OK … we are on to Part 3 of our interview with the newest addition to the Technomic Asia team, Kim Woodard.  In this section, we get down into the nitty-gritty of doing deals in China.  Enjoy!

The shining star of original content in the China blog-world, in my mind, is the China Law Blog … so when they highlighted our little China Business Blog and Podcast as one of their favorite China blogs, we got all goose-bumply and our ears turned pink.  The CLB (as we cool kids like to call it) is on the cutting edge of original content for China blogging.  Dan Harris knows far too much about China for someone who has not lived here all of his life and Steve Dickinson – who HAS lived here nearly all of his life – has this weird, kinetic, “I see dead people” sort of insight into the goings-on in China.  And they are both great guys to have a beer with so you get kind of a double bonus out of the deal (though, oddly, Dickinson always seems to have to use the restroom just before the check comes).  Thanks, guys … we are truly humbled by the honor and will endeavor to live up to the high praise.

OK … enough of the mutual admiration society … back to work everyone!!

Maybe I am being unfairly smarmy, but smarmy is sometimes the only club I have in my bag.  However, there is a potential flaw here in that, in the interest of coming up with the Index That Explains All, we are missing a TON of subtlety.  And trust me, I do the same thing … it is very human to want to find a Unified Theory.  Oh … and I am usually not very subtle.

But I think there are a couple of things we should be thinking of here …

First of all, a single manufacturing index is potentially misleading because there is not a single manufacturing environment in the world.  Sure, saying that “in general” Mexico is cheaper than China is OK, but you start breaking this down by manufacturing sector and you’d start to see a lot of differences.  The article says that Mexico makes a lot of sense for things like automotive components being shipped to the U.S. … well, auto manufacturing in the U.S. just got the rug pulled out from under them and they DRASTICALLY cut all sourcing.  And it would make sense that the first cut sourcing from China because, for landed cost to the U.S., it is not as competitive.  Look at individual sectors: alternative energy; wafer fabrication; food and beverage.  We might find the same thing but we might not.

Secondly, the business press tends to gloss over a key point of international business by focusing on EITHER cost savings OR growth, but never in combination.  The simple fact remains that, while China might be getting more expensive on a bill of material line-item basis, the pull of its growing markets is enough for companies to ignore one-sided thinking about costs and, instead, consider their entire businesses.  If I am an auto parts manufacturer and am thinking about the sales from a factory, I am going to look at my global sales opportunities … and if I am located in China where the auto market is still growing at double digits, I might be willing to trade a few points of manufacturing cost over a plant in Mexico where the markets in their sphere are receding faster than my hairline.  As we’ve said before in these pages, cost cutting will only get you to business heaven … all companies need to find a way to GROW!  And China is leading on the growth index in almost every sector, far greater than anything in North America.  I’d rather see an index on manufacturing costs to products shipped to China … this is where the growth is and where our eyes should be also.

Third, I don’t think we should be looking at this as a competition, a horse-race between nations where we identify winners and runners-up.  Some very grave errors have been made over the last 30 years by companies swinging on the Manufacturing Pendulum — first we move everything to Taiwan (and close down the U.S.), then we move it to China (and close down Taiwan) and finally back to Mexico (where we close down everything else and start all over again).  A mature global business thinks in terms of “and”, not “or”.  We should ALWAYS be thinking “China and Mexico” (and Poland and Russia and Brazil and…).

Fourth, I am very hesitant to base any view of global business on a survey done this year.  We are in the Twilight Zone in terms of our understanding of the puts and takes of the global economy … the floor has dropped out and we are suspended in mid-air, Wiley Coyote-like with an “Acme” anvil in our hands an a panicked look on our face.  Any survey of ANYTHING this year should have a big ‘ol asterisk on it making a disclaimer that the results may not have any relationship to a future reality.  Based on points 1-3 noted above, I think we are going to be seeing a lot of changes in these numbers in the very near future.

In no way do I want to minimize the findings here … it is very true that manufacturing costs have been on the rise in China for a number of years.  It is a fact of life.  But as those costs have risen, the world in and around China has changed drastically and companies should not only look at raw manufacturing costs to plan their global strategies.  First ask the question “How can we grow?” and then (and only then) decide where to put your operations.

We are in the middle of a Podcast interview with Dr. Kim Woodard, the newest addition to the Technomic Asia team here in Shanghai.  Kim’s background includes setting up A.T. Kearney in the early days of China business and running his own boutique M&A consulting firm.  We brought Kim into Technomic to fill out our ability to provide end-to-end services for our clients doing deals in China.  While we saw a bit slow-down in 2009 for M&A in China (and, in fact, around the world), we see that things are really going to pick up in 2010 as companies are looking for aggressive growth opportunities.

In this Podcast, I talk with Kim about the practical do’s and don’ts of doing deals in China …

Unless you have been living in a hole or the dark side of the moon for the past year, your life has somehow been impacted by the global economic slowdown.  You, a friend or a family member have lost a job; your municipal budgets are being cut; heck, your OWN budget is being slashed.  It has not been a fun year, even here in China where things are still moving along at a pretty good clip.

Though there are signs that things are getting better, I am not convinced we are totally out of the woods yet.  But just because we have no guarantee of where things might be going, that doesn’t mean we can crawl back into our hole or retreat to the backside of the moon … no, we need to keep moving forward.

And at Technomic Asia, that is exactly what we are doing.  For many years, our consulting practice has been involved with foreign companies doing all kinds of alliances in China: from joint ventures to licensing to distribution to acquisitions, we have helped our clients put their alliance strategy together and then execute it.  Up until about a year ago, we had been seeing a real upturn in acquisitions in China: the government rules for acquiring companies were loosening up and foreign companies were looking to China for new growth opportunities.  Then the bottom fell out of the economy and companies put all that activity on hold.

However, as things settle around the globe, multinational companies are looking for ways to grow and China seems a very good place to look for that growth.  And one of the methods they are returning to is growth through acquisition.

To capture this wave, we have brought in a new team member to Technomic Asia: Dr. Kim Woodard.  Kim has had over 30 years of experience in China, first coming here in the 70s in the earliest stages of China’s opening to the West following Nixon’s “Ping Pong Diplomacy”.  Armed with a Ph.D. from Stanford, Kim was soon a respected leader of foreign companies’ earliest advances into China.  Kim helped establish A.T. Kearney’s China practice and then went on to help big names such as John Deere and AMP establish their China operations.

Most recently, Kim had his own firm, Javelin Investments, to assist Western multinationals with acquisitions in China.  We wanted to bring Kim in to Technomic Asia to give us the ability to provide a complete M&A advisory practice – from initial strategy development all the way through to negotiation, closing and integration.

Given the returning importance of M&A in China, I wanted to have a series of conversations with Kim about M&A and, in his experience, what makes for a successful acquisition in China.  Attached is the first in a series that we will roll out in the coming weeks.  I hope you enjoy it!

I woke up this morning with two words running through my head: “Reality TV”.  Kind of a scary thought, huh?  But what got me thinking about Reality TV is not the content, per se, but the business model: find a bunch of people, average schlubs, and film them acting as such; edit the content to highlight the schlub-iest moments and then put it on prime time television. Violà… instant ratings. Like all great ideas, I am kicking myself that I did not think of it first. Why, you might ask, should I consider myself so forward-looking as to think I should/could come up with that idea? Well, because what they call “Reality Television” I call “the average day in China.”

China is a country of “watchers”: people sitting around and simply studying other people being…well…people!?! One of the things that foreigners have to get used to here is what we would call “staring” … many here would call, simply, “observing the behavior of those around them.”  I suppose that makes sense … there are so many people there that free content is always available.  Several decades ago, just being a foreigner in China attracted attention. Go to the market, let a couple of Chinese words slip out of your mouth and you gained such a crowd on interested onlookers that you could put up a tent and charge admission.

Now, certainly, things have changed over the years.  But many years ago, I was a spectacle, even in a big city like Shanghai where foreigners were not very common.  I once asked a Chinese friend why everyone stared at me and he said, “Well, for thousands of years, all we’ve had to look at is other people who look like us … you are REALLY different, so we want to have a look!”  That was tough to argue with, I must admit.

So I have spent countless hours entertaining local residents here over the years. I should have had an agent negotiate a contract for me, thusly: “Mr. Kedl is willing to shop for vegetables every Tuesday and Thursday and to mispronounce a minimum of 17 Chinese words while doing so. The neighborhood will provide no less than 83 gawkers, at least 11 of whom will attempt to help Mr. Kedl negotiate the transaction and another 6 will comment on the proceedings. Mr. Kedl will receive 10% of the front end and two points on the gross plus all residuals on local TV news footage.”

Not much has changed over the years in terms of the spectacle I create when shopping. The modern hypermarket has made for some great leaps in shopping convenience: too many choices are jammed into too little space at too high prices and NO room to negotiate. The beauty about shopping in China is that total strangers will feel very free to look into your cart and check out what you are buying. Many of them will feel even freer to comment on your purchases, particularly if they don’t think you can speak Chinese: “Hmmm….look at that foreigner…what in the world would he need with a toaster oven, a pile of hangers and three apples?? And he should get himself a real nose instead of that two-car garage he has holding up his glasses now!”

I was at my local hypermarket recently when one elderly lady tried to convince me – in animated sign language reminiscent of Helen Keller doing liturgical dance – that the milk I was purchasing was NOT the right milk and that, if I bought the one she was buying, I could get 2-for-1. I explained to her that my kids preferred this type of milk, but thanks for the advice. She walked away a bit confused, mumbling to her shopping companion “Why in the world wouldn’t he by the cheapest kind…and it almost sounded like he spoke Chinese!!”

But having a foreigner as the center of attraction is not necessary. Almost any activity on the street will garner attention from passers-by. The other day a motorcycle cop stopped a guy on a bicycle carrying a load (looked like three sofas and a cage of ducks). The cop dismounted his bike, sauntered over, Ponch-style, to the offending cyclist and stared at him. Immediately, a gaggle of pedestrians gathered around the two of them to see what would happen next. Not able to resist peer pressure, I joined the throng (it felt good to be the gawker as opposed to the gawkee). And you know what happened? The biker got a ticket.

The crowd went away happy, but I was left unfulfilled. No fight broke out. No blood was spilled. No threat levels went to Orange. A TV news anchor didn’t show up with his helmet of hair and don’t-believe-me-at-your-peril voice to intone, over a dramatic graphic sequence, What It All Means and Why You Should Be Very, Very Afraid. The dude just…got a ticket.

The West is trying to convince China that they need to change, to upgrade themselves to the “modern world”. Personally, I think China is doing OK, for the most part. However, if I were to be honest, I think China could add a bit more excitement to what is, essentially, a reality show here.  I mean, if all of life is open for others to sit around and stare at, you should really go for it …you know, punch it up a bit, get better ratings and maybe raise ad rates. Cops shouldn’t just give someone a ticket: apply a little OJ and first have a slow-motion chase through downtown (actually, it would be slow-motion here in Shanghai because you’d never get over crawling speed through the traffic). An overloaded vehicle tips on the highway? Splash around some fake blood and have five people go at it, Jerry Springer style. Over-crowding on the subways could be solved if we could all vote someone off every stop (my choice would be the guy with the scary comb-over taking up two seats) or the guy who keeps losing his mobile phone signal and keeps shouting “Wei?  Wei?” into his dead phone.

But I think the ultimate Reality Show here would be to demonstrate just how helpless some foreigners are here.  We could put a collection of them in a row house off Chang Le Lu, give them only CCTV, no access to DVDs or any restaurant that ends in “on the Bund”, take away their Ayis, drivers and secretaries and see who lasts the longest. Guaranteed to make Survivor look like summer camp for sissies.

Last week I posted the first part of an interview with Sayed Jafry of ThermoFisher where we discussed their decision to located the global headquarters for their environmental division in China.  Even though China is not currently a big part of their business, ThermoFisher management thinks that this will change and Asia – particularly China – will figure heavily into their business.  In Part 2 of my interview, we talk about the challenges in making China a global headquarters and how that is signaling some important changes in this market.

Those of you who are long-time listeners to the China Business Podcast have heard us talk, endlessly, about ways that companies need to be looking at the potential opportunities in China, not just the actual ones … to look not only at the present, but the future of China.

