Watching the Sino-US relationship evolve, and then not evolve, since the inauguration of President Donald Trump, I have to confess some disappointment. Let me qualify what follows by noting that I am not a fan of POTUS 45. I not only crossed party lines to vote against him, I left the GOP outright and joined a tiny third party when he was selected as the Republican nominee.
So all of that said, we have reached a point in the relationship between the US and China such that a reset is in order. It has been 44 years since Nixon went to China, and nearly 40 years since Jimmy Carter and Deng Xiaoping recalibrated the US-China relationship.
That relationship was formed when the United States was entering the fourth decade of its Cold War with the Soviet Union and the Sino-US tie-up promised to subtly but importantly shift the balance of power in favor of the West. It was formed when China was crawling out the wreckage of the Cultural Revolution, and out from under the long shadow of Mao Zedong.
That relationship was framed between a large and slightly desperate third-world country that constituted absolutely zero threat the world order and a developed nation that boasted the most prosperous economy in history, the most powerful military on Earth, and leadership of an international system that it had forged with its allies a mere three decades before.
Four decades hence, China has changed, the United States has changed, and the world has changed. Yet we have been conducting this bi-lateral relationship on terms that are increasingly irrelevant and unrealistic. Let me put that another way: the US continues to conduct its side of the relationship on that basis. China has made clear to us for a long time – without ever actually saying it – that it will conduct its relationship with us on terms dictated at least as much by immediate expediency as decades-old agreements.
So it is time for a strategic reset in our relationship that accurately reflects what China is and wishes to become, who we are and what we wish to become, and the fluid state of the global order.
The call that Trump placed to President Tsai of Taiwan, representing as it did a break from diplomatic tradition if not international accords, once appeared to be Trump’s opening gambit in his version of that reset in the Sino-US relationship, and a possible change in the rules that govern that relationship.
That no longer seems the case, and one can hope that the change in tone from the White House reflects a practical desire to compel a resolution to the North Korea question rather than acquiescence to a Chinese view of international affairs. Putting off a reset in Sino-US relations for too long will only make the necessary changes all the more disruptive.
Apropos of my post last week about Wanda, a quick thought.
One of the issues that remains a matter of our ongoing fascination with Wanda revolves around a series of important questions that remain largely unspoken: Do Wang’s purchases in the US constitute a simple diversification of his investments? Are they part of a strategy to globalize his businesses?
Or are we witnessing something quite different, Wang’s slow divestment out of China and the flight of his capital to safer havens abroad? And if not a flight out of China, is he at least shifting his money out of real estate?
The company bears close scrutiny if for no other reason than they are a harbinger of what is likely to be a larger trend, and understanding the forces that drive this trend are going to be essential in helping business address Wanda as a strategic challenge, and policymakers address it from a regulatory standpoint.
And so within the space of half an hour the Financial Review was shown the new and old face of corporate China.There’s paranoid Huawei that will not answer questions and refuses to explain itself in any detail to its stake holders around the world. Then there’s the likes of Green Valley, which represent a new, more open face to corporate China.
This is an oldy but a goody, and I do not mean to pick on poor old Huawei: the organization is led by people for whom transparency and engagement are just not a part of the plan. This is not an especially Chinese failing: I have watched American, European, and Japanese companies build public relations organizations that were little more than beautiful stone walls.
I agree with reporter Angus Grigg completely: let us hope we see more openness from Chinese companies, rather than less.
What concerns me, though, is that for every wise, open, and transparent company that I encounter, I still come across a dozen more who believe that that the “new” face of corporate China is not private, independent, or entrepreneurial, but government-owned, government-subsidized, and expert at blowing smoke up the hindquarters of foreign journalists.
And of course, that’s not new: that’s a giant leap backwards in China’s evolution into a nimble, innovative, and commercial economy.
Which is why I talk so much about public relations in China here. The degree to which a nation, and organization, or a company is prepared to institutionalize an ongoing, open, and wide-ranging conversation with its stakeholders has great predictive value about its success, and the degree to which we should feel comfortable dealing with it.
