The issues driving a developing economy

A Welcome Oil Crisis

In a major relief for the Indian government and consumers, crude palm oil (CPO) prices are likely to decline by nearly 15 per cent before the end of 2017 due to bumper supply from Indonesia and Malaysia, the world’s two largest producers of the oil

Source: Crude palm oil prices may decline up to 15% by year-end | Business Standard News

A fall in demand of palm oil wouldn’t be a bad thing for the world. Of all of the vegetable-based oils, palm is one of the least healthy, and it tends to get dumped on price-sensitive consumers around Asia.

India is the world’s largest market for palm oil. China held that title as recently as 2009, but as incomes have risen, palm oil has been discarded for a mix of healthier cooking oil alternatives.

China is the harbinger of a bigger trend, and Malaysia and Indonesia should be concerned: this is the beginning of a long-term secular decline in a key commodity.

 

PR World

Over the past four years I have discovered that there is an implicit belief among many US public relations (PR) practitioners – especially in the large global firms – that PR around the world will develop to become similar to what it is in the US, and will follow the US lead as the profession evolves.

Axiom: it will not. If the PR industry manages to rise above its straightjacket of inertia and hubris, it will find itself changed by forces from India, China, Latin America, Russia, and Africa.

What keeps me awake at night is the fear is that ethics in the name of expedience will be the first sacrifice in that process.

Huawei’s PR Struggles

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.

Source: Huawei’s epic PR fail | afr.com

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 One Belt Test

Source: China’s New Silk Road Is Getting Muddy

The reason the “One Belt, One Road” initiative is going to be so interesting to watch carefully is that its outcome will be a litmus test for governance in China.

More than just a simple question of whether the initiative makes economic sense, the results will determine the degree to which such centrally-planned and -driven initiatives are either workable or relevant in modern China.

Rhetoric about strongmen aside, this is not the era of Mao. China is a larger, more complex, and more decentralized country than it was forty years ago, or even in 1999 when Jiang Zemin launched his “Go West” initiative. If the nation faces challenges with OBOR, it does not follow that the strategy is wrong: what it points to, more likely, is how the role of government in these initiatives must be to instigate and enable rather than to plan and oversee.

That thinking would represent a huge deviation from the Party’s modus operandi, but as Huang Yasheng is fond of reminding us, the greatest leaps in China’s post-Liberation economic progress have occurred when the government sets the tone, and then gets out of the way. Combining such an approach with vigilance over safety, graft, corruption, and the environment will likely emerge as the way forward for the government’s role in development.

 

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Concept of the Week: Leftover Students

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.

Three Trends to Watch in China Hospitality

Even if 2016 does not turn out to be the year Airbnb announces an initial public offering, it may turn out to be the year of deep, fascinating Airbnb data

Source: Measuring Airbnb’s Real Threat to U.S. Hotels Using Industry Metrics – Skift

Thanks to Airbnb, apparently, we now no longer have a “hotel industry.” what we have is an evolving “hospitality ecosystem.” Nowhere is this evolution taking place more quickly than in China.

Hotel brands – and their offerings – have been diversifying beyond the traditional rankings of luxury. Local brand Orange and Starwood’s W, and boutiques like Opposite House introduced lifestyle choices to that mix. Expect to see more of that as we see greater consolidation among global brands and increasing competition for domestic tourist dollars.

Two trends to watch in hospitality in China this year: shared and recreational. Shared lodging services like Xiaozhu and Airbnb look set to take off this year for both domestic and outbound travelers as these services begin offering fapiao for business guests and usage moves beyond early adopters.

Recreational lodging, specifically camping, is the second trend to watch. We are seeing the rapid growth of legitimate, licensed campgrounds this year, primarily front-country sites that allow guests to drive up to their unimproved sites and camp. In addition, the growth of the RV industry in China is driving growth in campsites designed for Airstreams and Winnebagos as China’s prosperous are learning the joys of the road.

Finally, we’re witnessing the birth of what can be best called “nostalgia hospitality,” where lodgers are offering boutique lodgings reminiscent of earlier and simpler times in China. This deliberate step backward in time is a sort of bed-and-breakfast with Chinese characteristics, an experience designed for urbanites looking for a true getaway from the complexities of daily life. This is beginning as a part of the shared lodging trend, but will become a sub-phenomenon of its own in the next two to three years.

