China Law Blog - China Law for Business

China Business Blog and Podcast has a great post up on what it calls China's pre-consolidation stage. The post is entitled, "Signs: Observing the pre-consolidation stage in China," and its gist is as follows:

But I think there are some signs that are quite clear that are telling us what stage we are at in China’s growth — and one of the defining features of this stage is what I call “pre-consolidation,” meaning, generally, that many industrial sectors in China are still very diverse, fragmented and messy but are in the process of becoming more aligned and streamlined. Instead of trying to further describe this stage, I would like to look at four “signs” that define what I am calling “pre-consolidation” and signal that we might be coming to a crossroads.

First of all, the biggest sign — and the easiest to recognize — is simply the number of players in many market sectors in China. One of the features of a more mature economy is that there have emerged several large players in a particular sector and other players have either fallen away or have been gobbled up (and that’s how the big players got that way, growth by acquisition). The auto industry is a good example — in the early 1900s, there were dozens and dozens of car companies in the U.S.; today, there are only three (and if the talks GM is reportedly having with Chrysler come to fruition, there will only be two!). China is on the other end of this spectrum. There are over 54 different car companies operating in China and well over 100 brands. Given time, consolidation will happen, but for now, China is in the “pre-consolidation” stage.

This post does a superb job explaining China's economy from a business perspective and I strongly recommend anyone with any interest in China business read it (or listen to the podcast) -- it is that good . . . .though quoting Billy Joel really ought to be verboten.

CLB co-blogger Steve Dickinson wrote the following article for the China Economic Review. Steve is the monthly legal columnist for the Review, which BizCult rightly raves about today in its post, entitled, "China Economic Review: In Review." Steve's conclusion: As written, this law is no big thing:

For all the hype about recycling,the purpose of China’s Circular Economy Promotion Law (CEPL) is not to reduce waste. The primary goal of the legislation, which was approved in late August and comes into effect on January 1, is to deliver energy efficiency.

Misinterpretations in the West are understandable: Circular economy laws in developed countries tend to be concerned with recycling as a form of pollution control and waste management. But China is different. Energy conservation and recycling are viewed from the standpoint of contribution to efficiency, reduction in cost and reduced reliance on imported raw materials.

The entire circular economy initiative is based on inputs and outputs operating in a circle: Fewer energy resources are required because more of the detritus produced by energy consumption is swept up, reconditioned and reused.

Situation: Critical
Energy utilization is a very serious issue in China.

Beijing’s plan is to quadruple the size of the national economy between 2001 and 2020 while doubling energy use. The plan is based on China’s experiences in the 1980-2000 period, during which this ratio of growth to energy utilization was achieved. At the start of the current cycle, economic planners – both in and outside China – assumed that the energy utilization target would be reached with ease.

They believed that the real problem would be to keep the economy growing without overheating or falling into a recession.

In 2006, these same planners were shocked to learn that resource utilization in China had dramatically increased. For the five-year period from 2001 to 2005, economic growth was about 8% as planned, but energy utilization growth jumped 12%. Working to this ratio, if the size of the economy grows by a factor of four through the year 2020, energy usage will grow by a factor of six. For economic and physical reasons, this kind of expansion is just not possible.

If China is not able to bring energy utilization under control, its entire plan for continuous economic expansion at a rate of 8% for the foreseeable future will have to be written off. The CEPL has been adopted as a means of dealing with this problem.

Given the significance of the issue, it is surprising that the law actually offers nothing concrete in pursuit of its stated goal. It is really nothing more than a general statement of policy.

As has been learned in the environmental wars in the US, Europe and Japan, laws that require economic sacrifice now in order to achieve an energy reduction or related environmental goal in the the future only work when backed with clear standards and significant penalties. Both of these are missing from the CEPL.

What the new law does call for is for the State Environmental Protection Administration (SEPA) or some other agency to develop a national circular economy plan. The agency in question should draft formal rules and regulations for implementation of such plans, the law goes on to say.

This approach has been common in legislative drafting in China over the past several years. Controversial laws are adopted by the National People’s Congress, but rules and enforcement mechanisms are absent from the law – responsibility for them is merely passed on to the relevant government agencies.

