am actually interested in this stuff and I started to doze off by the line about “unswervingly accelerate the transformation of economic growth mode” (as a side note, this might be good advice to give drivers here in China because they tend to accelerate in a “swervingly” manner … President Hu’s people can contact me if they want further advice on this one).  Anyway, the speech in Chinese was not much more thrilling (like political speeches in ANY language, the Chinese for such situations tends to be very flowery and over-laden with adjectives).

In the past couple of months, China has been crowing about its 8% growth while the rest of the world is in the dumps and President Hu was responding to accusations that China’s economy was build on a foundation of sand … that government investment in infrastructure was going for short-term growth while ignoring long-term economic drivers such as technology innovation, consumer spending, etc.  Such accusations are not only coming from foreign sources but locals as well … the running joke in China is that the current leadership is pursuing the 保八计划 or “Protect the 8% Plan”, at any cost insuring that China reached that magic 8% growth that everyone thinks they need to avoid economic collapse.

This speech, I think, was intended to tell everyone that, “No, we really do have a plan here … we are not just going for short term development but we are trying to set China up for success in years to come.”  And how is that to be done?  Well, President Hu listed a lot of things: encourage the new energy sector; reform agriculture; support the growth of science and technology … heck, I think he even called for the development of a bubblegum to arrest male pattern baldness (a key concern for much of the world’s political leadership these days … they may want to pay attention).  But jumbled among the disparate ideas is a key phrase that President Hu used that responds – finally! – to your question, Dave.  President Hu said that China’s economic development is going to be driven, in large part, by “independent innovation”.

This phrase, “independent innovation”, is an echo of rumblings we’ve been hearing in China for some time.  Just last November, several Chinese ministries came out with the “Indigenous Innovation Product Catalogue”, a listing of approved vendors that government entities can purchase from.  The restrictions on this Catalogue are quite tight and makes it difficult for a foreign firm to get on the list, spurring many foreigners to accuse China of being “protectionist”.

Are they being “protectionist”?  I don’t know … that’s kind of a loaded word and it can be applied to other governments as well (similar accusations have been leveled at the U.S. for keeping China out of their oil, technology and agricultural sectors in the past).  But what they ARE being is “independent” … and that means, that, yes Dave, I think they are going to value foreign participation in China’s markets differently.  Not necessarily “less”, but certainly differently … whether or not it is “less” determines what we do about it.

This is a topic we are going to keep our eyes on this year and is closely related to one of the “Themes for 2010” that we identified in December of last year – China’s growing confidence in their own power and importance in the global economy.  But suffice it to say that foreign companies are going to have to pay even closer attention to the value that they are bringing to the China market.  We’ve been saying for some time that things have changed here … no longer can foreign companies just show up with money and cool technology and have China fall all over them.  Foreigners need to clearly articulate their value and to get local Chinese partners to agree to this value and to partner with the foreign company to bring it to China.  In the process, foreigners are going to have to give up this value to their Chinese partners … the risk being that you are starting to train your future competitors.

I am often asked if business is becoming “easier” in China – as in, “are the structural barriers to foreigners doing business in China becoming less?”  In general, I think this is true … China’s entry into the WTO has brought them in line with many global practices.  Sure, there are still questions of currency exchanges and the like, but I really don’t see these as being the greatest barrier to working with China.  I actually think that business is, in some ways, becoming MORE difficult to do in China because it is more difficult to determine exactly what foreigners bring to the deal; what we can do that China cannot yet do for itself?  You are right, Dave … we foreigners are becoming less interesting to China.  We need to work harder to find out what our value is to China and sell it to people here.  This is our game to lose.

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

We are continuing our series on mergers and acquisitions in China through a conversation I have been having with Kim Woodard, a Vice President here at Technomic Asia and a specialist in China M&A.  In over 30 years of doing business in China, Kim has done deals both from within the corporate environment – with companies like John Deere and AMP – and as an outside advisor.  In the last part of this conversation we talked about the five key risk factors in doing a deal in China:

1. The acquiring company chooses the wrong target for the wrong reasons.

2. Failure to connect well and build trust with the shareholders, management, and other stakeholders of the target company.

3. Inability to bridge the valuation gap

4. The target company fails to meet due diligence expectations on financial documentation or on financial and commercial performance.

5. The C-suite in the acquiring company gets worried about post-acquisition performance.

Let’s get back into the conversation as we now turn to the best way to manage these risks …

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 …

I was quoted recently in an article in the New York Times on the growing demand of direct sales in China.  The article is very well done and I highly recommend anything that David Barboza writes on China … the man knows his stuff about China and he really does his homework.  One of our Five themes for China in 2010 and Beyond is “Distribution” and the direct-sales model is a very interesting one for China so I wanted to add a couple more comments here.

For those not familiar with it, “direct sales” is when individuals are recruited by a company to sell their products directly to consumers who are, typically, their friends and family.  There are many well-known companies that have used this model such as Mary Kay, Amway and Avon (those of a certain age will remember the old commercials in the U.S. whose tagline was “Ding-dong, Avon Lady calling!”).  As David’s article notes, direct sales have not always had smooth sailing in China as the government has been wary of allowing individuals to start up their own businesses (because, as we know, once people have money-power they want all sorts of other power).  I think that the combination of entrepreneurial sellers and adventuresome consumers are fertile ground in China for direct selling business models for two main reasons: first, direct-selling can leverage relationship-based sales which have a long history and solid cultural foundation in China; and secondly, direct-selling goes around the modern sales channels in China which, although growing in strength, are still very immature and often very difficult to work with.

One of the main reasons that China’s distribution networks have been so fragmented is that they have been based on guanxi or relationships which are simultaneously personal and professional.  In a traditional distribution model, this guanxi holds you back because you are limited in they amount of personal relationships that you can maintain at any one time.  In other words, if my hometown is in Wuhan, all of my guanxi will likely be from that place because I grew up with many of these people, our families know each other, we went to school together, etc.  However, if I try to expand that guanxi network out to, say, a city like Chengdu (probably over 1,000 km away from Wuhan) it will not be possible to develop the same depth of relationships in that region.

Historically, sales in China have been based on this guanxi … I get the sale, not necessarily because I have the best price or the best quality product, but because I have good guanxi with you.  However, this is rapidly changing in China: while good guanxi is a necessary condition to successful sales, it is by no means a sufficient one — I now have to bring good products to the market at good prices.  And for most industrial and consumer products companies, this is a good thing because it means that they can develop more “professional” distribution channels and get a broader sales footprint in China.

So let’s go back to the direct-sales model … this is a model that leverages (and even celebrates) guanxi-based sales.  Sales most often are made to friends and family (or the friends and family of other friends) and, while these product suppliers are certainly concerned to bring good quality products to market, I would argue that they are relying even more on the strength of their sales teams’ guanxi in their local area.  The strength of the direct-selling model is that it goes with the flow of traditional Chinese culture, not against it, by making each sale personal.  And all you have to do is multiply the large number of people in China by their growing disposable income and you understand why executives at companies such as Mary Kay, Amway and Avon are having a hard time controlling their excessive drooling.

The second reason why I think that the direct sales model will have some legs in China is that it goes around the typical sales channels for consumer products: retail stores.  This is a topic too large for one blog post but suffice it to say that China is in the midst of a sea-change in its retail channels, moving from a “traditional” model — dominated by mom-and-pop stores and small specialty stores — to a “modern” model dominated by the larger hypermarkets, “Big Box” and grocery chains.  If you look at China as a whole, a slight majority of consumer products are sold through traditional channels; however, the growth is in the modern channels and particularly in the so-called “hypermarkets”, chains such as Wal-Mart, Carrefour, Rt-Mart, etc.

Initially, consumer products companies were excited about this change … selling to many thousands of traditional outlets is much more difficult than selling to fewer (and larger) modern chains.  However, what everyone is realizing is that these modern chains, while good looking on the outside, are often very difficult to work with simply because they are so big and wield so much power.  The cost of doing business with them — what consumer products companies call “trading terms” — are often quite high in China compared to the rest of the world so while consumer products companies are often happy with the volume that moves through modern channels, they are not as happy with the margins (and multinational consumer products companies are ALL about the margins!).  These companies are often finding that the hypermarkets are not all that good at merchandising and marketing themselves so consumer products companies often feel that they end up paying a lot in terms of marketing fees and not getting all that much for it.

However, the direct-sales model does an end-run around these channels and goes directly to the consumer.  The only marketing fees are the commissions to the sellers so, theoretically, both the margins and the volumes can be quite high.  Consumer products companies don’t have to deal with the retail stores nor do they have to work with distributors to those stores (a topic for another blogpost). In our work with consumer products companies, some of them — and some big names too — have secretly asked about direct-selling and whether or not they could do it.  To date, none of them have but that doesn’t mean that they are not thinking about it.

Now this direct-selling model is not all beer and skittles and in his New York Times article, David Barboza identifies some of the challenges that companies such as Mary Kay are facing (for one, direct sales companies are required to open their own “brick and mortar” retail stores through which to do they actual distribution of product).  Suffice it to say, there is no magic bullet in China retail … we are in the midst of a mini-revolution in China retail and all players — retailers, product companies, distributors and consumers — are changing faster than we can keep up with them.  However, given the sheer size and potential on the China consumer market, everyone is dumping massive amounts of investment and are exhibiting as much patience as they can.  Keep your eye on the direct-sales model in China … we could see it expand beyond the companies we typically associate it with and move into areas we never thought possible.