 

Sophisticated Chongqing

Hutong Forward
LAX bound for Bangkok and Shanghai
1215 hrs.

My first trip to Chongqing summarily destroyed all of my preconceptions of the central Chinese river terminus.

Instead of an immense but slightly provincial city, I came away after three days with the impression that Chongqing is about as provincial as Hong Kong, and is in many ways a lot more livable than its coastal cousin.

People were fashionable and stylish, at least as much as Beijing. The streets along the river were lined with remarkable restaurants and shopping districts that made Shanghai’s Xintiandi look both quiet and unsophisticated by comparison. The Pedestrian Street between Minzu Road and the Liberation Monument bisected the central business district with a sophistication that rivals Nanjing Road and Wangfujing. And the people have that warmth that seems to come so readily to the people of Sichuan.

I berate myself now for delaying my visit for so long. There really is more to Chongqing than a foggy, overgrown river port, and I suspect that I will be going back again soon.

The True Measure of Urban China

On the Hutong Express
Somewhere in Central China
1123 hrs. 

As I hurtle through 2,800kms of Chinese countryside, a question occurs to me about China’s massive urbanization. The shift is unprecedented, and for that reason alone begs for close examination.

The truth is, we are not examining the scale of urbanization as closely as perhaps we should. Is China urbanizing as quickly as statistics suggest? Or are we – at least in part – witnessing some statistical sleight of hand?

The thought that provoked me on this trip was the villages. Admittedly, my survey was back-of-napkin and limited to those villages alongside the high speed rail lines, but there seemed to be more building, more development, and little blight. That made me wonder. Are people really leaving their villages and heading to the Big City, or are they staying put, and statisticians taking villages and towns previously designated as “rural” or other non-urban areas and predesignating them as “urban?”

There is more to this question than statistical nit-picking. If many people are urbanizing in place, this means that China faces a very different set of challenges in addressing urbanization, including rethinking the infrastructure that needs to be built and probing whether this means that more of the country’s shrinking stock of arable land is in jeopardy.

For marketers, it would mean that a growing percentage of potential customers are physically beyond the reach of their current advertising, retail promotion, and distribution infrastructure.

Either way, it is time we tarted probing China’s urbanization statistics rather than take them as gospel.

Concept of the Week: Urbanizing In Place

Urbanizing in placeconcept – the idea that China’s urbanization is not being driven entirely by migration from the countryside to the cities, but that large areas that Beijing’s statisticians might once have considered “rural” are now considered “urban.”

In-place urbanization could occur in one of three scenarios.

The physical area of a municipality has been expanded to include what was once surrounding countryside.

In the second scenario, a village that was once considered part of the countryside has now grown into a town that a demographer or statistician would now classify as urban.

In the third scenario, a group of villages in a given area are considered to be conglomerated as a single administrative entity and reclassified as a single town.

In these cases, China’s urbanization is taking place without migration, and presents a different set of policy, marketing, and personal challenges and opportunities than classical migration-based urbanization.

Stadiums, Sports, and the Imagination Gap (Updated)

Hutong West
Beijing on Sunday
0800 hrs.

Visiting Winnipeg on business in April, I was treated to a personal, behind-the-scenes, roof-to-foundations tour of Investors Group Field, the gleaming, high-tech new sports venue that will host eight matches of the upcoming FIFA Women’s World Cup, including the sold-out pre-cup friendly match between China and the USA.

You would not necessarily associate Winnipeg with great sports business (beyond, say, sales of donuts at a hockey rink,) but what I found even more impressive than the physical plant of the 33,000-seat stadium was the care and thinking that went into creating a venue designed around a great experience for both spectators and athletes. Everything about the stadium, from concessions to security to the locker rooms, was designed and built to do one or more of the following:

1. Create the best possible experience for fans from the minute they leave home to the minute they get home: parking is ample, buses to and from the venue serve neighborhoods throughout the city; there is a huge grassy area just for toddlers where parents can still follow the game on screens: there are areas designated for people who want to watch the game in a bar or club-like environment; and seats and bathrooms are spotless;

2. Maximize revenue opportunities at every event, but do so without making people feel like their being gouged or nickel-and-dimed: concession selections were eclectic and reasonably priced, and there were numerous ways to “upgrade’ your experience;