Further delays
Where the issues are controversial, as in the case of the CEPL, there is usually a long wait before the designated agency issues any rules. And once they do this, the final rules are often no more concrete than the governing law.

The normal reason is that there is no genuine consensus within the government, and between the center and the regions on how to proceed. This is clearly the case with the CEPL. The circular economy program is not well-understood and the present economic sacrifices it would require are strongly resisted by local governments, businesses and consumers.

As a result, even though the law addresses an issue that is critical to the growth of the Chinese economy over the next 20 years, it is unlikely the CEPL will have a genuine impact.

The sadly predictable result is that China will continue to overindulge in the consumption of energy and other natural resources. Beijing faces a struggle to meet its current economic development targets -- and it appears likely to be in vain.

Very interesting post on Shenzhen Undercover, entitled, "Shenzhen's Greater Plan: No Manufacturing, No Problem." Grossly summarized, put into my own words, and infused a bit with what I think is happening, the post essentially says that the reports of the death of China's economy, as evidenced by the closure of thousands of toy factories in and around Shenzhen, is greatly exaggerated. This is merely part of Shenzhen's (and China's) long term plan to move up from low end manufacturing.

On the other hand, my friend David Dayton, over at Silk Road International, in his post, entitled, "So, How Does the Carnage Look from Ground Level?" says things are much worse than the media is letting on. David does an excellent job laying out the ground level things he is seeing that tell him things are bad and getting worse. Oh, and where is the ground level from which David is writing? Why, Shenzhen of course.

What do you think?

UPDATE: Just read this very thoughtful on the ground analysis of China's economy at a brand new blog called Chinayouren. The blog is written by a native Spanish speaker (but his English is just fine) and the post is entitled, "Crisis and the Great Wall of China." I urge readers to check out this post as well, along with the blog. (h/t to Blogging for China)

There are two kinds of people. Those who hate going grocery shopping, and those who love it. I fit into the second category.

I love it for various reasons. I love food. Going to the grocery store is for me what going to a stereo store is for an audiophile or going to a book store for a bibliophile.

But I also like grocery stores for what they reveal. A Whole Foods executive once told me that Whole Foods chooses locations with a high level of educational attainment. So just seeing a Whole Foods tells you there are a lot of people with advanced degrees living nearby. But going into one will tell you a whole lot more. My "home" Whole Foods here in Seattle has a massive seafood selection. The one in my brother's Houston neighborhood has a smaller fish section, but a much larger meat section. From this I conclude that educated Seattleites eat more fish than educated Houstonians, while the reverse is true for meat.

I went into "my" Whole Foods this evening and I noticed two things. One, it was less crowded than probably any other Sunday at around that time, and two, there seemed to be more of an emphasis on the "value" of items and their sale prices. Shucks, if I hadn't gone shopping this evening, I would never have known we are in the midst of a financial crisis.

Seriously though, whenever I go somewhere new, I love going to the grocery store. It gives me a better feel for the local culture and the local economy.

So I was delighted to learn of a relatively new blog out there that feels as I do regarding grocery stores and food in general. The blog is Beijing Gourmand and its subtitle is just perfect: "Understanding China through its stomach and my own." It further describes itself as looking "at not only what and where to eat in Beijing and China, but also examines the social and economic aspects of our food and where it comes from." I like that and I like the blog. I also know have known "Benjamin," the force behind this blog, for years and know him to be a very thoughtful guy and an excellent writer.

Some of my favorite posts:

1. "Like a (kaoya) Virgin," which waxed so poetic (along with photos) about a Peking Duck restaurant that it had me momentarily reconsidering my decision to give up meat more than 15 years ago.

2. "China's Crops Challenge," which does an excellent job explaining why China's agriculture policies are progressive.

3. "Lau Kin-Wai: Decline of Chinese Cuisine Since the 1950s," explaining how the old ways of cooking were better, yet are fading out due to it being so time consuming.

I just added Beijing Gourmand to our blogroll.

Jeremy Gordon at China Business Blog is out with his latest in his emminently quotable "Don't Quote Me" series. This one is entitle, "Don’t Quote Me (On When US$100=RMB100)" and it quotes Jack Perkowski, of “Managing the Dragon” (the book and blog) on how Chinese view money.

