No question the economy is down in China, but unlike the Unites States, the China economy is above break even. In 2008 China’s economy grew 9%, a whopping number to Americans, however, it is the lowest growth rate to the Chinese in the last 8 years.

As the world economies contract, the whipsaw effect is stinging China, especially in South China. This export mecca of Asia has many companies shutting down, consolidating, and fighting to stay alive.

We all know it is difficult to undertake new programs during an uncertain economic downturn, but for those with the wherewithal and the will, there is opportunity in chaos.

Taking a new look at your sourcing can have the following benefits:

1. Immediate cost reduction
2. Improved sourcing performance in quality, consistency and speed
3. A more robust but leaner organization to ensure longer term stability
4. And stronger and more effective supplier relationships

Let’s keep the COST acronym as a road map to taking action. The landscape for sourcing product is changing dramatically. Here are a few mile markers.

C - Now is the time to assess changes in Countries in Asia for sourcing. There was a brief moment in recent memory when oil costs were at all time high other Asia counties may have looked attractive, now the pendulum has swung back, so considering the right countries to prepare for demand when it returns is critical to reducing costs.

O - The Organization with the right skills in place will be better positioned to control costs. We have seen general discontent with 3PL performance that is leading management teams to explore doing more themselves in China, such as putting in their own warehouse or consolidation center. 

S – Just as you need the right mix of organizational Skills, the same is true for suppliers. The opportunity in the chaos is reassessing your suppliers and whether their suppliers are handling the economic downturn. How will downstream suppliers align is a question that should be answered now, and not in the middle of the future accelerated demand that may seem distant today.

T – There is no time like the present to review Terms of traditional vendor relationships and consider other strategic sourcing arrangements. The time to reduce costs is at hand. It is an opportunity that may lead to both short term cash and long-term relationships that are mutually beneficial.

Listen to more of this discussion with Jim Tompkins CEO of Tompkins Associates and me in this podcast called Asian Sourcing Cost Reduction

But, like many things in the global economy, the China auto industry is still coming along OK.  GM just upped their forecast for sales for this year (not that this will reduce the more-gruel-sir handout they are getting from the U.S. government).  In fact, China’s vehicle sales accelerated 25 percent in February, reversing from a 14-percent drop a month earlier, as demand for small cars surged after the government launched stimulus measures.  It is reported that was the first year-on-year gain since last October when the financial crisis began to take its toll.

It was also just announced that China’s second largest auto firm – inappropriately named “First Auto Works” or FAW – is working with a Mexican group to build China-designed cars for the North American market.  After Chery and Chrysler pulled back from their sales agreement, this could be the biggest chance for a China auto group to penetrate the U.S. market.  China is also being lauded as the next place for auto innovation as Chery is developing their new battery powered car.   Several years ago Chinese designers were winning the Yugo Award for Crappy Auto Design and now they are ripping up Motown.  Go figure.

This is all well and good.  But have any of these journalists actually DRIVEN on Chinese roads lately and seen how cars are used?  I mean, c’mon!  China has over 100 car manufacturers churning out ever more makes and models of cars and its tough to tell your QQ from your Spark these days (Hint: look for the annoying logo of the hydrocephalic penguin to find the QQ).  In the pre-consolidation dawn of the China auto industry, there are going to be some winners and losers, so instead of using brand names to identify cars – brands which may or may not be around in a few years – I like to identify cars on China’s roads by their function – how they are actually used by their drivers.  I have come up with several types:

The In-Santana-ty: these are typically ancient model VW Santana cars, often purchased used and driven by individuals who have NO business operating any road vehicle, let alone a car.  You can trust these vehicles to be weaving between lanes, braking for no apparent reason and stopping in the middle of the street.  These cars typically have major dents on them as living proof of the driver’s lack of skills.  When one encounters such a vehicle, give it wide berth because, sure as they don’t wash their car, they don’t give a rat’s hind end about yours either.

The next type is what I call the Speed Bump and it refers to any of the mini-sized vehicles on the road in China, so easily trampled underneath the treads of other cars.  The leader of these is the QQ – of the aforementioned penguin brand – and they look like Matchbox cars on the road compared to real sedans.  These things cost something like $49.95 plus tax and I think you can buy them in a gumball machine, packaged in a plastic bubble [I always get the cheap plastic ring when I try, but I am just an unlucky person].  Speed Bumps are often manual transmission and are powered by an engine measured in hamster- (not horse-) power.  I think they even squeak when you squeeze them.  In developed nations these engines power riding lawnmowers in the suburbs, hauling around overweight, middle-aged men in shorts, black socks and sandals.  Here they haul extended families of seven with one child and a nephew in the glove compartment.

A third type are those owned by young parents who liberally affix “Baby On-Board” stickers to their rear bumpers … and then refuse to use car seats to strap in said precious cargo.  Many is the time that I see a parent driving and a 3 year old child running laps in the back seat, occasionally dong the Fossbury Flop over the front passenger headrest to land in the lap of the other over-indulgent parent riding shotgun.  Just imagine the horrendous results of an accident … the kid will be bouncing around the car’s interior like a ping-pong ball in a Lotto draw.  I call these cars, sadly, a Baby Rattle.

So yes, let us now praise the China auto industry.  It is on life support and yet is the clear global winner in the Global Automotive Zombie-fest. But let’s also admit that, for every cool new battery powered car being developed in China, there are 3 million people driving backwards down the freeway because they missed their exit.

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

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

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

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

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

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

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

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

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

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

At the very top of the Party’s honey-do list is to insure that China’s growth continues on through the airsickness bag that is the global economy.  But in order to do that, they need to assure their people that they are on the job and have the situation well under control.  Like every politician worth their earmarks, there is a certain amount of sounds-good-if-you-say-it-fast in the Party’s communication about the economic state of things and the plans they have to fix it.  Premier Wen Jia-bao’s Congress-opening speech – of Castro-like duration minus the spiffy fatigues – was pretty much simply a restatement of what we have heard before: that China plans to invest RMB 4,000,000,000,000 (that’s “trillion” for those of you still counting zeros) back into the Chinese economy and it will go to both physical infrastructure (bridges, roads, obscenely tall buildings) as well as social infrastructure (hospitals, clinics, schools that won’t fall down in an earthquake).  Bully for them.

Mr. Wen did take an extended solo around the riff that the Chinese people should spend more to support their own economy, but it seems that such exonerations are going to fall short of their goal.  He might want to take a page from G.W. Bush when he encouraged Americans to continue spending at the onset of the Iraq War, for fear that the terrorists might win … the fact that it worked and, eventually the economy tanked, might seem to beg the question of who really won, but those are issues for other blogs.  Seriously, as we’ve said before in these pages, consumer spending in China won’t move much until the social safety network is repaired – once Chinese citizens feel that there is help for their parents and themselves in their old age, they will start to spend in their youth.

Two points are worth mentioning, however, regarding the 4 trillion RMB stimulus package.  First of all, that is not going to be the total sum of relief spending in China; it is likely to be far more.  The rumor on the street and among my staff is that the final tally could be double that amount.  In fact, the rest of Asia seemed to think so too because the Japanese and Korean stock markets went up significantly following Wen’s speech.  Their economies – like all of ours – are tied so closely to China’s that, when the dragon looks like it will flap its wings, we all try to get aerodynamic for the expected blast of air.  Of course, as the U.S. is proving with its multi-squillion dollar relief package, “more” is not necessarily “better” so just because China is going to spend more doesn’t mean it is going to be better.

What DOES make China’s relief plan potentially more effective than the U.S. plan is because of how the money will be applied in China.  In the U.S., so much of the relief money will go to relieving pressure on companies’ balance sheets … many U.S. companies are so far in a hole that they need significant help just to get back to ground level (most U.S. banks and car companies are in this condition).  In China – where most companies are not so deeply in debt – any relief is going to go directly to benefitting the P&L … juicing the topline and/or helping companies invest in improving their bottom lines.  Therefore, if the China relief program works at all, we can expect to see a more rapid uplift here than in the U.S. (where the key measurement of impact immediacy is in calculating the number of “shovel ready” projects available).

Where are we going to see the biggest hits?  Our money is on anything in the medical sector – medical devices, pharmaceuticals and healthcare – and in higher value-added manufacturing (systems integration, design engineering, etc.).  Listen for the Perotvian “giant sucking sound” as money and resources are poured into these sectors (and look particularly for consolidation of smaller players to form larger ones).  And remember, RMB-for-RMB, the lift in China should be more immediate and more – perish the use of the word – “impactful” than anywhere else in the world.  Chinese companies are, in many cases, well-positioned to take advantage of the boost and will be quick to respond.  The question remains is whether the rest of us will be too.

March is when things start to heat up in China – both literally and metaphorically – and there are a couple of things we are going to want to keep an eye on in the coming weeks.  The biggie, of course, is the annual meeting of the National People’s Congress that starts this Thursday.  Signs have been up for some weeks now around Shanghai, touting the accomplishments of the Party and the advances of the nation and the Chinese people under their leadership.  If you didn’t know any better, you’d think they were running for something.

Well, in fact, they are.  You see, just because there are no elections, doesn’t mean that the government is not, to some extent, “of the people, by the people and for the people”.  As I have said in these pages before, the Chinese government and the Party – one in the same thing – know that, in today’s modern tell-all era of instant electronic communication, there are plenty of ways that they can be embarrassed in the eyes of the world.  And that is a BIG no-no as far as they are concerned.

So besides the herd of 60+ year old men in bad suits and comb-overs rubber-stamping as if their life depended on it (and it does), we can also monitor the NPC meeting for some other details.  The biggest issue will be how focused the Party will be on “social investment” in their economic stimulus program.  In the past, most of the government’s investment has been in “big iron” projects – infrastructure (highways and railways) and energy (the Yangzi river dam, big mining projects).  But now that China can claim more roads and rail than the U.S., it is time to move on to the next Big Thing.  And that is investing in people: hospitals, healthcare, schools, job re-training and the like.

The current investment proposal allocates 1% of the stimulus to health care and education spending and 7% to public housing … not exactly numbers to warm the potentially frigid feelings of the populace.  So I am looking for some other announcements to come out; some big Hallmark card of a program to send out the love.

The Party has been doing a decent job of maintaining their street cred: from the Olympics to a pretty rapid response to the tragic earthquakes last year when Wen Jia-bao showed up to provide a much-appreciated compassionate face to an otherwise distant bureaucracy.  But it is difficult to send Grandpa Wen to every displaced worker to insure them that everything is being done to help them find another job; to visit every white collar worker to show them that its OK to spend some of their savings now because a social safety net is being built to help care for them and their parents in their old age.

Just like any other country in the world, China is going to need to speak words of comfort to their own people in these troubled times.  The NPC meeting this week and the subsequent economic stimulus package will be the next voice we hear.

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The world is a very large place if you get outside your comfort zone and experience it. That’s easy for me to say, I first set foot in China when I was 20. It was a very different country then. Fast forward to today and I’m here after more than two decades in the country, and reporting on the China Business Podcast for nearly four years.

ChinaSense Sample Itinerary

We are coming full circle in this interview with Jennifer Pan, the CEO of ChinaSense. Her company produces some of the most in depth, and eye-opening trips to China for US MBA and EMBA students. Jenny has graciously asked me to speak to several of her groups and it is a joy to field their questions. Regardless of how overwhelmed they may be with a two week China immersion itinerary, they leave China with a sense that anything is possible and a new horizon of opportunities for them to explore further.

In this podcast, I’d like you to meet this entrepreneur who has helped many American students discover a new country, while also discovering something new about themselves.

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

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

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

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

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

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

I listened patiently to his griping and then came back with some alternative views (hey, the guy was not paying me to agree with him … at least I didn’t think he was!).  All the time, I was thinking to myself, “I can’t wait to actually get him to China so he can see things for himself.”

Finally, that day came … we had completed the first phase of work and wanted to present it to him and his management team face-to-face.  They came to China and we spent a day, huddled together in a conference room and then four days going out to see potential customers, competitors, government ministries, the works.  To say that Del was blown away would be a vast understatement – he was agog at everything around him, going 24-7 and moving at a frenetic pace.  The market information we showed about the complexities of the China market took him totally by surprise – at the end of the first day, he told me “Wow, I never knew this … this is incredible” (thereby confirming to me, once again, my chosen profession!).

I took him to the airport on his last day.  As we were having a final drink and gab session, I asked him, “OK, Del … you were pretty down on China before you came here.  What do you think now?”  He got this sheepish look in his eye and said, “Well, I still think that there are problems with their currency and they’re playing fast and loose with intellectual property … but I think that, if we get beat by them, it is not going to be because of this.  It is going to be because we’ll get out-hustled.  They don’t talk about ‘work-life balance’ here.  They never stop.  What they lack in efficiency and accuracy they make up in sheer volume of effort.  And that is scary!”

As I look around at the state of the world today, I have to think that Del was right: we in the West are in danger – particularly in such a down market – of getting out-hustled.  We can spend so much time complaining that things are not like they used to be that we ignore the fact that WE are the ones that made it that way and that we need to work our tushies off to do it again.  People in China are NOT stopping to complain that their growth has dropped precipitously either.  They are not expecting to find work where they grew up … they are willing to uproot themselves to go find a better life.

Don’t get me wrong … just working harder is not going to help us.  We need to change our systems, upgrade our companies, give a helping hand to those that need it.  But don’t think for a minute that we are going to be able to put in the same level of effort we did when we were a couple of generations into our upswing.  Nope, we are going to have to raise ourselves a few orders of magnitude and hustle along with our friends/partners/competitors around the world.  Guaranteed, they are not going to be slowing down any time soon.

So the fact that the China Politburo – made up now entirely of men since the effervescent negotiator Ms. Wu has departed the scene – are in agitated preparation for a big anniversary in 2009, makes me think that there are some of the XY chromosomal pattern that do NOT have problems remembering anniversaries.  The event is, of course, the 60 year anniversary of the founding of the People’s Republic of China coming up October 1 of this year.  Let me tell you boys and girls, we are going to party like its 1949!

Ever-worried about the state of the Party before the party, the government is doing some major PR work.  Just announced: the deployment of the nearly two-million-strong police force out to do community work.  While I doubt that we are going to see Mayberry-like police work – only so many cats in China can get stuck in trees – this move is an interesting one.  It indicates that the government knows that, no matter the political system, their people do have a voice and that this voice counts.

The more cynical among us view this, at best, as merely a PR ploy to generate some warm-and-fuzzies for the Party; at worst, this deployment among the 老百姓 (lao bai xing: the “common people”) engenders feelings of dread, that the Party’s monitoring of people’s everyday activity is getting stronger.   The cynics will – and already have started to – wail that this is the first step on the slippery slope to the bad old days.  They worry about partying like the Party is still in 1949.

However, cynical as I am, I don’t view it this way – I actually see this as a good thing.  I am a firm believer that when people start to communicate, good things can happen.  So when the Chinese government starts sending their police force into the community, the police are – wondrously – going to actually start talking with members of that community.  They are going to hear complaints – some trivial, certainly, but many that are not.  And while there are certainly uncaring members of the police force – as there are in ANY country’s police force – there are also some who do care and who will respond.  We must understand the state of electronic communications in China these days where even the smallest transgression can be filmed and sent out for the world’s consumption (see here for a great example!).  The government knows that they are in a very different environment from 60 years ago and they have to do something to start seeing the problems before they become PR nightmares.

So the run-up to the anniversary should be an interesting one.  Don’t think for a moment that the powers-that-be here are typical males who will cobble together a gift the night before the anniversary by going to an airport gift shop or 7-Eleven (trust me, it doesn’t work, as a now-divorced friend of mine proved on his 5th and final anniversary!).  These next months will be very scripted and very purposeful.  But that doesn’t necessarily mean that some good things cannot come of it.

However, I don’t think that this Life Lesson is shared by everyone, least of whom the former U.S. Federal Reserve Chairman, Alan Greenspan.  In a recent interview, he said – and I am quoting directly – that “he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.”  Um … I might not be exactly clear about your job description, Mr. Greenspan, but wasn’t that kind of within your pay grade, to understand such things?  I mean, at the very least, if you didn’t understand it, then maybe you should have found someone you trust who CAN understand it (and maybe even attempt to put it in terms that your measly 160 IQ could understand).

And this is my point (in case you were wondering whether or not I had one) – we get into trouble when we do things we do not fully understand OR when we outsource that understanding to someone who, themselves, is clueless (but has convinced us otherwise).  Pretty deep, huh?  As I pondered this fortune-cookie wisdom I, of course, brought it back to doing business in China and decided that this Life Lesson has been the petard upon which many a foreign company has been hoisted.

First, for the do-it-yourselfers out there – those who invented a product in their garage 40 years ago, created a company around it to bring it to market and built an entire supply chain with their bare hands – you are probably going to be hard-pressed to do that in China, unless you have another 40 years to work on it.  We see many DIYers come to China and, after a week’s trip, decide they have it all figured out.  They start a company, build a factory, hire a staff and then go to work.  But they are not working in familiar territory – they are, to extend the metaphor, in the land of credit swaps, sub-prime mortgages and a raft of other Toto-we-are-not-in-Kansas-anymore issues to bring on a nice starter-ulcer.

To be fair, the hardcore DIYers are few and far between and most everyone knows that they need someone in China with local knowledge.  So for those smart enough to realize that they are not smart enough about China and go looking for someone smarter, follow the immortal words of Hill Street Blues Sergeant Esterhaus: “Hey…let’s be careful out there.”  The number of people lined up to tell you that they understand China will stretch … well … around China (and I am probably going to be one of those standing in line).  So while you will need someone more “local” than yourself, you have to be very careful not to believe their marketing brochures on first reading.

I met with a guy the other day, a potential local partner for a business we are looking to start.  I am trying to be polite here (‘cause my momma done raised me right) but the guy was so utterly full of it that you could smell him coming.  A former boss of mine called these people “all hat, no cattle” – and this guy had a hat that was so big for him that it came down over his eyes, blinding him completely!  He waxed poetically about the “many projects” he had done but, when pressed even a little, crumbled into a pile of none-too-specific specifics and claims of people he knew that could vouch for him.  He did not know it, but we had done some checking on him ahead of time and one of his “good friends” who, he said, could attest to his wonderfulness was, in fact, the first one to alert us to the indirect relationship between his hat and cattle.

But still, we know we need a local partner for this business.  We know that we don’t know enough about it and need an “insider” to work with.  But we know that this is going to take some time to find, so we keep looking (I reference the myriad blogposts and Podcasts we have done in the past on how to find and qualify a partner).  The point is that we are not venturing yet into something we don’t understand, even though the “we” here are both locals and foreigners who have been doing business in China for 20 years.

Deng Xiao ping is famous for his saying that development in China will be difficult and “like crossing the river by feeling for stones” – the way will not always be clear.  However, this is NOT what Mr. Greenspan and the global financial community (including naïve and greedy homeowners) were up against – they did not know enough to find the stones, nor did they really know where the river was because they were not even looking.  Business in China is the same way – it is certainly not easy, but it is impossible to do with your eyes closed.

No?  Really?  That is strange … because here in China, we are seeing some really weird stuff.  A report came out yesterday announcing that, in January of 2009, monthly automobile sales in China surpassed monthly auto sales in the U.S. — 735,000 new cars were sold in China last month against 656,976 vehicles sold in the U.S. (note the specificity in the U.S. numbers and the more general numbers in China … get used to it!).  Experts far and wide were very quick to point out that this is an anomaly and that, while China is the world’s #2 market for car sales, it has historically been far behind the U.S. market and still will need some time to catch up.  The overly-depressed market in the U.S. (last month’s car sales were down 37% from the year before) and the bleak consumer spending outlook contributed to last month’s perfect storm.  Net-net: we don’t have a new champion yet.

So when I say something “weird” is happening, I am not referring to the data – what is shocking is that we are talking about this at ALL; that we feel compelled to say “though the data is right, its not what you might think”.  To even voice the position that China’s car market could even THINK of surpassing the mighty United States of Automobiles is just crazy talk!  When I first came to China in the mid-80s, there were so few cars on the street that you’d have to work really hard to get hit by one.  Bikes?  They were like mosquitoes and you were constantly slapping them away when they buzzed near you.  I am sure they had taxis, but I don’t think I even saw my first one in Shanghai until the early 90s (and being a dirt-poor teacher at the time, didn’t ride in one until much later!).  And now, here we are, talking about even the POSSIBILITY that China could overtake the U.S. in car sales.

