Just How Important Is Wal-Mart To China?
By Paul Midler | May 11, 2008
We read in the press about the importance of Wal-Mart’s relationship to China, and I thought it would be fun to run out some quick figures. Wal-Mart procurement in China has been flat at $9 billion over the last couple of years. Meanwhile, exports out of China have risen fast. In 2007, exports were up 25% to somewhere around $1.2 trillion. What is that, 0.75% of total exports? In general business terms, it is not a significant figure, and as a proportion it is shrinking over time. While Wal-Mart may be a significant customer to some individual suppliers, it is not nearly as significant to the economy as some might have you believe.
[Stepping away from the blog for a couple weeks, or will at least be blogging at low-impact levels…]
Topics: China | 5 Comments »
Why Profit Zero Works In China
By Paul Midler | May 9, 2008
Far Eastern Economic Review published an article of mine in March 2008, wanted to introduce the piece here. For those less familiar with Far Eastern Economic Review, it is one of Asia’s leading business publications, and it shares an association with the Wall Street Journal. A couple of paragraphs, along with the link:
“… One of the big questions going forward is whether the government will allow foreign companies to compete unfettered, or whether they will burden foreign firms with increased taxes, regulation and the unequal enforcement of laws that were meant to apply to foreign and domestic firms in equal measure. China has been more open than either Japan or Korea at comparable stages in economic development—but one has the sense that profit zero will play out on the macro scale, that the day will come when the nation will come to see the work of foreigners as largely done.
U.S. politicians pushed bilateral trade with China expecting that greater economic prosperity in China would lead to increases in political openness, and trade was seen as a way of integrating China more closely into the global economy. Chinese political leaders have viewed international trade differently by seeing exports as a means to an end. China wishes for itself greater levels of self-sufficiency. China may never be able to do away with exports, but the nation looks forward to a day when it will need the world a bit less.”
May be worth noting that of those factory closures in Mainland China, most of the sizable ones were owned by firms in Hong Kong, Taiwan and South Korea. A distinction that was missed.
Topics: China | No Comments »
Beijing 2008: More Journalists Than Athletes Expected This Summer
By Paul Midler | May 7, 2008
Ran across an AP article about tightening visa rules in China, and the article mentioned in passing that China expects to play host to 10,500 international athletes and 18,000 journalists. More journalists than athletes? It’s going to be a very interesting summer in China.
One possibility on the recentl tightening of visa regulations is that, unable to prevent journalists from coming in to cover the Games, Beijing is seeking to clamp down on a surrogate. Such backwards logic is typical of what we see out of Beijing. Thinking goes like this: Leaders don’t want to see the foreign press making their country look bad, but they can’t prevent reporting. So, they intiate a crackdown on trouble makers, in general.
Foreigners who have been affected the most by visa guideline changes have been citizens of 33 countries, including: Afghanistan, Tunisia, Algeria, Bangladesh ,Congo, Egypt, Gambia, Ghana, Guinea, India, Indonesia, Iran, lraq, Mali, Libya, South Africa, Morocco, Kazakhstan, Kirgizstan, Malaysia, Philippines, Uzbekistan, Tajikistan, Nepal, Pakistan, Nigeria, Sri Lanka, Sudan, Turkey, Mauritania, Saudi Arab, Sierra Leone, Syria.
While many of these countries are the sort where terrorists can be found, they are not the countries most likely to cause trouble for China. At least they are not the sort that has caused China serious public relations difficulties to date. Mia Farrow doesn’t live in Sierra Leone (though perhaps she ought to look into it).
The International Olympics Committee has weighed in on political expression from its athletes and has recently reiterated guidelines: “No kind of demonstration or political, religious or racial propaganda is permitted in any Olympic sites, venues or other areas.” I wonder what kind of guidelines will be enforced for spectators. Will visitors be kicked out for putting little Tibet stickers on their faces? Will anyone be allowed to shout “Fuck [country of your choice]!” from the spectator stands?