I always carry two bills with me – an RMB100 bill and a $100 bill…The point I make is that these two bills are treated in exactly the same way in their respective countries. Just as the $100 bill is the highest unit of currency that you can get in the United States, an RMB100 bill is the highest unit of currency you can get in China.

When Americans look at a RMB100 bill, I say, divide by 8 and see $12.50. But when Mainland Chinese look at the same bill – and I don’t care how wealthy they are – they see what Americans see when we look at our own $100 bill.

Jermey goes on to say that "anyone who has conducted price negotiations in China will know what he is talking about."

So true.

In the Managing the Dragon book (which I highly recommend, here), Jack talks about how much he spent on a haircut compared with how much his well paid Chinese executives spent, and on how silly they all thought he was for spending something like $10. The book also uses hotel prices to show the purchasing power parity between a 100 RMB note and a USD$100 bill. The relevance of all of this is that if you do not understand how money is valued/viewed in China, you cannot be well positioned to negotiate anything there.

Tom Orlik, a very thoughtful freelance journalist based in Shanghai, with a real bent for finance and economics, was kind enough to send me his translation of a recent Caijing (probably China's best business magazines) article on China's economy.

I liked the anlysis so much, I am running Tom's translation in full, below:

China's GDP growth for 3Q08 came in at 9% yoy, down significantly from 10.1% in the second quarter and the slowest since 2004. Here are a few insights culled from my translation of Caijing's analysis (for those who don't know Caijing is like the Chinese equivalent of the Economist magazine):

Weak external demand and rising input prices dented growth in industrial production and profits. An 11.4% yoy growth in industrial production in September, down from 12.8% in August, was the slowest since 2002. Growth in industrial profits in the first 8 months of the year fell from 30% yoy in 2007 to 19.4% yoy in 2008. If you strip out power producers and oil refiners – who are both squeezed between high input prices set by the international market and low output prices set by the government – the picture is probably considerably better, though still not as good as 2007.

Export growth for the first 3 quarters decelerated to 22.3% yoy, a drop of 4.8% from the first three quarters of 2007 on weakening external demand. Import growth accelerated to 29% yoy, an increase of 9.9% over the same period last year, on ongoing robust internal demand and high raw material prices.

In the first 3 quarters, Fixed Asset Investment (FAI) growth increased to 27% yoy, up 1.3%. With FAI apparently robust, the government will have pause for thought about the much-predicted fiscal boost to infrastructure spending. With private sector investment holding up, the government will not wish to bid up the prices of raw materials with its own energy and raw material intensive investment programme.

Domestic consumption appears to be holding up, with retail spending for the first three quarters up 22% yoy, 6.1% more than in the same period in 2007, and retail spending for September up 23.2%, holding steady with the figure for August. Caijing points out that taking account of lower inflation in September, retail spending has actually increased month on month, though spending in August is normally slow because of holidays. In any case, it appears that the Olympics did not have a negative impact on spending.

CPI for September dropped further to 4.6% yoy from 4.9% in August on last year's higher base effect and an ongoing stabilization in food prices. Factory gate inflation fell from 10.1% in August to 9.1% in September. The still high reading for producer price inflation indicates the ongoing build up of upstream inflationary pressure. The ongoing fall in the CPI, however, will mean the government has increased leeway to introduce pro-growth policies in the remainder of 2008 and the first quarter of 2009.

The government's main priority will now be to introduce policies to prevent a hard landing and this will be the focus of the meeting of Communist Party leaders in November. Caijing notes that because of the US financial crisis a prolonged slowdown in export growth is to be expected. They suggest policies to strengthen domestic demand are the best and most likely option for the government. In particular they propose: 1. expanding medical insurance and constructing a rural health care network; 2. increasing the provision of affordable housing; 3. an end to control of food prices combined with food subsidies for poor people; and 4. a tax cut for middle income families to help boost domestic consumption. With these policies, GDP growth could be increased by 1.5-2% - enabling China to achieve GDP growth in 2009 of 8.5%-9.5%.