OK… I am just going to put it out there: these last 10 years have kind of sucked.  Years from now, we are going to look back on the first decade of the new millennium and only the very strong among us are going to be able to avoid using a variety of four-letter words to describe it.  From the rise of terrorism to the meltdown in the global economy, these have been tough times.

Things didn’t start well, of course, with the futuristic “Y2K” problem. It was, for the most part, just IT consultants crying wolf.  But to so completely lack faith in our own technology so as to doubt its ability to handle a digit change in the thousands column does not speak well of our confidence or our technology.

But, for me, what started things off on the wrong foot was our inability to agree with simply what to call this decade.  The “Aughts”? The “O’s”?  The “Naughts”?  Given the current state of the average American’s bank account, “the Nils” sounds like it’s the most appropriate.  But c’mon, folks … if we can’t even name the stinking decade, how are we supposed to handle the real issues.  Frankly, I am a bit ashamed that we Americans couldn’t come up with the marketing slogan that we could all hold hands around.  We are a country that brought you such ditties as Hooters, Cabbage Patch Kids and the Pet Rock.  And we can’t name a decade?  How embarrassing!

However, contrary to the desperation much of the rest of the world is facing, China had a pretty good decade.  From a GDP of about $2,000 per person when 2000 started, China is projected to be over $6,500 per person heading into 2010.   And unlike other changing economies such as the former Soviet Union, China’s political infrastructure didn’t go through a meltdown in the face of such growth.  Certainly, there were many doomsayers predicting the imminent collapse of China, but so far, these people with their Nostradamus For Dummies guidebooks have been, thankfully, quite wrong.

The Chinese authorities are, certainly, giving themselves a big Attaboy for their performance in this past decade.  Not only has their growth been the best in the world, but they’ve landed some pretty big gigs to show it off including the Olympics and the Shanghai Expo.  Fair enough, let’s give China their due … but let’s also look forward to the next decade and make some guesses ourselves as to what we might expect.

Here at Technomic Asia, we are celebrating our 25^th year in China … that is, if I might say so, pretty impressive for a boutique consulting firm where many of our peer firms have burned out long ago.  However, if you would have asked any one of us when we first started in China in 1985 to predict what China would look like in 2010, there is NO WAY that any of us would have come close to envisioning what I can see out my window right now.  Back then, I had to bring in coffee from Hong Kong and now I have three Starbuck’s stores and seven knock-offs of the same within a 10 minute walk of my office.  So predicting the future in China is not a science; heck, its not even an art.  I would liken it to a pin-the-tail-on-the-donkey game played by at a birthday party of some cargo cult voodoo priestesses.   Yea, its that much of a crapshoot.

But what the heck … its only my job to assess the China market and plan growth strategies for my clients, so I am going to go out on a limb here and introduce 5 themes for 2010 that I think will become even more important as the decade continues.   They are, in no particular order because they ALL are important and impact each other:

1. Growth

2. Distribution

3. Consolidation

4. Mergers & acquisitions

5. The emergence of China as a global power

As a year-end wrap up, I want to introduce each of these themes today and then we will re-visit them throughout 2010 and explore their progress (or lack thereof).  So let’s get to them …

The last decade has seen China grow in importance in companies’ global strategies … from just a blip on their radar screen at the turn of the century, China is now a major – if not THE major – strategic initiative for many companies.  And the reason?  Growth!  And its not just because, in 2009, China was the only market in the world to grow more than 8%.  The rumor perpetuated by politicians and angry journalists that China is ONLY a source of low-cost labor and a way for evil capitalists to export jobs from the U.S. is dead-wrong: China is a source of good-old top-line growth. In the midst of all the management theory bouncing around boardroom walls, it turns out that customers are important.  As a former sales manager of mine once told me, tongue firmly planted in-cheek, “Kent, I’ve done some research and have determined that 100% of our revenue comes from customers.  We better focus on them.”  And you know what?  China can be a great source of new customers for many companies.

We just completed the annual business survey for the American Chamber of Commerce in Shanghai and determined that over 60% of American companies were in China primarily to serve the China market … they were looking for growth!  As U.S. and European companies are emerging from the dark depths of economic depression in the past couple of months, I have increasingly had serious discussions with CEOs about ways to grow in China.  They have all said that they feel they have just scratched the surface of what they could – and should – do in China and they need to do more.

A sub-topic under our “Growth” theme for this year will be companies’ expansion into China’s Tier 2, 3 and 4 cities – its not only important to be in China but you have to expand across markets here as well.  Remember that a Tier 2 city in China can still have nearly 8 million people in it so we are not yet talking about selling into rural areas … this is still urban marketing.  But gone are the days when  company could just set up a sales office in Shanghai, Beijing or Guangzhou and hope to do enough throughout the country.  We see many companies today making significant efforts to expand their China footprints and throughout this year we’ll talk with some of these company leaders to find out what they are doing and how they are doing it.

Closely associated with the “Growth” theme is our second theme, “Distribution” … I guess this is overstating it but if you want to grow, you’ve got to actually get your products to market.  Companies who are already in China need to find a better way to get more products to more markets.   Companies are discovering that China is a VERY large and fragmented market and your route-to-customer in one region will not be the same as in another region.  We’ve said it before in these Podcasts but you will never – repeat, NEVER – find one distributor to represent you all over China.  I don’t care what industry you are in, it ain’t gonna happen.  Sure, your distributor will TELL you that they can do it, but they cannot, at least not as well as you need it done to realize the growth that you need.  You will need to take over that responsibility yourself, to find the right combination of distributors to reach the right markets.

In 2009, we did a lot of work for clients to assess the strength of their own distribution, typically benchmarking their operation against their competitions’ (both local and foreign).  And more often than not, we found huge gaps … geographies not covered, certain sectors totally missed and important customers under-served.  These clients are using 2010 to rebuild their distribution.  Sometimes they need to tear things down and then rebuild them … but more often than not, they just need to identify the gaps and start to fill them.

Not only do we need to address the people part of the distribution equation but we also need to consider the supply chain infrastructure.  From sourcing to manufacturing to transportation to warehousing and, finally, to distribution, foreign companies in China are reassessing how they handle their entire operation.  Growth without a firm distribution and supply chain foundation is impossible so 2010 will be the year when companies will start to get very serious about improving both.

The third theme that I think will be important in 2010 and beyond is “Consolidation”.  As I just said, China is a large and fragmented market and a key contributor to that fragmentation is purely the number of players involved in any particular sector.  For example, China has over 100 automotive OEMs … not just 100 brands but 100 distinct auto manufacturers (a long way from what we used to call the “Big Three” in the U.S. which is now, depending on how you count it, probably more accurately described as the “Big One-and-a-Half”).  In pharmaceuticals, there are over 3,000 manufacturers in China and over 10,000 pharma distributors.  Most of these are what China calls “sub-scale” which is a polite way of saying, in effect, that they are too small to survive very long on their own and really have no opportunity to grow very much.

The Chinese government is strongly supporting consolidation and are, in many cases, selecting key companies (often State-owned) to move to the top of the food chain in this Darwinian, survival-of-the-fittest process.  I did a Podcast recently on the Big Four automotive companies (including First Auto Works, Shanghai Automotive, Dongfeng and Changan) and how they are looking to acquire companies inside and outside of China to bring under their rapidly expanding umbrellas.  Look for some major automotive moves in 2010.  In pharma, the government is forcing the smaller distribution companies to merge with the larger ones, so much so that the rumor on the street is that there will be only one distributor per province in the end.  Personally, I don’t see how this can happen, at least in my lifetime, so while the end state is unknown, it is absolutely certain that consolidation will be the trend.

Foreign companies playing in China will want to play close attention to consolidation trends in their own industrial sectors.  The competitive landscape will change greatly as consolidation takes place … your competitors will be stronger, wealthier and have a larger geographical footprint.  In many cases, consolidation will result in a broader product portfolio, making it more difficult for you to compete with them toe-to-toe.

Our “Consolidation” theme leads us nicely to the fourth trend, “Mergers and Acquisitions”.  Not only will local companies grow through M&A but foreign companies are increasingly looking at growth by acquisition, particularly those who have been in China for awhile.  There are multinational companies who came into China through a joint venture many years ago but who are now, for all intents and purposes, operating as a wholly foreign-owned enterprise (or WOFE).  Once they did the deal, they started growing organically, adding products and distribution territories so that, over time, they have built quite a good presence.

However, they have gone about as far as they can go organically and, to speed up time-to-market and increase depth of market penetration, they are looking at acquisitions.  In the past couple of months, we have done some Podcasts on China M&A and will continue that again in the New Year.

Our fifth and final theme is a bit trickier and I put it under the heading of “China as a growing global power” … however, this requires some unpacking.  Here on the China Business Blog and Podcast, we tend to avoid so-called “macro views” and, instead, dig deep into the specific strategies and tactics that companies are using to succeed in China.  We don’t talk much about the goings-on in Beijing, the ins and outs of political leadership.  Its that not this is NOT important – it is – but such palace intrigue can often be quite far away from the day-to-day issues that company management faces in China and, for most of us anyways, we have very little direct influence on the seats of power.  Besides, our daily experience is in the trench warfare of markets, not hanging out in the rare air of the Zhongnanhai leadership.  And my momma always told me to talk about what you know…

However, I think we are seeing an emerging power and even “attitude” from Beijing that warrants mentioning and awareness.  Basically put, the Beijing leadership has been making more unilateral decisions lately and is doing so quite confidently that the rest of the world will not punish or even censure them all that much.  Just a few days ago it was announced that China executed a British citizen for drug trafficking, despite the VERY loud protests from the West that China should take some time and think about it.  The view from Beijing since the execution is that this is an issue of their “judicial sovereignty” and that the rest of the world should butt-out.  In the many articles I have read on this, the journalist inevitably mentions that Britain is China’s third largest trading partner and hints that British authorities are trying to “keep lines of communication open”.  Which means that, although they will whine a bit, nothing is going to happen to China because of their actions.

