Full text of article that I wrote about Alibaba-Gate for Global Sources can be read here.  Excerpts from my article and others’ articles about the issue are here.

And another piece by my friend and partner at CSIC, Mike Bellamy can be seen here and here.

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Some very interesting new stories over the weekend.

First, The firing and investigation of China’s Railway Minister for corruption here and here (subscription required). Fraud, gambling, corruption, contracts for favors, faked safety standards it’s all there.  (And how about the money quote from the Japanese engineer?!  Paraphase: The Chinese copied our technology, built it with inferior components and are running it (too) faster with fewer safety measures.)  The longer I’m in China the more I think that the biggest threat to China is China itself.  Sure it’s getting richer and we even saw Chinese shoes and refrigerators during the NBA all-star game this weekend, but until Chinese people learn to care about other Chinese “strangers” it’s never going to get past melamine-in-the-milk like situations and become a great power.  The out-pouring of charity during the Sichuan quake was a great leap forward, but how many steps back has China taken since then?

Second, after reading about Alibaba today, I was torn between entitling this post: “Alibaba and the 40 thieves” or “Elvis has left the building.”  No doubt a google search for either one will lead you to the same stories.  Here are two.  More on this below.

At their request, I wrote a piece for another site yesterday and will link to that when it goes up (or just post the entire thing here if they don’t use it).

Third, in case you, like I, still imagined that econ growth was going to be bring democracy to China some time soon, I offer up this gem from the WSJ:

The only sign of protest came from a young Chinese man who was detained by police after laying some jasmine flowers outside the McDonald’s and trying to take a photograph of them on his mobile phone, witnesses said.

The lackluster popular response, however, demonstrates how much harder it would be to organize a sustained protest movement in a country with a well-funded and organized police force, and with the world’s most sophisticated Internet censorship system.

So much for Engagement Theory (of which I have considered myself to be a strong believer for a long time now).

As always you can read the news in China in multiple ways.  You can say about the train story, “See! Look how serious China is taking corruption–they even fire people that are high up.”  You can read the Alibaba story and say, “How responsible of the CEO.  He quit even though the company line is that he had nothing to do with it.”  And you can read the protest story and say, “See how happy the Chinese are?  Even when foreign trouble makes try to stir the pot, nothing really happens.”

Or you can read with the more jaded I’ve-been-in-Asia-for-20-years perspective.  When I read some additional articles I find a few things that made me question the reality of the harmonious society.

1. The debt of the railway ministry is more than the govt can afford.  To have a leader rack up this much debt and put other leaders and entire sections of the economy in trouble at the same time as the new trains are not being used as much as expected (too expensive) and you have more than enough excuse to sack the official and change the previously announced (grandiose) plans to more than double the total length of high-speed rails in China.  Look for less, not more, railworks from China next year.

2. The “resignation” of the Alibaba CEO for 1100 fraudulent tractions the value of which was less than $1200 each is as ridiculous as Alibaba’s claim that they stand for values and “honesty online.”  Anyone that has worked with Alibaba knows a couple of things: 1. Unless you visit the factory yourself, you have no idea with whom you are really dealing with–there is no way to know outside of Alibaba’s own “gold supplier” status since you can’t get complete supplier info without paying for it (or ordering).  2. If you are a supplier, you can BUY gold status as well as “factory” status even if you are just a trading company.  3. The membership fees payed by the fraudulent companies were worth more than 3 times what the fraud receipts totaled.  So we can assume a) both Alibaba and others are making a ton of money off of these types of companies, b) it’s a safe bet that it’s happening a lot more than these 1100 transactions, c) the employee that caught these “problems” is probably scared for this life right about now.

Full Disclosure–A few years back I was asked by Alibaba to spend 6 hours a week to be a third party moderator in an online buyer forum on Alibaba.  They asked me to work with buyers that had had problems with suppliers but were still interested in getting the problems resolved and completing their orders (as opposed to filing a formal complaint with Alibaba and/or suing the supplier).  I got online once and was immediately overwhelmed with complaints from buyers that had been ripped off in some way.  Not only did they all want some sort of immediate resolution but they assumed that I was part of Alibaba and expected me to both commit to getting their money back but also to censure the supplier in some way.  I had no power to give them what they wanted, most of the buyers were furious at the lack of help from Alibaba (and me) and quickly removed my name from the list of moderators.  That was 4 years ago and I still get emails from people that want my help with their Alibaba-introduced supplier problems.

