September 2006

I really like Andrew Hupert.  I like what he does for companies needing marketing or human relations assistance in China.  I like that he has been involved in international business and China business for a long time.  I like that he really knows China business. I really like how he focuses on what companies doing business in China should be doing to succeed.

I also really like his Diligence China blog, on which he just did a post entitled, “Approaches to Due Diligence in China II ‘ Business Entry Consultants” that, among other things, gives great advice on finding a China business entry consultant (My comments are in non-italicized font):

  1. Look for business entry firms that have a specialty you will find useful.”  So true.  The company that knows where to turn for auto parts may not be the company you want for assistance in memory chips.  The company that knows Xiamen may not know Qingdao.
  2. “Find out how long they have been doing it.”   Yes.
  3. “Check references thoroughly. Then check them again.”  Yes.
  4. It’s not necessary, but you might want a combination of western and local expertise.”  Oftentimes it is necessary.
  5. You want simple solutions to complicated problems.”  Yes and no.  Andrew is right to note that the company you hire should not be “stumped” at the beginning, but, at the same time, China can be complex so there may not always be a simple solution.
  6. Beware the guanxi salesmen.”  Yes, yes, and yes.  The person who talks about “connections,” rather than about the specifics of what he or she has accomplished in China and about what he or she can do for you in China is to be avoided.  Plain and simple.
  7. Transparent fee structures.”  Sure.

If you are thinking of going into China (including just to source materials from there) or you are relatively new to China, you should read both part I and part II of this excellent series.

Jake Ludington is a technology explainer.  He operates Mediablab, a hugely popular website that provides “Audio and Video Answers for Your Digital Lifestyle.”  It does an excellent job at explaining things like the following:

  • How to backup your iPod
  • How to Change Windows XP Boot Screen
  • How to sync Google Calendar & Outlook
  • How to convert DVDs for PSP

I love this stuff and I could go on and on.  But this is a blog on China.

A few weeks ago, Mr. Ludington e-mailed me to tell me he had attended DEMO China and would be doing a post on all of the companies/technologies there. Now that he has completed his first ten posts on the various exhibits there, I think it timely to direct those interested in Chinese technology to Mr. Luddington’s new DEMO China Blog.

First, a bit about DEMO ChinaDEMO has for many years been a leading US showcase for start-up technology companies to show their technologies to VC companies in the hopes of securing venture capital funding. Palm, Java, and TiVo all “launched” at DEMO.  DEMO China is the first time DEMO has ventured outside the U.S.

DEMO China touts itself as doing all the vetting and picking 70 technologies “so you can do a lot of business in a very efficient three days.”  It boasts of the following:

Civilized networking in an intimate environment.
A select group of decision-makers from emerging companies, respected veterans, sought-after VCs, top analysts and influential journalists — all engaged in the mutual pursuit of what’s next. At DEMO you won’t just exchange business cards, but ideas, connections and opportunities.

Industry leaders talking, not just speaking.
The recipe is simple: gather upper-echelon leaders from a wide range of technology sectors, put them together on stage with a moderator who knows how to stir things up, open mikes to attendees, then see what happens.

Mr. Ludington’s goal is to post on every single technology exhibited there and he has already covered the following:

For those wanting more on DEMO China, check out ZDNet, which provides some video coverage of the event, and Postcards from China, which does a nice job synthesizing and highlighting Mr. Ludington’s posts.

By now, most are aware of the problems Procter & Gamble has been having with its SK-II cosmetics in China.  To very briefly summarize, the Chinese public is angry at Procter & Gamble because of its unwillingness to give immediate refunds for product that was said to be contaminated.

The Positive Solutions Blog (h/t to Asia Pundit) has an interesting post, entitled, “Whiter than White,” [link no longer exists] chronicling what has occurred, and essentially concluding Procter & Gamble did nothing wrong.  According to the post, Procter & Gamble is guilty of nothing beyond bad luck.  In reading the post, I tend to agree.  No matter what, the post makes for chilling reading for those selling consumer products in China.

Full disclosure:  I own shares in P&G.

For more on how quickly the Chinese consumer tide can turn, I suggest reading the following:

1.  “When Consumer Power Turns Nasty

2.  “China Trademarking, Chinese Watermelons, And Rumors Of HIV Tainting

3.  “Chinese Bloggers Smack Dell.

