We’re from the FDA. We’re Here to Help

In the Hutong

Scoffing at pessimism

1952 hrs.

Richard over at AsiaBizBlog (just blogrolled – not sure what took me so long) is less than impressed with the idea that the FDA will open an office in China. He believes, not without justification, that the office will be a non-factor in the effort to improve the quality of China’s exports of non-farm foods, medicines, and medical devices.

Watching the Watchers

I tend to agree. Unless the FDA is prepared to seriously staff-up its efforts, even getting deep access to factories (by no means a given, as Richard points out) will not be enough to regulate the immense and growing flow of consumables out of China and into the U.S.

Where they will help, though, is in certifying and monitoring third-party inspectors, and anything else they can do to help promulgate a quality-control system based on commercial standards and contractual requirements rather than government regulation and inspection.

There are already a decent number of enterprises and organizations engaged in product inspections in China, ranging from massive companies like the SGS Group, to entrepreneurial operations like David Dayton’s Silk Road International, to religious purity inspectors like the Orthodox Union. What is missing is a guardian to watch the guardians, and the FDA would likely be better off spending its time on that effort, and on requiring U.S. importers to show proof of inspection by one of these outfits.

I suspect that over time they will get this (if they don’t already), and that the noises that made by the Secretary of Health and Human Services suggesting his A-Team of eight inspectors were going to personally clean up the collective act of China’s factories were, in fact, nothing more than spin for the home audience.

A Reason to Believe

Richard also noted that the Foreign Ministry is already publicly prevailing on the U.S. to accept certificates issued by the Chinese quality inspection department on goods to be exported to the United States.

It would serve us all well to remember that for a long period after the U.S. discovered a few cases of Mad Cow disease in American beef, the Chinese authorities refused to accept any beef approved by the United States Department of Agriculture until such time as PRC regulators could be convinced that the U.S. system had taken appropriate action to eliminate the danger, and the USDA approval was once again credible.

In the wake of an ongoing sequence of quality issues that have killed and injured far more people than Mad Cow ever did, China needs to appreciate that rebuilding the credibility of its certification authorities will likewise be a process, one that I expect the new FDA offices could assist by observing and providing feedback on the Chinese certification process.

If, however, the FDA receives something less than the full cooperation of Chinese factories and authorities, U.S. acceptance of any Chinese government certification will be a long time coming – even if this gets turned into a political football between Beijing and Washington.

Why Land Reform is a Tech Opportunity

In the Hutong

There’s something about a high-fiber snack…

16:23 hrs.

In the flurry of news about plans to reform land use in China, much of the coverages focuses on the new potential for Chinese farmers to either pay to farm the land of others, or to indeed expand their own plots by renting more land, thus building scale and offering the greater potential for profit. I think a lot of people noted this, and after checking to ensure that neither Monsanto, John Deere, nor DuPont was in their stock portfolio, dutifully forgot it.

There is, however, more to this story.

Not Your Father’s Land Reform

While the idea of land reform gets folks in the agriculture business dreaming about China’s vast farmlands changing from a patchwork of tiny plots to a more orderly quilt of massive farms, that dream is both unlikely and overrated. The omnivorous Tom Barnett notes an important point Callum MacLeod makes in his article in USA Today:

“China is the opposite of the USA, which has an abundance of capital and land. In China, labor is abundant, but it is short of land and rural capital, [said Li PIng, of the Seattle-based Rural Development Institute.]

In short, don’t count on Hebei starting to look like the upper San Joaquin Valley anytime soon.

But let’s take a closer look at Li’s point.

  • China has abundant labor. Yes, and that is not likely to go away soon, massive urbanization notwithstanding. America has under 6 million people living and working on farms. China has around 700 million. You could literally cut China’s farm population by 90% and still have too many farmers to replicate the efficiencies of U.S. farms.
  • China is short of land. Yes, and that is not likely to change anytime soon, either, unless China plans to invade and cultivate the Siberian steppes. Whether taken as a ratio of land under cultivation to the total national land mass, or as a ration of arable land to population, Chinese agriculture is land-deficient.
  • China is short of rural capital. Yes, it is now. This, however, unlike the previous two conditions, can change. And therein lies the real opportunity behind China’s land reform.