3. The lack of protesters for this specific event doesn’t negate the reality that 2010 saw a huge increase in urban protests all across China for the same reasons called for at this time, namely: rapidly increasing food prices, inflated housing costs, under-employment for college grads and corruption by government officials and the nuvo-riche.  Again, China raised the number of college spots available (good) but not the number of jobs for college grads (bad).  Throw in the world recession and you’ve got millions of underemployed smart people.  I’m very afraid that this won’t end well.

Talking about all of these stories with some Chinese friends over lunch on Monday elicited this observation:  “Don’t ever be  famous person in China.”  Hearty agreement from the other Chinese present included these pearls:  Money makes you a target.  Success makes others jealous.  Being famous can hurt your family and business.

I  hope that you can follow the note structure.  There are a couple of highlights that I’ve highlighted.

John Pomfret

I’ve tweaked the outline today to include Why Things like Egypt haven’t happen in China.  There are a number of reasons that what’s happening in Egypt have not happened in China.  Yet.

First economic reforms.

1980-2011 has seen HUGE changes in the lives of average Chinese.

1989– When China had it’s “Egypt” moment and subsequent crackdown, Deng and the other leaders in his camp gave three options to China’s elite:

1. They could remain involved in politics (Basically they could go to jail.)

2. They could go abroad, leave China and live elsewhere.

3. They could stay and keep quiet and get rich; but their future is their own responsibility from their on out.

This “self responsibility” option was a serous mental change for many.

Also, at this time was the opening for FDI which China realized that it had to have.  And this led to the employing of the lower classes (which Egypt has not done).

Second, housing reforms.

1990s was start of housing reform and now about 60% of urbanites own their own home and car.  This is linked to #3 as well.  In the past people couldn’t divorce because they couldn’t move out!  NO houses for rent or sale, so one slept on the couch and one in the bedroom.  Of course, now the divorce rate is much higher than it used to be.

Third, personal freedoms.

It’s gone from 1980’s and all having assigned jobs to today, personal choice, freedom from bosses/teachers etc.  Jobs are easier to get (and lose).  Passports are not as tightly controlled.  Of course that’s let to other social ills such as: mistresses, fake contracts, divorces, overpriced rental units, polluting cars, etc…

Fourth, Expansive Educational opportunities.

In the last 30 years there has been a quadrupling of educated Chinese. You’ve now have the first college graduated generations who are making much higher salaries than their parents or grandparents ever dreamed of.  Of course they all have had serious “Patriotic Education” via the CCP’s post ’89 campaign.  After ’89 all were considered “too western.”  Since then the govt has actively taught that the West is NOT China’s friend and that only the CCP is the answer.  Partly this is justified through the growth of the past 3 decades but it’s also partly a manufactured political tool.

Fifth, the Security Bureau in China is as tough and more of a significant presence now than it’s ever been!  NO political dissent is tolerated at all. Religious and media repression are worse than the 80’s.  The “Golden Age” of Chinese media was 15 years ago, and getting worse.  The major misconception about China is that it’s getting freer as well as richer. The reality is that it is NOT becoming freer politically.  Economic growth has not equated to political development.

SO…..Can China avoid what’s going on in Egypt?

Medium term, it’s unclear–there are some serous problems coming up. Demographic issues–fastest aging poorest country in the world. They are old and not yet rich and have no health care system to speak of.

They face HUGE environmental problems, like lower crop yields, lack of water (dust bowl concerns), major pollution.  Yes, they are investing in green tech, but they are not solving their current problems fast enough.

There is no moral compass in China. Tradition was destroyed in the 1950-1976.  Then Deng told them to forgot communist ideology and thought reform and they went straight into making money.  This back and forth tradition-money-values now (confucian tradition  now) has served to disenfranchise generations of Chinese and now people are tired of being told what to think.

Q&A.

Gender imbalance?

Military is shrinking in size and increasing crime and cross boarder wife stealing/sales is a very worrisome trend.

How does the new freedoms and the political controls work together?  Where’s the line?  Are business cases different than criminal and political cases? (my question)

I think that independence of the Chinese legal system is a dream of western lawyers and its clearly NOT a priority of the party.  All decisions are, to a degree, political.  So the party monitors everything.  And fewer and fewer Chinese want to be defense lawyers because they can be arrested at the desecration of the prosecuting attorney!