I mention this, not to criticize either side for their behavior – and I am sure there is lots of criticism to go around – but rather to highlight that we are moving into some new territory here.  2009 was a heady year for China … the Olympics, the fastest growing economy in the world, huge cash reserves, significant investments in U.S. t-bills all added up to an administration that, frankly, thinks they are pretty bullet-proof.  You can be sure that, increasingly, the Chinese government will be making more unilateral decisions and will be less and less sensitive to the opinions of other international players.  How it plays out is anyone’s guess … but suffice it to say that this will be a factor, starting in 2010.

One word of caution here – just because things are happening in Beijing does not necessarily mean that there will be a direct impact on what you are doing in your local area.   All governments move along their own timelines … and some would say their own dimensions of reality … and these timelines are often best measured using carbon-dating methods, things move so slowly.  So please don’t assume that I am prophesying doom and gloom … this is just another data point you will need to include in the algorithms you use to understand what is happening in China.

So there you have it … my predictions for the future.  Radical and cutting edge?  Probably not, but I am very certain that we will see these themes come into play and interact with each other this coming year.  As for each of you and your companies – include these themes in your strategic planning.  Assume that your competition is moving in these directions and challenge yourself and your China management to be able to articulate, in detail, how you are going to handle all of these, both defensively and offensively.

One of my favorite quotes about the future is from Alan Kay, the American computer scientist, researcher and visionary, who said “The best way to predict the future is to invent it.”  It has been true for the past quarter century I have been in China and will be so for the next 25 years – China is a unique environment where you can, literally, create your own future.  And this is what we at Technomic Asia hope for you in 2010 and beyond which is why we end every Podcast with our motto: “In China, everything is possible but nothing is easy.”  We wish you all a very Happy New Year and we’ll see you next time on the China Business Blog and Podcast.

Most Americans live with the delusion that we blend in well in foreign cultures. We think that because we come from a melting pot culture we are, by definition and constitution, “multi-cultural” and, therefore, “any-cultural”.  As a card-carrying American (VISA card, I should clarify), I can tell you that this is wrong. While our distant ancestors might have come from somewhere else, the remnants of cultural sensitivity have long left the American cultural gene pool; indeed, they have showered, toweled off and returned home. The truth is most Americans, no matter their ethnic DNA, have regressed. We have adopted the American cultural mean and are therefore easily identified, particularly here in China. We walk tall, talk loud and surgically remove most of the tones from our spoken Chinese.

That said, most Americans are genuinely interested in what makes other cultures different …not that we necessarily respect those differences, but it is sure neat to know what they are. And what they are is very different from us. We are fascinated with the unique ways of foreigners because Americans have a generally-uniform culture. It is spread across 5,000 km of country and we all speak, roughly, the same language (except for members of our former government administration who tended to drop vowels and add syllables when discussing the situation in Eye-rak).

Then again, maybe our interest in other cultures is all a sham, nothing more than an attempt to assuage our collective guilt for foisting fast food and Britney Spears on the rest of the world (being responsible for both “Hit Me Baby One More Time” and a global addiction to trans-fatty acids is enough to make anyone desperate, I suppose). Whatever the reason, Americans are morbidly interested in how other groups of people behave, and how they’ve managed to retain their identities.

So for my American clients and friends that are making their first trip to China, I give them a crash course in “what to do” when they arrive. First, I tell them to present and receive business cards with both hands; secondly, always offer a guest something to drink; and third, if they drive, be sure to drive rapidly on crowded sidewalks, all of which are VERY culturally sensitive. The purpose of such cultural niceties is that it has meaning for both parties. The gesture of respect shown by offering your business card with two hands means a great deal to the Chinese, and at the same time it helps lessens the chance your card will drop on the floor which is definitely not a sign of respect.  The Chinese are quite pragmatic in these things.

My frustration, however, comes when foreigners start using cultural norms from our host country (China) when interacting with each other. For example, when I meet another foreigner and he hands me his card with two hands. C’mon … just get your card to me any way to you can: slide it across the table, flip it, fold it into a million paper cranes and fly it over, I don’t care. I am not Chinese so the two-handed thing means nothing to me and I don’t really need to know that you know how to do it, thank you very much.  Save it for someone for whom it really matters!

Things get really sticky when two foreigners from different cultures interact here, particularly when it comes to greetings. Meeting for the first time is pretty straightforward: smile, shake hands; get over the one-hand / two-hand business card thing and then you are home free. But develop a social relationship and things get hairy, especially between Americans and Europeans.

I think I speak for all Americans when I ask my European friends, in all sincerity: “What’s up with the kissing thing?” You know, that two cheek kind of thing when members of the opposite sex greet each other (or, I guess, when Italians greet ANYONE).  When do you do it? How do you do it (on the left first, on the right)? And it seems to me that no actual contact is made between lip and cheek – its more of an air kiss, is that correct? And am I right in assuming that French kissing, despite the name, is not appropriate when greeting a Gaelic friend? I’m just asking, here.  I don’t want to offend.

Like I said, this is where things get sticky.  For many Americans, the part of me that is “me” begins about 21 inches from my physical body (or 53 cm for the rest of the world that insists on using a system of measurement that actually makes sense). You get inside of that me-space and, unless I know you very well, I feel a bit uncomfortable. Mainly, because I don’t know where those lips have been (and I really don’t want to know so don’t bother explaining). Where I am from … the great state of Minnesota in the U.S.A. we really value our personal space.  Men on one side; women on the other and don’t get too close.  Its like some Amish throw-down.  Its amazing that enough physical contact even takes place in that state enough to keep the reproduction level roughly above that of the Giant Panda (who, for those interested, conceive roughly once every two millennia.  No wonder they are nearly extinct.  Let’s get it on, my furry friends … throw a little Barry White on the hi-fi, fluff up the bamboo leaves and get un-endangered!).

But I digress …

This is the month when many people around the world celebrate Christmas … a holiday that, arguably, has been internationalized mainly because it has been Americanized (and by that I mean “consumerized”).  I would encourage those from other countries to join in the fun and celebrate with all we Americans. I think you will find us open, friendly and on the good side of naïve. But if possible, before greeting us as comrades, please provide a warning. Something like: “Excuse me, clueless American friend, I am going to greet you with a friendly air-kiss. I come in peace. Do not be alarmed or try to defend yourself. And I will go left and you should go right …”

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…

In  past interviews here on the China Business Podcast, we’ve talked with business leaders about their approaches to China … why their company came to China, how they are approaching the market, how  things are going, etc.  I am trying to think back, but I don’t think we’ve ever talking to someone about how a country approaches China.  Well, in today’s Podcast, we are going to change all of that by talking with David Thomas, Founder and Managing Director of Think Global Consulting, a firm based in Sydney, Australia.  David and his firm work with Australian businesses and government to make connections to China.  I’ve known David for a couple of years and, in fact, I think we might have even met through his listening to our Podcasts in the early days.  But as we’ve talked and done business together, I learned more about the deep connections between Australia and China and how those ties are becoming even stronger as both countries find a deeper affinity with each other.  Certainly, those deeper ties are not without their conflicts as we’ve been seeing recently with the dust-up around Rio Tinto and mining contracts.  But as we’ll hear from David today, though the road might be a bit rough, there are some good things ahead for both countries.  Attached is part 1 of my interview with David Thomas of Think Global Consulting…

In our recent Podcast series, we have been talking with Bill Powell, senior writer for Time and Fortune magazines, based in Shanghai.  In the last Podcast, we got into, what I thought, was a VERY interesting discussion about the uniqueness of what is going on in China these days.  Literally, what we are seeing in China is unprecedented … never before has an economy (and a society) grown and changed so much in such a short period of time.  Understanding it, let alone predicting it, is very difficult and we are all, in a sense, working without a script.  We talked earlier about what the U.S. and other Western economies could learn from China … to wrap up our conversation, I started by asking Bill what he thought China could (and should) learn from the West …

Those who have been doing business in China for awhile are quite familiar with the differences between the State-Owned Enterprises (SOEs) and the Privately-Owned Enterprises (POEs).  For those of you not familiar with this distinction, let me break it down for you.  The POEs are just that, companies owned privately with little or no government involvement – they are often run by business-savvy executives with global business experience.  The SOEs, to put it succinctly, are seen as hulking, unprofitable behemoths chocked full of aging assets and run by 55 year old Party hacks in moth-eaten Mao suits and greasy comb-overs.  OK … maybe I am being a bit too hard on them, but the term “SOE” has been used as a pejorative descriptor more often that not.

After Liberation in 1949, the Chinese Communist Party brought all businesses under their control and POEs were, for all intents and purposes, completely eliminated in China (as was nearly all foreign investment when they were unceremoniously kicked out of China).  Through a series of disastrous events in the 50s through the 70s (the Great Leap Forward, the Cultural Revolution, etc.), the government proved that, not unlike their Soviet cousins, they were terrible CEOs – factories were inefficient, poorly run and churned out bad-quality junk that had no relationship to any market demands whatsoever.  That wasn’t as bad as it seemed because China retail and commercial trade was not yet standardized so bad products were also hard to purchase.  Go figure.