I loved to play and watch hockey when I was a kid, and nothing was more thrilling than to see the great Wayne Gretzky play … it was magical, how he would always be in the right place at the right time.  Someone once asked him why he was such a good hockey player and he said, “because I skated to where the puck was going to be.”

And that’s the challenge, isn’t it … to start working in China today based on where it is going to be in the future.  In today’s Podcast, we have a very special treat … we are going to talk with someone who is actually putting this adage into practice.  Syed Jafry is the President of the Global Environmental Division for ThermoFisher Scientific, a very diverse, publicly traded company.  Syed and ThermoFisher are on, what I believe, is the cutting edge of global business and we sat and had a conversation in his Shanghai office on a rainy morning just before the National Day holiday.

My mother told me that its not polite to say “I told you so”, but I can’t help it.  From the start of the global economic crisis last year, we’ve been blogging and Podcasting like maniacs saying, “Yea … I know it is rough out there.  But China could be a shining light at the end of the tunnel for companies going through the rough stuff.  If the rest of your world is crumbling, now might be the time to really look at China.”

And now, no less an august body than the U.S.-China Business Council is saying just this.  In their recent survey, released on October 7^th and highlighted in this article from Industry Week, they say, and I quote, “Most U.S. companies doing business in China are profitable and many want to step up investments despite fears on the economy, protectionism and intellectual property rights.”

Yep, I told you so.

The USCBC survey is quite revealing.  51% of the 100 respondents projected that their revenues in China will grow in 2009, and 84% said their China operations remain profitable.  How many of you can say that about your U.S. operations?

A year ago, when the nasty stuff hit the fan, the one question we asked was “Where are you going to look for growth?”  We received a number of comments using words that my mother would never approve of … but all of them were along the lines of, “Are you nuts???  Growth?? Who can look for growth?  We are only interested in survival at this point!”  Yea, I get it … when you are shedding employees and operations faster than an Eskimo stripping on a Miami beach, its tough – maybe even unnatural – to ask about growth opportunities.  But that’s what separates the men from the goats, isn’t it … asking questions and using different words from what your competition is asking.  They say “tomato”, you say “kumquat”.

So I am going to go out on a limb here and repeat what I said a year ago … in 2010, companies should be looking to China for new growth opportunities.  I’m talking blue ocean, limited competition, boldly-going-where-no-person-has-gone-before stuff.  Seriously, most market sectors are still doing double-digit growth in China, more than the existing suppliers can supply.

Yes, the signs in the U.S. and Europe seem better … capital markets are improving a bit, money is starting to flow and buyers are starting to buy.  But recovery is going to be slow … slow like glacial slow … slow like the speed of mammal evolution slow.  Dollars to donuts, you are not going to be able to sustain your company waiting for your domestic markets to come back.  China could be part of your answer.

Now I know my smarmy tone is probably not appropriate … going after China is NOT easy.  We’ve never said it was … in fact, this blog and Podcast is dedicated to exploring just what a royal pain in the backside China is to succeed in.  But the difficulty of success here should not be confused with the importance of the pursuit.

Everyone is deep into planning for 2010 so you are setting priorities and budgets.  If China is not among your top priorities, then it probably should be.  Almost 90% of USCBC’s members surveyed indicated that China remains the top or among the top five priorities for their global investment plans.  Is it yours?

Now, my momma done raised me right.  I try to keep my elbows off the table when I eat, say “excuse me” when I sneeze and open doors for people when I can.  Mom also told me its not right to say “I told you so.”  So do it right this year … listen to what everyone is saying and get things in gear for China.  Get your team together Monday and ask yourself a simple question: “What are we going to do in 2010 to grow in China?”  Don’t make me have to say “I told you so” again next year.  I am already in enough hot water with Mom over missing holidays, birthdays and not writing as often as I should … and I don’t want to make it worse.

However, even if the task for “universal coverage” seems more daunting in China than the U.S., I wouldn’t bet against China to actually get there before the U.S. does.  Why?  Simply put, the Chinese government is starting to see that universal healthcare is a responsibility of the government to provide to all its citizens.  In other words, China seems to be looking at healthcare first as a right, and then as a business  This means that, while companies are invited to participate in healthcare and private companies can expect to make a profit, at the end of the day, healthcare is a right and it is a moral responsibility of the government to provide it, at the expense of business, if necessary.

Don’t get me wrong … the Chinese government is being pretty self-serving in considering healthcare as a right.  They know that, in order to maintain the support of the people, they need to provide for their basic needs.  The Party and the government (one in the same in China) knows that healthcare is an issue of national security, not just the health of its people.

But the U.S. is different.  Healthcare is not a right in the U.S., it is a “benefit” that only the employed (most of them) receive from their employer and many (but not all) elderly receive from the government.  If it were assumed to be a right – as it is in most of the rest of the developed world and much of the developing world (like China) – I think we would have a VERY different discussion on our hands.

In the past couple of Podcasts, we’ve been talking about healthcare in China and, specifically, about the potential opportunities that this might represent for foreign companies doing business in China. The rallying cry here in China these days comes under the heading of “yi1 gai3”, literally “healthcare reform” … and if you think that Mr. Obama is staking his future presidency on healthcare reform in the U.S., the pressure on the Chinese government is 10 times worse. China suffers from similar issues – a large number of its citizens not covered (or under-covered) by the existing insurance options. But when we say “large”, we need to be very careful what we mean here … because “large” in China means something like over a billion people with inadequate coverage.

Remember from our previous Podcasts, that this is a population that is rapidly aging – by 2020, there will be 181 million people aged 65+ in China, more than the entire population of Russia, and those 181 million elderly people will be 25% of the world’s total elderly. Remember, too, that the responsibility of supporting these elderly is falling on the shoulders of China’s vast only-child children, those born starting in the early 1970s when China stepped up their population control enforcement.

Of course, what actually will happen in China’s healthcare reform is anyone’s guess right now and I cannot claim to have unique insight … China’s healthcare reform leaders are following Deng Xio-ping’s dictum in the early 80s that China’s developing would be, what he called, “Mo shi tou guo he” … crossing the river by feeling for stones. We’ve already talked about one of those “stones”, the infrastructural changes that China needs to make, upgrading their hospitals and equipment, starting with the mid- and lower tier hospitals. This will certainly be happening, and in a big way. But there are three other “stones” that seem to be most prominent right now: insurance, doctor training and healthcare regulation and monitoring. Let’s look at each of these in order:

Insurance
For most people – including yours truly – discussing health insurance is a sure cure for insomnia! But in China, there are actually some very interesting socio-economic issues tied with health insurance. In China today, over half of people’s healthcare costs come out of their own pocket while only about 18% comes from government-sponsored insurance. The exact opposite is happening in the U.S. where the vast majority of healthcare expenses are born by government or employer-sponsored insurance programs and, though it sometimes seems like a lot, a smaller portion of the average American’s paycheck goes to pay for their own healthcare. In China, about 9% of a person’s disposable income is spent on healthcare … and that figure will nearly double to over 16% by the year 2025. China has a HUGE problem on its hands right now!

One of the biggest challenges we have in getting foreigners to understand the China healthcare system is to get them to realize just how little insurance matters in China … seriously, for most of China’s citizens, insurance picks up such a small portion of the total healthcare tab that people will rarely think about it. I was on a panel a couple of months ago, speaking to a group of doctors and healthcare professionals visiting from the U.S. I was the only foreigner on the panel … kind of the token white guy! For the first half hour, the visitors pelted us with questions about the insurance system in China … how much did it cover, what drugs and devices were covered, how was it paid for, etc. We tried to politely answer their questions but my fellow panelists were getting frustrated … they were wondering why these people were asking questions about something that didn’t really matter here. Finally, I spoke up and said, “Listen, I guess what we are trying to tell you is that insurance doesn’t matter AT ALL here! People don’t think about it much … they look at how much money they have in their pockets or bank account and make healthcare decisions on that basis. Get off the insurance stuff already!!” There was this shocked look among the visitors … then one of them said, “Wow … this place really IS different!!”

Yes, it is different … but the Chinese government’s goal is for it to change and change drastically. As we’ve discussed before, the relatively high savings rate in China (30-40% of total income, depending on where you live) can be attributed, in part, to people’s concerns about the future healthcare costs for themselves and their parents. Beijing has to find a way to crow-bar open people’s wallets and encouraging local consumption (and not rely so heavily on exports) so fixing health insurance is a HUGE requirement for them. So a key goal of China’s medical reform is the elusive phrase “universal coverage” … that every one of China’s 1.3 billion (and growing) population is covered under a health insurance plan. And as the United States is finding out, the devil is in the details of defining what “coverage” means and how far do you need to go to get to “universal”.

There is a plan in China to have several different kinds of insurance but divided, generally, into two types: insurance for urban residents and insurance for those living in the smaller towns, villages and countryside. Let’s start with urban residents, currently the only population with any kind of meaningful insurance (and even then only about 15% of them are covered). The government’s goal is, by the end of 2010, to have 100% of urban residents covered by what they are calling the Urban Employee Basic Medical Insurance. The details, of course, are still being worked out on this, but the goal seems to be to have it be funded by both the employer and the employee with co-pays up to 30% and a deductible of up to 2,000 RMB (about $300). Right now, they are saying that the maximum annual payout would be 4 times a person’s annual wage … but this could just be marketing at this point. There is talk, too, of an insurance program to cover those urban residents who are unemployed … and that would have a maximum out-of-pocket payout of about 35% of total costs. That is not much lower than it is now, but I suppose it is, as my grandfather used to say, better than a sharp stick in the eye (and, at least you can get some help paying for the medical care necessitated by the sharp stick in the eye and you know that can’t be cheap!)

The insurance plan envisioned for rural residents is a bit more basic but will be much more difficult to roll out. Right now, the average rural resident gets a medical reimbursement every year of about $20 … now, healthcare is certainly cheaper in China than it is in most other countries, but 20 bucks won’t get you very far, even here! The program for rural residents is much cheaper, per person, than is the urban plan, but there are more “persons” to cover in the rural area (remember that nearly 65% of China’s 1.3 billion people still live in the countryside). In the rural plan, there would be a 100 RMB premium with 80 RMB paid by the government. There would be a 60% co-pay with an RMB 500 deductible. The maximum payment under this plan would be 10,000 RMB per year, only about $1,500. Under normal circumstances, that would be OK … but in any kind of catastrophic or near-catastrophic situation, that would not be enough to get anyone through.

Again, there is a LOT of talk about this … in the media, among colleagues, etc. And this is completely anecdotal evidence, but I don’t see a lot of optimism from the average Chinese citizen that these programs will arrive on time and provide adequate coverage. There could be an opportunity here for private insurance and more of that is coming online (all the big international insurance companies are already here) but there is not a historical practice of buying health insurance. I think that people here will still be hedging against the future by saving money, not spending a lot on insurance. So right now, it seems that everyone is waiting around to see just what kind of insurance the government comes up with … and then everyone will decide if it means anything to them or not.

Medical Training
The second “stone” sticking up out of that raging river we are trying to cross is medical training. Right now in China, there really is no standard to practice medicine and you do not necessarily need a medical degree to practice medicine … in fact, 98% of medical professionals practicing in China today have a bachelor’s degree or less, and about 70% have the equivalent of a vocational college degree.

Now, this is a bit scary, but let’s put it in some context here … China’s medical training is NOT based on a “general medicine” approach is it is in the U.S. where all medical doctors – from surgeons to dentists to psychologists – go through a standard program of general medical training. Rather, nearly every one of China’s 1.6 million doctors is a specialist – in fact, only about 4% are considered general practitioners. Everyone else has some specialization … 18% do internal medicine, 12% are surgeons of one kind or another; 10% are obstetricians; 4% are pediatricians. So when I say that they have a “vocational degree” of some kind, it means that they study their particular vocation … like surgery … to the exclusion of all else.

This can make for some very good surgeons … if the problem presented to them fits the textbook case that they have previously studied. A son of a good friend of mine here fractured both bones in his forearm last year and they went to a local orthopedic surgeon who did the surgery and pinned the bones. They went back to the U.S. over the summer and had a surgeon look at it there and the U.S. surgeon was very impressed. He said that the Chinese surgeon had done the best job he had ever seen in this type of surgery.