Yes, indeed, foreigners are using business law to a larger degree than Chinese are.  And whither they like to admit it or not, the business decisions are still political decisions and are tracked and later used for political purposes by the government with the US embassy or others–like having a “chit” that you can toss into the ring and ask someone to pay up or to help us out later.

What’s the health status in China?

Heart disease is rising quickly, cancer is growing and lung cancer is HUGE.  Tobacco is a source of major state revenue so stop-smoking policies have been half hearted, at best.

Also there are major pollution problems.  They’ve made huge efforts to clean up in BJ, for example.  But now auto is replacing coal as the major pollutant.  We’ve all heard that 17 of the 20 most polluted cities in the world are in China.  It’s becoming a priority for local govts and even the national govt.  But still not as important as growth.

There is still a get-rich-quick mentality and a State with a serious lack of resources and that means that China is VERY UNSAFE.

What about income disparity? As bad as in the US?  The economic disparity is MUCH wider now than in the 80’s and now even greater than the US and just getting wider.  They’ve lowered taxes in the countrysides and have starting to set up medical systems–but it’s still slow and mainly urban.  Inflation is HUGE now too.

What is the view of Tiananmen?

Teens won’t even know anything about it.  BJU students had never seen the “tank man” photo before.  People that know and tell are fired from jobs and/or imprisoned so a whole generation does not know.

People that know and are rich are very cynical (too much skin in the game to be radical anymore), they say: “Chinese morals are so week that we can’t have political change now in China.”  If you have  money you’re less revolutionary.  People today mostly say: “Maybe in the future.  ’89 was bad, but less bad than chaos.”

What people forget is that the reality is that the CCP is the SOURCE of the instability, not the cure.  People weren’t crazy and then the Cultural Revolution started–the CCP lost control and allowed it to happen.

Do you see a change coming in moral freedoms?

Historically, there were not a lot of real christians in China.  Pre-49 not many christians at all.  But in the 80-90s there was a christian explosion!  Other sects too (falungong) and the traditional Chinese religions too–it’s obvious that people are looking for something to believe in.  Estimates are that there are 60 million Christians in China now.  And they are not really rice-bowl christians anymore either but rather something homegrown, a Chinese version of Christianity.

But the Party is very schitzo about religion.  A few years ago they thought that you could believe in God and the Party.  Jiang Zemin had a much mellower view of religion.  But now with a weaker leader they are backing off of this; the party is trying to mollify this change with a return to confucian ideology (of course, respect the State is the #1 value).  How this will work will be difficult, to say the least.

Most important thing to remember is that China is not static.  CHINA IS RAPIDLY TRANSITIONING and it’s hard to tell where it’s going.

Why Mao still so revered?

Well, the constant state sponsored propaganda is the main reason but also he was successful in unifying the country.  There is a ton of really good scholarship coming out of HK right now–better than the research into Mao that’s being done in the US.

Explain about the China’s foreign policy, specifically with Brazil but also with others.

Brazil exports the most Soy, iron ore, and a few other things to China;  their largest suppliers in the world.  10 years ago B and C were high on their relationship, China wanted to bring money and workers–B said no to the workers plan (“not another Africa”).  So then China hired away all the mid managers from shoe companies in B and gutted their industry.  But they C is buying iron-ore and soy, and those are  billion dollar deals so the relationship is strained.  Also, in manufacturing, C is not B’s partner, rather their competition.  C is taking over B’s relationships in Africa too.

B now sees C as both a competitor and partner–this is the same as with other developing countries.  African poorer countries with experience with C they are not as hot on China as they were in the past.  Both corruption and development of the economics will all hurt China’s relationships–New Colonialism.

How is the freedom within arts and film industry.  Are they a source of morality teaching?  How tight are the controls?

First, there is still massive censoring going on. But in some areas (kissing) there is more freedom.

Second, in the 70‘s and 80’s dissident painters were big in China and they also became popular in the West–so much of Chinese dissent was commodified.  Now it’s reached art-house movies and visual art too.  For example, Fengxiaogang has a new movie, Let the bullets fly, it’s a coeh brothers-esque movie and it pushing the boundries.  Fortunately for him, humor allows him to get away with it.  He’s still relatively independent.  But Zhangyimo is now a totally co opted “state” filmmaker.  Chinese culture is the most retarded in terms of development.  Culture is still viewed as a tool of the CCP.