Beijing will undoubtedly place tight controls in official venues, and much of what the Chinese deem unacceptable will have to be figured out on the fly. Many demonstrators won’t risk finding out; they will simply take their political expressions elsewhere around Beijing. With so many journalists in China looking for an angle, the Chinese government won’t be able to prevent the negative reporting, though they will likely create a fuss trying to do so. Many in the West have expressed regret that the world has allowed China the opportunity to host the games. China may in the end regret it even more.
Keeping undesirables out of China is a futile excersize anyway because those who harbor serious terror ambitions can circumvent the new visa restrictions. All that it takes for most is an invitation letter from a legitmate company in China, and there are already agents who have stepped in to help. But China must be seen as doing something to prevent the chaos that is inevitable.
Some recent reports suggested that the government will be monitoring email transmissions from hotels where journalists stay. Another futile move. Just like the baddies who can figure a way in, journlists will have no problem finding a way to get their stories out. If hotel Internet systems go buggy, there will be the fax, the telephone, or the Blackberry.
Given the Chinese government’s desire to control what is reported, journalists and political demonstrators may simply choose to meet outside of traditional venues. With software applications such as Twitter, groups with a political message to deliver can easily meet with journalists who have nothing better to report on. Impromptu demonstrations of political expression could happen anywhere this summer - on a Beijing street, in a hotel lobby, in front of a foreign consulate. As with so many efforts at control in China, the government is more than likely going to cause the opposite intended effect.
It’s going to be more intersting to watch the journalists than the athletes this summer, that’s for sure.
Topics: China | 4 Comments »
Chinese Nationalism: Is There More Than One Kind?
By Paul Midler | May 5, 2008
Apologies to anyone who was looking for a post and found nothing new here for some time. Like the activity of blogging itself, I found taking a break to be rather addictive! Took a few days off, and then a few more. Felt so good, didn’t want to stop (or, rather, I didn’t want to start).
Here’s an article worth a look, from the Herald Tribune…
Which of the competing Chinese nationalisms will show up at the Olympics in August? An aggrieved, defensive nationalism, or a confident and proud nationalism?
Chinese society embodies both types, reflecting a deeper dualistic set of identities: one xenophobic type rooted in past indignities experienced by the Chinese people, the other more cosmopolitan version taking shape along with globalization and China’s integration into the international community.
In recent weeks, as the Olympic torch has wound its troubled way around the globe to Beijing, the world has been shown the virulent form of Chinese nationalism. While Chinese audiences were genuinely shocked and hurt by the pro-Tibet and anti-China demonstrations on three continents, the resulting anti-Western invective and demonstrations inside China and by Chinese abroad have surprised many around the world.
While it is not becoming to Chinese culture, heritage or dignity - and not representative of all Chinese nationalist feelings - the world should brace itself for more such xenophobic outbursts in the run-up to - and possibly during - the Olympics.
Don’t know about you, but “xenophobic” is not a word I would use to describe the Chinese.
Also, not sure about this idea of “two kinds of nationalism”. Seems that there is only one kind - the prickly, antagonistic sort. It bubbles up to the surface then slips back into the undercurrent.
Topics: China | 4 Comments »
Joint Ventures: More Trouble Than They Are Worth?
By Paul Midler | April 16, 2008
My experience with Chinese joint ventures have been disappointing, but I’ve always stopped short of saying that a U.S. company should never enter into such a partnership. I can at least imagine cases where it makes sense to do a joint venture.
On the subject of joint ventures anyway, China Law Blog’s Steve Dickinson has published a thought-provoking article for AmCham Beijing that is worth a look. The article, Avoiding Mistakes in Chinese Joint Ventures, suggests where trouble might arise. One of the issues surrounding joint ventures involves control, Steve points out. Just because a foreign partner owns 51% doesn’t mean that they run the show.
Here are three key points worth noting. The rest of the article can be found at the link over at China Law Blog.
