This is China! blog

The Financial Times this past weekend wrote an in-depth article on a German-owned advertising company based in Beijing who’s most trusted Chinese managers set up a competing company and siphoned (bone-dry) business from their employer to the new company.

Raiding his own company’s Beijing headquarters with the help of lawyers and a police escort was not what Heinz Zuercher had in mind when he agreed in March to take over as chief executive of Frankfurt-listed Business Media China.

But that is where he found himself in early June as he and another German manager broke into the finance department while a group of his employees barricaded themselves inside and hid under their desks.

The impromptu raid turned up a raft of evidence showing that a group of BMC’s senior Chinese managers had – unbeknown to BMC’s German managers – set up their own company within the advertising and exhibition business and, Mr Zuercher and the rest of the company’s management claim, siphoned off its most lucrative advertising contracts.

“We’d been tipped off anonymously by one of our staff that some executives had set up this secret company and were taking all of our clients,” explains Mr Zuercher, who is due to face shareholders on Wednesday at BMC’s annual meeting.

The case, which is under investigation by the Beijing police, involved at least seven senior executives and has brought to its knees a company that controls billboard advertising at dozens of China’s largest railway stations and airports.”

I agree with one Westerners’ explanation for why such behavior is so prevalent in the Chinese business community:

“There is an attitude among many in the Chinese business community that foreigners are rich and stupid and therefore fair game; that deceiving them is somehow acceptable in a way it wouldn’t be if they were Chinese,” says one intellectual property lawyer who has worked in China for nearly two decades, and who asked not to be named to avoid repercussions for his business.

I also agree with the prognosis of a Chinese staff member:

“He was a vain old man who trusted the wrong people,” says one BMC employee. “They built up a world around him in which he felt safe and he didn’t see the problems in the business because he didn’t want to see them.”

Ultimately, James McGregor, author of One Billion Customers, who was interviewed for the article puts his finger on the issue:

“But what this shows you is you can’t maintain a business by remote control in China and expect other people to run your company in your best interests.”

Read more of A Cautionary Tale from China…

The financial journal The Daily Reckoning had an interesting piece on developing trade relations between the Middle East and China. American and European stonewalling of visa requests as well as oil revenues are increasingly driving Arab buyers to China – and vice versa:

The number of Arab visitors to China surged as a result, filling up flights between Dubai and the main Chinese cities of Guangzhou, Shanghai, and Beijing.

The economic crisis has only intensified the trend. It’s no wonder. The Middle East’s imports from China are still growing, albeit in low single-digit figures, even as the United States imports from China collapse at near twenty percent rates relative to last year’s levels. And Chinese manufactures are searching for new markets in the Middle East as a result. It is just one more sign of the change in demand.

Take Yang Linshan, for example, a fabrics manufacturer in the coastal province of Zhejiang. The Middle East now accounts for almost twenty percent of his exports. He is looking to set up a branch office in Dubai. Other manufacturers like Yang are meanwhile scouting for locations in the Middle East to build factories even as production costs at home rise. Egypt, with its low-cost workforce, is a particularly attractive investment destination.

Read more…

The Financial Times recently reported a tremendous sea-change in the investment policy as well as the popular sentiment of Guangdong province:

“China has taken the unusual step of moving a $5bn refinery and petrochemical plant, one of the country’s biggest foreign investment projects, after a public outcry, a senior Communist party official said on Thursday.”

This reflects how Guangdong values environmental protection, the ecology and the opinions of our citizens,” said Mr Wang, who sits on the party’s 25-member Politburo, in a rare interview with foreign reporters.”"

Really, this is revolutionary. Consider it was Guangdong province that first (re-)opened up to foreign direct investment in the early Eighties with Guangzhou and then Shenzhen leading the way to China’s future as an export-driven country. The “Hong Kong model” became the dominant model of foreign direct investment (FDI) in the region as Hong Kong companies just over the border moved their noxious toy and appliances factories off their territory and onto the Mainland. The Hong Kong Model became synonymous with terrible working conditions for staff in factories that paid extraordinarily low wages (“oh, but their pay is higher than what the Mainlanders would get back on the farms,” big bosses would croak); low or non-existent profit margins because the big bosses would skim surpluses off the top of the companies to spend on KTV parlors and second families; and a complete disregard for the environment. The ever-innovative Taiwanese took the Hong Kong model further by scaling it up to companies the size of Foxconn with its tens of thousands of drones, while maintaining the same skin-flint, anti-environment approach to doing business. The Hong Kongese with Taiwanese and wanna-be tycoons from the Mainland also helped create Guangdong’s vibrant KTV and spa industries.

With the mass closure the past eighteen months of thousands of these low-margin, labor-intensive factories in the region, hostesses throughout Guangdong must be agonizing the loss of their sugar daddies. Add to that the Guangdong provincial government’s efforts the last couple years to actually slow industrial investment in the region because of an over-stretched infrastructure and choking pollution. The government has been actively working to attract high-value, service- and IT- industries to its cities to literally clean up its act and lift its GDP growth rates to the next level.  So, Guangdong entertainment venues as well will find themselves re-tooling for a nerd-future.

But get this. A provincial level official actually says:

“We only have one planet to live on and whatever we do at this end affects people at the other end,” he said.

The plant was to be built in southern Guangzhou, the provincial capital, 60km upwind of Hong Kong, where the project has also come under criticism.

I didn’t think anyone in China was aware of “people at the other end” when it came claiming economic preeminence, leave alone cared about what happened to “them foreigners” [sic] in their mad scramble for world acclamation. Unless what they mean by “the other end” is Hong Kong itself – which, I suppose, can be considered widening their perspective. What’s also impressive to me is there is a quasi-democratic process at work here that may one day become a model in itself and spread to other provincial-level governments:

“Last year, 14 delegates to the provincial people’s congress filed a motion opposing the refinery on the grounds that it could worsen regional air pollution. That opposition emboldened environmental officials, who also began to question the project’s suitability pending the completion of an environmental impact report.”

Still, eminent domain reigned, and the locals had gotten the short end of the stick long before:

“The project was to have been sited in a new heavy industrial zone in the geographical centre of the Pearl river estuary, not far from a bird and wetland sanctuary. The site was marked out last year and villagers were relocated to new housing closer to the centre of Guangzhou.”

Residents may have lost their homes, but may have helped save their land.