One of the many reforms that the Deng Xiao-ping administration started in the early 80s was captured under the Party phrase 民进国退 (min2 jin4 guo3 tui4): “POEs will advance; SOEs will retreat.”  What this meant, in effect, was that the Party wanted to get out of the business of being in business and started the long, mind-numbing, ulcer-inducing process of unwinding the complicated SOE culture … which included, for many people, guaranteed housing, education and healthcare.

Fast forward to the mid-2000s and you begin to see private Chinese companies really moving the market.  Thanks to China’s joining the WTO in the early part of this century, various sectors in the China market were opened to foreign investment, particularly retail and distribution/logistics.  This led to further (and more rapid) modernization of China’s business environment and it looked as if the SOEs were going to go the way of the dinosaur, only to be studied by business anthropologists who dug up their jerry-rigged balance sheets and padded expense accounts.

But don’t count the SOEs down for good … we see that there might be life in these old war horses yet, in part because the Chinese government and the Party (one in the same thing here) sees some advantages to keeping their fingers in the business world, particularly in areas that have remained the jurisdiction of the government such as automotive, oil & gas, media, etc.  Not to over-simplify things but these SOEs have two unique competitive advantages over their foreign competitors: first, the SOEs are not held to strict growth and profitability metrics and are encouraged by the State to get as big as possible, regardless of margin targets; and second, the government makes available an almost unlimited stock of growth capital through forced lending from the State-controlled banks.  Imagine if you, as a business executive, were told by your shareholders, “OK … here is the deal – we want you to grow this company.  Don’t worry about profits, just bring in the revenue … we have ways of dealing with the P&L.  And when you need money, just ask.  We’ve got plenty.”  Sounds like a dream scenario, right?

Well, it seems to be working and we are seeing a surge in some of these SOEs – in automotive, the so-called “Big Four” (First Auto Works, Shanghai Automotive, Dongfeng and Changan) are on a consolidation tear, encouraged by the government to acquire smaller, regional automotive companies, much like GM, Chrysler and Ford did in the early days of the U.S. auto industry.  The Chinese oil, gas and mining giants are actively looking outside of China for investment and, though they have been rebuffed by some foreign governments, are slowing expanding their global footprint.  Several of the larger SOE construction equipment companies are aggressively expanding, both inside and outside of China (as a side note, some say that this is why Carlyle’s acquisition attempt of construction giant XCMG did not go through last year … that the government wanted to maintain control in what they saw as a very strategic industry).  All of these SOEs – and many more besides – benefit from very easy capital lending requirements from State-run banks.

A recent article in the New York Times highlighted the pressures that Chinese banks are under to insure that they keep their lending capital accounts well-stocked and rumors are flying around China that the government is requiring China banks to raise their capital adequacy ratios.  Some might see this as a slowing down of lending.  However, I interpret it as just the opposite: the government wants the Chinese banks to keep good reserves of dry powder to be able to lend to those, predominantly, SOE companies that need growth capital.  It’s a “go slow to go fast” strategy if there ever was one.

All of this has led to private chats over dinners and drinks all over China that the government is trying to reverse their dictum of the 80s and say, rather, 国进民退 (guo3 jin4 min2 tui4): “SOEs will advance and POEs will retreat.”  While I seriously doubt we will ever see this in an official government document, the government’s practices are certainly encouraging this.  The SOEs are no longer run by Party hacks … their CEOs are often Western-business educated and understand very well both international commerce and the unique requirements of doing business in China.  They are dressed in Armani suits, have their hair styled and show up at the right parties, all the while maintaining their status in the Party-with-a-capital-P!

Just this past year, we’ve been involved in more competitive intelligence programs with our clients, helping them understand the ever-changing landscape around them.   It used to be that they were just interested in understanding their foreign competitors; however, more and more we see Chinese companies – and particularly SOEs – coming to the forefront of our clients’ concerns.  And given the competitive advantages these SOEs bring with them, everyone is very smart to be concerned about them.

So the question you need to answer is this – do you know your SOE competition?  Do you know who is backing them?  Who is running them?  Do you know what their growth strategies are and what their plans are to grow in the market?  Do you know what they think of you?!?  I can almost guarantee that they are no longer the lazy competitors you once knew.  You better understand them because they are a big threat, whether you know it or not.

We are in the middle of a discussion with Bill Powell, senior writer for Time and Fortune magazines.  In the first part, we talked about China and the rest of the world, how we try to make comparisons to what is happening in China with what we have seen in the past.  In this Podcast, I wanted to start off by getting Bill’s take on the challenges of covering China.  I prefaced my question by saying that, in our consulting practice at Technomic Asia, we are very careful not to talk about “THE” China market … there are, in fact, MANY China “markets” taking into account big cities, small cities, northern cultures, southern cultures, urban and rural, etc.  I asked him to talk about the practicalities over covering such a vast subject and the challenges he finds in trying to do so …

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 …

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.

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!

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 …

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!

I woke up this morning with two words running through my head: “Reality TV”.  Kind of a scary thought, huh?  But what got me thinking about Reality TV is not the content, per se, but the business model: find a bunch of people, average schlubs, and film them acting as such; edit the content to highlight the schlub-iest moments and then put it on prime time television. Violà… instant ratings. Like all great ideas, I am kicking myself that I did not think of it first. Why, you might ask, should I consider myself so forward-looking as to think I should/could come up with that idea? Well, because what they call “Reality Television” I call “the average day in China.”

China is a country of “watchers”: people sitting around and simply studying other people being…well…people!?! One of the things that foreigners have to get used to here is what we would call “staring” … many here would call, simply, “observing the behavior of those around them.”  I suppose that makes sense … there are so many people there that free content is always available.  Several decades ago, just being a foreigner in China attracted attention. Go to the market, let a couple of Chinese words slip out of your mouth and you gained such a crowd on interested onlookers that you could put up a tent and charge admission.

Now, certainly, things have changed over the years.  But many years ago, I was a spectacle, even in a big city like Shanghai where foreigners were not very common.  I once asked a Chinese friend why everyone stared at me and he said, “Well, for thousands of years, all we’ve had to look at is other people who look like us … you are REALLY different, so we want to have a look!”  That was tough to argue with, I must admit.

So I have spent countless hours entertaining local residents here over the years. I should have had an agent negotiate a contract for me, thusly: “Mr. Kedl is willing to shop for vegetables every Tuesday and Thursday and to mispronounce a minimum of 17 Chinese words while doing so. The neighborhood will provide no less than 83 gawkers, at least 11 of whom will attempt to help Mr. Kedl negotiate the transaction and another 6 will comment on the proceedings. Mr. Kedl will receive 10% of the front end and two points on the gross plus all residuals on local TV news footage.”

Not much has changed over the years in terms of the spectacle I create when shopping. The modern hypermarket has made for some great leaps in shopping convenience: too many choices are jammed into too little space at too high prices and NO room to negotiate. The beauty about shopping in China is that total strangers will feel very free to look into your cart and check out what you are buying. Many of them will feel even freer to comment on your purchases, particularly if they don’t think you can speak Chinese: “Hmmm….look at that foreigner…what in the world would he need with a toaster oven, a pile of hangers and three apples?? And he should get himself a real nose instead of that two-car garage he has holding up his glasses now!”

I was at my local hypermarket recently when one elderly lady tried to convince me – in animated sign language reminiscent of Helen Keller doing liturgical dance – that the milk I was purchasing was NOT the right milk and that, if I bought the one she was buying, I could get 2-for-1. I explained to her that my kids preferred this type of milk, but thanks for the advice. She walked away a bit confused, mumbling to her shopping companion “Why in the world wouldn’t he by the cheapest kind…and it almost sounded like he spoke Chinese!!”

But having a foreigner as the center of attraction is not necessary. Almost any activity on the street will garner attention from passers-by. The other day a motorcycle cop stopped a guy on a bicycle carrying a load (looked like three sofas and a cage of ducks). The cop dismounted his bike, sauntered over, Ponch-style, to the offending cyclist and stared at him. Immediately, a gaggle of pedestrians gathered around the two of them to see what would happen next. Not able to resist peer pressure, I joined the throng (it felt good to be the gawker as opposed to the gawkee). And you know what happened? The biker got a ticket.

The crowd went away happy, but I was left unfulfilled. No fight broke out. No blood was spilled. No threat levels went to Orange. A TV news anchor didn’t show up with his helmet of hair and don’t-believe-me-at-your-peril voice to intone, over a dramatic graphic sequence, What It All Means and Why You Should Be Very, Very Afraid. The dude just…got a ticket.

The West is trying to convince China that they need to change, to upgrade themselves to the “modern world”. Personally, I think China is doing OK, for the most part. However, if I were to be honest, I think China could add a bit more excitement to what is, essentially, a reality show here.  I mean, if all of life is open for others to sit around and stare at, you should really go for it …you know, punch it up a bit, get better ratings and maybe raise ad rates. Cops shouldn’t just give someone a ticket: apply a little OJ and first have a slow-motion chase through downtown (actually, it would be slow-motion here in Shanghai because you’d never get over crawling speed through the traffic). An overloaded vehicle tips on the highway? Splash around some fake blood and have five people go at it, Jerry Springer style. Over-crowding on the subways could be solved if we could all vote someone off every stop (my choice would be the guy with the scary comb-over taking up two seats) or the guy who keeps losing his mobile phone signal and keeps shouting “Wei?  Wei?” into his dead phone.

But I think the ultimate Reality Show here would be to demonstrate just how helpless some foreigners are here.  We could put a collection of them in a row house off Chang Le Lu, give them only CCTV, no access to DVDs or any restaurant that ends in “on the Bund”, take away their Ayis, drivers and secretaries and see who lasts the longest. Guaranteed to make Survivor look like summer camp for sissies.

