This is China! blog

The Wall Street Journal has a DIY Guide to Exposing Dodgy Companies that reminded me of a due diligence trip I took in China a couple years ago. I was leading a group of European investors through deepest Zhejiang province. They were interested in acquiring a Chinese company in the home decoration industry. We had identified three potential targets. All it took, though, was a visit to the first company for the group of straight-laced Westerners to understand how businesses operate in China – and just what sort of business model many Chinese companies are attempting to export to the world.

Two brothers in their early thirties owned that first company. The factory was actually in the middle of the city, in a compound that had once been the site of a State-Owned Enterprise. The brothers were soft-spoken, courteous even, and solicitous. Settled in the spare conference room, the parties talked about the business and prospects for growth. The Europeans asked to see the accounting records for the company. One of the brothers and an assistant, a young woman in a factory smock, brought out two great ledgers, hand-written. Two books? the Europeans queried.

“Oh, one book is for us and the other for the tax authorities,” one of the brothers answered blithely. “They don’t want us to report too much income, so we have to keep the records elsewhere.,” he explained. Apparently, the difference in actual vs. reported was negotiated and channeled to tax patrons. Neither of the brothers considered maintaining at least two sets of books or tax negotiations or contorted shareholding structures at all improper. It was just the way things ran in China. Visits to the remaining two targets revealed the same modus operandi.

It’s no wonder, then, that Chinese businesses seem genuinely aggrieved that Western shareholders and stock exchanges consider their business dealings improper at best, down-right illegal at their most dramatic. After all, what’s worked for a society for thousands of years must be good for the rest of the world.

Mustn’t it?

image credit: factsanddetails.com

I recently wrote a couple posts on my book blog ChinaInsideOut.info about worker unrest disrupting company operations in China, and even entire communities. Zengcheng, in Guangdong province, seems to have settled back down to being the jeans manufacturing capital of the world. The one city alone generates 40-percent the jeans Americans slip over their buttocks. Migrant workers got sick and tired of being treated like second-class citizens and revolted en masse. Staff at a factory owned by Citizen, the Japanese manufacturer of the watch brand of the same name, also recently staged an industrial action.

I’ve written more in-depth about the impact the spate of unrest is having on China-based operations and the knock-on effects on supply chains of international companies that rely heavily on China being a stable Workshop of the World. The report is called, “Social Unrest in China: Implications for Foreign Invested Enterprises”. One of the interesting points I turned up in my research for the report was the overwhelming number of companies at which workers are staging proletariat-style revolts are Asian: Taiwanese and Japanese, mainly, with some Hong Kong investors I suspect are predominantly Chinese Mainlanders “round-tripping”; that is, setting up HK investment vehicles to re-invest in the Mainland as foreign companies: helps in reducing local tax burdens and makes it easier to get their income out of China.

I’ve always been of the mind Asian investors tend to treat their employees as liabilities, disposable; while Western companies invested for the long-term in China tend to treat their staff as assets to take care of and encourage. People don’t like being treated as liabilities. Of course, their are exceptions in both camps; however, I’ve found few exceptions over the years.

Read more about the report here.

Related posts from ChinaInsideOut.info:

The Unrested in China

Workers Still Unrested

I recently had a couple beers with an American quality manager who had been to China a couple times, but who was just now settling into a six-month contract at a Suzhou factory. He had had no idea, he told me, how difficult it was to find local professionals. He was charged with building up the quality assurance team for the company. “I want people who will stay around for years, not hop from job to job,” he explained. It’s not been easy going for him and the Chinese supervisor, who himself was from Chongqing.

“We did find one guy, though,” he offered, “and gave him an offer. He sold me my bike! “the  Ameriican beamed. The bike shop was in downtown Suzhou. He explained, “I watched the put my bike together, then true the wheels. He put so much attention on the job, so much care. He clearly liked what he was doing and took pride in the job.

“I figured, the hard part in China is finding people who care about doing a good job. The rest is just training.”

