The issues driving a developing economy

Where is China’s Motorhead Messiah?

In the Hutong
Trying to break delicious.com
1549 hrs.

As we swing into the political season ahead of the unveiling of the 12th Five Year Plan, the question on many minds is whether (and to what extent) “indigenous innovation” is going to be at or near the top of China’s policy imperatives in the coming half-decade. This is not an idle concern.

The past several years have given the government and the Party plenty of time to not only think more carefully about the value of innovation for its own sake, but also of the unintended consequences of embracing the appearance of innovation as much (if not more than) innovation itself. What is more, I detect here in the capital a growing realization that not all worthy innovations come out of the labs of state-owned enterprises.

And none too soon. A recent article in Fast Company (“Motorhead Messiah“) on the work of independent automotive engineer Johnathan Goodwin underscores the last point (apologies for the long pull-quote):

Goodwin, a 37-year-old who looks like Kevin Costner with better hair, is a professional car hacker. The spic-and-span shop is filled with eight monstrous trucks and cars—Hummers, Yukon XLs, Jeeps—in various states of undress. His four tattooed, twentysomething grease monkeys crawl all over them with wrenches and welding torches.

Goodwin leads me over to a red 2005 H3 Hummer that’s up on jacks, its mechanicals removed. He aims to use the turbine to turn the Hummer into a tricked-out electric hybrid. Like most hybrids, it’ll have two engines, including an electric motor. But in this case, the second will be the turbine, Goodwin’s secret ingredient. Whenever the truck’s juice runs low, the turbine will roar into action for a few seconds, powering a generator with such gusto that it’ll recharge a set of “supercapacitor” batteries in seconds. This means the H3’s electric motor will be able to perform awesome feats of acceleration and power over and over again, like a Prius on steroids. What’s more, the turbine will burn biodiesel, a renewable fuel with much lower emissions than normal diesel; a hydrogen-injection system will then cut those low emissions in half. And when it’s time to fill the tank, he’ll be able to just pull up to the back of a diner and dump in its excess french-fry grease—as he does with his many other Hummers. Oh, yeah, he adds, the horsepower will double—from 300 to 600.

“Conservatively,” Goodwin muses, scratching his chin, “it’ll get 60 miles to the gallon. With 2,000 foot-pounds of torque. You’ll be able to smoke the tires. And it’s going to be superefficient.”

He laughs. “Think about it: a 5,000-pound vehicle that gets 60 miles to the gallon and does zero to 60 in five seconds!”

The dutiful production of a string of novel and interesting inventions may fluff the national ego and build an increment of soft power among the global geekocracy. But as the modern histories of America and Japan suggest, is the rapid industrialization of innovation, the process of taking something out of a lab or garage and making it accessible to the widest number of people, that creates economic value.

If China is going to reinvent its economy as a cradle of high-value innovation, it has to start figuring out where its Goodwins are, and how to bring them in from the cold.

I suspect that there are hundreds, if not thousands, of Johnathan Goodwins scattered around China, each with a brilliant idea that could propel a company, a sector, an industry, or even perhaps the entire economy. But something is keeping them from standing up. And it is that same thing, I reckon, that keeps Johnathan Goodwin from giving up on GM and Ford ever paying for his ideas and instead coming to China to sell them to SAIC, or Beijing Auto.

Time to stop bankrolling high-cost, low-return projects to try and reinvent the microprocessor or build a cheaper 757. Fix the Goodwin problem, and China will become a global leader in innovation.

As the 12th Five Year Plan rolls out, read through the fine print and see if the country is starting to move in that direction. Otherwise, expect “indigenous innovation” to become nothing more than a fig-leaf for import substitution and subsidies for SOEs to continue reinventing wheels.

Responsa: Dealing With the Disposable Backhoe

Caterpillar 12G grader.
Image via Wikipedia

In the Hutong
Managing the Phoenix
1330 hrs.

Jack Perkowski continues our serve-and-volley on the future of China’s construction equipment makers here on his Managing The Dragon blog, and he brings out the Caterpillar fanboy in me when he notes:

“How should Cat, Komatsu, and the other global leaders prepare for Chinese competition overseas? By far, the best way is to compete successfully with them in China.  That is why the battle for the construction equipment market in China is so critically important.”

That seems obvious, but the next logical question is how?