The craft of filmmaking is a perilous one, a balancing act between the art of cinematic storytelling and capricious public taste. Overt inclusion of foreign propaganda would likely be a destabilizing ingredient in any film, just enough to turn a potential blockbuster into an expensive turkey, undermining a studio’s reputation in the process.
But facing a U.S. administration that is hostile to China (at least on the surface), Hollywood’s new Mandarins, in particular the squires of Wanda’s interests in The Business, must be prepared for three questions that are likely to arise in the coming months from either the public, a Republican-dominated Congress, or the new Administration.
First is a matter of US law. In what is known as the Paramount Decree, in 1948 the U.S. Supreme Court ruled on an anti-trust case against Paramount Pictures, a ruling that compelled the separation of motion picture production and exhibition companies. On its face, Wanda owning both production assets like Legendary and exhibition companies like AMC appears to be a potential violation of US Law, and Wanda will be required to explain why it is not.
The second question touches on the issue of whether films made by a studio owned by a Chinese company will produce propaganda. To this point, we have focused on Wanda CEO Wang Jialin’s promise not to turn the studio into a propaganda machine. For what it is worth, I believe that is Wang’s intention. But let us not forget that the Party still holds considerable sway over Wanda’s fortunes and its core assets in China. Wang’s best intentions aside, Wanda must prepare to answer this question: what will Wang Jialin do when or if Xi Jinping comes calling with an unrefusible offer? Can Wanda afford to decline the call of Beijing if that call should come?
And finally, a third question. We have, in the last forty years, taught China how to create everything from machine tools to smartphones, and Chinese companies now lead the world in the creation of those products. Motion pictures and microchips are not analogous, but what has ensured Hollywood’s continued global leadership in filmed entertainment has been an accumulated century of technical and process know-how that results in marketable films if not global entertainment phenomena. Hollywood as a whole must be prepared to answer: at what point will Hollywood have sold its Mojo to Beijing? And to what degree does the presence of Chinese conglomerates in Hollywood speed that process?
At the very least, these companies must have answers at the ready. Ignoring or dismissing them will only serve to convince potential opponents that there is more to Wanda’s motives than a good business deal.
SinoSkeptic (or Sino-skeptic), noun. A person who harbors honest concerns – based on China’s stated policy goals and behavior – about whether China is willing or able to be a positive participant in a global community of nations, (as framed by the system of international institutions that has evolved in the wake of World War II,) or whether its very participation is by accident or design inimical to the intent of those institutions. Different from a “China-basher” or “Panda-puncher,” a person who paints China as an implacable foe based at least in part on that person’s ulterior motives.
Wanda’s Wang Jianlin has now made his fourth major acquisition in the US film industry. To his stable of the AMC and Carmike cinema chains and the Legendary Pictures production company he is now adding Dick Clark Productions. But it is rare indeed that something in China is as it seems, and that is why it is worth probing a bit into Wanda’s US acquisitions.
To their credit, US media are trying to do exactly that. Over the past several months, I’ve spoken to experienced reporters from the world’s leading financial news services, all of whom are trying to discern whether to take Wang Jianlin at face value, or whether there is something happening beneath the surface at Dalian Wanda Group that is at odds with its founder’s public positions.
What they’re getting is frustrated. It is always challenging to get information out of a firm unbound by the disclosure laws that govern public US companies. For what are probably very practical reasons related to its China business, Wanda apparently makes a fetish out of opacity.
When the world’s best investigative financial journalists start coming up empty, we are left with seeking answers based on clues rather than on answers. The best place to look is in the behavior of their partners and subsidiary companies. Some potential clues:
Check IMDB. Does Legendary look like it’s production slate is shrinking, or its production rate is slowing? Is Dick Clark increasing production, or is production on decline?
Check reviews of AMC and Carmike cinemas, especially their bigger, newer, flagship multiplexes in large US cities, on Yelp! and similar sites. Are reviews trending upward, or are they in decline? Are there complaints related to quality of service, of food, of cleanliness?
What is the status of partnerships with companies like Sony and IMAX? Are we seeing any action, or have things gone quiet after big announcements? Is Wanda living up to its commitments?
And, of course, watch for news on major moves in China’s real estate market, or from the government on restricting Chinese investments abroad.
