This is China! blog

Andrew Hupert makes the point in his latest China Economic Review column that western companies should be thankful for the central government’s efforts at controlling the flow of information across the internet, marking out Chinese space and that other world out there. Essentially, he says, the GFW reduces the competition Chinese companies can present MNCs, as well as keeps Chinese professionals dumbed-down (my term). It certainly keeps the country from leaping into the international innovation leagues.

China’s huge population and vibrant marketplace has been the lure for thousands of foreign companies that wanted a piece of the prosperity that China promised. The attraction is nothing new: British merchants three hundred years ago relished the thought of adding an inch of cloth to the sleeve of every Chinese at the time. Imagine the profits!

Germany’s Siemens AG and Japan’s Kawasaki Heavy Industries Ltd. licensed their high-speed train technology to China to gain their slice of the Chinese pie. Now, China wants to sell on the technology to the state of California, which is planning a high-speed rail network of its own. Though the trains China promises to sell on to California are less expensive than the German and Japanese models, the Germans and Japanese licensed the technology to the Chinese on the condition that the Chinese use only the technology within China, according to the Wall Street Journal.

The car company BYD, in which Warren Buffet had invested US$230 million, is running into the same IPR issue in its efforts to enter the American market through California’s own short-sighted mercantile tender. The electric vehicles BYD is offering the Americans run on lithium-ion technology, which is un-proven and not even theirs. The highly labor-intensive and expensive processes involved in making the lithium powder are not even theirs to give to others. BYD has said it is licensing another lithium powder, to get round the export restrictions. Of course, that calls into question the source and quality of the product they are using in their batteries, then.

The train makers – essentially Chinese State-owned Enterprises – are jumping through hoops of semantics to convince potential buyers that the IPR they licensed for use in China undergoes an alchemical transformation that renders it free of legal obligations. They call the alchemy “re-innovation”.

Expect more IPR shenanigans as Chinese companies use double-standards and outright misdirection to break into international markets.

Further reading: WSJ

Technorati Tags: china, economic trends, globalization

Zbigniew Brzezinski, National Security Adviser to President Jimmy Carter, recently published a frank and enlightened opinion piece in the New York Times. He writes on the upcoming visit President Hu Jintao of China will be making to meet with President Obama this month. He makes the point that both countries have an opportunity to shape history on the same order as the summit meeting between Deng Xiao Ping and Jimmy Carter thirty years before, marking the opening up of the Chinese economy.

He also makes an incisive observation about American society and its economy:

The United States’ need for comprehensive domestic renewal, for instance, is in many respects the price of having shouldered the burdens of waging the 40-year cold war, and it is in part the price of having neglected for the last 20 years mounting evidence of its own domestic obsolescence. Our weakening infrastructure is merely a symptom of the country’s slide backward into the 20th century.

Finally, he implores the two leaders to do something at a high level that would be contrary to decades of diplomacy between the two countries: cooperate.

For the visit to be more than symbolic, Presidents Obama and Hu should make a serious effort to codify in a joint declaration the historic potential of productive American-Chinese cooperation. They should outline the principles that should guide it. They should declare their commitment to the concept that the American-Chinese partnership should have a wider mission than national self-interest. That partnership should be guided by the moral imperatives of the 21st century’s unprecedented global interdependence.

Come on, guys, listen for once.

A good American friend of mine who has been living in Shanghai for eight years has been hiding out to finish writing his book in a small town of 40,000 in Zhejiang province called Wukang, near Moganshan. He recently told me over cups of coffee  in Shanghai that the local government in Wukang has finished its mission: its infrastructure projects are all but complete and they’ve moved most if not all the people from the surrounding countryside into flats in the city. Now, the city is populated with unemployed and unemployable country folk. Which brings me to a very nicely done white paper sent me by the Economist Intelligence Unit about the urbanization trend in China (about which I write in chapter 3 of my book, China Inside Out) and the market opportunities in what the report calls China’s Champs – the up-and-coming x-tier cities.

