This is China! blog

The holidays have still not ended in China. Though the West is recuperating from Christmas and New Years (and the Americans are still trying to work off the Thanksgiving turkey from round their waistlines), we here in China are gearing up for the mother of all human-migrations – Spring Festival (otherwise known as Chinese New Year).

Here are some of the conversations I’ve had with people (usually over a pint or two of brew) during the festive season:

The 30% Problem
It was Christmas day in Suzhou. Several score of us families and friends both Chinese and Western were hooting and hollering and eating and imbibing and generally having a festive time. But the owner of one of the Western restaurants in the area was not in as festive a mood as he would have liked. He continued, “Since September, business has been down 50%.”

I offered, “Some have said that by this time next year there’ll be 30% fewer Westerners in Suzhou than last year,” proposing that companies are recalling their expat managers in increasing numbers.

A pub owner in the group exclaimed, “30% percent of the Westerners have already left Suzhou since the summer!” He had also seen a substantial decline in business in his establishment.

“The problem is that Western companies aren’t flying their managers here to Suzhou every month for operations visits and supplier tours.” Indeed, a senior level manager in the group who was accustomed to hosting managers and engineers from the UK and the States nearly every month for ten years said HQ had frozen ALL international travel for its staff.

More space at the Inn.

Siphoning Welfare
With so many companies in Suzhou Industrial Park (SIP) laying off staff an issue has arisen with former employees withdrawing all the contributions from the SIP Provident Fund. The British manager who broke the news explained, “Employees contribute a portion of their salary to a fund that serves as a savings account so they can buy a home in SIP. The company matches the contribution. But employees have the option of withdrawing the funds when they no longer work in the Industrial Park.”

So, the dispossessed – mostly assembly workers and machine operators – are taking the contributions back to their hometowns, likely to start little businesses of their own.

“But if they decide to work again in SIP,” the manager said, “they may not be able to take advantage of the Provident Fund. Their names are still in the computer.”

So, they may be welcomed back to work; but they may not be able to get that subsidy that helps them buy their home in SIP.

Koreans Go Home!
A long-time resident of Suzhou has several children attending the Singapore Suzhou International School (SSIS) in SIP. He talked with a couple of his childrens’ teachers to learn that about 200 Korean (South, of course) students had not returned to classes after the Western holidays that round out the year. Now, that may not sound like much, but consider: SSIS has about 1200 students; 600 (!) of those students are South Korean; 1/3 of the South Korean students did not return at mid-term; or more than 15% of all students did not return to kick off 2009.

That certainly reflects gravely on the plight of South Korean manufacturers in Suzhou, and on the South Korean economy itself. And it certainly isn’t helpful in keeping Suzhou buzzing along at its 36% GDP growth rate. I’d certainly be interested in hearing the extent to which matriculation by Western students has been affected.

You Are Uncordially Invited…
While gulping a beer after work one evening I was whining about again having to renew my visa just after three months after getting it renewed in October. A combination of bad timing with the expiry of my passport, expiry of my work permit, and expiry of my visa all within a six-week period forced the situation. I don’t think it helped that the government was still in bad temper after the Olympics. Despite after living here in China five years and always getting one-year residency, local officials thought I only deserved a three-month visa; because that’s what my latest visa was for. One of my staff explained the odd confluence of events during the Fall of last year. The local government said they would take it under advisement.

One of guys around the Table said one of the rules that has stuck since the Olympics was that now invitation letters have to come from local governments, NOT from the companies. The company feeds the local bureau information about the foreign guests, whereupon the government takes its time deciding when to forward the letter. Of course, that lengthens the time during which executives and the like have to wait for their invites, and can frustrate a great many investment plans.

Though it’s clear China wants to ensure it inadvertantly does not invite riff-raff into its country, one Westerner’s view (ie, mine) is that they are sure to throw the baby out with the bathwater by pinching off genuine interest in foreign investment into China.

