Silk Road International Blog

I mentioned on Wednesday that, despite the media that plays up every aspect of violence it can find anywhere in the world, the political crisis in Thailand will have little impact on business.  Turns out I was right.  More here and here too.  Unfortunately, I also said (as a comment at a different site) this political mess will most likely happen again and others, it seems, agree with that too.

And even more proof that Thailand has the unique ability to destroy its government every few years and just keep on going, new rankings list Thailand as #13 on the list of countries for “ease of doing business.”  Only Singapore (1), Hong Kong (4) and Japan (12) were ahead of Thailand in Asia.  Taiwan was #61, China was #83, and Vietnam was #91 out of 181 countries.  India was #122, Cambodia #135 and Lao #165.  New Zealand was #2 and the US was #3.  The full list is here.

What I’d really like to see is a list of countries ranked by how young expats die of exasperation, stress, heart attacks or other job related illnesses.  I’m guessing that China would be much higher (and Lao not even) on the list?  But I could be wrong.  This list does have a lot of other interesting sub categories, like: starting a business, employing workers, getting credit, protecting investors, cross boarder trade and enforcing contracts.  China, it should be noted, is 18th on the list of “enforcing contracts.”  This means that it will take you approximately 406 days to resolve a legal contract dispute in China.  479 in Thailand, 211 in Hong Kong and 300 in the US.

I also made a comparison of Guangdong and ASAEN a couple of days ago.  Here’s some more on that.  Minimum wage in Cambodia is $50 a month with 20% inflation.  Minimum wage in Guangdong is $187 a month with about 9% inflation.  Despite the low wages, the inflation is so high that factories (garment factories, the nations major export earner and employer, in particular) are closing as the average profit margin of 2% is disappearing.

Tags: Business, China, Thailand by David Dayton
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Last week, while negotiating some future opportunities, I had the boss of a potential supplier tell me that the slow down in the US (and the EU) is having no affect on China whatsoever.  He then proceeded to tell me how strong the domestic Chinese economy was and that I if I didn’t believe him, he could show me one million RMB right then and there.  When I mentioned that most of our suppliers are telling us that things are slowing down and that domestic clients are the ones that typically are not paying their bills he told me that because I’m a foreigner he doesn’t believe anything I say about China and that I should pay early to prove to him that I really do have money.  That’s what I get for questioning his proposed payment terms, eh?  (In the end, we got the payment terms we were asking for, by the way.)

Now if you’re equally skeptical about the strength of the Chinese economy, you’re not alone.  There are a number of factors that are having serious effects on individual projects right now.  Here are a couple of real price-affecting issues:

1.    The VAT refund is down 10%.
2.    The cost of raw materials is up.
3.    The number of orders from the US and EU is down.
4.    The number of orders to China is down due to competition from ASEAN and product recalls.
5.    The Chinese domestic economy is not as strong as it was in the past years.
6.    The RMB rise (recently slowed) hurt Chinese competitiveness.
7.    Labor prices are continuing to rise.
8.    Inflation in China is finally slowing down from record highs earlier this year.
9.    Electricity and fuel costs are higher (and no longer subsidized as much as before).
10.    Export restrictions are tightening.
11.    Many areas of China are trying to “upgrade” the quality of exports buy moving up the production ladder from simple assembly to higher technology.  This means provincial governments are giving incentives to tech products first and foremost.
12. I’ve heard that spending by the Chinese government will slow on social/infrastructure projects now that the 0lympics are over.
13. I’ve also heard that a post-0lympic economic hangover (slower growth) will set in the last quarter of this year too.

None of these issues are “new” or unexpected.  But, there is definitely a post-0lympic let down sweeping through Guangdong province if not the whole country.  Of course, the Chinese government says all is well. While it’s been estimated before that Chinese factories can work for profits as low as 1-3% (or even breakeven), these hits directly to their bottom line will make it next to impossible to continue to do business on such small margins.

I’ve heard, from other suppliers and business associates, that there are “thousands” of factories in Guangdong province that have closed down in the past 18 months or are closing down now.  We’ve worked with a couple of sub-suppliers that have closed their doors recently.  And we’ve had two suppliers ask us to pay early to allow them to have the cash to finish production too.