Some of the surprises (for me) in the report included:

• Hefei ranked first as an up-and-coming potential money-maker for companies invested in the city;
• Baotou (in Inner Mongolia) and Shenyang ranked second and third, respectively
• Wuhu (no,. 7) ranked above lovely Xiamen (14th);
• Anshan, in Liaoning Province, (no. 18) made it on the list at all (the city’s only redeeming feature is the great jade Buddha – recommended).

What struck me most about the list was that many of the cities are highly polluted (Hefei is terrible from automobile exhaust; Baotou is coal mining town; Shenyang is unpleasant, especially during the dust storms; and Changchun is simply toxic).

Now, that’s not to say the cities on the list do not have market potential; however, the report seemed more bullish to me than the average Economist output. The report estimates that urbanization and related wealth creation in the Champs cities will continue into 2035. The biggest obstacle the report suggested was perpetuation of the hukou, which essentially segregates country folk and city folk.

The report creatively identifies market opportunities in up-and-coming cities across eight categories: economy, consumer markets, IT connectivity, education, average wages, health care and industrial pollution. Suzhou ranked first for its output per head (yeah!), maturity of the economy and openness to trade, above Hangzhou, which ranked 10th for the same measure (in the never-ending battle between the two cities for who indeed has the most beautiful women – among other things).

In general, the white paper is a good read, and a good indicator of China’s boom towns over the next five to ten years. At least, it should get some armchair industrialists back out into the field. I am not as confident as the EIU, however, in the viability of the local economies over the next thirty years, based on my visits to many of these smoke-stack cities, and based on the fact that many of these cities are up-and-coming precisely because of local government economic gerrymandering, much like Wukang.Then again, Chinese cities across the board are increasingly finding their environmental sins catching up to them economically.

The report does not give weight to very real concerns that have the possibility over the next thirty years of putting the breaks on the micro-economies of these towns as well as China overall: the effects on GDP of pollution; of the loss of local ecologies and the cost of maintenance from the standpoint of livability – or of clean up; the costs to the local healthcare systems of pollution (with air pollution already killing an estimated 700,000 people per year throughout the country, and counting); the extent to which water is heavily subsidized and how rapidly dropping water tables in many of the regions in which the cities are located will have their water bills increased and perhaps water rationed from the near term on; and of the energy requirements of these cities (at least doubled over the next ten years; and only God knows the multiplier over the next twenty five years), and the extent to which the environment is able to continue supporting the opening of (by some accounts) as many as three new coal-fired power generation plants each week in China – with, of course, attendant pollution costs. Though, of course, there are business opportunities in the clean up itself, it would be naive to think local governments will slow down economic activity to give ready access to industrial “spoilers”, or that the revenue created through the clean-up would offset the costs already incurred to local health care and pension systems.

Finally, there’s what I call the Wukang effect, in which expensive, polluted cities are predominantly inhabited by an under-educated, under-employed majority that’s been moved into the cities from the countryside that makes substantially less money than the elite who live in high rises above the smog of the cities. Also, university graduates, despite the booming economy, are finding the job market practically nonexistent, with many bright young things making the same amount of money as migrant workers. In other words, come twenty-five years from now, there may not be the wealth at the level the report discusses; if, that is, consumers live long enough to spend all that supposed disposable income.

To get a copy of the EIU report, contact:  Martha.McCubbin@grayling.com. Also, you’ll find a very nice infographic of China’s Champs here.

Further reading:

China’s Golden Cities – Newsweek

World Bank City Rankings: An Explanation — china.org.cn

China Is Set to Lose 2% of GDP Cleaning Up Pollution

I found disconcerting New York City Mayor Bloomberg’s recent comment in Hong Kong that “We’re about to start a trade war with China if we’re not careful here – only because nobody knows where China is. Nobody knows what China is.” The  statement disturbed me because of the amount of news and books about China pouring through media channels into American newspapers, magazines, TV sets and web portals. Either nobody’s listening or the wrong message about what’s happening here in Asia is not getting through to Americans – especially their leadership.