These are CARS we are talking about, the very essence of what it means to be an American!  Baseball, hot dogs, apple pie and behemoths burning fossil fuels – those are almost constitutional guarantees if you are Born in the U.S.A.  An entire generation in the 50s grew up in automobiles (and some of their children were conceived in them).  Songs were written, movies made, books published about cars.  A national highway system cemented the American psyche as Big, Bad and Bold and the open road and cheap gas fueled a uniquely American sense of freedom – be anything, go anywhere, do anything.  To say that Highway 61 led to a neo-con Iraq policy might be hyperbolic, but it is not necessarily untrue.

To think that – at some point in the future – the U.S. will lose bragging rights as the “owner” of car culture is, to me, quite shocking.   If you would have asked me 20 years ago when this would have happened, I would have thought you were completely nuts – heck, even 10 years ago I would have thought you loopy.  But now, not so much.

Ultimately, though, this is not about cars.  This is about the phenomenon that is China and what the rapid growth of the auto industry here indicates – that, given time, China will be a global leader in just about any industry or business you could possibly imagine.  End of story.  Think about the most unlikely product or service for China to be a global leader – hair gel, pain relievers, financial services, basketball.   EVERY one of those is nearly guaranteed to have a huge market here (whether or not one can create a BUSINESS around that market is another question altogether).  And foreign companies that are waffling now on “shall we, shan’t we?” do something about China, to find their place here, mark their territory and start growing– well, these companies will soon find themselves pushed off to the side as the Chinese Monster Truck starts to really roll.

The crisis of both economy and faith that hangs over the U.S. now makes it even more imperative that companies figure out what to do about China, because it is only going to get more challenging.  Yes, China still has HUGE problems and MASSIVE gaps in their economy and the way they do business here – but they ARE growing and will continue to do so.   And like the foreign auto companies (GM, VW, Toyota) whose only bright spot is their China business, they had to get in 10 years ago to take advantage of the market now.

So the world is not completely crazy yet.  Pigs are not flying.  But give it time and they just might be driving…

Despite the global downturn, China still offers an economy that’s growing, with predictions for growth ranging from about 7 percent to 9 percent in 2009, stimulated by significant government investment. As such, China will remain a key market for growth as well as a major supplier to the world. To help management of Western businesses better understand how to tap China’s potential, Technomic Asia has partnered with the producers of “On the Frontlines: Doing Business in China” to create a pragmatic and street-smart business tool useful for China beginners and veterans alike.

A preview from the producers of “On the Frontlines: Doing Business in China”:

The “On the Frontlines: Doing Business in China” series consists of five DVDs full of insights from more than 150 interviews and one CD, sponsored by Technomic Asia, that contains research reports, book excerpts, a China Readiness Assessment and more. The video series is hosted by James Fallows, China correspondent for the Atlantic, who also served as editorial director for this project. Joe Nocera, business columnist for the New York Times, provides commentary and analysis throughout the series, as well.

With “On the Frontlines: Doing Business in China,” business leaders will quickly understand how to:

• overcome the cultural barriers to doing business in China,
• master the fine art of negotiating with the Chinese,
• succeed in making the deals you want to make in China, and
• avoid costly mistakes: business is different in China.

“On the Frontlines: Doing Business in China” is only available online and sells for $199, but the series can be ordered at a 25 percent discount off the retail price at www.chinadoingbusiness.com using the promo code “TechAsia2009.”

“One of our favorite sayings is ‘In China, everything is possible, but nothing is easy,’ and this documentary shines some light on why that’s true,” said Steven Ganster, one of the interviewees for this documentary series and the managing director of Technomic Asia, a China-strategy consultancy and a division of Tompkins International. “Although nothing in China is easy, a well-informed strategy to establishing a business presence is worth the effort. With most of world reeling from economic trouble, China provides opportunities to great to be ignored.”

(Original news release)

So when the Chinese government wants to encourage consumer spending, they are up against some interesting challenges.  Remember that only 34% of China’s GDP is supplied by consumer spending (in the United States of Easy Credit, it is over 70%).  China is a land of savers, of people who don’t trust the social security network and figure they will need to foot the bill for their parents’ and their own retirement.  Kinda limits your spending at present when you are your 401(K)  for the future – but I bet these personal 401(K) did better than mine last year!

Last week, one of my senior managers and I had lunch with a professor at a local business school whose expertise is in automotive.  We were talking about the dismal state of the car market in China where sales have dropped precipitously over the go-go years in recent history.  We pondered when and how the market could come back and, as with all consumer purchases, the conversation quickly turned to price.

As we discussed the importance of price, my senior manager made a very good point.  She said, “You know, in the West, you have a price in your minds that you are willing to pay and, if you can find it, you buy it.  But in China, our price comparisons are always against our friends and neighbors and we are always afraid that we will pay more than others will.”  In other words, in the West, something is a good price if it meets our own expectations; in China the price is good if it beats what my neighbor just paid.  Suddenly, it made sense to me – I thought that, when people ask how much I paid for something, they are just being nosy (like when they ask how old you are, what your salary is or how much you weigh!), but really, they are gathering market intelligence.

So the logical result of this intra-societal comparison shopping is that when prices are falling, everyone in China stops buying because they are waiting for the market to hit rock-bottom.  Everyone’s Pay-dar is on the Super Sensitive setting and the rumor mill runs rampant with pricing alerts.  We are seeing this, in particular, with the big-ticket items such as cars and real estate.  In the West, the auto market stinks because people can’t get financing.  In China, they don’t need financing because everyone pays cash – but what they can’t find is the confidence that they are paying “The Lowest Price.”

That said, the China retail market is doing OK, thank you very much.  Reports say that China retail sales reached RMB 290 bln (US$ 42.6 bln) during the Spring Festival Holiday this year.  It was also just announced that retail sales in Shanghai reached RMB 453.7 bln (US$ 66.7 bln).  Both of these figures are double digit growth over the previous year – again, compare that to ANY other part of the world at this time and China is a superstar.

But the lift off point is still some ways out.  The indicators will be rising Consumer Price Indices, an improving stock market and rising (or at least stable) housing prices.  Until then, look for China retail tactics that include massive sales and price-slashing.  People will likely be pretty open to buying something that says “NEW PRICE TODAY – DRASTICALLY REDUCED FROM YESTERDAY” because everyone knows someone who bought one yesterday!

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Full transcript of today’s podcast:

In a recent podcast, I talked about how we at Technomic Asia think that many sectors in China today are in a “pre-consolidation” phase where, we believe, that we are going to see a lot of the smaller companies in many industries falling away and the bigger ones getting bigger. I talked about the potential for some interesting acquisition plays in 2009 for the right company to come in and lead this consolidation. We’ve had some really good response to this podcast and some good questions so I thought I would continue the topic this week.

I was in a meeting a couple of weeks ago with a client of ours, a foreign consumer products company that is looking to acquire a local company here in China. One of my senior managers and I were talking with their division president from their overseas headquarters and their China GM in charge of this division, along with various other financial and legal reps on their deal team. We were talking about the M&A process in China – what to do, the pitfalls, how long it takes, etc.

The Big-Big Boss asked me the question that EVERYONE asks in this situation: “What are the chances of success for doing a deal in China?” Not able to resist a chance to be smarmy, I responded, “Well, if you do it right, you’ll probably see over a 60% hit rate. But if you want to mess it up – and most seem to be wanting to do that – the rate is closer to 25%.”

Thankfully, the Big-Big Boss got the distinction and my lame attempt at injecting humor in a very serious question. Then, better than any straight-man in a comedy team, asked me the next question, a great set up: “So, Kent, how would we really mess this one up?”

So in this week’s podcast, I am going to tell you, verbatim, what I told this deal team and am titling it, “China M&A: How to mess up a deal, possibly wrecking both your company and your career.” OK, I didn’t quite respond with that level of sarcasm, but you get the idea…

So, here, in order of importance, are the 4 steps to doing a bad deal in China:

#1: Make no attempt to understand the market environment in which you are acquiring a company.

You are thinking to yourself, “Oh, this is going to be a good podcast, starting out stating the obvious like that.” But you’d be surprised at how many companies come to China to acquire a company and they don’t really understand the market environment in which the targets live and work. We were contacted recently by the CEO of a company who wanted to look for acquisition targets making a certain kind of product. There are, conservatively, about 500 companies doing this type of product in China. I asked him what applications were most attractive; what types of distribution they needed to have; did they need R&D; how about certifications? There was a pregnant pause and the CEO said, “I don’t know, they just need to make the product.”

No. Wrong answer. Successful China M&A starts with a deep understanding of the market and a VERY detailed checklist of the criteria of an attractive candidate, the criteria that makes the target attractive in THIS market. If the market I am working in has a particularly fragmented distribution structure and several key customer segments, then I am going to want to look at the targets that have both solid distribution and a really good sales team into those customers. It sounds really simple, but again, you’d be surprised at how many companies overlook this when coming into China.

You are going to want to pay particular attention to the requirements for distribution in China. Too often, we see foreign companies come here with what they think is a “great product” but since they don’t understand the often-fragmented distribution chains here, they don’t really know how to get it to market. I would say that nearly all of the acquisitions we do here put “effective distribution” very high on the list of criteria for assessing targets. Distribution is the one thing that takes a long time to build in China and tends to be regionally fragmented. If you can come in and buy that distribution and start to run your own products in parallel with the target’s, then that can be a “win” all around.

So though it might seem obvious, get a shopping list together before you head into an M&A program. Deep dive the market to understand what products are out there, what customers want, and how the competition is getting product to market. Only then will you be able to determine the list of criteria that makes for an attractive target. We typically spend the first part of a project developing and refining that list – it might seem tedious at first, but if you have a good criteria list, then it makes the rest go much faster.

#2: The second way to mess up a deal in China is to go after the first company you find.

A good M&A process – like a good sales process – starts with a good pipeline. If you have a number of prospects in your sales pipeline, you are going to be able to work all of them at the same time. The right ones will close and some will fall away. If you have only one deal in your pipeline, you are going to kill yourself to close it, even if it is not closeable.

The same goes for M&A – if you only have one company you are considering, and if you REALLY want to do a deal, you are going to do whatever you can to make that deal work, even if it is the wrong deal. You should arrive at your acquisition targets through a rigorous process of elimination, starting with that criteria list I talked about. Take that list and find as MANY companies in China as you can that come anywhere near fitting that list. Then start doing commercial due diligence on them, all at the same time. Get as much information as you possibly can about all of them, and then you can compare this information and benchmark them against each other.

“How many” companies should I consider, you ask? It might seem like an unanswerable question, but those are my favorite kinds! In truth, I think you need to have at least 10 companies on your “Long List” – this is the list of companies that somehow operate in this market and on which you have a certain high level of intelligence (and in some cases, we’ve had as many as 30). Then I think you need to have at least 2-3 on your “short list” … these are companies that you have researched very deeply and know a LOT about them. You know their commercial practices (distribution, pricing, bribes, etc.), manufacturing (processes, costs, suppliers, etc.) and their management (who they are, where are they from, what is their reputation, who really owns the company).

Your short listed companies should have also indicated a level of interest in doing a deal with a foreign company. We’ll talk below about HOW to approach them but, for now, hear what I am saying: You should have at least 2-3 companies that fit your criteria and who have shown an interest in doing a deal. Certainly, you will prefer one over the others, but at least you’ll have back-ups. If you have only one option, you are, essentially, going into a deal and are trying to “marry your first date”. You could be in trouble. You NEED options and it is your responsibility to go find them.

#3: Ignore the importance of relationships in China

The 3rd way to mess up a deal in China is related to the first … and that is to ignore the importance of relationships in China when starting deal discussions. The Western way to get a deal started is often to have the CEO of one company call the CEO of another company and they start talking. Sure, sometimes intermediaries like brokers or investment banks are used, but direct is a valid approach as well and is often preferred. At least in U.S. business culture, “directness” and “openness” is valued and boss-to-boss communication is often the best way to do that.

Too often, we see foreign companies use this same method in China, going directly to a potential acquisition target and start discussions, saying too much, too soon, before they have done any kind of due diligence on the target. They even rely on the target to tell them about the target’s business and the market. But in China, where standards of accounting and business practices are still in their early stages, you cannot rely on a target to either really understand their market or their company the way YOU need to understand them. And in Chinese business culture, going through intermediaries is often preferred so that both sides can explore things slowly without having to confront the principals directly and risk either side losing face.

The consumer products company I was talking about in the introduction to this podcast fell into this trap. They are a large, well-known global company with a very large group of super-smart MBAs in their deal team. When they want to do a deal, they send these Men (and Women) in Black who do a deal the way they are used to doing a deal … approach the target, sign an NDA, validate the target’s financials and go from there. Well, they basically did that here in China … before getting ANY market intelligence on the target, they approached one of the biggest players in the China market and started talking about ways they could cooperate. The target was, of course, VERY interested in this large, well-known company that wanted to do a deal with them, but they were a bit befuddled as to how to properly respond. So they did the only thing they knew how to do and they pulled out all the stops to show what a good acquisition target they could be and why a VERY high price would be justified. After many months, LOTS of documents being passed back and forth (including letters of intent that discussed possible valuations) not to mention untold dollars spent on the deal team’s resources, the Western company’s senior management suddenly realized that what they were hearing from the target did not seem to make sense in the market and that they had no objective view of the target or the market.

That’s when they called us, to come in and do the due diligence on the target – which is fine! We love doing this and we are VERY good at what we do. And in this case, we found out that there were some huge problems with the target: they had been losing market share rapidly, their management was clueless and many of their distributors were angry and in danger of jumping ship (none of this information, of course, was included in the presentations that the target did when our client approached them directly … then everything was hunky dory and getting even hunkier and dorier!). This is NOT an uncommon finding in China; however, since our client had already had very deep discussions with the target – including discussing deal structures and valuations – there was no room to move with this new information.

If our client would have done the commercial due diligence FIRST, before ever approaching the target, then they would have been MUCH better prepared to discuss the details of a deal and would have had tons of objective market intelligence to challenge the target with.

We did a program like this a few months ago, for a large high-tech company where we had 9 China targets on the “long list” and on whom we did a pretty deep level of due diligence. Two companies came out of that effort as the leading targets – we knew who they were, their ownership, their advantages in the market, their warts. Everything! We also were able to get a high level of confidence from the target’s ownership that they were interested in talking to a foreign company about potential hook-ups.

The key here, is that we were able to get all of this information ANONYMOUSLY … none of the 9 companies knew who our client was. Now, we were able to put our client in a VERY strong position where they know a lot more about the targets than the targets know about them. We can make the introductions and continue to act as a “middle-man” of sorts to facilitate the communication. Our client is able to keep the conversation going with several of the targets at once, only committing themselves once they absolutely have to (usually around the time that they need to sign an LOI).

If our consumer products client had done this, knowing what they know now, they might not have approached their target at all. But like my point earlier, they had NO back-up plans … they didn’t have a short list … so there was no where to go from here. It is really too bad because our client wasted a LOT of time, effort and money to get to a point of no return and they had to start at zero again.

#4: Relying too much on financial wizardry

The fourth and final way to mess up a deal in China is to assume that the value you create is going to be done through balance sheet re-engineering and NOT through improving the commercial practices of the target. In the West, the heroes of the M&A deal teams are the financial wizards, the quant jocks who can read a dense balance sheet like a primary school textbook and then apply complicated techniques to squeeze more value out of it. A Private Equity firm we work with did just this with a recent acquisition of a $25 million company, finding an extra $1 million in EBITDA that the original owners did not have the experience to locate. I am not naïve here … of course this is not the ONLY value that is created from M&A in the West, but it is a key goal for many acquiring firms, be they strategic or financial.

But in China, this does not work so well; rather, value in an acquisition is created by helping the target become a better player in the market. To a great extent, this starts with very often not having an accurate balance sheet at all … remember, you ask a Chinese company to show you their books and they will often say, “sure, which ones?”. This even applies to the larger, publicly traded companies – we found this to be very true in the due diligence we did on this consumer products company – there was a broad discrepancy between their stated sales and the actual tax receipts that could be associated directly to those sales.

No, foreign companies who acquire Chinese companies need to be thinking, first and foremost, of creating value by upgrading the target’s commercial practices, working with them to find the right products, at the right prices going to the right customers through the right channels. For the consumer products company, we identified big gaps in the target’s distributor management processes that were contributing to their loss of market share. Our client is quite well known for how they manage distributors and, though their practices would need some “China-fying” we identified several key areas where value could quickly be created.

With our high-tech client – the one with the 9-company long list – it was a different situation. The targets had very good channel and distribution practices (this was one of the key criteria for selecting them); however, what all of them lacked was a solid foundation in R&D, an area in which our client is a global leader in their sector. We identified areas where upgrading the targets’ R&D capabilities could reap great rewards in the market, by promoting Western technology at a China price.

The value created is, of course, very different in each situation – but the fact remains that, more often than not, this value is going to be in the commercial area and NOT in reorganizing the balance sheet.

So…if you really want to mess up a deal and risk destroying both your company and your career, I just gave you the roadmap! I am assuming, of course, that this is NOT the case. So what should you do?

Well, if you already have a target identified, sit with your deal team and assess what you do or do not know about the China market situation (point #1 above) and what other possible targets might be out there (my point #2). If you are in talks with a target and find that things have stalled, a good way to shake things up is to start talking to another target: it provides you with some perspective and signals to the first target that you have options!

If you are just considering growth in China via acquisition, then you have the freedom to start things off correctly. Walk through points #1 and #2 by fully understanding the market and all of your options. Then you can find a way to approach these targets in an IN-direct fashion and find ways where you can add value by improving their commercial practices. Trust me, when you reach the point of pulling the trigger on a deal, you will be MUCH more confident if you’ve first eliminated most of the ways that you could possibly mess it up.

Thanks again for spending time with us. Remember our motto – and it particularly applies to M&A in China – “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Blog and Podcast.

I give this background because today’s topic is “Engineering in China” and it was prompted by an email I received from Roger this morning.  He sent me a link to an article that says that China is now the global leader in indexed engineering publications – in other words, more words about engineering are coming out of China than anywhere else in the world.  I sent Roger a note back on the topic and, not seeing any shame in being lazy and re-purposing content, I thought I would riff on it a bit more here.

It would make sense, with all the manufacturing in China and the number of schools graduating HUGE numbers of engineering students here, that the total volume of engineering publications coming out of China would be quite large.  Heck, China is the number one exporter of engineered products … why shouldn’t it also be the leader in exports of articles about engineering?  However, as we often see in China, “volume” does not connote “quality” and that would be my primary concern in this case – just because there are a lot of engineering articles coming out of China does not mean that China is a leader in engineering best practices.

I think we have talked before in these pages about some of the challenges in engineering in China, particularly the differences we see between engineering education in the West and here in China.  In the West, students are trained in “engineer-to-solution” methods where they are taught how to provide a total solution using various principles of engineering.  Sketch a challenge out on the back of a napkin and a Western engineering student should, theoretically, be able to give you several ways of solving it (it seems like U.S. engineering students are always participating in some invention competition or another).

In China, the training is more “engineer-to-print” where students are taught how to “read” a problem (a blueprint, data output, etc.) and then solve that particular problem.  Foreign friends and clients here who run engineering departments are constantly challenged by their local staff who want to be given a problem to which they can apply their standard toolbox of formulas to come out with the “right answer” (I still remember our English students bringing us the TOEFL test and wanting to know which of the two choices was “right” … when actually, BOTH of them were “right”, given the situation!  Very frustrating for them as well, I’m sure!).  They have to work very hard to get their local staff to stop applying solutions until they fully understand what the problem is.

A British friend of mine runs an engineering department at one of the biggest Chinese car makers.  He said that the greatest frustration he has is working with local engineers who understand engineering theory…but don’t drive!!  He told me of a time that they were designing a car seat that kept rattling once the vehicle reached a certain speed.  The engineers said, “That’s OK, my bicycle seat rattles too when I go fast!”  My friend could NOT seem to get them to understand that this was a TOTALLY different situation that required a different solution!!