Last week I posted the first part of an interview with Sayed Jafry of ThermoFisher where we discussed their decision to located the global headquarters for their environmental division in China.  Even though China is not currently a big part of their business, ThermoFisher management thinks that this will change and Asia – particularly China – will figure heavily into their business.  In Part 2 of my interview, we talk about the challenges in making China a global headquarters and how that is signaling some important changes in this market.

Those of you who are long-time listeners to the China Business Podcast have heard us talk, endlessly, about ways that companies need to be looking at the potential opportunities in China, not just the actual ones … to look not only at the present, but the future of China.

I loved to play and watch hockey when I was a kid, and nothing was more thrilling than to see the great Wayne Gretzky play … it was magical, how he would always be in the right place at the right time.  Someone once asked him why he was such a good hockey player and he said, “because I skated to where the puck was going to be.”

And that’s the challenge, isn’t it … to start working in China today based on where it is going to be in the future.  In today’s Podcast, we have a very special treat … we are going to talk with someone who is actually putting this adage into practice.  Syed Jafry is the President of the Global Environmental Division for ThermoFisher Scientific, a very diverse, publicly traded company.  Syed and ThermoFisher are on, what I believe, is the cutting edge of global business and we sat and had a conversation in his Shanghai office on a rainy morning just before the National Day holiday.

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.

In the past couple of Podcasts, we’ve been talking about healthcare in China and, specifically, about the potential opportunities that this might represent for foreign companies doing business in China. The rallying cry here in China these days comes under the heading of “yi1 gai3”, literally “healthcare reform” … and if you think that Mr. Obama is staking his future presidency on healthcare reform in the U.S., the pressure on the Chinese government is 10 times worse. China suffers from similar issues – a large number of its citizens not covered (or under-covered) by the existing insurance options. But when we say “large”, we need to be very careful what we mean here … because “large” in China means something like over a billion people with inadequate coverage.

Remember from our previous Podcasts, that this is a population that is rapidly aging – by 2020, there will be 181 million people aged 65+ in China, more than the entire population of Russia, and those 181 million elderly people will be 25% of the world’s total elderly. Remember, too, that the responsibility of supporting these elderly is falling on the shoulders of China’s vast only-child children, those born starting in the early 1970s when China stepped up their population control enforcement.

Of course, what actually will happen in China’s healthcare reform is anyone’s guess right now and I cannot claim to have unique insight … China’s healthcare reform leaders are following Deng Xio-ping’s dictum in the early 80s that China’s developing would be, what he called, “Mo shi tou guo he” … crossing the river by feeling for stones. We’ve already talked about one of those “stones”, the infrastructural changes that China needs to make, upgrading their hospitals and equipment, starting with the mid- and lower tier hospitals. This will certainly be happening, and in a big way. But there are three other “stones” that seem to be most prominent right now: insurance, doctor training and healthcare regulation and monitoring. Let’s look at each of these in order:

Insurance
For most people – including yours truly – discussing health insurance is a sure cure for insomnia! But in China, there are actually some very interesting socio-economic issues tied with health insurance. In China today, over half of people’s healthcare costs come out of their own pocket while only about 18% comes from government-sponsored insurance. The exact opposite is happening in the U.S. where the vast majority of healthcare expenses are born by government or employer-sponsored insurance programs and, though it sometimes seems like a lot, a smaller portion of the average American’s paycheck goes to pay for their own healthcare. In China, about 9% of a person’s disposable income is spent on healthcare … and that figure will nearly double to over 16% by the year 2025. China has a HUGE problem on its hands right now!

One of the biggest challenges we have in getting foreigners to understand the China healthcare system is to get them to realize just how little insurance matters in China … seriously, for most of China’s citizens, insurance picks up such a small portion of the total healthcare tab that people will rarely think about it. I was on a panel a couple of months ago, speaking to a group of doctors and healthcare professionals visiting from the U.S. I was the only foreigner on the panel … kind of the token white guy! For the first half hour, the visitors pelted us with questions about the insurance system in China … how much did it cover, what drugs and devices were covered, how was it paid for, etc. We tried to politely answer their questions but my fellow panelists were getting frustrated … they were wondering why these people were asking questions about something that didn’t really matter here. Finally, I spoke up and said, “Listen, I guess what we are trying to tell you is that insurance doesn’t matter AT ALL here! People don’t think about it much … they look at how much money they have in their pockets or bank account and make healthcare decisions on that basis. Get off the insurance stuff already!!” There was this shocked look among the visitors … then one of them said, “Wow … this place really IS different!!”

Yes, it is different … but the Chinese government’s goal is for it to change and change drastically. As we’ve discussed before, the relatively high savings rate in China (30-40% of total income, depending on where you live) can be attributed, in part, to people’s concerns about the future healthcare costs for themselves and their parents. Beijing has to find a way to crow-bar open people’s wallets and encouraging local consumption (and not rely so heavily on exports) so fixing health insurance is a HUGE requirement for them. So a key goal of China’s medical reform is the elusive phrase “universal coverage” … that every one of China’s 1.3 billion (and growing) population is covered under a health insurance plan. And as the United States is finding out, the devil is in the details of defining what “coverage” means and how far do you need to go to get to “universal”.

There is a plan in China to have several different kinds of insurance but divided, generally, into two types: insurance for urban residents and insurance for those living in the smaller towns, villages and countryside. Let’s start with urban residents, currently the only population with any kind of meaningful insurance (and even then only about 15% of them are covered). The government’s goal is, by the end of 2010, to have 100% of urban residents covered by what they are calling the Urban Employee Basic Medical Insurance. The details, of course, are still being worked out on this, but the goal seems to be to have it be funded by both the employer and the employee with co-pays up to 30% and a deductible of up to 2,000 RMB (about $300). Right now, they are saying that the maximum annual payout would be 4 times a person’s annual wage … but this could just be marketing at this point. There is talk, too, of an insurance program to cover those urban residents who are unemployed … and that would have a maximum out-of-pocket payout of about 35% of total costs. That is not much lower than it is now, but I suppose it is, as my grandfather used to say, better than a sharp stick in the eye (and, at least you can get some help paying for the medical care necessitated by the sharp stick in the eye and you know that can’t be cheap!)

The insurance plan envisioned for rural residents is a bit more basic but will be much more difficult to roll out. Right now, the average rural resident gets a medical reimbursement every year of about $20 … now, healthcare is certainly cheaper in China than it is in most other countries, but 20 bucks won’t get you very far, even here! The program for rural residents is much cheaper, per person, than is the urban plan, but there are more “persons” to cover in the rural area (remember that nearly 65% of China’s 1.3 billion people still live in the countryside). In the rural plan, there would be a 100 RMB premium with 80 RMB paid by the government. There would be a 60% co-pay with an RMB 500 deductible. The maximum payment under this plan would be 10,000 RMB per year, only about $1,500. Under normal circumstances, that would be OK … but in any kind of catastrophic or near-catastrophic situation, that would not be enough to get anyone through.

Again, there is a LOT of talk about this … in the media, among colleagues, etc. And this is completely anecdotal evidence, but I don’t see a lot of optimism from the average Chinese citizen that these programs will arrive on time and provide adequate coverage. There could be an opportunity here for private insurance and more of that is coming online (all the big international insurance companies are already here) but there is not a historical practice of buying health insurance. I think that people here will still be hedging against the future by saving money, not spending a lot on insurance. So right now, it seems that everyone is waiting around to see just what kind of insurance the government comes up with … and then everyone will decide if it means anything to them or not.

Medical Training
The second “stone” sticking up out of that raging river we are trying to cross is medical training. Right now in China, there really is no standard to practice medicine and you do not necessarily need a medical degree to practice medicine … in fact, 98% of medical professionals practicing in China today have a bachelor’s degree or less, and about 70% have the equivalent of a vocational college degree.

Now, this is a bit scary, but let’s put it in some context here … China’s medical training is NOT based on a “general medicine” approach is it is in the U.S. where all medical doctors – from surgeons to dentists to psychologists – go through a standard program of general medical training. Rather, nearly every one of China’s 1.6 million doctors is a specialist – in fact, only about 4% are considered general practitioners. Everyone else has some specialization … 18% do internal medicine, 12% are surgeons of one kind or another; 10% are obstetricians; 4% are pediatricians. So when I say that they have a “vocational degree” of some kind, it means that they study their particular vocation … like surgery … to the exclusion of all else.

This can make for some very good surgeons … if the problem presented to them fits the textbook case that they have previously studied. A son of a good friend of mine here fractured both bones in his forearm last year and they went to a local orthopedic surgeon who did the surgery and pinned the bones. They went back to the U.S. over the summer and had a surgeon look at it there and the U.S. surgeon was very impressed. He said that the Chinese surgeon had done the best job he had ever seen in this type of surgery.

However, rarely in a medical situation do problems present themselves textbook style. Right now, if you have a medical problem, you will go to the hospital, check in and tell them, generally, what is wrong with you. If you say that your stomach hurts, you might be sent to a gastro-intestinal specialist. But if you are found to actually have a nerve condition that presents itself with stomach problems, you will end up being in kind of a no-man’s land … once you enter the system along the “stomach” track, it is very difficult to get on to the “nervous system” track. In the Chinese medical system, there really aren’t anything like “case managers”, someone that will look after your overall health picture and coordinate the care you need with the best specialists to help you.