However, rarely in a medical situation do problems present themselves textbook style. Right now, if you have a medical problem, you will go to the hospital, check in and tell them, generally, what is wrong with you. If you say that your stomach hurts, you might be sent to a gastro-intestinal specialist. But if you are found to actually have a nerve condition that presents itself with stomach problems, you will end up being in kind of a no-man’s land … once you enter the system along the “stomach” track, it is very difficult to get on to the “nervous system” track. In the Chinese medical system, there really aren’t anything like “case managers”, someone that will look after your overall health picture and coordinate the care you need with the best specialists to help you.

I do some work with a medical foundation here in China and we had a baby from a rural orphanage in for some heart surgery. She also had a swollen abdomen but the heart was the biggest problem … she went through surgery and came out of it OK. She spent time in the hospital and slowly recovered … but it still looked like she was hiding a basketball underneath her navel. One day, the heart surgeon came by to check on her and, after examining her, declared her fit to leave the hospital. One of our Western volunteers was there and said, “Hey, wait a minute … what about her belly??” The doctor said, “Oh, that’s not my area. You’ll have to talk to someone else about that.” He was not being mean … he was a very caring man and was a very good heart surgeon. But that is ALL that he did … he did heart surgery! He was not trained in anything else and certainly was not going to stick his neck out to go beyond his expertise.

Now, what I have been talking about is for hospitals in the urban areas … the rural areas of China are even more challenging. A 2001 study of about 800 village doctors in Western provinces found that 70 percent of them had no more than a high school education, and had received an average of only 20 months of medical training. In addition, our interviews with rural clinics show that over 60% of doctors and healthcare workers in have less than 5 years of experience … and only 2% nationwide have over 10 years of experience.

For a country that will soon be smack-dab in the middle of a HUGE, medically-fragile, elderly population, this is not the kind of situation you want to be in! Part of China’s investment in their healthcare future will require massive amounts of money spent on doctor and healthcare worker training. As far as I’ve been able to see from the current talk on healthcare reform, I don’t see anything committed to this effort … but there certainly should be!

Regulation
For those that have done any business in China, you know what China can do with a bureaucracy. Typically, Chinese government bureaucracy is mirrored at multiple levels … starting with national and moving down through provincial, county, city, district and neighborhood, there are branches of the same government entity. In healthcare regulation and monitoring in China, we see the same thing … but it becomes MUCH more complicated because there are often parallel and competing government entities vying for power. Look just at the national level and you find multiple regulatory bodies involved including:

• The Ministry of Health which oversees hospital management
• The State Food and Drug Administration which , similar to the FDA in the U.S., regulates anything related to food and pharmaceuticals, from production to distribution.
• The National Development and Reform Council (NDRC) which oversees much of healthcare pricing
• The China Insurance Regulatory Commission (CIRC) which, as its name so subtly suggests, regulates insurance, particular private insurance.
• Then there is the alphabet soup called the MoHRSS, the Ministry of Human Resource and Social Security who looks over the shoulder of the CIRC to regulate public insurance and the reimbursement list.
• Finally, there is the Ministry of Finance who is responsible to help fund this whole mess.

There is not one, overarching ministry in charge … a ringmaster, a quarterback, a dominatrix in a doctor’s outfit … use whatever metaphor floats your boat! So not only do we have a HUMONGOUS need for real, lasting healthcare reform in China, we have a bunch of ministries all lunging for the same levers to pull. My concern is, obviously, that we are going to see some real challenges ahead of us in the coming years.

Conclusion
So let’s bring this back home … what does it mean for us, the potential foreign investors in China’s healthcare system? I can see two areas of interest:

1. Foreign investors should be focusing on the mid- and lower-tiers of the healthcare system … to find a way to participate where the volume is and where the money is going to flow. I mentioned this in earlier Podcasts, but foreign investors – device companies, pharmaceuticals, drug delivery, etc. – should certainly try to play in the upper sectors, but should use that play to find a way to get into the lower ones. If you are a device company, find a partner to work with to bring your particular technology to the masses. Guaranteed, you are going to have to take some engineering OUT, reducing features and functions but also reducing costs. Then you’ll need to find a distribution channel that can get it to the hospitals and clinics purchasing this equipment. And they WILL be purchasing … again, the government is going to be dumping MASSIVE amounts of funds in these mid-tier healthcare outlets to upgrade their capabilities. Get in on the ground floor and you could be in for quite a ride. We are working with several medical device companies now on these strategies and the opportunities are HUGE!
2. The second area I am only going to mention in passing because I don’t really know exactly how to do it yet – and that is, find a way to participate in the actual DELIVERY of healthcare. Participate in private clinics, open medial labs, work at doctor training. The need is obvious and overwhelming … I am honestly just not sure how to turn it into a business yet. We are working on a couple of projects in the privatization of clinics and hospitals and are seeing some very exciting things … I just haven’t seen a business here yet. Its there, I can smell it … but I haven’t found it yet.

If you are working in some area of China healthcare, please share your story with us … send a comment along on our blog at www.technomicasia.com/blog. If you have a really good story, we’ll get you on the Podcast to share it. For those of us trying to cross that raging river by feeling for stones, it always helps to have others by you, to help guide and stabilize you (and, to extend the metaphor, to help haul you up when you fall flat on your can!).
Thanks for listening … in our last healthcare Podcast coming this fall, we’ll talk about pharmaceuticals in China and how the healthcare reform will impact this very critical area. Until then, remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

The story can be summed up in Friedman’s first paragraph: “I believe future historians may well conclude that the most important thing to happen in the last 18 months was that Red China decided to become Green China.”  While the juxtaposed color metaphors are cool, I think he might be reading too many of the government’s brochures!

Yes, China is starting in invest massive amounts of money into exploring green-tech initiatives, much of it coming from their economic stimulus plan.  However, China will have two ends of the spectrum … one VERY high-tech and “green” development and the other VERY old-school with polluting factories that will continue to dump junk into the environment for many decades to come.  China still generates 70-some percent of their energy through burning coal … I heard a statistic (but cannot support it) that China  brings on one new “clean” power plant a month (water, wind, nuclear) and yet a new coal-burning power plant still opens here EVERY WEEK.  This is the irony of China … kind of like the brand new airport built so far out of town that it is only reachable by dirt roads.

The air and water quality in China’s cities are still some of the worst in the world.  I was out in a Western city a few months ago and refused to eat any of the local seafood … I had seen the state of the fish ponds sitting right next to the chemical factories!  And just yesterday, there was a yellow haze in Shanghai that reminded me of a scene from Blade Runner.  New, high tech, green initiatives will certainly help China going forward, but there is a TON of damage already done to the environment here that is going to be difficult to help with the new magic.

Hopefully, the aggressive, growing edge of China’s green-tech developments will spur the U.S. and other Western countries into truly innovating, as did Sputnik.  China might be able to grow their leading edge, but it is going to leave the trailing edge even farther behind.

The scholar Confucius was an interesting guy … he was also a bit of a worry-wart. Certainly, there was a lot to be worried about … Kingdoms were fighting Kingdoms, people were starving, there was a general lack of education across the land. And the rulers hadn’t even gotten into building ridiculous architecture like the Great Wall. So ol’ Confucius was scratching his head for a solution but he was a pretty bright guy. Part of what he came up with revolved around names … he said, “You know, the problem is that a ruler is not acting like a ruler; a father is not acting like a father; a son is not acting like a son.” And like other famous people that need only one name – Madonna, Sting, Cher – he was also pretty good at marketing, or at least his students were. So in succeeding generations, there have been vast campaigns to get people to act in ways consistent with their names.

We Westerners, on the other hand, are not smart in this way. We tend to follow William Shakespeare who asked, “What’s in a name? A rose by any other name would smell as sweet”. But maybe he wasn’t so smart … after all, he had to keep his first name in his brand.

But I have been thinking a lot about names recently and how important they are here in China. Chinese names are beautiful, rich in symbolism and possess a sense of history that places the bearer securely within the culture. Finding an appropriate Chinese name for a foreigner is, perhaps, even more difficult than it is for the native-born. Many opt for the easy way out – simply translating the sound of their name into Chinese phonemes. Of course, that means the Chinese characters are devoid of meaning. Most foreigners don’t mind, but if you want to belong then you should find a “real” name.

So if you want to make sure you have a good Chinese name, you’ve got to approach the situation not unlike your China business strategy – you need to take some control and work with people you trust. My Chinese name was chosen many years ago by a committee formed by my closest Chinese friends. Their mission: to find a name that matched my personality. However, the most appropriate, “Donkey-Face-Monkey-Boy’”, does not translate well in Chinese so instead they chose 高 德凯 or Gao Dekai. Gao is a traditional family name, but it also means “tall” and therefore alludes to my height. De means “morality” and Kai, “victory”, which says something about my successful struggles with sin (or pokes fun at my many failures). In short, Gao Dekai is a nice, solid, very Chinese name.

I am never embarrassed when presenting my business card to Chinese people and they always comment on my name – “Oh … very nice name. Very strong!”

Every once in a while, my Chinese friends ask me to help choose an English name for themselves or even their first child. This makes me feel most uncomfortable. The responsibility is too great and a wrong choice can mark a person with bad karma for life. I have trouble choosing a necktie, never mind something as serious as a name.

I once knew a young man surnamed Zhou, who approached me one day and said: “Mr. Kent, I want you to help me pick an English name.”
“OK,” I said, my voice aquiver, “have you anything in mind?”
“Well, I like the name Satellite,” he said, with a proud grin.
“Um… ‘Satellite Zhou’? Are you sure about that?” I asked.
“Yes” he said. “Satellites are very modern and are very strong. And I want to be modern and strong. Besides, my best friend said it was a good name for me.”
“Who is your best friend?” I asked, fearing the answer.
“Oh,” he said, “his name is Auditorium Li.”

Which reminds me, in China, everything is possible but nothing is easy.

In a country this big there are plenty of sick people. Combine hundreds of millions of sick people, with less than 1,200 hospitals capable of providing comprehensive care, by that I mean best physicians, technicians, and staffing, which are called Grade 3 hosptials, and you have the world’s largest waiting room.

Allow me to describe this potential process. Man has pain in groin and suspects it’s a hernia. He travels a couple of hours to nearest Grade 3 hospital in Shanghai, primarily because he has little faith in a Grade 2 hospital nearby and there are no real places that a Westerner would recognize as a primary care clinic in China. He waits a day in Shanghai to see a physician, if he is lucky, who confirms his suspicions and recommends surgery. Unfortunately no beds are available which means waiting in a nearby hotel – that’s right, hotel stays and hernias go together here in China’s health care system, until a bed opens up.

Can you feel his pain? Yes I believe you can. My friends, pain like that can only produce opportunities for business here in China’s vast and emerging health care market. But where exactly do you say are those opportunities? Let’s start at a level down from that Grade 3 facility where the bulk of patients can be served.

We have seen most of the opportunity in the 6,500 Grade 2 hospitals across the country. That is where many of those people in waiting rooms in Grade 3 hospitals will find their cures by improving the quality of care at hospitals usually closer to their homes and with greater distribution across the country. After extensive research, we have found that this level of hospital will receive more government funds for improvement and greater flexibility to incorporate private sector principles in their operations.

The specific opportunity is for medical device and IT companies to provide equipment and software, for better trained physician groups to practice, and for investors to add to the infusion of Chinese investment in healthcare, nearly $125 billion government funds over the next 3 years. That’s an opportunity. The full transcript of this podcast which includes a greater description of the hospital structure in China is available here.

Shanghai – August 21, 2009 – Technomic Asia CEO, Steve Ganster, announced today that Dr. Kim Woodard will join the company as of September 1, 2009 and will help lead the company’s Asian M & A practice, focusing on developing a comprehensive deal execution capability. Technomic Asia is a wholly-owned subsidiary of Tompkins International, a leading business and supply chain consultancy, and has been assisting companies from around the world on their China and Asian business strategies.

“Kim’s extensive track record and on-the-ground experience in China and other Asian markets will significantly enhance our ability to serve our clients who are trying to profitably build their Asian businesses through acquisition”, stated Steve Ganster. “For the past decade, we’ve had a strong M&A strategy practice to find and cultivate deals; however, now we are seeing a growing demand to extend that practice to assist in executing deals. Kim will lead the development of these capabilities.”