A conversation during a dinner party a couple evenings ago with a China veteran with more than 13 years experience managing factories in China seemed to support Bloomberg’s assertion. The manager had finished a management contract in Guangdong province and had returned to the States to pick up another contract for another China-based position. He is in his late fifties. He, too, said Americans have no idea of the level of activity occurring here in China; or in Asia, in general. “They don’t understand what’s happening,” he said thoughtfully. We agreed that, whether we like it or not, the balance of economics – if not power – was shifting to Asia.  “I picked up more job leads in the last two weeks since returning to China than the two months I was in the States.” Actually, he hadn’t picked up any China-related leads back in the States.

There’s so much Americans can be doing to rebuild their economy, develop new industries and technologies, create more jobs, and, in general, just feel better about themselves in a dramatically shifting post-industrial world. None of the rebalancing that’s happening globally is a fait accompli.

Congress, as Bloomberg asserts, is doing Americans a great disservice.

Further reading: New York Daily News

image credit: bookhuntersholiday.wordpress.com

Image Credit: Build

I wrote this week in my cleantech column for the China Economic Review the extent to which the United Steel Workers Union is pursuing an internationally counterproductive approach to preserving alternative energy jobs in America. It’s a move that is sure to set the United States job market back further and may result in American industry encountering higher barriers of entry to the Chinese domestic market for cleantech in the near future.

“America’s blind spot, however, is in the adoption of a national policy of any kind – it smacks of the sort of big government Republicans demonize and Democrats are embarrassed about. In reality, national energy policy in the 21st century is about gearing a country and its people toward meeting challenges that include dwindling natural resources and increasing amounts of waste and pollution. The Land of Plenty can no longer remain insulated from problems the entire world shares.”

Read more …

Image Credit: Made-in-China

My column in the China Economic Review analyzes just how China’s back room dealings with Japan and control of supplies of rare earth minerals may leave China trawling in empty waters one day…

The Turbot War of 1995 saw Canada take a Spanish fishing vessel the Canadians claim were over-fishing waters just outside Canada’s Exclusive Economic Zone. Over a span of several weeks battle lines were drawn along Anglo-American and European Continental lines as the British and Irish sided with Canada in the international conflict against, it seemed, every other country in the European Union. At that time, the natural resource under contention was fish. Now at issue between China and Japan are deposits of oil and other natural resources in an island chain the Chinese call the Diaoyutai Islands and the Japanese call the Senkaku.. At stake for the moment is Japan’s access to rare earth metals it uses in its celebrated electronics and motors. Also held hostage is world’s ability to develop clean and renewable energy technologies to ensure the survival of entire societies.

Read more of the column …

My General Manager (GM) friend GM X forwarded me another email he used to explain to HQ just what’s going on now in China. He’s encouraged me to post the message, so other GMs and HQs may benefit from the observations.  GM X is an American with more than eight years in China running factories.  Every day is a new day for him, which is why he’s my friend:

It is becoming clear that there is an inevitable upward price correction coming on all metal products and possibly all products produced in China. The reasons are two fold, Power Limitations and Pollution Control Policy. These new policies came into effect suddenly within the last month. Factories are saying that the policies came without warning and are causing market corrections in pricing to align with the new reality of these policies.

Power Limitations

Several factories have told me that they are being forced to shut down for days at a time to comply with power usage policies that have recently come into practice. The reality of the situation is such that anyway to look at the situation this will cause an increase in prices, due either to increased cost of generating power at the supplier or the decrease in available supply or a combination of both factors. The net result is that by limiting the power, the prices will rise.

This upward pressure has already reached the top tier suppliers from there sub-suppliers, with many sub-vendor refusing to make current orders without in immediate increase in price. It is only a matter of time before the top tier suppliers pass that cost increase along.

Pollution Control Policy

It seems that China is taking immediate action to clean up the industries that she has. Over the past month there has been closures and consolidations in the plating industry in Zhejiang province, due to national level policies. This has caused an immediate reduction in available capacity for plating in the region. Lead time have lengthened and prices have increased practically overnight. There is a reverse auction taking place to secure plating services at the remaining suppliers. The top tier suppliers that are willing to pay the most are getting their orders processed first. This negotiation is taking place on orders that are already in production but are facing being bumped to the end of the line unless the plating supplier’s pricing demands are met. Prices have increased 70% in the past month.