AgriBusiness with Chinese Characteristics

Regardless of how much you change China’s agricultural land use rights, you’re always going to have too many people cultivating too little land, which means that the future of Chinese agriculture is not about vast wheat fields or free-range beef ranching. You have to find another model.

At the most basic level, this means that China’s farms will find prosperity with crops that demand a great deal of human attention, and that will capture market prices that will allow farmers to compensate their workers accordingly. But more labor working fewer valuable plants is only half of the answer. There is a shortage of water available to farmers in a growing proportion of the country. Air pollution, soil degraded by poor irrigation practices, and lousy infrastructure still hamper the industry.

At the same time, consumer demand for higher value farm products means that for most farmers their real opportunities lie with crops they are not accustomed to cultivating. With some exceptions, China’s successful farmer of the future will be a small- or medium-sized agribusiness focusing on high-value cash crops or horticulture (flowers and foliage.)

So when Li Ping talks about rural capital, we need to think beyond cash: China’s farmers also need equipment to address environmental and infrastructure challenges, as well as the know-how to get the most out of whatever size plots of land they can cobble together under land reform. Which, in turn, means that land reform is the first step to liberating the value of Chinese farmland, rather than the last.

Chinese AgTech

I would love to say that technology is a panacea that will clear up all of these challenges, but if I did, I’d be wrong. Nonetheless, there is a growing range of opportunities for technology to help turn the more entrepreneurial of China’s farmers into agribusinessmen. Just a few of these include:

* Drip irrigation: China’s shortage of fresh water is already bad, and it is going to get worse. Chinese farms will only be sustainable if they use exactly as much water (and fertilizer, and nutrients) as they need, and no more. Drip irrigation is the best, most practical solution today. As aeroponic techniques develop beyond space travel and dorm-room cultivation of cannabis sattiva, they may eventually supplement drip irrigation, but likely only for specialized applications.

* Greenhouses and Nurseries: beyond the vagaries of pests and weather, the challenges of China’s environment is likely to drive the production of cash crops – not just flowers – into greenhouses. We see a lot of this around major cities and in centers like Kunming, but expect this to expand. This involves more than just covered farmlands: it also means temperature monitors and controls, irrigation systems, air-quality management systems, and harvesting.

* mAgriculture: few Chinese farmers can afford laptops, but many more can afford mobile phones to monitor their crops, the weather, and market prices, as well as to take orders, capture opportunities to sell at higher prices, and make payments on supplies and micro-loans. Farmers will need inexpensive yet rugged and waterproof handsets with large buttons, long battery life, and possibly even solar charging capability. They will also need easy-to-use service bundles to include information access and mobile banking.

* Training: there is just no way to get millions of farmers into schools. Raising skill levels in new crops, new tools, and agricultural economics is going to involve a combination of traditional low-tech methods and some experimental efforts in using remote training via satellite TV and possibly the Internet.

* Finance: once you have the land, you need the cash to develop it and to finance your first crop. Traditional methods of agricultural banking in China, including banks and farm co-operatives, won’t be enough. Micro-finance, in all of its forms, can be most economically administered using technology. That doesn’t mean a computer on every farm, but it does mean loan officers in rural areas equipped with at least hand-helds to help manage payments and collections.

These only touch the surface, and there will be specific opportunities around specialized crops, but you get the point. As we slide gently into global recession, technology firms have an opportunity with Chinese land reform to begin developing – or at least researching – how to deliver products to help solve some of the challenges implicit in China’s next green revolution.

The ARJ-21 and China’s Long, Slow Climb to the Skies

In the Hutong

No place else I’d rather be

1158 hrs.