“With economic recovery already happening in China and clear signs of a bottoming out in the West, we anticipate strong activity in M & A in China as early as the 4th quarter this year,” said Kent Kedl, Technomic Asia’s Shanghai based General Manager. “Many deals have been done in China – but doing the right deal in the right way is a huge challenge. Kim’s proven success in executing deals will enable us to provide a complete package to our clients.”

Dr. Woodard has twenty years of business experience in China, primarily in investment planning and strategy. He lives and works in Shanghai and Beijing, where he led Javelin Investments, a boutique advisory firm focused on M&A. He has served as a Vice Chairman and a Member of the Board of Governors of the American Chamber of Commerce in Beijing. Kim was previously Chairman and General Manager, AMP China Investment Company, part of the world’s leading producer of electronic and electrical interconnection products, where he was also responsible for strategic planning, project development, and government relations in China. He previously worked, also in China, for John Deere and for A.T. Kearney. Dr. Woodard holds a Ph.D from Stanford University in international relations. He is fluent in Mandarin Chinese and first traveled to China in 1971 at the invitation of the late Premier Zhou En-lai.

You can find more details on the China M & A markets on the China Business Blog and our China M&A presentation on SlideShare

About Technomic Asia
Technomic Asia, the Asian arm of Tompkins International, is a strategic consultancy with more than 25 years of experience helping clients plan and execute Asian growth strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential and assistance in designing the optimum strategy for success including M & A. Technomic Asia’s Steven Ganster and Kent Kedl are co-authors of “The China Ready Company,” a book that details the formation of a successful China strategy. (www.technomicasia.com)
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Media Contact

Albert Maruggi, for Technomic Asia
651-695-0174 – office
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amaruggi@providentpartners.net

I have been living and/or working in China for over 20 years and have been witness to one of the world’s most amazing phenomena … the aging of the population. Why is that so amazing in China? Well, just 50 years ago the life expectancy of the average Chinese person was 35 years old; today it is 72. In the past 10 years, life expectancy has been raised over 2 years. And why are people living longer? There are a number of reasons, but the major factor is is that people are getting better healthcare. But the cure to the Chinese people’s improved lifestyles is also the disease. Do the math: more than a billion population living nearly twice as long as their great-grandparents, equals some very, very large health care needs.
The attached Podcast is starting a series on Chinese healthcare but I will just highlight some of the issues here.
It is common knowledge that the low levels of consumer spending here and high savings rates compared to more developed economies – the average Chinese citizen saves 35-40% of their total income – is due largely to the fact that the Chinese social safety net has huge holes in it. In the old days of the planned economy in China, healthcare – such as it was – was a given, part of the so-called “iron rice bowl” of guaranteed supports which included housing, schooling and healthcare along with a basic (and low) salary. Well, as the economy has opened up and more capitalistic structures and systems have been allowed to bloom in China, this iron rice bowl has started to crack and, for most people, disintegrate completely. And the economic planners in China, giddy from the incredible wealth and its associated global power, focused more on the exo-structure rather than the infrastructure in China’s development.
There is a running joke among some of my China-phile friends that, if you hear a so-called expert start his or her speech with the phrase, “China is a big country”, you should immediately discount anything you hear from that point on … pointing out the obvious is not a good way to begin.
Still, this must be the foundation for any discussion on the social welfare system in China, that this is just a MASSIVE country, both in terms of geography (the physical size of the U.S.) and population (1.3 billion people, more than triple the U.S.) and this scale has a lot to do with how things do or don’t get done. Comparisons are often made between China and Japan or the “Four Tigers” of Asia (Taiwan, Singapore, Hong Kong and Korea), looking at how these early Asian economies developed versus what and how China is doing today. While certainly some comparisons can (and should be) made, the fact remains that China’s scale sets it apart from the others – its like the difference between driving a Jet-ski and a super tanker – both are navigating some of the same waters, both have somewhat similar methods of propulsion and steering, but the simple differences in volume and mass make for VERY different sailing experiences!
Let’s look at some age breakdowns … in 2000, it was estimated that 7% of the population was 65 and older. If current trends continue, by the year 2040 that group of 65 and older will have increased to almost 20% of the population. And a population skewed older will have greater need for healthcare of all kinds. The aging of the population alone is predicted to produce a 200% increase in deaths from cardiovascular disease in China between the years 2000 and 2040.
Now, where are these people all living? A majority of China’s population – albeit a shrinking one – lives in rural areas, in small towns and villages, far from the infrastructure of the cities. In 2010, about 55% of China’s population will live in rural areas.
However, this is rapidly changing and China will add about 150 million people to its urban areas over the next ten years, making for about a 50/50 urban/rural split by 2020. That means that China’s cities, many already bursting at the seams, will be additionally challenged to provide for their populations. We’ve talked before in these Podcasts about the growth in consumer activity in China’s so-called Tier 3 and 4 cities … but these cities still have between 1 and 3 million people in them! This is NOT what we in the West are used to. My own hometown – the Twin Cities of Minneapolis and St. Paul in Minnesota – has about 2.85 million people and is estimated to be the 16th largest metropolitan area in the U.S. (and notice that it takes us combining TWO cities together to do this!). But in China, that population would barely get us into the top 100 cities! Granted, we Minnesotans – with our German and Scandinavian ethnic heritages and our great bread, beer and cheese – are an order of magnitude larger than the average Chinese person so it feels more crowded in Minnesota. But for sheer measurements of “people per square meter”, China is the clear leader, if not necessarily the winner.
One of the benefits of improved lifestyles is better food … and “better” often means “more fattening.” In 1982, Chinese citizens consumed, on average, about 48 grams of fat per day … in 2002, that figure was up to 76 grams for urban dwellers. This exceeds the World Health Organization’s recommended level by over 30%. Some statistics put the number of the overweight and obese in China at over 200 million people. These new diets are leading to an increase in the so-called “modern” chronic diseases such as hypertension, diabetes and heart disease. In the past couple of years, diet programs from Jenny Craig, Weight Watchers and hundreds of China look-alikes have sprouted up all over China, pursuing, particularly, the young female population by telling them that they won’t be happy until they look like this retouched photo of a movie-star who has 7 personal trainers, the God-given metabolism of a wolverine and several liposuctions under her ever-tightening belt. I have even seen adds aimed at parents of chubby kids … you can bring them to fast food during the week and to a “fat camp” on the weekend.
A running joke among some of my friends in China is to walk into a restaurant and ask for a non-smoking table. “Non-smoking” just means that there is not an ashtray on the table and that YOU should not smoke there … but everyone around you, at all points of the compass, will be belching smoke like an iron smelter. Needless to say, smoking is VERY prevalent in China … an estimated 1/3 of the world’s 1.3 billion smokers are in China.
The prevalence of smoking has actually dropped in China … it was 63% among men in 1996 but then fell to “only” 48% in 2002. Culturally speaking, smoking among women is not very popular … only an estimated 3% of Chinese women smoke, but that is changing as well as younger, more “modern” women are taking up the habit.
And when you see smoke, you think “cancer” … and that is certainly happening in China. Reliable statistics here are MUCH more difficult to come by (given that the biggest supporter and supplier of tobacco products in China are state-owned enterprises), but some random data points (and the experience of smoking deaths in the West) can lead us to some pretty clear conclusions.
Lung cancer is expected to increase by nearly 2 times, resulting in over 100 million lung cancer patients in China by the year 2015. Cancers of all kinds are growing in China. Today, about 300,000 patients die each year of primary liver cancer in China … this is a rate 24 times higher than the United States. Cardiovascular disease, chronic respiratory disease and cancer are, by far, the leading causes of death in China.
Stay tuned to these pages as we explore more about the Chinese healthcare system. And check out today’s Podcast which goes into this subject in much more detail.

Those of you who are regular consumers of this Podcast and associated blog may have noticed that I have been unusually quiet as of late. In fact, I’ve gotten email messages asking if I was alright. Was I sick? Did I break my fingers or lose my voice, rendering me technologically mute? Did the global economic tsunami finally reach the heretofore protected shores of China and was I, too, scrambling for an employment life-ring of support in my middle age? Nope. Although things were slower in the first part of this year, business is going great – everyone is interested in growing in China, the only place FOR growth these days, it seems.

No, the reason for my silence is much more simple, and yet more sinister. I don’t have anything to say! I sit down to write. I stare at the blank page, my mind empty as an honest man’s wallet. After nearly 25 years writing about one American’s life abroad, I’m out of ideas. I am all talked out (and blogged out and Podcasted out!). For someone who, as a child, thought his name was “For-the-love-of-all-that-is-holy-would-you-please-shut-up,” speechlessness is an altogether alien state.

Writer’s block happens, I suppose, but it happens to other people, those with less interesting lives. For instance, accountants hunched over the books under the glare of fluorescent lights – hydroponic humans in cubicle farms. What are they going to write… “Dear diary: today I struggled valiantly with that last entry until the T-account balanced, perched precariously on profit’s knife edge…?” I can imagine florists would have a tough time drumming up passion in their writing: “Dear diary, today I sold flowers. Just like yesterday. And probably tomorrow.”

This I can understand. But I am writing from Shanghai, the refurbished Pearl of the Orient, a city with 23 million people all doing things my mother told me never to do: crossing against the light, slurping their noodles, eating with sticks, fricasseeing the family pet. You’d think I could find something interesting to write about.

I wrack my brain, searching through the last month of my calendar. Surely something has happened that is worthy of comment. Some “ah-ha!” Some something that no one has noticed before. Suddenly, I have it, a golden nugget around which I can weave a perfect pearl of wise insight. I will blog about the traffic! Something odd is always happening in Shanghai traffic. I look out my window. Sure enough, drivers are playing their horns like a Swiss bell choir and are power-merging like Stevie Wonder in a demolition derby. But on second thought, this seems a bit lame. The traffic situation is no different today than it was last year and in fact it seems to work just fine, albeit with a few more fender benders. “Nothing to report here, Skip…back to you in the studio.”

Return to the calendar. Maybe I can write about something stupid I’ve done recently. Certainly I have pulled a bonehead move in the last month that I can write about … that seems to be a never ending stream of content. I must have committed a cultural gaffe. Messed up my Chinese tones and called my mother a horse, something like that. Yeah? So what? Everyone I know is already familiar with that scenario, though my Chinese friends and colleagues are far too graceful to point out my mistakes.

Yesterday I was sitting at a Starbuck’s on Huaihai Road in Shanghai, waiting for a client and trying to dredge up an idea for the Podcast…any idea…and it hit me: I am in a STARBUCKS on HUAIHAI LU trying to come up with something to say about a foreigner’s so-called crazy life in Shanghai! How crazy can it be…is the foam on my latte too frothy? Am I forced to use refined instead of raw sugar? Oh horrors, the swirl on my caramel Frappacio goes to the left and not the right??? However, this sort of middle-aged rant against the middle class in the Middle Kingdom might be considered the Grunge music of the new millennium; after all, those with nothing really to complain about favor a public forum. And I am already having trouble with middle age. Or at least my expanding middle in middle age … no one needs to hear about that.

So that’s it then: it’s not me, it’s China… China’s gone mainstream. We used to have to bring pizza in from Hong Kong and now we get it delivered from around the corner. Biking down to the Telecommunications Bureau to register an international phone call and waiting three days to actually place that call was ink-worthy in the 80s. Today? I miss a call from the States because I out was taking pictures, SMS-ing and playing music on my iPhone until the battery died.

So that’s my headline then: China is Not Interesting Any More. Officially hum-drum, day-to-day, not unique in any noticeable fashion. It’s not me, it is my subject: Shanghai, the Fargo of the Far East. “Move along, there is nothing to see here… go about your business.” How reassuring. I feared I was losing my edge.
Confidence recently restored, I then experience an epiphany. My client arrives, the president of a billion dollar multinational, he is barely 24 hours into his first visit to China. This is a guy who has seen everything, done everything… spent more money last week than most of us will see in a lifetime and will probably lose it just as effortlessly next week. His passport has more stamps than a Philatelic Society swap-meet. His is a Gold frequent flyer on five airlines and rates “Super Mother Bad Platinum” on two more. This dude has been around.