4.  “Procter & Gamble’s SK-II Public Relations Fiasco in China Leads to Brand Exit.

The China Economic Review’s relatively new Logistics blog recently did a post on consolidation among Chinese logistics providers, entitled, “Small firms fight for survival.” [link no longer exists] The gist of the post is that logistics in China is growing quickly (15 to 20% per year) and is becoming increasingly dominated by big companies, many of which are foreign.

China only opened its logistics sector to foreign companies in December last year, pursuant to World Trade Organization (WTO) agreements, but consolidation has been “in full swing” since.  The big multinational logistics companies and the big Chinese domestic firms “are taking over small mainland companies in a contest for the major prizes.”

Consolidation has a ways to go, however, as there are still more than 700,000 logistics enterprises registered on the mainland, most of which are small and medium-sized companies (SMEs).  According to the post, most of these “lack strategic planning, trained personnel and systematic management.”

The post goes on to detail the following milestones for logistic multinationals (MSCs) in China:

  • Schenker has set up a logistics center near Beijing’s airport.
  • STX Panocean of Korea launched a joint venture in Qingdao.
  • US multimode operator Burlington Northern Santa Fe Corporation set up an office in Shanghai.
  • Prologis and Wurth plan to expand their logistics park in Shanghai.
  • Container service provider Scoular settled down in Guangdong.
  • FedEx, which entered into a 50-50 joint venture with Datian in 1999 after leaving another partner, paid the company $400 million to purchase the other 50 percent early this year.
  • TNT offered $135 million for 100 percent control of Huayu Logistics, the biggest truck operator on the mainland, based in Heilongjiang Province.
  • UPS agreed to pay $100 million to break free from a joint venture with Sinotrans.

Also on the logistics front, the Zhonghua Rising Blog just posted on how China’s seaports were ranked number one for the third straight year for cargo handling and capacity and went on to list China’s top ten ports, ranked in order of cargo handling:

1. Shanghai Port.

2. Qingdao Port.

3. Shenzhen Port.

4. Ningbo Port.

5. Guangzhou Port.

6. Tianjin Port.

7. Xiamen Port.

8. Dalian Port.

9. Lianyun Port.

10. Yinkou Port.

Those wanting to learn more about China logistics can attend the First Annual China Logistics Congress, [link no longer exists] set for Beijing on October 18-20.  According to the China Business Services Blog (0ne of the top China blogs on doing business in China), this is going to be a big event, as senior executives from China’s ten leading logistics companies (COSCO Logistics, China Post Logistics, COSCO International Freight Co.,Ltd., China Merchants Logistics, JC TRANS Logistics Inc., Tianjin Datian W. Group Co., Ltd, China National Materials Storage and Transportation Corporation, China Railway Container Transport Co.,Ltd., SITC Maritime (Group) Co., Ltd., China Railway Parcel Express Co.,Ltd.) will be there, along with numerous high level personnel from many of the major Western logistics companies.

For more on China logistics, I recommend the following two logistics blogs that fairly regularly write on Chinese logistics:

  • Asia Logistics Wrap, which describes itself as “News and commentary from Tokyo on logistics in Asia”
  • 3plWire Blog, which describes itself as “Third Party Logistics Trends, News and Information”

Just read a very thoughtful two part article (here and here) on innovation in China, written by Bright Simmons.  Entitled, the “Chinese Griffen,” the site editor describes the two articles as follows:

In two installments, the author discusses China’s ongoing efforts to instill innovation into its economy. The first article, below, raises a number of general themes about the quest for innovation and some unintended effects as well as identify clear failures the quest has met. This is to lay the groundwork for a more focused analysis in the second article, in which a critical perspective on viewing innovation in general is presented and the “innovation gap” in China dissected.

The first part is subtitled, “Despite Rapid Growth, Country Faces Innovation Gap.”  The second part is summarized as follows:

Chinese efforts to create an innovation society are based on one of two possible approaches. There is accumulative innovation, which China currently practices, and there is transformative innovation, which the country today shuns. 

The overall thesis of the two articles is that China practices accumulative innovation, driven mostly by the government.  This sort of innovation can be profitable (witness Singapore), but it is, for lack of a better way to put it, less innovative than transformative innovation (which is, I believe, sometimes referred to as disruptive innovation), as practiced by countries like Israel. 