But before you get ready to jump ship and plan your move elsewhere, remember this, there are pro’s and cons to production no matter where you are located.  One story from Richard Brubraker is here.  For more examples look at the new about ASEAN countries: Thailand is in the middle of political turmoil and is never as fast at turnaround time as China.  Many factories, especially toys, stuffed animals and clothes suppliers are currently overwhelmed with orders that have moved from China in the last year (because of recalls and 0lympic delays).  Cambodia is having record inflations, 22%, and has very little developed infrastructure and no port (but Cambodia’s Ankor Wat is THE most incredible historical site I have EVER seen—and I’ve been to Egypt, Jerusalem, Jordan and seen it all here in China).  Vietnam has only one deep-water port, high inflation and weak infrastructure.

Good news is that Thailand’s over all confidence is still high and trade will continue to benefit the country. Here, and here, and here. 

Vietnam too is improving.  HSBC and Standard Chartered are the first banks to have wholly owned branches in Vietnam—one in Ho Chi Min City and another in Hanoi.  Both will be open within the next 12 months.  No doubt that other banks are lining up to follow their lead.

And, just because this got me thinking about this now, here is a point of comparison between Mainland ASEAN (Thailand, Vietnam, Cambodia, Lao; not Burma) countries and Guangdong province/ Hong Kong: Guangdong/Hong Kong has 95 million residents and another 31+million migrant workers for a total of about 126 million.  Mainland ASEAN countries have a combined population of about 140 million.  Guangdong has three of the world’s largest and busiest ports, Yintian, Guangzhou and Hong Kong.  Not to mention three of the busiest airports (Hong Kong, Guangzhou and Shenzhen).  Mainland SEA has two deepwater ports (Hanoi and Bangkok) and one major airport (Bankok).  Guangdong is the world’s 17th largest economic unit.  ASEAN as a whole wouldn’t be as large as Guangdong (without Hong Kong), Taiwan, or South Korea.  While these numbers don’t mean all that much for individual projects, it puts China into perspective.  (Just a little more perspective: California is the world’s 7th largest economic unit and the US economy is still more than 3 times larger than China’s with only 20% of the population).

Finally, I was in Hong Kong recently to do some tax and banking work and was asked to do a survey at the newly renovated Mong Kok office of HSBC.  The bank is now open 8AM to 8PM 6 days a week—how’s that for service!?!  Can’t ever complain about longer bankers’ hours.  Compare this with US hours—9-6 (some open as late as 7pm and some with partial services on Saturday AM); and with China hours—8-6 seven days a week; and Thailand hours—9-3, with a long lunch, five days a week (but only if there are no holidays or coups; Thailand has the most holidays of all countries on the planet, probably coups too).  As a side note, the survey I participated in was in Mandarin, furthering my complaints/perception that Hong Kong is quickly turning into a Chinese only business center (Cantonese or Mandarin).  While they offered to do the survey in English, I gave them (two customer service reps) the choice of English or Mandarin—they chose Mandarin.

Tags: Business, China, Thailand by David Dayton
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Pierre Xiao Lu’s look into the luxury market in China is probably the best book on the topic you can buy.

But even if you are not trying to break into the Chinese luxury market there is great value in this book—as a tool for understanding urban culture, background of employees, partners, significant others, suppliers, customers and friends.  For just about anyone working in China today, Pierre’s analysis of the Chinese consumer by age, economic status and location is an invaluable tool.

His age classifications are:

The New Generation; born before ‘45. Witnessed a half-century of incredible change; well educated, in important sociopolitical positions, parents of Transitional generation, about to retire.
The Lost Generation; born before ’60. Victims of CCP social upheaval, lost educational opportunities in the 70’s and jobs in SOE’s in the 80’s and 90’s, first/most affect by one child policy too.  Parents to the One Child Generation.
The Suffering Generation; born before ’70. First generation to really “see” the world and work with it, also saw the events in T!ananmen Square, conservative, well educated, current source of most of China’s “elite” class and much industry upper management.
The Transitional Generation; born before ’80. Grew up in stability, reform, opening up, money.  They are optimistic, well educated, confident and pushing the “New China” forward.
The One Child Generation; born before ’90. In or just out of university, internationally oriented but very nationalistic, affluent, trendy, morally relativistic, aspiring professionals.

Socio-economic classifications are (adopted from non-Chinese models–After read this, I thought there could be more work done to differentiate Chinese social levels here, but they may be too new and too varying at this point, I don’t know.):

The Country Club Establishment; small number of established families, accustomed to wealth, work as heads of banks or major firms, are prominent physicians or lawyers and trusties for hospitals and universities.
New Wealth; wealthy but not “established” families, successful business executives, conspicuous users of wealth.
Achieving Professionals; Yuppies, career oriented, college educated, home is the symbol of achievement, child oriented, conspicuous consumption.
Faithful Followers; white collar workers, working for “respectability,” typically avoid faddish or high-style

Geographic classifications are:

The North, typified by Beijing.
The East, typified by Shanghai.
The West, typified by Chengdu.
And The South, typified by Guangzhou (Hong Kong, Taiwan and Macao included here).

