This is China! blog

BusinessForum China Magazine mid-summer published my article on the Services Outsourcing Industry in China. Entitled, “Out of Bangalore and into China,” I discuss the social and economic drivers, and government subsidies and policies promoting what Central government has deemed a pillar sector. One of the best things about the article is its placement in a particularly outstanding issue of the magazine, published by the German Chamber Network in China. Articles I found must-reads included:

• A Tectonic Shift: What Will China’s Role be in the World’s Future Financial Set-up?
• The China Price is Unsustainable, an interview with the author of the book, “The China Price”
• Monetary Flows:  Chinese Foreign Investment – How Much and Where (Part 2 of 3)
• Place Your Bets, about China’s real estate bubble

It’s a timely and relevant issue well worth checking out.

Shanghai Expat.com has been gracious enough to re-publish some of my posts in their Channels section. The latest re-post was about MBA programs in China. The Shanghai Expat is a fine website chocked full of the latest China news and local happenings in Shanghai. I’m privileged to have some of my pieces re-published there.

Keep up the good work, Shanghai Expat.

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.

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!”

It seems almost every month now Western friends are leaving Suzhou, re-patriated from whence they came. Timing’s everything, they say, and the Times have forced companies to dramatically re-think the way they use expats in China. In one instance, a friend’s Australian company – in the household goods manufacturing industry – just simply doesn’t exist any longer. For another mate, the early retirement package the company offered is far greater than if he just continued working in Suzhou another two years and then retired as a matter of course.

In the March 2009 issue of Eurobiz Magazine I write about succession matters in companies in China, and why it’s important for Western companies to plan for and cultivate talent that will eventually assume the role of General Manager of a company:

Robert, the British GM, also stated that succession Matters ultimately come down to an issue of trust. “It is important for Chinese managers to establish credibility with Western managers abroad.” Without trust there cannot be effective, transparent communications between two sides separated by vastly different value systems.

And trust, we all know, is a precious commodity in the business world.

Brian Schwartz has a well-researched article in the March 2009 issue of China International Business Magazine on the development of China’s IT services outsourcing industry. He asked me some of my thoughts on the topic for the article, one of which involves the relationship between the Indian outsourcing platform and the Chinese. I responded in the article by saying:

The Indian government is continually having difficulty rationalizing a business sector capable of capitalizing on the outsourcing services in its own backyard…

Certainly, two things I’ve been struck by in the global financial downturn is the sheer number of Chinese IT service providers that keep on keeping on: they have made it plain they are not going to close shop any time soon. Though far smaller than their Indian counterparts, they are eagerly moving up the customer-service learning curve while keeping costs low.

The other interesting point is the very reason behind the staying power of Chinese IT-service vendors: they have a domestic market that is increasingly becoming rationalized. Rationalized in this context means that local regulations, transportation and information infrastructures, staffing levels and more are well enough mature in China that IT services companies can actually get to and support customers in a somewhat timely and effective manner.

Until India has this kind of domestic customer base, it will always be at the mercy of the international markets that have caused massive layoffs of staff at their outsourcing facilities, salary deflation and customer flight to competing countries – like China.

Email me… your name, company name, industry and country in which you are working to get a PDF copy of the article.

National Public Radio recently interviewed me on the Chinese government’s interests in promoting a domestic wind industry. The piece, run by the talented Scott Tong out of the Marketplace’s Shanghai bureau, is called, “Wind farms change the air in China.” I admit I got a bit woolly when I said:

“We may see wind turbines off the coast of Saudi Arabia, or off of Vietnam, off the Ivory Coast. Because the Chinese were able to bring the technology down to a cost level that these developing economies could afford.”

Wish I could have taken out the Saudi Arabia bit; after all, they won’t be running out of oil for another fifty years.

Still, I was able to make a couple other good points, which did not make it into the piece; like, the Chinese government is requiring that domestically made wind turbines have 70% domestic content. Now, since domestic makers like the National Railroad Company do not do a good job at making such components, international components makers from Denmark and Germany mostly are making their way in-country.

However, the international players do not seem to realize that very shortly not only will domestic Chinese manufacturers learn how to make the same components, but the Chinese will more quickly customize the sets for Chinese geographies and economies, and will produce competing parts at half or less the cost – and perhaps half or less the lifetime.

Originally published in Chaina Magazine

July/August 2008

by Bill Dodson

It’s a long way to Meishan Free Port right now. The last few kilometers into China’s newest Free Trade Port are spent slowly driving a temporary bridge tiled with thick steel plates followed by winding gravel roads. Visitors driving those last tortuous bends must make way for the constant stream of dump trucks that return from filling ocean with landfill. By 2010, the small island off the coast of Zhejiang , an hour’s drive west of Ningbo city, will rival the Yangshan Port near Shanghai for the volume of containers the Port will support.