Point 1: The power to appoint and remove the JV’s representative. The side that appoints the representative director will have significant control over operations. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake.
Point 2: The power to appoint and remove the general manager of the joint venture company. It must be made clear that the general manager is an employee of the joint venture company who is employed entirely at the discretion of the representative director. The common practice of appointing the same person as both representative director and general manager is a mistake.
Point 3: Control over the company seal, or “chop.” The person who controls the registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers. The power over that seal should be carefully guarded. Ceding control over it as a matter of convenience is a mistake. There is a long, documented history of this seemingly minor consideration dooming EJVs.
For those who don’t already know, CLB.com is one of the leading blogs in the China space. Dan Harris and Steve Dickinson do one hell of a job and run one of the most interesting forums for discussion on issues relating to China business and law. Those who are in Beijing may want to be on the lookout for Dan and Steve as they are planning a visit to the capital city soon.
Topics: China | 1 Comment »
Censorship: Obstacle To Freedom
By Paul Midler | April 14, 2008
Censorship continues to be a major obstacle for this global superpower. When will their leaders understand that no nation can achieve maximum potential while freedoms are constrained?
The link is here.
-
Topics: China | 3 Comments »
Get Ready For “Teaming Masses”
By Paul Midler | April 12, 2008
One of the more popular videos on YouTube these days shows a group of Duke University students waving Chinese flags, chanting their support of the motherland (link here). That Chinese are able to protest in the U.S. is ironic, but even more interesting is the idea that average Chinese may be learning through these protests how political activism works.
Jack Perkowski wrote an interesting article for Huffington Post, in which he argues that protests have the opposite intended effect on China. Jack says that Steven Spielberg made a mistake by pulling out of the Olympics, that he could have done more if he had stayed involved. That’s funny. I thought it was pretty clear Spielberg’s resignation made a direct impact. The sacrifice set off a media storm, and China soon thereafter announced some major changes on Darfur. Had Spielberg gone to work for the Chinese, offering the excuse that he could ‘do more from the inside,’ recent protesters might have been more focused on Darfur (I don’t recall seeing any signs for Darfur, the issue was almost exclusively about Tibet). The fact is that Chinese leaders are influenced by activists abroad, even if they insist that they are not.
I believe that worldwide protests against China will over the long-run continue to have an impact, and there is even a chance that we will see China announce further human rights concessions in the run up to the Olympics. Such a move would be made to appease critics so that the likelihood of conflict at the Games might be minimized. While such moves may not be sincere, we should acknowledge that protests have the potential to influence China at least to some extent.
The unintended consequence of global protests is that many Chinese will feel more emboldened to display extreme national pride. While China was inclined to hide its jingoistic nature so that it could play host, protests have struck a nerve and the world may have unwittingly triggered a we’ll-show-them-attitude. If Chinese college kids are feeling comfortable waving the Communist flag in America, imagine what’s in store for us this summer in China. Get ready, is all I’m saying…
Topics: China | 14 Comments »
France, Thou Dost Protest Too Much
By Paul Midler | April 10, 2008
Recent protests in France were so successful that China is now considering a retaliatory strike against French products.
In the meantime, I caught an article written by a former activist from Poland:
I remember 14 December 1981. Arm in arm with trade union leaders, Andrzej Seweryn, Zbyszek Kowalewski and I were leading a demonstration protesting against the introduction of the martial law in Poland. We had 100,000 Parisians behind us, nowhere else did as many people take to the street.
How I was proud of that city then. And today I’m proud of it again.
I don’t support boycotts, nor are you likely to find me at a protest rally, but it does seem that actions in France have caught China’s attention — and isn’t that interesting?
Topics: China | 11 Comments »
China Land Speculation: Is This What Moving Inland Is All About?
By Paul Midler | April 10, 2008
While many have reported that China manufacturing is on its knees, I want to assure that a great many of the country’s factories are doing just fine. I visited one manufacturer recently and was not surprised to hear that revenue increased 35% in 2007. While some manufacturers are falling on hard times, others are finding that opportunities abound.