I do some work with a medical foundation here in China and we had a baby from a rural orphanage in for some heart surgery. She also had a swollen abdomen but the heart was the biggest problem … she went through surgery and came out of it OK. She spent time in the hospital and slowly recovered … but it still looked like she was hiding a basketball underneath her navel. One day, the heart surgeon came by to check on her and, after examining her, declared her fit to leave the hospital. One of our Western volunteers was there and said, “Hey, wait a minute … what about her belly??” The doctor said, “Oh, that’s not my area. You’ll have to talk to someone else about that.” He was not being mean … he was a very caring man and was a very good heart surgeon. But that is ALL that he did … he did heart surgery! He was not trained in anything else and certainly was not going to stick his neck out to go beyond his expertise.

Now, what I have been talking about is for hospitals in the urban areas … the rural areas of China are even more challenging. A 2001 study of about 800 village doctors in Western provinces found that 70 percent of them had no more than a high school education, and had received an average of only 20 months of medical training. In addition, our interviews with rural clinics show that over 60% of doctors and healthcare workers in have less than 5 years of experience … and only 2% nationwide have over 10 years of experience.

For a country that will soon be smack-dab in the middle of a HUGE, medically-fragile, elderly population, this is not the kind of situation you want to be in! Part of China’s investment in their healthcare future will require massive amounts of money spent on doctor and healthcare worker training. As far as I’ve been able to see from the current talk on healthcare reform, I don’t see anything committed to this effort … but there certainly should be!

Regulation
For those that have done any business in China, you know what China can do with a bureaucracy. Typically, Chinese government bureaucracy is mirrored at multiple levels … starting with national and moving down through provincial, county, city, district and neighborhood, there are branches of the same government entity. In healthcare regulation and monitoring in China, we see the same thing … but it becomes MUCH more complicated because there are often parallel and competing government entities vying for power. Look just at the national level and you find multiple regulatory bodies involved including:

• The Ministry of Health which oversees hospital management
• The State Food and Drug Administration which , similar to the FDA in the U.S., regulates anything related to food and pharmaceuticals, from production to distribution.
• The National Development and Reform Council (NDRC) which oversees much of healthcare pricing
• The China Insurance Regulatory Commission (CIRC) which, as its name so subtly suggests, regulates insurance, particular private insurance.
• Then there is the alphabet soup called the MoHRSS, the Ministry of Human Resource and Social Security who looks over the shoulder of the CIRC to regulate public insurance and the reimbursement list.
• Finally, there is the Ministry of Finance who is responsible to help fund this whole mess.

There is not one, overarching ministry in charge … a ringmaster, a quarterback, a dominatrix in a doctor’s outfit … use whatever metaphor floats your boat! So not only do we have a HUMONGOUS need for real, lasting healthcare reform in China, we have a bunch of ministries all lunging for the same levers to pull. My concern is, obviously, that we are going to see some real challenges ahead of us in the coming years.

Conclusion
So let’s bring this back home … what does it mean for us, the potential foreign investors in China’s healthcare system? I can see two areas of interest:

1. Foreign investors should be focusing on the mid- and lower-tiers of the healthcare system … to find a way to participate where the volume is and where the money is going to flow. I mentioned this in earlier Podcasts, but foreign investors – device companies, pharmaceuticals, drug delivery, etc. – should certainly try to play in the upper sectors, but should use that play to find a way to get into the lower ones. If you are a device company, find a partner to work with to bring your particular technology to the masses. Guaranteed, you are going to have to take some engineering OUT, reducing features and functions but also reducing costs. Then you’ll need to find a distribution channel that can get it to the hospitals and clinics purchasing this equipment. And they WILL be purchasing … again, the government is going to be dumping MASSIVE amounts of funds in these mid-tier healthcare outlets to upgrade their capabilities. Get in on the ground floor and you could be in for quite a ride. We are working with several medical device companies now on these strategies and the opportunities are HUGE!
2. The second area I am only going to mention in passing because I don’t really know exactly how to do it yet – and that is, find a way to participate in the actual DELIVERY of healthcare. Participate in private clinics, open medial labs, work at doctor training. The need is obvious and overwhelming … I am honestly just not sure how to turn it into a business yet. We are working on a couple of projects in the privatization of clinics and hospitals and are seeing some very exciting things … I just haven’t seen a business here yet. Its there, I can smell it … but I haven’t found it yet.

If you are working in some area of China healthcare, please share your story with us … send a comment along on our blog at www.technomicasia.com/blog. If you have a really good story, we’ll get you on the Podcast to share it. For those of us trying to cross that raging river by feeling for stones, it always helps to have others by you, to help guide and stabilize you (and, to extend the metaphor, to help haul you up when you fall flat on your can!).
Thanks for listening … in our last healthcare Podcast coming this fall, we’ll talk about pharmaceuticals in China and how the healthcare reform will impact this very critical area. Until then, remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

The scholar Confucius was an interesting guy … he was also a bit of a worry-wart. Certainly, there was a lot to be worried about … Kingdoms were fighting Kingdoms, people were starving, there was a general lack of education across the land. And the rulers hadn’t even gotten into building ridiculous architecture like the Great Wall. So ol’ Confucius was scratching his head for a solution but he was a pretty bright guy. Part of what he came up with revolved around names … he said, “You know, the problem is that a ruler is not acting like a ruler; a father is not acting like a father; a son is not acting like a son.” And like other famous people that need only one name – Madonna, Sting, Cher – he was also pretty good at marketing, or at least his students were. So in succeeding generations, there have been vast campaigns to get people to act in ways consistent with their names.

We Westerners, on the other hand, are not smart in this way. We tend to follow William Shakespeare who asked, “What’s in a name? A rose by any other name would smell as sweet”. But maybe he wasn’t so smart … after all, he had to keep his first name in his brand.

But I have been thinking a lot about names recently and how important they are here in China. Chinese names are beautiful, rich in symbolism and possess a sense of history that places the bearer securely within the culture. Finding an appropriate Chinese name for a foreigner is, perhaps, even more difficult than it is for the native-born. Many opt for the easy way out – simply translating the sound of their name into Chinese phonemes. Of course, that means the Chinese characters are devoid of meaning. Most foreigners don’t mind, but if you want to belong then you should find a “real” name.

So if you want to make sure you have a good Chinese name, you’ve got to approach the situation not unlike your China business strategy – you need to take some control and work with people you trust. My Chinese name was chosen many years ago by a committee formed by my closest Chinese friends. Their mission: to find a name that matched my personality. However, the most appropriate, “Donkey-Face-Monkey-Boy’”, does not translate well in Chinese so instead they chose 高 德凯 or Gao Dekai. Gao is a traditional family name, but it also means “tall” and therefore alludes to my height. De means “morality” and Kai, “victory”, which says something about my successful struggles with sin (or pokes fun at my many failures). In short, Gao Dekai is a nice, solid, very Chinese name.

I am never embarrassed when presenting my business card to Chinese people and they always comment on my name – “Oh … very nice name. Very strong!”

Every once in a while, my Chinese friends ask me to help choose an English name for themselves or even their first child. This makes me feel most uncomfortable. The responsibility is too great and a wrong choice can mark a person with bad karma for life. I have trouble choosing a necktie, never mind something as serious as a name.

I once knew a young man surnamed Zhou, who approached me one day and said: “Mr. Kent, I want you to help me pick an English name.”
“OK,” I said, my voice aquiver, “have you anything in mind?”
“Well, I like the name Satellite,” he said, with a proud grin.
“Um… ‘Satellite Zhou’? Are you sure about that?” I asked.
“Yes” he said. “Satellites are very modern and are very strong. And I want to be modern and strong. Besides, my best friend said it was a good name for me.”
“Who is your best friend?” I asked, fearing the answer.
“Oh,” he said, “his name is Auditorium Li.”

Which reminds me, in China, everything is possible but nothing is easy.

In a country this big there are plenty of sick people. Combine hundreds of millions of sick people, with less than 1,200 hospitals capable of providing comprehensive care, by that I mean best physicians, technicians, and staffing, which are called Grade 3 hosptials, and you have the world’s largest waiting room.

Allow me to describe this potential process. Man has pain in groin and suspects it’s a hernia. He travels a couple of hours to nearest Grade 3 hospital in Shanghai, primarily because he has little faith in a Grade 2 hospital nearby and there are no real places that a Westerner would recognize as a primary care clinic in China. He waits a day in Shanghai to see a physician, if he is lucky, who confirms his suspicions and recommends surgery. Unfortunately no beds are available which means waiting in a nearby hotel – that’s right, hotel stays and hernias go together here in China’s health care system, until a bed opens up.

Can you feel his pain? Yes I believe you can. My friends, pain like that can only produce opportunities for business here in China’s vast and emerging health care market. But where exactly do you say are those opportunities? Let’s start at a level down from that Grade 3 facility where the bulk of patients can be served.

We have seen most of the opportunity in the 6,500 Grade 2 hospitals across the country. That is where many of those people in waiting rooms in Grade 3 hospitals will find their cures by improving the quality of care at hospitals usually closer to their homes and with greater distribution across the country. After extensive research, we have found that this level of hospital will receive more government funds for improvement and greater flexibility to incorporate private sector principles in their operations.

The specific opportunity is for medical device and IT companies to provide equipment and software, for better trained physician groups to practice, and for investors to add to the infusion of Chinese investment in healthcare, nearly $125 billion government funds over the next 3 years. That’s an opportunity. The full transcript of this podcast which includes a greater description of the hospital structure in China is available here.

