This is China! blog

One of the things that drew me to studying Chinese history and culture was the sheer scale of death and destruction that would every now and then convulse the country: great floods, great earthquakes, great revolutions, great wars, great leaps forward and great stumblings backward. Nassim Nicholas Taleb in his books “Fooled by Randomness” and “The Black Swan” would call these highly improbable events that have major consequences Black Swans.

Since I’ve finished reading the books, I’ve wondered what makes a Black Swan with Chinese characteristics – what I’d call a Black Dragon. What makes a revolution in China different from, say, a revolution in Europe? Or what makes an economic miracle in China different from one in Japan or South Korea (societies and individuals can have positive Black Swans as well)?

Of course, there are two kinds of Black Dragons in China: man-made and natural. It’s the natural Black Dragons that can kill thousands in a matter of seconds, like the earthquakes of Sichuan in 2008 and Tianjin in 1976. In such instances, man-made efforts more often than not magnify the consequences of the Black Dragons. In the case of Sichuan, substandard construction of school buildings apparently killed thousands of children, while bunker-style government administration buildings next door held up strongly.

The Great Blizzard of ’08 is another case in point: the heaviest snows in a century in Central China moved down south to Guangdong trapping hundreds of thousands of travelers in railway stations, on trains, and in airports during the busiest travel season in the world: Chinese Spring Festival. A lack of government planning and coordination and price-caps on coal exacerbated the effects of a snow that had devastating consequences for the credibility of the leadership.

SARS was likely the most memorable bite from an international Black Dragon China has had. The threat of disease (after all, the Chinese like to say, only a few score people died; that’s nothing compared to the numbers that die in really important Chinese events, Chinese offered) completely shut down Chinese business, commerce and society for two months. The Chinese governments’ cover-up and reluctance to share information about the outbreaks with its populace and with international agencies slowed the country’s return to normalcy and, again, the government’s credibility.

There are of course Black Dragons that are purely of a man-made nature: in recent Chinese economic history, the bursting of the real estate bubble that has left thousands of construction sites idle is a case in point. Over-building, over-lending and over-investment by institutions and families alike led to an over-valuation that is unsustainable in the medium-term. The gamble has paid off well for those dispossessed from their land who were given flats that eventually ballooned in value far above their original value. But families that have pooled funds to buy empty concrete husks as investments have seen the values of their speculations tumble, especially in Beijing, Shanghai and Shenzhen.

One could say that the troubles west of Sichuan are of a man-made, highly political nature. The protests, looting and deaths all came at a time when China was trying to get its makeup right for its debut as Olympics host. The dairy scandal that came on the heels of the Olympics was a completely man-made Black Dragon: take an unregulated industry, mix in greed and corruption in business and government, add a pinch of melamine, leave in a political pressure cooker for several months and – voila! – the publicized deaths and injuries of infants that wiped away any credibility China had as an up-and-coming world power that took its caretaker role seriously.

Several Chinese cultural traits combine to create Black Dragons – Black Swans with Chinese characteristics: the Chinese penchant for reducing costs by cutting corners; the overwhelming quest for Face; the lack of transparency with which Chinese work in business and in government; a penchant for risk taking that would make even the most X-treme sportsman break out in sweat; collusion through guanxi; and an addiction to urgency.

Cutting Corners
From the time the avatar Marco Polo returned to Europe to tell of the riches of China nearly every Western businessman has considered the metaphor that to add an inch to the sleeve of every Chinese would make any businessman rich indeed. The Chinese operate on the flip-side of the aphorism: instead of adding an inch to every sleeve, wouldn’t it be glorious to subtract an inch, instead? Imagine all the savings one can pocket with such sales! the average Chinese businessman imagines. I realized this way of thinking after having a suit made by a Suzhou tailor to whom I had given the original to copy. Though I’d tried the suit on in the shop before leaving, I hadn’t thought to shove my hands in the trouser pockets to test their depth. It was when I wore the suit to a meeting for the first time I realized I didn’t have room enough in the abbreviated pockets for the customary keys and mobile phone and change and used kleenex, etc. The tailor had likely saved about 5 RMB in shorting my pockets (and the crotch, I might add), which doesn’t seem very much until one adds up all the suits he’s made that he’s short-sheeted. He is likely able to squeeze several more suits and pockets out of all that scrimping.