Speaking of which, at one point in my meeting, I was told that the supplier were almost finished with construction on a new plant. I asked where the new factory was going to be located and was told four hours away by car. Four hours! The plan to build a factory four hours inland sounded ridiculous, and I told the factory owner so.
The original factory was located in a city where prices were high, I was told, and the factory wanted to build where property values would appreciate faster. What they were looking for was a real estate play. I expressed doubt about the scheme and was taken to school: The company had acquired land for US$1mn and completed construction on a plant that cost around US$3.5mn. Before the project was completed, they had a new real estate appraisal done, and the updated value of the property came in at $3mn for the land and $7mn for the plant. The value of the property had increased over 100%, I was told, before the project was even completed.
Manufacturers in China built new factories all the time; not always was the move about the need for additional capacity. They built new factories because foreign buyers were cautious and only placed orders after seeing that a factory was impressive looking. Sometimes a nice factory was built in the hope of hooking investors. I figured that the factory owner in this case might want to build and flip the property in this one case, but the goal was even more short-term. The plan was to take the increased property valuation and go to the bank with it. They expected to take out a loan for the increased value of the property.
“But what can you do with the money you borrow?” I asked.
“Anything,” he said.
China banks loan money to industrialists but then don’t push for repayment. Factories are taking advantage by borrowing money and then making minimum payments while they put the money to work. This is a golden opportunity for those in China who have access to capital. Interest rates are low, and real estate valuations in many corners are climbing rapidly. I was told that only a fool couldn’t figure out how to make money on an arbitrage opportunity like this one. The factory owner then detailed some of the company’s real estate holdings outside of manufacturing. They were significant, and they were poised to grow fast.
Questions I came away with were: (1) Was this the reason for reports that manufacturers were looking to move inland? (2) Could this be how some could afford to make products for next to nothing and still find success?; (3) Could factories that have access to capital be responsible for pushing out those that did not?
Those who might read this will wonder whether the suggestion is that we are in the middle of an industrial real estate bubble. Another consideration is whether all of this might somehow impact non-performing loans. There is nothing to worry about for the moment on either front, but if the pattern continues unchecked, asset inflation and non-performing loans will almost certainly be among China’s most significant economic challenges down the road. For now, let the good times roll!
Topics: China | 4 Comments »
China Drug Firm Dopes Greek Olympic Team By Mistake
By Paul Midler | April 8, 2008
A Shanghai pharma company may have managed to disqualify the entire Greek weightlifting team from the Olympics after shipping them tainted health supplements. A surprise inspection of the Greek team by the World Anti-Doping Agency revealed that 11 of the team’s athletes had unapproved substances in their systems. The Chinese firm has already apologized for providing the bad product, saying: “We send [sic] you L-tyrosine mixed with something else that it [sic] only for research purposes.”
This is another one with quality fade written all over it. Looking to widen its margins, the factory probably cut an active ingredient with a molecular lookalike that was slightly cheaper. Since the general public to this day still doesn’t understand the extent to which quality fade occurs across China manufacturing, the recent supplement spike will likely be seen as sabotage. Some will suggest - if they are not already doing so - that China deliberately attempted to knock Greece out of the weightlifting competition.
Foreign athletes are going to be on high alert this summer in any event. The foreign catering companies that will set up shop in Beijing are promising to do an an excellent job of controlling quality, and they will be shipping in meat. All the same, they still need to source many ingredients in China. Athletes who somehow manage to bring their own food into China are going to have to get around rules that prohibit outside food in the athletes’ village.
There is nothing that the Chinese are more proud of than their cuisine, and they are likely going to take dietary ambitions of foreign athletes the wrong way. By rejecting food products made in China, the foreign atheletes may inadvertently cause China more embarrassment than all of the protests combined. Protests abroad do not upset the Chinese. In fact, they offer proof to the Chinese that along with freedom comes an anything-goes social order, and it’s highly undesirable. The food snub is a different issue. It will genuinely sadden many Chinese, though, oddly enough, they won’t seem to understand the extent to which they have only themselves to blame.