Sever Me, Please!
Peter, a good friend, recently took a severance package from his company. After more than twenty-five years with the Fortune 500 company and just a couple years from proper retirement he told us all at the beginning of January he was stepping out. By his telling, the severance amount was HUGE. He and others of his executive level were offered such packages essentially because of the global economic downturn.

He is one of the “old-timers” in Suzhou, having set up one of the first Western operations in the area ten years ago. It can genuinely be said he contributed a great deal to the modernization of Suzhou and to the development of talent in the area – not to mention to the once-upon-a-time color and fun of Suzhou’s Bar Street, Shiquanjie.

He has no intention of returning to the West, but has every intention of “working for the enjoyment of it,” instead of “working for a living.”

All the best in the next chapter of your life, my friend.

Minxin Pei recently wrote an essay that went to the heart of the Central Government’s Fears about the global economic downturn: unemployment.

….high unemployment of migrant labourers and university graduates could pose a more deadly threat to social stability. Based on surveys by Chinese sociologists, only about half of the jobless migrant labourers have returned to their native villages, leaving roughly 5m unemployed, mainly young, migrants in urban areas (the number is expected to rise significantly this year). Chinese graduates, most of them the only child of their family, are among relatively privileged members of Chinese society. Unlike the proletariat in moribund SOEs, Chinese graduates harbour powerful individual ambitions, possess strong organisational skills and have a tradition of challenging government authorities.

The author proposes that though it is necessary to build China’s “hardware” infrastructure – roads, airports, railways – it is as important to invest in China’s human capital.

While infrastructure spending can help absorb some of China’s overcapacity in heavy industries (especially steel), it will have a negligible impact on generating employment for jobless migrant labourers and graduates.

I would add to this point that China’s desire to move up the industrial value-add ladder will require more and better trained personnel than it currently has on hand.

A more effective approach to staving off potential unrest in urban areas would be to increase investment, not in more hardware, but in human capital. For example, China should create its own “Teach for China Corp” (modelled after the successful Teach for America Corp) and hire hundreds of thousands of new university graduates as teachers in rural areas, which have a severe shortage of qualified teachers.

I realize this smacks of the programs of the Cultural Revolution in which young people were sent to (and sometimes stranded in) the countryside, but a loosening of the hukou (residency) permit requirement as well as the “contractualization” of the education terms for teachers could go a long way toward dispersing a great deal of creative and potentially destructive energy.

If implemented, these two “human capital investment” programmes would absorb 2.5m migrant labourers and new graduates, with the job creation effect equal to 2.5 per cent of gross domestic product growth. This would be money well spent. By investing in people, China would not only increase its human capital, but also secure social peace in hard times.

Services outsourcing businesses here have certainly seen a slow-down; especially those that are oriented to international customers. An insider at one of the outsourcing companies here in SIP has told me they’ve laid off most of their people in the BPO division, their localization group has been idle the last two months, and they are laying off staff in their IT outsourcing division.

I would say the best positioned companies to weather the financial crisis are those that are domestically oriented – which is the majority of services outsourcing companies in China; and those international service providers with very deep pockets – ie, the Indians (including Satyam, if it finds financing, public or private). Most Chinese services outsourcing is done with customers within China. The outsourcers based in the Yangtze River Delta region stand the best chance with all the MNCs in the neighborhood to develop the technologies, processes and disciplines that will make them world class outsourcers in the international markets five to ten years in the future.

Since the Chinese market has indeed slowed down compared to 2006, overall industrial activity has decreased domestically. However, many mature Chinese companies are finding cost savings through outsourcing back-office services to Chinese providers; the Shanghai financial industry outsourcing back-office activities to Hangzhou providers is a case in point. The rigidity of the new labor law has made it more difficult to fire people; skilled, experienced labor is still difficult to find and salaries are still relatively high; hence, the appeal of services outsourcing in a modernizing China.

