Silk Road International Blog

China Success Stories asked me to flesh out the outline of the Global Sources presentation that I posted a week or so ago on this blog.  They’ve split it up into two parts and posted the first half yesterday.  Here is part one.  Part two comes out next week–I’ll post an update here when it’s available.

Despite the recent numbers (and the recent posts here on the blog) I think that I am honestly more optimistic than I sounded in the piece.  Again, context matters, and the presentation was for new buyers coming into China for the first time–it was a cautionary tale meant to encourage homework and due diligence before investment.

Enjoy!

Tags: Business, China by David Dayton
1 Comment »

First some news with context.

1. Power consumption is down.  This is really a bit troubling.  As the weather heats up there is not additional monies being spent on AC, and, as the govt claims, factories are starting to buy more raw materials but there is less, not more, power-consuming activity.

This also means that factories are going to have materials on hand, low demand and extra time to do projects.  These can be good things for you–especially if you’re coming in to China now with cash.

2. Trends are up, but April is down. This is certainly my feelings–I believe that we are definitely trending up, but more slowly and without a quite as much swagger as we hear from official quarters.  The context of this trend (see below) is that most of the growth before April was in infrastructure (i.e. government expenditures, not private sector growth).   And, like we’re seeing in the US, tens of thousands of new government jobs and hundreds of thousands of private sector lay offs do not make for a strong sustained recovery.  In fact, just the opposite is true–once the govt monies dry up who fills the void?

3. Fix-asset investment is up.  Again, if we can strip away some of the earthquake and pre-stimulus government spending, I doubt the numbers would be as rosy.  That means that while this news is good, there isn’t a lot more spending outside of the govt sponsored projects.  China is, for sure, doing a much better job of injecting cash into the economy and helping people with actual economic issues (as opposed to the US where if you don’t like the current version of “hope” you’re just SOL). But government cash keeps things going in the short term, it’s not a fix for a still largely export-driven and weak consumer economy.

4. Factory output less than expected.  Taken alone this would be bad news.  But because the economy so dependent on exports but overall numbers show it’s not falling further behind, the bigger picture appears to be that China is stabilizing and the trend will hopefully continue.  But two more weak export quarters, inflation and the end of stimulus cash (loans are already drying up) could mean more trouble than the “recovery” can take.

5.  Problem is, it’s still not a consumer economy.

This is one of my fascinations here in China.  There seems to be a ton of money in the East Coast cities and in the second tier cities.  But I believe that it’s deceptive.  Yes, there is a lot of money here but there are so many people in such small places that there seems to be more than there really is.  This is my theory (and what it is, and it’s mine, too):  First, take 200 million Americans and estimate that the median household income is, say $35K a year.  And then take 200 million Chinese with an average income of, say $12K a year (I know, it’s not that high, this is just an example).  Now I believe that even with the income disparity, the 300 million Chinese are going to look a lot richer than the 300 million Americans.  Why?  Because the vast majority of the 200 million Chinese are condensed into about 30 cities and there are two of these incomes for most households–you’ve got more people with some money in a smaller location.  It would be like if all of the cities in the US looked like Beverly Hills.  The 200 million Americans are spread out over the entire country, in small towns and suburbs, not high rises surrounded by shopping malls.  There are less than 10 metro areas in the US with more than 5 million people and none over 10 million.  There are 5 metro areas with over 10 million people in China and 8 over 5 million.   The issue of very conspicuous consumption can also be argued makes China look richer than it really is.

Maybe you don’t agree with my theory, but the Chinese economy is not a consumer economy regardless.  And that’s not good news for an export dependant economy that is trying to recover.

Tags: Business, China, Culture, Politics by David Dayton
3 Comments »

May 13 UPDATE: Here are the new China export numbers for April and a bit of analysis from multiple sources on what they mean.  Summary: Over all it’s disappointing, domestic demand is not really here (in China), Govt stimulus is not spurring investment by Chinese companies in China (so where is all the money going?  The stock market.  Watch out for a huge drop in the near future.).

—————————————-

First, a culture note.  If you think that the days of face being a major consideration in business in China are past, or that “it’s all business now,” or that “business is business no matter where you go,” then do I have a link for you!  Apologize Inc. (Chinese)  If you can’t say sorry, they’ll do it for you!  Did you piss off your boss?  Give them a call.  Did you get in a fight with your wife?  Here’s your ticket out of the dog house.  Did you make a spectacle of yourself at the company dinner the other night?  These guys are your path back into good social graces!

Not only is face still a very big deal in Chinese business, these guys are turning it into money!  Conflict resolution with a Chinese twist.  It’s all about knowing your market.

Now, a “It really is this bad” link.  Loan money wasted, no domestic or international growth to speak of, over supply, over capacity, inflation fears, no growth in power consumption (production) and only government stimulated (as opposed to sustainable) spending.