Topics: China | 9 Comments »
Chinese Security Forces: Coming Soon To A Street Near You!
By Paul Midler | April 7, 2008
John Pomfret launched a new blog at the Washington Post. An interesting voice on China, he put his best foot forward with a first post, “Don’t Expect Protests to Hurt Chinese Regime”:
[Protest is] going to weaken China’s government? On the contrary. The more pressure the Chinese get from foreigners and barbarians – which are actually synonymous in ancient Chinese – the stronger the system becomes. Indeed, China’s system feeds off this kind of adversity. The Communist regime has a peculiar genius for turning these types of threats into opportunities.
Speaking of opportunity, Beijing recently succeeded in pressuring both England and France into placing their own security forces around the Olympic torch on its path through each country. I wonder how many other nations are being browbeaten into allowing Chinese security forces. Dressed in track suits, the security team appears more athletic than threatening, but that’s not really the point, is it?
England and France are military powers. They have their own police, for god’s sake. Maybe these other nations felt incapable of denying China’s request, who knows, or maybe they thought it would cause no harm. Already one has had the fortitude to say “no”. Australia’s Kevin Rudd told China that his country would be handling its own security. Good on you, mate!
-
You can catch the RSS at: http://thechinagame.com/feed/
Topics: China | 10 Comments »
Careful Distinction: Financial Economy vs. Real Economy
By Paul Midler | April 7, 2008
Received an email from someone on Wall Street, who saw the last post and suggested that I clarify a distinction between the financial economy and “the real economy”. Since the difference has not been much talked about, and because it is important, I wanted to add his comments separately:
One point that I think needs to be borne in mind is the difference between the financial economy and the real economy. In China’s case, the financial economy is not integrated into the global economy (you can’t move large sums in to invest or repatriate or invest-out large sums without bureaucratic approval and good reasons), which is one reason people say Western financial conditions have limited impact on China. This is why many large financial firms are clamoring to get into China, not only because it’s a promising new market but because it represents diversification in the way few overseas markets do these days. As far as the real economy of imports and exports etc. goes, I think there’s little doubt that China is significantly integrated into the global trading system, for good and for ill.
Speaking of these comments about a global system — for good or for ill — I wanted to turn China gamers onto a book that addresses the risks associated with an increasingly interconnected global economy. Here is a description of the book, End of the Line, by Barry C. Lynn:
Lynn observes, “Our corporations have built the most efficient system of production the world has even seen, perfectly calibrated to a world in which nothing bad ever happens.” Yet, bad things happen all the time, from natural disasters and wars to human error. The American people are relying on a global industrial system, which has serious structural flaws, and Lynn offers a thought-provoking perspective on the system’s winners and those at risk. We learn that while academics, investors, and customers view the global production system with enthusiasm, it is a disaster for many, including pension and health-insurance beneficiaries, and it shifts the power over wages and work environment from workers to investors. In reality we already live in a global system, and the author recommends using economic tools to correct the system’s failings. Since we are participants in a production system that is not controlled by any one company or any one country, this will be a challenge.
If you are a fan of The China Game blog, please pass the link to others. For reference, you can catch the RSS at: http://thechinagame.com/feed/
Topics: China | 1 Comment »
Does China Really Depend On The U.S. Economy?
By Paul Midler | April 5, 2008
Many are saying that a downturn in the U.S. economy will necessarily have a negative impact on China. David Frum, a former speech writer for George W. Bush, reflected this sentiment at NPR:
“Probably no major economy has ever depended so much on one partner as China now depends on the United States. Eighty percent of China’s GDP derives from international trade, and the United States is far and away the top destination for Chinese merchandise exports.”