The Chinese services outsourcers that support Japan and South Korea are going to really hurt. Those two export markets are falling off a cliff economically. It is also possible that once the recessions in the those countries end, it will be more cost-effective for companies in Japan and South Korea to keep the services in-country, because of salary and operational cost deflation brought on by the recession.

So, services outsourcers based in China catering to clients outside China will continue to hurt. Domestic services outsourcers have seen business slow down; however, business will pick up for them as the Chinese economy picks up for secondary industries, and as Chinese consumers regain their confidence about the Chinese economy (which is why many Western companies are here in China – to sell to the Chinese).

Meanwhile, the Indian services outsourcing sector sees a slowdown in the growth going into 2009 from 30% per year to 10% to 15% per year for the next couple years. Further, their government is continually having difficulty rationalizing a business sector capable of capitalizing on the outsourcing services in its own backyard. Of course, it does not help that the CEO of Satyam – one of the Big 4 services Indian outsourcers – quite effectively scammed the company’s customers so he could live the good life. Sort of leaves a bad taste in a buyer’s mouth. Finally, with India and Pakistan posturing at their shared border, no wonder Western multinationals are diversifying their outsourcing risk by using service providers in China, too.

The next year could be the best opportunity the Chinese have of eating a larger portion of Outsourcing curry.

The Financial Times reported today that the Chinese leadership is making a big push to better inform international audiences about the way things really are in China.

China is pushing its state media to create credible, appealing news for an international audience, in an attempt to spread a more favourable image of the country in the west.

The plan, backed by at least Rmb30bn ($4.4bn, €3.3bn, £3bn) in government funds, comes as Beijing looks back on a year of public relations disasters.

Global Times, closely affiliated with the Communist Party will launch and second English-language newspaper while Xinhua hits the airwaves with an English-language station.

Of course, it would be simpler and cheaper to just let the international journalists already in China gain access to restricted regions in the country to file their reports, and to allow them to do their jobs without being beat up by local government thugs.

But the image might not be as pretty.

The Financial Times today reported that the Chinese government is cheered somewhat that its fiscal stimulus package is working.

“Wen Jiabao declared China’s efforts to offset the effect of the global economic slowdown an “initial success” on Sunday as the economy performed “better than expected” last month. …

Speaking during a three-day visit to industrial regions in eastern China, Mr Wen said sales at some companies had begun to rebound, stockpiles were falling and electricity consumption was rising.”

Well, that all seems rather premature to me, especially since the package was just announced in October last year. And though monies in the package had already been disbursed in 2008 as part of infrastructure projects, it’s much too early to declare victory in what will be a very long economic march indeed.

“It was not expected to improve economic growth until the middle of this year but some industries, such as steel, have already shown more confidence since the stimulus package was announced. Scores of Chinese steelmakers have resumed production in the hope that it will lead to a sustained recovery in steel prices.”

Steel makers:
a) are mostly state-owned, with largesse passed on to them by the state-owned banks;
b) know that eventually, likely in the Spring, the real estate market will begin revivification;
c) are no rocket scientists and have a reputation for being famously speculative;
and
d) have probably been ordered to increase production.

I’d rather watch concrete dry.

I’ve always said that next-door Kunshan per capita has the prettiest women in China. It’s a simple fact that Kunshan as a boom town made rich by Taiwanese investment attracted to its KTV lounges, discos, bars, tea houses (of ill repute) and barbershops (yes, even a haircut could be made sublime) attracted the cream of Chinese xiao jie from around the country.

But now the party has come to an end and districts in Kunshan are scrambling to find a way to take care of former employees of Taiwanese bosses that have taken the money and run back to Taiwan. According to a Financial Times report:

“As factories in this manufacturing hub near Shanghai, hit by the sudden collapse of export orders in the past few months, fail by the dozen, the government of the district of Lujia is scrambling for financial aid to pay off thousands of laid-off workers. It has turned to the few flourishing businesses in town for help.”

This is a huge trauma for the local government, which built the village into a vibrant if not unique economic success story in China.