Roger embodies the Western approach to problem solving.  The small teachers college where we worked had a flat roof over the dining hall and, after heavy rains, the pipes would clog up and would not be able to drain the water, leaving a VERY heavy and dangerous weight over our heads (it did not promote good digestion, to have the Wading Pool of Damocles suspended above you over dinner!).  The engineers at the school did their best to unplug the drains, but it just didn’t work – so they threw up their hands and said, 没有办法 (mei you ban fa “nothing we can do about it”).  Roger, being Roger, did not agree with this assessment, nor did he agree with the basic problem.  The issue, said Roger, was NOT that the drains did not work … the issue was that the water was still there!  Just because the drains didn’t work did NOT mean that you could not get rid of the water.  After another nerve-wracking dinner one evening, Roger went down to the local store and purchased a long section of rubber tubing.  He then went up to the roof, put one end of the hose in the water and tossed the other end over the side of the building.  Using some magical principle of physics that I think he called “gravity”, he started the flow of water out of the hose and, after some time, the roof was completely drained.  The school’s engineers were VERY impressed and proceeded to go buy more sets of tubing to deal with other buildings on campus (I think the local store ran out of supplies and purchased a truckload of tubing the next week, wrongly thinking there was a bull run on the rubber tubing market … and that stuff is probably still there, 20 years later!).

By NO means do I intend to belittle Chinese engineers … the market is making quantum leaps every day and, to be honest, the quality of “engineering to print” can be phenomenal and much better than the West (the copy-market benefits from this!).  But there is still some way to go, as the editor of the Chinese Journal of Construction Machinery is quoted as saying about the engineering articles coming out of China, “… their quality is still an issue. Many of China’s EI papers are less than satisfactory.”  That’s OK … give it some time and there will be millions of engineers embodying the Spirit of Roger solving more problems than you can shake a rubber hose at!

He writes:

[T]he most significant part of Supplier Relationship Management (SRM) — the actual Relationship — has either not been fully developed or has been insufficiently nourished in order to thrive. SRM goes to the heart of successful Supply Chain Partnerships, and in China, Guanxi is at the heart of any business, government or personal relationship.

…With suppliers, Guanxi is a general and deep type of understanding between two entities in which both are aware of the other’s needs and always take them into account. It’s an ongoing process and often flows on a more personal level than Westerners would consider a typical business relationship.

Read the full post here.

For more on guanxi, watch this 3:30 video put together by the creators of “On the Frontlines: Doing Business in China,” a DVD series Technomic Asia has helped produce. For more info on that, see here.

We did intensive training for our sales staff on how to sell “solutions” (rather than just schlep software) and we instituted a process to walk prospects through the discovery and solution phases of a sales cycle.  We had a sales pipeline management process where we listed the sales prospects and where they were in the process.  This was all earth-shaking stuff at the time – such things were NEVER done in China where most sales were relationship-based (someone bought your product because you knew them or their families).  To do a “cold call” or sell purely on the basis of how you could help a customer solve their problems was very new in China.

But getting there was tough.  We were coming off of the old way of thinking in China, the “iron rice bowl” (铁饭碗 tie fan wan) where your compensation was not much, but it was guaranteed.  If you showed up to work, kept your head down, you got your three squares a day and government housing, healthcare and schooling for your kids.  Any bonuses were often in the form of a “13th month”, a guaranteed one-month salary at the end of the year in time for Spring Festival.  In running our performance-based comp plan, we had to work through this mentality, that it was not enough to just show up – you actually had to perform as well.  And we got HUGE resistance from our staff who thought that, because they “worked hard”, they should get the bonuses.  The ones that got it succeeded; but there were many that couldn’t hack it and they went back to their comfortable iron rice bowls.

So when I read a story in the news where bankers were being interviewed about their bonuses and why they deserved them, I had a feeling of déjà-vu all over again.  One banker said, “People come here because they want to work hard and get paid a lot for working hard” (my emphasis).  Some of them go on to say that, if they are not paid their bonuses, then that is “just like socialism”.

What???  I would say just the opposite – it is “just like socialism” when you get a bonus just for for showing up and “working hard”, not because of your performance.  I am sure it WAS hard work to sell the magical pixie dust that passed for financial instruments – hey, it was tough enough selling software in China when the same stuff could be bought on the street corner for 5 RMB!  Granted, these bankers rice bowls are made of more precious stuff than iron, but the principle is the same.  If you live by the sales comish, you die by it.  End of story.

After the CNY holiday, I am going to be meeting some of my former software sales staff for lunch.  I am DYING to hear what they have to say about these bonuses and, I am sure, am going to be pushed hard to explain just how this happened.  And, as I often do when I can’t explain, I adopt my best befuddled look (and it IS a good one!) and say, “Hey…what can you do?  They’re foreigners!”

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

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

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

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

Yea, yea, yea … some meteorological nerd is going to comment on this blogpost about the “vernal equinox” or the “infernal aquablox” or some such nonsense.  I am a liberal artist and have very little patience for – or faith in – science.  I’ve seen Mystery Science Theater 3000 and, while greatly amused, was not impressed with the science part.  I also ordered Sea Monkeys as a kid, from the back of Mad Magazine – “Do science in your own bedroom” – and was shocked (SHOCKED, I say) to learn that the creatures had no relation at ALL to monkeys.  They were not even mammals!  That pretty much killed any interest I had in science.  Instead, I look at things in a simple, cause and effect sort of way.  We have Spring Festival here, and Spring shows up.  Its as simple as that.

Why doesn’t this work everywhere?  As I have so (semi) proudly announced in these pages, I am from Minnesota, cultural epicenter of the United States of America and home to displaced Scandinavians, Germans and (as with my relatives) Eastern Europeans of various sizes and shapes (most of them “large”).   If there is ANYWHERE on the face of the earth that needs a holla-back Spring holiday, its Minnesota where Spring acts like some teenager on a Monday morning … late getting up and, when they do, they are NOT in a good mood!  Wouldn’t it be nice in oh, say, about March 1 to have some sort of Spring Festival in Minnesota to exorcise the ghosts of frigid temperatures and magically melt the snow, microwave style?  Sure, it would pretty much do-in the Winter sports market, but I have a sneaking suspicion that, given bright skies and 24 degrees C temps, even petulant Minnesotans would melt.  Literally.

The one disadvantage is that such nice weather early in the season would invite others into the state.  The aforementioned Scandinavians and Germans are very proud of the fact that they have weather that, during the Winter months, makes several serious attempts to kill you and we enjoy griping about it.  If we had nice weather, that would encourage others to come in… and those “others” would not have the moral fiber of the natives.  How could they?  They don’t have crappy weather 8 months out of the year to show them that life is nasty, brutal and cold and that only the strong and stoic survive.  They would probably NOT be passive-aggressive and would actually answer the question, “So, cold enough for ya?” when it is really only a way to say hello in Minnesota.  We certainly can’t have that!

While there are many things that China can learn from Minnesotans – driving between the lines and not using the horn like they are breathing, for starters – Minnesota can learn a lot from China.  Even if we had to put up with the attendant Spring Festival fireworks from our neighbor’s backyard, being able to dope-slap the thermometer and make it obey would be worth it.  I am sure Minnesotans can find plenty else to complain about.

Back in the good ol’ days in China – Before Starbucks – we used to have to bring in our own coffee.  We’d make bi-annual trips to Hong Kong with an empty suitcase and fistfuls of cash … to go to the trading post (also called Marks and Spencer) and buy up what we could to bring back.  Those in China who had coffee found themselves the envy of friends who did not and could trade coffee beans like beaver pelts on the frontier.  I nearly had to post a guard at my door to keep my so-called “friends” from raiding the storage.

But that was life B.S.  Today, there are over 400 Starbucks in China and countless copy-cats with variations on the green circular logo and the name (I have seen Starburks, Starbook and a Moon Dollar … that last one, I thought, was particularly creative).  There is a definite coffee culture brewing here and these coffee houses are packed to the gills at all hours of the day.  Now, it seems, Chinese consumers are consuming coffee because it is hip and the stores area cool places to hang out.  Not even banning smoking in their stores has seemed to dim Starbuck’s popularity.  Someone should inform the Chinese about this new study – if they can be both cool and sane, double bonus!!

We have had companies talk to us about the potential of the coffee market in China, citing the popularity of such coffee shops.  But this is a good example of the importance of market segmentation and finding market indicators.  The not-so-crazy coffee consumers in China are doing their consuming outside of the home, in what Starbucks has called the “third place” they have created, a site between home and work.  Marketers erroneously point to a building coffee addiction based on how crowded these locations are but such a generalization should NOT be made – rather, we should say that “in-store coffee consumption” is strong.   The jump has not been made by the Chinese consumer to significant coffee consumption in the home and its attendant machinery and accessories (I have an elephant graveyard of coffee paraphernalia in my cupboards at home!).  In fact, Starbucks reports that their accessories sales are quite a bit lower than same store sales would be in the U.S.  People in China come for the coffee, not the bling.

So what is the lesson here (besides “drink more coffee to avoid going ‘round the bend”)?  I think it is this: if you are looking for China market indicators, dig deeper than just the ones you find on the surface.   The popularity of Starbucks does not indicate a popularity for coffee overall; rather, it indicates the popularity of social gathering spots (which might or might not include coffee).  If you are assessing your China market potential based on the popularity of your products in a certain consuming segment, look beyond that segment to understand the broader market context (and this works in industrial segments as well as consumer).  In the big-but-not-quite-ready-for-prime-time market that is China, such market fragmentation is very common.

But I would encourage you to consume coffee while you do this research – I now know how I have been able to maintain the shreds of sanity in this place!

The fourth edition of the report, described in detail here, was released in partnership with the Automative Aftermarket Industry Association. You also can watch an audio-video slideshow of an overview of the data contained in the report.

For more details or to place an order for the report, visit technomicasia.com/auto.

But here in China, the authorities are betting it is going to be different. The rumor on the street is that we will soon see a move by the Chinese government to provide huge subsidies on a basket of goods that will be pushed out into the countryside and small towns in China. This cornucopia of goodness, supposedly, will include things like washing machines, motor scooters, TVs, rice cookers and other small appliances. And by “subsidies,” the word is that this stuff will be practically free to the buyers — like they will pay only 10 percent of the retail price of the goods. Its like one day Sears and Best Buy throw open their doors and help patrons loot the place.

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As we have said many times before in this podcast, rumors are rampant in China and we must be careful not to plan market strategy on the basis of what is called “back alley news” ( 小道消息 xiao dao xiao xi). However, as I thought about what this program might do, I wondered if it might actually work. Remember that, despite the spectacle that is the big cities like Shanghai (where you can’t throw a chopstick without hitting a Starbucks or McDonalds) the rest of China is decidedly less urban and an estimated 65 percent of China’s population still lives in rural areas. There is a lot of disagreement as to exactly what the rural population number is, but it is impossible to determine. The several hundreds of millions of migrant workers make it tough to count them when they won’t stand still.

The backlash of lower growth in China is going to hit the migrant workers the hardest, and many of them have lost their jobs in China in recent months. The timing of these losses might diffuse the situation a bit: We are in the Spring Festival holiday this week where many of these workers have returned to their homes and turnover at factories can be as high as 40 percent in a normal year. Still, if factories are shutting down, there will be less for these workers to return to after the holiday so the unemployment gap will increase.

The biggest challenge for the Chinese government is to find a way to keep many of these workers “down on the farm,” so to speak, and moderate the flow into the cities. Certainly, workers are going to be needed to support the growth that is still happening here (remember our rants last week that “only” 8 percent growth is still growth?!), but not as many. Adding to this challenge is that many of these workers have been to the circus and seen the elephant — they know what lives many Chinese urbanites are living with all the standard trappings of wealth (funny how a Mercedes E-Class communicates the same thing in any culture. It says: “I am a 55-year-old male, I have money and I am compensating for something”).

So the first bit of encouragement the government can bring to the rural worker is to start them on the road to the better life by providing the starter-kit of bling: call it “Pimp my Farmhouse,” if you will. When I first came to China in the ’80s, people lusted after the “4 Things that Go Around,” which included a bicycle, watch and sewing machine — and I forgot the fourth. A pizza cutter?

Not much has changed except that the expectations have risen. We need to get places faster, so the bike has become the scooter. No one makes clothes any more but they do want to avoid washing them by hand. Hence the washing machine.

And you know what? Bully for them! There is nothing wrong with wanting –- and getting -– this stuff. I love my washing machine, TV and my rice cooker. Probably couldn’t live without them (at least, I could not properly parent teenagers without a TV!). Why should others be denied these because they can’t currently afford them? If the Chinese government can find a way to get these things to people who want them, that’s great. And contrary to the U.S. approach where people collect credit cards like Yugioh, if the rumors are correct, then people here will still be paying cash for these goods like they always have. They are just going to pay a lot less than they otherwise would.

As we have seen, economic recessions have a huge emotional and psychological component and the path of a county trends in the direction of the collective consciousness of its citizens. The revolution in China in 1949 was a radical departure from the socialist revolutions in Europe. While the Soviet Union and its satellite protectorates came into being through an urban/worker revolt, China’s came about through revolution in the countryside. Mao Ze-dong and his compatriots harnessed the anger of the abused peasant and swept themselves into power. Since that time, there is a tension in Beijing that, on the one hand, celebrates such peasant roots while, at the same time, wanting to guard against a repeat performance.

China’s leaders now are decidedly urbanized intellectuals and one of their primary concerns is how to avoid rural unrest. There have been many protests in the countryside in recent years, and interestingly, the Chinese media has reported on some of them. But so far, the “big one” has not come about. Deng Xiao-ping’s twist on socialism was to say that its OK if some got rich before others –- which is all fine and dandy if you can see the path out for yourself to boldly go where others have gone before. These subsidized goods, if true, would be a step in that direction.

The second benefit this program could bring would be to help keep factories open that are making these goods. Yes, people would like stuff, but they also need a job so they can keep buying more stuff. I have heard figures of unemployed migrant workers range from 3 million to nearly 6 million (so much for data accuracy in China). Whatever the figure, there are not enough factories making washing machines, TVs and rice cookers to absorb all of these displaced workers. But every little bit helps.

And the Chinese leaders’ growing sophistication in PR could come into play here. Have some of the leaders visit the factories where these products are made and then accompany these goods to the countryside to pass them out, shaking hands and kissing babies in the process. Splash that around the newspapers and online chat rooms and get some buzz going, some good buzz that might transfer to the foreign press. Radical? Not by Western standards, but it would be very different here in China. And it might even do some good.

For every happy, smiley, feel-good tingle that this program might engender, there is a potential darker side to it, as well. Getting someone a washing machine for cheap will make one feel pretty good, but before the warranty is up, you can be darned sure that the receiver is going to be saying, “OK, thanks for the washing machine, but what’s next?” If the government is using a program such as this as a quick-fix finger in the dam of emotions in the countryside, they are going to be very shocked to find out just how short-term this solution will be.

The reality is that, despite the amazing growth of the past few years (or maybe because of it), true rural reform has to be high on the to-do list for Chinese government leaders. The opening of the economy has gutted the social programs that were tied to state-owned factories and farms and, while many individuals have been able to make more money on the freer market, they don’t often make enough to purchase affordable housing or good health care. Cheap motor scooters are nice, but if you can’t get emergency health care following your inevitable mash-up, is it that much of a benefit?

So we should be monitoring two things in the coming months in China: First, let’s see if the rumors are true and we see a subsidy program hit the street. Again, I hear enough rumors every day to listen to all of them and trust none of them, but this one seems to have a lot of internal logic to it. But secondly, keep your eyes on the real reforms that have been promised in the countryside: new schools, clinics, hospitals, affordable housing, etc. We have several clients for whom we are exploring these rural opportunities (particularly in medical devices and building products), and things are looking pretty good so far. But until real people get real and lasting benefit from real reforms, there is always the danger of people using their cheap scooters to drive to the nearest protest. And I don’t think the warranty is supposed to cover that!

Thanks again for listening. Happy Year of the Ox to everyone, and remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

Photo courtesy of JSolomon on Flickr

NEWS STATEMENT FROM TECHNOMIC ASIA:

China’s government has just announced its fourth-quarter GDP at a paltry 6.8 percent, leading to a full-year GDP growth in 2008 of 9 percent, down from 13 percent growth in 2007. This marks the first time since 2002 that China’s GDP growth was below 10 percent. Sound like doom and gloom?

Conversely, the United Nations Development Program still predicts that, despite this slowdown, China will contribute more than 50 percent of the world’s total economic growth in 2009. Rather than become preoccupied with slowing growth in China, managers and investors should focus on the unique and plentiful growth opportunities for their companies, according to consultants at Technomic Asia, a Shanghai-based firm that helps Western companies develop China business growth strategies.

“If companies looking to do business in China focus on macro numbers, they’re missing the point,” said Steven Ganster, Technomic Asia’s managing director. “What does GDP mean to a company anyway? If the government says the economy will grow 8 percent in 2009 then you can bet it will; whether they need to plow $1-2 trillion into infrastructure, or even ship millions of refrigerators and small motorcycles into the countryside at huge subsidies in order to keep factories working.”

Management needs to get underneath these macro statistics and look at their specific market segments, Ganster added.

“We have a client in building products where the construction sector is expected to remain flat at best in the year ahead,” he said, “but their strongest product line helps make buildings more energy-efficient, and that’s a huge growth opportunity right now in China.”

Over the years, measurements and predictions of China’s economic conditions have been all over the map. More important than aiming strategies based on these illusory targets, companies should focus on more directly controllable and meaningful insights, according to Kent Kedl, general manager of Technomic Asia.

“Despite the supposedly dire circumstances in China, we’re going to see more big winners here in the year ahead. They’ll be the companies that put aside these macro numbers and dive deep into the specifics of their particular products, customers and channels,” Kedl said. “To succeed, a business has to go to where the action is, and in today’s global economy, that’s still China.”

(Official news release here)

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

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

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

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

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

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

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

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

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

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

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

For those interested in reading the report (and the reports on the reports), you can look here. As our friends at the China Law Blog have so pithily observed, we are all commenting on the report without having actually read the dang thing. To me, this says as much about the author as it does the reader: If they would write in a more exciting manner, I wouldn’t have to be hopped up on Red Bull Espressos to get through it in some state of consciousness.

My only comment at this point revolves around the places in the report that say “The Chinese Government has made a commitment to do such-and-such…” or “The Chinese Government will begin to regulate this-and-that more strictly…”

The “Chinese Government”? Who dat?? Despite what it might seem – and a reputation that proceeds me – I am not trying to be difficult here. I mean, I know they mean “the Chinese authorities” and, at some level, “the Party” and that saying “the Government” is a shorthand way of including all such powers here. But using such shorthand is mighty misleading because the “Chinese Government” can’t do anything here because IT DOESN’T EXIST!

The Chinese governing structure is – like Shrek’s onion – comprised of layers; and layers of layers. There are many points at which the Party’s rule is administrated: National, provincial, county, township/city, district and neighborhood (and I am missing some in there, I am sure). Often, administrative positions and people are repeated; for example, there will be a Party secretary at each level; a person in charge of land administration; someone in charge of communications (it is still called the Ministry of Propaganda here, a shout-out to less P.C. days in China). Each level is somewhat responsible to the one above it but each, in its own way, runs its own kingdom and has its own royalty.

To get anything done in China requires the cooperation – or at least the benign neglect – of many levels of the “Government”. Major props to the late Tip O’Neil’s universal observation that “all politics is local” – because, at some point, you will need to know who the local authorities are in your particular situation and you will need them on your side. Or at least get them to not say “no.”

A client of ours is very proud of their “connections” in the Central government in Beijing. They have spent a lot of time developing relationships (read “drinking like a sailor on shore leave”) with various departments and leaders. Given the opportunity, our client’s management (none of whom live here) will talk endlessly about the “great discussions” they have been having with said Central government leaders and bragging about their latest bai-jiu bacchanal.

However, four weeks ago our client was having a terrible time getting some of their product produced and shipped out of a manufacturer here in East China. They tried to get the assistance of their drinking buddies in Beijing and, despite many promises of “immediate action,” nothing happened at their East China supplier. Our client called us in to help. One of our senior guys, Daniel, went to the factory and spent a day or two there getting to know the local leaders – it was a state-owned factory, so their management were also local government leaders as well. Daniel listened to their grievances about our client (many of which were valid), broke bread and bottle with them, and got most of the issues solved … with the promise to solve the rest once the products were manufactured and shipped. What our clients “friends in the Chinese Government” could not do in months, a simple visit and many follow up phone calls accomplished in a week.