Finally, Caijing notes, the main difference between the current financial crisis and that in 1997, is that back then many companies were state owned and therefore more able to ride out troubled times. Now, more companies are publicly listed or privately owned, so they are more likely to respond to low demand by cutting production or going out of business.

I'm buying it. Are you?

In its post, "Paying your Chinese Supplier – Know your payment terms and options in advance," SourceJuice does a yeoman like job setting out the various options for paying a Chinese supplier. The post explains the following options, and describes the risks of each:

-- Advance, Cash in Advance or Cash Advance – these are known as payment in advance terms

-- Telegraphic Transfer, Telex Transfer, Bank Wire Transfers – these are known as T/T or TT payment terms

-- Wire and Funds Transfer Services like Western Union and Money Gram
Internet payment companies like PayPal.com, Moneybookers.com, and Escrow.com

-- Letter of Credit and the various options that banks offer on these instruments – these are known as LCs, L/C, or LC payment terms

-- Documentary Collections like Documents Against Acceptance or Documents Against Payment – these are known as DA or DP payment terms and sometimes referred to as

-- “Bills of Collection” or “Bills of Exchange”

-- Open Account or Pay Post Receipt or Goods in Advance – When the Seller provides you Credit

I strongly urge anyone who buys from China to read SourceJuice's post in full. The one thing I would add to it is the advice to have a written contract (preferably in Chinese) with your Chinese supplier. In many cases, such a contract is necessary for you to be able to pursue a refund for bad product.

Richard Brubaker over at All Roads Lead to China just loves logistics. I don't love it, but I respect its importance. Anyway, Rich has taken to listing out and linking to the important China related logistics stories every week, and I see that as such an important task that I am going to take to linking over to Rich's blog every time he does that. So if you want to know more about China logistics by going to some great links, then go here, to "Logistics News in Review."

Long-time client, a manufacturer of small steel products, has for months been "threatening" to move his factory to Vietnam, either to replace an existing factory in China or as an adjunct. Company was unhappy with China's increasing taxes and labor rates. Just spoke with client this morning (yeah, I know it's Sunday but he was about to board a plane for China) and I asked him about Vietnam. His reply was essentially as follows.

"Forget Vietnam. Too risky. We found we just can't handle the inflation and the politics. Yes, China is getting expensive, but I just feel it is more of a known entity for us. Not worth chasing a few dollars in savings."

Again, I am NOT saying Vietnam is the wrong place for business, because it most certainly is not and a number of my firm's manufacturing, food, and high tech clients have done quite well there. But what I am saying is that the next time anyone acts as though Vietnam is necessarily better than China for your business, make sure you look at all relevant factors, not just easily apparent costs.

For more on Vietnam's political risks, check out this Asia Sentinel article, "Hanoi Pain."

David Wolf of Silicon Hutong has a very thoughtful post up on innovation in China. The post is entitled "Searching for China's Soul of innovation," and it nicely takes us through China's interrupted history of innovation and posits whether China will become a great innovator again, what it might take for that to happen, and what that might mean if it does.

I agree with Wolf that China innovation is going to be with Chinese characteristics, not just some knock-off of US methods:

So much of what is written about China and innovation today, whether by foreign or Chinese observers, is patronizingly prescriptive. If China wants to innovate, it must imitate - it must recreate the conditions that exist in high-tech hothouses of Silicon Valley, Boston's Route 128 corridor, Austin, and Seattle. There is some truth in that, but there seems something unnatural about trying to graft San Jose onto Shanghai, or Federal Way onto Tianjin.

* * * *

Perhaps the answer for China is to search for an answer to the independent innovation challenge in its own history, applying foreign lessons where appropriate.

Federal Way? Here in Seattle, Federal Way (a small city located between Seattle and Tacoma) is known more for its Wild Waves Theme Park and used car lots than for any innovation. Did you mean Redmond, home of Microsoft and many other tech companies?

I am just so glad James Fallows is writing about China. One hundred years from now, when the West is looking at why China is where it is, historians will read Fallows.