Chinese companies as China comes of age operate very much the same way. Unfortunately, they may scrimp on the really important stuff: like proper foundations and reinforcements and supports for the buildings that are supposed to house and protect residents and other end-users. Or they may short bridges … or super-dams.

Face It
Unfortunately, the overwhelming need for the individual Chinese to save Face only exacerbates the effects of Black Dragons like earthquakes and floods and food contaminations, and all but eliminates any impetus toward improving the system that spawned the improbably destructive event. As long as no one admits culpability and/or accepts responsibility for the unintended consequences of Black Dragons, cycles of destruction will continue to plague Chinese society for centuries more to come. Note there has been no visible, national-level drive to check the quality of workmanship of other schools in earthquake zones.

Under the Rocks
The Chinese have a saying: “If the water is too clean there can be few fish.” In other words, how can anyone in Chinese society possibly profit in the glare of a truly transparent system? The Chinese proclivity toward opaqueness in government and business dealings is also another major contributor to the creation and re-birth of Black Dragos. Without the checks and balances that allow regulatory and commercial transactions to be seen and reviewed and commented on, stakeholders cannot readily trust the institutions that are meant to support and champion their interests. Hence, mistrust is rife in today’s China, especially amongst the Red Guard generation that had pilfered China’s past without remorse. Black Dragons – like so many of the creatures that thrive in dark, damp places – love the opaque. The frequency – and perhaps even the devastating effects – of Black Dragons could be severely curtailed if only stakeholders could see them in the making. However, Chinese have a deep aversion to exposing the roots and ruts of their creative deal-making and power broking, no matter how petty the transaction. They seem after thousands of years of such gerrymandering not to have understood that Black Dragons breed in the shadows.

Risky Business
Anyone who’s visited a Chinese city for more than a day has seen the family of four on a single electric motorbike zipping down the side of a busy street, dodging oncoming bicycles and other electric motorbikes (that are careening down the wrong side of the street), speeding up to make the light at the chaotic intersection just AFTER the light has turned red. For those of us Westerners that live and work in China not a day goes by when we step out the door to see some of the most death-defying feats of derry-do any human being might subject his self or his fellow man to.

In some cases, one does not even have to step out one’s door. Just two days before writing this article I watched out the window of my eighth-floor apartment as a middle-aged Chinese woman was on the OUTSIDE of her eighth-floor window without a spotter, without a tether, and without a big-ass inflatable cushion on the hard asphalt sidewalk below to catch her should she … oops .. slip and splatter. Never mind, the window was dirty (on the outside) and she was the one at that moment to clean it.

Now, aggregate all the incautious activities of millions of individuals each day for days, weeks, years and eventually, in Mandelbrotian manner, you’re going to have one hell of a catastrophic fractal tearing through the fabric of your society.

For instance, let’s add up all the small risks of the individual dairy farmers with their handful of leveraged cows in feeding the cows whatever was digestible (to cows); the managers of the central milk stations into which the dairy farmers would pour their ablutions would daily add just a bit of melamine to boost the protein readings of the watery soup; the corporate managers who figured on a daily basis that small amounts of pollutants and melamine could never harm let alone melt down their company; the local government officials who took the risk of accepting bribes to allow the adulterated product to pass inspection and find its way into cartons of milk, vacuum packets of yogurt, and trays of cookies bound for Japan and chocolates molded for European palates. In the end, all these small, acceptable micro-risks crystallized into a super-structure of improbability that no single company, local government or national institution could moderate. The Chinese created a mother of Black Dragon.