They Drive ‘Em Different Here

The global majors are geared up to compete in very different kinds of markets. In any ordinary market, you are selling a piece of equipment to a construction company that is concerned about things like the total cost of ownership of a road grader over a 10-20 year life. To serve markets like that, companies like Caterpillar design their equipment to maybe be a bit more expensive up front, but cheaper to own over the long term. They support that with a dealer network, and they have a growing division that rebuilds the big machines, extending the lives of the equipment even further.

China is not an ordinary market. There are exceptions, but I am willing to bet that the average construction equipment customer is thinking rather less long term. He probably wants to buy a backhoe that will be less expensive up front, will save enough money so he can buy two rather than one, that can be repaired cheaply, and that may even be dumped or sold to someone in one of the inland provinces after a couple of major jobs.

As an aside, I know a little something of what I speak. The Hutong Party Secretary spent a good bit of time in her career trying to sell Linde forklifts to both Chinese and Western companies here in China. (For those who are not in the materials handling business, it is worth noting that Linde are the Porsche of forklifts, and offer many of the advantages over their local competition that Cat and Komatsu do.) No surprise: the western companies, concerned about total cost of ownership and the lot, bought lots of Linde forklifts. But our Hutong Party Secretary was extremely challenged trying to sell any to local firms.

The pushback? They didn’t care about the quality. Breakdowns a problem? No worries – if we can buy three local machines for the price of one Linde (the differential wasn’t that large, but this is for illustration), we’ll buy two local machines and one will be operating while the other is being fixed, and we’ll still save money.

How does a company that extols its innovation, quality, durability, technology, and dealer support go head to head against companies that are ready to sell two disposable backhoes for the price of one good one?

Playing A New Game

At some point, in order to fight back without undermining their own corporate image, Caterpillar, Komatsu, Volvo, Bobcat, Kubota, and any other global equipment maker who wants to compete in China is going to have to find a way to win on the customer’s terms. And they are starting to get that.

Late in August, Caterpillar’s new CEO, Doug Oberhelman, came through China in the wake of a promise he made to Cat shareholders that he would make the company the leader in construction equipment in China by 2015. In an interview with Andrew Browne at The Wall Street Journal, Oberhelman hints at the foundation of a new China strategy.

[Oberhelman] said Tuesday that some Chinese equipment companies have become “pretty darned good” and that Caterpillar is studying their operations, including their product designs, as it goes toe-to-toe with them in China and, increasingly, in the U.S. and Europe, where good-quality Chinese exports are taking hold.

The exercise is driving down costs at Caterpillar and encouraging innovation, he said. Already, Chinese engineers are developing parts for Caterpillar wheel-loaders, a type of tractor that is made in China for a domestic market. Of the company’s 6,200 employees in China, only about 100 are expatriates, Mr. Oberhelman said, including managers brought in from other Asian countries. “We’re pretty Chinese,” he said.

Based on these and other directions that the market is taking, I would expect a global construction equipment maker to pursue some mix of the following three approaches in the effort to go head-to-head with the locals.

Three Strategic Directions

First would be to sell second-hand, factory refurbished machines. As I noted, Caterpillar has made a huge businesses rebuilding and refurbishing construction equipment. China might be a good place to sell some of that gear, especially since I suspect there is plenty of it floating around in the depressed construction markets of the world.

Second would be to buy a local construction equipment manufacturer. That might be tough, though: China has proven itself rather touchy about selling off healthy companies, especially in this sector. As other companies have discovered, betting your future on a complex local acquisition often takes management attention away from other means of building business. But if the right opportunity comes along (an underperforming factory, for example) and the government gives a quiet nod, expect a bidding war.

Third – and I like this best – would be to launch an OEM line of construction equipment carrying a different brand, using local designs but with inspectors and other “soft inputs” from the international company. It would not be necessary to own the factory, just to contract the production capacity. The separate brand creates the division between the quality standard of the core brand, while offering many of the advantages of working with the global brand. The company would offer that brand alongside its own in China and in export markets in the developing world, where Perkowski notes the Chinese manufacturers will be looking when it is time for them to export.

The Stakes

I am reflexively skeptical of any company who makes the case for doing business in China by saying that success elsewhere depends on success in China. That sort of thinking tends to lead to bad business decisions, like foregoing profits for market-share victory. If you are not planning on making money in a given market, you are effectively declaring it a money sewer, and down that path lies heartache.