In the most recent issue of Atlantic Monthly, in an article entitled, "Their Own Worst Enemy," Fallows does a great job explaining the disconnect between how the West sees China and how it really is. The article's subtitle is "As China prepares to take its place as the world’s dominant power, it faces confounding obstacles: its insularity and sheer stupidity in delivering the genuine good news about its own progress."

China PR guru, ImageThief, in his post, "The tragedy of China's international communication," has this to say about Fallows' article and about China's lack of PR prowess:

Fallows' point --and I agree with it-- is that the great tragedy of this is that there is much positive happening in China and many good stories to tell, but that they often get lost among the time-warp rhetoric, self-destructive mistakes and ham-fisted attempts at total control. That's a shame, because the essence of good PR is to find the good stories and tell them well. Fallows also points out that the government's domestic communication abilities far outstrip its international ones. As someone who lives in China and likes it, I sympathize with the need for better external communication. As a PR man, however, I often cringe at the attempts.

I agree and will raise both Fallows and ImageThief one by pointing out how ultimately dangerous Western misconceptions of China can be. The US needs allies in the world right now and we should be making nice with countries that are seeking to build, rather than destroy, seeking to grow their wealth, rather than to terrorize others, and seeking to move towards freedom, rather than towards increasing repression. For all its faults, China is moving (yes, slowly) on the right path and we should be working WITH it as it does so.

Oh, and the reason I titled this post as I have is because I have yet to speak with someone who has gone to China who was not shocked at how much "better" and "freer" it is than they expected.

Please read Fallows and then let us know what you think.

Benjamin Joffe of Plus Eight Star has put up his Powerpoint presentation from the recently completed OpenWebAsia08 conference in Seoul. The Powerpoint is entitled, "Collaboration Beyond Culture" and it is on innovation in Asia and the tendency of the West to ignore it, at its own peril. The presentation is quite persuasive, and as a sushi addict, I particularly appreciated Benjamin's inclusion of sushi as one of Asia's top inventions. Check it out.

As a lawyer, I usually deal in facts, not feelings, but I've been pontificating about a feeling for the last few weeks, based mostly on an accumulation of facts and past experiences. The feeling I am getting is that Chinese companies are getting more sophisticated/businesslike/global. They are starting to play for the long haul.

I recently had lunch with a good friend and long-time client who heads up the Seattle office of a Singapore based oil and gas company/supplier. Client was born and educated in Russia, but has lived in Seattle for around 15 years now and is very Americanized. We spent most of the lunch talking about schools for our kids, the upcoming election, and the economy. Towards the end of the lunch, my law firm partner, Charles Moure, brought over a local banker with whom he was having lunch in the same restaurant (in case there is anyone in Seattle who does not know this, but if you ever want to find either Charles or me at lunchtime, your safest bet is always Redfin restaurant.) This banker has a Master's Degree in Russian literature and he and my client immediately lapsed into Russian, leaving me trying to pick out the maybe 1500 Russian words I know. After a couple minutes, it dawned on me that during my entire lunch with my client, his "Russianness" had never even occurred to me.

Just this afternoon, I had a two and a half hour (or, in lawyer speak, 2.6 -- that's a joke!) meeting with another long-time Russian client and, once again, his "Russianness" was a complete non-factor.

Many of our Russian clients have become such experienced international players that our dealings with them are no different from our dealings with our American clients. Though my firm has a Russian born employee with a US law degree and Russian born employee with a Russian law degree, at least half our Russian clients never deal with either, simply because there is no reason nor need.

This has never been true of our Chinese clients. Every time we have represented or sought to represent a Chinese company, whether that company has a permanent presence in the United States or not, we have had to involve one of our Chinese speaking lawyers in virtually every telephone conversation and meeting. Many times it was necessary not so much for language reasons, but to have someone there to make very clear that yes, in the United States, it is always better (and in the long run much cheaper) to follow every law.