Good reporters are already doing all of this. But journalistic standards won’t allow them to report on such circumstantial indicators. For the rest of us, they can help us gain a general hunch about where the company stands, how it is operating in the US, and where it is likely to go next.
Longer term, though, Wang will have to learn to operate in a part of the world where deep scrutiny of his operations are encouraged rather than prohibited, and where transparency is a necessary precondition for the trust he will need to sow in order to prosper.
Leftover students – concept – that group of high school graduates in China who aspire to higher education – and who appear to have the ability to complete a degree – but who are denied that education and the attendant social mobility by China’s limited university seats and the caprice of the gaokao.
Leta Hong Fincher has done an incredible job framing and documenting the phenomenon of “leftover women” in China, explaining the roots of the phenomenon and the challenges facing women who have, for all the best of reasons, passed what serves as a marriageable age, or who have careers that make finding a suitable spouse all but impossible. If you have not picked up her book, by all means do so. As you would expect, the work does more than simply describe a unique demographic: it also offers an insight into an underlying dynamic of China’s winner-take-all culture: the leftovers.
Indeed, riffing on Leta’s research, it is not hard to discern that unmarried women of a certain age are not the only leftovers in China. Last week saw this year’s administration of the gaokao, China’s national university entrance examination. Nine million students sat for the three-day exam this year, but there are seats in China’s universities for no more than three million. While some of those who fail to gain entrance in university will try again next year, we can count on over five million young people facing a future without a university education.
These “leftover students” are a challenge for China’s leaders and an opportunity for international educators. For the Communist Party, it is no small thing to say to six million families a year that the promise of a better life for their children through education is out of reach: every four years that tallies a population equal to the membership of the Party that has often invested its hopes and treasure into the promise of education, only to have it tossed back to them.
For tertiary educators around the world, many of whom are suffering from secular population and economic trends that are pushing enrollments downwards, leftover students represent an massive pool of potential enrollees, many from prosperous families, that could save and sustain many of the world’s less popular colleges and universities, and that could potentially fuel the creation of the world’s largest market for continuing education.
“China Developer Buys Robinsons-May Site in Beverly Hills” Julie Makinen Los Angeles Times August 8, 2014
The Times scored a win in picking up this story about how Chinese development giant Wanda is raising its bets on US real estate. Based in Beijing, Makinen can be forgiven, though, for not addressing what the real story is likely to be: the challenges the company is likely to face in gaining approval for its project.
Wanda has yet to reveal plans for the site, but the location has some particular challenges familiar to locals. Traffic is already very heavy going into the area on both Wilshire Boulevard and on Santa Monica Boulevard, which border the site, and during large parts of the day the proximity of Century City makes Santa Monica Boulevard a parking lot for several miles of its length. The development of a high-density complex on the eight-acre site would only exacerbate the problem.
That issue alone is likely to provoke public opposition to a sizable development. The NIMBY factor in the area is high. I know: I grew up three blocks away, and worked at the recently-demolished department store between college and grad school.
If Wanda is wise, it will embark on a campaign to woo local residents, most of whom live in homes with values far in excess of $3 million (and who are accustomed to wielding political clout with the local government,) as well as the Beverly Hills City Council. It will have architects focus on creating a site that integrates elegantly with the Century City, downtown Beverly Hills, with the Hilton, and with the elementary school and neighborhoods to the north.
If the project is clearly woven into the broader fabric of Beverly Hills, seeking to update an enhance rather than just plonking another Chinese multi-use center like it created in Beijing, Wanda will wind up with a flagship property and the respect of the business community in Southern California.
That costs money, of course. But Wanda has plenty of money, and it has every reason to make nice in the US as it diversifies its portfolio beyond China’s increasingly uncertain real estate market.
When challenged to come up with examples of innovative Chinese companies – or those that might start innovating soon – many of us are hard-pressed to come up with names beyond the obvious Tencent, Huawei, and Lenovo. To help remedy this, and to make a balanced case for China as an innovator, I am going to start highlighting select Chinese companies that I believe are moving in that direction.