Ningbo Meishan Free Trade Port Area is the fifth free trade port area China’s Central Government has approved; other Port Areas being: Yangshan, Tianjin Dongjiang, Dalian Dayaowan and Hainan Yangpu. Currently the island is only about 27 square kilometers, with 7 kilometers of coastline. It’s shores are natural deep-water ways, and a logical supplement to Beilun Port, a network of ports on the northern shore of Zhejiang Province. Beilun has ranked second of all ports in China since the beginning of the millennium, and fourth place in the world, according to Ningbo administrators. Meishan Free Trade Port was only recently approved by the state government on February 24^th, 2008.

Through an extensive landfill project, the local government will enlarge the island to 36 square kilometers.  Interestingly, the island already has a population of 150,000. The primary industries on the island until the construction of the Port facilities began in February this year were fishing and salt processing. Indeed, the foot prints of old salt processing facilities can be found along the rough route to the government offices, on the east coast of the island.

“The advantage of free trade ports is that ships can dock, off-load their cargo and processing can be done right at the Port, then re-loaded on other ships without customs duties paid and VATs tabulated,” according to Jeffrey “Casper” Yu, a senior administrator in the Promotion Bureau for the Free Port. Yu worked for nearly five years in the Ningbo Free Trade Zone, and so has a great deal of experience in developing a bonded zone in China. “Another point is that domestic companies that sell into a Free Trade Port can apply for VAT rebate,” he explained, “while those that sell into Free Trade Zones are not eligible.”

Ultimately, the island will have three bridges spanning the half-kilometer of water that separates it from the mainland. The current make-shift bridge will disappear, Yu said, “The Island will serve several roles:  to serve as a port logistics hub; to support service industries such as customs, port affairs, ship inspections, finance, law firms, audit firms and the like; tourism – including the development of an international cruise ship port in the north of the island; and convention and exhibition of import and export commodities among others.” The Island’s authorities will also entertain commercial and logistics real estate projects.

The island has been slated to be developed into several areas, including: International Transfer; International Distribution; International Purchasing and Export Processing, among others.

By 2010 the first phase of the Port will be put into operation. The first phase will include two 100,000-ton container berths put into operation, as well as completion of Meishan Bridge, the construction of a main thoroughfare Maishan Boulevard, and the Container Truck Highway. The project also plans to have complete by 2010 an additional 9 square kilometers inning project to expand the land area to 36 square kilometers. By 2020 the Port should be complete and in full operation, with an annual throughput of 5-6 million TEU.

Mr. Yu explained, “The Meishan Free Trade Port will not compete with Yangshan Free Trade Port for business. The plan is for Meishan Free Trade Port to cover port requirements for Zhejiang Province, Anhui Provinde, Jiangxi Province and Fujian Province. Meanwhile, Yangshan Free Trade Port will address many of the containers coming down the Yangtze River from river port towns, and north China, including Jiangsu Province, Shandong Province and Henan Province.

Copyright © 2008 William R. Dodson

Originally appeared in the China Business Guide 2008

Published by the China Economic Review

By Bill Dodson

China’s first-tier city economies are shedding traditional secondary-industries – also known as ‘light’ industries – to develop tertiary, service industries and manufacturing industries that are more capital-intensive than in the past. Representative light-industrial products are typically small in size and produced in high-volumes in labor-intensive “assembly lines,” and do not require as much R&D as, say, the production of microchips. Some light industry products that helped Chinese first-tier cities jump-start their economies include: toys, small components that work in computers, computer accessories, shoes, textiles, furniture, automobile parts and more. Light-industry products are easily commoditized. Guangzhou’s own economy gained great impetus by becoming the center of toy-manufacturing for Hong Kong businesses. Shanghai has become a nexus for automobile parts, while Beijing originally gave preeminence to smelting, steel production, petroleum processing and coal-extract products.

Capital-intensive and heavy industries include: sophisticated IT-related products such as telecommunications equipment and semiconductors, automobile assembly, engine manufacturing, heavy machinery, shipbuilding, petrochemical refinery, marine parts, aviation and aerospace, biotech and medicine.

The Chinese government has several motivations for promoting the capital-intensive industries in China: job creation, wealth creation, the rising cost of manufacturing inputs and the environment. The central government knows that light manufacturing with its thin margins can employ only a limited number of people economically, and that it needs to develop alternate channels for employment. China’s leaders seem all too aware that a nation’s wealth rises with the value of the products and services it produces; light manufacturing offers limited returns in the long run.

The costs of unregulated manufacturing

Issues such as the limited availability of arable land, spiraling natural resource usage and increased pollution levels constrain the degree to which China – or any country – can industrialize through traditional manufacturing. In particular, over the last three years, land for building low-value manufacturing facilities has become highly restricted through central government “macro control policies,” and economic development zones in China can no longer expand the size of the land available for investment in their locales.

The cost of materials has been steadily increasing at double-digit rates the past five years, as labor-intensive Chinese factories have sucked in greater amounts of metals, plastics, wood and other resources to meet production quotas inside and outside China. The havoc unregulated light manufacturing has wreaked on the environment will take decades to reverse. Air, water and land throughout China is poisoned to an extent that in some regions in China the pollution has entered the human food chain, for instance, in Daqing, Heilongjiang province, where cancer rates near a Chemical Industry Economic Development Zone have skyrocketed in recent years, according to the Economist.

