Silk Road International Blog

Like most other authors in the past 5 years, Donald N. Sull is pretty high on China and its coming ascendancy to world super-power status. Sull’s Made in China details many of the same company profiles (Lenovo, Sina, Haier, Wahaha, Galanz) that others use to talk about the rise of China.

Sull’s difference is that he holds up the Chinese companies as success stories “despite” their humble Chinese origins and then compares them with the failures of larger foreign companies is a similar environment. A pessimist could read this book as a litany of of foreign companies’ inability to really “get it right” in China.

But I’m not a pessimist–I like what this book has to offer.

I think that Sull has filled his praise for Chinese entrepreneurs with a ton of practical advice—and that’s what makes this book so valuable. Rather than just rehash mind boggling stats Sull includes a detailed and useful review of successes and missteps by both domestic and international companies in China.

This book makes stories and stats from China USABLE!

Some of the concepts that work for anyone coming to China include:

1. Fog of the Future: understand, truly understand that China is unpredictable and is constantly changing. What is true today probably will not be tomorrow. This means a complete mindset change. You have to be constantly looking out into the uncertain future and at the same time taking active advantage of today’s opportunities. Change is the only constant here. Learn to embrace it or it will crush you.

2. SAPE Cycle: Sense, Anticipate, Prioritize and Execute. Basically do it and do it now. If you don’t do it now, the fast pace of change in China will make you outdated before you even get started. Be capable of successfully managing internal and external change.

3. Manage Relationships Dynamically: Ironic here that the same book that holds Wahaha and Danone up as a success story also warns readers to be wary and cautious about relationships. This is not just “don’t do JV’s in China” but a how to grow and use relationships effectively in China. Despite what many people will tell you, personal relationships still do play an important part in doing business in China. I don’t mean that you still need to use guanxi to get in through the back door. Today, it’s about professional relationships that can also be intensely personal in nature and can be used to facilitate opportunities that appear in the ‘fog.”

Read up on the recent crumbling relationships between Danone and Wahaha at the same time you read this book—a timely confirmation that change and relationships are what you need to pay attention to in China.

Tags: Book Reviews by david
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Good balanced article from Bloomberg today on the cost of pegging or floating the Chinese Yuan. The article discusses the pros and cons for both sides of the Pacific, something that you rarely see in the US press.

The essence of the article is this (from the article):
“After years of talk and bluster, protectionism no longer seems like an empty threat,” says Stephen Roach, chief global economist at Morgan Stanley in New York. “Trade sanctions against China are now all but inevitable.”

If you produce goods in China, that should scare you. If you shop at Wal-Mart in the US that should scare you too.

First artificial valuations of the Yuan do help keep Chinese goods cheap and force manufacturing to move to China away from more expensive places like the US. But trade sanctions on Chinese goods in the US would do the same thing for the US—they would create a temporary and artificial wage protection for specific industries in the US. This, in the short term view of Democrats trying to win the ’08 elections, is great political strategy. But long term for the US economy, China-US relations, and the specifically affected and temporarily and artificially assisted industries, it will mean a hard crash later on.

Second, if you are just the average Joe-Shopper and don’t “do business with China” or are not involved in manufacturing in the US the bottom line is that the protectionist laws in the US will mean that you’ll be paying more at Wal-Mart so that someone else can keep their $22/hr union Job building whatever. If you do work in manufacturing, you’re cost of living will go up as the laws protect your job. But wages in China (right now about $0.50/hr.) are not going up as fast as these laws will go away. China knows that the US is all about 4 year political cycles. China is much more long term in their thinking than the US—they’ll weather the storm to maintain domestic social stability.

Further, the hew and cry in the US that outsourcing is taking jobs is just not statistically true. The Economist, April 7th 2007, citing an IMF report shows that labors are indeed getting a smaller share of the pie ($) but it also shows that the pie as a whole is getting much bigger at the same time. Bottom line, trade is growing faster than outsourcing and the US is the best positioned economy in the world to relocate laborers that do indeed get outsourced. The US is also the largest exporting economy in the world. It’s not as bad as election year politicians would like you too believe.

The point is: you should be much more scared of shortsighted politicians than of Chinese outsourcing.

The scariest specter on the horizon, to me, is a politically unstable China. A 40% jump in the value of the Yuan would throw hundreds of millions of people out of work. The migrant-worker population of China is already estimated to be MORE THAN THE ENTIRE POPULATION OF THE US! The unemployment from State-owned companies closing down in China is also already MORE THAN THE SIZE OF THE ENTIRE WORKING AGED POPULATION IN THE US! Hundreds of millions of more Chinese out of work would be a catastrophe of historical proportions. In addition to that, the export markets of all those US jobs that were just saved with protectionist legislation would dry up as China as an export market would disappear.

What you should be ironically grateful for though is a strong Chinese government. Why? Because there is no way on God’s green earth that they will either give into foreign pressures or actively create an environment where the ’08 Olympics could be become a world stage for hundreds of millions of dissatisfied peasants and unemployed workers.

For evidence the Bloomberg article says:
`…says Straszheim, who specializes in China’s economy. “They are going to take their chances and move as slowly as they possibly can.” China’s textile industry says it loses 8.2 billion Yuan ($1.1 billion) of annual profit for each percentage point rise in the currency.