But for the world’s leading construction equipment manufacturers, what is at stake is that in order to thrive on the development of the world’s emerging economies, those companies need to build large and profitable businesses in China serving the full range of customers. China is a must win, but the Big Iron merchants must win on China’s terms, not their own.

Freeing China’s Free Agents

New Business Elite in China

In the Hutong
Homemade buffalo wings
1809 hrs.

As with many memorable blog posts, Paul denlinger’s excellent article about China and its outdated version of capitalism holds a few hidden gems not to be overlooked. On second reading, this one popped out at me:

“Most of the reasons which [Ronald Harry] Coase outlined for the creation of the corporation in “The Nature of the Firm” no longer exist. Thanks to Google and other tools, small organizations can resolve all of these issues for almost no costs at all. Isn’t it time we start thinking and talking about deprecating large corporations?

Of course, many in the US and China would argue that only a very small and select minority would be able to work on different time zones and in remote locations with minimal supervision; I would beg to differ. For many service jobs where key personal relationships are not important, this will become the norm within 20 years. It’s just that the US and Chinese government haven’t figured it out yet.”

There are still many industries in which scale makes sense, perhaps not because large enterprises are the best loci of production, but because they are as yet unused to the challenges of integrating large-scale projects across multiple businesses. Boeing’s challenges with the 787 Dreamliner leap to mind.

But in his book Free Agent Nation, Daniel Pink made the case that for a growing number businesses, the traditional corporate structure had become a relic of the industrial revolution. Pink’s point was simply this: when the means of production for an industry can fit into a medium-sized backpack or a largish purse, the future belongs to the post-modern equivalent of the skilled craftsman.

Pink was writing about America, but Denlinger’s article poses a question: is China’s future, like America’s, more about forging coalitions of small firms – or even independent professionals – than the massive enterprises that currently dominate her landscape?

Much depends on a factor Pink identifies in the US: the need for an infrastructure to support such enterprises and individuals. Pink calls out several areas where America falls short in supporting free agents, and China has a long way to go.

As the nation begins to debate the issue of political reform, one of the matters on the agenda must be the final liberation of labor, the crafting of a legal and political infrastructure designed to empower not only small and medium businesses, but what Pink calls the “micro-enterprise.” This will be more difficult than it sounds in a nation whose very ideology is rooted in the industrial revolution.

The Real Question for China’s Construction Equipment Makers

Caterpillar HDR

In the Hutong
On a roll
1639 hrs.

In an excellent read in the Forbes ChinaTracker, Jack Perkowski lays out the dynamics of China’s booming construction equipment market. Jack points out, I think correctly, that bit by bit the construction equipment market in China will be taken over by Chinese companies.

I don’t think anyone (except, perhaps, the folks over at Caterpillar, Komatsu, et al.) would disagree. But there are two issues that face the industry that Jack alludes to but does not directly address.

First, China is in the midst of a construction boom, driven by ready bank lending on major projects, a rush of infrastructure development, speculation, and a relatively small number of reasonable investment alternatives for non-institutional investors. At some point, that boom must cease, and there will be a shakeout in the construction equipment industry. Which of the firms in the industry are best positioned to survive that shakeout should it come, say, tomorrow?

Second, when China ceases to be a growth market for construction equipment, which (if any) of China’s local companies will have established sufficient overseas sales and service networks to withstand the contraction at home? Which of the companies is building the skills necessary to operate in markets where Chinese is not the language of business and where deals are done differently? And what are Cat, Komatsu, and company doing in anticipation of Chinese competiton overseas?

The long-term survival and prosperity of these Chinese construction equipment firms is going to depend on answers to these questions, not whether they can win in China or not. And if you have any interest in whether China’s capital goods industries can compete overseas, this is a great sector to watch going forward.

Technology and China’s Offshore Farms

In the Hutong
Thinking “Tortillas”
1433 hrs.

Analysis of China’s resource dependence – a primary driver of the nation’s effort to extend its commercial ties overseas and to create an expeditionary People’s Liberation Army – tends to focus on mineral wealth. But in a superb analysis of China’s growing food imports, T. Marc Schober, who blogs at Farmland Forecast, calls to our attention how strategic commodities are now starting to include corn, soybeans, and even meat.