The CCP, flexible to survive and able to prosper–how do you explain the ability of the CCP to be effective and reexamine itself?

First, yes, in 1989 they killed a lot of people, but then the USSR collapsed and those two things were a GREAT negative example. So they printed up a study guide and EVERYONE could read all 12 volumes of the study–and they all did, for years.

Second, since then they’ve also looked at other color revolutions (and Egypt now for sure too).  They’ve adapted their strategy according to the mistakes of others.  The fall of the USSR was fundamental to their development, Deng switched instantly in the mid 90’s from the Stalinism of the ’89 reactions and went for econ development–that probably saved them.  They bought off the business elite and academic elite too.  ALSO 1000’s of Chinese have studied in the US, more than 1mil total and about 20% have gone back to China and are in the govt.  They brought western tech and management skills.

What is the status and restrictions of foreign correspondents?

You can go to events and places but they control the info tightly.  They bug apartments and phones still.  They don’t directly threaten foreigners any more, instead they threaten your assistants and friends (Chinese).  They’ll take out the Chinese friends to “tea.”  Friends pay the price for foreign press “mistakes.”

What’s the future of Tech coming from China?

They are pouring massive amount of money into this.  Uof Biotech (sp?) is the only Uni not controlled by CCP.  But the question is, will it spark innovation?  UofSD is studying the rise of innovation.  China is a 2nd level and moving to the 3rd level of innovation now.  They are not at the 4th level where it the US has been for decades.  But UofSD thinks that they will be there soon.  I DON’T THINK SO.  The system structure is still top down and so controls resources.  For example, the State mandated the development of 40 marketable pharma products in 5 years–you just can’t do that.  China’s only had 1 in the last 60 years!  So it’s still a top down system–but that said, there is desire to focus on tech.  They do NOT wan to be a low cost labor country any more.

I had more questions that I didn’t get to ask.

1.  How does the Hukou system still limit housing/bennefits etc?  Will it ever be abolished?

2. Is there a housing bubble?  All the excess building–will there be a crash like ’97 in Thailand and South Korea?

3. Investment and increased education has lead to both increase in corruption and scholarship?  How is this affecting the rest of the world?

4. How is business being changed by China?  Or is China being changed by western business standards?

5. Does the combination of corruption, pollution, the lack of brides, the age demographic and lack of health care and a slowing of growth result in “Egypt” in China in the future?

Quality, quality, quality. Quality equals money, which is most likely why it is the hardest thing to get. Over the last few weeks I have learned that you should never trust a factory’s quality control and you always need to check the product yourself. Here is one experience that helped me come to this conclusion.

Our factory was getting close to the shipping date of a product that was not packaged. The factory that we had contracted with couldn’t finish the packaging and was sending our product to multiple other factories to help with the packaging so we could meet our deadline. A co-worker and I went to one of the new factories to make sure that the packaging went smoothly and that quality was being maintained. We spent the whole day teaching the floor managers about the quality we were looking for, how to check for bad material, and how to package the product so it doesn’t get damaged. We felt confident that things were going smoothly and that we were going to get good product. The factory was going to have more people come and work through the night so we could get the product shipped the next day. Before we left the factory we made sure that the floor manager knew our quality requirements and that she would make sure all the new lines packaging at night knew them as well. When we came back the next morning to check the product we expected to find the quality as we left it but what we found was far from that. The lines at night had not maintained the quality like we taught during the day. We ended up not being able to ship the product. What is even worse was that when the product was moved back to the original factory their quality control personnel checked the product and tried to tell us that it was fine. They said after checking over 10 cases they didn’t find any bad product, we then checked and found bad product in every case. We ended up having the factory go through the product and pick out the bad items. They then had to make more to replace the large amount that was wasted.

I can only imagine how much extra money the project cost the factory because they didn’t maintain quality. It seems counter-productive for factories to cut corners to save a little money when it costs so much more to fix the problems if they are caught but they still do it hoping you won’t find out. The bottom line is trust yourself. If someone tells you it is fine, check it, if you weren’t there check it, even when you were there, check it again to make sure.