So when a report like this comes out touting what the “Chinese Government” is going to do, we should be encouraged that this is being discussed, but we should not start laying money on the fact that something is going to be done right away (or, if it is, that it will be done consistently across all of China). If you are involved in a situation with regulatory implications, I would encourage you to step back and assess just who you know and who you don’t know. If you don’t know people at the various local levels where your business is located, that’s where you should start working. The illusive “Chinese Government” is not going to help you out; they are not listed in the phone book because they don’t exist.

He talks about the importance of “MH 101,” referring to the fundamentals of materials handling. Andel quotes Technomic Asia’s Steve Ganster on the state of materials handling in China:

Ganster told me there’s a wide spectrum of warehousing in China, from dirt floors to state of the art. In fact China represents what the U.S. was like at several stages between World War II and up to the 90s.

“They need to take it to the next level of technology with equipment, process and strategy,” he said. “The government will ensure there’s a good 8% GDP growth one way or the other this year. There’s huge investment in infrastructure. The difference is they have the cash in their bank account.”

Read the full article here.

The personal trait that seems to be most admired – besides his three-point shot and Blackberry typing skills – is his intellectual curiosity, his interest in getting tons of opinions to inform his own decision. Whether or not this personal trait can translate into governing style remains to be seen; however, for the moment, I think many are at least impressed with how impressed everyone seems to be!

The one thing I can attest to, however, is that this decision making based on intellectual curiosity style does work well in China. In fact, it might be absolutely necessary to a foreign company’s success here.

Curiosity is the key to even beginning to understand China (not that “complete understanding” is a destination on the China cognitive map). Unfortunately, the average Westerner’s curiosity extends to the end of their first week of their first trip here. Then they know everything. They are experts. They go on talk shows. They write books. They certainly don’t continue to ask questions. For the Omniscient China Expert with the Executed Single Entry Visa, asking questions is a waste of good breath that is better spend expounding on their own omniscience.

But there are those who know that their first step into China begins a journey of a thousand steps that lead, inevitably to migraine headaches and a healthy starter-ulcer. For these lucky few, the questioning never stops. As a consultant and professional China Know-It-All, it is (supposedly) my job to provide answers to my clients; to (ostensibly) give deep insight into the China market miasma that will (oh-my-gosh-I-hope-so) unlock its secrets and bring untold riches to them. And you know what, to be brutally honest, I think we are really good at what we do … some of the best out there.

But the reason we are good is not only that we provide good answers – it’s that we have people who go out to the market who ask really insightful questions. Lest this post descend into a Confucian couplet worthy of its own fortune cookie, let’s bring it back to what it might mean for you, dear reader. It means this: NEVER STOP ASKING QUESTIONS! If you are blessed with good advisers – consultants, lawyers, accountants, mothers – and are getting good China advice from them, consider yourself lucky. But don’t stop there. Take in what they say…and then challenge it. Get a second, third and fourth opinion. Be like a three-year old in China: ask “why” and keep on asking until someone wants to give you a cookie to shut you up. Then take the cookie and ask why again!

Because somewhere in China, your strategy-of-choice is going to work. Somewhere it is going to NOT work. Just because someone succeeded (or failed) in their joint venture, doesn’t guarantee you will be on the same track. When one case study proves that XYZ is the “only” legal agreement to execute with a distributor, another will prove even more convincingly that and ABC agreement is best. China is a big place; big enough to both accept and reject a frustratingly large number of really good ideas.

The Chinese use a phrase to describe foreigners who supposedly understand China so well: 中国通 (zhong-guo tong) or “China Expert”. Too many foreigners take it as a compliment – I have learned to interpret it as thinly-veiled, tongue-in-cheek name calling, like “Nice move, Brainiac!” It is the only ironic thing that I have heard Chinese say … because no one – not even natural born citizens – are experts here.

I am encouraged because my next president seems like a guy who doesn’t hazard and answer until he asks tons of questions. Who knows, if this whole Ruler of the Free World thing doesn’t work out for him, there might be a role for Mr. Obama in our company. Seems like he’d fit right in. Besides, Team Technomic is in dire need of a good shooting guard.

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But the first moment of consciousness Monday morning upon emerging from the depths of R.E.M. brought this thought to my addled brain: “I wonder if, when I’m 80, capitalism will be the same?” Funny I did not question whether or not I would make it to 80, but there you have it.

Nine months ago I would not have been on this train of thought. I would have agreed with the recent presidential runner-up who said, at that time, that the “fundamentals” of the U.S. economy – the poster child and standard bearer for modern day capitalism – were sound. Daily, the sun rose in the east and my 401(K) followed the same upward path, bouncing a bit each 24-hour period but still following a generally buoyant trajectory. But suddenly, the Invisible Hand of capitalism grabbed a whistle, blew it and yelled, “Everybody out of the pool!!” And dang it all if we didn’t listen.

This, of course, got me to thinking about the situation here in China – because, when I am not thinking about my socks or capitalism, I guess I am thinking about China (someone, pity me quickly!). For years, the wizards and witches from the Hogwart’s School of Western Economics have been slapping Chinese leaders for not “opening up” their economy. The problem, quoth the wizards, was that the Chinese economy was too regulated where creativity and risk was not allowed free play, thus constricting growth and maturity. Cash, said the witches, was too important to the Chinese economy, not allowing it to bloom under the liberal application of credit, spread around like Dolly Levi’s manure, encouraging little things to grow.

The mad rush from the Pool of Western Capitalism was not just because of the lifeguard’s whistle … it seemed that someone had an accident in said pool and left a floater of assets that were so over-leveraged that they had nearly left their solid state and were approaching a gaseous one (OK, I know I mixed a metaphor there but, it being Monday morning, I am not sure how to make it right…work it out yourselves). The very principles upon which capitalism was based contributed to its downfall, the body economic had turned on itself in a cannibalistic fervor.

Which brings me to my initial question this morning – if the fundamentals of what we thought were capitalism are, in fact, contributing to its downfall, how then shall we live? Well, while the jury is still out, maybe the pithy and somewhat tongue-in-cheek “capitalism with Chinese characteristics” could have something to teach us.

First, the Chinese economy is very regulated – yes, too much so in certain cases, but I am not sure that a pendulum swing a bit right of center would be the worse thing for Western capitalism at this point (I have visions of sub-prime mortgage lenders standing at a chalkboard writing a thousand times “I will not destroy the very foundations of millions of people’s lives for my own selfish gain”). The Chinese government has regulations on who can invest; how much they can invest; what forms that investment can take; how much equity they can get for that investment – heck, even the currency exchange rate for foreign investment is controlled through a diaphanous peg to a “basket” of currencies. Regulatory control in China is ultimate; however, ENFORCEMENT is spotty and the reality is that things do fall through the regulatory cracks. But still, the Chinese regulators’ underlying philosophy – besides the maintenance of one-Party rule – is that we are NOT “rational actors” in any sense of the phrase. We are irrational, lemming-like creatures who will follow, nose-to-tush, the rodent in front of us as we all dive off the financial cliff du jour.

Sages in the West are nodding their heads in agreement that we need to “do something” and that greater regulation is part of that something. Talk is easy. As parents, its easy to feel bad once Junior is caught cheating at school and we might assuage our guilt by agreeing, as caring-yet-responsible parents, that Junior needs more discipline. Its easy to talk about this in the car on the way home, shooting Junior putative glances in the rearview mirror as he sulks in the backseat. But it is not easy to get home and dial back on Junior’s daily four-hour Guitar Hero fix and get his nose back in the books. His backseat sulk is a joy of Smurf-like proportions compared to the hooded glares of adolescent hate he will be shooting at you from his books. Same with demanding more regulation in Western capitalism – my fear is that its going to be difficult to keep them down on the Regulatory Farm when they’ve been to the Credit Circus and have ridden the cheap financing elephant.

Which brings us to point number two: Old Capitalism might need to dial back our obsession with credit. Economists will differentiate between a “leveraged deal” and a “Ponzi scheme,” as if it were a binary, black-and-white thing rather than a sliding scale full of more shades of grey than a Rauschenberg. In China, cash still rules – it is an incredibly frustrating thing running a business here where you still have to schlep around massive amounts of cash because, though wire transfers are certainly possible, the approval process can sometimes crush you (depending on which banks are involved). The penetration rate of credit cards is still only in the single digits in China (in the U.S. it is in the many hundreds of percent if you count the multiple cards that people often have). Though loosening slightly, real estate purchases in China – particularly residential – still require 30-40% cash up front. Over 90% of automobiles in China are purchased with cash, not credit.

So not only does Junior need to hit the books, he needs to limit his spending to what he earns mowing lawns on weekends. I often test my understanding of concepts by seeing if I can explain them to Chinese friends and colleagues. Not only does it challenge me to really understand the fundamentals, it also provides a moment of comedy relief for my friends – double bonus! In trying to explain credit derivatives and the sub-prime mortgage my Chinese friends would ask, “but how can you buy something when you can’t afford it.” I’d shake my head, like a majestic lion with a bothersome tse-tse fly buzz-diving its ears, and try again – “You don’t get it,” I’d say, “the credit allows you to buy what you could not originally afford…you look bigger than you really are.” One friend said, “I get it … just like the most popular elective surgery in China these days is the boob job.” Touché…

Third – and to me, this is the biggest one – we in the West would benefit from taking a longer view of our investments, how much they return to us and when. For our U.S. clients who are publicly traded, the pressure to show quarterly (or even monthly) progress borders on an obsessive-compulsive disorder. Monk might be a great detective but I’m not going to trust him with my stock portfolio. Every time we help a client do a big investment deal, I sit with the executives and, with full eye contact and a lot of love in my heart, tell them: “You know … some day, sooner or later, this China investment is going to look like doggie doo-doo. You are not going to hit your numbers; your manufacturing is going to suffer quality problems; your partner is going to go cowboy on you; your biggest distributor is going to hold you hostage for a larger margin; sudden regulation is going to make part of your original strategy obsolete. One, several or all of the above are going to happen. And when it does, what are you going to tell the market and the analysts? Draft the script now and keep it in a ‘Break Glass In Case of Emergency” box.’ You’re gonna need it.”

Wouldn’t it be nice to not have to worry so much about that? If the markets and analysts could show more grace; more patience; more understanding. To sit still long enough, take their eyes off their Blackberrys, stop Twittering every time they experience a gas pain and LISTEN to a company’s long term global strategy. To see the destination and not just the road thirty inches off the front bumper. To say, “yea, I get where you are going … it sucks that you had a bad month-slash-quarter, but life happens. I am not going to invest any more until I can see whether this is a blip or a trend – but I am not going to jump ship. I got your back, homey.”

All right, asking an analyst to use the word “homey” is probably demanding a bit much, but you get my drift. Our clients who are privately-held – although lacking in some of the experience and resources of their larger, publicly traded cousins – have a fundamental advantage in China simply because they often have more space to do something, stumble a bit, and then keep walking. Would that the NYSEs and NASDAQs of the world had the same grace.

Let me be clear here; I am not asking for the guilty to cry a tear-stained confession in front of the congregation, begging for our forgiveness. The guilt behind this global financial crisis is no one individual’s responsibility to confess nor is absolution ours to offer. That would be giving both parties too much power. But I am saying that there is a third way, grasshopper. Get back to the fundamentals, like in the bad old days: look for good assets that fit a validated growth strategy; acquire them at the right valuation and then run the heck out of them, knowing full well that the final movie will not follow the original script. Too simple? Yea, probably. But I don’t know of a company that got in trouble for doing just this.

We recently completed a commercial due diligence program for a large, publicly traded company. They were looking at an acquisition deal in China and we were tasked with assessing the feasibility of the deal – could our client believe the target’s marketing brochures and could our client execute the strategy they had in mind through this company. After many weeks of very intense work – and to grossly over-simplify – I had the meeting with the Big Dogs back in the U.S. At the end of my report, Chief Big Dog said to me, “So Kent, would you do this deal?” And I said – again, with full eye contact and empathy – “No, I would not…they are not who they say they are and you are not going to be able to do what you want to do with them if you were to acquire them. Besides, they are asking too much and you’d be giving up too much control. Plain and simple…no.” I gave him several other options that he should consider, each of them taking a bit more time and effort from his deal team to explore and execute but, in my mind, infinitely more do-able.

He was a bit shocked at my candor – I guess real consultants are given to more prevarication and use “it depends” every other sentence [Note to self: need to work on that]. But I could tell that he REALLY wanted to do this deal. I mean REALLY. His company was looking for some good news; something to show the Street that they were not going to let a pesky global financial meltdown ruin their plans for growth. He already had the press release drafted (in his mind if not on his laptop) and it sounded good. Really good. Lots of active verbs in a Dilbertesque homage to the gods of Leverage. The specter of old capitalism was on one shoulder, telling him in a raspy, been-there-done-that-deal-guy voice to do it. I am not sure if I embodied the spirit of new capitalism or if I was just being difficult, but I was on the other shoulder, and of a different mind.

Now is a difficult time to be making this decision, when the ghosts of old capitalism are still haunting us. Fast forward 30 years and the decision, I hope, will be easier because we will have learned our lesson. Somehow, though, I don’t think so – so I am going to keep this Podcast close. After all, I am going to be older then and won’t want to be working so hard. So when I wake up on a Monday morning pondering capitalism I will just call this up, change the dates a bit and re-record it. Then I can get on to more important things … like sorting my socks.

Remember our motto: In China, everything is possible, but nothing is easy. We’ll see you next time on the China Business Podcast.

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

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

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

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

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

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

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

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

For any decent Westerner with a modicum of moral decency, the term “sweatshop” should send shivers down their spine (unless it is cute name of the trendy new workout place near their swanky uptown pad, then it should fill them with an intense desire to run out and purchase Spandex clothing in colors not found in nature).  Visions of children working their fingers to the bone in unimaginable conditions and low pay waft through our minds.

But as Mr. Kristof  so carefully says, the conditions of a sweatshop should always be assessed compared to the alternative.  The alternative, in his op-ed, is a garbage dump in the heart of Phnom Penh, Cambodia, where hundreds of people live among conditions even more unimaginable than a sweatshop.  He says that, often, working in a demanding manufacturing environment is a dream for these people; a ticket to the good life of a roof over their head and a solid floor underfoot. What the “decent Westerner” might call deplorable conditions in the factory is a huge step up for the garbage-dump dweller.

This is argument that can still be made in Cambodia.  Also in India.  Even in the Philippines (where I did relief work in a similar garbage dump in the early 80s).  But in China?  Certainly, there are places in China of significant poverty – the new take from the government is to admit this and (slowly) start to expose such conditions in order to be able to show the improvements being made.  And there are improvements here: big ones.  And there are still many that need to be made (and maybe not so slowly).

But what struck me in reading Kristof’s artile is my sense that, somehow, China has passed places like Cambodia on the growth curve.  China is certainly not a “developed country”, but neither is it thoroughly destitute.  China is, as anyone who comes here immediately sees, a vast country of contradictions – where world-class business people in Shanghai (which I describe as “New York with a really big Chinatown”) are fellow citizens with the Gansu farmer making $1 per day.

In an earlier blog post, I talked about China “growing up” and experiencing all the pains of that experience.  Certainly, China going from 12% GDP growth to 8% (or lower??) is part of that “growing up.”  So is being held to higher quality standards in manufacturing, legal standards in IP protection, standards of humanity in life overall.

China is coming out of their adolescent phase, that growth spurt where you are thrilled that you are getting bigger but you wake up in the morning with your legs aching (and trust me, at 6’4” I know what this is like!) and your heart breaking at every supposed snipe and putdown.  Thankfully, you stop feeling like that; you get older, more mature (and maybe even start growing out instead of up).  You are also judged on different standards as a young adult. You are expected to behave differently in social situations (though are forgiven, I suppose, for the occasional college kegger) and are on a path to somewhere.  People no longer ask you what you want to be when you grow up; you are grown up, and they can see what you have become.

No, China (thankfully!) is not Cambodia; but neither is it the U.K.  It is somewhere in between.  I, for one, am honored to be alive and witness to China’s maturation process (at least their modern maturity … they’ve had 5,000 of history and might demand a bit of respect for that alone).  But anyone who works with the Chinese here needs to accept the almost-but-not-quite position where China is and needs to learn to live with the enviable contradictions found therein.  Being a young adult is tougher; living with one can be even tougher.

I love being from Minnesota.  I love returning there to visit family, friends and clients.  I never tired of the common greeting in the form of a rhetorical question: “So…cold enough for ‘ya?”  I tick people off by actually answering it – “Yes, it is more than cold enough for me.  You guys ever heard of territory nearer the equator?  There might even be daily flights to someplace warmer!”  From my Shanghai office, I check the temperature in Minnesota each day during the winter and experience a guilty Shadenfreude (which, my old high school German dictionary defines as “a sense of nyah-nyah-na-boo-boo.”).

But this trip back to the Motherland was different from Holiday Retreats of past years.  When I got back there, I found myself uvula-deep in a pile of angst brought by the U.S. economy, just starting to gain momentum ringing the bowl.  Election post-partum depression could not lift the spirit and, seemingly, every day brought yet another statistic of how crappy things were (I think economists used a more technical term than “crappy” but, as I have neither MBA nor CPA, the term works for me).  But it was not just the reality of our economy bleeding out all over our nice, clean New Year … there was a psychological element as well.  Lest I fall into the Graham Trap (Phil, not Teddy) and call this just a crisis of confidence, a pseudo-meltdown of American chutzpa and the can-do spirit, I do believe that emotional state of the average American is not helping matters. I have more faith in Tim Geithner than Norman Vincent Peale to find a way out of this crisis, but a little feel-good wouldn’t be unwelcome now.

So when I got back home to Shanghai, I was still in that “mood” and was fully prepared to find the same in China.  The statistics here would certainly validate such a feeling – exports are down, thousands of factories have reportedly closed and, though no one knows for sure, GDP growth is going to hover in the mid-single digits in 2009.  Bring on the Pity Party, baby … welcome to my economic nightmare … jump in, the water is warm.

But I don’t get that same feeling here.  Sure, I could very well be clueless and, typical of many foreigners in China, the true undercurrent of what is happening here could be passing me by (it has only happened 40 or 50 times before), but the local friends and colleagues I talk to are simply not depressed.  They are cautious.  They are wary.  But they are Chinese … they have survived 5,000 years as a basically intact culture simply because they are not given to wild fits of euphoria, even in – or maybe particularly in – the good times.

So what did we learn today, class?  To be wary? To be Chinese?  No … I think it is much simpler than that (and does not involve, for many of us, a change in skin pigmentation).  Two things come to mind…

First of all, don’t rely on statistics to set your mood and vision – don’t be too happy when they are good; don’t be looking for a Paxil hit if they are bad.  In the first place, the market data could be wrong – part of what got us into this mess is that we were actually encouraged by statistics on the increase in U.S. housing sales and highly leveraged global deals.  And statistics, at best, tell us what might have already happened – it takes seriously flawed humans to interpret that data to tell us what will happen.  Again, I reference the so-called experts’ recent poor track record.

Secondly, your company is not necessarily a statistic.  Yes, there are thousands of factories closing down in China … but have you seen what those are like?  Many of them are shoddy Taiwan- or Hong Kong-owned enterprises making commodity junk of questionable quality and pushing it into the market at dangerously narrow margins.  If this is you, then yes, you are a statistic and should take immediate action to remedy this situation – I suggest quickly removing yourself from the commercial gene pool.  But since junk companies are not this blog’s key demographic, I need to assume you are smarter than this.

We can all be cautiously optimistic about China in 2009.  Yes, 8% GDP growth is lower than the 12% we have been experiencing in the past few years, but it is about 9% greater than what most of the rest of the world is experiencing.  So find your happy place, and dig down to locate your opportunity in China.  Its here.  It is not going to be reaching out to grab you; you’re going to have to look for it.  But I am guessing that your opportunities among the native Minnesotans – as nice as they may be – are going to be limited.  They are too busy looking at their 401(K)s that are sliding quicker that a Lutheran in Sunday-go-to-meeting-shoes the morning after an ice storm.

No, your opportunities are here.  And with caution aplenty and wariness radar on full blast, you will find them.