I don’t know, though, if the bicycle shop fellow accepted the position, but I liked the American manager’s thinking very much. A guy like the bicycle builder could theoretically go wherever he wanted in life, simply because he’s mindful of what he’s doing and takes ownership of the finished product.

Pride in one’s product and actions is something that comes from within; no amount of propaganda or exhortation or rote learning or robot behavior can substitute for the real thing.

image credit: jeffreyhill.typepad.com

Technorati Tags: Doing Business in China

This past weekend I had the pleasure of attending a dinner party in Shanghai where Oded Shenkar was also in attendance. Shenkar is author of the business book  The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job. He is also Ford Motor Company Chair in Global Business Management  and Professor of Management & Human Resources at Ohio State University. He is a small, relaxed man who laughs easily and is an excellent listener. We swapped book publishing stories (his publisher is also John Wiley, albeit the American division; I worked with the Singapore division on my book) and the trials and tribulations of a writer and researcher trying to get his ideas across as unadulterated as possible to as wide an audience as possible.

He told the story of the Chinese translation of The Chinese Century, which was translated by a state-run publisher. He said the Chinese edition was much shorter than the original English version. “They cut an entire chapter of the book …,” he said, then paused for effect. “…the chapter on intellectual property rights violations in China!” he laughed. Also, he added, the Chinese version in the frontispiece notes how Shenkar had “accepted revisions of errors in the original English-language version,” or some such verbiage. “Imagine,” he laughed again, “it was like I had written  some kind of Mao-era confession!”

Shenkar’s latest book is Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge (Harvard Press, 2010).

Yesterday I delivered a talk to the Shanghai Foreign Correspondents Club (SFCC) on the energy challenges China is facing. For instance, power shortages are so severe in Yiyang, a small city in Hunan province, that homes and businesses receive power only every third day. Chinese suppliers in the Yangtze River Delta have also seen their electricity supplies become erratic, making it difficult on a day-to-day basis – according to foreign factory managers I know in the area – to ensure they receive the components and parts their suppliers promise. The cap will eventually be raised to bail out ailing power suppliers, a fifth of the more than 450 of which may be facing bankruptcy, according to a source in a New York Times article.

Though the much discussed issue of the government-enforced cap on coal prices at which power plants are forced to buy coal is important, I focused during the talk on the most enduring challenge the country faces in meeting increasing requirements to produce electricity for its modernizing country: water – or rather, the dearth of it. Again this year, hydropower dams in the southwest are generating power below capacity. Coal mines in the north are unable to operate due to a lack of water. And – to my estimation – aggressive plans to build nuclear plants along the Yangtze and Yellow rivers will have to change due to the lack of water flowing the concourses (and what to do with waste river water in the event of a Fukushima-style event).

The knock-on effects for the energy sector include greater opportunities for growth in the wind and solar power industries, and increased emphasis on energy efficiency, especially in its dreadfully wasteful property sector. However, by 2020 – when China’s energy requirements are set to double from the 2010 level of 1,000-gigawatts -  these alternatives will account for less than five percent of the total portfolio for energy generation. China’s big bet to take hydropower from generating its current level of about 20% of the nation’s energy to 25% by 2020 just may not be realized. The abundant sources of water the country has banked on for thousands of years may simply no longer be available in the quantities it has planned for its new and enlarged cities.

Coal – and the sort that’s even dirtier, lees refined stuff Chinese power plants have been burning  this past decade – may become an even more prevalent source of energy. Last year coal accounted for 83% of power generation; it may well gain ground as the waters recede.

Graham Earnshaw’s The Great Walk of China is a genuine pleasure to read. I had been reading the journal entries he had been publishing at the back-end of The China Economic Review (of which he is the publisher) for years, and always looked forward to getting through the magazine to see what Graham had gotten up to. In 2006 Graham decided to walk from Shanghai to Tibet in a due-west direction, over hill, over dale. Along the way he talks with whoever would like to pass the time with him and hands out his business card to all and sundry – even to local police, who find his foreign-ness disorienting and disconcerting. Graham has been living in Greater China for 30 years, and speaks, reads and writes Mandarin and Cantonese Chinese languages.