Covering this year’s Zhuhai Air Show, The Economist takes a look at China’s first domestically-produced jetliner, the AVIC1 Commercial Aircraft Corporation‘s ARJ-21, and on the eve of the regional jet’s maiden test flight takes a moment to consider its commercial prospects. Their verdict: don’t count China out.

Many foreign analysts doubt that Western airlines will ever be prepared to buy Chinese aircraft. But, as in other fields, China is playing a long game.

Much of the debate about the ARJ-21 thus far has centered around two issues: first, whether the ARJ-21 will attract buyers beyond the Chinese airlines who are compelled to purchase it (and GE, who is making a pile selling engines for the jet); and second, whether China will ever develop a globally competitive civil aviation industry.

Both questions miss the point. What is most important about the ARJ-21 is the lessons it teaches us about the process China goes through to catch up with the rest of the world in technical, complex, high-value industries.

Watch Process, not Product

If you look at all of the technical sectors in which China has built commercially viable businesses, you can discern a clear process by which the nation’s industrial policy kick-starts these efforts. In the case of cars, computers, mobile phones, and now commercial jetliners, the pattern is dependably consistent. Let’s call it the Four C Model.

First, comes what I call the “capability” phase. the government typically announces a national project to build its own version of an technical product. It turns to a government research institute or a similar organization, which in turn pulls together the team from across the nation’s universities and enterprises. Eventually they manage to produce a one or more prototypes, but there is no real possibility of commercializing the product.

Upon review of the initial prototypes and the development process, typically a range of issues is identified that prevented the commercialization of the product. As a result, during the next “collaborate” phase, China sets up an enterprise to build the product using foreign designs, components, and know-how. The result is not quite commercially viable, and may only sell to local customers because of tariffs, tax-breaks, or other subsidies that make the local product appealing to local customers.

Next comes the “component” phase, when a local company creates its own design or modifies another, and many of the parts, but key, mission-critical components come from overseas. In this phase the product is adequate and by most measures comparable to foreign products, but with no track record only the most adventurous foreign customers are ready to trust the product.

Finally, all of the technical kinks are worked out, there are several Chinese companies involved in the effort, and with a demonstrable track record behind it, China is ready to go head-to-head with global companies. This is the “competitor” phase, and it usually marked by brisk sales and the beginnings of a true competitive advantage.

Not Quite a Competitor

In the case of the ARJ, China’s effort to build its own jetliner has reached the “component” phase, and it has taken 35 years to get this far.

In the early 1970s, China began a project to prove to the world it was capable of making its own jetliner. the result was the now almost-forgotten Shanghai Y-10, which was as close to a clone of the Boeing 707 that the nation could produce in the late 1970s. Two prototypes were produced. They flew in the early 1980s. China made its point. And the jets never saw commercial service: they were essentially flying monuments to China’s aspirations. This was the “capability” phase.

Not long after, China got involved in negotiations with McDonnell-Douglas Aircraft for a joint-venture to assemble their MD-80 class jets in Shanghai. The JV went through brutal political turbulence and costly delays, and in the end the venture sold only a fraction of the jets it had hoped. McDonnell-Douglas was sent packing, but China was left with an entire generation of aircraft engineers, a lot of very helpful tooling, and the groundwork to take the next step. Thus ended the “collaborate” phase.

After nearly a decade of thinking, planning, proposals, and counter-proposals, and even another shot at collaborating with other Asian aspirants, China launched the ARJ-21 (Asian Regional Jet – 21st Century) project. This is the “component” phase, and at this point China is serving as re-designer (the jet is basically a shortened MD-80, or DC-9, with a new wing design from Russia), project manager, and system integrator.

Tough Room

China’s aviation policy-makers and industrialists knew the ARJ-21 would be playing in the most competitive end of the civil aviation pool. The regional jet field is dominated by Canada’s Bombardier, with its CRJ series, and Brazil’s EMBRAER, with its ERJ series, both of whom have complete lines of aircraft, global technical support, and who built their business on solid reputations for making dependable aircraft.