The article is a worthy read by itself, but the part that hooked me was this:

…China committed $5 billion for agricultural development in Africa in 2008. China is sending expatriate farmers to Africa to cultivate the land and export the grain directly back home to ensure a consistent supply of grains. According to the Chinese Ministry of Commerce, over one million Chinese are farming in Africa dispersed throughout 18 countries.

We could wax philosophical and talk about the growing importance of Chinese peasants as an export commodity, or about how Americans offshore manufacturing while Chinese offshore their farming, but we would be missing the point.

At some stage, the traditional labor-intensive agricultural practices that China has employed will not be adequate for its offshore farms. The need for more advanced farming methods and hardware designed to increase yields in water-constrained environments is going to grow. All of this is to suggest that China’s grain giants (like China Cereals and Oils Import and Export Corporation, COFCO, the Archer-Daniels Midland of China) or their contracted suppliers (also Chinese-owned) are likely to need to make major investments in agricultural technology in the coming five years.

Some of those investments will go to global leaders in green revolution technologies, like Israel’s Netafim, but in the long run China will need to develop its own AgTech giants, if for no other reason than a reluctance to spend billions on foreign-supplied tech that will just be put on a boat for Africa.

Just as we have watched alternative energy companies grow in China, I expect to see a wave of AgTech firms emerge in the coming decade, supplying not only local needs but also the growing demand from China’s offshore farms.

This all assumes not only growing demand in China, but also that China will be unable to fulfill its requirements more economically using standard imports. The pressure is on the commodity-producing nations to keep costs below China’s own offshore resources.

Beware of Dumb Investors

In the Hutong
Catching up
0916 hrs

Reading a thoughtful article a year after it was originally written might seem folly, but given that I am still running to catch up with my backlog means that I have no choice. And sometimes, that’s a good thing.

Perusing a Martin Wolf (no relation) column in the Financial Times from 8 March 2009 entitled “Seeds of it own destruction” is sobering. As the world’s stock markets were still in their half-year-long nosedive, he noted:

“The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it. As Mr Volcker remarked during a speech last April: ‘Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the marketplace.'”

It would be very easy for me to jump on the bandwagon of Main Streeters jumping all over Wall Street and scream for better regulation of the markets. While that may be part of the answer, the other part is an old adage my mom taught me when I first started following her at swap meets in Southern California as a kid:

Caveat emptor. Let the buyer beware.

The more you read through the details of the story of the crash, the more you realize that buyers, driven by greed, willingly bought financial instruments they didn’t understand on the basis the two factors you should never trust when purchasing a financial instrument: past performance and the assurance of salesmen of the security of the asset.

To be sure, there were other factors involved, but it is illustrative that the greatest assurance against having a bubble blow up in your face is a dose of clear-headed thinking.

Which brings us to China.

Chinese enterprises and individuals are being given opportunities to purchase financial instruments about which their only knowledge and understanding comes from the people who are selling said instruments to them. They are buying real estate with the absolute conviction that property prices only go up, they never go down. And they are doing all of this believing that if a crash happened, the government would step in and bail out individual investors.

The buyers are not aware, and this is an implicit danger the government is going to have to address in a broad, systematic manner in a way that doesn’t cause a run for the exits. So the question is, how do you inform a hundred million small investors without completely undermining confidence in the markets? Especially when there is no comparable, successful model that has ever been used elsewhere?

Or, believing that to be an insurmountable challenge, and recognizing the weaknesses underpinning China’s still-developing financial and property industries, do you not even open that can of worms, and instead choose to foot the bill when the air finally leaves the balloon?

This is important. Because if there is a single factor that is more worrisome about China’s economy than its real estate prices, it is the under-informed, over-trusting, investor living in a cloudcuckooland of moral hazard.

China’s Education and Great Wall Street

In the Hutong
Planning a Den Meeting
0834 hrs.

Superb article in The New York Times by Beijing’s own Didi Tatlow covering the issues she faces in putting her child into the Chinese educational system. It was fascinating to me as a parent, but what really grabbed me was this throwaway comment deep in the story from a friend who was commiserating with Didi about today’s Chinese school kids:

“Once, the nation’s elite wanted to be scientists and build their country. Today they want to be bankers, or stick with safe state jobs.