“For Kunshan, home to the largest cluster of Taiwanese-owned manufacturers in China, this is a drastic turn in its fortunes. The arrival of manufacturers from the island in the mid-1990s, which quickly built profitable export bases for everything from computer components to furniture, made the city the first in China with tax revenues exceeding Rmb1bn.”

But the same Taiwanese companies that would willfully spew industrial waste into Kunshan waterways and paid its workers a pittance to work long hours and to live in cramped dormitories are getting out while the getting is still good.

“In October the Taiwanese founder of Hei Mengniu, a forklift factory close to Thermos, closed its gates and disappeared, leaving several thousand employees behind, their wages unpaid.”

But Kunshan government has a way of detecting possible plans for Great Escapes by its investors, something I’ve not read before:

“A utility company has been ordered to report weekly on trends in electricity consumption by local corporate users to the government. ‘Once there are drop-offs in use, township officials will be on your doorstep investigating whether you are closing down,’ says Mr Lin.”

But Taiwanese investment in Suzhou is just as much a cause of the meltdown in Kunshan as Kunshan’s liberal policies toward its tenants.

“Dick Lai, a senior executive at Plotech, a neighbouring computer component company, says the recent collapse of an affiliate of Taiwan-based Vertex Precision Electronics in Suzhou, a city close to Kunshan, means a number of suppliers in Kunshan will be next.”

Sounds like it’s only going to get tougher to find a satisfying haircut in Kunshan.

George Orwell’s 1984 presaged a modern age in which Big Brother – an autocratic and technologically sophisticated government – is watching its citizens. But what Orwell never presaged was that the citizens would take to the technology with gusto and start watching the government itself!

And so we have the case of the not-so-modest government official in Nanjing who’s been caught in a photo clocking into work with a much too expensive watch and smoking upscale cigarettes. According to the Shanghai Daily:

“The watch would have cost at least 100,000 yuan (US$14,500) in China, while each carton of the Nanjing 95 Imperial cigarettes sells for 1,800 yuan.

“Zhou, 48, was also found to drive a Cadillac to work.

“Photos of him wearing the luxury watch were posted on most China’s major Web portals and were widely discussed among Netizens.

Some Netizens, wondering how a public servant could afford such an expensive lifestyle, filed complaints with related government departments.”

Jiangning district officials quickly responded – through the internet – that Zhou was being investigated for possible wrongdoing. And if that wasn’t enough…

Media reports also revealed Zhou’s son was engaged in the housing-material business. There are suspicions of illegal dealings between father and son. However, no evidence has been released so far.

Government Suits: The Sons and Daughters of the Revolution are Watching You!

The January issue of Eurobiz Magazine just came out with my latest column, entitled “Slowdown Survival”. Eurobiz is the publication of the European Chamber of Commerce in China. The article describes approaches SME’s are taking to managing their China operations in these challenging economic times. Some of the tactics companies have taken to hold steady through 2009 include:

-restructuring their business entities to either reduce costs or to boost revenue streams;
-reducing operating hours while holding on to staff;
-asking staff what it can do to reduce costs (of course, this one usually results in a unanimous “turn the thermostat to freezing!);

I even include some of the approaches we are taking in our own company to reduce overhead, including:

-using the bullet train to get into Shanghai (35 minute ride each way), or out to Nanjing or even Xuzhou;
-managing our outsourced IT outfit as though it was an internal department.

Of course, the classic knee-jerk reaction to most recessions is “to fire the bums!” The “bums,” of course, being the non- or under-performing staff. I write in the article that an HR Manager friend – a Chinese fellow with many years experience working for multinationals in China – makes the point, “”you have to keep your core staff for the future, even if you lay off employees. The core is always protected.’”

Sometimes it difficult to remember during tough times that a new tomorrow will dawn. Best to prepare for it now.