Addiction to Urgency
It only takes a day for the average tourist in any city in China to see that Chinese ARE NOT patient people. They will push and shove their way to the head of any assemblage that begins to hint at a line; they will honk their cars through any yellow-to-red intersection; they will dive into a business with nary a thought to planning, funding or close-out. The up-side of such behaviour is that Chinese people get things done: witness the creation of what I’d guess would be at least a score new cities in China in the last three years, while the USA is still trying to figure out how to put the uniquely humpty-dumpty New Orleans back together again. The down-side of CHinese urgency addiction is that they tend to do a lot of things half-assed. A Westerner who has lived in China for years and who owns a home here advised me, “If you think you’ll ever be able to buy a home you can live in for twenty or more years and raise a family in China, think again. The average residence in China is built to last five years – seven years tops.” Just how Built to Last is the Three Gorges Damn?

Collusion
The citizens of every society must collude to some extent in order for the society to have some semblance of cohesion. The American television show The Wire delves deeply into the strata of a society and the degree to which black and white (morally speaking) mix to create a plenitude of grays. China’s collusions begin and end with its citizens’ distrust of its own institutions. Chinese are born into and cultivate guanxi nets – networks of reciprocal obligation – that begin with family, extend to classmates and coworkers, and perhaps even to people from the same hometown. The cliques are tight, mobile and highly adaptable. Guanxi has saved millions of lives throughout China’s history when her institutions have failed her. The transactions within the guanxi networks tend to run counter to the interests of the State, creating cross-currents and rip-tides of intersts that ultimately undermine society itself. Witness last year’s dairy scandal. Enough said.

Black Dragons are very difficult to predict; after all, they are amongst the most improbable of events. And yet, such events have etched as much of the character of Chinese culture and society as any extended period of peace and harmony.

And with China potentially spawning more Black Dragons at an increasing frequency as the complexities of its moderninzing society mount, how can Western companies predict – or at least prepare for – the inevitably improbable?

Read the first in the Black Dragon series: The Black Swans of China

Read the next installment in the Black Dragon Series: Managing for Black Dragons

I recently delivered a talk in Shanghai to a group of Master’s and PhD degree candidates from the American George Fox University. The group had come to China to witness first-hand and then to fold into their theses the impact of China’s economic development on international business and the American economy.

A point several of the students seemed dismissive of was that Chinese industry would one day be as innovative as the South Korean and Japanese. Incredulous, they pointed out issues such as the continued culture of IPR violations and a color-by-numbers education system.

Of course I agreed with their assertions, as one cannot argue with the numbers nor with the anecdotal evidence. Still, other trends are impossible to ignore: the increasing number of IPR-violation suits that Chinese companies are bringing against other Chinese companies (implying the Chinese themselves are beginning to develop products and approaches worth protecting and fighting for); the establishment of more R&D centers in China by multinationals; the fact that China has been posting amongst the highest numbers of patents in the world, rivaling the States itself.

I made the point that one of China’s greatest assets is the huge size of its increasingly rationalized marketplace. Compared with the higgledy-piggledy Indian economy, the speed and depth with which China is normalizing its information, transportation  and logistics infrastructures as well as its commercial protections is breath-taking. Also dizzying is the pace of its adoption of technology at all levels of social strata: whether TVs, washing machines, mobile phones, computers – China is intent on becoming a nation of savvy consumers.

Most of the R&D centers that Western manufacturers and IT outfits are establishing in China are to meet Western design requirements. Increasingly, though, I’ve met GMs in China who are excited at the potential of a well-trained R&D staff adapting Western-born technologies to use in the Chinese marketplace.

“A fundamental difference between America and China is that China has too many people in too small a space with too few natural resources,” I offered the George Fox group. “Meanwhile, America has relatively few people in a relatively large space with an abundance of natural resources. It’s a truly challenging environment into which technology is being channeled in today’s China, and in which the technologies are being adapted.”

“Now,” I went on to say, “once China has overcome those barriers of a rote-based education system and rampant copying so it reaches a threshold of innovative design and implementation – just as the Americans had eighty years ago, the Japanese forty years ago, and the South Koreans twenty years ago – and has become comfortable innovating to meet its domestic demands, its will begin exporting technologies to a world that increasingly has…” I ticked off on my fingers, “…too many people, too little space and too few natural resources.”

Though ten or even twenty years off, the world needs to prepare itself for China’s Innovation Blowback.