‘They don’t know what they want, but they hear bankers make the most money and everyone else is doing it, so that’s what they want to do,’ Hua said.”

China’s best and brightest don’t see a future in inventing or making things. They want to work for Goldman Sachs. Sounds familiar, doesn’t it? The story could just as well be quoting someone talking about undergraduates at any of America’s elite universities, as Don Peck does in the March issue of The Atlantic:

“…to an unprecedented degree, people who graduated from high school in the 2000s dislike the idea of work for work’s sake, and expect jobs and career to be tailored to their interests and lifestyle. Yet they also have much higher material expectations than previous generations, and believe financial success is extremely important. “There’s this idea that, ‘Yeah, I don’t want to work, but I’m still going to get all the stuff I want,’” Twenge told me.”

Two generations of young Chinese people have been told “to get rich is glorious,” they want to take the easiest route possible, and they see investment banking as that route.

China needs to cultivate a core of smart investment bankers to help the nation wisely invest its treasure, guide the consolidation of overbuilt industries, and extend its reach overseas. But does China want to become a nation led by its investment bankers in which the primary locus innovation is in arcane financial instruments? Or would the nation and its leaders prefer to be a global leader in science, in innovation, in solving the world’s problems and profiting richly therefrom?

If China starts siphoning its best minds into investment banking at the expense of other industries, teaching finance at the expense of creativity and innovation, the PRC may well follow America’s path into looming national insolvency.  To stop that, China’s youth need to be infused with a passion for not just doing well, but doing good.

No easy task.

China’s Auto Reform: One Foot on the Gas, One Foot on the Brake

In the Hutong

Good grief, March already?

2111 hrs.


The Associated Press is reporting that we can expect China to undertake a reform of its largely state-owned auto manufacturing sector. The plan apparently calls for China to winnow the number of domestic auto manufacturers from 14 down to 10.

No, Not THAT Big 10…

The AP report refers to a Chinese “Big 10” made up of a top tier of auto makers with the capacity to make 2 million vehicles or more (Shanghai Automotive Industry Corporation (SAIC), First Automobile Works (FAW), Dongfeng Motor, and Changan Motor) and a second tier of six manufacturers with capacity of around 1 million cars per year.

First, some perspective: a million cars a year is not small, but Ford and GM will probably make around 9 million vehicles apiece this year, so “Big 10” is still relative.

Second, in an environment where the auto business is so difficult that even Toyota is starting to sweat, one might ask whether China is being a tad cautious in reforming the auto business. It would seem a tad ambitious to envision a global market with sufficient room for ten Chinese car brands.

In truth, China is being cautious about consolidating the country’s auto business, and for good reasons.

Slow and Steady

The first and most important is the geographic dispersion of China’s car makers, and the political challenges that implies. Unlike the U.S. car industry, which was traditionally concentrated in the state of Michigan, China’s automakers are scattered around China.

Closing one – even if it is just eliminating the brand and keeping the factory – means favoring one region over another, and that is sensitive in an economy so careful with its local companies that domestic protectionism remains a major challenge to the country’s development.

Edmunds Inside Line notes that if local governments want they can derail the process. Even if they do, that derailment won’t be permanent – the central government will get its way, but the question will be the cost: each closure is going to demand negotiation and horse-trading among the governments, meaning more costs and delays.

Second, China does not want to undertake consolidation at the expense of market share. Foreign makes still take up over 60% of local vehicle sales by volume, and closing down too many local companies too fast will mean that foreign marks will gain ground. Given China’s stated intention to create global auto marques of its own (rather than just being the factory for European, Japanese, Korean, and American brands.) Given that the ability of the remaining 10 automakers to increase capacity is limited, best to go slow.

Third, all of the industrial policy in the world does not make up for solid market performance. It is still too early to tell which automakers will be able to make the difficult shift into international markets and then be able to build that into global leadership. Picking candidates, not winners, is the wise approach now.

Upshift

Finally, there are the intertwined issues of technology and the environment. And for us here in the Hutong, this is a big one.

In the coming decade, China’s auto industry is going to have to shift away from petroleum-fired internal combustion engines to something else: The country’s air quality will not be able to take hundreds of millions of cars running on unleaded; simply fueling those cars would put China into a geopolitical face-off with the U.S. and Europe; and the global car manufacturers who remain after the global downturn will be producing their own low-emission or zero-emission vehicles in China.