3. Simplify the jobs of the people who have to bring the talent to and from the stadium, whether the managers of the home or visiting team, or Taylor Swift coming to do a concert: the venue was set up so that fans could see the stars pulling into the stadium and their specially-designed dressing rooms, but not obstruct or endanger them in any way;

4. Maximize revenue from the venue even when there are no events scheduled but in ways to make the events themselves more exciting: the venue had a series of boxes that are rented for parties (both for kids and adults) focused on the sports events; there was a huge fan store open year-round on the main level; plans are now afoot to commercialize the tour that I was given;

5. Make the venue as practical and simple to maintain as possible: there were numerous places where the designers could have added some flair and touches that would have made the venue more visually stunning or that would have been very “cool,” but they wisely chose to make the venue beautiful, comfortable, and hardy.

As I rode to dinner after the two-hour walk, I could not help but compare Investor’s Group Field with so many of the beautiful stadia in China. The nation has built temples to sport that are uplifting in their architecture and stunning in their scale. And yet few, if any, are delivering lasting value to their owners, to their neighbors, or to sport.

Beijing’s most iconic sporting grounds have become silent, aging white elephants. Yet Winnipeg, a city of around 700,000 that is so cold for five months of the year that locals dub it “Winterpeg,” can boast two new, prospering sports venues with two league-leading sports teams and dozens of events and commercial activities to support them.

I recognize that prosperous sports leagues and venues are, for a “developing” nation, nowhere near as high on a list of priorities as, say, putting a man on the Moon. But the constellation of decaying stadia that dot China’s cityscapes stand in mute testament to a national failure, not in finance or audience, but above all in imagination.

China’s leaders have focused on technological innovation as the nation’s pathway out of the middle-income trap. The focus is valid, but myopic. The silence of the Bird’s Nest is a hint that something else is lacking. In its quest to lead the world economically, culturally, and politically, Beijing must dare to stoke the imaginations of its people, its merchants, its scientists, and its athletes.

Setting the Stage for Chinese Innovation

Near People’s Square, Shanghai
Skyline in Silhouette 
0700 hrs. 

Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.

One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.

But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.

From Buy to Make

Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.

The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.

China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.

Fast Followers

By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”

By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.

Innovation, however, remained a challenge. While a handful of local tech companies –  notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.

Enter the Innovation Platforms

And there it remains today.

This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.

Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:

Significant – The core innovation is a genuine advance that is both useful and relevant;

Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;

Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;

Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.

Supported – Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.

Early Innovation Platforms

Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.

But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:

The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;

The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;

Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.

Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.

Platforms for the Future

In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.

But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.

For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.

But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.

The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?

I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.

Clarity for China’s Growing GMO Debate

Texas Hill Country
Doing Agronomy 101
0902 hrs 

The debate over genetically-modified crops is reaching the boiling point among Chinese policy-makers, and the past several months have witnessed a spate of media coverage on the issue suggesting that the two sides are taking their case public to try to sway the issue.

One would hope that the science will win out in the end, but in the meantime I am doing a deep-dive on the GMO issue to a) understand where the scientific consensus lies, beyond corporate positioning and activist FUD, b) understand China’s interests in the area, so that I can c) start making some calls as to where this will go in the region.

Which is important because where China falls on GMOs is critical to the special interests cheering from the sidelines on both sides. As a massive and growing consumer of the world’s agricultural products, a ruling by China on GMOs either way could determine the future of genetically-modified crops worldwide. Yet as an increasingly important exporter of processed food, China does not want to get too far ahead of the world on the issue.

There are a ton of superb, science-based resources on GMOs, and Dr. Cami Ryan at the University of Saskatchewan has compiled an incomparable list of those resources. Some are technical, but most are highly accessible even for those of us who haven’t taken a science class since our freshman year in college.

China and the BRICs

English: The BRICS - Brazil, Russia, India, Ch...
English: The BRICS – Brazil, Russia, India, China and South Africa. Português: As Potências regionais. (Photo credit: Wikipedia)

BRICS: In Search of Unity? | Institute for Defence Studies and Analyses.

Hutong West
Dealing with plumbers
1228 hrs.

While the Fourth BRICS (Brazil, Russia, India, China, and South Africa) summit was nearly three months ago, the meta-message that is emerging from the aftermath is that these countries do not yet form anything resembling a bloc of interests.