I had a very pleasant consumer experience recently in the new apartment. The washing machine was burping water onto the floor of the patio. Despite all DIY efforts to unstick what had gotten stuck from the machine’s pipes, we eventually had to call the manufacturer, Haier, for a service call. The number was a Beijing phone number, which was still manned on a Friday evening (January 1st). Saturday morning, a Haier repair fellow came by and fixed the machine. Took him about an hour.

Later that evening the Haier-Suzhou office called. Did the technician arrive? Did he successfully fix the machine? Did he charge just the 50RMB that appears on the service slip? (It is common practice here to discuss one price, charge something higher, and record an even higher price on the invoice – which some find useful when expensing items and services).

Talk about flabbergasted. I found myself grinning from ear to ear with the revelation of a true customer service experience in China. After having suffered nothing but subpar service and no after-service support for years here in China, the experience was like a breath of fresh air.

Then, to cap that bit of customer satisfaction, the Beijing service center called. Is the washing machine still working? Were you satisfied with the service? Is there anything else with the Haier brand in your home we can fix?

If indeed other flagship Chinese conglomerates are striving and actually achieving world-class levels of excellence in production and service in their HOME market, then Western producers need beware in the international marketplace.

Chinese companies with international-brand aspirations are smartening up.

I had written a couple weeks ago that while I was traveling the States I was notified water was coming up from the floor of my Suzhou apartment. The landlady as much as admitted once the jackhammers had torn up the tiled concrete of the kitchen floor the plastic piping for the water main was substandard and the workmanship even less so.

Despite her making the place unlivable then, forcing me to find new digs, she still refuses to ante up any compensation for damaged furniture, an unlivable apartment, another deposit forked out to yet another skin-flint landlady, and the time and hassle spent finding a new place, moving there and then getting re-organized. Three weeks on and the bare concrete floor still has no faux-wood paneling to recover the dining area and living room. And perish the thought I should get my deposit back on the place.

I kept ALL the keys and the electricity and water and gas cards; she’s apparently changed the lock on the front door, though, according to my former real estate agent. So much for that bit of leverage. She clearly did her math, carefully weighing the hassle factor of getting new keys and cards against the money she had in the bank from the gullible foreigner.

A Chinese friend explained that of course she wants to hold on to the last month’s rent and deposit since now the place is emptied at the height of winter at the start of what looks like will be the mother of all recessions. It will be difficult for her to find new tenants soon. Still, I hope the water pipe just installed bursts again with no one but the downstairs neighbors to discover it once the water has completely saturated the ceilings and drips brown stains on all the hapless neighbor’s furniture. BWAH HAH HAH!

And as those of my gentle readers will recall my exploits a couple years ago at the Lakeview Tower on Jinji Lake (though it should now be called used-to-have-Lake-View Estates), I was bilked out of that deposit as well: all the construction noise and dirt and violence (yes, violence), was not enough to convince the owner of the flat to cough up the deposit. I hope they demolish the Tower by dint of eminent domain to make way for Phase III of the apartment complex.

An American friend of mine that also lives in Suzhou told me how despite numerous complaints to his landlord about a leaky toilet he also did not receive his deposit back at the end of the contract. The landlord claimed the guy and his girlfriend clearly did not flush the toilet right.

The kicker to all this is: there is NO legal recourse! One Chinese suggested I call the local TV station to show them the photos of the damage to the place and to plaster the landlady’s face all over every TV set in Suzhou. (For those of you who do not live in China: that is literally how so many Chinese civil issues are decided: through public shaming on local TV.)

So I’ve been thinking a lot about 20th-century Chinese history, and recollecting just why the Communists beat the hell out the landlords. Clearly, it’s BECAUSE THEY DESERVED IT! That’s my exalted conclusion. If modern-day Chinese new-money are behaving just as poorly as their fallen ancestors, then I will have no sympathy for them when the dispossessed of today’s China cry out in unison: “We’re sick and tired of it and we’re not going to put up with it anymore!” And actually do something about it.

Then we’ll see who holds the keys in the end.