One company to keep on the radar is Hisilicon. Formerly Huawei’s application-specific chip (ASIC) division, Hisilicon has developed a system-on-a-chip (SOC) product line designed for mobile devices. The recent announcement that Huawei will be using Hisilicon chips in its upcoming flagship Ascend P7 mobile phone offers no surprise – on the surface. In fact, a skeptic might suggest that Hisense winning a spot on a a Huawei device is so much internal self-dealing.
The skeptic would be only half right. Huawei’s mobile device team are a loyal bunch, but the company’s leaders are no idiots. To risk the company’s tenuous reputation among consumers in an insanely competitive market merely to engage in some gratuitous dogfooding is uncharacteristic of the firm. Something else is going on, and it is likely that Hisilicon is sneaking up on the better-known MicroTek in its ability to provide the processing power for complex smartphones. If that is the case, Hisilicon is about to pop onto the radars of both Qualcomm and Intel as well.
Before we add Hisilicon to the ranks of mobile chip powerhouses, however, we need to add an important caveat. It makes good sense for Huawei to buy from Hisilicon if it can, but it probably does not make as much sense for other manufacturers. Putting a chip into a phone design involves more than just buying processors off the shelf and sticking them on a printed circuit board. Smartphone testing and development demands close cooperation between component providers, essentially letting everyone in the process into a lot of proprietary secrets.
If I were a smartphone manufacturer, I would look at Hisense SOCs in the same way that I would look at Samsung memory: whatever the virtues of the silicon, I am giving my competitor a close-up look at my mojo. In a world where Samsung and Huawei are pulling out all stops to lead the smartphone business, that’s writing an invitation to my own funeral.
So that is why I am watching Hisilicon. The technical capabilities are growing to the point where the company is likely to become a nexus of innovation, but the commercial challenges it faces are interesting indeed.
Doing book research (and shifting as much of it from my bookshelf to Evernote as possible), I came across this little gem that had escaped my attention while I was on the road last fall.
James Fallows turned to some experts to help him come up with the 50 greatest post-wheel innovations, and while each deserves a book – or at least a long chapter – the list is intriguing for several reasons. My favorite: counting the innovations that first came out of China.
From the top 50, they are:
43. The abacus
17. The compass
1. Moveable type printing
Two points fascinated me. First was printing press showing up on top, and the fact that the article does not ascribe an origin to the invention. People who have studied the history of Chinese innovation understand that the movable-type printing press was invented in China by Bi Sheng some 400 years before Johannes Gutenberg and Laurens Janszoon Coster argued about who of the two of them was first. History will out, though, and China gets credit for the most important innovation since the wheel.
Speaking of wheels, a sort of honorable mention on the list goes to the wheel barrow, a simple device created in China that allows a man to move heavier loads than he can carry without the aid of an animal. And I always search these lists for acknowledgement for China’s invention of investment casting, a process that turned complex metalworking from a handicraft to a mass-production process.
But these are quibbles. The point that the article brings home is that China was once far more innovative than we – and, indeed, Chinese – give it credit. While taking credit for four great innovations, China deserves credit for at least five, and probably more.
The perpetual challenge, of course, is how to make it innovative again. And to that theme we shall return in due course.
If we have not witnessed the peak of mass production in China already, we will soon.
It is not just that costs are rising and production is moving elsewhere: the entire mass production model may well have jumped the shark. The growing costs of energy and commodities, as well as the coming end to the ability of enterprise to externalize the social costs of production will make mass production look increasingly wasteful.
We are leaving the age of “make enough so that everyone has what they want,” and coming into the age of “make just enough of the right stuff.”
Mass is Over…
With due respect to Henry Ford, we are witnessing the birth of a long-term trend away from mass production and toward an industrial model that manufactures a product only when a customer wants it, how she wants it, and where she wants to use it.
This will undermine the consumer model predicated on planned obsolescence, overproduction, and disposable components, and will ultimately destroy economies of scale as the means to lower costs and profit. That means moving the production closer and closer to the customer, and the growth of mass customization. That, in turn, spells the end of our reliance on mass production, and that will turn every shopping mall into a factory floor.
None of this should come as much of a surprise. Mass customization has been a meme of futurists for over a decade, and technologies like print-on-demand and 3D printing are but the harbingers of a new industrial revolution that will turn the point-of-sale into not only the point of production, but, increasingly, the point of design as well.