Ruchita Beri’s short piece (linked above) is guardedly optimistic about the grouping, but if you read between the lines you can almost feel the divergence of interests that is pulling this grouping apart. Beri, a senior researcher at India’s Institute for Defence Studies and Analyses, gently suggests that China is part of the problem.

While the BRICS grouping does provide an opportunity for each member to play an important role on the global stage, one of the challenges that it faces is cohesiveness. Take the issue of the BRICS development bank. While it is indeed a laudable initiative, the challenge lies in aligning the differing interests of the member countries. Moreover, other members of the grouping are wary of China’s domination over the bank given that China holds very large foreign exchange reserves ($ 3 trillion).

All of this serves to underscore the real elephant in the room, which is the fact that while some of the BRICS might trust each other, most are having a hard time trusting China. As it considers its soft power challenges, China also needs to see that being a trustworthy player in the global system would do a lot toward making it influential (rather than disruptive) in such international groupings, and in turn toward making those groupings influential.

Dissecting China’s High-Speed Rail Fail

China Railways CRH5
Image via Wikipedia

In the Hutong
Trying to translate “Casey Jr.”
1238 hrs.

In the face of recent revelations around irregularities at the top China’s Rail ministry there is a growing meme afoot suggesting that we have been too quick to praise China’s high-speed rail system. In reality, we are told, the PRC’s high-speed rail system is a corruption-ridden white elephant that the people cannot afford to ride.

Reading from his copy of the South China Morning Post, Tim Ferguson of Forbes.com writes:

The larger issue with the vast (16,000 kilometers planned by 2020) endeavor is that it isn’t, in fact, so appropriate to China’s needs. Rather, it may be another symptom of a bubble economy in which vast sums are misspent on underutilized assets.

Not So White An Elephant

My father always taught me to be skeptical of blanket condemnations of this flavor, as they reek of demagoguery and are often wrong. In fairness, let us grant to Mr. Ferguson and like-minded folks like Joel Kotkin two points: first, that there has been waste, possibly massive, in the development of China’s high speed rail system. Second, until we run out of ways to economically fuel passenger aircraft,  or until the US population quadruples, that high-speed rail is probably not an panacea for North American intercity travel. Still, neither of these factors militate against the viability of–and the long-term need for–high-speed passenger rail in China.

China has had for some time examples of high-speed intercity rail lines that are both successful and popular. Indeed, one could argue that it was the success of the Hong Kong–Guangzhou, Beijing–Tianjian, and Shanghai–Hangzhou lines that provided proof-points for the expansion of China’s own bullet trains. So let us dispense quickly of the question of whether high-speed rail is workable in China: it is, and it forms an essential part of the nation’s intercity infrastructure.

Note, however, that the lines mentioned above are limited examples of routes with extraordinary situations. The distances between the city pairs is too great or too traffic-laden for taxi, bus, or personal automobile, and are too near to justify air travel. There is also already a great deal of traffic between the two cities, with one sometimes serving as a satellite to the other. Other city pairs like this would include  Chongqing–Chengdu, Shanghai–Nanjing, Wuhan–Changsha, Jinan–Qingdao, and Shenyang–Dalian. There is an argument to be made that China should have limited its high-speed intercity rail to just such city pairs, and if China were a developed country, I would be making that very point.

Driving High Speed Rail

Of course, China is not a developed country, and indeed its rapid growth compels the nation’s leaders to project two decades or more into the future when making infrastructure investment decisions. A series of factors that argue in favor of wider rollout of high-speed passenger rail complicate such decisions.

Urbanization – China’s population is leaving the countryside and becoming increasingly urban. As Richard Hobbs noted in a recent article in Foreign Policy, by 2030 China will have 44 cities boasting populations in excess of 4 million souls, and 221 cities with over 1 million in population. Let’s put that into perspective: in 2009 the United States had two cities in excess of 4 million souls, New York and Los Angeles, and only 10 with a population over 1 million. Here is what this means: in 20 years, China will have 44 cities the size of Los Angeles or larger. It also means viable high-speed rail city pairs will grow in number as well.