That shift is going to mean investments so large in technologies so complex that it may force a rethinking of the entire automobile industry. The logic of a single vertically-integrated manufacturer starting with steel, plastic, and rubber and churning out cars may not hold is the industry makes its leap.

As such some companies in China’s auto industry may well elect to specialize either in assembly or components, opening the door for one or more of the current players to ease their way out of making cars and into supplying China’s remaining brands with motors, batteries, fuel cells, bodies, or other major components.

If that happens – and I suspect that at least in the case of second-tier brands it might – it makes more sense to allow that specialization to evolve and chivvying it with the visible hand of government, rather than making those choices now. The coming years, in fact, are likely to involve the government making the case to some manufacturers move to making parts and components.

Taking a “slow-cull” approach to reforming the industry is the wise approach for China’s policy makers. The nation’s auto industry will be reformed in stages rather than with the single stroke of a pen, and the speed of those reforms will depend not only on market growth and global finance, but on the demonstrated ability of China’s automakers to withstand the successive waves of change they will face in the coming years.

Funny, I Thought It Was a New Kind of Herb…

In the Hutong

One month to go

2039 hrs.

There are a lot of terms people use that they do not really understand, and I am as guilty of that as anyone out there. I didn’t understand “soft power” until I read Joseph Nye’s book. I had no clue about social networking until I actually started doing it.

And even though I deal very rarely with finance, there have been two occasions when I’ve used the phrase “Basel II requirements” in a conversation about Chinese banking when I realized I only understood a single specific piece (the minimum capital requirement) of the global standards by which banks are increasingly judged. I kept smiling, but I broke into a cold sweat.

You know that feeling, right? That feeling like you are walking happily across a frozen lake, and then you wake from your reverie to realize that you are on thin ice, that you have walked the conversation right up to – and sometimes beyond – your real level of knowledge. And you are about to be exposed for the pretentious idiot that you are for having had the conversation in the first place.

Okay, well, maybe you don’t. But I’ve felt it, and I hate it. Once my internal baloney alarm kicks in, there are only two solutions: never, ever, go there again; or set about learning more.

So I went hunting, and I found this juicy little pdf at the Bank for International Settlements website – the full text of Basel II: International Convergence of Capital Measurement and Capital Standards Revised Framework – Comprehensive Version. At 347 pages of dry text, it was probably more than I needed, but being the finance tyro that I am I kind of get a kick out of reading it. I feel like I’m a fly on the wall at a meeting of central bankers. The wikipedia entry was a little too light on detail anyway.

Figuring Out Sustainable Development

In the Hutong
Waiting for the rain
1212 hrs.

The phrase “sustainable development” has become a buzzword, which means that a lot of people are talking about it without being quite sure what it means.

That is starting to change. The prestigious Commission on Growth and Development (chaired by Stanford’s Michael Spence and including such luminaries as Governor Zhou Xiaochuan of the People’s Bank of China, Singapore’s Senior Minister Goh Chok Tong, former Mexican president Ernesto Zedillo, Citigroup chairman and former U.S. SecTreas Robert Rubin, and Nobel economics laureate Robert Solow,) last month released a report titled Strategies for Sustained Growth and Inclusive Development.

It’s fairly readable as these things go, but it points out very early on that there are no pat answers – only some lessons learned and a framework for asking the right questions. It is nice to see such a report deviate from the kind of preachy prescriptions we tend to hear from the IMF, World Bank, and other big international non-governmental organizations (BINGOs).

Download the PDF here.

Rule of Law is Only As Good as the Cops

In the Hutong
Listening to Harry Shearer
1756 hrs.

Using Chinese New Year to catch up with my reading, I came across this short jewel by Maureen Fan over at the Washington Post. Maureen reported on the current environmental protection plan.

The money quote comes from the plan itself:

“Laws and regulations are not respected. It’s very hard to punish those who violate the law and law enforcement is not strict enough.”

Spot on. And it’s nice to know that the government realizes it, too.

China has made immense progress over the past three decades in terms of putting Of course, it doesn’t take rocket science – only the experience of driving on China’s roads for more than about five minutes – to recognize that law in China is worthless without enforcers who can do their jobs without fear of reprisals from above.