It was June 2008 when a group of us lads were taking in pints of beer on the patio of Blue Marlin 3, in the Suzhou Industrial Park, our watering hole, as it were. We discussed China’s recent flare-up of troubles west of Sichuan, and how the Chinese government was intent on keeping the lid on anything that might deflect from the wholesome image it was trying to project through the politicized prism of the 2008 Olympics. I happened to comment, “God only knows what’s going to pop up after the Olympics is finished. The Central Government must be sitting on a lot of stuff it doesn’t want the world to know about.” Already, there had been reports of petitioners to Beijing turned away from the city. They had come with grievances brought from their hometowns, usually about corrupt officials and unfair land grabs. The Sichuan earthquake had revealed construction of private and school properties that was substandard. “What ever does come up,” I said sagely, “it’s going to be ugly.” The guys silently nodded assent, took another sip from their beers.

Three months later China single-handedly destroyed its flagship dairy industry and any credibility and goodwill it had built up during the Olympics. It turned out that since Spring of that year that milk tainted with a derivative of plastic had been poisoning infants throughout the country. City, provincial and national level officials had already known about the devastating revelation for months before, but had been directed to keep the news under wraps until after the all-precious Olympics had run its course. I’ve been drinking imported milk ever since.

I recently finished reading Nassim Nicholas Taleb’s books “Fooled by Randomness” and “The Black Swan”. Taleb is Dean’s Professor in the Sciences of Uncertainty, and holds a PhD in Statistics and one in Philosophy. He’s also been a professional stockmarket trader for more than twenty years. Essentially, both books discuss the role of randomness in our perceptions of the way the world works as we would like, and as it seems to more deliberately operate. Randomness has a greater influence on stock markets, gambling, academic studies, the social sciences and success itself than we are willing to admit – or that we are able to perceive. And the more we try to fit our own experiences and perceptions and the way society functions into what Taleb calls more convenient, digestable narratives, the more we expose ourselves to Black Swans. He presupposes that our post-modern society is and will continue to see more Black Swans as we continue to add complexity into our lives.

For hundreds of years in Europe scientists professed that all swans were by definition white.  When colonists and naturalists stepped onto the shores of Australia, lo and behold, they discovered swans that were in every way the same kind of swans as those found in Europe except that in Australia there was also a variety was black. The discovery serves as a call to the scientific establishment to consider how it conducts science and declares the truth. The Black Swan, then, in Taleb’s thinking, is the highly improbable event that individuals and societies are not prepared to meet when it does occur. The current global economic meltdown of the financial system is just such a Black Swan: bankers and financiers believed it highly unlikely that, despite the great cross-border inter-dependencies that had developed between financial institutions, that the entire system would grind to a withering halt. Governments, banks, politicians and business “leaders” were entirely unprepared for the occurrence of just such a Black Swan.

China, interestingly, was ahead of the rest of the world in experiencing its Black Swan. Actually, what China had suffered was a Perfect Storm in the first half of 2008, even before its Olympics; and before the rest of the world fell off the edge financially. The period was more like a flock of Black Swans furiously beating their wings.

Whatever one might want to call the convergence of unfortunate consequences, the first half of 2008 saw the greatest snow blizzard the country had seen in 50 years – in some parts of China, for nearly 100 years; commodity prices skyrocketing to the extent that even rice seemed to become a precious commodity for a few weeks; factory closures that occurred under cover of cold Spring Festival nights; the violent protests in the Western parts of the hegemony; the Sichuan earthquake.

Other Black Swans that have given Chinese leadership pause in recent decades include: the student unrest and subsequent crackdown of 1989; the Asian financial crisis of 1997 and the SARS outbreak in 2003. One could say that Chinese history from 1842 (the First Opium War) until 1949 was one damned Black Swan after another. Things didn’t settle out much after that, with various self-inflicted events that had catastrophic consequences for the country and its citizens.