At the other end of the argument, some suggest that China is immune to our economic woes. The China economy is not “coupled” with the U.S. economy, they insist. Oddly enough, these comments are coming from the same sort who suggest that China’s rise necessarily lifts the U.S. economy (it is as if China’s economy were connected to the U.S. by a one-way valve — China can pump up our economy, but even our biggest problems cannot deflate theirs).
There is an overemphasis placed on the U.S. economy’s significance in China’s equation, and it needs a rethink. International trade may account for most of China’s GDP, and we may be China’s most significant trading partner, but the U.S. takes only one-fifth of China exports. That’s all – and we account for an even smaller proportion of profitability for China manufacturers.
Let me explain how we matter less…
The U.S. is a modern and well-coordinated economy. Its businesses enjoy economies of scale and its supply chain networks are efficient. One of the greatest ironies in the global economy is that products sold in the U.S. – the world’s wealthiest country – are often priced lower than the same products sold in many lesser developed economies. I once manufactured a product in China that retailed in the U.S. for a dollar and on a trip to Brazil found the same item selling for close to five dollars.
American importers purchase in large quantities, and because they do (and for other reasons I won’t go into here) U.S. importers receive significant discounts. The liberal argument is that we should feel sorry for China. The prices we are paying are too low, they say, but this claim takes in only a limited view. The reality is that China manufacturers earn a higher margin on products they produce for other markets, and that extra margin offsets some of the discounts we receive.
At a typical Chinese factory, a single buyer from the U.S. might account for as much as half of the factory’s book of business but almost none of its bottom line. The bulk of the supplier’s profitability instead comes from a large number of smaller customers — mostly non-U.S. — who willingly pay higher prices.
Since factories earn less profit on their U.S. accounts, it stands to reason that a downturn in the U.S. economy would affect China less. What needs to be taken into account is not a direct bilateral link, but the more complex dynamic between the U.S. and the global economy. A recession in the U.S. should affect China only to the extent that such a downturn affects the world more broadly.
Topics: China | 10 Comments »
Survey: Testing Affects Price
By Paul Midler | March 29, 2008
The Wall Street Journal ran an article on an American company producing quality suits in China. The suits are nearly as good as high-end suits you find made in Italy. Interesting piece, but let’s set aside so that I can introduce a survey.
Williams Loft, a distributor of mattress products, ran the recent survey. The company sent out requests for quotation (RFQ) to twelve suppliers in China. Each was given the exact same set of specifications. The company did nothing with the quotes, but went back to the same factories six weeks later. On the follow-up, they mentioned in passing that they would be verifying quality through a testing agency. Guess what the impact was of mentioning a third-party tester: Ten out of twelve factories immediately moved to raise prices by an average of 20%. Why would a factory raise its prices after learning that customer would be checking quality?
Back to the WSJ article where the idea is that quality is up. I’m not so sure much has changed. Manufacturers have for some time now been in the position to make a product at virtually any quality level. The bigger variable is whether the customer is getting what has been ordered.
Links:
H/t: China Law Blog
Forbes: Dealing With China’s ‘Quality Fade’
Topics: China | No Comments »
Unfortunate China Conference Title Of The Day: “One World, One Web”
By Paul Midler | March 28, 2008
The 17th International World Wide Web Conference will be held in Beijing (Apr 21-25). I got a chuckle out of the title for the conference - “One World, One Web”. Looks interesting, but what a horribly named theme. Web surfers inside Mainland China most certainly do not experience the Internet in the same way as outsiders. Even Hong Kongers enjoy a more liberated online experience.
The World Wide Web Conference is a global event bringing together key researchers, innovators, decision-makers, technologists, businesses, and standards bodies working to shape the Web. Since its inception in 1994, the WWW conference has become the annual venue for international discussions and debate on the future evolution of the Web. The main theme of the conference is “One World, One Web”. The conference will explore how Web access is moving from the desktop to cell phones and TV screens, and how most users are moving from passive browsing experiences on the Internet to active participation in building Web communities.
Topics: China | 1 Comment »