I have been living and/or working in China for over 20 years and have been witness to one of the world’s most amazing phenomena … the aging of the population. Why is that so amazing in China? Well, just 50 years ago the life expectancy of the average Chinese person was 35 years old; today it is 72. In the past 10 years, life expectancy has been raised over 2 years. And why are people living longer? There are a number of reasons, but the major factor is is that people are getting better healthcare. But the cure to the Chinese people’s improved lifestyles is also the disease. Do the math: more than a billion population living nearly twice as long as their great-grandparents, equals some very, very large health care needs.
The attached Podcast is starting a series on Chinese healthcare but I will just highlight some of the issues here.
It is common knowledge that the low levels of consumer spending here and high savings rates compared to more developed economies – the average Chinese citizen saves 35-40% of their total income – is due largely to the fact that the Chinese social safety net has huge holes in it. In the old days of the planned economy in China, healthcare – such as it was – was a given, part of the so-called “iron rice bowl” of guaranteed supports which included housing, schooling and healthcare along with a basic (and low) salary. Well, as the economy has opened up and more capitalistic structures and systems have been allowed to bloom in China, this iron rice bowl has started to crack and, for most people, disintegrate completely. And the economic planners in China, giddy from the incredible wealth and its associated global power, focused more on the exo-structure rather than the infrastructure in China’s development.
There is a running joke among some of my China-phile friends that, if you hear a so-called expert start his or her speech with the phrase, “China is a big country”, you should immediately discount anything you hear from that point on … pointing out the obvious is not a good way to begin.
Still, this must be the foundation for any discussion on the social welfare system in China, that this is just a MASSIVE country, both in terms of geography (the physical size of the U.S.) and population (1.3 billion people, more than triple the U.S.) and this scale has a lot to do with how things do or don’t get done. Comparisons are often made between China and Japan or the “Four Tigers” of Asia (Taiwan, Singapore, Hong Kong and Korea), looking at how these early Asian economies developed versus what and how China is doing today. While certainly some comparisons can (and should be) made, the fact remains that China’s scale sets it apart from the others – its like the difference between driving a Jet-ski and a super tanker – both are navigating some of the same waters, both have somewhat similar methods of propulsion and steering, but the simple differences in volume and mass make for VERY different sailing experiences!
Let’s look at some age breakdowns … in 2000, it was estimated that 7% of the population was 65 and older. If current trends continue, by the year 2040 that group of 65 and older will have increased to almost 20% of the population. And a population skewed older will have greater need for healthcare of all kinds. The aging of the population alone is predicted to produce a 200% increase in deaths from cardiovascular disease in China between the years 2000 and 2040.
Now, where are these people all living? A majority of China’s population – albeit a shrinking one – lives in rural areas, in small towns and villages, far from the infrastructure of the cities. In 2010, about 55% of China’s population will live in rural areas.
However, this is rapidly changing and China will add about 150 million people to its urban areas over the next ten years, making for about a 50/50 urban/rural split by 2020. That means that China’s cities, many already bursting at the seams, will be additionally challenged to provide for their populations. We’ve talked before in these Podcasts about the growth in consumer activity in China’s so-called Tier 3 and 4 cities … but these cities still have between 1 and 3 million people in them! This is NOT what we in the West are used to. My own hometown – the Twin Cities of Minneapolis and St. Paul in Minnesota – has about 2.85 million people and is estimated to be the 16th largest metropolitan area in the U.S. (and notice that it takes us combining TWO cities together to do this!). But in China, that population would barely get us into the top 100 cities! Granted, we Minnesotans – with our German and Scandinavian ethnic heritages and our great bread, beer and cheese – are an order of magnitude larger than the average Chinese person so it feels more crowded in Minnesota. But for sheer measurements of “people per square meter”, China is the clear leader, if not necessarily the winner.
One of the benefits of improved lifestyles is better food … and “better” often means “more fattening.” In 1982, Chinese citizens consumed, on average, about 48 grams of fat per day … in 2002, that figure was up to 76 grams for urban dwellers. This exceeds the World Health Organization’s recommended level by over 30%. Some statistics put the number of the overweight and obese in China at over 200 million people. These new diets are leading to an increase in the so-called “modern” chronic diseases such as hypertension, diabetes and heart disease. In the past couple of years, diet programs from Jenny Craig, Weight Watchers and hundreds of China look-alikes have sprouted up all over China, pursuing, particularly, the young female population by telling them that they won’t be happy until they look like this retouched photo of a movie-star who has 7 personal trainers, the God-given metabolism of a wolverine and several liposuctions under her ever-tightening belt. I have even seen adds aimed at parents of chubby kids … you can bring them to fast food during the week and to a “fat camp” on the weekend.
A running joke among some of my friends in China is to walk into a restaurant and ask for a non-smoking table. “Non-smoking” just means that there is not an ashtray on the table and that YOU should not smoke there … but everyone around you, at all points of the compass, will be belching smoke like an iron smelter. Needless to say, smoking is VERY prevalent in China … an estimated 1/3 of the world’s 1.3 billion smokers are in China.
The prevalence of smoking has actually dropped in China … it was 63% among men in 1996 but then fell to “only” 48% in 2002. Culturally speaking, smoking among women is not very popular … only an estimated 3% of Chinese women smoke, but that is changing as well as younger, more “modern” women are taking up the habit.
And when you see smoke, you think “cancer” … and that is certainly happening in China. Reliable statistics here are MUCH more difficult to come by (given that the biggest supporter and supplier of tobacco products in China are state-owned enterprises), but some random data points (and the experience of smoking deaths in the West) can lead us to some pretty clear conclusions.
Lung cancer is expected to increase by nearly 2 times, resulting in over 100 million lung cancer patients in China by the year 2015. Cancers of all kinds are growing in China. Today, about 300,000 patients die each year of primary liver cancer in China … this is a rate 24 times higher than the United States. Cardiovascular disease, chronic respiratory disease and cancer are, by far, the leading causes of death in China.
Stay tuned to these pages as we explore more about the Chinese healthcare system. And check out today’s Podcast which goes into this subject in much more detail.

Nearly 18 months ago, I wrote an article for the British Chamber of Commerce in Guangzhou called “Continuous Market Entry”. A client of ours found that article and called to talk to me about it. It had been awhile since I looked at it so I did a quick review … and not only did I COMPLETELY agree with what I wrote then, I think it is even more important now! Lest you think that my ego has completely run away with me and that I have become my biggest fan (or maybe IN SPITE of that!), let me be clear – what I said then (and will say today) is NOT rocket science. In fact, because this is not rocket science – because it is quite logical and, at its heart, pretty simple – we tend to overlook it in favor of more complicated (and, we think, therefore more valuable) ways of growing our China businesses.

So in today’s Podcast, I would like to revisit this issue and explore it a bit deeper.

For most foreign companies establishing a business in China, the phrase “China market entry” is a one-time process of market assessment, strategy planning and corporate structuring. Once the business license is issued, there is a palpable sense of relief among the management team – “Whew, market entry is done,” they say, maybe hoisting a few congratulatory pints between then, “Now bring in the implementation team to get things going!” However, those that have been here for awhile understand that “China market entry” is not a one-time thing and that successful companies – i.e. those that are making money here – are continuously revisiting and refreshing their market penetration strategies.

In a similar way, a manufacturing theory that originated in Japan called “Kaizen” – roughly translated into English as “continuous improvement” – advocates that quality improvement is not a one-time thing: do it once and you’re done. Rather, quality should be a constant concern for everyone in the manufacturing environment and companies should always be evaluating how they make their products and how they can improve them.

We look at what we call “continuous market entry” in the same way: it is an attitude and a process whereby companies approach their on-going China market assessment and strategy planning as if they are facing it for the very first time. This approach is especially important for companies that have been in China for awhile, typically 5-10 years (or even more). Our market strategy consulting firm has been on-the-ground in China since the mid-80s and helped many of these companies on their first market entry. We are now working with many of them to “re-enter” China by taking a fresh look at today’s market conditions and then crafting an appropriate response.

Continuous Market Entry: “Re-asking” Questions
Going “back to the beginning” is nothing new. Sports professionals talk about maintaining their love for the game by remembering what it was like to play as children on the playground. Therapists recommend couples to find ways to keep their relationship fresh by imagining that they had just met. Buildings are renovated, torn down to the foundation and rebuilt, as if new.

For those who have been here for some time, it is difficult to go back to the beginning because we cannot help but look at China through the lens of the lessons we have learned from the past, through our successes and failures. Most of us would not want to return to the naïve attitudes we had when we first came to China: how easy we thought it would be, how smart we thought we were ourselves. No, many foreigners here “walk with a limp” and we would not trade our battle scars for anything.

So when I talk about continuous market entry, I am by no means advocating naiveté and downright stupidity (there is already a whole lotta that here among foreign companies entering China!). What I am encouraging us all to return to is the exploration of the many questions we had about the China market and how we could be successful when we first came here. Deep down, we knew that we didn’t know much, and we were hungry for information and any bit of insight that could give us a leg-up in our market entry. It is this non-stop asking of questions that lies at the heart of continuous market entry.

There are three categories of questions that I would like to briefly address here: questions about market demand, distribution chains and competitors.

Market Demand: Who is my Customer?

One of the first questions anyone asks when getting into a new market is, logically, “who will buy my product?” A simple question, no? Well, no…at least not in China! Identifying, with any level of precision, who in China would buy your product and what product features, functions and pricing would satisfy was very difficult in the “old days.” Getting access to potential buyers was difficult: travel was hard, phones didn’t work, we didn’t have the Internet or email. Secondary data, when available, was very thin and was too loaded with political overtones to be very accurate.

However, many early foreign entrants showed up with their products and – wonder of wonders – they sold some. Sometimes they sold a lot! Slowly but surely, the foreign companies that survived developed a customer base that kept them in business. The smarter ones moderated their expectations, following a fortune cookie I once read: “Set your goals low and you will always attain them.”