Density – China’s urban population density is high, and it is growing, in particular along nation’s seaboard. Even as of 2006, China’s urban population density – the average number of people living in a square mile of a city – was 27,300, three times the global average and nine times the U.S. average, even excluding Macao and Hong Kong in China’s figures.

Megacities – China is planning the creation of at least two and possibly more mega-cities, one clustered around Guangzhou in the Pearl River Delta, and one around Beijing and the North China plain. These cities will be so large as to require a re-thinking of intracity transportation. High-speed passenger rail is likely to form the core of the mega-city rapid transit system, linking thence to subways, taxis, and bus lines.

Energy – Built around gasoline-powered automobiles, diesel-powered buses, and kerosene-powered aircraft, China’s transportation network is dependent on supplies of imported petroleum, and that dependence is growing as China grows. Policy-makers seeking viable transportation options that are not beholden to the petroleum supply are naturally drawn to rail, and would like to see high speed rail as a substitute for air travel on shorter routes.

Environment – China’s leaders breathe the same air the rest of us do, and it would take a theatrical degree of paranoia to think that they delight in modern cities with sludge-enshrouded skylines. High-speed rail, if fueled by dirty-coal generated electricity, is not going to make China’s air any cleaner, but the ability to drive it based on nuclear, wind, solar, wave and other forms of cleanly-generated electricity make it a potentially greener means of intercity travel than buses and aircraft.

Expertise – The other development motive behind high-speed rail is the belief that if China can build tens of thousands of kilometers of high-speed railways, along with the equipment, locomotives, rolling stock, and software to make it all run, the nation can become a global player in the construction and management of such railroads. The effort is already underway, most notably in California’s on-again, off-again high speed rail project, where CSR is partnering with GE on one bid for the trains themselves, China Rail Construction Corporation is partnering with Fresno County to bid on a maintenance and repair facility, and China itself has dropped hints about financing the whole venture.

Execution, Execution, Execution

The case for high-speed passenger rail in China is, thus, compelling, far more so than in the United States. The danger is in applying high-speed rail as the answer for all of China’s transportation needs. What critics should be focused on, therefore, is less Chinese high-speed rail qua high speed rail, but on factors that threaten the success and viability of the system.

As cool as the upcoming Beijing-Shanghai high-speed railway sounds, the route between the two cities probably stretches the distance limit of a viable high-speed rail system. For me, on most days, it would make more sense to take a 350 km/hr train to Shanghai than a plane, but only because of the spectre of weather and air traffic delays. A high-speed train to Hong Kong, on the other hand, would need to be very fast indeed, even though I am over seven hours from my front door in Beijing to my office in Central when I fly.

What the government needs is some systemic sobriety to counter the early intoxication with high-speed rail. Because of the fixed, inflexible nature of high-speed rail’s assets (as opposed to, say, those of an airline,) a good start would be creating a framework against which the National Development and Reform Commission can evaluate the economics of a given line over the long term. Clearly the success of the early lines suggest the beginnings of such a template: Beijing to Shenyang, yes, Beijing to Urumqi, probably not.

Time-in-motion studies and other engineering homework would be worthwhile, as would be getting outside agencies to double-check the arithmetic of the Railroad-Industrial Complex to make sure each line is worth building. With the national budgets at stake, and given the mess at the top of the Railways ministry, I would not be surprised if these sorts of controls were not already in the offing.

The Wrong Solution

The issue, however, is not what Ferguson thinks it is. He suggests that the problem in China is that the market mechanism is missing, and that all of this money spent on high-speed rail is a “massive misallocation of resources that is a hallmark of top-down systems such as in Communist China.”

Taking the time to rebut Mr. Ferguson with a catalogue of the massive misallocations of resources that take place in America, Britain, Japan, and the E.U. would be both pedantic and off-topic. Suffice to say that the historical record gives ample proof that “top-down systems” like those in China enjoy no monopoly over expensive government boondoggles.

It is worth pointing out, however, that one of the few downsides of market mechanisms is that they occasionally stand in the way of solutions that make more sense when the full costs of implementation are considered. I grew up in a Los Angeles choked by its forced dependence on the automobile, the results of a local government abetted by automotive interests that abandoned a viable interurban rapid transit system because it didn’t want to pay for upgrades. Half a century later, a new generation of southern Californians confronting the limitations of automotive transport is footing the bill to rebuild it completely. This kind of market mechanism China can afford far less than America could.