…So are China’s Days as the World’s Factory
But the implications for China are potentially immense. It suggest that, for most Chinese manufacturers, automation will only delay the inevitable. After all, who needs a factory in China manufacturing blue jeans when you can get yours custom sewed based on your measurements and preference right at the store? Or have your phone assembled for you at a local factory, shipped to you, then upgraded rather than changed when the time comes?
What applies to finished product applies to components as well. Fabric can be woven in custom lots as and when needed – it is not hard to visualize a Home Depot-sized warehouse store filled with machines that will knit, weave, and dye on demand, or a ballroom-sized microchip fab that turns out programmable or application-specific chips in tiny lots.
The future of Chinese manufacturing, then, lies not in producing consumer products for the world, but in producing consumer products for itself, and, I expect, building the machines that make local, personal production possible.
China’s Microfacturing Future
This will not happen right away: China’s mass-production manufacturers still have a long runway ahead as the world retools. It is also likely that the economies of mass production will continue to be essential for low-cost products for sale to developing nations.
But for producers catering to the developed world and the global upper- and middle-classes, that runway is not as long as some would wish. Our best guess: a decade at the outside, but likely less.
Watching this evolve will be fascinating. China, Europe, and the US will be scrambling for the lead as the world’s factory moves in next to the cash register, and it’s anyone’s horse race.
On Valentine’s Day, the always excellent Jing Daily published an article (“Ultra-Luxury Auto Sales In China Surprisingly Robust, But Are They Sustainable?“) that calls into question whether those stunning new Lotus, Maserati, Bentley, and Ferrari dealerships that are sprouting up around China are in for some hard times. Economic uncertainty and the potential that Xi Jinping‘s administration might discourage conspicuous consumption apparently has many buyers holding off on purchases. The spectacular Beijing accident a year ago that claimed the son of a powerful Party official and one of his passengers has made ultra-luxury cars an unintentional symbol of cosseted elites and official malfeasance. Markers of success are becoming stigmata of excess.
But the Chinese party is not over for the luxury car-makers, although a change in strategy may be in the offing. It may be time for the Ferraris and Bugattis of the world to learn from the purveyors of less expensive luxury goods, because the real market may not be in China: there is a fair chance that the majority of Chinese who will be buying ultra-luxury cars in the future will be buying them overseas.
Naturally they won’t be doing so in order to ship the cars back to the PRC (with the exception of the occasional gray-market beast that cannot be found in China or Hong Kong). Instead, they will be buying their high-speed bling to park them in the garages and and driveways of the homes they are buying in North America, Europe, and Australia.
Adjusting to this shift will mean changes in the way these cars are sold outside of China. Dealerships will need Chinese speakers on the showroom floor and in the service bays. Sales literature and owners manuals will need to be available in Chinese as well as the local language. Manufacturers will need to create Chinese websites for markets where Chinese isn’t usually spoken. And that is just a starter list.
The really smart manufacturers will set up Chinese-language customer service hotlines and owners clubs that cater to Chinese speakers in North America and Europe at least. They will advertise online in Chinese and in the mass media of the Chinese diaspora. And if they’re really smart, they’ll offer those special models and features that are designed to cater to the tastes of the new global Chinese elite.
None of this is mandatory, of course. For some brands, the snob appeal is derived in part by the derision with which it treats even its best-heeled customers. But the wiser luxury car manufacturers will realize that the Chinese are coming to the world: best to reach out and meet them before they decamp to the competition – or decide to spend their money on something else.
The Chinese New Year holiday is a period where many of China’s well-heeled consumers travel abroad, so it was no surprise that CCTV ran a story on how many Chinese consumers use their trips not just for sightseeing and relaxation, but for buying luxury goods. The national broadcaster took China’s 80 million international travelers to task for spending $30 billion abroad last year buying luxury goods, and criticizing them for not spending that money at home.
The media coverage of this transnational luxury buying spree implies that a hunt for bargains is all that sends these buyers abroad. Yet while price is doubtless an important motivator, there is more to it. What most analysts – and probably a few brands – are missing is the unarticulated value luxury consumers place on the experience, those intangible factors that makes buying the purse, the shoes, the watch, the dress so deeply satisfying.