Combined Impact on Steel Prices

The steel market has already been unstable over the past year due to increased demand and the change to spot pricing in the iron ore market. The above policies have aggravated the already tenuous steel market. A very large sheet steel supplier to one of our top tier suppliers, suspended order taking last week and held their stock until price of sheet steel increased sufficiently, then they began to take and fill orders. As you can imagine this type of behavior in the market is causing a spike in steel prices across the board.

Summary

Prices from top tier suppliers are increasing due to raw materials increases, power cost increases (if they generate their own power), and lost capacity due to mandatory power outages.

Technorati Tags: china, economic trends, globalization china

The Shanghai Business Review recently reported the European Union Chamber of Commerce has raised further complaints about discrimination against Western companies in the Chinese marketplace. Much of the consolidation occurring in China industry, though, is premature, much like the American teenager who believes at age 15 he’s entitled to drive the family SUV because he’s all grown up. Many of the sectors that rely on extensive R&D and innovative approaches to technology application are wholly immature in China, however. In the September 2010 issue Eurobiz Magazine I write in my China Energy column that:

The overwhelming majority of Chinese engineers and the companies that employ them are quite literally without application knowledge of the technologies required to meet the conditions into which the wind turbines are thrust, especially in the rough conditions of offshore installations. More than a few European General Managers and CEOs have told me Chinese buyers for their components and chemical processes expect the vendors to educate the Chinese on the specifications their parts require. As the CEO of one Danish components maker expressed to me, “We ask them [Chinese buyers] for specifications and they ask us what the specifications should be, since we are ‘the experts’.” The lack of knowledge and experience of domestic wind power components makers of many of the domestic turbine and components makers is a constant theme in discussions with Western vendors. Vendors have found they have to provide additional training and longer sales cycles to potential and current customers in order to make and keep sales in China.

Check out more of the Eurobiz article here.

The Financial Times recently published two articles about the increasing number of protests in China after the Foxconn suicides and Honda plant shut-downs spotlighted employee dissatisfaction with salary levels and working conditions. I had written a few posts back how some smaller Western companies in the Suzhou area are being affected by the confidence-building actions down South; however, the FT’s coverage indicates something slightly different afoot in Suzhou’s industrial actions.

“Workers born after the 1980s and 1990s are concerned not just about pay but about safety, rights and respect,” Dong Baohua, professor of law at East China University of Politics and Law, told the FT. A strike leader at Suzhou NSG said “That strike is about pay, ours is about safety conditions,” referring to discontented worker actions in South China.  I would go so far as to proffer that Suzhou is also one of the first manufacturing centers in China to upgrade its industrial policy to attract higher-value manufacturing, R&D and outsourcing services. It began those efforts as early as five years ago: one of the reasons for the outbreak of green algae on Lake Tai (Taihu) – Suzhou pushed lower-end manufacturing westward – to cities like Yixing and Wuxi – which would take the dirtier, more labor-intensive industries like textile and plastics manufacture. Suzhou industries typically have workers with far less education levels than higher-value producers and service sector offerings. Hence, a greater focus in the Greater Shanghai region on quality-of-life aspects of work.

Interestingly, a feature protests in the Yangtze River and Pearl River Deltas share is an extreme distrust workers have for the Party-sponsored and controlled unions in the companies. The trade unions are more a function of Party control and monitoring in the Party’s interests than in either advocating employer or employee concerns. “Low union credibility is contributing to unstable industrial relations, labor analysts say, adding that more disputes are inevitable.”

Of course, further protests are inevitable for plant managers who insist on keeping their heads buried in the sand, instead of acting proactively to address possible worker concerns.

Further reading: FT

Related posts:

Chinese Workers Extorting China Operations

China is Cracking Up

Managing the Return to Normalcy

There’s No Place Like Home: Worker Shortages