So he comes into Starbucks, sees me and nearly RUNS across the room. He drops into the chair across from me, breathless and wide-eyed, having just arrived in a taxi from the airport and his usual executive demeanor is displaced. “What is it with this place?” he whisper-screams, “I nearly lost my lunch five times on the ride over here…and these buildings…and the language…and…and… is this Starbuck’s!? I have no idea what to think about this place…it’s, it’s FANTASTIC! Where have I been all my life?!?!”

We proceed to talk about the work we are doing for his company and some of the growth opportunities we have identified. There are some very exciting things happening here in his industry. At headquarters, he is trying to deal with the rug getting pulled out from under him by the current state of the economy; here he is losing himself in the lush shag of the rug that has stayed put. He is petrified by what he sees here but he is intrigued as well. China, so ugly its cute. The Orangutan of global business.

A minute ago, I was thinking that I’d seen everything here. And now I meet a guy who literally HAS seen everything, and he says that China is making him think that he has seen nothing. And I have it, my new headline: “Big Pale Writer Thinks He Knows Everything About China: Film and Self-Criticism at 11.”
Note to self: my blasé attitude and road worn demeanor is not about China being boring. Far from it. It’s just me being me.

Thanks again for listening … and remember our motto “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

Nearly 18 months ago, I wrote an article for the British Chamber of Commerce in Guangzhou called “Continuous Market Entry”. A client of ours found that article and called to talk to me about it. It had been awhile since I looked at it so I did a quick review … and not only did I COMPLETELY agree with what I wrote then, I think it is even more important now! Lest you think that my ego has completely run away with me and that I have become my biggest fan (or maybe IN SPITE of that!), let me be clear – what I said then (and will say today) is NOT rocket science. In fact, because this is not rocket science – because it is quite logical and, at its heart, pretty simple – we tend to overlook it in favor of more complicated (and, we think, therefore more valuable) ways of growing our China businesses.

So in today’s Podcast, I would like to revisit this issue and explore it a bit deeper.

For most foreign companies establishing a business in China, the phrase “China market entry” is a one-time process of market assessment, strategy planning and corporate structuring. Once the business license is issued, there is a palpable sense of relief among the management team – “Whew, market entry is done,” they say, maybe hoisting a few congratulatory pints between then, “Now bring in the implementation team to get things going!” However, those that have been here for awhile understand that “China market entry” is not a one-time thing and that successful companies – i.e. those that are making money here – are continuously revisiting and refreshing their market penetration strategies.

In a similar way, a manufacturing theory that originated in Japan called “Kaizen” – roughly translated into English as “continuous improvement” – advocates that quality improvement is not a one-time thing: do it once and you’re done. Rather, quality should be a constant concern for everyone in the manufacturing environment and companies should always be evaluating how they make their products and how they can improve them.

We look at what we call “continuous market entry” in the same way: it is an attitude and a process whereby companies approach their on-going China market assessment and strategy planning as if they are facing it for the very first time. This approach is especially important for companies that have been in China for awhile, typically 5-10 years (or even more). Our market strategy consulting firm has been on-the-ground in China since the mid-80s and helped many of these companies on their first market entry. We are now working with many of them to “re-enter” China by taking a fresh look at today’s market conditions and then crafting an appropriate response.

Continuous Market Entry: “Re-asking” Questions
Going “back to the beginning” is nothing new. Sports professionals talk about maintaining their love for the game by remembering what it was like to play as children on the playground. Therapists recommend couples to find ways to keep their relationship fresh by imagining that they had just met. Buildings are renovated, torn down to the foundation and rebuilt, as if new.

For those who have been here for some time, it is difficult to go back to the beginning because we cannot help but look at China through the lens of the lessons we have learned from the past, through our successes and failures. Most of us would not want to return to the naïve attitudes we had when we first came to China: how easy we thought it would be, how smart we thought we were ourselves. No, many foreigners here “walk with a limp” and we would not trade our battle scars for anything.

So when I talk about continuous market entry, I am by no means advocating naiveté and downright stupidity (there is already a whole lotta that here among foreign companies entering China!). What I am encouraging us all to return to is the exploration of the many questions we had about the China market and how we could be successful when we first came here. Deep down, we knew that we didn’t know much, and we were hungry for information and any bit of insight that could give us a leg-up in our market entry. It is this non-stop asking of questions that lies at the heart of continuous market entry.

There are three categories of questions that I would like to briefly address here: questions about market demand, distribution chains and competitors.

Market Demand: Who is my Customer?

One of the first questions anyone asks when getting into a new market is, logically, “who will buy my product?” A simple question, no? Well, no…at least not in China! Identifying, with any level of precision, who in China would buy your product and what product features, functions and pricing would satisfy was very difficult in the “old days.” Getting access to potential buyers was difficult: travel was hard, phones didn’t work, we didn’t have the Internet or email. Secondary data, when available, was very thin and was too loaded with political overtones to be very accurate.

However, many early foreign entrants showed up with their products and – wonder of wonders – they sold some. Sometimes they sold a lot! Slowly but surely, the foreign companies that survived developed a customer base that kept them in business. The smarter ones moderated their expectations, following a fortune cookie I once read: “Set your goals low and you will always attain them.”

But many of these companies became satisfied and somewhat complacent with their success, even moderate success. Slowly, they stopped asking themselves the questions that got them there: Who is my customer? What do they want? What else can I provide them? They slid comfortably into defining their China market as “the segment in which I am successful” rather than “all the segments I could possibly address.”

In recent years, segmentation of many markets in China has become much more complex and fragmented. Take the automotive market: there used to be only a few kinds of cars to choose from with very few private buyers. There are now well over 100 brands of cars in China with hundreds of models to choose from in a dizzying array of quality, price and performance tiers, all being purchased by private owners. If you are selling into this market now, you better understand, in detail, what your opportunities are in each segment, for each kind of buyer.

All foreign companies – and particularly those that have been here awhile – need to understand the details of their market segmentation and to identify, clearly, which segments they should pursue and which they should leave alone. For the latter, this is not easy. A client of ours in consumer products with over 10 years in China is currently going through a ground-up market assessment, looking at the market as if they were not yet here. Our early strategy meetings were full of statements that started with “based on our experience…” or “we know that…”. They have now moved into a stage of asking questions of the market and exploring ways of looking at it that they have never done before. The deep market probes we are doing among customers, distributors and competitors are guided by these questions and we are looking at how our client’s products are used in the market, not how our client sells them. This, in turn, has led to new ways of segmenting (and selling to) the market that is resulting in some real growth.

Another client of ours is trying to look at new ways of serving the customers they already have. Because they were so early into the market, they pretty much defined their sector … and while they have certainly found success and happy customers, their strategy has been more focused on “what we have to sell” rather than “what our customer wants to buy.” Now that there is more competitive in the market, our client is going back to their long-time customers and are asking, in effect, “what if we weren’t here … what would you want??” It’s a tricky thing and we are getting some resistance from some divisions in our client from people to have an “if it ain’t broke, don’t fix it” mentality. However, the CEO and senior management, thankfully, have a different view … they see the market changing and know that they will soon face customer demands that they cannot fulfill. They need to get out ahead of those demands now, understand them and plan for them.

Distribution: Finding New Routes to Market

Not only have veteran foreign companies in China lost touch with their customer segments, but they often miss key distribution routes to those customers. It is logical to think that if my customer is “A” then the way to reach them is “B”. However, as markets have changed and segmented, so have routes to those markets and it is healthy to continuously review one’s distribution strategies.

A client of ours brought a product in over 12 years ago and used some Hong Kong distributors to do so. At that time, the Hong Kong distributors knew the market as well as anyone and besides, there simply were not any “local” distributors. In fact, many foreigners at that time did not differentiate between those from Hong Kong and those from the Mainland, naively calling them all “Chinese”.

Depending on the industry and channel, there are now many local distributors that are quite mature. They know their markets, they often know technology, and they certainly know how to sell to local buyers. In the case of our client, their Hong Kong distributors are now actually losing deals to local distributors because the local buyers consider those from Hong Kong to be “foreigners” who don’t understand local markets. I am in no way saying that all Hong Kong distributors are a bad idea in China today – but I am saying that what was appropriate several years ago may not be appropriate today.

Companies pursuing continuous market entry are re-mapping distribution channels at the same time they are re-segmenting their markets, all the while trying not to be biased by the distribution channels they worked so hard to establish already. It is not an easy thing to do, but they are critically analyzing the “reach” of their present distribution and are assessing whether or not it is as broad or deep as is required. We have done many projects over the past year to objectively map just how far a foreign company’s distribution is reaching. In all cases, we found that penetration was not as great as the distributor was telling our client nor was it often even in the right channel. These discoveries didn’t necessarily lead to our clients replacing distribution; rather, they were able to add partners to get into areas they had no access to. Only an attitude of continuous market entry led them to such conclusions.

Competition: New Players in New Segments

When many of the “old-timers” came into China, they were some of the first foreign companies entering the market and their ability to differentiate themselves was relatively easy. Price and quality differences were very apparent: the quality and price of the foreign product was very high and the Chinese competitive products were, if they existed at all, typically low price and low quality. It was often easy for foreign companies to charge a premium of several hundred percent because a certain portion of the market was looking for quality and was willing to pay for it. If a foreign company was bringing a product or a technology to the market that had never been seen before, they found buyers (often other foreign companies) willing to pay anything for it. Ask them who their competition was, they would say “no one”…and they were basically right.

A client of ours was in this situation. The capital equipment they brought into China was brand new in the market; there was nothing like it here. Our client considered it “world class” quality – and indeed, they lead most of the rest of the global market in this product category. Their immediate market entry was very successful. There was a small part of the market that would pay any price and our client was always pushing their manufacturing capacity to supply their customers.

However, as the market matured, two things happened: first, more buyers came online who began to see the use of this particular product and thought it would be helpful. However, these buyers were not rich foreign companies but were often privatizing local companies who were looking for “China quality”, not “World Class quality”. Secondly, more competitors – many of them local Chinese companies – rose up to supply these segments with that “China quality” equipment, leaving our client in its own “World Class” bubble.

Recently, our client has been looking at the China market with a fresh perspective and is realizing that the market has not grown beyond them, but has grown up below them. They still have sales in the premium segment of the market, but the sweet spot of the market has shifted to the middle range and competition there is quite fierce. Our client has been going back to find out how their competition is serving this market and how our client can begin to compete. We have had to work together to eliminate the phrase “we have never done it that way before” and still have some distance to go; however, waking up to a market rife with strong competition has changed the way our client is looking at the market and planning their future strategies. Our client no longer claims they have no competition in China!

Another client of ours in consumer products is looking at the challenges facing them in China in today’s very unique retail market. For the non-retail jockeys in my listening audience, the retail challenge in China today, in a nutshell, is the tension between what is called “traditional trade” and “modern trade”. Traditional trade are the mom & pop shops, local retailers serving a particular neighborhood … think the corner hardware store or the neighborhood grocery store… small, familiar and convenient. Their product stocking practices are hit or miss, their pricing is not too aggressive and their quality is sometimes suspect, but their customer service is fantastic. They have been serving the same neighborhoods, sometimes for generations.

Modern trade, on the other hand, are the “super stores” and “hypermarkets” … think Home Depot in the U.S. (or B&Q in Europe) and Wal-Mart. These are the stores that go to market based on their huge selection, their good quality and their low prices. They are not always convenient to get to, but they are a “destination” … you go there, fill up your car (or bike basket) and go home happy.

China is going through a massive transition from traditional to modern trade … where people are going from shopping at the corner grocery store to making a trip to Wal-Mart or Carrefour. While the VOLUME of total retail sales is in the traditional channels, the GROWTH is in the modern ones. And consumer goods suppliers must manage the tension that exists in serving both of them.

Our client is struggling with this … and so we are in the process of doing a benchmarking program to look at how some of their competitors are handling some of these problems and then looking at how these challenges are addressed by peer companies – companies working the retail space but not in the product space of our client. We are seeing some VERY interesting results so far. The biggest benefit is that it kind of levels the playing field. We all tend to complain that what we are facing is unique (and many try to get their bosses to see that, given the uniqueness of the situation, they are doing pretty good!). However, when you look at how your competitors are facing the very same problems you are, you take away these excuses. You benchmark your current performance against theirs and you see where you really stand. You also can sift through a lot of approaches to the same market – some of them are good and some of them are not (and some of them are downright illegal!). But you are not creating strategy in a vacuum here … you are looking at the market realities and are honestly assessing yourself against them.