One analyst quoted in the article says, “In the past several years when investment was booming, we were seeing a lot of waste. But now companies are rethinking their expansion plans and proceeding more carefully and rationally.”

However, some analysts say that now might be the time for foreign companies to make aggressive investments in China — acquiring companies, forming ventures, committing to solid projects and boldly entering the Chinese market.

“While things are deteriorating in the West and companies are hard-pressed to grow in their
home markets, they are finding new markets and new growth opportunities in China,” says [Technomic Asia's Kent] Kedl. “China is going to be the key path out for a lot of companies.”

You can read the full article on AmCham’s site — look for the link to the PDF at the bottom of this excerpt.

Download this podcast
Download audio file (20090112_top_20_things.mp3)

Of course, I could take the easy way out and reply that China is great because of its “long and storied history” or that its “modern dynamism is unparalleled in the world.” But that would be like saying Hunter S. Thomson was a “good” writer.

China (and the good doctor) deserves more. I have come up with a list. A definitive list.

The Top 20 Reasons to Love China:
(with apologies to talk show hosts and their lawyers)

1. China is the only place on earth where you can see a man pedaling a bicycle loaded with two butchered pigs, a living room sofa and two family members. And he is not even breathing hard.
2. The Chinese word for “mother” and the word for “horse” are separated by just one tone, leaving open a world of possible insults for the sloppy student of the language.
3. A black GM sedan is the coolest car on the road…this IS your father’s Oldsmobile!
4. You are acclaimed a “China Expert” by local acquaintances the minute you come close to properly pronouncing ni hao and know the meaning of the word guanxi.
5. At the same time, these same Chinese acquaintances will correct your mispronounciation of ever other Chinese word, which will fill you with a sense of belonging, knowing as you do that they now feel comfortable enough to tell you what they really think.
6. When someone asks you whether they drive on the right or the left side of the road in China, you can truthfully answer: “both.”
7. Reading an EKG report is easier than deciphering Chinese calligraphy, even for many locals.
8. It is not impolite to slurp your noodles, ask someone’s age or how much money they make. Eat your heart out, Ms. Manners.
9. You can buy a Spongebob Squarepants doll while visiting the Great Wall, thereby gaining an immediate understanding of the clash of civilizations without having to read Samuel P. Huntington.
10. One’s heart rate after crossing the street on foot is roughly equivalent to a 20 minute Stairmaster workout.
11. The answer given to me by a Shanghai native when I asked how he knew if a Chinese sign should be read left to right or right to left: “I read it one way. If it doesn’t make any sense I read it the other way.”
12. The look on the face of a foreigner at his first formal banquet when he receives an answer to the question, “What is this I am eating?”
13. Dogs here understand commands in Chinese better than I do.
14. The always empty Rolex brand store 200 meters from Xiangyang market.
15. Fortune cookies are NOT a Chinese invention; spaghetti is.
16. Not only can you turn right on a red light, you can do so without stopping.
17. Even though China’s per capita GDP is one-twentieth that of the US, Starbucks charges the same price for a cup of coffee in China as they do in the States.
18. The taxi sign reminding you to take everything with you, the English translation of which reads: “Don’t forget to hold your thing.”
19. A coupon to the local go-kart track, good for “One free ride” and “One free beer” at the bar, which stipulates that the beer must be consumed before taking the free ride.
20. You get to eat with sticks.

James Fallows, China correspondent for the Atlantic, serves as co-host and editorial supervisor for the series, and Joe Nocera, business columnist at the New York Times, provides special commentary throughout the series.

“On the Frontlines: Doing Business in China” consists of five DVDs and one info-packed CD-ROM that will show you how to:

• Overcome the cultural barriers to doing business in China
• Master the fine art of negotiating with the Chinese
• Succeed in making the deals you want to make in China
• Avoid costly mistakes: business is different in China

The six-disc set sells for $199, but if you order with the promo code “TechAsia2009,” you’ll get 25 percent off that price.

The article looks back at the trouble facing China and the rest of the world during 2008 and analyzes how those challenges might affect 2009. Some suspect China to see a bit of a business exodus, but others disagree.

As for competition from other low-cost Asian contenders, Steve Ganster, senior vice president, Asia, for Tompkins Associates, a Raleigh, N.C., firm that advises mostly U.S.-based Fortune 500 and mid-size companies, has analyzed the costs of sourcing in nearby Vietnam and found that with the exception of savings in the value-added tax regimes, there is no appreciable benefit. India, he says, is hampered by an inferior infrastructure and a multilayered bureaucracy that makes it virtually impossible to develop and implement projects in a timely fashion.

“China is unparalleled in its economic scale and size for both exports and domestic demand,” says Ganster. “None of the countries we’ve looked at will be able to match China’s will and ability” to continue to make offshoring an attractive sourcing option.

Ganster advises companies now in China but mulling a shift in their sourcing plans to first examine ways to optimize their existing distribution networks. He says that might include more effective consolidation practices at origin or streamlined transportation strategies such as shipping direct to customers and bypassing warehouses and distribution centers in the United States.

Read the full article here.

In other news, the December/January issue of Supply & Demand Chain Executive magazine contains an article written by Steve, titled “The China-ready Supply Chain.” Here’s the intro:

For a successful supply chain in which China is a main source of your raw materials or destination for finished goods, you need to operate in a high state of readiness. The combination of stark differences in business systems with the West, long travel distances, and constant and sometimes turbulent change make it imperative that you have a “China-ready supply chain.” This article first describes why your supply chain needs to be “ready” and then discusses the key attributes that indicate a high degree of readiness for doing business well with China and getting excellent performance from your supply chain.

Read the full article here.

Today’s podcast features Steve Ganster, managing director of Technomic Asia. Kent’s not gone — just sharing the spotlight.

Download this podcast
Download audio file (20081215_china_matters_2.mp3)

A full transcript:

I wanted to take a few minutes to lift our thinking out of the chaos and calamitous scenarios bombarding us in the news today to revisit and expand on one of our earlier podcasts by my cohort Kent Kedl on the topic “Why China Matters.”

In that podcast, Kent encouraged us to keep our eye on the ball with respect to China — in terms of what it can contribute to both our top and bottom lines. He also warned us to keep our attention on China’s ability and increasing interest to invest in the West.

As many of you no doubt have heard, there are a range of scenarios being bantered around about a Chinese auto company buying GM. While I think there are many hurdles to this scenario, even its possibility should grab our attention. China will continue to increase its standing in the world economy and thus affect our business, negatively or positively, whether we like it or not. Therefore, it has to remain on our strategic radar.

In this podcast I wanted to give you some perspective on the “talk on the streets” from companies and observers actively playing in China’s market in order to get a read on their views of the opportunities and challenges facing western firms doing business there. I’ll also touch on the tactics and initiatives being considered as a response. These insights are assimilated from a range of sources, including our own Technomic team, our many clients (who comprise both large and small/medium sized firms both sourcing and selling in China), from local Chinese businessmen, as well as from our friends at AmCham-Shanghai.

First let me acknowledge that all is not rosy in China either. Most firms are planning for lower growth (though you will note they do use the term “growth”) and, as you would expect, they see recession in Europe and the U.S. Credit is tight and the market for public offering of equity is very difficult. China’s stock market has also tumbled. Competition is becoming even fiercer with resultant price/margin pressure.

This margin pressure extends throughout the whole supply chain. So local management see as the keys to success a major focus on cash and cutting costs while trying to maintain and even develop their human capital, attempting to keep morale up. They are looking to be more innovative and to excel in their supply chains. We continually hear the buzz words, “get lean,” “best practice” and “China is the best place to be.”

Digging deeper

Let’s probe a couple of these areas a little more deeply and identify some specific measures and initiatives being implemented by those companies taking a more proactive position in these tough times.

Supply chain excellence remains a central theme with a focus on inventory reduction, scrap/waste elimination, capacity rationalization and better/smarter purchasing. As mentioned, credit risk management is a high priority as is the preservation of cash. One thing the Chinese businessman has taught me over the years is that “cash is king,” or emperor as the case may be.

Importantly, and a central point I want to get across, is the continued emphasis on growth. China, despite some slowdown, still offers attractive possibilities to expand the top line, even in this world recession. To achieve this, companies are trying to get smarter in their commercial strategies, selecting high value/high margin projects, targeting higher growth industries and especially import substitution (perhaps a warning here for those of you feeling comfortable with your export channels into China’s marketplace). Additionally, they are maximizing access to global and regional accounts, trying to exert as much account leverage and influence as they can.

The central theme here is proactivity. In these turbulent market conditions, disruptive strategies can be very effective, especially if your competition is distracted by such mundane things as survival.

Let me also address a question that I hear constantly these days: Is manufacturing leaving China? I know how to say the word “no” in about 10 languages, so consider it said. Now, is China’s manufacturing profile changing? Absolutely! We see some attrition where manufacturing is very people intensive, has low margin and is highly polluting. The government seems content to let this type of manufacturing either survive on its own, or migrate to other Asian countries like Vietnam. We are seeing little abatement in manufacturing FDI coming into China.

Look what at China offers manufacturers:

1. A strong and deepening supply chain and infrastructure
2. A major and continually growing domestic market in addition to export potential
3. Large volume scale and its benefits to cost competitiveness
4. An ample workforce that can be trained and empowered
5. Significant latent productivity to be gained by further process improvements
6. A very supportive pro-business government

Talk to Westerners who have dealt with government, employees and unions in Vietnam, India or other developing southeast Asian nations. This may open your eyes to the positive things China offers.

As we have repeated over the past year, China remains a strategic market for a dual-strategy approach: tapping the local market while developing secure and competitive sourcing for both domestic and international markets. And to quell the rumors of China’s impending demise that I see reported in the U.S. media, note the following:

• According to the “2009 Economic Blue Paper” released Dec. 2 by the Chinese Academy of Social Science, a central government think tank, China’s GDP is expected to grow 9.8 percent or so this year and should be able to be maintained at a growth rate of some 9.3 percent in 2009. The minimum GDP growth rate for 2009 as set by the government is 8 percent. Anything lower than this is not acceptable to the government, whose top priority is to maintain social stability. So I can imagine that the Chinese government will do whatever is possible to accomplish this “break-even” growth rate for 2009. The government has both the will and the means to make this happen, and we have seen no hesitation in the past for them to take action.
• If you like mind boggling numbers, note this one: Pledged investment by the central government for 2009/2010 is RMB 4 trillion! My calculator doesn’t have so many decimal places, but I reckon that’s almost $580 billion. Local governments are committing substantial funds, as well, which could significantly increase or even exceed this already massive figure. The central government even earmarked almost $15 billion for investment projects for the 4th quarter of 2008 to pad GDP a bit. As the Summer Olympics this year showed us, China can do things on a mind-boggling scale.
• The EIU forecasts that by 2030 China will have over one billion middle- or upper-class consumers and be second only to the U.S. in economic output.

So, yes, China will have its struggles, but it ain’t going anywhere.

Finally, let me leave you with a few take-aways in terms of actions you might consider with respect to China as you review your 2009 strategy:

• A clear theme among our client base is “smart growth.” This means being aggressive but more pointed in your projects and target markets/customers. To be effective, you must have current and accurate intelligence on your marketplace.
• Manufacturing efficiencies are there to be had. Explore lean strategies and bring your best practices to China. Even if you are working with third-party vendors, in the right buyer-supplier relationship, you can effectively transfer process knowledge to key partners to help them improve their competitiveness.
• Re-think your supply chain from start to finish. The recent dynamics in global markets have changed the landscape of sourcing costs and moving product around. Look at ways to optimize your supply chain and use it as an offensive weapon. You can exploit the strain your supply chain partners are feeling to develop a more efficient process and a more competitive supply structure. You may find, like the Detroit Three, as our auto companies are now called, that they are open to about any conditions in order to get “bailed out” of their present circumstances.
• Lastly, chaos is the breeding ground for disruptive strategies. Look at going forward or backward in your supply chain in order to add value and enhance control. Consider an aggressive acquisition. There are many cost-effective assets to be had in China if you know how to find and cultivate them. A strategic move here could alter the playing field in your market, both in China and internationally. With the lull in market demand and the difficulties in going IPO, you may find that there are more friendly targets out there among Chinese manufacturers than there have been in the last couple of years when many of these same companies were demanding 20-30 times earnings for a piece of the action.

I hope these insights from the front lines have been helpful and that you will consider some of the actions I suggested. It is interesting to note that when the Chinese use the word for crisis (wei ji), it is a joining together of two words: “danger” and “opportunity.” Let’s not forget the second part of this meaning for crisis as we battle this economic environment. Stay tuned for continued updates from our teams at Technomic Asia and Tompkins Associates.

You can legitimately vote once per computer per day, so get to it. Dan and Steve do great work, and we’re happy to support them.

Good luck, guys.

That is, there needs to be something more, such as commitment and communication, for both types of relationships to survive. Stresses, including the current economic downturn, tend to reveal the cracks between supply chain links.

“The market turbulence we are now experiencing is putting significant strain on buyer-supplier relationships,” says Steve Ganster, podcast guest speaker and managing director of Technomic Asia. “Transparency, trust and open communication provide the needed ingredients to work through these difficult times.”

Along with ensuring that strong relationships remain intact, Ganster reminds listeners that their supply chains should be used as offensive weapons to differentiate themselves from the competition. He stresses the importance of strategic thinking when making the “buy” decision.

“As the first component in the supply chain, ‘buying’ is crucial to the other steps. If you get the ‘buy’ phase wrong in your supply chain strategy, then ‘make, move, store, and sell’ are going to be much tougher to execute well,” he says.

“Carefully think through options, work with real-time market intelligence, and consider the longer term. Don’t make decisions based on short-term spikes or overreact to changes,” Ganster adds.

The recent podcast is the second in a series focusing on “buy, make, move store and sell.” “Supply Chains in the Global Economic Downturn,” the first of the new series, explores the economic issues affecting businesses in every nation today. In this first episode, Gene Tyndall outlines what companies need to do to survive and prosper in a challenging climate.

Tompkins Associates features a new podcast on the first and third Tuesday of every month. Visit http://www.tompkinsinc.com/podcast to subscribe via iTunes or any podcast feed reader, or to sign up for email updates

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A common question among the foreign community in China is “Do you speak Chinese?” Well, my answer is yes, but with a somewhat metaphysical qualification. Yes, I speak Chinese, however I’m unsure that when I do that I am really “me” — or even human. Because to the non-philosophy majors (i.e. those with a real education) “metaphysics” often means “confusion,” allow me to explain.

To my Chinese friends and co-workers, I am neither funny nor witty in Chinese, though I like to think I am (maybe mistakenly) in my native language. I am certainly interesting, in the same sense that monkeys are amusing when taught to use simple sign language. I can talk, but it is not communication. It is desperation. Some people say I am “bright” because I can pick up the language or “clever” because I can mimic an accent. Yet I don’t consider those attributes “human.” This reason being, communication has nothing to do with fluency and everything to do with culture.

In China, to be human is to use the Chinese language and to use it properly. Anthropologists have discovered rudimentary Chinese characters scratched into turtle shells and cattle bones many thousands of years old. To be Chinese is to be attached to this history by some unseen umbilical cord that feeds you and keeps you alive. To really speak Chinese, one must incorporate that history.

The idiom, and its linguistic cousins, is shunned in the English language — as a high school English teacher said to us, “avoid cliches like the plague!”

However, in Chinese, to speak the language properly, one must correctly use cheng-yu, idiomatic parts of speech passed down over millennia that define what it means to be Chinese. In China, you are “human” not because you sound human but because you are able to link yourself with the rest of humanity (i.e., the Chinese).

When you speak or write in Chinese, your audience is much broader than the receiver(s) of your immediate message. The Chinese ancestors hover about your conversations and they are disappointed when you miss an opportunity to refer to a present situation in light of the past, for it is the past that is their primary concern. These forbears still communicate with the modern generation and they are strict teachers, ready to rap you on the knuckles with the ruler of historical linguistics should you neglect their lessons.

One can think of communication not as a process of passing a “message” from sender to receiver but rather as a way of sharing meaning. A conversation can be a “sacred ceremony” wherein meaning is shared and reality is created, altered and negotiated. According to this perspective, my primary purpose for communicating is not to get someone to do something (although that may also happen), but it is to tie myself to that person, to share something beyond the words of the liturgy and to the spirit of the relationship. To be able to take part in that ceremony, one must be a “believer” in a linguistic sense. In Chinese, the meaning, history and feel of the words must reside in your soul, not in a dictionary.

So yes, I guess I “speak Chinese,” but not as a believer. In Chinese, I am a heathen, like noted atheist Madeline Murray O’Hare reciting the Common Book of Prayer — you know what the words mean, but you are not quite sure what she means. Which is why I prefer to communicate in English, because when I do I feel a weight lifted from my shoulders, a great linguistic burden placed there by the whim of natural geography and about 10,000 years of Chinese history. Suddenly, I am no longer a talking monkey — I am human again.

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

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

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

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

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

The article is clear to say that China is not the sole recipient of U.S. inspectors, but the FDA office in China is the agency’s first overseas. According to the report:

Experts welcomed the potential partnership but said it might prove largely symbolic.

“It’s kind of like an ant standing against a flood,” said Kent D. Kedl, general manager of Technomic Asia in Shanghai, which helps medical-device and pharmaceutical companies navigate the Chinese market. “The Chinese State FDA can’t monitor everything, so the U.S. FDA is going to have a huge challenge.”

For more, read the full Washington Post article here.

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Well, the elections in the U.S. just came to a historic conclusion, and amidst those rejoicing and those preaching gloom and doom, there is a general agreement that the United States has done something “new.” What was once thought absolutely inconceivable just two generations ago is a reality. It doesn’t mean that the old racist attitudes and systems are a thing of the past (I think some unfortunate events during the campaign proved that this is not the case). However, everyone I have talked to — from all points on the political spectrum — feels that we have, to some extent, sloughed off the “old” way of thinking and are in some “new” territory.

In today’s podcast, I want to talk about this transition from the “old” to the “new” — but I would like to apply it to today’s environment of global business. And the subject was not originally inspired by the election, though I personally found it very inspiring. Rather, it came from a note sent to me by Scott Tong, a friend of mine who is a journalist with Marketplace at National Public Radio. He said he wanted to talk about “this big-picture existential conversation about the U.S.-China ‘global imbalance’ — Chinese oversave, Americans overconsume and it’s unhealthy for both sides. Do you ever think about that? Does it overlap with your work?”

I was going to send him back some piffle, but once I started writing, I just kept going. By the time I looked up, I had written some massive treatise to what was, possibly, just an interesting question on his part but from which I had departed on my own rant. It might still be piffle, and there is a lot of that, but I thought it would make an interesting and timely subject for this week’s podcast, given the global pondering of the old and the new. So if you hear Scott address this issue on his program, I would believe him before me (he has a much larger audience and gets paid to do that besides!). Anyway, here is what I wrote to him…

Hmmm… “Is there an unhealthy global imbalance between U.S. over-consumers and Chinese under-consumers?” Interesting question, but I think it is actually just as practical as it is existential, in part because it is using the language of an “old” way of thinking. In our business, we deal with this all the time in the microcosm of an individual company trying to balance out supply and demand in their own chain. The problem is that the road we took into this mess is not the one that will take us out, and we are always working with companies to get them to see this.

For example, a company might have built their current business structure (and size and profitability) on the foundation of a stable, predictable (and, typically, growing) U.S. demand. Sure, they might have international sales too, but their real bread and butter is their domestic market. Some of them have been doing this for generations and their company structure and culture is based on it. And its not just small companies — most of the bigger companies are still, by far, larger in their markets of origin than they are in other markets (there are a few exceptions like GE, but they are exceptions and not the rule).

Of course, this is logical: you would expect to be strongest in the market where you began. And when times are good, that’s not necessarily a bad thing. But fast forward to today where one of the most stable, predictable (and growing) markets is China — and the U.S. is unstable, wildly unpredictable and in recession (and Europe, in many ways, is even worse). Asking about U.S. vs. Chinese consumption in this environment always comes up with a messy answer, in part because it does not account for all the inputs of this new situation. And the typical company does not have the resources or the experience to deal with something like this.