A Chinese friend postulated that because China had suffered so many misfortunes last year, that this year it was able to ride out the global economic downturn better than Western countries. In some ways, she’s right: it is unmistakable that its stimulus package has given a much-needed shot in the arm to its infrastructure projects, and that consumption in China continues to rise, albeit not as aggressively as exporters around the world would like to have it. Global economic antecedents such as factory closures in the south and north of China; rising unemployment among migrant workers and recent university grads; and increasing numbers of protests based in the rising inequality of income levels in China proved canaries in the coal mine. The Chinese government could feel the sea change and met the challenge domestically before Western countries knew what fate had befallen their own credit-bloated systems.

Though China’s is half the GDP growth rate of just a couple years ago, the current six percent mark is not bad by Western standards, especially considering that most economies in the OECD are contracting. On the ground here in China recent visits to Chengdu, Chongqing, Nanjing, Hefei and Shanghai have shown consumers out buying: women are still spending on keeping up with the latest (ugly) fashions; new model bicycles appear daily on the streets of my hometown Suzhou; and tourist destinations in China are chock-a-block with stiff-capped Chinese tourists following, blinking, behind an exhausted tour guide sporting a tattered yellow flag. China’s economy has certainly slowed down, but Chinese have adjusted in ways deeply ingrained in them from having already met the challenges of thousands of years of Black Swans.

Read the whole series:

Next week: Thar Be Black Dragons in China

Next Installment in the Black Dragon Series: Managing for Black Dragons

A charming reporter for the Singapore Straits Times recently called me up to interview me about my perceptions of the Suzhou Industrial Park on its 15th anniversary. The article should be coming out next week. Apparently, it will be a full two-page spread. The Singaporeans clearly take their largest investment in China very seriously.

The reporter was curious about how SIP has changed over the years, and especially how it is faring during the economic downturn. I organized my thinking around three main trends: administrative, economic, and business.

Salient points I made about administrative revolved around the warm welcome SIP administrators – Chinese and Singaporean – gave to investments just after SARS; how the couple years until the economic meltdown they’d become very picky about who they would take into the Park and who they would help in times of trouble; and how much more pliant and accessible they’ve become since the downturn. I postulated that instead of deterring SIP’s (and Suzhou’s) plans to become a high-tech hub that the downturn would actually accelerate their efforts. Already, companies that had been purely manufacturing in SIP are considering or are actually implenting transition plans to perform R&D in the area.

The economics of SIP – and of Suzhou, at large – has been criticized in Beijing think tanks. The “Suzhou model” of attracting export-driven (albeit cleaner and more sophisticated than Dongguan, for instance) has resulted in a donut-effect: the Chinese transplants that have come to take the engineering and middle-management positions have raised the cost of living in the area without the foreign companies investments really benefitting the pocketbooks of the average Suzhounese. One Suzhou lawyer I talked with said part of that was just the Suzhounese Way: historically the Land of Fish and Rice has always been pretty well off. Suzhounese have always managed a lifestyle that they found comfortable, without the manic need work harder and longer hours. Still, it is a fact that Suzhou has reaped huge benefits the last ten years, and has grown out of all proportion to everyone’s expectations. However, with factories pulling back on production, thousands of operators have returned to their hometowns and recent university graduates are finding it tough to land a job. Salaries are substantially depressed from even a year ago, and rental prices have dropped precipitously.

Though local businesses are still coming and going apace, businesses that relied on expat salaries have taken a hit. I’d estimate Suzhou has seen 30% to 50% of its expat population evacuated back to their home countries. Landlords clearly don’t like the trend, and neither do restaurant and bar owners who depend on foreign tastes. The South Korean population, I understand from teachers at international schools, have taken the biggest hit. Of the Westerners, perhaps the Americans.

One of the more interesting impressions I drew from the interview was that the Singaporeans are still smarting over the supposed slight of nearly ten years ago, when the Singaporean investors accused the local Suzhou  government of directing potential investment projects to the Suzhou New District, a large economic development zone on the west side of the city.

“Get over it,” I wanted to say to the journalist’s readers, “This is China!”

You ever try to read a book and you find you just can’t get into it? I just did. Twice. Still can’t get into it. Set it aside a couple months after reaching the half-way mark; figure I’d have another try at it again. Forced to lay on my back for several days in submission to a flu, what better opportunity could a book have to exploit an unsuspecting human being? Still, no success. I’ve closed the book up again, put it back on the shelf.