Of less value is his discussion on values.  While the list of values is extensive it is exactly this variety that lessens the effectiveness of the specific values as marketing/business tools.  This is unfortunate as more analysis into the motivations for individual consumers in the luxury (and other) market(s) would be a valuable upgrade.  Far too often the “values” are presented as either historical left-overs with little to no urban contextual analysis or are modern constructs with positive characteristics attributed to the current government and negative characteristics attributed to western culture (the good/bad domestic/western dichotomy is, unfortunately, used through out the entire book).   The list is valuable, if it can be applied to specific demographics in specific situations.  Alone it creates an overly broad template, often contradictory, that could be used for many countries, not just China.

Peirre also falls victim to the very common faux pas of talking about (blaming) the mythical “west” as the source of a specific set of values and historical mistreatment of China.  If China, with 90 plus percent of its population being Han Chinese, can be divided into specific geographical market segments, shouldn’t at least the same amount of division (respect, research) be given to all of the countries/cultures/peoples west of Israel since 1000BC?

Two other criticisms that I have are what’s included and what’s not.  First, the islands of Taiwan, Hong Kong and Macao were specifically not included in the discussion of Chinese cultural values.  But opinions from citizens of these areas were included in the results.  Either these inclusions skewed the results or the same exclusions skewed the discussion on values.  Since the citizens of these islands have, in general, higher levels of exposure to luxury brands, higher education and higher incomes it strikes me as disingenuous to include them in the results.  But since these peoples have also been exposed to very different and often competing values over the last 100 years, including them in the values discussion would have probably been problematic as well.  Taiwan, it should be noted, is listed as “part of, but not administered by, the Mainland” according to Pierre.  I’m not arguing this now, just pointing out a bias the comes out in more than one area.  Which brings me to the second point.

Pierre, like many Chinese authors, is either afraid or unwilling to be critical of the current government in Mainland China and their deleterious affect on market activity.  For example: he talks about the unwillingness in the recent past to be ostentatious as resulting exclusively from traditional values rather than giving even the slightest reference to the political climate that persecuted conspicuous consumption and the climate of fear that limited consumption by anyone with money (or even rich ancestors).

In another section of the book he attributes the growing consumption by overseas Chinese travelers to their new self confidence in the mainland (as it goes into space, hosts the 0lympics, etc.) but never mentions the fact that less than 30 years ago there were NO Chinese traveling abroad from Mainland and until this decade there were not significant numbers with any money to speak of.  The attribution of spending patterns on feelings of nationalism when overseas is almost laughable.  National confidence or merely opportunity that almost no Chinese have ever had before?

In a similar vein, he notes that the names on the lists of the richest Chinese change every year and attributes that to the large turn over of wealth now in China (which may or may not be true).  But he conveniently forgets the (well publicized) fact that Chinese actively try to get their names OFF these lists for fear of extortion, taxes and other threats to family and wealth.  Further, the discreet purchasing of large luxury items is attributed to a sense of Chinese social humility (buying a Bently is more humble than buying a Rolls, he claims) and has nothing to do with (political) self-preservation, taste, availability or any other variable.

Don’t get me wrong, It’s a great book—one that I will refer to and read again for the insight into market segments in China.  In addition to it’s great value in marketing, I see this book as being very helpful to foreign team leaders or HR managers or owners/bosses that have a (relatively) diverse group of Chinese employees that they’d like to compensate and gift appropriately.  It also explains much to the lay foreigner that is trying to make sense of the conspicuous consumption on the streets of Chinese cities today.  I read it with specific suppliers and employees in mind and found the research very helpful in understanding motivations and ways to reward/cooporate in the future.

Tags: Book Reviews, Business, China, Culture by David Dayton
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Like Junior Soprano claims, “things like this come in 3’s.”  Maybe it’s true.

For the first time today I saw a Bangkok license plate on a car in China.  (I can’t upload the photo for some reason, you’ll just have to believe me that I saw it.)  Now I know that the Bangkok traffic is a mess, but this is a bit of a stretch, don’t you think—and a in Citrone?  I’ve got a French supplier in Taiwan who told me straight out “I’d buy an American car before I bought a French one.”