This is a brand new machine, and they see all these buttons and levers in front of them and they don’t know which to push and pull (and in what order) for good things to happen. In fact, most American companies are still in denial and think global expansion is optional. Our European friends look at Americans and just shake their heads. They know that going global is not optional, and, in fact, many of them are here ahead of us. And most Asian economies were built on going global and, like China, have to learn how to rely more on their domestic markets.

Expand this out to the macro economies of the world and you see the problem magnified. We can talk about “U.S. consumption” and “Chinese savings,” but those are just broad (and fundamentally inaccurate) descriptions of a phenomenon that we really don’t have the language to describe yet. By calling it an “existential question,” you already know that to reduce the issue to a drop in U.S. consumption and “stuck” Chinese savings does not do justice to the problem. But we are talking two languages here: the first is the language of a business culture in which the West are consumers and Asia are producers — U.S. demand drives global markets and U.S. money funds global growth.

The second is the language of truly global commerce where supply and demand is not just filled — it is actually created and the people with the money could be anywhere. To introduce (and probably butcher) yet another metaphor, it’s like going from doing math to playing jazz. There are relationships between the two of them, and mathematic principles can be identified within jazz. But we know that to explain jazz using only mathematics does not do justice to what jazz really is.

So this is where the existentialism comes in — in that we are in the process of, literally, creating a new culture with different words, syntax, rules of behavior, and internal logic systems. Certainly, the new culture has its roots in the old, but there are fundamental ways of thinking that we are all catching up to. And, in the spirit of true existentialism, it trends toward the absurd.

The problem comes in our natural tendency to frame the question as Scott did (and as I would do): that the drop in U.S. consumption might be able to be counterbalanced by getting these Chinese people to stop saving so dang much money (on average 50 percent of their total incomes). But what we are saying is that, the way we got into this mess — by the U.S. consuming a basket of goods and services and driving the global economy — is the same way to get out, just replacing U.S. consumers with Chinese. But fundamentally, it’s the same old junk that we are consuming! This is the old way of thinking, not new.

I look at this as somewhat similar to the Internet economy created in the ’90s. The fuel of our growth was not an increase in consumption on one side and a decrease in savings on the other. We did not find new markets for our old products. Rather, we created a whole new economy with new products, services and ways of generating value (and money) that had never been dreamed of before — and this resulted in new markets and new consumers. In fact, we got so excited about this new thing that we got into trouble thinking that the “new” business culture so transcended its predecessor that it eradicated the “old” business culture’s stodgy views of business principles — pesky things like revenues and profits!

Thankfully, I think that we are beyond that now. The Internet did not re-divide the economic pie — it made the pie bigger and gave us a few cakes, cookies and kick-ass, double-fudge chocolate brownies to boot! The “new” global business culture, yet to be defined, is not a zero-sum game where an increase on one side means a necessary reduction on the other — where a U.S. company going global means that a guy named Wang in Guangzhou gets a job but a guy named Johnson in Chicago loses one.

If done correctly, and in thoughtful and careful response to real market conditions, a U.S. company expanding operations overseas can actually grow their base business at home. A client of mine who has opened a new factory in China went through this with their employees, dealing with the fear that expanding in China would mean that people in the U.S. would lose jobs. When the management did the analysis, they found that for every $1 of investment they made overseas, they grew by $2.17 in their home office. Certainly, they lost low-value manufacturing jobs but they hired a bunch more higher-value jobs (engineering, customer services, sales, etc.) to support that growth. In fact, they have had to hire so many people that they cannot keep up and are, in fact, “exporting jobs” to China because they cannot find enough people to fill them in the U.S. This is the absurdity of what is coming.

There is talk in the U.S. in some circles about the creation of an “Apollo Program” for environmental technologies — mirroring the moon program in the 1960s where massive amounts of public and private funding were invested into putting a man on the moon. Given the undisputed environmental mess we have foisted upon our planet through our “old” way of thinking, the idea is that the creation of new technologies and products to solve this mess will result in new markets and customers — growing the entire pie instead of arguing over who got the bigger piece.

There are some very exciting things happening here in China, not only in environmental technologies but in other areas as well: medical, energy, communications — the list goes on and on. But we can no longer talk about shifting consumption from the worn out husk of the U.S. to some other, fresher and more unsuspecting country. That will just dig us further deeper into a hole we already cannot get out of.

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

As Jim says:

In fact, I have heard it said that Western companies and Asian companies spell SRM differently. In the West, SRM is spelled capital S, little r and capital M (SrM). For the West, it is all about Supplier Management. To the contrary, in Asia, SRM is spelled little s, capital R and little m (sRm). It is all about relationships.

Read a full transcript and listen to the podcast with Jim and Steve here.

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Quick quiz — what’s the most difficult job these days? Besides the one the new president of the United States will take on, I would vote for “business journalist.” It’s tough enough these days reporting on what just happened in the global business arena. Can anyone still say, exactly, what deferred securities are and who really owns them? But try to report on what might happen tomorrow … next year … over the next TEN years? Fugitaboudit!

But that’s one of the secrets of success, isn’t it? To be able to see what’s coming before it gets here. And to do that, you have to learn to read the signs…

Warren Buffet is called the Oracle of Omaha for his supposed ability to peer into the future. He avoided the tech bubble, he avoided (I understand) the major tragedies of the recent housing crisis and is starting to invest more in this down market. Alan Greenspan, former chairman of the U.S. Federal Reserve, was also called The Oracle and was, by current accounts, tough to argue with during the go-go years of the banking boom. But now, he is not looking too Oracle-like.

China could benefit from an oracle or two these days — is China, quote-unquote “de-coupled” enough from the global economy (particularly the U.S.) to weather this storm? Can China safely transition from an economy based on infrastructure building and exporting to a more mature, domestic consumption and global investment platform? Don’t ask me. I’m just a consultant!

Seriously, when I first came to China in the ’80s, if you would have shown me a picture of downtown Shanghai and said, “In a mere 25 years, you are going to look out your window everyday and see THIS,” I would have said you were, as my British friends say, “barking mad!” I would NEVER have predicted this; and neither would anyone else, at the time.

So all we can do is sit here and look at the signs — read the tea leaves, as it were and, based on our imperfect interpretations of the past and our too-sketchy view of the present, we predict the future. Sounds like a good gig if you can get it, isn’t it? Hey, welcome to life in China, baby!

But I think there are some signs that are quite clear that are telling us what stage we are at in China’s growth — and one of the defining features of this stage is what I call “pre-consolidation,” meaning, generally, that many industrial sectors in China are still very diverse, fragmented and messy but are in the process of becoming more aligned and streamlined. Instead of trying to further describe this stage, I would like to look at four “signs” that define what I am calling “pre-consolidation” and signal that we might be coming to a crossroads.

First of all, the biggest sign — and the easiest to recognize — is simply the number of players in many market sectors in China. One of the features of a more mature economy is that there have emerged several large players in a particular sector and other players have either fallen away or have been gobbled up (and that’s how the big players got that way, growth by acquisition). The auto industry is a good example — in the early 1900s, there were dozens and dozens of car companies in the U.S.; today, there are only three (and if the talks GM is reportedly having with Chrysler come to fruition, there will only be two!). China is on the other end of this spectrum. There are over 54 different car companies operating in China and well over 100 brands. Given time, consolidation will happen, but for now, China is in the “pre-consolidation” stage.

Car companies is one thing, but what about the rest of the China market structure? Could other sectors be described as being in a “pre-consolidation” stage? I think they do. In the past couple of months, we have done programs in medical devices, off-road equipment, vehicle components, stationary, aerospace — and ALL of them have MANY times the number of players in them than do similar sectors in North American and Europe. There are over 500 tire manufacturers in China, each of them making a variety of tires from smaller ones for lawnmowers to larger ones for road construction equipment. Most of them are doing less than $5 million per year in revenues.

I was talking to the product manager of motor graders at Caterpillar the other day and he said that, in China, there are 15 serious competitors — in the West, there are only 2 or 3 others, besides them. And several of these China competitors are only making 30 units per year! “That is tough to compete against,” he said. No kidding.

The interesting thing about many of these markets is that the “sweet spot” is pretty big — many of these manufacturers are making products that are “good enough.” It is a clear issue of over-supply in the “good enough” sector. Companies like Caterpillar, of course, are not competing in this “good enough” sector but rather are working to pull the market up to the premium end. But for now, “good enough” is pretty strong and it is a VERY populated section of the market. There are too many players offering too-similar a product with an value proposition that is difficult (if not impossible) to differentiate. Something’s gotta give…

A second sign that China is in a “pre-consolidation” stage is its fragmented distribution channels. Historically, China has developed regionally where personal relationships (you’ve probably heard the Chinese term guanxi) built over generations have made their way into business relationships. And these personal relations are, by definition, geographically specific. If I grew up in Beijing and so did my parents, then our relationships are strongest there … and if I have a business, I am going to rely on these relationships to help me start and grow. If I need sources of supply, I am going to look to my immediate network; my customers are probably near me as well; and I certainly rely on the good graces of the local governing authorities to smooth my road for me. Historically, in China, all distribution (like politics) is local.

Although the mass of China’s national economy has increased, some regions have grown more quickly than others. Starting in the south in the 80s, it moved to East China — Shanghai, Suzhou, Nanjing, Hangzhou, Ningbo, Wenzhou — in the 90s. And today, some think that the north, particularly Tianjin, is going to be the next growth frontier. For foreign companies wanting to penetrate the China market, they typically have had to contract with different distributors to be successful in different markets (if you are listening to this Podcast and are wondering why your Hong Kong-based distributor is not able to get outside of Guangdong province, there’s your answer — go find other distributors in other areas!).
In part, this is why the Chinese economy can support so many players, because there really isn’t one “national” economy here; rather, there are a series of smaller, regional economies with their bigger and smaller players.

But things are changing…transportation in China is improving drastically, and it is now possible to get products from one part of China to the other relatively quickly. Business people, too, are widening their spheres of influence and are beginning to make cross-regional guanxi work for them. They are partnering with others and, in effect, consolidating distribution. Distribution is still very fragmented, compared to the U.S. but we are starting to see some changes. The automotive sector is seeing some consolidation as dealers are starting to gather under nation wide dealer groups. The smaller dealers — those not able to perform a wide range of services — are closing their doors as they are unable to survive just selling new cars.

Think of your own industry sector and the China distribution map (and if you don’t know it, go find out!). Are there distributors moving from one region to the next? Have any of the smaller distributors died out or gotten snapped up by larger ones? Are you seeing the establishment of distribution centers to be able to stock regionally for faster customer service? If so, you are seeing signs of “pre-consolidation.”

The third sign that we are in a pre-consolidation stage in China is that the expectations of customers are slowly beginning to rise. I mentioned before that, often, “good enough” has been good enough here. Starting with consumers in China, they are the first generation of Chinese with enough disposable income and enough choices to make consuming interesting. But they have not been, on the whole, as picky as their counterparts in the more developed West and a lot of junk still sells. But this is changing…there are now MANY choices in markets here and consumers are getting good at making choices. Many are looking beyond “good enough” and are differentiating good-better-best.

Manufacturers, too, are considering product quality a must-have and not just a nice-to-have. They are more concerned with the quality of the components and raw materials that go into their products and are demanding quality. As they push on their suppliers, some of them will rise to the challenge and will improve, thus differentiating themselves from the hundreds of others. Some will, inevitably, fall off.

We see this beginning to happen, particularly, in the medical sectors in China. There has always been, certainly, an acceptable level of quality — when you are messing around with people’s lives, you pay attention to quality. However, “good enough” is no longer good enough for many mid- and upper-tier hospitals and their patients, and the medical device manufacturers selling to them are improving and streamlining their supply chains to make sure they are getting better quality products at competitive prices.

Finally, rising costs are a sign indicating that we are in a pre-consolidation stage in China. Historically, China has been THE (or one of THE) lowest cost markets in the world. However, just in the past year and a half we have seen a sharp rise in a number of costs. Labor rates have risen about 12% in the last year, on average, and have included a more restrictive employment law that adds costs for employers. Tax rebates for exporters have gone down, which means that the lower margin exporters are getting squeezed even more. The increase in raw material costs — particularly steel — has had a global impact and China has not been immune as costs have risen dramatically. Rising oil costs have hit the logistics sector particularly hard and so now the total landed cost of many goods exported from China is becoming less competitive with locally-made products.

In a developing market where costs are low and price is King, nearly anyone can compete. Provided the capital costs are controllable, the barriers to entry in many industries have been quite low, so tons of companies have rushed in. But as input costs rise, the winners are those that are able to maintain (or even increase) their sales price to balance costs, maintaining or increasing margins. Those who can’t either learn to survive on lower margins — which, for many Chinese companies were already quite low — or go out of business. And we are getting early indications that this is happening. Many low-value manufacturers in southern China have reportedly gone out of business in the last year because of this caustic cocktail of price increases.

So this is what I am calling a “pre-consolidation” stage in China and am defining it by the signs in the market — a situation where there are too many players, going to market through a fragmented-yet-slowly-streamlining distribution chain reaching customers for whom “good enough” is good enough but not for long, all the while navigating the rough waters of rising prices. I don’t think I am going to win a Nobel prize for economics any time soon, but there it is.

Well “so what,” you are asking yourselves, “Interesting observations, Kent, but how does it affect me, the international business person and my dealings with China.” Well I am glad you asked that question … because this Podcast needed a couple more minutes to be long enough!

Seriously, I think this “pre-consolidation” stages has HUGE potential to impact foreign business. And the advantage is that, if I am right and this is still in the “pre” stages, planning our strategy now helps to insure that we are ready when it really DOES happen. Overall I see a couple of things that all foreign businesses should be thinking about to take advantage of “pre-consolidation” in China…

First, understand that the needs of your customers are changing. If you have been selling into China for awhile, don’t rely on your past knowledge of what your customers want. Ask them again. We have done an inordinately large number of “Voice of Customer” programs this year simply for this reason — our clients want to find out what customers are thinking now, not what they thought 5 years ago when “good enough” was good enough. What kind of “better” product are they looking for? How do they define “better”? What does “best” mean to them — what features and functions define “best”? What price premiums are they willing to pay for “better” and “best”? Unless you know the answers to these questions, the consolidating market is going to pass you by and you won’t know what hit you (or even why).

Secondly, competition is going to become more intense. In order to survive — yet alone thrive — competition is going to start going beyond their normal bounds, expanding into new territories with new distribution, coming out with new products, new pricing. You are likely going to start seeing new competitors in some of your regional markets — they are not new in an absolute sense in that they have been around for awhile, are strong in other regional markets and are expanding their spheres of influence. You might start seeing several of your competitors band together in order to attack a market segment or customer grouping. If you have not been gathering intelligence on your competitors to this point, now is a good time to start. Find out what they are doing now and what they are planning on doing in the coming 18-24 months.

Finally, the “pre-consolidation” stage in China could represent an opportunity for you to grow exponentially, through acquisition. This is how the big companies in the West got big — they didn’t so much grow their markets as they ate their competition! We have done several growth strategy projects recently where growth-by-acquisition was a viable strategy and we found some attractive targets where acquisition was possible. However, rather than finding just the ONE good target, in several cases, we found a couple of smaller targets where we could see a step-by-step move to acquire them in quick succession. Are there risks to this? Sure…big ones. Is it easy? Heck no…smaller deals are just as much of a pain as big ones. But the goal here is not just to get into the market, the goal is to be a catalyst to consolidate the market…to own some major real estate in the market and to establish ourselves as the no-B.S. market leader. We planned the acquisition path to work, even if we could not eventually get them all…but our ultimate goal is to do so.

Now, I realize that there are going to be a LOT of people who will have a LOT of arguments as to why we are not in a pre-consolidation stage or why consolidation won’t happen or that it will happen in such-and-such a way. Most people — most sane people — would say that, in any case, the risks are just too high to lead consolidation. The chances of failure are VERY high; it is too risky to rely on consistent market trajectories in China; and besides, the global capital market are in such a mess now that consolidation is going to take its time, if it even ever happens.

And to those people, I would say, “You may be right.” Certainly, the history of market development in the West has many examples of companies that were trampled under the wheels of changing market sectors. But there were always those that were not quite sane — the Fords, the Welch’s, the Gates’s — that thought differently. They were sitting in an era of “pre-consolidation” and thought, “you know, maybe if I did something different…” and look what happened.

So I would quote the philosopher Billy Joel and say, in this era of pre-consolidation in China, “You may be right. I may be crazy. But it just may be a lunatic you’re looking for!”

Why China Matters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Great Wall of China” courtesy of SmokingPermitted on Flickr

The concept of global supply chain nodes becomes important when setting up plants in this new workshop of the world. Blue jeans companies, for example, might choose to produce denim in China but manufacture the apparel elsewhere.

Retailers also can form partnerships with local manufacturers to gain an edge in China. Haier, one of China’s largest appliance manufacturers, introduced its products to the United States through Wal-Mart. Today, Wal-Mart imports account for more than 1 percent of China’s gross domestic product.

Despite the potential cost savings, manufacturers must pay close attention to supply chain control if they want to thrive in China. This means manufacturers must buy from reliable vendors and monitor processes closely.

In her previous column, Teagarden wrote about China as a market base. Next month, she’ll discuss China as a research base. You can follow her “China Insider” series of columns here.

Technomic Asia’s Steve Ganster earned his MBA from Thunderbird and has participated in various China seminars at the school over the years.

On Sept. 24, Steve was in Wolfsburg, Germany, giving a talk at the Informationstechnologie für die Autoindustrie (Information Technology for the Auto Industry) conference. Steve’s presentation was about “Supply Chain Management in China’s Automotive Market.” Just prior to that conference, Technomic Asia’s released the most recent edition of its China automotive aftermarket research report.

The very next day, Sept. 25, Steve was in Munich, Germany, discussing “Sourcing in China: Trends and Best Practices” at the ROI Annual Best Practices Event. Then, back in the United States, Steve headed to Denver yesterday to give a talk on “Building Supply Chain Partnerships in China” Council of Supply Chain Management Professionals’ Global Conference 2008.

If you’re interested in more information on any of these subjects, or perhaps having Steve speak at an upcoming event, please let us know.

The article explains that ” ‘relationship’ rules in ’supplier relationship management’ with Asian sources.” From the article:

“Moving too quickly on sourcing decisions in low-cost countries may prove to be a short-term tactic,” notes Steven Ganster, managing director of Technomic Asia and author of The China Ready Company. “Businesses need a long-term strategy that focuses on relationships for effective sourcing in Asia, and the most successful sourcing companies have placed a premium on developing relationships with their suppliers. These relationships are the backbone of SRM,” he says.

Tompkins conducted a survey of companies that averaged nearly 10 years of experience in sourcing in China and more than 6 years of sourcing in all other Asian countries to gain further insights into trends and current practices in international sourcing and supplier relationship management.

Read more here.

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Download audio file (20080922_buying_nothingness.mp3)

The following is a complete transcript of today’s podcast:

For those of you familiar with the recent history of Shanghai, you will remember the Xiangyang market. Plunked right in the middle of downtown Shanghai, it was both a beacon to tourists and a bane to local authorities - for it was the biggest, wildest, most uncontrolled fake-goods market in the city (if not the country). The tension among the local authorities was palpable because, although it was a big draw for many foreigners, it was also a sign that China’s control over knock-off products was not as good as they were touting.

The authorities have since shut down the market claiming, rightly so, that the land was too valuable and needed to be developed (I think they are putting in another hotel-shopping-residential-commercial complex that will look just like the other 20 million similar complexes in China, thereby eliminating any character and class from a city that used to have buckets full of both).

Anyhow, this podcast is not a screed of the cynical China expat - or, at least, it is not intended to be. It is actually the story of grace and kindness in the midst of hardcore commerce. This is the story of the day I went to Xiangyang Market to buy nothing. I had something to buy but that something was, really, nothing. Lest this quickly digress into a podcast on Retail Zen - “Grasshopper, first you must know the sound of one hand shopping” - let me try and explain.

I had recently purchased a new belt at Xiangyang. When I got home I found that I needed a couple of extra holes to make it smaller. Now, if I were back in the States, I would go to the garage, find a hammer and nail and just make my own hole. But in China, I possess neither hammer, nor nail, nor garage so I had to find someone to help. And this is where the nothingness comes in: I needed to buy a hole.