Conclusion

In conclusion, I certainly do not want to give the impression that a continuous market entry perspective is easy nor is it a cure-all for what presently ails stagnant foreign companies in China. However, for many of us who have been in China awhile, we are victims of our own success, even if success is defined as “still standing.” We have found that returning to the fundamental questions about customers, distribution chains and competition really does begin to help break us out of old ways of thinking.

For those newly arrived in China, I would like to encourage you to start now your process of continuous market entry. For the moment, hide your business plan and the feasibility study you used to get your business license. Get your key sales and marketing staff in a room and ask each other the tough questions about customers, routes-to-market and competition and press yourselves to answer them (or at least establish a plan to come up with the answers to them).

If China has taught us one thing in the past decade, it is that this country and its markets will not stop changing, growing and adjusting to global conditions. The successful foreign company in China will adopt a similar attitude knowing that when they stop entering the market for the first time, it will be their last time.

Thanks again for listening. And remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.

I’m speaking this week at the Sixth Annual GIC Mergers and Acquisition Summit, the title of my presentation is Deal Cultivation – Keys to Success in Making Acquisitions in China. The M&A process in China is much different than in the United States. Understanding this difference will reduce anxiety and frustration among US executives pursuing M & A strategies in China.

To give you a graphic representation think of the process as a ride on Disney’s Space Mountain, a long wait, followed by a plunge into the darkness of twisting turns, hair-raising screams, and emerging at the same place you started.

One of the reasons that the identification and relationship phase is so important is the high transaction costs in China, compared to the deal sizes available, so effective “discovery” is important before spending substantive dollars in due diligence. In China, acquisitions require more upfront target cultivation and pre-due diligence than is typically needed in the West.

To appreciate this, one need only be reminded that in China the seeds of private investment and the concept of a merger were sown just 20 years ago. China is more akin to a college age individual as it is developing a comfort with markets and corporate business entities.

In this podcast, I’m interviewed by Albert Maruggi reporter for the Marketing Edge podcast about the M&A landscape as a preview to the GIC presentation this week in Shanghai.

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Shanghai, China, June 21, 2009 – Steve Ganster, Executive Director of Technomic Asia, will highlight the opportunities and challenges of mergers and acquisitions in China at the GIC sixth annual Mergers and Acquisitions Summit held in Shanghai on June 25. Ganster says China’s business is good for M&A activity, however it is still a maturing market that requires a much different approach from what many US companies expect as they consider expansion through acquiring a stake in China companies.

“US companies need to modify their approach in making acquisitions in China putting a great deal more emphasis on cultivating relationships with target companies. Acquisitions are in an embryonic state in China, and the rules of the game are not well established. Much more energy needs to be spent in the discovery stage, getting to know the stakeholders and what they want from a deal. Local Chinese management often goes into the discussions not fully understanding what they want,” says Ganster.

“In the US, the emphasis is placed on financial statements in a relatively transparent process. In China, relationship is the key filter through which the deal must successfully pass.” Ganster added.

China’s companies are searching for natural resources and big name brands to beef up their portfolio or supply chain in anticipation of increasing growth. Since 2007, outbound investment has grown from $26.5 billion to $52.2 billion in 2008, according to Reuters.

One example of this activity is the recent intended acquisition by Sichuan Tengzhong Heavy Industrial Machinery, a private machinery maker, to purchase the Hummer brand from bankrupt General Motors.

The Mergers and Acquisition Summit will be held at the Crown Plaza Century Park, Shanghai June 25 and 26.

Editors & Bloggers Note: A soundbite from Steve Ganster is available with a description of the bite below.
Soundbite with Steve Ganster on China Mergers and Acquisitions
IN: After I’ve identified…
OUT: Can’t do that successfully in China
Length: :38

A full interview with Steve Ganster on the Merger and Acquisition topic is available on the China Business Podcast

About Technomic Asia

Technomic Asia (www.technomicasia.com), a division of Tompkins Associates, is a business strategy and supply chain consultancy with more than 25 years of experience helping clients plan and execute Asian growth and operational strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential, and assistance in designing the optimum strategy for success.

Media Contact: Albert Maruggi amaruggi@providentpartners.net
612-325-8126

This is an excellent article by Steve Minter, Editor-In-Chief of Industry Week, as he examines some of the turnaround planning being done by companies in China. My colleague Steve Ganster, who has provided business recession recovery advice over three decades in China is interviewed for this article.

RALEIGH, NC and SHANGHAI, China, June 1, 2009 — Global business consultants Jim Tompkins and Steve Ganster view this week’s meetings between U.S. and Chinese economic policymakers as a key stepping stone to worldwide economic recovery that is already underway in the U.S.

On his first official visit to China, U.S. Treasury Secretary Timothy Geithner is focusing on ways to end the global economic recession. “It’s clear that the U.S. is in recovery mode,” says Tompkins, CEO of global supply chain consulting firm Tompkins Associates. “The U.S. consumer is driving this comeback, and the return of consumer confidence will lead to an increase in business volume and capital investment in China. We are now seeing that China’s manufacturing sector has expanded for a third month, and U.S. manufacturing and construction spending is looking more optimistic. Thus, having the world’s first and third largest economies convening now to solidify strategies is very important.”

Tompkins, author of The Great Recession Gives Way to the Great Comeback, notes that one impetus behind the rapid, deep spread of the recession was organizations’ super-fast and super-efficient global supply chains. “These same supply chains will now lead us out of the downturn,” Tompkins says. “It will take all the stimulus weapons of the U.S., China and Europe – plus the supercharged supply chains – to complete the Great Comeback globally.”

Ganster, Managing Director of Technomic Asia, knows the economic heartbeat of China well, having worked and lived there during previous downturns while helping U.S. companies establish operations. “During the U.S. recession of 2001 when China was at the threshold of entry into the World Trade Organization (WTO), forward-thinking U.S. companies who saw both the impact of China becoming a member of the WTO and the quick return of the U.S. economy were establishing China operations. They reaped the benefits for the next 8 years of China’s nearly double-digit growth,” he says.

More recently, Ganster has been connecting the dots between government stimulus and growth in China’s consumer goods sector. “I just met with the leader of the supply chain initiative for China’s largest grocery store chain. They are building a state-of-the-art distribution center in part with government funds,” he reveals. “This is one of many examples that lead us to believe that the Great Comeback is underway.”

As Geithner talks with Chinese officials, some of the U.S.’s top industries will be hitting their economic bottoms and gearing up for a post-recession return to recovery, growth and prosperity. Tompkins urges companies to look beyond the macro economic headlines of the China talks and focus on their sector’s details to convert today’s comeback plans into tomorrow’s profits.

“While the May Consumer Confidence reading of 54.9 surprised some, our research in such industries as food, cosmetics, pharmaceuticals, and inexpensive consumer electronics shows that these sectors are on the upswing,” Tompkins adds.

Tompkins Associates (www.tompkinsinc.com) designs and integrates global end-to-end solutions for companies that embrace supply chain excellence. For more than 30 years, Tompkins has evolved with the marketplace to become the leading provider of global supply chain services, distribution operations consulting, technology implementation, material handling integration, and benchmarking and best practices. Subscribe to Tompkins Associates RRS feed.

Technomic Asia (www.technomicasia.com), a division of Tompkins Associates, is a business strategy and supply chain consultancy with more than 25 years of experience helping clients plan and execute Asian growth and operational strategies. Technomic Asia assists companies in entering the Asian market or in expanding their business by providing critical market insight, an understanding of business potential, and assistance in designing the optimum strategy for success.

Resources for Western Business in China: Great Comeback Blogs, Caught Between the Tiger and the Dragon (Book), The China Ready Company (Book), China Business Blog and Podcast, Asian Sourcing Cost Reduction (podcast)

FOR IMMEDIATE RELEASE

CONTACT: Myra Schwartz, 919-855-5533
mschwartz@tompkinsinc.com

China’s rapid development in the past 15 years can leave one feeling a bit dizzy.  My first time in Shanghai in the late 80s – in town for an escape from the small central China city where I was living and teaching – was heady enough.  There were only 10 taxis in the entire city and you had to get around on diesel fume-belching busses or by foot (and it was a battle between the aerobic benefits of walking and the heart-stopping inhalation of diesel exhaust).  Now its tough to step in the street here and avoid getting hit by a cab (unless, of course, it is raining or you are late to a meeting or you have two heavy boxes you are trying to schlep to a client … and then there are NO taxis to be found in the entire city.  Go figure).

So when China seems like its returning to the bad old days, it is a bit shocking, particularly when this return is signaled by increased regulation from the Party.  There have been a series of steps over the past year that, in hindsight, are heading in a direction that could be of concern to everyone who does business in China, local and foreigner alike.  Late last year we saw the government put extra restrictions on Carlyle, the financial investor, as they sought to buy out XCMG, one of China’s leading heavy equipment manufacturers.  Carlyle eventually let the deal die because the limitations were so onerous.  At the time, everyone clucked about “protectionist policies” but eventually chalked it up to China wanting to guard an industry that could figure into national defense (ala the U.S. blocking the Chinese oil giant CNOOC from investing in a U.S. offshore oil company a couple of years ago).

The next big restriction was for visas for foreign visitors wanting to enter China just before the Olympics last year.  Thousands of businesses were impacted by this and many Olympic events were sparsely attended because people just could not get here.  Again, apologists for China cited so-called “legitimate” reasons for this … in this case there were serious security concerns.  The reality was that China was playing a game of CYA – “Cover Your Anterior-region” – and was willing to go overboard on restrictions in order to insure that nothing happened while the spotlight was shining so brightly on them.  Sure, it bothered me too but I guess I understand erring on the side of caution – my own country’s Transportation Safety Administration recently busted my daughter on a routine check at an airport … she was relieved of a fingernail clipper, ostensibly because she might use it to hijack the airplane to Cuba (where she would need said clipper because you simply cannot buy them there).  In the immortal words of Fleetwood Mac: “Oh well.”

But then this year, things have been getting even more tight, it seems.  We started the silly season off with Coke being denied their acquisition of the large Chinese juice manufacturer, Huiyuan.  The government was oddly silent on the specific reasons for the denial.  There were some mumblings of avoiding “monopolistic” practices which, in a way, was legitimate as the merger would create a beverage company that would rule in two key categories: sodas and juices.  But many legitimately pointed out that China’s industries are ripe for consolidation and that, following pretty much any other economy as its developed, there are, as time goes on, going to be fewer but larger players in the market.  There is speculation – no none of it published, as far as I have seen – that the government is pushing Huiyuan to themselves become more acquisitive … to go out and start buying up smaller beverage companies to grow larger themselves, in effect creating a competitor to Coke.  Typical of China, the old adage is flipped on its head: “if you can’t join them, beat them.”

Just this last week, two things have happened to make me even more concerned.  The first was the release last Friday of the new Postal Law in China which everyone in the logistics and delivery sector has been anticipating like Christmas morning at the Bill and Melinda Gates household.  However, much to the chagrin of foreign delivery companies like FedEx, UPS and DHL, the law bans foreign companies from participating in domestic express delivery, citing the original 1986 Postal Law that limits domestic delivery of regular mail to the government-owned China Post.

1986?  In China in 1986 it took an entire day to mail a letter!  We had to, literally, make our own envelopes, painstakingly cutting out a template from paper and then using paste thoughtfully provided by the post office to glue them together.  Then you had to let them dry before stuffing them with your letter.  You ended up with glue all over, trying to cram a sticky mess in a drop box with fingers webbed like Aquaman.  And if you wanted to send a parcel in China, fuggitaboutit!  You had to purchase white cloth and make your own bag in which to put your items.  Seriously, I am not making this up.  Around the post office were stores selling fabric, needles and thread and you had to form your own sweatshop on the steps outside the post office to assemble your package for mailing.  I had flashbacks to 7th grade home-economics class, nearly failing for improper needle threading and insufficient stitch tightness.  Who knew that I was actually learning life skills that would come in handy some day??