Notes from David

Notes from New to China Buyers Seminar at the first phase of the Global Sources China Sourcing Fairs at the Asia World Expo in Hong Kong.  I’ll be speaking again this next week at the Gift and Premiums Show and then again next week at the Garments and Textiles show.

1. Charles Kirmuss of Kirmuss and Associates Consultants says that  buyers need to build relationships with manufactures because you’ve taken away the QC and the professional middleman that was guaranteeing product quality.  If you go factory direct to China you are now responsible for ALL the professional services that were previously taken care of by others (QC, logistics, testing, importing, project management, etc.)

2. In China there are very few managers with more than 10 years of experience.  There are a bunch with less than 10 and then there are a ton of guys just out of college (who have NEVER EVER even had a part time job before).  That’s pretty much it.  If you’ve graduated from a Western University, if you had a part-time job in high school and/or college or fixed your own car (or stereo) you are the new middle manager and you have more experience than most of the people you’ll work with here.  If you went to graduate school and/or have been working for more than 15 years in your profession/industry you will be the undisputed expert in just about every factory you visit over here.

3. Mike Bellamy of Passage Maker said: Choose you lawyer and location carefully.  1. Make your contracts enforceable in China first, and a nearby locality or the main city of production preferably. They only time when you wouldn’t want to do this is when the town is so small or the manufacturer is so large (% of local employment) that you’ll not be guaranteed a fair trail.  In that case make the juristiction the nearest big town/provincial capital.  2. While you may be better/more familiar legal services and a better court system in the US you’re not likely to ever see your Chinese supplier in the US–and that means you’ll never be able to actually take him to court.

Here’s a link to a very good  article about the N0be1 Pr1ze from Cal Poly that references SRI (blocked in China).  What will the Chinese government do when some Chinese person they agree with wins the N0be1 Pr1ze? (Yes, I’m paranoid about getting blocked.)  Will they count past Chinese winners?  Will they let a Chinese ever accept the award?  What if it’s a government official?

On a related note, of course the events of the past week are blocked in China.  Even with the fact that there were issues with busses and marches in SZ on Monday, no one in my office knew anything about them other than there was traffic problems.  Isn’t this is like lying to get something and then realizing that the lie may ultimately prevent you from getting what you wanted after all!

The reality is that the Red Shirts have won.  Like it or not, they have been in the streets too long and have too many people shutting down too much of the city to be physically moved or cajoled out.  The government has ordered them out, has issued summons for arrest of the leaders and still they fill the streets and shut down multiple shopping malls, hotels and intersections.

The govt looks both weak and indecisive even though they have the law on their side.  They probably have about ½ of the populace on their side and business leaders are putting pressure on them to do something too.  But they have done nothing.

But to be fair, the govt have few if any choices left to them.  They can use force and push out the Red SHirts and then have a full scale riot on their hands—this will garner support from people on the fence and be condemned by all the int’l press and foreign govts.

Or they can negotiate—which just means that the Red Shirts get more and more leverage the longer they can hold out.

The military doesn’t want to step in either.  This is evidenced by the fact that there are NO police or military on the streets at all (police offices near the protests are closed!).  Even though there is a State of Emergency in effect, laws specifically regarding mass assemblies have been breached and there have been more than 40 bomb threats in the last 3 weeks—even injured policemen–there is NO security presence visible at all in the main protest area (Radjaprasong Dist.).

So if the military aren’t going to stop the protests will they force a coup?

They are stuck here too.  If they force a new govt on the people then they’ve simply recreated the same problem they are facing now—a non-elected government that the people do not accept.

This is a crisis of faith in the system, not just a partisan political move at this point.  The Thai people have to choose: if the government is dissolved and a new election occurs, will they accept democracy regardless of whom is elected or will the next government also face mass protests from the opposition?

If it was just the position of the PM in Thailand that was in question this might be just an academic question.  For example, Military kicks out Abhisit and sets up a temporary govt for 2-3 months to set up new elections and then the democratic vote ends the problem.  But it’s much more serious than that.

It is no secret that corruption in Thailand (and China, and Vietnam, etc., etc.) is a historical and cultural problem that affects not just governments but businesses and everyday life of almost everyone living in it’s wake. The Thai courts, the military, the freedom of press, the relationships/influence of business and powerful families are all in question.

