from Eurobiz Magazine

July 2009 issue

by Bill Dodson

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 stock market trader for more than twenty years. Essentially, both books discuss the role randomness plays in our perceptions of the way the world works as we would like, and as it seems to more deliberately operate. Black Swans are highly improbable events that have consequences in proportion only to the improbability of their occurring at all: the more improbable, the more consequential. The recent meltdown of the global financial system is a Black Swan: the highly improbable events leading up to and coincident in the cascade of failures was a phenomenon few in the world foresaw.

Black Dragons are Black Swans with Chinese characteristics. Black Dragons are equally improbable, but have the distinct fingerprints of the Chinese culture, psyche and system of governance all over them. The Blizzard of 2008 in Central and South China in combination with coal and electricity price controls, weakening export markets and hyper-inflated costs for inputs spawned just such a Black Dragon. Strict controls on the media during the run-up to the Olympics in combination with corporate and government collusion gave birth to the Dairy Scandal in 2008. Indeed, it could be said that 2008 was more the Year of the Black Dragon for China than the Year of the Rat!

The outbreak of Swine Flu in April 2008 led expat friends who were around during SARS to reminisce one evening at a local Suzhou pub about the impact SARS had on their operations. “Oh yeah,” one British engineer said, “it was great! No visits from the home office. No Vice Presidents or technicians or Inspectors to hand-hold while they were in China.”

“There was no production,” another friend chimed in. He was a production manager for a large Danish company. “There was nothing to do for weeks,” he said.

“So what did you do during the time?” I asked them.

“We drank beer!” one of the fellows laughed. The others heartily joined in the camaraderie, taking sips from their own glasses of beer. Of course, this is the last thing any headquarters would want to hear from its staff about its far-flung investment in China.

Very few Western companies with which I am familiar in China have contingency plans and budgets to deal with Black Dragon events. SARS saw the mass evacuation of expats and their families at enormous cost to companies, not to mention the damage done to balance sheets by operations that had to be taken out of production. Companies also need to consider local and expat staff that may be personally caught up in Black Dragon events. In the event of death or dismemberment, companies in China are responsible for compensating the Chinese families of the staff affected – even if the company was not at all responsible for the event.

Of course, a common sense approach to meeting the challenges the occurrence of the highly improbable event presents companies is to keep a cash reserve or line of credit that specifically addresses the consequences of just such catastrophes. Also, as morbid as it may sound, providing staff training in self-supporting emergency services such as evacuation procedures and CPR techniques will reduce the risk of tragedy to employees on the job. The Chengdu-based Bookworm book shop went one better and coordinated emergency supplies and volunteers to help the victims of the Sichuan earthquake last year.

The New Zealand company Fonterra’s China strategy could easily have been swallowed up by the most dramatic scandal in China in 2008: melamine-tainted milk powder products. Fonterra had a 45% stake in a joint venture with Shijiazhuang-based Sanlu, the third largest dairy producer in China. When the story finally broke in September 2008 that Sanlu and other Chinese dairies had known about the poisoned milk and its effects on infants, Fonterra could say it had been the one that had been pushing Sanlu and local authorities to publicly recall the bad product. Though the central government has acquired the assets of the joint venture (some of which Fonterra may be re-purchasing at this writing), Fonterra has gone on to act on its promises to help Chinese citizens the best it can under the difficult circumstances. For instance, Fonterra is making donations to a foundation to support construction of maternal and infant hubs in rural communities. Now, according to reports, the company is on track to treble its dairy exports to China to about 160,000 tons this financial year, because Chinese have lost a great deal of faith in local dairy products.

In other words, it sometimes pays to stick your head in the mouth of the dragon.

Copyright ©William R. Dodson, 2009