Three very old names in the aviation industry, British Aerospace, Dornier, and Fairchild, have already been driven out of the aircraft manufacturing business after losing out to Bombardier and EMBRAER, and Boeing’s 717 was squeezed out of its market niche with a plane strikingly similar to the ARJ-21. Four other very old names in the aviation industry, Antonov, Tupolev, Sukhoi, and Mitsubishi are all getting ready to pounce on the ARJ-21’s markets with brand new regional jets of their own.

So there is not much hope for the ARJ-21 beyond China. And prospects inside of China are not that great, either.

Fat Planes Wanted

The idea behind a regional jet is that you have flights under two hours duration connecting cities under 1,800 kilometers or 1,100 miles apart where you cannot economically fill, say, a Boeing 737, or where the field might be a little short for a small jetliner.

In China, however, the problem is that we have a limited number of airports, a limited amount of airspace, and a whole lot of people who want to fly. There will be some market for regional jets, but in the medium to long term China needs larger jets that make the best possible use of the limited resources in Chinese aviation (i.e., concrete and airspace) to move the maximum number of passengers at the lowest possible cost.

Finally, let’s not forget that perhaps the most serious competitor to regional jets in China doesn’t even fly. China is in the early phases of a madness for high-speed intercity rail transport. The threat posed by trains as fast as Japan’s Shinkansen and France’s TGV is most serious to the shorter air routes served by the ARJ. As the price of jet fuel goes up (and, despite current trends, it surely will), that threat grows all the more critical.

Back to our Model

There are other issues, such as a total cost of ownership for the ARJ-21s that are going to be higher than carriers are being let to expect. With all factors in consideration, the ARJ-21 faces some roaring headwinds.

But again, what is important is not the plane itself, but where China’s jetliner manufacturing industry will be after the ARJ-21. And here is where it starts to get really interesting.

Just as the ARJ-21 goes into full production, Airbus will be completing its A320 assembly plant in Tianjin. Between the two, China will for the first time have two factories cranking out airliners. The benefits to the industry will be enormous. China will have created overnight a workforce of engineers, machinists, and all of the other specialties involved in aircraft assembly.

In short, by 2014, the groundwork will be in place for China to make the next jump, and the ARJ-21 team will have had five years learning what it takes to support an airliner in the field, sometimes even in the most challenging locations.

What is more, right about that time, Boeing and Airbus will be under pressure from their customers around the world to develop successors to their single-aisle jetliners in the 110-170 passenger range. Both have made it so far by updating and extending their 737 and A320 lines. Five years from now, that may not be enough.

At that point, the door will open for China to enter the fray with its own design, and they will have the benefit of being able to work with the world of suppliers and subcontractors – both in China and overseas – that Boeing and Airbus have helped create. And with Boeing and Airbus forced to contend with powerful unions determined to secure for their members a comfortable American or European middle-class lifestyle, China may well offer a nice cost advantage as well.

All things being equal, then, China may well be able to compete in the small airliner market by 2020.

A Lesson, not a Product

Again, though, this makes the ARJ-21 a stepping-stone, not the destination itself. As such, the success or failure of the ARJ-21 project cannot be measured solely on the basis of aircraft sold. Rather, it must be judged on its by-products, on the extent to which it prepares the nation’s aerospace industry to take the next, all-important step and become a global competitor.

AdAgeChina: Obama, China, and Public Diplomacy

In the Hutong

Using music to tame The Beast

1145 hrs.

AdAgeChina.com just posted my Viewpoint article on Obama and public diplomacy. My core point:

If Obama is to keep his hard choices from backfiring with China, he must make his case to both the Chinese government and the Chinese people.