I figured that since I had purchased the belt at Xiangyang, I would return to the scene of the crime in search of the belt puncture-upgrade. I reached the market gate and steeled myself for the phalanxes of commerce vultures screaming the glories of their wares (all of whom, oddly, mistook me for Dick Van Dyke, repeatedly greeting me with a hearty “Hello, DVD!”).

But first, a confession: I really am a cynical person. The reason matters not, for I am not alone: the expat community in China is rife with cynics. And our Cynicism Radars are particularly active at Xiangyang-type markets where the stall owners are out to make a quick RMB off our supposed ignorance.

However, my radar did not seem to be functioning that day and I found myself explaining my situation to one of the DVD touts at the gate. He smiled and, with a glint in his eye, said “Follow me.”

We wove our way through the stalls of “genuine fake” goods, ending up at a shoe repair place at the back of the market. My new Best Friend proudly introduced me to the proprietor and I explained what I wanted. Shoe Repair Guy looked at the belt and shook his head; no, he didn’t have a leather punch big enough for that purpose and recommended that we try another place a few stalls down - where we found that they, too, did not have the right tool but directed us to yet another stall down the way. This charade lasted half an hour, with each stall owner shaking his head in empathy - “can’t help, so sorry.”

After awhile, my radar warmed up and I began to wonder if my Best Friend was taking me for a ride, a ride that would end at his stall where I could not get a hole made but where I was sure to find an excellent selection of other belts (in addition to an oh-so-lovely purse, should I wish to accessorize further).

Just as I was about to give up, we stopped by a stall that was tucked among the meat vendors (where, I am pretty sure, you can find all the components to assemble your own pig, should you care to).

I explained to a cobbler, for the umpteenth time, my dilemma. She took a look at my belt (which, by that time, I had removed from my person to relieve myself of the embarrassment of beginning a striptease at each stall), hauled out a punch and whacked two proper-sized holes in it. She handed it back and said, “That will be 5 kuai.” Stunned, I fished around in my pocket for change and handed it to her.

I looked over at Best Friend, Radar in “full alert” mode, expecting him to try to sell me something else, but he just looked at me and asked “Is it OK now?” I was shocked. Did he really want nothing from me? Was he really just trying to be helpful? Is the world really flat? Is up, down; is black, white; and are Shanghai pedestrians now crossing only at intersections?

But it was true: He really was being helpful. He saw someone in need and decided to take 45 minutes out of his day to help me out. Amazing. I thanked him profusely and asked for his card, promising to stop by his stall with my rich laowai friends.

So beware, dear listener of foreign origin: If ever we meet in person, I am going to insist you visit my Best Friend who, while no longer at Xiangyang market, has moved to a different one and was kind enough to inform me of the fact. After all, we are guests in China and we owe our hosts a debt. Our cynicism must be compensated for with kindness, and I don’t plan to foot the bill on my own.

Photo courtesy of Marc van der Chijs on Flickr

More from the event description:

Rising oil and commodity prices. Changes in tax regulations. Inflated Chinese currency. With these recent changes in the Chinese landscape, just being in the game is no longer enough. To be successful, retail and consumer products companies need to take a strategic and financial approach to supplier relationship management and the operating environment.

Steve also will speak at the Council of Supply Chain Management Professionals 2008 Global Conference, also in October. Stay tuned for more information on that event.

China’s auto aftermarket moves into high gear

SHANGHAI — Sept. 9, 2008 — Parts and service in China’s light passenger vehicle market reached an estimated US$27 billion in 2007, driven by strong expansion and continued aging of the vehicle parc, according to new research conducted by Technomic Asia, an international market consultancy specializing in China strategies for U.S. companies.

The report, titled “A Strategic Assessment of China’s Light Passenger Vehicle Aftermarket, Fourth Edition,” stems from Technomic Asia’s ongoing primary research into the Chinese auto marketplace and its key players. Other major findings indicate that the light passenger vehicle car parc has expanded to more than 32 million units, with middle-aged vehicles (4-9 years old) reaching a 41 percent share. More information is available at http://www.technomicasia.com/auto.

“The aging and expanding parc, coupled with private ownership of vehicles at almost 70 percent today, supports strong growth in the parts and service market,” said Steve Ganster, managing director of Technomic Asia and primary author of the report.

“The market is fragmenting as more vehicles from recent market entrants, notably the Japanese, hit the road,” Ganster said. “Both local and international parts and service companies are aggressively developing their infrastructures to penetrate this dynamic market. Though many challenges exist, the outlook for growth remains robust, with the market expected to expand at 19 percent per year through 2012.”

This unique China auto report offers valuable statistics, insights and analyses to assist management to successfully address this important market, including:

• Perspective on China’s automotive market, including a long-term growth outlook for China’s light vehicle market in terms of types of vehicles, key OEMs, growth drivers and constraints, etc.
• Overview of the automotive aftermarket in terms of parts and service, covering size, segmentation, parts types, key players and trends
• An assessment of China’s automotive parc in terms of size, vehicle composition, age, technology base and future growth
• A description of the maintenance and light repair service market, covering outlets, services provided, value, etc., and current and forecasted 2012 value by vehicle and service type
• A description of the collision repair market, covering the insurance market, accidents rates, service providers, service value, etc., as well as current and forecasted 2012 value by vehicle type
• A description of other major and minor spot repairs in terms of value, repair type, segmentation by age of vehicle and vehicle type, growth vector and key trends
• Collision repair market, covering the insurance market, accidents rates, service providers, service value, etc., as well as current and forecasted 2012 value by vehicle type
• A detailed evaluation of the parts supply chain, with descriptions of structure, key players, pricing characteristics and future dynamics
• Perspective on key opportunities and challenges facing players in China’s automotive aftermarket

For more information on the report, or to purchase a copy, please visit www.technomicasia.com/auto or call our offices at +1-919-855-5437 (U.S.) or +86-21-6473-2588 (China).

The in-depth conference is subtitled “Emerging Trends and Best Next Practices.” It’s designed to help senior supply chain executives gain insights into hot topics, including reverse logistics and global supply chain capacity constraints, and understand how your current performance and operating practices compare to similar enterprises.

Technomic Asia’s Steve Ganster is one of the many presenters at the conference. He’s presenting “Global Sourcing Practices” of “top quartile companies,” helping attendees understand how their operations compare with those of industry leading companies.

For more information, visit the Supply Chain Leadership Forum site.

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The following is a full transcript of today’s podcast:

KENT KEDL: Newsflash. The U.S. economy stinks. Now I know I do not have the academic credentials to make an educated pronouncement about this – then again, a Master’s degree in Chinese philosophy qualifies me for very little – however, I think it is safe to say it is true. The Republicans thinks it is too many taxes, the Democrats think it is too much outsourcing, and Phil Graham thinks its all in our heads. No matter the cause, the fact remains that the U.S. economy is deep in the doldrums and there does not seem to be much hope that it will get out any time soon.

This was really brought home to me when I was back in the U.S. a few weeks ago for an all-too-brief summer holiday. I try to get back to the U.S. several times a year to visit family and clients, and it is always an education. No matter how informed I try to be here about what is going on back home, simply reading news stories does not give one the full picture, particularly the current status of emotions in the U.S. business community.

So it is from these conversations with U.S. clients and friends that I reached this conclusion: the U.S. economy stinks. More to the point, the many people I talked to seemed to question whether or not the U.S. economy was worth investing in as a stand-alone investment. There was not a lot of faith that we would be getting back to the hey-days of the U.S. economy where growth was easy, foreign competition was very low and return on investment nearly guaranteed.

Notice I qualified that last statement by saying that I heard people questioning the U.S. as a stand-alone investment. This is a key point – certainly, U.S. businesses are not giving up on their domestic markets completely; however, they are considering how their domestic and international strategies can work together. And this is where I heard some rumblings of optimism among U.S. businesses, that there were some investment opportunities outside of their domestic markets which, if successful, could help grow their domestic business.

One of the key investments we see companies making overseas is some form of equity alliance with a foreign company – be it joint-venture, acquisition, merger, etc. Here in China, over the past year, we have seen our M&A practice jump to a new level as Western firms interested in the China growth opportunities are looking for good companies to align with.

But when times are tough in domestic markets, this puts even more pressure on a foreign alliance to work the first time – there is no margin for error when sales are down and capital markets are tight. Over the past few years of these podcasts, we have addressed the subject of China alliances from various angles. Today, I’d like to update that perspective and talk a little about what makes China a unique environment for alliances. This is not meant to be an exhaustive list; rather, I want to point out what makes China alliances unique and identify potential potholes in the road ahead.

One of the biggest challenges to doing good alliance deals in China (or anywhere, for that matter) is finding good alliance targets. In other podcasts, I have talked about the all-too-common mistake we see foreign companies make here by being too opportunistic in selecting their alliance partners. A common pitfall is finding a partner at a trade show – what I have called the “industrial single’s bar” – and, after a few drinks and an exchange of product literature, both sides are ready to do a deal. I won’t harp on the fact, again, that it is CRUCIAL for you to “date around”, to assess multiple alliance opportunities and benchmark them against each other and against the strategy you have in mind for China.

But when you find these companies, they will, generally, share some similarities. Assuming they are a private company (and not State-owned, a whole ‘nuther can of worms here!), it is almost guaranteed that they will be a “first generation” owner, meaning that the founder of the company is likely to be the owner or at least one of the owners. In more developed and older economies such as the U.S. and Europe, good targets can be found among second- or third-generation owners. The kids or grandkids of the founder have run the business for awhile, have made some money but have lost the original emotional attachment to the business and, in many cases, are looking for an exit strategy.

Not so in China where modern business is still measured in years, not decades (or even centuries). Private businesses were allowed here starting in the late 80s and did not start becoming popular until the mid 90s, so we are still very much in our first generation of founder/owners. These are people who have put their very lives into their businesses, risking a LOT to do so. Many of them could have settled for a well-connected job in a State-owned company but they didn’t. Many of them gutted it out and became successful as a result.
So, psychologically speaking, these owners are in a unique place when someone approaches them about a possible alliance. In the first place, they are not actively looking to sell their companies nor are they even interested in capital investment. If they are good (and typically we are only targeting the good ones), then they are fully confident in their ability to continue to grow their company and be successful, without having to give anything away or ask for anything.

I have told this story before, so forgive me if you’ve heard it, but its like my oldest daughter (now 15) when she went to her first day of preschool here in Shanghai when she was 4 years old. A very confident and outgoing child, she walked in the front door of the school, put down her book bag and called out, “OK, I’m here … you can all play with me now!!” In the same way – and unfortunately – many foreign companies think that, because they are foreign, everyone here is just DYING to work with them. They can just show up and everyone will come running.

Owners of Chinese private companies want to know what the foreign partner brings to the table. Before starting a program, we work with our clients to define, very specifically, just what they could bring to the Chinese partner. Chinese companies are often looking for access to foreign markets (particularly big-name customers) and access to brand or technology. Many of these companies know that, to be a legitimate global player, they cannot copy technology or rip off trademarks. This – oftentimes more than money – is what the foreign partner can bring to the Chinese side and make a potential alliance very attractive to both.

A desire of many Chinese companies is also to go international and this can be a key motivation for them to do a deal with a foreign company. If the foreign company has access to good channels and customers then, often, they can work with the Chinese company to expand their product portfolio by either providing a broader range of products or more price, quality and brand tiers. However, before you go offering this to a Chinese company, you must think VERY carefully about how that will impact your current business and how to avoid diluting revenues and margins with additional – often lower cost – products.

Another characteristic of first-generation owners is that their objectivity in valuations can be a bit skewed. If you have just invested your heart, soul and savings account into a business and have succeeded, you are not going to be satisfied with more “objective” calculations such as multiples of earnings or discounted cash flows. The cold, objective, CPA-driven valuations that many Western companies take can really be a turn-off to a Chinese company. When we approach the topic of valuations with a Chinese alliance target, we do it very carefully and slowly, helping them see just how the foreign company is looking at the deal as well as the final numbers.

Very often, I will represent the foreigner’s perspective and will say to the Chinese partner “You know, we foreigners have our own way of looking at things and the board of directors for Company X is no different. This is how they will be doing their valuations…” and I launch into a description of the criteria and methods our client will use. But then I continue, “However, we all know that there are many more issues that need to be taken into account when evaluating your company and we want to make sure we are able to capture all of them.” Then we start to have the conversation about the assets – tangible and intangible – that the Chinese partner brings to the deal and start drilling down into the details of just how valuable they really are.

For example, we just went through this with a Chinese company that a client of ours is considering doing an alliance deal with. The Chinese company, though small, has captured some very big customers, in particular the largest Chinese company in this industry, a Big Name. The Chinese target is, rightfully, proud that they are a supplier to this Big Name and they point to this as being a reason that they are such a valuable partner. However, when we started digging down into the actual metrics of this relationship, the picture changed – we discovered that the business the target was doing with the Big Name was barely break even and, in fact, had prevented them from serving other, potentially more profitable, companies in a similar space.

After some time – and it did take some time – the owner of the target company started to see that maybe this Big Name was not such a big deal after all. In fact, this started a very good discussion about how, with our client’s participation, they could both go after even bigger names and could demand the kind of premium that would result in a sustainable, profitable business. And, in addition, we were able to get to a much more reasonable and agreeable approach to valuation.

Finally, these first generation owners – while very “modern” by Chinese standards – are still often very traditional in that relationships are of central importance to them. All of them, without exception, cultivated good relationships to get them where they are today. And I am NOT saying that they succeeded only BECAUSE of key connections which, to foreign ears, implies some form of under-the-table dealings. In some cases, this is true, but that is fairly easy to discover in a rigorous course of commercial due diligence. No, successful Chinese companies got that way because they sought out and nurtured relationships all along their value chain – from suppliers, to customers, to regulators and even competitors. They work very hard on getting and maintaining these relationships.

In the same way, they are going to judge the value of a potential partnership on the basis of the type of relationship that they are going to be able to build with you. You might dazzle them with your company’s success and the animated PowerPoint slide show about how you are going to dominate the market might be kind of cool, but they will follow through with an alliance ONLY if they trust you. There is no set path to developing these relationships – suffice it to say that everything you do, every word you say has an impact. If you are truthful and fair in the due diligence and the negotiation process, then chances are you will be able to continue that going forward. If you are cheap and are trying to “win”, then you can just give up now – because even if you “win” the deal, you are going to loose the business eventually.

A very practical way to show the importance of this relationship is to clearly identify the role of the owner going forward. The fear of every business person is to go from owner to employee. And, even though the org chart might say “employee”, no former-owner should be made to feel that way. In China, it is appropriate to just “hang-out” … spending an afternoon having a conversation. I would recommend that the role of the owner be a topic for several of these sessions. You are not going to solve it in one sitting, but if you keep returning to it and talk about it over time, you will show that you are serious about it and you will get to a conclusion that feels right to everyone.

A Chinese friend of mine asked me yesterday what I thought of the U.S. economy and what the chances were of recovery. “I don’t know,” I told him, “I don’t think anyone knows. We are such a new territory here – while the U.S. has certainly seen some down economic times in its history, never before has much of the rest of the world been as strong. This is certainly a threat in that, if they U.S. cannot bounce back or find their feet, then other global economies will come in and fill the vacuum (and one might argue that this has already happened in the manufacturing sector, particularly for commodity goods). However – and I hate to sound like a bad fortune cookie here – with every threat comes and opportunity, and a well-planned alliance in China could be just that opportunity.

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

Tompkins Associates says its podcast series will “educate business executives on the advantages of adopting a global supply chain strategy, and any company that makes, buys, sells, or moves products will want to hear the series.” Here’s more info from the series description:

Your company needs a supply chain operations strategy that is responsive to a global market. The leading experts at Tompkins Associates explore the hot issues associated with global business today, including supplier relationship management, supply chain benchmarking and best practices, the facts versus fiction in globalization, and much more in this podcast series. Tompkins Associates designs and integrates global end-to-end solutions for companies that embrace supply chain excellence. In mp3 format and updated with a new podcast every first and third Tuesday of the month.

The first podcast in the series is called “Stop Debating Globalization: It’s a Reality.” Read the transcript or listen now.

You can check www.tompkinsinc.com/podcast for more or subscribe via the podcast’s RSS feed.

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Dear faithful reader [Kent has sent his monthly "that's Shanghai" magazine columns to a list of several hundred e-mail subscribers, but that came to a halt recently]:

Sorry it has been awhile since you’ve heard from me as we have been distributing my monthly column from “that’s Shanghai” magazine.

But there is a reason for my silence. I am not quite sure how to say this … so I will just say it. I was fired. Well, maybe “fired” is too strong a word. Let’s say I was “given a firm talking to by the authorities and then summarily ignored.” In a Chinese context, that is being fired.

I started writing for “that’s Shanghai” in 2005 when the magazine was just exiting from a nasty battle between the publishers and the former owners. There was a new managing editor — I will call him “Ian” — and he was looking for something to spark up the magazine. Someone sent Ian some of my musings and he called me. Ian is classic Dubliner Irish and has lived a long and hard life here in China — so when he called, I thought it was the Lucky Charms leprechaun channeling Tom Waits.

“I read yer articles, lad,” he said to me. “Not bad. Want a job?” When I told him I already had a job but that I would love to write for him he said, “Whatever … just don’t go over 800 words. What country you say you were from? American? Well, then really don’t go over 800 words!”

Over the ensuing months and years, Ian would prove to be my toughest editor and biggest fan. Every month he would call me: “We got a problem with the censors this month, lad,” he’d say. “They say yer being too sarcastic. I told them ‘of course he’s sarcastic … he’s a fackin’ American! What else could he be?’ I hope you don’t mind.”

No, I did not mind in the least. Ian had one of the toughest jobs known to foreigners here, trying to ride the jagged edge between being interesting enough for people to read and yet politically correct for the State-controlled media. He was immensely successful and remains, to this day, one of my personal heroes.

However, the closer we got to the Olympics, the more pressure Ian was getting to dial back the tone of the magazine, to be more “supportive” of China and less critical. My article, on the back page of the magazine, was a key culprit and Ian caught all sorts of flack for it. The censors — the State-owned entity that controlled the publishing license — were on his case to talk to me. When that did not happen, they insisted that he set up a meeting between them and me. Ian held off as long as he could. “Sorry, lad … but would you mind meeting with these chaps? They’re on my arse about it.”

I said, “no problem” and was actually looking forward to it. It is not everyone that gets hauled in to the Great Principal Publisher’s office. I thought that, at least it would make great content for a new article!

I met with their chief rep, a very nice guy who had actually studied and worked in Australia for a bit. He was oily-smooth, just as I had imagined a publisher would be. “Kent,” he said, “Let me start off by saying that your article is just what we want our magazine to be. It is smart, funny, articulate, to the point. Great writing. Just great. It is the first column everyone around here reads every month. We love it!”

I nodded and smiled … and waited, because I knew it was coming. The Chinese word “dan shi.” Dan shi means “but” or “however” in Chinese and it signals a radical turn is ahead — “I have been telling you all of these nice things, dan shi, I am going to give you the real story. And it ain’t gonna be pretty.”

“Dan shi …” he said. “There is a bit of a problem. You see, you are being very sarcastic in your articles by pointing out the behavior of the Chinese people. That is causing a problem.”

“I see,” I said, “but don’t you also see that, when I point out people’s behavior here, I also point to the even-more-ridiculous behavior of foreigners. My conclusion is usually that all these people are behaving this way and don’t have a problem with it — therefore, it is not them that is wrong, but ME!”

“Yes,” he said, “I see that. But still. You are pointing out behavior and that is not good. As you know, all media in China is approved by the government. And if this is published, it is like the government approving these things. And that is not possible. Kent, let me tell you this: You are becoming too famous in Beijing.”

And it was that last statement that froze me in my tracks. The very last thing anyone wants to do here is to become well known for anything! Chinese phrases are rife with warnings: the tallest tree in the forest gets blown down first; the highest nail gets hit. To be famous here is not good.

So I crumbled. I said yes, he was right. I should dial it back. I should not be so sarcastic. I should be nicer. We continued for some minutes as he emphasized that I was not in trouble at all, but that this was just a friendly conversation. I got up to leave, shook his hand, promised to do better and walked out, my knees still shaking from this “friendly conversation.”

But then and there I knew it was over. One only gets hauled before the court here if one is guilty. Judgment had been brought and sealed by my agreement to attend the meeting. I went home and wrote my new column — trying hard to behave myself, knowing all the time that it would never be published. It was, of course, rejected. Completely. “Too sarcastic,” they said.