Anyway, I digress …  This new and unimproved interpretation of the Postal Law is going to be a serious setback to the entire postal system in China.  Plainly speaking, the foreign delivery companies have, for the most part, cracked the code in express delivery in their home markets.  Pretty much anywhere in Europe or North America, if I want something delivered by 10 a.m. tomorrow morning, its going to get there.  I might have to take out a second mortgage on my house to do it, but dang-it, its going to get done!  Now, I don’t for a minute think that any express delivery company would be able to quickly transplant their system in China … China is too big and too complex to do that simply.  But the China postal system could certainly use some external influence and best practices … mailing a letter by regular post is a hit-or-miss thing these days.  The Chinese authorities cited security reasons for keeping the foreigners out … I guess news of the express-delivered anthrax a couple of years ago in the U.S. freaked some people out here.  But seriously, can the Chinese postal system do any better??  I guess in one way they can – with such a dismal delivery rate for their mail the insidious package can’t do any damage if it never reaches the intended receiver.  Let’s hear it for incompetence!

The last indicator that something’s up is the rumor – at this point unsubstantiated – that China is going to once again be very restrictive in issuing visas this summer and into the fall.  This year marks two very important anniversaries in China: the 20 years this June since the Tiananmen Square movement and 60 years this October since the founding of the People’s Republic.  Like with the Olympics last year, China wants to keep out anyone who might make a placard and march on the streets, shouting their support of any one of a number of banned issues.  Hong Kong’s South China Morning Post published a story last Thursday saying that Beijing has said that all “F” business visas issued after April 15th will expire on September 15th.  An F visa is for short-term stays of less than 6 months.  The paper quoted several China visa agents who said that applications for F visas beyond September 15th would be put on hold until there were more clarifications from the government (who, like any government, avoids clarity like the plague).  Again, there have been no confirmed announcements of this, just newspaper articles … so let’s not wig out until we have to.

But shy of wigging out, I think there is some indication for concern here. There is DEFINITELY a protectionist wind blowing in China and with it could come a storm that could hit us all.  There are two sides of this coin here:

First, remember that Chinese regulations are often published but never – or are selectively – enforced (on a side note, the converse is also true … China has been known to enforce rules for which they do not allow the publishing of the official law … I have heard stories of people being prosecuted for breaking a law and were refused the request to actually read the law on the basis that the law was a state secret).  What this means is that there are varying levels of sensitivity in China – if you are a big company and are doing big things in China, the light shines more brightly on you and you have to take more care to cover your bases.  All the big Fortune 500 companies working in China spend squillions of dollars each year in lobbying efforts in Beijing and in the various localities in which they do business.  This is just good business practice (hey, they even do it in Washington!).

But for many companies, they work hard at doing a series of smaller things in order to stay below that radar and to not attract attention.  In any M&A deal we do in China, one of the biggest commercial due diligence questions to probe is how the regulating authorities will treat the new entity once it has foreign ownership.  Chinese companies can get away with things that foreign companies cannot, simply because they are foreign companies (and, contrary to popular practice, having local staff often does not protect you … the spotlight is just brighter on you when you are a foreign company).  So the lesson here is to explore all the possible regulatory implications of what you are doing in China … not just the laws on the books but to talk to all the authorities who touch your business to get their read on what might actually be enforced.  Your business leaders here – your general managers and CEOs – should be spending a large amount of their time schmoozing with the authorities here.  If they are not, you are exposed.

The second thing to remember is, simply, that China is different – it is a one-Party system and that Party is primarily concerned with maintaining their singular hold on power. On a global scale, it is not the riskiest place to do business – that honor is held with dictatorial grip by some southeast and African nations.  But it is comparatively riskier than doing business in the West.  Walk the streets of Shanghai and you can often forget that – the signs for Western products and services make it seem like New York with a really big Chinatown.  But its not.  China is different from other markets.

And, truthfully speaking, I often forget this.  Therefore, I have made myself a May Day resolution (my New Years resolutions having drowned in the Ocean of Poor Self Discipline long ago) – I resolve to be more observant of some of the macro-regulatory moves here and to not be so flip and dismissive of them when they do happen.  I firmly believe that China is moving towards more openness … my last quarter century hanging around here is proof of that.  However, these changes progress at glacial speed with short-term freezes and retreats in the midst of forward movement.  Whether what we have been seeing recently is such a momentary freeze or the tip of a larger iceberg remains to be seen.

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Every market prognosticator worth his/her/its salt is in constant search-mode for “leading indicators” – data points that show us which way the markets are shifting and where trends will be moving before they actually become trends.  The easiest (and most used) are probably the ones everyone knows: GDP, consumer prices, commodity prices, exchange rates, etc.  Look on the back page of any financial magazine and you’ll find them … the problem, is that different sources will have different data, all highlighted by an asterisk that tells you why they are different.  Then mix in the challenge in China where economic data is so fraught with government intervention and interpretation so as to make it intelligible at best and downright false at worse.

These indicators are pretty important – as we’ve discussed in these pages before, everyone is looking for the “bottom” of the market and the economic windsocks and canaries in the coalmine are the only way we have of seeing this.   Everyone is looking for the upswing, particularly here in China which is expected (read: “desperately hoped”) to help lead a global recovery.

The more smarmy among the economists have tried to come up with “common sense” indicators, the best-known of which, probably, is the Economist’s Big Mac Index.  This is based on the theory of purchasing power parity (PPP) which says that exchange rates should equalize the price of similar goods between economies.  They use the Big Mac, a product available across most markets in the world, as that standard and compare the Big Mac prices when converted into US dollars at current exchange rates.  This is all well and good … but with the increasing health consciousness of many populations, it might be a good idea to get away from the Super Size Me indices.

So what else can we use?  I might have an idea …

I live in Pudong, the “new” area of Shanghai where construction cranes have been the city bird for the past 5 years and building has been going on 24-7: industrial, commercial, residential … everything has been going up in a flurry of activity.  However, starting last fall and then hitting a low point around Chinese New Year this year, things have been going oddly quiet.  In what used to be a dust-choked part of town we can now see blue sky.  What’s up with that??  Dust, dirt and noise are good – they are signs that stuff is happening!

But over the past few weeks, things seem to be changing, and that has resulted in my discovery of the perfect indicator that we are on the upswing in China – I call it the Teenage Attitude Index (or TAI). The TAI is plotted on a matrix with “Weekend Wake-Up Time” on the vertical (plotted inversely so an earlier wake up time gets a higher score) and “Crabbiness Factor” on the horizontal.  The louder the construction is around us and the earlier it starts, even on Saturday and Sunday, the earlier the kids wake up and the more angry they are that they had to wake up early.  It works really well and I can clearly plot the upswing here: the past few weekend mornings, I have observed my teenagers very carefully and have noted that they are not only waking up earlier but are in a MUCH worse mood when they do.  And I could not be happier!!  Sure, we start to hear jackhammers and cement trucks at 5 a.m. on a Saturday, but that just means that life is returning to our definition of normal.  And the grumpy look on the faces of my darling children are empirical proof of this.

The only piece I have not worked out yet is how to differentiate between the crabbiness brought on by construction noise and the crabbiness associated with simply being a teenager.  But once I figure that one out, I am going to be the Nostradamus of Asia.  Who knew that teenagers could be so helpful??

But Wal-Mart is not necessarily cutting staff … they are “relocating” them.  This might not be such a big deal in the U.S. where white collar management in retail is somewhat used to being moved about like pawns on a national chess board (a friend of ours with Best Buy was relocated 5 times in 11 years).  But in China, this is a big deal.  The hukou system – whereby everyone has a city “residence permit” that gives them and their families access to cit services such as education – is still alive and well in China.  It used to be (10+ years ago) that the hukou system would keep people from moving at all because you could not get healthcare or education in a city in which you did not have your hukou.  Many of those restrictions, particularly for white collar workers, have been lifted.  A lot of people now living in the big cities (i.e. Beijing, Shanghai, Guangzhou) are not originally from here, but many of them sure hope to get their hukou here some day.  For instance, of the 20 people in our Shanghai office, only 6 are from Shanghai itself; the rest are wai di ren, or “outsiders”, in a polite way of speaking.

So when Wal-Mart says they are going to relocate people, this – in and of itself – is not a shocking thing.  Lots of people in modern China are from “somewhere else”.  The problem is where Wal-Mart will likely relocate them to.  The vast majority of Wal-Mart’s recently-opened stores are not in the big cities.  Ammend that: they ARE in big cities, just not THE big cities of Shanghai, Beijing and Guangzhou.  They are in smaller cities like Wuhu (in Anhui province with 2.3 million people) or in Maoming, a prefecture-level city in southwestern Guangdong province with a population of “only” 6.8 million.

“There are no layoffs,” said Jonathan Dong, a spokesman for Wal-Mart China. “If someone wants to go somewhere else [outside Wal-Mart], that is their decision.”  Right.  The “choice” they are offered will be moving to Maoming and keep your job or stay in Shanghai and lose it.  If true, it is an ingenious play…Wal-Mart is able to stay within the strict confines of the labor law that makes it difficult to let workers go and still effectively reduce their workforce.  If my way IS the highway, the choice is easy.

Some are calling the Chinese economy “the canary in the coal mine”, a harbinger of the near future (and a kick-butt song by The Police!).  As well they might…things have been moving along OK here lately.  Q1 ended at, I think, the 6.5% growth that the government was predicting – but, then again, it is the government that determines this number so they had a pretty good chance of it being close!  But in March, the Purchasing Managers Index (PMI) in China rose to 52.4%, over a 4% increase over the previous month.  Pointy-headed economists tell us that any PMI reading over 50 suggests that the manufacturing sector is growing again.  This makes China the first major country to record such a good number since the global economy went in the crapper last September.

However, I think we need to be careful here.  Saying that China is a predictor of good things for the global economy suggests a cause and effect relationship that might not be there.  Remember that, because it has been so reliant on exports, China’s economy followed those of the West down the tubes – water skiing behind a speedboat is fun until that boat heads for the bottom of the lake and you can’t let go fast enough!  For China to be a predictor of the global economy’s slow return to health means that China is now the speedboat and everyone else is the hapless skier tied on back.

To a certain extent this might be true.  For example, General Motors – which is now, for all intents and purposes, a State-owned company in the U.S. – is going gang-busters here in China where total car sales reached another record in March.  GM might still be making your grandfather’s Oldsmobile, but that’s what folks are buying here – in fact, GM just announced that they plan on doubling their sales in China in the next five years.  Many of my friends who work at GM are very thankful that they are working here for the company, and not back in the United States of Depression.  But GM’s success in China is not going to prevent them from going into selective receivership in the U.S.  They are not doing THAT well here!

The question is how “deep” are foreign companies augured in here and will they be in a position to catch the China helium-lift as it hits?  For years, we have been preaching that, for many companies, some of their best opportunities for growth are in China.  This was certainly the case when the economy here was growing at a neck-snapping 13% annually.  But the halo factor is still possible, for those that were able to get in and get established.  I have been talking to several companies these last few weeks who have seen NO drop in their business throughout the downturn, even though their parent companies in the U.S. are going through terrible times.  China has been able to sustain through it all!

So while the signs of life in China are good news – particularly for those of us here! – I am going to hold out on saying that this is a broader sign that the global economy is following hot on China’s heels.  We have a saying in the U.S. that “the opera ain’t over ‘till the fat lady sings”.  So far, she is tuning up, but the curtain has yet to rise.

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Sheesh … can’t a guy get away for holiday without the world falling apart??  I go for 10 days of sun, sand and minimal Internet and come back to find the world upside down.  AIG needs more money (to fund bonuses? foreign banks? Liddy’s baseball card collection?) and President Obama is firing CEOs (not that many others have wanted to do the same in the past but lacked the political will and cajones).  China dope-slapping Coke in its attempted acquisition of Huiyuan is counter-slapped by Australia for Minmetals attempted investment in OZ Minerals.  An apt description from Dr. Venkman in Ghostbusters: “Cats and dogs living together!  Real wrath-of-God stuff!!”

Not that the situation would be any different if I would have been on the frontlines last week, bravely Podcasting and blogging about the world from my 5th floor Shanghai office … but I do have a bit of a Rip VanWinkle feeling about it all.  To have so much happen in the space of just over a week makes my head spin (causing the too-small brain inside my rather large cranial capacity sound like some Cinco de Mayo maraca jam session).