Or you could read this one, approved by the Chinese government.  Summary: China-government sponsored think tank release info that economy is up.  Xinhua reports companies listed on the Shenzhen and Shanghai exchange showed both gains in the stock market and net earning profits (although still down more than 25% from last year).  No link between on-paper profits or the growth in the market and the billions in loans given out by the government in the first quarter though.

But Jack himself over at the  Managing the Dragon blog seems to think that it’s not only not that bad right now but getting much much better.  (I recommend Jack’s blog and book–very insightful stuff.  Book review coming soon!)  I won’t argue with Jack about his opinions or the numbers.  But I will really question the context and the hope that numbers give when people don’t have the whole story (and I don’t have the whole story–so I’d really like more, please Jack).  Here’ my three contextual issues.

First, PMI numbers are up.  Context:  What factory in China has bought any new raw materials in the last 12 months?  No one.  They’ve all been living with and have finally used up last years (unpaid for) inventory.  Retailers in in the West have similarly been using every last bit of inventory before they are absolutely forced to place new (MOQ) orders.  AND (yes, big and) it’s the start of the holiday season in the West.  Back to school, Halloween, the Holidays–these are the biggest retail times in the West every year.  OF COURSE orders are up now…but is it a trend?!  Is this a hopeful sign or just an MOQ refill in a prolonged recession? I hope that we’re going to being coming out sooner or later, but I think that we need to see if orders are continuing an upward trend through August (two Q’s of positive growth) to have a lot of hope.

Second, housing starts are up.  Context:  The industry is being massively incentivised, raw materials are dirt cheap, Western China (especially Sichuan) was already scheduled to get a ton of infrastructure money, prices to consumers are low (no demand for the last year) and through Q1 credit has been easier to get than dumplings in China.  Is this a positive trend or will it slow down now that loans are going to be limited for the rest of the year, prices rise and once Sichuan is more rebuilt?

Third, record auto purchases.  Context: Chinese New Year, great incentives on cars, massive over production in the domestic market last year, easy credit and face in bad economic times have all played a big part in the surging auto sales.

I’m not trying to be an antagonist, just questioning the context of the “recovery” numbers. I hope that I’m wrong and that it gets better soon.  Personally, it’s in my best interest for China to recover sooner than later.  I’m just not sure that the situation is all that hopeful yet.

I know that the stock market is up–but is it stable? I know that are more signs each day that things are changing–but is it sustainable? I’m excited for this if it’s for real.  And I’m not disagreeing that there is hope as much as I’m trying to be cautiously optimistic (emphasis on cautiously).

And in a completely unrelated note.  This is my favorite email from a factory so far; I just thought this was too interesting not to pass on.  Like, I’ve said before, it’s a great time to be buying just about anything in China!!

Dear Sir / Madam

We are please to offer you directly from the Manufacturer, Buses at World Recession Prices!

10M 43+1+1      Diesel Bus from USD 33,900.00

6M  17+1+1      Diesel Bus from USD  9,600.00

7M  20+1+1+1    Diesel Bus from USD 16,470.00

8M  20+1+1+1+1  Diesel Bus from USD 21,540.00

Both available in Right hand drive and left hand drive.  Contact us for full details.  Distributorship offer is still available for some countries. We reserve the right not to supply to countries where we have our own distributor already.

Thank you.

Tags: Business, China, Culture by David Dayton
3 Comments »

Update 13th May: Thailand tourist numbers 1/2 of last year’s numbers.

—————————–

If you only read/watch the news on the major sites then you’d probably concede that tourists in Thailand are in a world of danger because of the ongoing political protests there.  But talking with people on the ground, I find that quite the opposite is true.  I have one friend on holiday there now.  No problems.  Ditto multiple friends that live and work right in downtown BKK.  This article would agree with their experiences.

Certainly the long term consequences of the color coded temper tantrums will be significant.  Even disastrous.  But fears of physical harm to tourists are overplayed by the media looking for a story and subsequent over-reacting governments issuing travel warnings based on “news” reports.  (By the way, is there anything more overvalued by it’s own people and less valued by the rest of the world nowadays than the MSM?)  You should be much more worried about being poisoned by a mistress/hooker or beat up by a bootlegger than being caught up in political violence.  Even the Thai’s with color-coded blinders realized how stupid it was to shut the airport down, so that’s not much of a fear anymore.  The point is, you’re in about as much danger as you put your self in.

Further to the point that the media has to make up work for it’s employees, when I was a student in Israel in ’94 my parents were freaking out watching the news each day just sure that I was going to get blown up while shopping.  Other than a few limes thrown at us and a few rocks thrown at our buss, nothing happened for an entire semester.  Indeed, the “news” stories that my parents were seeing I’d not even heard about!  And I was living there!