The Chinese government sees the heavy industries as a social release-valve, of sorts. Currently, Chinese universities are annually churning out hundreds of thousands of engineering graduates that are un- and under-employed. Further, with per capita GDP in the nominally poorer interior of China rising, more students are able to go beyond the compulsory nine years education to complete twelve years, gradually increasing the overall education level, sophistication and expectations of the population. The Chinese government realizes it has the added responsibility of creating jobs for the millions that do not go on to university but who are better educated than previous generations. Heavy industry provides an outlet for a labor pool that a diminishing light manufacturing sector cannot.

Finding a base of operation: Shanghai, Beijing, Guangzhou

Shanghai

Shanghai is often considered the flagship of China’s economic development, and there have been dramatic changes in its mix of light-industry and heavy industry. Shanghai’s commercial investment policies through its 11th 5-year plan have de-emphasized its cottage industries such as textile, chemical refinery, paper processing, plastic molding and others to encourage others: electronics and information processing technologies, photoelectric and sophisticated mechanical products, and biology and medical technologies.

Economic Development Zones (EDZs) in the Shanghai municipality have not been renewing the business licenses of light-industry companies that are considered labor-intensive, polluting or not involved with higher-value technologies. EDZs are areas in or near cities and towns in China that offer special tax incentives, subsidies and locations in which foreign companies can build manufacturing operations, among others. For instance, companies invested in the Waigaoqiao Free Trade Zone, report the zone has been actively discouraging investment from traditional manufacturers who, five to 10 years ago, it was courting without restraint.

Meanwhile, new EDZs have been barreling ahead to develop facilities and logistics that capital-intensive industries require. The Lingang Economic Development Zone, just south of Shanghai city, is certainly positioning itself to take advantage of the trend toward hi-tech and heavy manufacturing. The zone lines the coast that supports the Yangshan deep water port. Yangshan is an island some 30 km from the coast, accessible by one of the longest deep water bridges in the world. The port is positioning itself to become one of the busiest in the world by 2015. Lingang EDZ as a locale for heavy manufacturing allows manufacturers that produce huge products that weigh tons – such as engines, avionics parts, marine parts, logistics equipment and the like – to quickly and efficiently move their products offshore for foreign markets. The EDZ, by moving products through its Logistics Park, will then also become a major logistics hub. The EDZ is also positioning itself to become a major R&D and IT hub through its Comprehensive Industrial Zone.

Beijing

The Beijing municipal government has been capitalizing on its heavy concentration of top-notch universities such as Beijing University and Qinghua University to develop its own Silicon Valley, the Zhongguancun High and New Technology Development Zone. Established in 1999, the area supports 39 higher education institutions focusing on scientific and engineering disciplines, the highest density of its kind in China. More than 200 research institutions provide talent to the likes of Motorola, Microsoft and Intel, who have R&D and manufacturing centers in the Park. The Park is an umbrella for ten sub-parks, among them: Haidian Park, Fengtai Park, Changping Park, Desheng Park and Daxing District. Haidian Park is a 100 square kilometer park concentrating on IT. The Fengtai Park is an eight square kilometer zone with a focus on bio-engineering and pharmaceuticals, as well as the development of new materials. Desheng Park, established in 2002, highlights its business incubator policies and workshops where high-tech manufacturing start-ups can move products from conception to production. Daxing District is the base for the China Bioengineering & Pharmaceutical Industrial Park (CBP).

Guangzhou

August 2006 saw the approval of the largest-ever petrochemical deal in China, with Guangzhou as the municipal administrator of the project. The China National Petrochemical Corporation (Sinopec) and Kuwait Petroleum Corporation (KPC) are jointly funding the project, projected to cost as much as US$5 billion. The project will outsize the US$4.3 billion Nanhai Petrochemical Project, a JV of China National Offshore Oil Corporation and Shell Petrochemical. Guangzhou will then become the hub of a major petrochemicals refinery alley that will stretch the length of the seacoast along Guangdong province. Official sources reckon that Guangdong’s overall petrochemical production value will total US$100billion in 2010, with an average annual increase of 20% over the next five years. The refinery belt would be made up of five petrochemical bases: Guangzhou, Daya Bay (Huizhou), the Western Coastline (including the cities Zhanjiang and Maoming), Yamenkou (including the cities Zhuhai and Jiangmen) and the Eastern Coastline (including the north Guangdong cities Shantou, Chaozhou and Jieyang). The overall development plan involves bolstering upstream businesses such as exploration and production, and middle- and downstream businesses including oil refinery and petrochemicals.

Looking west

Domestic, Taiwanese and Hong Kong companies are moving to the interior of China to capitalize on lower labor, utility and land costs. Provinces such as Henan, Jiangxi and Anhui are seeing higher rates of investment than before, as companies seek to escape the pressures success in the Bohai region, the Yangtze River Delta and the Pearl River Delta has wrought. Meanwhile, the first-tier cities Beijing, Shanghai and Guangzhou will continue to develop their leads as service centers and as centers of heavy manufacturing that rival any in the world.

Copyright William R. Dodson, 2008