But just recently, we took on a new Chinese client that, in the slightly ungrammatical words of the old Apple ad, "thinks different." This is a very large and very successful Chinese manufacturing company that set up a sales/distributing arm in the US and for the first few years, did things the "Chinese way" here. The head people in the US were friends of friends of the company owner and the extent of their US business/legal knowledge appears to have been confined to the fact that they live here. The US arm functioned very poorly and the Chinese company eventually replaced the first wave of leadership with a second wave. This second wave attended college here in the United States and very much wants to do things correctly here, and avoid the mistakes of its predecessors. Our telephone conversations and meetings do not require attendance by our Chinese speaking lawyers and they do not differ from meetings with American clients. Just last week we added another one, with nearly the very same background.

Steve Dickinson, who heads up my firm's China practice and who is based in China, is always telling me that our best American clients in China are those who came into China 4-7 years ago, made all kinds of mistakes, yet survived. They are now so profitable they are willing to pay lawyers to avoid future mistakes because they now have so much to protect. I think more and more Chinese companies are hitting that stage in the US now.

I see similar changes/business maturation happening with Chinese businesses in China as well.

Shanghaiist recently did a post entitled, "Shanghai matchmakers promise to tell the truth":

Shanghai Daily tells us that around 30 members of the Shanghai Matchmaking Trade Association (yes, there is such an organization), have signed an agreement promising to be honest to their customers. If information provided by these agencies turn out to be false, or if their service isn't satisfying, customers will get a refund. The trade association also said they will inspect these companies once a year to make sure they live up to their standards.

This move seems much needed, in a city with over 100 matchmaking agencies. According to the article:

Complaints about companies faking identities and credentials have poured in during recent years. Many people also complained of high fees for poor services.

This evidences Chinese companies grasping the importance of reputation.

Then just this morning, I read an email summary of stories from the China Economic Review, that the following two summaries:

BYD to debut electric car in November
BYD, a Shenzhen-based company best known for producing batteries, is set to begin selling China's first mass-produced electric car in late November, the Wall Street Journal reported. The car, called the F3DM, will be priced at about US$22,000 and will be able to travel up to 110km on electricity when fully charged. The F3DM – reportedly a major reason for a US$230 million investment in the company by Warren Buffett – will come out two years ahead of the expected release dates of GM's Chevy Volt, which is similar in design, and Toyota's new hybrid-electric model. GM and Toyota have said they are taking more time to ensure the safety of the lithium-ion batteries in their cars.

IBM plans Shanghai R&D center
IBM is planning to open a research facility in Shanghai, its first new research center in a decade, the Wall Street Journal reported. The lab will focus on building new applications for the internet and small businesses. John E. Kelly III, IBM's director of research, said China's population, economic growth and large number of private enterprises present a "huge laboratory" for the company, and that its customers have recently gravitated toward China. IBM has eight R&D centers worldwide, but has not opened a new one since building two facilities in India. The Shanghai lab will be an extension of the company's lab in Beijing, which it opened in 1995. Other technology companies, including Google and Microsoft, have expanded their R&D presence in China.

The sad part of all this though is that in the last few weeks, for the first time ever, we have been receiving more inquiries from Chinese companies owed money on deals gone bad with American companies than the other way around. Far more.

Yup, "the times they are a changin...." and "I'm hooked on a feeling."

McKinsey is just out with a new and very comprehensive survey and analysis of the Chinese consumer, entitled, "What's new with the Chinese consumer" (free registration required). Its subtitle is that "It’s hard for brand managers to keep pace with the shifting attitudes of Chinese consumers. But some trends can be discerned amid the noise."

The upshot is that brand loyalty seems to be weakening in China and word of mouth is more important than television ads. Unfortunately, this survey was before the Sanlu milk scandal which must have impacted consumer sentiment.

Go here to learn all.

One of the advantages to living in a city without a decent newspaper is that until only a few weeks ago, virtually every article on local real estate would quote a local realtor talking about how the market is fine and how now is the time to buy a house. As a homeowner, reading those articles always made me feel a little bit better.

Lately though, even our two local papers are starting to catch on.

Newsweek is apparently a bit slower as it just came out with an article with all of the requisite quotes from realtors telling us how China is different and why real estate will always be a great investment in China. The article is entitled, "Great Expectations," and subtitled, "Real estate around the world may be on the skids, but China's homeowners are feeling little pain."