Couple recent articles in the Wall Street Journal and Forbes Magazine (h/t to Nanodot and Nanotechbuzz) on how China is making gains in nanotechnology highlight how China is both making efforts to move beyond manufacturing and is succeeding in doing so.  The Wall Street Journal article, written by Andrew Batson, and entitled, “China’s Nanotechnology Gains Have US Looking Over Its Shoulder,” explains the significance of nanotechnology:

Nanotechnology gets its name from the nanometer, which is one-billionth of a meter, or about 1/100,000th the width of a human hair. The term refers to the manipulation of materials at very small scales, where they start to take on unusual physical properties. Many governments have focused on the technology because it could lead to breakthroughs in areas such as enabling tiny medical devices that could enter human cells and building super-strong materials from novel combinations of molecules.

Not exactly making one million flashlights at a nickel a piece.

The article goes on to talk about how Beijing has released a “national plan for scientific development that calls for raising spending on research and development to equal 2% of economic output by 2010, from just above 1% in recent years.”  The plan lists nanotechnology as a major priority, describing it as an “area where China may be able to ‘leapfrog’ wealthier nations.”

It makes sense to me for China to focus more on a newer, less developed, technology, like nanotechnology, where no country has an overwhelming wealth of experience, than on a more established technological sector.

Interesting post over at the China Rises: Notes From the Middle Kingdom Blog, entitled, “On Growing Sino-Latin Trade Ties,” on increasing economic ties between China and Latin America.  The writer of the China Rises Blog, Tim Johnson, was a reporter/editor in Latin America for fourteen years, before moving to China to head up McClatchy’s (formerly Knight Ridder) Beijing news bureau so we can assume he knows whereof he speaks:

According to the Business Times newspaper, the bilateral trade volume between China and Latin American countries has jumped to $50.5 billion in 2005 from $8.3 billion in 1999. That’s even more than China’s much vaunted trade with Africa.

The newspaper cites a recent report of the Commerce Department of China saying Latin America has surpassed Asia as the biggest investment destination for Chinese companies.

I find it interesting how many times Chinese lawyers with whom we work ask us about doing business with Mexico and other places in Latin America.  It seems that their Chinese clients are at least as focused on entering into Latin America than the United States.  Indeed, many of them talk about setting up assembly operations in Latin America to ship their product to the United States while avoiding any potentially punitive United States tariffs on Chinese goods.

For more on the growing business embrace between China and Latin America, check out the following:

1.  New economic rule set, new language in Latin America [link no longer exists].  Thomas PM Barnett post on how Latin American businesspeople feel an increasing need to learn Mandarin.

2.  China-Latin America Trade is Beginning to Favor China.  By Andres Oppenheimer, Miami Herald and El Nuevo Herald columnist.

3.   China Seizes Opportunity at Cuba Summit

4.  Latin America-China relations.  Are China’s relations with Latin America a threat to the United States?

5.   China — Not Just For Americans Anymore

6.  China’s Move Into Latin America.  Are China’s relations with Latin America a threat to the United States?

The World Economic Forum out of Davos, Switzerland, just released its Global Competitiveness rankings and China has fallen from 48th last year to 54th this year.  The Forum summarized China’s positioning as follows:

China’s ranking has fallen from 48 to 54, characterized by a heterogeneous performance. On the positive side, China’s buoyant growth rates coupled with low inflation, one of the highest savings rates in the world and manageable levels of public debt have boosted China’s ranking on the macroeconomy pillar of the GCI to 6th place — an excellent result. However, a number of structural weaknesses need to be addressed, including in the largely state-controlled banking sector. Levels of financial intermediation are low and the state has had to intervene from time to time to mitigate the adverse effects of a large, non-performing loan portfolio. China has low penetration rates for the latest technologies (mobile telephones, Internet, personal computers), and secondary and tertiary school enrollment rates are still low by international standards. By far the most worrisome development is a marked drop in the quality of the institutional environment, as witnessed by the steep fall in rankings from 60 to 80 in 2006, with poor results across all 15 institutional indicators, and spanning both public and private institutions.

To see the full list, go here [pdf format].   To see the criteria employed, go here [pdf format]. The top ten most competitive countries are as follows:

  1. Switzerland
  2. Germany
  3. Netherlands
  4. United Kingdom

Hong Kong came in 11th, Taiwan in 13th.  This is a serious, well documented ranking, and China’s falling six places, due in large measure to its institutional failures (legal, ethical, transparency) should not be taken lightly.