So what if the government is replaced but the courts are still controlled by the military?  So what if a new PM is elected democratically if he again has big business ties (as Thaksin did)?  So what if Thailand gets a new government but a large enough percentage of the population decides they’re not going to accept it no matter what (and protest until the choice is, again, force or absolving yet another )?

Regardless of who wins this round Thai’s have some ethical decisions to make about what’s next for the land of smiles.  And these decisions will specifically affect business as well as politics, hopefully for the better.

On a lighter note, the best piece of political commentary I’ve ever heard came from a speech given by a UDD leader yesterday.  In talking about policies that look good on the surface he said (Using the word for transvestite as the personal pronoun) “It may look pretty, but until you see which bathroom it walks into you don’t really know what it is.”

And I bought a great shirt t00.  It says: “Have you gagged-down-like-a-dog enough yet?”  Very vulgar Thai verb for eat that you don’t use for people.

Also, the Red Shirts were the most polite group of protesters I’ve ever seen.  They offered me food, drinks and a place to sit and listen (relative close to the stage).  I must have had polite conversations with 10-15 different people attending the rallies last night–all from BKK (as opposed to the afternoon folk which are mostly bussed in from the provinces and paid around 65B/day)–to a person they were interested in what I understood and hoped that I would support their cause.  But they weren’t pushy about it.

Finally, just by chance I ran into a buddy from grad school who was also watching the protests.  What are the odds?!  Two Americans, that speak Thai, who went to school together, in the midst of a crowed of more than 10,000 people, at night, run into each other!

I’ve also been incredible busy–I’m writing this from Vietnam. 5 countries in the last week and the contrast in national “personalities” is just striking–I’m literally overlooking a huge street party in HCM city right now.  Vietnam just won the Asian Games football gold.  Thailand was a vacation (whether we wanted it or not) and China is 24/7 business–we were gone for only a week and came back to a new building that had previously just been cement, with a totally new glass face.  Taiwan seems more and more depressing each time I go and Hong Kong is still amazing.   And as we’re heading back to the US for Christmas (country #6 in 10 days), this will be the last post of the year too–other than the annual year-end review of the most popular posts.

Thanks for reading and commenting.  Merry Christmas and Happy New Year.

At the last Global Sources show in Hong Kong I was asked after my presentation: “So is there anything else that you think we (people new to business in China) should know?”  I answered, “Yea, tons!  Do you have a year?”

Here’s the longer answer to that question.  These are my suggestions based on the books that I’ve read over the last few years.  These are all books that I liked and found to be of value, or at least to be of interest.  I tried to focus the list and limit the qtty to what I expected is a manageable amount of reading for someone who is busy moving to another country.

Of course, this list is in no way exhaustive.  Feel free to add to it.

I’ve divided the suggestions into different categories based loosely on the situation of the coming reader.  The first link is to SRI’s book review (if I wrote one), and the second is to Amazon–you’re welcome.  My favorites are numbered (1-10).

First, Business Professionals—meaning people that are going to be working in China in a more or less completely Chinese environment full time.

(4) Inside Chinese Business, by Ming-Jer Chen

(3) Chinese Business Etiquette, by Scott D. Seligman

(7) The China Price, by Alexandra Harney

The Chinese, by Jasper Becker

Managing the Dragon, by Jack Perkowski and (8) Mr. China, by Tim Clissold

Business Leadership in China, by Frank T. Gallo

(5) The Coming Collapse of China, by Gordon G. Chang

(Yes, there are a ton of other books that could go here–feel free to add to the list below–but these are the ones that I thought were the best.)

Sub category: Importers—people trying to build their own brands and markets within China.

All of the Business books above, plus:

Luxury China, by Michel Chevalier and Pierre Xiao Lu

(6) Elite China, by Pierre Xiao Lu

Where East Eats West, by Sam Goodman

Sub category: Buyers—these are people that are here irregularly, but still have significant in-China experience.

All of the Business books above, plus:

Poorly Made in China, by Paul Midler

Factory Girls, by Leslie T. Chang

All the Tea in China, by Jeremy Haft

One Billion Customers, by James McGregor

Second, non-business types. Maybe spouses of professionals and/or English teachers or students (non-business focus).