Next, an actual news article on Lao.  The only other two “mainstream press” pieces I’ve ever seen on Lao were one on poorly built Chinese motorcycles taking over the Lao markets and the NYT’s claim that Lao was “The Destination” of 2008.  I’ve been there twice and would hardly call it a “destination.”  I have also tried for years to get my wife and friends to join me on a drive from Shenzhen to BKK; but to no avail.  Any takers?

Lao ranks at the bottom of most international lists, and for good reason.  While it is resource rich, it’s very mountainous, has been connected at the hip to Vietnam for 30 years and has less than half the number of people (6.5 million) than the Lao population of Thailand (about 15 million).  Quick myth-busting side note: despite what I’ve heard for decades from Thai/Lao friends in the US there are NOT more Lao in the US than in Lao.  The US Lao/Hmong population is only about 350K. Until 2002 there was really no economy to speak of in Lao.  But today, Lao is the “land-link” of Southeast Asia with China, Thailand and Vietnam all vying for influence and access.  Most fascinating to me were the trade numbers.  Lao-Vietnamese trade is almost to $1 billion annually.  With a GDP of $12 billion and only 6 million people, there are a lot of very rich government officials (and 30% of the population living under the poverty line).

And finally, I had a conversation with a potential client last night that included a discussion about “not wanting to be in Communist China.”  Her words, not mine.  I have no problems with other peoples’ politics or reasons for wanting to be or not to be in China or anywhere else.  My position is that it’s their call—but once the decision has been made there are cost/consequences associated with that choice. Sometimes China is cheaper than the ASEAN countries and sometimes it’s not.  China’s government has a bad name (communist/socialist), serious social problems but a vibrant economy.  Thailand’s government, on the other hand, has a good name (Constitutional Monarchy) but rampant (political) corruption and a relatively strong economy as well.  Thailand and China are both ranked in the same general level of corruption in Transparency International’s 2007 report.  So corruption and social ill’s are, like I told the client, are pretty much par for the course in this part of the world.

The Guardian has a good set of pieces, photos and video (in Thai) on the conflict in Bangkok.

Coincidence or harbinger of things to come?

Tags: Business, Culture, Politics, Thailand by David Dayton
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Here’s an interesting twist on the question: “where do you want to be?”

OBAMA:  “Everybody’s watching what’s going on in Beijing right now and the Olympics.  Think about the amount of money that China has spent on infrastructure.  Their ports, their train systems, their airports are all vastly superior to us now, which means if you’re a corporation deciding where to do business, you’re starting to think, Beijing looks like a pretty good option.”

So why if Beijing is such a good option are the Dems so gleefully bashing McCain for exporting 2.3 million jobs to China?!?!  Sounds like pretty smart business (and pretty fuzzy math) to me.

But this is more about infrastructure than politics.  Everyone’s guilty of political pandering.

Chinese infrastructure in many places is newer than that in the US, true.  China’s market is larger than the US’s so it should be a bigger draw to companies than the US.  Labor is cheaper, regulations are lower (enforcement much lower), cost of living is lower. But “all” of their airports and ports are better than ours?  Come on, I can understand a bit of exaggeration when stumping—but “ALL” of China’s infrastructure is better than that in the US?  Really?  Western China?  Guiyan?  Inner Mongolia?

China indeed does have some advantages and as any free-market, free-trade promoting country will tell you.  But I think that we should be taking advantage of it, not complaining about it. Obama has never been to China, doubtless most of his staff haven’t either.  There is more to China and to manufacturing than infrastructure on the east coast.

But assume he’s right–China has a better environment for business than the US.  Let me ask those of you who do work in China regularly (all the time!), when was the last time you said: “You know what?  The traffic in ________, China is so much better than _______, USA!”  Or how about this one: “The legal system here rocks!”  Maybe you’ve said: “The QC in this factory is world class.”  Or: “Human rights/standard of living/political freedoms are totally leading the world here.”  Maybe you’ve said: “I just love the free flow of information here.”  How about: “Who would ever want more than one child anyway?!”

These questions do NOT mean that you shouldn’t work in China nor do they directly answer the infrastructure vs infrastructure question.  But there are issues in that maybe significantly different from other locations you are considering doing business.  More importantly, international business is not, unlike politics, a zero sum game.  What protectionists on both sides of the isle like to forget is that trade is generally very good for both the Chinese and the US economy and the poor, recently homeless, unemployed, flag-waving American consumers too.