One of the best things that ever happened to me occurred during my first year of legal practice. I worked on a massive case representing the FDIC in trying to figure out who was liable for the collapse of Oak Lawn Savings bank, the fourth largest savings and loan in the country. As part of the investigation, I must have deposed at least twenty of Illinois' top real estate developers, and of those twenty, probably eighteen of them had gone under. And of those eighteen, probably fifteen were truly experts in real estates. They had gone under simply because nobody could have predicted interest rates would spike to 20%. I learned one very important lesson from that case: there are no sure things. The corollary of that is that real estate is not a sure thing and that what goes up can come down.

I am not going to make any long term predictions regarding China real estate as that would take a far better grasp of economics, sociology, and demographics than I can muster, but I would urge anyone thinking of buying real estate in China to base their decision on more than just the assessments of self-interested realtors and developers.

For a more realistic assessment on China's housing market, check out this Economic Observer article, entitled, "Wind Knocked out of China's Housing Prices."

Since this is number 19 of this series, it should be pretty obvious by now that I am strongly of the view that China is ripe for foreign service businesses. Yesterday's New York Times has an interesting story, entitled, "N.B.A. and Partner to Help Build 12 Arenas in China," on how National Basketball Association (NBA) and AEG Worldwide are teaming up to design and build "at least a dozen arenas in China.

The NBA's explanation for doing this makes complete sense and it holds true for virtually any service business:

Stern said the league was looking to capitalize on a growing urban Chinese middle class with increasing disposal income.

“China is an enormous market with enormous potential, not only for basketball but for entertainment venues,” he said in an interview.

If only 1% of China's 1.3 billion attend an NBA game....

Asia Logistics Wrap is on part two of a very thoughtful seven part series on Asian supply chain challenges. For those involved in moving products into, within, or out of Asia, I strongly urge you to start reading this series. Part I is here and Part II is here.

Asia Logistics Wrap's post stems from this post on Bob Ferrari's Supply Chain Matters Blog.

Paul Denlinger over at China Vortex has a good post up on where to invest in China going forward. The post is entitled, "The New Investment Rules For China," and it sets out the following seven rules for China investing:

1. "Avoid Shanghai and Beijing." They both have plenty of smart people, but staff turnover and costs are just too high.

2. Look at the "20 major city markets in China" like "Dalian, Hangzhou, Ningbo, Xiamen, Guangzhou, Wuhan, Nanchang, Chongqing, Chengdu, Fuzhou, Kunming, Nanning, Nanjing, etc." And Qingdao.

3. Because Guangdong and Zhejiang are the two largest manufacturing provinces in China, these they "are going to be hit hard because of their dependency on the US market."

4. If you are a private equity or hedge fund investor, you need to think about investment horizons. If you can offer investments which create jobs and upgrade the skill force, you are in a good position.

5. "China’s hardware development and infrastructure are very impressive and are the most modern in the world, as the Beijing Olympics showed. The hardest part to modernize is peoples’ mentality as the tainted milk scandal has shown. China’s aging demographics do not give it enough time to cross the chasm, so Chinese will get old before they get modern. When that happens, China will look like a bigger version of Japan, and will have all the problems Japan has today. Just hope that China has a national healthcare system in place by then"

6. The wealth gap will become wider over the next 10 years between the cities and the countryside, then stabilize for five years, then shrink as the city worker bees retire in 15 years.

7. The dumb money has already been made in China. It’s time to rebalance your portfolio to make smart money.

I agree with all except numbers 5 and 6, which are, like all long term predictions based on the assumption there will be no big changes.

The key business point to take from Paul's post is that it is too late for companies to make easy money by just going blindly into Shenzhen or Beijing. They should consider second tier cities and they should consider demographics. Paul is right to tout China's hardware (infrastructure) and bemoan its software (service sector), but I see this as THE opportunity for Western companies. China's service sector is growing and it is in precisely that sector where the Chinese are looking for help and where Western companies are so well equipped to give it. And it is indeed the second tier cities that are, as of now, relatively undeserved.