(9) River Town, by Peter Hessler

Oracle Bones, by Peter Hessler

The Rape of Nanking, by Iris Chang

Will the Boat Sink the Water, by Chen Guidi and Wu Chuntao

Wild Swans, Jung Chang

Life and Death in Shanghai, by Nien Cheng

Soul Mountain, by Gao Xingjian

Chinese Lessons, by John Pomfret

China Hands, by James R. Lilley and Jeffery Lilley

Lonely Planet China, here’s the web site too.

Sub category: Politics and/or higher education

(10) China: Fragile Superpower, by Susan L. Shirk

The Tiananmen Papers, by Liang Zhang, Andrew J. Nathan, Perry Link, and Orville Schell

(1)Gifts Favors and Banquets (anthropology), by Mayfair Mei-Hui Yang

(2) Capitalism with Chinese Characteristics, by Yasheng Huang

The Great Wall, China Against the World, by Julia Lovell

What does China Think?, by Mark Leonard

The Search for Modern China (history), by Jonathan D. Spence

Chinese Religiosities (anthropology), by Mayfair Mei-Hui Yang

Unless Madoff-style or Enron-style accounting is taught in school, I believe that “Accounting in China” should probably be taught as at least as an anthropology class in International MBA schools: this is just the way numbers are run over here—from SOE’s to NGO’s, to local govts, to private companies.

Item 1.  NGO’s are not. Meaning your donation to the Sichuan earthquake victims actually went to the CCP.  Highlights here, and the original article here (h/t to China Esquire)

Item 2. SOE’s are making a comeback. Contrary to popular belief, SOE’s are not a diminishing part of the Chinese economy, but rather a ever-growing presence.  In the book Capitalism with Chinese Characteristics, Huang discusses this as a mater of policy since the early ‘90’s.  In his (always good) blog Bill Dodson discusses how the tax laws, investments in strategic resources and the stimulus package in China is accelerating it too.

Finally the One Child Policy. The numbers from private groups, again different than the propaganda that the central government is putting out, show that China is going to have a very different set of demographics in just 20 to 30 years.  And, as the comments point out, there are significant questions about the accuracy of the numbers as the census takers are motivated by politics and countervailing job performance standards than by collecting accurate numbers.  But even if the numbers (120-100 girl-boy ratio) are less than that (I’ve read more like 112-104) the result will be the same, just a decade later. Brubaker’s blog is another that I recommend should be regular reading—always good stuff.

The reason for pointing these out is not to make China look bad but to make foreigners coming here for business for the first time (the majority of my clients) look twice (or three or four times).  My intent isn’t to bash China, but rather to point out that just because people work in glass an steel office buildings, wear (pant) suits and use cell phones and computers does not mean that they do business the same way.  I just think that it’s often times a shock for non-Chinese speaking Westerners to see McDonald’s and Starbucks and then find out that account rules are not the same and might just as well be written in cuneiform.

I find the excitement about China to be significantly reduced when the rubber actually hits the road for most people.  More often than not China ventures are not as financially successful as they could be (or were expected to be), often because many coming to China don’t know what they don’t know about Chinese business.  Admittedly, I’m in the fixing-problems business so I only hear the horror stories, but I have to think that many problems that foreigners have in China could be managed if not avoided if more education and DD were added into the pre-order processes.

Good luck.

Long time readers will also know that I doubt that the China is the next “superpower.”  But I do completely agree with and believe that China should and will be the largest economy on the planet—just getting 1.5 billion people to a respectable level of education and income will demand that it be so—the world just needs to get used to that.  But China is not there yet, as this FP article points out.  And there are many issues (increasing poverty, decreasing education) that have been getting worse not better in the last 20 years; hence my uncertainty about China’s future.  The combination of so many factors leads me to the conclusion that there are serious troubles ahead for China.  For the sake of my family and business (and other people too) I hope that I’m wrong.

If you’ve read my posts on the economic situation on the blog and are again thinking “man, this guy just can’t say anything good about the Chinese economic miracle and the fact that it’s the only growing economy on the planet” then you need to read both these articles and some of the other books that balance the China-as-world-savior hype.  I’m not saying you should subscribe to the China’s-going-down-in-flames perspective, I don’t; cautious pessimism is more of what I would call my attitude—which I find prudent for doing business here.  But as more info comes out, an increasing number of people in a wide variety of business and political sectors are seeing a big crash coming too.