Along the way Graham chats with grannies, children, farmers, students, teachers, former Red Guards and more. I admire how he refuses to be bullied by local constables who want to mark out their territory, and was fascinated by the remnants of the Cultural Revolution he discovers. The cognitive dissonance between the Party’s exhortations writ large on crumbling brick walls and the realities of modernization closing in on the countryside are jarring. His writing is unpretentious, and his approach companionable. It’s a very different sort of read than other travelogues about China, in which writers tend to distance themselves and judge the Chinese they meet during their travels. The book is an affectionate look at the country and its people.

I found it a great read because it’s so easy when you live in China long enough to get jaded about The Chinese Way, the blah blah blah about 4,000 years of history, the pushing and jostling for poll position – whether buying train tickets, flagging a taxi or buying steam buns – the spitting. Graham’s book helped remind me of what attracted me to China in the first place, why I do have a level of admiration for the people, and the extraordinary recent history that many of them have lived through.

Highly recommended.

Graham will be talking about his book on Sunday, June 19, 2011 at 4pm at The Suzhou Bookworm, Gunxiu Fang 77, Shi Quan Jie, as part of the Royal Asiatic Society series of talks on Chinese culture and history through Western eyes. He’ll also be introducing the writings of some of those writers of a bygone era, which Earnshaw Books has re-published.

30rmb for students; 50 rmb for members; 70 rmb for non-members. Includes one glass of wine or beer.

I was quoted in a recent Bloomberg article about the dangers of Westerners relying on Chinese friends to set up domestic companies in China. The article discussed the South China case of a couple brothers from Chicago, the Fiocci’s, who, while apparently waiting two years for establishment of their WOFE, relied on a Chinese friend to set up the business for them, presumably under the Chinese person’s name, and not rip them off. Dan Harris, of China Law Blog fame, highlights the fact in the article it’s illegal for foreigners to have any ownership in a domestic company.

I have dissuaded people from following such an approach, as it’s fraught with all kinds danger, number one of which is losing the business lock, stock and barrel. I’ve gone to great lengths here in China and invested a great deal of time and energy in keeping friends in China from following this path. I’ve seen too many business tragedies first-hand to allow that sort of thing to happen.

The article says,

“China Inside Out” author Bill Dodson says he’s heard of foreigners using Chinese citizens to form a domestic company and then contracting with the Chinese citizen to be able to control the company, but warns “it’s dangerous, because the Chinese person who sets up the business has the license, controls the chops, and has the relationship with the local government officials.” Jim Fiocchi says he wouldn’t recommend the approach he took with his brother.

Then again, neither would I recommend a poke in the eye with a sharp stick.

Read more of the article here.

Technorati Tags: Doing Business in China

I was recently privileged to be invited to give the keynote speech to the graduating class of 2011 at the Suzhou-Singapore International School. Two charming and pleasant young ladies, 11th graders, showed me around the school before the graduation ceremony last week Friday afternoon. I’d never been to the new, much larger school before, and was surprised how huge, populated and busy the School was. I was also surprised how largely Asian the School was, as well. I’ve had and have Western friends who send their children to the School, and simply presumed the school population was more heterogenous. That said, my tour guides before the graduation program were from Australia and Malaysia. Of course, the school has a large South Korean population – nearly 40%, I’ve heard said. Of course, there were a lot of Singaporeans, as well as a smattering of Japanese. Westerners seemed about 20% of the make-up of the school, split between Americans and Europeans.

The ceremony was charming and inspiring. I haven’t been to a graduation in years, and found the speakers – faculty and students – thoughtful and funny. Of course, I didn’t get some of the inside jokes, as I don’t know the schooling system and the international certifications for which they have to work so hard to acquire.