And make no mistake, Obama will need China. One only need look at the issues the new president will face to see how important the help of the PRC will be to his success. At the very least, China will be essential in forging a global energy and environmental regime, bringing security to Central Asia, ensuring that Russia remains integrated in the global system, midwifing North Korea’s return to that system (and perhaps its peaceful re-unification with South Korea), and, of course, resolving the current global financial crisis and forming new system to both nurture and regulate international finance.

Conventional diplomacy will form a part of the effort to enlist that support, but it will not be enough. Instead, Obama and his team will need to undertake an unparalleled effort of public diplomacy, and one that shuns the tools and tactics of the Cold War for strategies, approaches, and messages more appropriate to a world rendered naked by the Internet.

It’s up on the site now, available to subscribers only. If you’re interested in the discussion, let me know. I’m thinking about re-crafting the article into 1 or two expanded blog posts.

China 2.0 Tour: It Doesn’t Get Much Better

Jingshun Road, Inbound

Adjusting to a more social life offline

1745 hrs.

If you haven’t been following the China 2.0 Tour online via Twitter (#china20), you should really check out the site and the linked blogs of all of the participants. They are leaving Beijing tonight and heading for Shanghai to continue their tour.

I have had the opportunity to both run and to take part in many immersion programs seeking to help executives and others learn about China from the ground up. This one was ambitions in both scope and participants: audiences do not get much tougher than a roomful of high-profile bloggers.

But this program went off so well I told The China Business Network’s Christine Lu that they need to make programs like this a regular offering to organizations, individuals, and businesses who really want a crash course in the China you do not see on CNN or read about in the papers.

I’m not accustomed to doing plugs here, but if they ever get around to offering such immersion programs, they would be well worth looking into. The kinds of people you meet, the range of perspectives you get, and most important the insights you take away are phenomenal. I fancy myself something of a China specialist and was participating as such, but I probably learned almost as much as the China “n00bs” on the tour.

A Clear-Eyed Look Ahead

The Parking Lot of the Heqiao Building

Smog smog blow away, go light on Tianjin today

1007 hrs.

The shelf life of a good China book, especially one that covers business, is short. The pace of change in China is so brutal as to render the best tomes obsolete all to quickly, and often before they even reach the bookshelf.

So when finally sat down to read James Kynge’s China Shakes the World last week, I was concerned that I had waited past the book’s prime to imbibe its insights.

I needn’t have worried.

A clear-eyed look forward

James has been in China for 27 years, but the tone of the book is one of humility. He approaches his subject – the economic rise of China and what it means for Chinese and for the rest of us – as a student, and he takes us along on his journey of discovery.

Thus unlike most books about China, China Shakes the World looks forward rather than back, using the past and an acute understanding of what drives China and its people to attempt to draw some faint lines into the future. The picture he paints is not always comfortable, but he resists the temptation of weaker writers to lapse into alarmism or make sweeping generalizations. His head remains calm throughout, and this makes his conclusions all the more disturbing because they cannot be dismissed.

When the going gets tough

What I treasured most about the book was the distilled insights that he gently placed throughout. My favorite – and, given the times, the most relevant – was his observation that reform moves forward in China at a brisk pace when the nation faces severe challenges, and when times are good the pace of reform slows, stops, and sometimes reverses.

Generalizations are always suspect in China, and it it has been my experience that when dislocations are severe regulation on media actually increases. That said, a review of the historical record bears James out, and if the Hu/Wen administration remains true to form, the next major policy initiative to address the current economic crisis (after the current round of Keynesian pump-priming) may be a liberalization in foreign investment policy.

(As such, this is a very good time for companies operating in highly-regulated industries and the associations that represent them to begin crafting the economic case for greater liberalization, because the opportunity to drive change will come quickly.)

A must-read

Once again, I have yet to read the single book that provides the key to understanding China, despite a quarter-century of looking. When China Shakes the World, however, should be at the top of your reading list of books that offer precious insight into where China is going and how we should prepare for it.