In its post, "Franchising and Education Market -- Lucrative Business in Asia," Trendsniff contends that "education, healthcare and retail" seem relatively immune from the economic slowdown in Asia. Though I have to believe almost nothing is completely immune from a major economic slowdown, I do see the service sector in China continuing to thrive, particularly for foreign companies. The number of Chinese with sufficient disposable incomes to contract out for services is rising and these are the exact people who both understand the benefits of paying for name brand services and can afford to do so.

The always excellent (but far too infrequent) Chinese Negotiation Blog recently posted on ten warning signs of an impending bad China deal in a post entitled, "Negotiating in China Can Get Complicated Fast."

The post starts out stating two important and fairly obvious (though too often ignored) truths:

-- Many westerners who enter into a negotiation with a Chinese counter-party are so sensitive to cultural and interpersonal issues that they lose sight of business issues.

-- The key to success in China is to walk away from bad deals and find good ones. The fact is that many newcomers to China business have trouble spotting the red flags and danger zones that indicate a deal is about to fall apart. The result is that they hang in there and keep negotiating with inappropriate counter-parties until they end up with a bad compromise and a disastrous deal.

The post then sets out ten warning signs of what will almost certainly turn out to be a bad China deal:

1. Terms that will change at some unspecified future time.

2. "New technology or connections to be introduced later – but priced now." Your concern should be that the first iteration will not work (but will fulfill the terms of your contract) and the second one will never happen.

3. You pay now – the Chinese company delivers at some unspecified time in the future.

4. "Open ended liabilities or unsettled valuations. Every deal you do should have very specific valuations and timetables. You wouldn’t sign a contract with blanks – don’t do a deal until you’ve clarified all the terms."

5. "Best effort sales/marketing. If you are investing or supplying technology and relying on your local counter-party to market your product, make sure that they have a solid network, good references and specific experience in your industry. Make sure you have a way out and a Plan B."

6. "Anything involving connections, relationships or trust. If they say 'I have guanxi' you say 'I have to go.' Seriously."

7. "Mysterious new players enter – particularly decision makers – and change the terms. This can happen to anyone in any country, but in China it means you are starting over from scratch. This is a common tactic here, and it doesn’t bode well for your partnership."

8. "Deals escalate into long-term, multi-transaction JVs too quickly." If you want to buy or sell something, start with a few test orders and develop the relationship over time. Do not believe your counterparty's insistence that a joint venture is the only way to go in China, because it probably is not. Check with your lawyer on this one.

9. "They want you to do anything without a contract. Usually this takes the form that 'the owner/accountant/treasurer is away on vacation and we can’t stamp the contract until he’s back but if we don’t get the deposit now we won’t be able to make the deadline…' No. Just plain NO.

10. "They tell you that something is too complicated to explain. They’re right. Walk away now."

All very good advice. I am constantly seeing all of these tactics and I would love to hear stories from readers who also have experienced them (or not).

Third Party Logistics News recently posted on how those considering Vietnamese manufacturing should look long and hard at Vietnam's logistics problems. The post is entitled, "Vietnam : Lack of logistics infrastructure = higher logistics costs," and it contains good advice for those considering Vietnam.

It concludes what I always conclude. Vietnam is great for some things and not so great for other things and nobody should just be rushing in:

Anybody who has been reading our blog since its inception knows that we’ve always cautioned against “rushing” into China and evaluating the pros and cons for going in carefully before making that decision. We’ve never advocated avoiding China, simply that people should think twice and consider carefully before making that jump - for some companies, it just might not make sense.

As China moves to higher-end manufacturing and costs in general have continued to rise, some companies have been tripping over themselves in their rush to move production to even-lower-cost Vietnam. I wish I could say I was puzzled at the frenzy of activity in Vietnam or that I was surprised by the subsequent port congestion issues that slammed Ho Chi Minh City earlier this year, but I can’t. It’s interesting to note that the same advice we have advocated in the past in regards to China - and still do - are similarly being ignored by countless firms now rushing headlong into the next “hot sourcing country”, Vietnam.

It’s been pointed out before, but I’ll point it out again: Vietnam is not China. And one of the largest differences between the two countries is the level of port and logistics infrastructure. Vietnam simply can’t compare to China’s port infrastructure:

Put simply, Vietnam's logistics, especially its ports, are not on China's level and that oftentimes directly translates into increased costs.