But many of these companies became satisfied and somewhat complacent with their success, even moderate success. Slowly, they stopped asking themselves the questions that got them there: Who is my customer? What do they want? What else can I provide them? They slid comfortably into defining their China market as “the segment in which I am successful” rather than “all the segments I could possibly address.”

In recent years, segmentation of many markets in China has become much more complex and fragmented. Take the automotive market: there used to be only a few kinds of cars to choose from with very few private buyers. There are now well over 100 brands of cars in China with hundreds of models to choose from in a dizzying array of quality, price and performance tiers, all being purchased by private owners. If you are selling into this market now, you better understand, in detail, what your opportunities are in each segment, for each kind of buyer.

All foreign companies – and particularly those that have been here awhile – need to understand the details of their market segmentation and to identify, clearly, which segments they should pursue and which they should leave alone. For the latter, this is not easy. A client of ours in consumer products with over 10 years in China is currently going through a ground-up market assessment, looking at the market as if they were not yet here. Our early strategy meetings were full of statements that started with “based on our experience…” or “we know that…”. They have now moved into a stage of asking questions of the market and exploring ways of looking at it that they have never done before. The deep market probes we are doing among customers, distributors and competitors are guided by these questions and we are looking at how our client’s products are used in the market, not how our client sells them. This, in turn, has led to new ways of segmenting (and selling to) the market that is resulting in some real growth.

Another client of ours is trying to look at new ways of serving the customers they already have. Because they were so early into the market, they pretty much defined their sector … and while they have certainly found success and happy customers, their strategy has been more focused on “what we have to sell” rather than “what our customer wants to buy.” Now that there is more competitive in the market, our client is going back to their long-time customers and are asking, in effect, “what if we weren’t here … what would you want??” It’s a tricky thing and we are getting some resistance from some divisions in our client from people to have an “if it ain’t broke, don’t fix it” mentality. However, the CEO and senior management, thankfully, have a different view … they see the market changing and know that they will soon face customer demands that they cannot fulfill. They need to get out ahead of those demands now, understand them and plan for them.

Distribution: Finding New Routes to Market

Not only have veteran foreign companies in China lost touch with their customer segments, but they often miss key distribution routes to those customers. It is logical to think that if my customer is “A” then the way to reach them is “B”. However, as markets have changed and segmented, so have routes to those markets and it is healthy to continuously review one’s distribution strategies.

A client of ours brought a product in over 12 years ago and used some Hong Kong distributors to do so. At that time, the Hong Kong distributors knew the market as well as anyone and besides, there simply were not any “local” distributors. In fact, many foreigners at that time did not differentiate between those from Hong Kong and those from the Mainland, naively calling them all “Chinese”.

Depending on the industry and channel, there are now many local distributors that are quite mature. They know their markets, they often know technology, and they certainly know how to sell to local buyers. In the case of our client, their Hong Kong distributors are now actually losing deals to local distributors because the local buyers consider those from Hong Kong to be “foreigners” who don’t understand local markets. I am in no way saying that all Hong Kong distributors are a bad idea in China today – but I am saying that what was appropriate several years ago may not be appropriate today.

Companies pursuing continuous market entry are re-mapping distribution channels at the same time they are re-segmenting their markets, all the while trying not to be biased by the distribution channels they worked so hard to establish already. It is not an easy thing to do, but they are critically analyzing the “reach” of their present distribution and are assessing whether or not it is as broad or deep as is required. We have done many projects over the past year to objectively map just how far a foreign company’s distribution is reaching. In all cases, we found that penetration was not as great as the distributor was telling our client nor was it often even in the right channel. These discoveries didn’t necessarily lead to our clients replacing distribution; rather, they were able to add partners to get into areas they had no access to. Only an attitude of continuous market entry led them to such conclusions.

Competition: New Players in New Segments

When many of the “old-timers” came into China, they were some of the first foreign companies entering the market and their ability to differentiate themselves was relatively easy. Price and quality differences were very apparent: the quality and price of the foreign product was very high and the Chinese competitive products were, if they existed at all, typically low price and low quality. It was often easy for foreign companies to charge a premium of several hundred percent because a certain portion of the market was looking for quality and was willing to pay for it. If a foreign company was bringing a product or a technology to the market that had never been seen before, they found buyers (often other foreign companies) willing to pay anything for it. Ask them who their competition was, they would say “no one”…and they were basically right.

A client of ours was in this situation. The capital equipment they brought into China was brand new in the market; there was nothing like it here. Our client considered it “world class” quality – and indeed, they lead most of the rest of the global market in this product category. Their immediate market entry was very successful. There was a small part of the market that would pay any price and our client was always pushing their manufacturing capacity to supply their customers.

However, as the market matured, two things happened: first, more buyers came online who began to see the use of this particular product and thought it would be helpful. However, these buyers were not rich foreign companies but were often privatizing local companies who were looking for “China quality”, not “World Class quality”. Secondly, more competitors – many of them local Chinese companies – rose up to supply these segments with that “China quality” equipment, leaving our client in its own “World Class” bubble.

Recently, our client has been looking at the China market with a fresh perspective and is realizing that the market has not grown beyond them, but has grown up below them. They still have sales in the premium segment of the market, but the sweet spot of the market has shifted to the middle range and competition there is quite fierce. Our client has been going back to find out how their competition is serving this market and how our client can begin to compete. We have had to work together to eliminate the phrase “we have never done it that way before” and still have some distance to go; however, waking up to a market rife with strong competition has changed the way our client is looking at the market and planning their future strategies. Our client no longer claims they have no competition in China!

Another client of ours in consumer products is looking at the challenges facing them in China in today’s very unique retail market. For the non-retail jockeys in my listening audience, the retail challenge in China today, in a nutshell, is the tension between what is called “traditional trade” and “modern trade”. Traditional trade are the mom & pop shops, local retailers serving a particular neighborhood … think the corner hardware store or the neighborhood grocery store… small, familiar and convenient. Their product stocking practices are hit or miss, their pricing is not too aggressive and their quality is sometimes suspect, but their customer service is fantastic. They have been serving the same neighborhoods, sometimes for generations.

Modern trade, on the other hand, are the “super stores” and “hypermarkets” … think Home Depot in the U.S. (or B&Q in Europe) and Wal-Mart. These are the stores that go to market based on their huge selection, their good quality and their low prices. They are not always convenient to get to, but they are a “destination” … you go there, fill up your car (or bike basket) and go home happy.

China is going through a massive transition from traditional to modern trade … where people are going from shopping at the corner grocery store to making a trip to Wal-Mart or Carrefour. While the VOLUME of total retail sales is in the traditional channels, the GROWTH is in the modern ones. And consumer goods suppliers must manage the tension that exists in serving both of them.

Our client is struggling with this … and so we are in the process of doing a benchmarking program to look at how some of their competitors are handling some of these problems and then looking at how these challenges are addressed by peer companies – companies working the retail space but not in the product space of our client. We are seeing some VERY interesting results so far. The biggest benefit is that it kind of levels the playing field. We all tend to complain that what we are facing is unique (and many try to get their bosses to see that, given the uniqueness of the situation, they are doing pretty good!). However, when you look at how your competitors are facing the very same problems you are, you take away these excuses. You benchmark your current performance against theirs and you see where you really stand. You also can sift through a lot of approaches to the same market – some of them are good and some of them are not (and some of them are downright illegal!). But you are not creating strategy in a vacuum here … you are looking at the market realities and are honestly assessing yourself against them.

Conclusion

In conclusion, I certainly do not want to give the impression that a continuous market entry perspective is easy nor is it a cure-all for what presently ails stagnant foreign companies in China. However, for many of us who have been in China awhile, we are victims of our own success, even if success is defined as “still standing.” We have found that returning to the fundamental questions about customers, distribution chains and competition really does begin to help break us out of old ways of thinking.

For those newly arrived in China, I would like to encourage you to start now your process of continuous market entry. For the moment, hide your business plan and the feasibility study you used to get your business license. Get your key sales and marketing staff in a room and ask each other the tough questions about customers, routes-to-market and competition and press yourselves to answer them (or at least establish a plan to come up with the answers to them).

If China has taught us one thing in the past decade, it is that this country and its markets will not stop changing, growing and adjusting to global conditions. The successful foreign company in China will adopt a similar attitude knowing that when they stop entering the market for the first time, it will be their last time.

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

I’m speaking this week at the Sixth Annual GIC Mergers and Acquisition Summit, the title of my presentation is Deal Cultivation – Keys to Success in Making Acquisitions in China. The M&A process in China is much different than in the United States. Understanding this difference will reduce anxiety and frustration among US executives pursuing M & A strategies in China.

To give you a graphic representation think of the process as a ride on Disney’s Space Mountain, a long wait, followed by a plunge into the darkness of twisting turns, hair-raising screams, and emerging at the same place you started.

One of the reasons that the identification and relationship phase is so important is the high transaction costs in China, compared to the deal sizes available, so effective “discovery” is important before spending substantive dollars in due diligence. In China, acquisitions require more upfront target cultivation and pre-due diligence than is typically needed in the West.

To appreciate this, one need only be reminded that in China the seeds of private investment and the concept of a merger were sown just 20 years ago. China is more akin to a college age individual as it is developing a comfort with markets and corporate business entities.

In this podcast, I’m interviewed by Albert Maruggi reporter for the Marketing Edge podcast about the M&A landscape as a preview to the GIC presentation this week in Shanghai.

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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.

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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.

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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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