Remember when you read numbers on China—there is absolutely no transparency here.  Not in the government, not in public companies, not in private companies, not in tax records, not in corporate power distribution.  Nowhere.  So everything you read, you have to question both the source and the motive of the source.  Further, the terminology used by Chinese and then translated to into English equivalents are often misleading as the baggage/meaning in the English is not necessarily the meaning in China and sometimes completely different from the Chinese.

And finally, while the US and China are sitting down together this week–the Chinese are (rightly) asking the US what the hell is up with the “stimulus” package that inflates both long term US debt and the current deficit?!   But the US is asking the right questions too–how can the Chinese government continue it’s stimulus if the world doesn’t recover to pre-crash levels of consumer spending?  Answer?  They can’t.

For example, the sales team was told that it takes two weeks to produce item XYZ.  But in reality over the past year every shipment is at least a week late, if not two.  This PM says it’s obviously taking 3 weeks to make the products.  So, logically, they need to extend their lead times accordingly.  But where’s the other week going then?  Domestic port transfers.  Closing dates are on Wednesday or Thursday for Yantian port in Shenzhen.  So if you don’t get product IN the port by noon on Wednesday you miss the boat and have to wait A WEEK for the next one.  And the boats don’t leave on Wednesday, that’s just the closing date.  So even if you make the closing date your stuff won’t leave China for another 4 more days.  There’s your second week.

But for some reason, sales people think 1) “Hey?! We can load and clear out a container in one day, why can’t they?!”  and 2) “Can’t we just tell them to do it faster?”  This is the secret to working in China.  Logical and logistical inefficiencies abound and make every transaction take longer (even if there are more workers and production is actually shorter than in the US).  You have to realize that banking, logistics, communications, physical confirmations of product and container loading can take you much longer than what you’re used to in the US.

Get your head around this reality and adjust your expectations accordingly or be very frustrated for the last two weeks of every order.  PM’s can help the process by placing orders on Fridays and start counting days on the following Monday.  You can also account for closing dates and shipping lead times; add in at least 4-5 days for every shipment or coordinate orders to finish and go to port on Monday or Tuesdays so you know you’ll catch the Sunday boat.  Understand that there are cultural issues on both sides that are hard for the other party to understand.  (For example, why can US companies only cut PO’s/checks one day a week?  This drives Chinese business people nuts.)

The second conversation was about attitudes and perceptions in China with the US economy is still weakening and China (according to official reports) still getting stronger and pulling out of the recession (first).  I’m still hearing that this is changing some of the ways that factories are looking at clients/buyers.  It’s not bad, actually it’s good.  But for those foreign buyers (especially US) that were used to being treated special, those days are coming to an end.  There are other fish (with money) in the pond now.  And there are enough stories about foreign companies stiffing Chinese factories that everyone here knows someone who was “unfairly” imposed upon because of the financial irresponsibility in the West.

Both this blog and China Law Blog have detailed how Chinese factories are more and more sophisticated in their research of potential foreign buyers and their participation in foreign markets.  This is all good, unless China was where you came to stroke your ego and feel appreciated.

You can also add to this the fact that factories are calling and telling us that if we have clients from the US they don’t even want them to visit right now because of the fear of H1N1 (pig flu).  They don’t want to take the chance that they’ll have to quarantine everyone for a week to ten days just because some guy from LA showed up with a cough.  Like Rodney says, no respect.

Other tidbits.

GM to make autos and ship them to the US.  Good, bad or ugly?

Good, for the domestic market here for sure.  Bad for Detroit—but what isn’t other than the Red Wings?  And ugly for quality.  Everyone’s heard of Beijing Jeep.  But it’s not just fake autos but parts out of China that are really scary.

80% of fake parts come from China. It’s so bad India (yes, India) is scared of being lumped in with China.  Most know that counterfeits are endemic to the China auto industry.  And that Professionals can’t tell the difference. What’s scary is that poor quality fakes in your car can kill you and the number of products sourced for autos in China is going to rise (especially if the entire car is built here!).

This is a good source for Black Market auto parts and other counterfeit news (news about counterfeits, not fake news).

Other Econ news.

You’ve heard of the bell curve, right?  Well, meet the “W” curve.  No it has nothing to do with George but everything to do with the end of this year.  Be afraid.

And finally, Missing China stimulus money is feared to be in individual bank accounts and stock portfolios.  50% of govt infrastructure programs are not completely funded either.  This is how you spell “slower-than-expected” second ½ of 2009 annual growth.