One factor for Chinese in particular is mental comfort. It is not much fun consuming conspicuously in an environment that heaps growing opprobrium on bling buyers. Better to go somewhere where your purchase is at least taken in stride, if not celebrated. These days, that means buying in Hong Kong, Tokyo, Singapore, New York, Beverly Hills, London, Paris, or Milan – not Beijing or Shanghai.
But there are other factors that make up the luxury buying experience, factors captured in such post-buying questions as:
Where did I buy this?
What was the service like?
Did the salespeople make me feel at home?
Why was the experience special?
What was different about buying there than in China?
What was I able to get there that I couldn’t in China…or anywhere else?
Any and all of these factors have the potential add greater meaning to the purchase, make its acquisition more gratifying, and deepen the relationship with the brand. Equally important, they add to the “show-off” or “shai” value of the item. The new owner not only gets to show-off the bauble to her friends, she also gets an excuse to relate the trip, the circumstances, and the feelings she took from the purchase process itself, all to the admiration (or envy) of the people whose respect is important to her.
Some Brands Get It
On a vacation trip in 2008, my wife bought a limited-edition LeSportsac Tokidoki handbag designed by Simone Legno at the LeSportsac store on Waikiki. The store was a delight, the location superb, the service was so good that even my son and I felt good about coming into the store, and that is saying something. My wife had never heard of Tokidoki before, but the whole experience of buying the bag was such a delight that she came back the next day to buy one for her mom. To this day, five years later, she still talks about the bag, and has a deep affinity for LeSportsac.
Christine Lu of Affinity China is out ahead of the industry. She has begun leading luxury shopping tours of the U.S. for Chinese ladies that go beyond high-end store-hopping. Shops on Rodeo Drive, Park Avenue, and Waikiki are prepared in advance, provide engraved invitations, put on private fashion shows with Chinese narration, serve champagne and chocolates, and arrange to have purchases taken back to hotels while the ladies continue their day. As a bonus, Christine will bring along a Chinese celebrity or two, and tweet/blog/weibo aggressively, raising the profile of the trip and making mere attendance prestigious. The stores who work with her get it: the experience is every bit as important as the quality or design of the items that go in the bag. Expect these kinds of events to grow into a trend, traveling trunk shows where the groups come to the stores.
So all of this is interesting to be sure. Here is why it is important.
Today, it’s Price, but Tomorrow it Won’t Be
Understanding the non-price factors that drive Chinese to buy abroad is going to grow in importance. At some point the Chinese government will figure out that it needs to take steps to keep the luxury dollar at home beyond lame propaganda campaigns to shame buyers as unpatriotic. That will mean eliminating the price difference for buying at home. Either the government will have to start levying duties at airports and ports of entry (insanely hard to do and guaranteed to cause congestion at China’s overwhelmed airports and borders,) or they will need to eliminate duties altogether.
It is anyone’s guess on which course Beijing chooses, economic logic notwithstanding. When that happens, luxury brands will have their own choice to make: they can either play the zero-sum game, doing nothing and watching overseas purchases slowly leech back into China; or they can play the growth gambit, sustaining patronage overseas while building sales in China.
I’m betting the brands will want to do the latter, so I expect to see them taking steps to improve and even differentiate the buying experience for Chinese luxury consumers. At the very least, we will see more luxury stores with Chinese speakers and creating the kind of buying experiences that Affinity China is teaching them to offer.
I expect it will (or should) go beyond that. The brands will realize that simply offering a cookie-cutter experience in every store worldwide misses the point for their clientele. Each city, each store has to offer a different but equally compelling experience that reflects the brand in a unique way. This starts with store layout, but also speaks to decor, merchandise, and layout that reflects the location, and even offering items that are exclusive to that store. Let’s face it: even Disneyland has learned to differentiate its parks worldwide. Can luxury brands be far behind?
It is a truism (or should be one) that long after the price of an item is forgotten, the experience is remembered. Price will bring China’s increasingly sophisticated luxury customers in your door, but the experience will form the basis of a lasting relationship.