Managing the Dragon: How I am Building a One Billion Dollar Company in China is about as self-aggrandizing an autobiography as they come. But then again, as one friend told me when I told him how bored I was with the book, “Bill: the title does say ‘How I am building …” In other words, my friend was saying you CAN judge a book by its cover. Managing the Dragon is the autobiography of Jack Perkowski, CEO of Beijing-based ASIMCO, a holding company with a plethora of auto parts manufacturing facilities throughout China. Unfortunately, the autobiography is not finished yet, as Perkowski is still well and alive and lecturing on the back of the book. That means there’ll likely be a sequel, which I will also probably be unable to finish reading for the tears of boredom leaking from my eyes. (“My life is a stack of books, unfinished in the reading. – ME “).

The book starts with his childhood as a working class kid in Jersey (New, that is); who gets into Yale; Harvard Business School; works on Wall Street, makes loads of cash; convinces financiers in the early 90′s through vision and grit that China is THE NEXT BIG THING; gets nearly a billion dollars to finance a start-up in China; loses nearly a billion dollars financing a start up in China; and learns stuff along the way to become a better magnate. End of story … i have to guess, because I can’t seem to finish the book.

Tom Clissold’s side of the ASIMCO story is a far better written, much more entertaining and far more illuminating about the trials and tribulations of the early years of ASIMCO and of the “joys” of joint ventures in China. Clissold’s autobiography Mr China is self-effacing and simply a good read. Managing the Dragon reads like a cross between an over-achieving cv and an American football playbook with Harvard MBA-type buzzwords thrown in to add credibility to what would otherwise would have just been a playbook (if Perkowski’s ghost writer had used the word “bench” as a verb one more time I thought I was going to puke).

Now, just to prove to myself that I haven’t become jaded reading these books by “China Hands,” I decided to pick up the copy of 400 Million Customers I had bought from Sinomedia (publishers of The China Economic Review) just a month before Spring Festival 2009. Carl Crow wrote the book some seventy years ago. Crow made pots of money through the advertising company he owned and operated out of Shanghai for nearly twenty years. In my eyes his claim to fame was the popularization through his collectible posters of the qi pao, that lovely and elegant work of fashion that makes most any Chinese woman look like a million bucks when she dons one. Crow lived and traveled throughout China from 1911 to 1937, when a Japanese bomb dropped from the sky and exploded on the street in front of his home.

400 Million Customers is absolutely brilliant! The book, too, is written in the first person, and is packed from the first page with his experience and the experience of his customers in China with the buying and selling habits of the Chinese when China first opened up to the world, just before World War II. From the first page I was chuckling at the anecdotes, nodding in affirmation at the some of the characterizations with which I’ve had experience in China, and genuinely enlightened about the motivations behind other notions the Chinese have. I will devote a full review to 400 Million Customers when I’ve finished reading it, which should be any day, now, as its tough to put down. Ah, they don’t write them like they used to.

Wished they did, though.

But then again, I just may one day be able to finish reading Managing the Dragon. Who knows, perhaps if I have a bad case of la duzi and am once again captive …

As I’ve a soft spot for Yunnan province, I thought I’d pass along this email from a friend of a friend in Kunming, the capital of Yunnan, who sets up foreign companies in the mountaintop city. Lee Perkins of the China Intel Group wrote:

We’ve been doing quite a lot of business recently setting up WOFE’s for people who hope to do business in Kunming. It’s becoming quite a trend at the moment. Mainly, at the moment, most people have some small scale business or freelance interests and have just decided that Kunming is a nice environment to pursue those interests. Making for quite an interesting scene.

We were working with on computer programmer who set up an online hotel booking service, a US translator who moved down from Beijing to develop his business and a guy who just had already made some money and wanted to relax for a while running his own restaurant.

People are often surprised by how easy it is to get a foreign owned business up and running here – and given the environment I can see that might well be a growth area for small foreign businesses in the future.