The suddenness of all this – and too much free time on a beach – has led me to think of three deep thoughts:

Deep Thought Number One: the age of dominance of the western multinational company (MNC) is over. Actually, I think this dominance has been over for some time but we’ve been so busy kicking the body and yelling “Look!  Its moving!” that we’ve not realized its dead.  Certainly this is true in manufacturing … that happened some time ago when we started worshiping at the alter of the god Wal-Mart to receive the deity’s blessings that came from cheap products manufactured in low-cost countries.  I am not saying we would/could/should have done anything differently, but we are where we are.

So maybe the proper way to say this is that we Westerners need to lose the illusion that we are in total control of the world.  We are not.  And the last stand where at least Americans could claim dominance – the financial sector – has completely lost its mojo (and most of its money).  The title “Bank Manager” has become the new oxymoron replacing “student-athlete” and “country-music”.

Practically speaking, this means that Western companies will now be the seller as often (or even MORE often) than they are the buyer.  For every Coke-Huiyuan situation we will find Chinese companies buying medical companies (ala Mindray), mining rights (ala Minmetals) or car companies (ala a billion rumors in the market about various GM divisions being schlepped to the Chinese ).  Certainly, there are massive financial and cultural hurdles to overcome for Chinese companies and institutions to become major buyers, but there is definitely the motivation here and there are certainly enough Western assets – distressed and otherwise – for them to pursue.

Deep Thought Number Two: China WILL become a stronger global player in several sectors. This is a natural result of the first … if there is a leadership vacuum created by the decline of Western firms, someone will step into their place.  And the Chinese seem to be the most likely to come off the bench and make the winning basket.  I see three sectors to keep our eyes on – two are no-brainers and one might be a long-shot.

The first sector where China will begin to gain global leadership is, obviously, automotive.  Already the second-largest auto market in the world, China is also the leading supplier of auto parts and components to the world.  China will begin to leverage this supply chain dominance into actually creating cars to sell into other markets.  It is already happening in southeast Asia where a number of Chinese suppliers are exporting cars.  And Chery attempted a distribution agreement for small cars with Chrysler in the U.S. before the U.S. auto world turned upside down.  Finally, China has declared that they WILL be the global leaders in electric cars and technology – in the next three years.  That is very aggressive but it seems the entire economic and political system is focused on doing this.  Look for the leading China auto companies – SAIC, FAW, Dongfang, Changan, Chery and the cheeky BYD – to flex their muscles internationally.

The second sector is medical device.  Again, China is a leading player in the supply chain of components to the global medical industry but strict regulatory requirements have kept them largely from being very strong in Western medical markets.  The Mindray acquisition of Datascope last year was their attempt to change that – Mindray is the biggest Chinese medical device company, competing against the big boys of GE, Philips, Toshiba and Siemens.  Their acquisition of Datascope, a mid-sized U.S. player in the patient monitoring device sector, was Mindray’s first entry point into the U.S. market.  Look for them and others to follow. But look particularly at China becoming an even stronger growth market for medical companies of all kinds.  China will be investing a big chunk of their economic stimulus package in their medical sector in an attempt to rapidly upgrade the penetration and quality level of medical care for their 1.3 billion population.  As they do this, there is going to be a lot of money out there to purchase medical devices, pharmaceuticals, lab equipment and even healthcare management solutions.  Any medical company of any size should be looking at China as their key growth market in the mid-term.

The third sector to keep your eyes on – and I know I am out on a limb here – is the financial sector.  What?, you say.  A centrally-controlled, socialist system with a partially convertible currency is going to become a leader in global finance??  Yes, that is exactly what I am saying.  I am not saying “tomorrow” or even “in the next 20 years”, but all you have to do is follow the money and the motivation.  China certainly has the money – both in cash and U.S. T-bills – and their motivation is repeatedly being articulated – the latest has China’s leadership saying that they hope to build Shanghai into a major financial sector by 2020 and that “the Chinese Yuan will become a new world-favored currency by then”.  Gutsy?  Sure.  Possible?  Maybe.  But are they going to work on it?  You can bet on it!

This all leads us to my Third Deep Thought:  When it comes to the future, we don’t know JACK!! I know … as the proprietor of a leading market strategy consulting company in China whose very JOB it is to predict market futures for our clients, it is counter productive to admit this.  But c’mon … consider the situation.  If, 18 months ago, you would have told anyone with half a brain and a cable TV subscription that Lehman Brothers, Bear Sterns and AIG would be toast at the start of 2009, we would have assumed you had only a quarter of a brain.  Two years ago – even in the midst of big changes already happening in the automotive market – if you would have said that the U.S. Big Three would be on the edge of global collapse and that BYD (hitherto known as a battery maker) would make the biggest splash at the Detroit Auto Show, we would have taken away the last 25% and made you ride the little bus.

The truth of the matter is that we – meaning pundits, consultants, politicians, TV news anchors, banking regulators (if there are any left) – have NO idea what is going to happen next.  Sure, we know that “down” is still the trend and that “flat” is the new “growth”, but the details of which movers and shakers will actually be the ones shaking and moving is a complete mystery.  So let’s give up trying to predict where things are going and start act like they are going to go somewhere.

This means that we – and by “we” I mean “we Westerners” – get it through our neatly coiffed (but thick) skulls that we are not going to be returning to “normal”.  This economic crisis is not just a speed bump on the journey that we’ve been on since the dawn of the industrial age … it is a fork in the road with a car-swallowing pothole in it, at the bottom of which is a pack of very hungry lions who have been subsisting only on lettuce and Fruit Roll-ups.  OK … that metaphor needs a bit more work, but the bottom line is that EVERYTHING has changed!  The products, pricing, distribution, supply chain, competitors and even regulatory environments of your business are changing radically.  New players – many of them Chinese – are not just playing in the shallow end of the business pool; they are swimming in the deep end and, frankly, many of them look pretty good.

What has not changed is the advice for Western companies regarding China – we have been saying this for a LONG time and, in fact, we can maybe put a sharper point on that advice which is: your company’s future WILL be involved somehow with China so find out what it is now and start working on it.  In the midst of the global economic meltdown, China is still one of the best places for pure growth in most sectors.  You are probably not going to find growth in your home markets in the U.S. or Europe so why keep banging your head against that wall?  Net-net: if China is not at the top of your list of “Ways to save your corporate ass and position yourself for the future”, then you are missing the boat.  That is a fact that I feel 100% confident in predicting.

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There has been a lot of press, not to mention moaning and groaning, about stimulus packages in the last few months. Many countries have put forth their genius to turn their economies around…but we haven’t seen much fruit yet to be sure, and their remains a high dose of skepticism out there on virtually everybodies stimulus approach. This skeptical view even exists with China, the global champion in actually getting things done. As usual, there is a lot of noise in the media about anything to do with China and the ever present political filters that tend to bias realities. In this podcast, I will try to cut through this static and identify what we think is really happening with China’s stimulus plan and how western companies can benefit. I’ll cover the current status of the plan, what forms the various stimuli are taking, some key themes that underly the programs and the industry sectors that will benefit most. In this horrible economic environment there are few places one can go for revenue growth. China is one of those places… so companies with the intent to find growth despite the current pain they are experiencing in their home markets, will do well to take a hard look at what is happening in China.

So let’s set the context a bit before getting into specifics on the stimulus plan. It should be clear to us by now that when the Chinese government is determined to get something done, it usually happens… and it happens fast, and often in a big way as we saw with the Olympics last year. Go to a rural township one year and it’s a patchwork of dirt roads and asphalt. Go there the next year, and not only are all the roads paved, but they are lined by quaint looking trees of all the same breed, shape, and height. Ask around, and a peasant points into the distance and says that the government “uprooted all those trees from that mountain over there”.

The Chinese government has, to date, earmarked (can I use that word?) some US$ 584 billion to stimulate things in the economy. By our US standards of throwing trillions at a problem in the hopes of overwhelming it, this figure may seem a bit paltry. But keep in mind that at 10 to 20 times the wages of those peasant tree-movers, we’re getting a lot less investment bang for our stimulus buck here. Further, the actual usefulness of the monies spent almost embarrases our US program (most pork bellies in China are served with a nice Maotai). There is some opaqueness to the source of these funds (about 25% is slated to come from the central government and the balance from provincial and local government sources). Yet China’s track record when it comes to stimulus spending is pretty stellar so we have confidence this level of resource will indeed find its way in to the market…eventually.

Best estimates say that about $57 billion (or one-tenth of the total package) has already been spent as of the end of 2008. Of this, about $39 billion has been spent on rural infrastructure, roads, railroads, and housing construction. Construction has already started on a $13 billion gas pipeline from Xinjiang to Shanghai, and there are plans to start building at least four nuclear power plants this year. As a result of these and other mega-projects, Yangtze River cargo throughput of steel, coal, and cement ticked up in January after suffering declines since last August. A sign of the stimulus at work!

I was in a meeting with China’s largest grocery chain a couple weeks ago and they were describing their brand new 1.3 mm sq ft., state of the art distribution center being developed…with monies from the stimulus. Our stimulus activities in the US seem like taking a couple advil to ease the pain of a heel spur versus China’s shot of cortisone right into the ­­­affected area.

In these types of programs, we see the Chinese government taking more of a long-term, strategic view of the investment. The goal is not only to address the short-term pain, but to build the country’s overall health and competitiveness. In this regard, it is interesting to note some of the main themes of the stimulus package…

1. Upgrading technology through forced obsolescence and replacement of outdated, energy intensive and polluting processes & equipment
2. Upgrading/expanding capacities e.g. an astonishing $90 billion has been budgeted to more than double China’s rail network over the next decade, adding 25,000km of track.
3. Providing rural development/support, as in offering coupons to get discounts on purchasing durable goods
4. Providing investment and incentives for innovation and expansion of R&D
5. Implementing industry consolidation
6. Spurring export promotion and competitiveness via putting back some of the VAT tax refunds
7. Expanding energy sources including nuclear, coal and renewable energy

We also see the government using a creative mix of methods to stimulate the market using both direct and indirect tactics…it’s not all about spending cash.

1. Tax rebates/cuts
2. Direct investment
3. Policies e.g. consolidation, financing terms
4. Technology funds
5. Direct subsidies

Ten industries have been designated as direct stimulus beneficiaries: automobiles, steel, textiles, shipbuilding, petrochemicals, light industry, electronics, nonferrous metals, equipment manufacturing, and logistics. Not many areas will be unaffected. The government will employ a mix of the methods I just mentioned to bring help to these sectors. Some will benefit from consumption subsidies, e.g. 13% off for peasants to buy mobile phones, computers, and home appliances. Others, such as textiles and light industry, will get bigger export tax rebates. The auto industry will get some help through tax reduction, e.g. going from a 10% to 5% purchase tax to buy a car.

Almost all of the industries will benefit from government commitments to invest in innovation and new technology, with multi-billion dollar funds already announced for the auto and steel industries. The government is also taking industrial policy one step further, guiding consolidation in the fragmented auto and logistics sectors, and getting rid of excess capacity in steel, metals, and equipment manufacturing. Industrial policy is not always spending per se (and it is important to keep in mind that the Chinese term for “stimulus,” zhenxing jihua or “rejuvenation plan,” does not necessarily imply spending), but China is clearly thinking of the global crisis as an opportunity to enhance its industrial competitiveness.

While the ambition of government planners has never been in doubt, there is always some concern for the reality of things in China given that the government always retains a level of opaqueness in its announced programs. So we do need to take some of these specifics with a grain of salt. There certainly will be some, how shall we say “leakage” as the money flows into the system (or the pockets of some politicians). It’s easy to suspect that some big-ticket projects and industrial policies are simply “piggy-backing” on the stimulus to give their proponents bureaucratic momentum, thus exaggerating the headline figure of $586 billion. My litmus test for the reality of these types of things in China is simply to look out my apartment window to see if I can see tangible evidence of activity. I recall during China’s boom periods in the 1990s and early 2000s when many economists doubted the reality of China’s double digit GDP growth. Yet the fact that 50% of the world’s construction cranes were operating in China at the time presented a pretty compelling case for the reality of China’s growth.

So, bottom line? China’s stimulus package is real and its impact will not only spur more economic growth in China’s domestic market but will take China to the next level of global competitiveness as we have seen happen before. The plan is not without its faults and false advertising but don’t doubt its real impact on the economy. Foreign companies, with smart and targeted growth initiatives, can take advantage of this stimulus package to obtain some added growth. You need to be proactive and aggressive to exploit these opportunities. They won’t just fall in your lap!

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