Canada has given the “all clear” for the China National Offshore Oil Corporation (CNOOC) to purchase upstream oil and gas developer Nexen, a company with reserves in Canada and the Gulf of Mexico (among other places) and, perhaps more important, some interesting capabilities in shale oil and oil sands. CNOOC’s interest begins with the reserves but the long-term value of Nexen lies in its oil sands capabilities. China has an estimated 14.5 billion barrels of oil locked up in oil sands, a quantity that is over twice the nation’s proven conventional reserves. Even with the technological hurdles, the value of Nexen to China and its energy security would be huge.
CNOOC faces one last hurdle: the Committee on Foreign Investment in the United States (CFIUS.) That body has not been particularly kind to Chinese companies of late, and it has come under fire at home for an approval process that is opaque by Washington standards. There are still those in Congress and industry who flatly oppose any Chinese investment in U.S. fossil fuel assets or reserves. What this decision will come down to is how well CNOOC has laid the groundwork.
Regardless of the outcome in Washington, the fact that the purchase of what one senior Canadian executive called a “bit player” in the energy business has caused such a stir is an indicator that despite CNOOC’s groundbreaking efforts to build goodwill in government and industry, China, Inc. has a long way to go before it is viewed in American capitals with anything but suspicion.
The next bit, though, is the hard part. Building support among like-minded oilmen and politicians with bigger fish to fry is easy. Winning over the growing slice of America that believes the worst about China and state-owned enterprises is going to demand more than schmoozing: a wholesale rethink of corporate behavior is in order.
The formula that CNOOC and its fellow Chinese companies will need to follow when pursuing global mergers and acquisitions begins with the company’s actions. How has the company behaved in its operations both in China and abroad? Has it operated in a transparent manner, or has it used its government ownership as a fig-leaf to hide its activities behind a veil of secrecy?
Has the company been fair with its partners? Has it built up a genuinely positive environmental record (one that partners and foreign competitors would agree is world-class?) Does it behave in a high-handed manner, or does it operate with humility? Is it out for long-term cooperation, or does it just want to dismember its acquisitions for a few key personnel, some technology, and its reserves?
Next, the company has to consider its reputaiton. If it is behaving well, does it get credit for its actions across the full scope of its stakeholders, or do too many people fail to discern a difference between CNOOC and other oil companies? For that matter, is it seen as a company, or is it perceived as little more than an extension of the Chinese government? Is it telling its story to enough of the right people to matter? And, by the way, who are the right people?
M&A success for China’s companies abroad – for any perceived interloper, for that matter – rests on cash plus positive corporate behavior plus credit for that good behavior with all audiences. Actions + Reputation + Cash. Anything less leaves a deal dangerously vulnerable.
It will be interesting to see how things progress. CNOOC – and China – have a lot riding on this deal.
I wrote in June that the current downturn in the worldwide market for large ships would hit Chinese shipyards especially hard, constituting as they do some 20% of global shipbuilding capacity. The shipyards had little to fear, I noted: if for no other reason than the sheer number of people employed at China’s shipyards (and memory of the Gdansk shipyards as the birthplace of Lech Walesa‘s Solidarity movement, an event that presaged the disintegration of communism in Eastern Europe), the central government would do anything they could to keep the yards operating, orders or not. Yet rather than simply pay for the production of more surplus tonnage that nobody would want, or for make-work or no work, the government would instead get the yards to re-tool to produce naval vessels – if not warships and landing vessels, then naval auxiliaries like replenishment ships, transports, and maritime patrol ships.
Sure enough, Hu Wenming, chairman of China’s second largest shipyard operator, China State Shipbuilding Corporation, was in Beijing during the just-wrapped 18th Party Congress lobbying to get orders for naval and “fishing” vessels. He is the first: expect the line of shipyard managers and owners to form behind him.
With China’s now-open goal of becoming a maritime power, the timing of the global shipbuilding downturn and stiff domestic competition means China can conduct its naval buildup at an accelerated pace AND at a lower cost that it might have otherwise. And the yards, instead of going bankrupt, will get contracts that will likely be more lucrative than orders for container ships, cruise liners, bulk carriers, and tankers. Who knows? Many may never go back.