Do we need to be careful about building costly high-speed rail systems in the U.S.? Definitely. Are there problems in the way China is laying high-speed rail lines? Almost certainly. But even despite all of this, is China going to need more high-speed passenger rail networks? Count on it. Let us focus on helping them build wisely and well.

Why China’s Hobbled Education System Isn’t Stopping SOEs

In the Hutong
Marvelling at the Chill
1025 hrs.

In an excellent, wide-ranging article for The New York Times Magazine (and one that will inspire  a few posts on this blog,)  David Leonhardt  zeros in on education as one of the obstacles China faces in building a consumer society.

When I met with Guo Shuqing, a party official and the chairman of China Construction Bank, in his office high above Beijing’s financial district, he mentioned that a recent ranking of the world’s top 100 universities included 53 from the United States but just three from mainland China. Even those numbers, Guo said, probably overstated the strengths of China’s universities: “In terms of innovation — really original, creative ideas — they’re very weak,” he told me. By contrast, the American education system helped make possible Google and other companies.

This has become something of a meme among those who dismiss China as a “real” competitor to the U.S. Because Chinese high schools and universities still emphasize memorization over creation and theory over practice, China will be unable to make the transition to a creative, innovative society.

Who Needs Reform?

Yet while education issue is vitally important to China’s future development, we need to be careful about using the state of education and pedagogy in China as a barometer for competitiveness. China’s companies, even its lumbering bureaucratic state-owned enterprises, are finding ways to work around the limitations of the PRC’s politicized, doctrinaire, rote-driven education system.

  • Executive Education – Ranging from full-time paid overseas study, to part-time MBAs, to open admission continuing education and even government-sponsored programs for accounting and administration, Chinese firms are starting to make use of educational options for middle- and senior management that were originally intended for the executive rosters of multinationals.
  • Training –   An unprecedented choice of commercially-available programs, ranging from basic English instruction to secretarial skills to even Dale Carnegie courses, are available to Chinese companies. Even more firms are choosing to develop their own in-house training programs as a means of attracting, developing, and retaining talented staff, without having to spend a fortune on outside providers.  (In some cases, this means paying for program the first time, and using it over and over in-house without paying the provider.)
  • Hiring MNC Veterans – As the pay gap between MNCs and SOEs narrows, going to work for a local company is a viable and sometimes desirable next step for an executive with several years of experience in a multinational. It’s also a relatively easy way for a company to pick up international best practices. That is, if they actually adopt the ideas thinking and techniques that the new employee brings.
  • Hiring Sea Turtles – While their older brothers and sisters may have chosen to go to an MNC first, today’s generation of graduates, seeing their prospects better at a local enterprise, are choosing careers with SOEs fresh out of school.
  • Hiring the Foreigner – There persists the perception among executives lacking extensive international experience that foreigners are overpriced, difficult to work with, and lacking of a fundamental understanding of Chinese business culture. And in many cases, that’s true. Nonetheless, it is an option more companies are trying.

Long-term, the most important of these sources of smarts will be the foreign educated Chinese, and not just those popping over to the US for professional finishing at American graduate schools. Put off by the hyper–competitive university examination and entrance system in China, parents with the financial means are now sending their little emperors abroad for their undergraduate educations.

Start Them Young

And a small but growing number of parents aren’t waiting for university: they are finding ways to enroll their children in international schools in China, or are sending them abroad as middle- or high-schoolers.  The logic is compelling. Despite the loss of some of the virtues of a Chinese education, these young sea turtles will have been formed in a more open educational environment, ostensibly enabling them to think more creatively, be more adaptive, and possibly even more innovative than peers reared in China’s neo-Confucian secondary schools.

The numbers of students in such programs is not so large as to relieve China of its eventual need to reform education. But as long as that option remains politically unviable, it will grow in unofficial acceptance. If and when the Ministry of Education starts allowing the experimental enrollments of Chinese nationals in international schools, the partial outsourcing of China’s elite education will have become official policy.

So while the issue of mis- or mal-educated youth (and a lack of executive diversity) is a real macro problem in China, don’t count on it to slow or stall your Chinese competition for very long. Driven by the management challenges and global ambitions of organizations like Guo Shuqing’s China Construction Bank, China’s wiser companies are finding ways around the education problem.