One more example and then I’ll let the poor horse die.  I was in Chongqing in ’95 when China was shooting missiles into the Taiwan Strait.  Once again, we got a number of phone calls and letters (no email at that our “Communications University” yet, but they’d all read books about it!) full of concern that we were either being bombed or going to be thrown in the gulag and never allowed to leave.  If we hadn’t had the riveting and insightful CCTV and the People’s Daily we wouldn’t have even have known it was happening.

Now is a great time to go to Thailand; it hasn’t started raining yet and you’ll have the place all to yourself!  And if there are any more political problems this year, Christmas in Thailand is going to be a fantastic time to take long walks on totally empty beaches too!  Foreigners can buy homes/apartments there too and, like most places, it’s a buyers market right now. (No, I don’t get paid if you go there.)

Just remember to get an on-the-ground perspective before you cancel your factory visit or your beach vacation to Thailand.

Tags: Thailand by David Dayton
2 Comments »

The one thing that was not expecting when I to Hochiminh City to work with factories this last week was the size of the Chinese population.  I was told that Vietnam has a population of over 1 million overseas Chinese and millions more that are half or less Chinese but whose families have been there for two or more generations and who still speak some Chinese as a first or second language.

The Chinese here are either from Guangdong, Hong Kong or Taiwan.  Like in the other SEA countries, the Chinese dominate the business landscape.  They seem to own most of the major factories and talking with management in 4 factories I was working with was all done in Mandarin and Cantonese.

One night my wife arranged for me to go to dinner with 6 factory owners, all Chinese.  All of them had been in Vietnam for at least 8 years.  All of them were making product exclusively for export.  All of them had moved factories from Guangdong province within the last 20 years.  Two of them spoke Vietnamese.  Only one of them had (their primary) family in Vietnam with them.  They complained about the same things in Vietnam that I hear most foreigners complain about in China.

Highlights, lowlights and surprises from a week in HoChiMinh City.

Horrible infrastructure. HCM City has no freeways a couple of bridges and no flyovers.  All transportation was limited to surface streets.  No subways or city trains either.

Millions of Motor scooters. The fact that there was a city of 10 million people without anything but surface streets was bad enough, but then throw in 4 million-plus scooters and you have a traffic nightmare.  As bad as it was, it was nothing like Bangkok in the 80’s and 90’s when you could literally sit, unmoving in a car for hours in rush hour.  But still, 50 to 70 kilometers can (and regularly did) take hours to cover.  One factory trip, a distance of 54km took almost 3 hours out and more than 3 and a half back.

Quality factories are hit and miss. There are some great faculties here, but there isn’t anything that’s more than 15 years old.  That’s good and bad.  New equipment is good, but very little experience is bad.  Many new factories are small and many of the best large factories are producing for a limited number of large clients.

QC vs Cost. Of course the prices of raw materials and even finished goods are great, much better than China for the exact same items, but there are QC expenses that MUST be factored in.  Sure you have to do CQ everywhere, China, Thailand, Taiwan.  But I was amazed at what was passing for “acceptable” while watching (other people’s) stuff come off the lines.

Flights are not cheap, hotels are overbooked and so are very pricey too.  Food is more expensive than China as well.  Another cost you have to figure in is the lack of options for complementary components.  A lot of bits and pieces are moving in from Thailand, Malaysia (lower duties in ASEAN) and China.  The fact that materials are cheap should not translate into “doing business is cheap.”

Great wireless access but an information black hole! I was amazed that my 3G phone with a China SIM card worked better in Vietnam than in China.  And unlike Hong Kong I had free wireless almost everywhere I went.  Hole-in-the-wall coffee shops and bakeries had wifi.  Almost every place we went in HCM City had the “Wifi Free Zone” stickers on the door/window.  But even the HCM City Investment and Trade Promotion Center told me that good information is VERY hard to find (even for them).

Thailand, 20 years ago. HCM City really reminded me of when I was living in Bangkok in the 80’s.  There were only 3-4 buildings over 15 stories high, tons of construction, no zoning laws, bad traffic, high growth rates (meaning lots of visible gap in local incomes), lots of expats and everyone has a shop of some sort in the street level of their home.

Noodles, bread, coffee, and bad Muzak. It’s like the entire city got together and said, “We’re all going to offer the same food and play the same bad music.  Everywhere!”  How does this happen?  Hotels, restaurants, department stores, banks, factory waiting rooms.  It was an a amazing feat of coordination.

Traffic comparison Saigon 7AM Sunday vs. Shenzhen 7AM Wednesday, same week.

Tags: Business, China, Culture, Politics by David Dayton
1 Comment »