After the ceremony, during the mixer, an American who seemed new to the scene echoed a thought I had while reading the program for the day. Inserted into the simple bi-fold was a list of ALL the universities to which the graduating seniors had been accepted. As students accepted their diplomas from the headmaster and received a shake from the Chairman of the Board of Directors of the school the master of ceremonies called out the name of the college or university the student would be attending. Easily 95% of the students were going on to University. The American with whom I’d chatted after the ceremony noted that in the States the usual number of people going on to 4-year school is about 30% – less in some parts of the country.

Nevertheless, all the students whom I met and with whom I chatted were shy, self-effacing and gracious – even if they were going on to Cambridge the following academic year.

You’ll find a transcript of the keynote speech I delivered at the ceremony, which seemed to have gone over well with students, faculty and parents alike.

Many of you are probably wondering who I am and why I am speaking today. Someone jokingly told me the School had originally invited President Barak Obama. However, he was unable to attend. Disappointed, one of the School staff saw me walking down a Suzhou street a few weeks back and figured, “He’ll do!”; though, they did admit later, they would have preferred a stand-in for the president who had a full head of hair.

I need to ask you all an important question: what are you going to do TODAY about the 150 million people within a day’s drive north of here who do not have enough water to drink, cook with or farm with? The largest drought in more than 50 years in Shandong province will turn China into a net importer of grain for the first time ever in its history. In Zhoushan, near Ningbo, just a two hour drive from here, people only have access to water five hours each day. The first and second largest lakes in China are becoming grasslands and mud flats, putting millions of Chinese fishermen out of work. Water levels were so low in Yunnan and Guangxi Provinces last year that 90% of hydroelectric dams in the region were shut down.

You all, the graduating class of 2011, are what I call the Tipping Point class. The Tipping Point is the threshold beyond which great events come together to define people and societies. You are at the threshold of an adult world fraught with some of the greatest challenges ever faced by humankind. It will be up to your generation to meet the challenges and take advantage of the opportunities the future will present us all.

In my book, China Inside out: 10 Irreversible Trends Reshaping China and its Relationship with the World, I talk about how China is at the LEADING EDGE OF HISTORY. Now, what does that mean, LEADING EDGE OF HISTORY? It means that though China may be amongst the first to experience these environmental and resource pressures, MOST OF THE REST OF THE WORLD IS FOLLOWING IN ITS PATH.

The CFO of microchip maker Intel recently asked me over dinner in Chengdu what I thought the most critical trends are right now at work molding China and affecting all our societies. I told him and the executives at the table there were FOUR trends in particular:

• the rapid development of China’s middle class;
• increased pollution of the land, water and air;
• ballooning resource consumption rates;
• and a rapidly aging population.

The rapid rise of China’s middle class approach to consumption and the society’s massive use of natural resources is based in a model 250 years old, called the Industrial Revolution. The Industrial Revolution model assumes that the earth has an infinite amount of natural resources to take out of the ground to be made into products; another Industrial Revolution axiom is that we have an infinite amount of air into which to blow our carbon dioxide when burning coal for electricity; the world view assumes we have an infinite amount of water with which to irrigate our farms, manufacture our products and drive our power plants, amongst other presumptions of about the wealth of the earth.

Five days ago in Shanghai, I explained to a group of top executives from TOTAL, a French energy group that whereas about 600 million people in the West have been happily consuming and polluting the last sixty years; now – if we include India – another 3 billion people are rushing into the party. It is THE SPEED OF THE RUSH AND THE SIZE OF THE CROWD coming assuming modernity that have created this Tipping Point in human history. The rapid modernization of China has compressed into 30 years major environmental and social issues that took the West 250 YEARS to arrive at. China though – because it has so many people on a relatively small amount of land with few natural resources of its own remaining – has rushed past the West into the future. And make no mistake: other countries are following behind.

America, Germany, Italy, Japan, South Korea and others are beginning to grapple with the issues I’ve described. I hope this generation graduating today will consider the challenges posed to the members of their society – and to their families – and consider the opportunities that are opening up that intend to build a better world.