So it is time to close this chapter and go look for another one. However, I wanted to at least get this out because, although the style is different and “nicer” than what I usually am, I mean every word of it. Here it is…

Dear Chinese Citizen,

Hi. How are things? Its been awhile since I wrote. Been busy. Living in your country is a full time job. I don’t know how you handle it with such grace.

Anyway, I thought it was time to write and say “thanks” for letting me live here. I know I complain a lot. Sorry for that. I am trying to become a better person but don’t have much to work with in the way of raw materials. My elementary school teachers said the same thing.

You have an amazing country. Honestly, I am into my third decade here and not a day goes by when I don’t sit back and think about something new I saw that day. Try to find that anywhere else. I know the rest of the world is impressed by the big stuff — the Great Wall, tall buildings, new Olympic sports venues — and well they should be. But I am more impressed by the little things I see every day.

For instance, your road construction workers. Do they have no fear? Americans are proud of our astronauts having the Right Stuff…but to face immanent death the way your DMV gauchos do every day? Wow. These men and women live lives of Tao-like calm amidst chaos, like a duck in a shooting gallery. And what do you make those orange vests out of? Must be Kryptonite, the way cars seem to avoid them.

Then there are your inventions. I know you are more famous for your gunpowder, paper and kites (and make full and ostentatious use of them around Spring Festival) but I am more impressed by some of your modern creations. I was in a park the other day and saw a wedding photographer with several groups of newlyweds. He had a wedding dress with a quick-release zipper in the back…strap it on one bride, snap some pics and then move it to the next. Beauty and efficiency, all in one package. Very cool! With the high divorce rate in the U.S. we could benefit from one of those. Here is a business tip: set up your first distributor in Las Vegas.

And how about that horn you have on official vehicles? Who came up with that sound? Ah-oo-ga!! It’s like a nine foot tall goose with adenoidal blockage or a T-Rex with intestinal gas. Clears traffic like a flatulent T-Rex would too. Kudos to your sound engineers for that one.

I know I gripe a lot by how crowded it is here, but it doesn’t seem to faze you. To those of us of Caucasian-European heritage, our body size and sense of personal space are directly proportional and we do not take kindly to being touched, bumped or grazed (our ratio in swimsuits is, on the other hand, indirect – the larger the belly, the smaller the Speedo). A room is crowded in the U.S. when you can reach out and touch your nearest neighbor; in Shanghai, I could have three people living in my back pocket and still feel there is room to expand. The morning subway here looks like a shuttle bus for the Siamese Twin Convention, but no one gets upset. Incredible. In the U.S. there would be three lawsuits per subway car by the end of rush hour.

I am also amazed by what good travelers you are. The quality of a person’s character can be clearly seen in their response to the inevitable delays that plague every plane, train and bus terminal around the world. When a flight is delayed in my home country, the chorus of complaints sounds like extras rehearsing “Mutiny in the Bounty.” But in China, a delay just means there is more time for another bag of sunflower seeds, a longer nap stretched out on your carry-ons or another hand of cards. By the way, thanks to that group in Beijing late last year that included me in their game — remind me again, are face cards high or low?

I have always been impressed with your food history, one of the greatest in the world. However, you are not food snobs — your ability to tackle a gourmet restaurant meal and airplane food with equal relish is astounding. Are your taste buds on a toggle switch?

Finally, I want to thank you for the grace you have shown me, a foreigner, living in your country and butchering your language. In the U.S. we legislate that English — American English — is the “legal” language and criticize anyone who speaks anything else, as if being multilingual is the same as being polygamous. But here, you are very excited every time someone makes a lame attempt at speaking your language, and most of us are pretty lame. A big 谢谢 for that (or, as most foreigners pronounce it, “shay-shay”!)

So thanks for all of this. I promise to tone down the whining and keep my eyes open for all the good stuff.

Sincerely, Kent

P.S. If you could hook me up with one of those T-Rex horns, I’d appreciate it…these morning commutes are killers!

So that’s it. My final column. A column that was never a column. For now, I am going to keep these musings going through the podcast and blog we do for our company — its called (creatively) The China Business Blog and Podcast. The link is at the top of the page and I would encourage you to sign up for it to receive them every week.

Thanks to all who wrote words of encouragement and appreciation for the articles over the year. I love this place and I love sharing it with others. Writing this stuff is the cheapest form of therapy I know. And goodness knows, I need a lot of it.

The articles that most fascinate me are those by journalists who have never been here and are sitting in a sports venue for the most hyped-up event in the lives of modern day Chinese people – and they try to deduce “what the Chinese are like” by watching the participants.

I read one article that was critical of the cheer that everyone uses here – “Zhong Guo Jia You!” and insinuated that this was something mandated by the government authorities to show support for China.  Um … no.  It is not.  Jia You has been around here for ages and is shouted at every sporting event – directly translated it means “add oil” or, better, “step on the gas”.  Basically, it is just a way to say “Let’s Go!!”  I attended a warm up game with the U.S. Olympic basketball team last week and thousands of Chinese fans were screaming Mei Guo Jia You (“Let’s go USA!!”).  Not sure what the same journalist would make of that – probably would tell his editors that a revolution was brewing.  Alert the Neo-Cons!

Anywhere in the world, there is a danger in observing human behavior from afar and deducing complex, internal cultural motivations.  And the Olympics is, in some ways, the WORST place to do this.  Its like the last time the beloved and beleaguered Minnesota Twins baseball team played in the World Series – the stadium was filled with thousands of Minnesotans screaming their lungs out and waving “Homer Hankies”, white pieces of cloth that some marketing genius came up with (the fact that we were waving a symbol of surrender did not occur to many of us until much later).  A simple Jane-Goodall-among-the-apes observation of these event would deduce that Minnesotans are all turbo-charged extroverts hyped up on 3.2 beer and have odd fascination with white cotton.  OK, the 3.2 beer is correct…

But what else can we do?  A view from the outside is often the only way we have of learning about other people and cultures.  And being new to China, frankly, doesn’t make that much difference.  Even though I am “here” and have been for some time, I am not really here (starting to sound like a Bob Dylan lyric??).  I am not Chinese nor do I blend in all that well (six foot five and blue eyes stick out somehow …not sure why).  My view is still one of an outsider – maybe a bit more informed than a newbie journalist but not all that much.

Such knee-jerk observations in the press could be an opportunity for those of us, more enlightened, foreign residents of China to retreat smugly into our China-watcher cocoon and pontificate on the “real” China (some of us might even have the hubris to start Blogs and Podcasts … imagine that!).  It would be easy to do as some of these observations – like the Jia You editorial – are pretty easy to swat out of the air.

However, I think we all need to remind ourselves that, like any culture and country, China resists the iron-clad box of clear definition.  We need to monitor our descriptions of China, avoiding definitive statements that begin “China is…” in preference for more qualified ones: “China seems to be…” and “China is in the process of…”  Wimpy?  Maybe.  Wishy-washy?  Yea, probably.  True?  Definitely.

In these pages and Podcasts, we make a point to tease out the subtleties in China business that impact your investments here.  Guaranteed, we have made a couple of Jia You gaffes in the past and likely will do so in the future.  However, the speed and scale of change here has never been seen, at least in modern times, so we are all working without a net.  All we can do is observe, comment and learn.

China-Watchers Jia You!!

Blanchard’s piece reinforces part of what our own Kent Kedl had to say in his recent podcast about the “new normal” in China: China isn’t simply the cheapest place to find manufacturing labor, but (to paraphrase) it is still one of the best places to establish manufacturing operations.

As a sidebar to Blanchard’s cover story, Technomic Asia’s founder Steven Ganster writes about how Western companies can “China-fy” their manufacturing operations. From the article:

Achieving the right level of China-fication in facility set up, process and equipment is the key to success here. China-fication is transplanting to China what you do well in manufacturing in the West, while exploiting the unique competitive aspects of the Chinese market. China-fication also means you have to do things differently than you do in your home market while not meaningfully compromising the integrity of the end result.

Ganster goes on to remind manufacturers of Technomic Asia’s favorite refrain, to remember the “6 Ds”: due diligence, due diligence, due diligence.

Read the full article on IW’s Web site.

But I like this public viewing thing. I watched the opening ceremonies from two different locations, first at a local bar near my home here in Shanghai and then moving on to Malone’s, more of an expat hang-out (which, actually, was loaded with more locals than expats that night). I won’t comment on the opening ceremonies – needless to say they were very cool and had more how-the-heck-did-they-do-that moments than a David Copperfield special.

I spent as much time watching the crowd watch TV as I spent watching TV, and I was enthralled! The faces looking up at the big screen TVs, imagines reflecting off eyeglasses, was amazing. For every amazing moment, local Chinese were not only thinking “isn’t that incredible” … they were also thinking “aren’t we incredible?” When the Chinese national anthem came on, everyone in the bar stood up and sang at the top of their lungs.

As an American, I am conditioned to be wary of mass demonstrations of loyalty and unquestioned fealty for a government – I would say that, on the whole, Americans are proud of our system of government, but we are not necessarily proud of the people or parties that make up that system. We reserve the right to throw the bums out (even if we cannot get a quorum of citizens who care enough to get off their chip-eating, X-Box-playing tushies long enough to actually go into the voting booths).

During the singing of the Chinese national anthem at the opening ceremonies, many people had tears in their eyes, as if they had just won a gold medal after many long years of training. Well, in a sense, they have. Even if much of post-Liberation history has been erased from the books here, the shame of the Opium wars and Japanese colonial occupation is learned by wrote. So, to see 80 world leaders gathered with 91,000 others in a stadium to be watched by – probably – nearly a billion more on television, all to recount 5,000 years of Chinese history and contribution to world culture and commerce … well, that should be emotional.

So I say, let China have its moment. Are there still problems? Of course there are. But I believe that the way out of these problems is through the pride and (yes) abject nationalism of the Chinese people themselves. Pride in building a nation into the fourth largest economy in the world over the past 20 years is child’s play compared to the challenges of building one that represents justice for every one of its citizens. Given that, over the past 200 years, we Americans have not been able to do this ourselves – and, in fact, have slipped drastically backwards in recent years – should give us all pause.

But give it time and the Chinese people will stop comparing themselves to where they have come from and will start measuring themselves against where they could be. Then – and only then – will change happen in China.

Twenty years ago when I was teaching in a Teacher’s Institute in rural China, where the average wage was barely $40 a year, I never thought I would see this day. So I am going to gather with my friends and neighbors at the local pub and will lend my voice to the shouts of “Zhong Guo Jia You!!” (”Go China!!”). I, too, get misty when I see a Chinese gold medal winner on the stands and hear their national anthem. I am not Chinese and I will never claim to know what it is like to be Chinese, but I am honored to be here among them as they are discovering just what that is.

Full transcript of today’s podcast:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As companies are learning that what works at home won’t necessarily work abroad in the Chinese marketplace, they’re finding new ways to cater specifically to the needs and desires of Chinese people — rather than shoe-horning American products into a distinctly non-American set of tastes.

Watch the full segment, about 6 minutes long, here.

With his new documentary for the Discovery Channel, “The People’s Republic of Capitalism,” Ted Koppel shines a light on issues that aren’t much of a revelation for seasoned China watchers. From the producers’ description of the show:

“The American and Chinese economies are irreversibly intertwined. The common complaint that the Chinese are taking jobs away from American workers is in many cases true. China’s cheap and abundant labor attracts manufacturing from all over the world. Still, American economists estimate that the U.S. is as much as $70 billion richer each year because of its relationship with China — something must be going right.”

A number of U.S. companies are enjoying huge success in China. General Motors is the market leader in China and is reaping attractive profits, a stark contrast to its U.S. market position. Profits from their China businesses are having a significant influence on the global financial health of many U.S. companies. In fact, recent research indicates that companies pursuing a dual strategy of participating in China’s local market and exporting from China are achieving substantially higher profits than those firms only doing one form of China business.

The economies of China and the U.S. are, as Koppel reminds us, inextricably intertwined with benefits for both sides. As Koppel’s documentary shows, globalization isn’t the boogeyman some make it out to be. There’s certainly a positive give-and-take between China, the U.S. and, of course, other countries around the world. Those companies proactively exploiting these relationships are going to be the winners going forward.

The article, written by Jim Tompkins of Tompkins Associates, Technomic Asia’s parent company, emphasizes the importance of relationship building for effective Supplier Relationship Management. A quick excerpt:

China has become North America’s preferred overseas destination for low-cost sourcing. It seems like the perfect strategy, right? The North American company gets what it needs at lower costs, and the Chinese manufacturer/distributor gets the business it needs. Everyone is happy.

But there are clear signs in the business world that the honeymoon is over. This is because the most significant part of Supplier Relationship Management (SRM)–the actual Relationship–has either not been fully developed or has been insufficiently nourished in order to thrive.

Read the full article here.

Today’s podcast is another light-hearted one, based on a humorous society-and-culture column Kent Kedl wrote for “that’s Shanghai” magazine, an English-language publication in China.

This podcast features Kent expounding on patience (or a lack thereof) in China. A wise man once told Kent, in his early days in China, “If you want to understand China, you must know what it means to be patient.” But that doesn’t mean everyone in China embraces the idea that “patience is a virtue.”

From the article:

Although foreign companies have had a presence in China since the mid-1980s, China’s reputation as a risky place to do business has not abated. Rather, in some ways, it has increased over time from the regulatory changes in the 1990s through today’s concerns over the quality and safety of Chinese-made products.

Certainly, there are legal and financial tactics that companies use to manage risks in China, and companies should take every precaution to insure that they are on solid ground. There are some broader risk management imperatives, however, that companies should also consider as they establish their China strategies.

Read the full article.

From the article’s introduction:

China’s burgeoning automotive market is having a significant and strategic effect on companies’ supply chains. Western parts and material suppliers have little choice but to respond proactively to China’s exploding automotive market or risk not only missing new demand opportunities in China but also opening the door for both international and Chinese companies to come after them in the West.

[...]

In the past few years, first-tier parts makers have turned to their supply base, passing on the pressure to localize to second- and third-tier suppliers. This cycle creates both opportunities and threats at all levels of the supply chain. As a result, many small- to mid-sized firms (SMEs) are now challenged to respond — or else.

Read the full article here.

Based on a humorous society and culture column Kent Kedl wrote for “that’s Shanghai” magazine, this podcast features a little rant about what Kent sees as excessive multitasking. Let’s just say, you shouldn’t hear a toilet flush on the other end of the business phone call you’re on.

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

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

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

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

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

A quick excerpt:

U.S. companies planning to build their success on domestic markets alone will be gone in five years. That’s Jim Tompkins’ opinion, anyway. As president & CEO of Tompkins Associates, he sees an opportunity for U.S. companies to take advantage of the changing demographics among China’s 1.3 billion people.

The article also includes this quote from Steve:

“In 20 years [China's] economy will be as big as the U.S. Automotive will be as big or bigger in less time than that. Warehousing and land costs are going up, as are labor costs, and it will push them to more automation,” [Ganster said.]

Read the full article on MMH.com.

From the Time article:

Since Hong Kong’s return to China from Britain in 1997, entry to the mainland has become even easier and faster—visas are processed with great speed and little hassle, making entry points into Shenzhen, the booming megalopolis adjacent to Hong Kong, among the busiest in the world. But all this has been upset in recent weeks: the Chinese government has mysteriously stopped issuing multiple-entry visas—an essential tool for Hong Kong’s doing business with China—in a move that has sparked confusion and frustration.

[...]

Most China analysts, though, expect these difficulties to disappear after the Olympics. “They’re having a few jitters, but China isn’t going to cut off its nose to spite its face,” says Kent Kedl, a consultant at Technomic Asia, a Shanghai-based market strategy firm. Plans are already afoot to give Hong Kong permanent residents of any nationality visa-free access to the mainland within the next few years, the kind of privilege that millions of Asians who work in the West can only dream about. “Getting my Chinese staff to the U.S. is an absolute nightmare,” says Kedl. “Let’s have a bit of perspective.”

Read the full story on Time’s Web site.

In my previous podcast, I talked about how you can’t succeed by simply being in China — you have to BE GOOD. In today’s follow-up, we share some examples of companies and strategies that ARE GOOD.

In the past podcast, I referenced the famous quote from Woody Allen — “90 percent of life is just showing up” — and posited that this was not the case in China any more. Just showing up is being opportunistic, getting lucky (to a certain extent) and being at the right place at the right time.

While this still can happen in China, it is more likely that the winners here will be those that are not willing to just be here, but are pursuing being GOOD here, thinking and executing strategically. I would encourage you, again, to get your international teams in a room and challenge yourself to assess whether you are being opportunistic or strategic. If you are the former, pat yourselves on the back and thank your lucky stars that, just by showing up, you are still standing and are doing OK. Then roll up your sleeves and get to work on becoming good!

IndustryWeek’s Adrienne Selko reported on the China presentation here. From the IW article:

Companies should develop operations in China that export back to the U.S. as well as sell to customers within China, says Tompkins. “Integrate sourcing from China with product sales in China and make Asia part of your overall global supply chain and customer base,” he adds. This dual strategy also recognizes the growing middle class in China, currently estimated at 100 million. Opportunities for sales and distribution will expand as the middle class continues to grow.

Western companies require “competitive intelligence” in their Asian business strategies in order to be successful, however. “It is a mistake to assume that what works in the U.S. States or Europe will work in China,” says Ganster.

Read the full article here.

Jim Tompkins, CEO of Tompkins Associates, and Steve Ganster, Senior VP with Technomic Asia (a division of Tompkins Associates), addressed China’s changing business climate this morning at the 2008 North American Material Handling Show in Cleveland.

“The smartest move that material handling and related companies can make is to adopt a dual strategy,” says Tompkins. “Now, it is all about ‘globalization’ instead of ‘China-fication.’” Tompkins advises companies to develop operations in China that export back to the United States as well as sell to customers within China. “Integrate sourcing from China with product sales in China and make Asia part of your overall global supply chain and customer base,” he adds.

This dual strategy also recognizes the growing middle class in China, currently estimated at 100 million. Opportunities for sales and distribution will expand as the middle class continues to grow.

Western companies require “competitive intelligence” in their Asian business strategies in order to be successful, however. “It is a mistake to assume that what works in the United States or Europe will work in China,” says Ganster. “People, thought processes, how technology is viewed, and even the different terrain must be considered when establishing China as part of the global supply chain.”

Ganster also points out that China’s material handling industry has grown aggressively due to continued construction and industrial expansion. “Material handling equipment sales have increased 25-30 percent a year over the last four years,” he notes. “And the opening of China’s logistics market will provide a huge opportunity for suppliers to the warehouse industry.”

On the other hand, the country’s level of technology (including WMS) is still in the embryonic stage, with only about 5 percent of warehouses in China reporting that they have sufficient IT systems. “Many Chinese companies are writing their own WMS programs that are not built to international standards, and this will only add to their difficulties in globalizing,” Ganster says.

It is predicted that China will move from manual labor to automation at a much greater rate in the next five years. Manufacturers there are seeking new ways to increase productivity while cutting costs, which opens up a sure-fire niche for companies in the material handling industry.

Building a dual strategy and understanding how to compete intelligently will provide an edge for logistics, material handling, and systems integration companies to conquer the changing tides in China.

Earlier this month, the American Chamber of Commerce in Shanghai released the findings of a study conducted among 66 of the chamber’s member companies, assessing their global competitiveness and ways in which they might become more competitive.

Remember when Woody Allen said, “Ninety percent of life is just showing up”? The considering the size, fragmentation and competitiveness in the Chinese marketplace these days, just being there is not enough. Kent sums it up: “You can’t just be here. You have to be good.”

Three key take-aways from the study:

-China is losing it’s competitiveness
-Successful companies are adopting a dual strategy in China (listen for explanation)
-Companies should push China strategies to go deeper into China

Kent addresses the first two take-aways in today’s podcast. In the next episode, we’ll dive deeper into this third point.

In the meantime, if you have any questions or are looking for more insight into this report and its significance, e-mail Kent.

Steve’s session is titled “M&A Opportunities and Challenges in China,” and he’ll address:

• Recent developments in M&A in China
• Review of the process and its differences from the West
• Finding good prospects
• Pitfalls in due diligence
• Key principles of success

The conference site has more info about the conference topics.