We just added Engaging China Blog to our blogroll and we recommend our readers check it out.  Engaging China describes itself as follows:

EngagingChina aims to keep you informed about the new strategic opportunities in China’s  fast-growing economy — and warn of potential pitfalls.

There are plenty of other sites that write about China.  But in their enthusiasm to describe this fascinating country, readers risk not seeing the wood for the trees.

Our focus at EngagingChina is strategy, pure and simple.

And unlike other sites, we look across the range of fast-growth industries, rather than concentrating on just one.  That’s because the lessons to be learned from doing business in China are rarely sector-specific.

To be sure, the challenges facing electronics companies are different from those facing investment banks or wind farms.  But there are also plenty of parallels. We want to encourage this cross-fertilization by drawing readers from different industries and backgrounds.

Geoff Nairn, the founder and managing editor of Engaging China, is a veteran business journalist and long-term contributor to the Financial Times.

EngagingChina is currently operating in  “stealth mode” and we plan to go live commercially  in the fall of 2006.

I agree with Mr. Nairn’s views of China, but I disagree with his perceptions on the Chinese blogosphere.  All Roads Lead to China, China Business Services, China Economic Review Blog [link no longer exists], and Diligence China all “look across the range of fast-growth industries, rather than concentrating on just one” and they do an excellent job of it.  ImageThief and Danwei, though to a large extent focused on media, are great blogs that also often look across the range of fast-growth industries.

Having said this, however, China being as vast as it is, and as quickly changing as it is, there is definitely room for another stellar Chinese business blog, and Engaging China definitely fits that bill.

In e-mail correspondence with Mr. Nairn, I learned he is “a Brit” currently living in Spain.  He has been a journalist in various European countries for nearly 20 years.  For the past decade, he has been a regular contributor to the Financial Times (FT), “writing mostly on IT and telecoms, but also areas like  renewable energy, medical innovation and financial technology.”

Mr. Nairn first became interested in what he calls the “China story,” while writing a magazine article on Cable & Wireless back in 1987.  According to Mr. Nairn, C&W wanted to use Hong Kong as a springboard to into the mainland and it had built a fibre optic network in the Shenzhen SEZ. “The idea that China would one day be a huge and attractive market for western tech companies then seemed far-fetched.  A decade on, I was writing about the  internet boom.  A  clutch of  China dotcoms listed on Nasdaq and the western world woke up to the advances that had been made in China’s economy.”

Mr. Nairn sees China as “impossible for western businesses to ignore” and he aims his blog at helping them better understand it.

Mr. Nairn described EngagingChina to me as follows:

It is not an “insider’s view” on  doing business in China — that would be presumptuous, as I don’t live in China. Nor do I set out to exhaustively detail every  Chinese announcement made by Microsoft, each new store opened by Carrefour or every mobile phone model launched in China.   There are other sector-focused China sites that do that, but they are often light on analysis and sometimes one cannot see the wood for the trees.  EngagingChina’s focus is strategy, pure and simple.   To narrow it down, it covers a handful of sectors that are developing rapidly — IT and telecoms, China’s consumer boom, financial services, energy and the environment, and high-tech.

Engaging China has rapidly become one of my daily “must reads.”  It is both thoughtful and original and I urge all readers interested in China business to check it out.

Peter Yuen, an attorney in the dispute resolution department of Freshfields Bruckhaus Deringer, (one of the world’s biggest and best international law firms) recently wrote a very informative article on Chinese arbitration law, entitled, “Supreme People’s Court: Validity of Agreements and Challenges to Awards.”

Mr. Yuen, who has been counsel in arbitration proceedings in Beijing, Shanghai, London, Singapore and Tokyo arbitrations under CIETAC, ICC, LCIA and UNCITRAL, works out of Freshfields’ Hong Kong office.

Mr. Yuen’s article focuses on the Chinese Supreme People’s Court’s recently issued interpretations of China’s Arbitration Law and it is an excellent short summary of both the interpretation itself and of where it falls short. The Court’s new interpretation provides substantial guidance on two key issues in arbitration: the validity of arbitration agreements and challenges to arbitral awards.

Because Mr. Yuen’s article is itself a summarization, rather than my simply re-hashing nearly the entire article, I suggest those interested in arbitration in China be sure to read it.