(One guy here in the Hutong cracked recently that Beijing could probably pay for the Olympics with traffic citation revenues if they’d let slip 40 or so California Highway Patrol cars and officers on Beijing’s streets for a year. My back-of-napkin calculations figure he’s off by a few zeros, but his point is well-taken. I figure an honest, intrepid cop willing and able to pursue violators without fear of getting fired for doing so could probably deliver $360,000 – $500,000 per year in citations. That’s US$.)

Why is this important?

There are indications that some senior people in the Hu administration are pushing hard for better training and management of the nation’s law enforcement agencies. This group understands that there will be no “Harmonious Society” without entities that are empowered to enforce the laws on the books.

At some point in the next 18 months – though probably not during March’s First Plenary Session of the 11th National People’s Congress – we’re gong to start hearing more about law enforcement. Some of it will be cosmetic, but we will see the start of a clear movement to improving law enforcement at all levels, beginning with a few high-profile cases.

Whither to Stash the Great Haul of China?

Sunflower Tower, Beijing
Grokking wind chill
1320 hrs.

China has financed a huge part of the American consumer’s borrow-and-spend spree of the last two decades, to the point where the doomsayers are suggesting that the U.S. has in effect mortgaged its future – both economic and political – in return for a few shiny trinkets.

At the same time, of course, the Chinese look at the Blackstone fiasco and the sub-prime meltdown and wonder if they are the ones being played for suckers, watching their invested dollars disappear as the dollar plunges and the American financial system looks a lot less stable than it once did.

James Fallows, sophomore China-hand and probably one of the most astute observers of the American political system, has jumped on the issue in his piece in The Atlantic this month, “The $1.4 Trillion Question.” Well worth the read, it provides grist for anyone who wants to understand why (although not “how”) the nature of the Sino-American relationship must change (and soon) and what that is going to mean for American lifestyles and for the men responsible for a the world’s largest hoard of cash.

Here’s what gets me. Warren Buffett’s company Berkshire-Hathaway piles up $1 billion a month in excess cash, and Warren says he has problems figuring out where to effectively invest that. And he’s arguably the smartest guy in the game. The people at China Investment Corporation have a US$1.4 trillion pile of money that is growing at an estimated $1 billion a day.

Fallows makes the point that China’s well educated, brilliant, and determined financial leaders want very much to do a great job with this cash. What is clear to us here in the Hutong is that they are going to be writing an entirely new chapter in the history of investing as they attempt to do so.

Confucian Schools and the Quest for Values

Starbucks Guomao 2
Turn the Music Down
1121 hrs.

Maureen Fan from the Post did a profile of Luo Yu, a Chinese entrepreneur who has set aside his businesses and is focusing on running courses designed to instill traditional Chinese values into the children of China’s newly-prosperous entrepreneurs.

We are going to see more of this kind of thing in the coming years. The Chinese people have had their moral codes stripped from them twice in the past century – once when Confucianism was tossed out the door in 1949, and then again when Maoism gradually fell out of favor in the wake of the Cultural Revolution.

What this has left the Chinese people is a moral code based on two of Deng Xiaoping’s most famous utterances:

1. To get rich is glorious.

2. It doesn’t matter if the cat is black or white, as long as it catches mice.

In other words, do whatever it takes to get rich.

Even a hardcore secular humanist should agree that this is a horribly inadequate moral and ethical basis on which to build a “harmonious society.”

I suspect many parents will head in the direction of neo-Confucian schools like Mr. Luo’s, and still others will turn to Buddhism and even Christianity, and that the government will be happily complicit in this process. It may not be politically correct for a senior member of the Communist Party to say that China’s people need to have a spiritual aspect to their lives, but you can bet they’re thinking it.

Something else we can look forward to: a growing national debate on what constitutes “Chinese Values,” and an effort to create a secular cannon of Chinese morality cobbled from Confucianism, Daoism, and the more enlightened aspects of Chinese revolutionary thought (from Sun Yat-Sen through Jiang Zemin.)

Causal Marketing

In the Hutong
Would you like fries with that humbuger?
1704 hrs.

I regularly get questions from companies, practitioners, and NGOs about best practices for corporate social responsibility in China, mostly because it’s an area about which I harbor some fairly strong opinions.