Now, I’m a free trader, but I’m also a Realist who likes relative peace and stability. Certainly the Yuan needs to be revalued. But calls for 10%, 15% or even 40% changes in a single year are ridiculous. They just aren’t going to happen either. Expect 4% or maybe a little more if the protectionist legislation is very strident—but not 10%. Expect this to be a huge election year topic and expect to see tons of bills and hear tons of speeches that sound good to protectionist US ears, but really mean nothing long term.

Tags: Business, Politics by david
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The last two years of unfettered growth and hundreds of other books on the same subject seem to have supported Ted Fishman’s early optimism that this is indeed the Chinese Century.

China Inc., one of the first in the China-will-soon-dominate-the-world genre, has all the great news and wonderful statistic that China supports and critics alike love to quote. The fast growth, the lack of IP protection, the leaps in education and income, the rise in prostitution and crime.

This book interesting but not very deep. Lots of personal stories support the statistics but there is little in terms of actually doing business in China. This book tells you what you already know—that China has a ton of people, some serious social issues, and will change the face of the global economy for good or for will simply because it’s so big.

Much better more balanced books include: One Billion customers, Made in China, and The New Chinese Empire.

But there are some valuable take-ways. First, the Chinese know about the internet and are using it. If you (somehow) still believe that China is far away, Fishman says you’d better do a quick search on eBay and see how many sellers are working directly from China.

Second, for good or for ill, China is taking the world stage and it would be wise for everyone to learn some Chinese or at least encourage your kids to do so.

Third, no matter what your future is you’d better be better than competent at what you do. Competition is coming and it’s coming fast and in larger numbers than the world has ever seen. Keep learning and stay ahead in whatever industry you’re in.

If you do read China Inc.—and it is an exciting, well written book—you should also check out The Coming Collapse of China just so that you have a balance to Fishman’s unabashed optimism.

Tags: Book Reviews by david
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In terms of sheer numbers of new articles it was a banner day for China today. And the news highlighted the completely different animal that China is. It’s like nothing the world has ever seen before. Even growth is bad and old words mean new things in China.

In case the news that the CCP is talking about expanding democratic rights gets you overly giddy. Remember, democracy in the West is not the same as democracy in China. Specifically, structures that appear similar are actually used quite differently. “Democracy” in China is meant as a way for the CCP to benevolently understand the needs of the people and then implement what they see as the best solution–not government by/for/of the people.

While definitions may be different, politics are the same—the maintenance of personal power is every politician’s goal (OK, I’m a bit jaded here, but you understand). The rise of the economy and businesses in terms of both domestic political influence and international media attention means that even if they don’t want to the CCP has to give more attention to the Chinese with money to maintain control.

In 1994 I was told by a foreign professor working with CCP leaders on political projects that the silent opinion of most Chinese leaders was that socialism was indeed dead and that keeping the CCP in power during the long arduous shift to a new system was the real goal. The problem is how do you “control” democracy? The attempts in ’89 were obviously a failure. So now what?

There are few real answers and now the general Chinese population has caught wind of the big secret. For many years in China the buy-off-the-populace-with-economic-growth-so-they-won’t-worry-about-democracy has worked. For a billion people going from absolutely nothing to middle class was a huge step and it has totally changed the world’s economic landscape. But many people with money and subsequently more global experience and education in China are now looking for something more.

Small steps toward more participatory government will continue to buy time, as long as no missteps are made. Adding businessmen, professionals and intellectuals to the CCP was huge. Small, local elections are too. Broader participation in the relatively new stock markets and actual property ownership by the end of this year will certainly pacify many for the next few years. But if the economy overheats or if there is a political crisis of any type the trappings and slogans will do little to pacify an increasingly media savvy Chinese population.

And indeed a crisis may be where things are headed. I’m not a doom sayer and I think that the CCP is itself pretty clever. But the unexpected rise of the 1Q economic figures (Govt. predicted 8%, released numbers were over 11% and you know that the govt. held back on even those numbers) is going to be putting a lot more international pressure on China to revalue it currency—something the govt has been unwilling do more quickly out of fears of both negative social and financial reactions.

Add into these numbers the fact that loan growth in China is doubling despite the fact that Beijing has raised interest rates 3 times in the past year. In an already horribly insolvent system even the new spat of foreign banking JV’s and their FDI isn’t going to solve the problems of increasing numbers of NPL’s. Because of the Chinese governments artificial security blanket around the economy China didn’t really feel the effects of the Asian banking collapse in 1998. But it could have a crisis of its own in the making.

This financial “bad” news was accompanied by reactive falls in oil, gold and stocks across the globe and coincided with a condemnation by Canada over the jailing of a Canadian Uighur in China and the lawsuit against Yahoo in the US by a Chinese couple.

In these interesting circumstances the government is limiting every type of political dissent and both domestic and international media outlets in hopes that a strong hand before the ‘08 Beijing Olympics will mean relative peace, or at least quite, for another 18 months. Things are so tenuous that Premier Wen in his visit to Japan not only didn’t mention Abe’s visits to Japan’s controversial WWII shrine he even went so far as to praise Japan for it’s historical apologies to China for WWII and their subsequent FDI and aid!

Politics indeed make strange bed fellows.

Tags: Business, Politics by david
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China Law Blog has some great links and analysis on the Wahaha Danone story that’s unraveling. It’s worth a read for anyone considering partnering with a local factory.

Tags: Business by david
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