Take me, for example.  I could choose to work at a job in the US (that’s +1 domestic US job).  Instead I own my own company and live in China.  A net loss for the US?  No way.  SRI has had, at different times 5-10 employees in the US (+5, just to be nice).  Not only that, but how many clients in the US do we support?—more than 25 different US companies this year.  A couple of examples, we have three clients who have person by person moved their line workers into warehouse workers and office people.  They employ more people and pay them more than they previous did when they did line production/assembly in the US (that would be at least another +30 just counting the people I know).

I may be a small example, but I can count at least 35 white color jobs in the US that my small company facilitates by being in China compared to maybe 2 “jobs sent overseas” by “staying home” working for someone else, like I was in ’99.  And, I still pay taxes (corporate and individual) in the US, I travel to and shop regularly in the US and I hope to maintain a residence there soon too.

The stupidity of the arguments about the jobs that US companies hire out in China is that they are flat out untrue.  Trade generates wealth which in turn generates jobs—trickle down economics ring a bell?  When jobs do leave (plant closures), many (not, all, I know) are low-end labor jobs which are, on balance replaced by higher end jobs necessary to coordinate importing.  White-collar job flight is a bit different, sure, but (1) “flight to Chindia” is not the disaster the economy that it was predicted to be years ago.  (2) Many of the white collar jobs didn’t “leave” as many are only temporarily in China and then will return home to the US, still working for the same companies they were with before they came to China.  And (3) the exchange from blue to white color (or even just moving from blue collar to service oriented jobs) is at least a trade off if not an improvement.  Finally, (4) the US has had a net job increase (and not in low in labor positions) since NAFTA was signed—which incidentally, coincides with the rise of the Chinese economy.  This last point being the most important—NET JOB INCREASE in the last decade despite NAFTA, economic downturn and the rise of China.

What no one will say, especially in political events is that most of the jobs moved over here can be traced to foreign companies that are moving their lines to China but keeping offices/HQ in their home countries (and contributing money to both campaigns).  Many companies exist because of the jobs that are created from processing imports.

Exports (jobs, goods and money) are the price we pay for imports (jobs, goods and loans).  Who in the US wants to live without imports, including oil, loans and Wal-mart?  No one with a view past their own wallet.

So here is that bigger picture view.  China in (my) perspective.

If China is not the biggest economy in the world there is something wrong.  Take the argument that environmentalists use about carbon output and use it on the economy.  How can the US, with only 300 million people, have a larger economy than the PRC with their 1.5 billion?  India should be included here too.  China will soon be the biggest _______ (fill in the blank) like it or not.  So get used to it—better yet, prepare for it, embrace it, make money from it, support your family/lifestyle future from it.  Or stick your head in the sand.

If China does not have newer infrastructure than the US there is something wrong.  China had NO infrastructure at all just 30 years ago.  Of course everything they have is “newer” than what most of the US has.  So what?  The US has something like 1 airport for every 900 people (300 mill/3,300), China has something like 1 airport for every 6.4 million people (1.5 bill/250). Their building 100 a year just to keep with the population.  The US doesn’t need to “update” all 3,300 airports every two years to keep up.  Honestly, the date things were built is not as important for most manufacturing as a few other things (like corporate tax breaks, utility subsidies, cheap labor, income tax rates, etc.).

If China doesn’t win the most gold medals there is something wrong.  There are a couple of realities that the rest of the world has to face: China is bigger than anyone else.  They should be winning most “total” number counts in any competition or business.  They have a huge government funded sports program that prepares kids for decades to compete in the 0lympics.  Even without this national level program, they have a middle class that is as big as the entire US population not to mention another billion plus people to draw athletes from.  If you’re not comfortable with China being involved in just about every global conversation from here on out, you are in for a rude awakening.

If China isn’t the largest market on the plant there is something wrong.  Again, 1.6 billion people x rising standards of living = biggest (potential) market ever in the history of the world.  Who doesn’t want to be here (some in T!bet and T!aiwan excluded)?!

Obama’s comment shows two things, one, don’t beleive anything you hear from politicans this year (or maybe ever).  And two, someone commenting on China who has never been here, doesn’t work here or isn’t involved in business here (regularly working with govt regulations, company registrations, employees, suppliers, logistics) probably does not have much more diversty of perspective than NBC (Nothing But Crap, Jeff Dunham).

Finally, you should be in China or India or Vietnam or Thailand or the US for the right reasons; and that is because it works financally for your specific business.  And, as I’ve detailed here before–you’d better be making an extensive study before you make the final decision.

Tags: Business, China by David Dayton
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