One of my biggest is peeves is this: there is a thin but important line between true corporate social responsibility and community relations tied to marketing goals. There is nothing wrong with either CSR or what is known as “cause marketing;” the problem comes when the thin line disappears, and a company will try to categorize the latter as the former.

Self-serving behavior like that tends to ruin a company’s credibility, and to add to the dormant cynicism the general public maintains about the very idea of a company doing anything socially responsible.

That said, I’m a big fan of cause marketing when appropriately labeled, and I think companies in China (both foreign and local) do far too little of it. Given the decline in the effectiveness of TV advertising, I suspect both marketers and agencies are going to do a lot more of it.

What companies should be doing is defining CSR and cause marketing very clearly clearly and handling them separately.

Jeremy Nedelka at 1:1 Magazine (registration required) did an excellent cause marketing case study, including five rules for successful cause marketing according to David Hessekiel at the Cause Marketing Forum. The two articles are a good introduction to the topic.

What I love about the five rules is that all of them apply in China:

1. Set goals, knowing what you want to achieve going in;

2. Commit resources, because good intentions are no substitute for planning, budgets, and implementation;

3. Find a cause that has a clear, intuitive link to your core business or competency;

4. Search for models in what other companies have done before;

5. Expect results because solid cause marketing builds an emotional tie between customers

I have a few to add, though, because of a few issues I have seen crop up here in the PRC:

6. Cause marketing is no substitute for CSR. You need to do both. Make sure they are handled by separate teams and have clearly defined (and different) goals.

7. Don’t be a cause-a-week company. Stick to one cause for a full marketing cycle of 12-18 months at least, and longer if possible.

8. Find a cause that is meaningful to people in China, not just to your CEO.

9. Cause marketing in China is virgin territory, so don’t restrict yourself to what other companies in China have done.

10. Olympic sponsorships are not a great example of cause marketing, unless they are executed with a particular challenge in mind.

11. When your relationship with a cause wraps up, leave everyone smiling.

Shave a little of that TV budget, guys, and put it toward cause marketing. CCTV won’t miss it, and you could put it to far better use than paying for fancy office towers for public broadcasters.

The Big Easy and Government Farkage

Starbucks China World 1
Just anotha Maniq Mundeh
1115 hrs.

Doing research for my book on innovation in China has really underscored what I call The Government Farkage Factor, or the extent to which government funding, direction, or primary role in any sizable development project is almost an a priori guarantee of graft, wastage, and failure. While I am no longer convinced that the private sector has an answer for every major problem, it is pretty clear that most serious development challenges demand an intelligent response from a balance of government, commercial, and non-governmental entities.

The New Orleans Example

The city of New Orleans continues in its role as the worlds preeminent development petri-dish because it is one of those places where all of the other factors have been eliminated and we can watch the various forces contend with each other in an effort to revive an entire political/economic entity. While most coverage has concentrated on the failures of various levels of government (municipal, parish, state, and national) first prepare for disaster, then to clean, repair, revitalize and fortify New Orleans in its wake, several reports have surfaced in the last month that point to the much-ignored but all critical role of other players in what is, basically, a problem of development.

The first I heard was a report on PBS’s excellent NewsHour with Jim Lehrer about people who have moved to New Orleans on their own for whatever reason to start a new life. They’re called “pioneers.”

Second, while catching up on my NPR podcasts, this excellent report by Eve Abrams covers the beginnings of an effort of New Orleans residents to take on recovery tasks on their own.

The third was a speech at the University of Chicago Graduate School of Business by Jack McGuire, CEO of the American Red Cross, who talked with the frankness of a former corporate CEO of the ability of NGOs to respond to challenges more effectively than government. McGuire basically had to rapidly expand the Red Cross to help catch the ball fumbled so badly by the government. It wasn’t pretty, but they did it.

Finally, there is an excellent article in BusinessWeek by John Tozzi who talks about the role entrepreneurs are playing to get the city back up on its feet again.

Takeaways

There are entire syllabi of lessons to be learned from New Orleans, but my take away vis-a-vis China is that it is not only more evidence of the very real limits of government in development, it is also (and more importantly) a lesson in the very wide range of forces that have to come into a situation – often of their own volition – in order to make it better.