Great opportunities are opening in energy production industries like wind power, solar power, coal gasification, biofuels and even nuclear power: materials engineers, civil engineers, safety inspectors, environmental lawyers, biochemists and geneticists will increasingly be in demand. Energy efficiency policies in China and throughout Asia will create new industries in the building construction sector: in materials development, sustainable living architecture, and in heating and ventilation self-sufficiency, in gray water treatment and more. China in particular will develop institutions that for the first time in its long history will care for the elderly, the disabled, and those made redundant after all the cities are built and the roads laid, to help them many of them feel – if not actually become – useful and valued citizens of their societies.

I will finish with the story of a young Chinese woman, someone I am proud to call a friend of mine. She is a professional, born and raised in Shanghai, who works in a British professional services firm. When she turned 25 years old two years ago, she threw a special birthday party for her friends. She invited more than two hundred young Chinese professionals – and myself – to the party, which she hosted in a renovated warehouse on Suzhou Creek. She told the guests in her invitation that she did not want us to give her gifts for her birthday. Instead, she wanted us to donate at least 100rmb each to her favorite charity: the ONE EGG A DAY foundation, which would take the money to buy eggs to provide children in the poorest villages in China the only protein many of them would have each day.

She also invited eight other Chinese charities to the event and gave them space and time to display the services and products they offered, all of which helped the Chinese people who were not as fortunate as she, and to help the society at large to help those the government was not able to support. By the end of the evening, she had raised more than 32,000 rmb.

THIS YOUNG LADY WAS ONLY A FEW YEARS OLDER THAN THOSE OF YOU GRADUATING TODAY. I challenge any of you to contribute as much or more to society during your entire lifetimes as this young lady did in one evening of enlightenment.

I challenge you, Class of 2011, to do more than consider narrow career options for your future, to look outward from the protective cocoons of adolescence you are leaving to consider the issues our world, our societies and our families are increasingly confronted with. I challenge the Tipping Point graduates to make this a better, cleaner, safer world than the one into which you had been born.

Personally, I cannot think of a generation better equipped than the group sitting before me: international in outlook and experience; technologically savvy; related to each other and to a foreign environment through a sophisticated network of adaptation. You all, like my Shanghai friend, have it within each of you to become leaders in your own societies or even in foreign lands.

And if there is anything the future will require of us all, it is leadership of a different kind, in a world we can scarcely imagine.

Thank you.

Technorati Tags: expat life

Last week I had the pleasure of hosting Helen Wang in my adopted home of Suzhou. Helen is the author of The Chinese Dream, which has garnered a fair amount of critical acclaim. Helen is a native of Hangzhou, and has lived in America for 20 years. She calls the San Francisco Bay area home. She was visiting Suzhou to give a book talk about The Chinese Dream at the local Bookworm. She was gracious enough to accept my invitation to tour some of the more charming and traditional lanes of Suzhou, with its gardens, canals and tea houses. It was a great opportunity for two authors to sit down together to complain how much hard work goes into writing books, how the pay is lousy, and how rewarding the process ultimately is.

Though my book China Inside Out covers three critical issues China’s middle class – property, education, and health care – Helen’s book discusses Chinese people’s aspirations and how they went about realizing the good life for themselves. As was my feeling three years ago, when I first read the manuscript, I find the most engaging interviews (she interviewed more than a hundred Chinese people in researching the book) to be in the chapter on religion: the ultimate search for meaning beyond simply making money to show off to your neighbors.

During the intimate and animated book talk later that evening, one Western participant voiced his observation that the young Chinese he teaches are interested first, second and third in making money. He expressed his doubt about interest in a hereafter beyond gaining reassurance that an individual would be able to make more money. I chimed in with my observations that there seems to be a nascent movement among young white collar professionals toward charity donation and work.

Nevertheless, The Chinese Dream is a good read for American audiences that would like a translation of some of the Chinese motivations involved in the development of China’s middle class. For Western expats steeped in the day-today vagaries of the China’s middle class, the book requires a more nuanced sell.

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