GLOBAL PARTNERS MBA
Final Thoughts on China
Asian Experience
Karen Loch
6/12/2012
Final Thoughts on China
Chapman Parker, Vikas Agrawal, John Cranshaw
Final Blog
Intro:
While in China I found myself spending an inordinate amount of time reminiscing about Mexican food, its many qualities and few faults, and after an entire flight dreaming of skillets and Mexican cheese, I sat resolutely, in a state of sheer bliss, across the table from my father at a local staple; Jalisco’s Restaurant.
So entranced by the smells and sizzles was I, it took my father two attempts to register with me a question- my attention span was myopically Mexican. I apologized.
“Sorry Pop, what was that”
Happy to be paid attention to, he re-stated his question, with genuine curiosity, “Chap, sum up China in one sentence?”
I paused. Many sentences popped into my head. It seemed too big a question, and so I sought clarification. “It depends on the framework I guess. Are you asking from an Economic perspective, a social perspective, political?”
“C’mon, just give me a sentence”
I began to work it out with an external monologue. “I was walking around, in Shanghai, Chongqinq, and Beijing-to a lesser extent- thinking how little connection there seemed to be between this construction explosion, and the people who meander about these massive – airy boulevards. It didn’t seem market driven, which is to say, it didn’t seem that these projects needed to make a profit, to be occupied, for the building to continue. I knew a huge part of China’s year-on-year GDP growth was from Government Investment, but I didn’t know how little connected Chinas vaunted progress would feel with real market forces.”
If it is a sentence, it’s a question; “Wow, is this sustainable?”
Final Impressions
Where is all this money coming from?
My colleagues and I spoke for quite some time, going over numerous observations we each had while in China. Mining through all of the material to synthesize five distinct observations was difficult, but one stood out immediately. The amount of high-end retail shops, car dealers and office towers going up seemed out of proportion with the amount of wealth commanded by the citizenry. GDP growth in China is of a tripartite composition, with government investment, domestic consumption and exports making up the bulk of year-on-year growth. China has been trying to boost consumption for years, and I just don’t know if building more snazzy shops, office and residential towers will create the kind of middle class wealth that China is hoping for. Maybe so, from a small anecdotal sample, there appears to be a disconnect. Gucci, Fendi, Ferragamo and the like are popping up everywhere, in each city we visited, often in the base of a new spectacular office or residential tower. But people don’t seem to be frequenting these shops, and the disparity between the socio-economic position of the people you see on the street and the shops lining that street, is vast.
More Guangxi, please..
In our official company visits, various officials spoke to building Guangxi- loosely translated as a “network” in Chinese. As we learned, a foreigner can build Guangxi in many ways. They can build distinguish existing connections, perhaps a mutual friend. Another way to gain Guangxi is o publicly praise someone, or provide them with gifts. Our academic materials, as well as our official company visits, led us to believe that a foreigner could, with proper observance of Chinese cultural norms, gain enough Guangxi to effectively conduct business in China.
Some of us met with executives outside of the company visits, and all of us spoke with locals in the cities we visited. In those conversations, there existed a common theme; that for a foreigner, no amount of proper behavior- or cultural correctness-could overcome the simple fact that you are not Chinese. A foreigner will remain outside the Chinese inner network, end of story.
China first, the world second
The Chinese are simply not concerned with anything above national interest. That is not so different from any other government, but because both the state and the party have direct control over everything that transpires in mainland China, the results of self-interested policy manifest themselves differently, especially with regards to foreigners trying to do business.
The Chinese government controls all investment into the country, owns almost all of the land, and can seize plant and property at a moment’s notice. While at UPS, our presenter spoke about a large infrastructure project that UPS had recently completed in a Chinese province. Unfortunately, they did not own the facility, and it seems to me a rather risky situation. UPS had to give all of their facility secrets to the builder of the facility, they then build it, and UPS signs very short 10 year leases. At any point, the government (part of which is UPS main competition, China Post) could fail to renew the lease, and give the plant to a competitor.
Going along with UPS, the Chinese government, upon accession to the WTO was supposed to grant UPS domestic carrier rights. They have not, and will only do so if the rights are granted piecemeal, a formula they know full well will not work for UPS. UPS has to establish a network. A package carrier that can only deliver to a few cities is essentially worthless.
Fool me once….
The day we left China, the central bank for China cut interest rates by a quarter of one percent. This was not enough apparently, as it seems that even nudging by the government cannot make Chinese people drastically alter their consumptive habits. Chinese people tend to save much more than their Western counterpart, a responsible habit, which has helped prop up an inefficient banking system with a glut of deposits, but certainly doesn’t help GDP growth through consumption spending.
The Chinese government did not stop with a lowering of the interest rate. China then said it would double its exports, at the same time that their top trading partner, the Euro Zone, had GDP contraction.
So where are all of these exports going? Correct, the United States of America, which is expected to increase Chinese Imports by 12%. Needless to say, this should increase tensions between the two nations. With controlled currency exchange, controlled banking systems, outright intellectual property theft, a court system that rarely awards Westerners, and a massive current account balance spent on government investment, the real question is, why China was accepted to the WTO. John Cranshaw said it best, “Nobody would do business with China if they didn’t have to do business with China.”
Western businesses will continue to get kicked around, when the net result is profit margins that carry the global operations. But can this continue in the face of sure economic slowdown, and a possible hard landing.
Here’s hoping..
The people we encountered in China were wonderful. During our visit to Lenovo, for example, the assistant to the C.E.O spoke of becoming the number one computer maker in the world. He never spoke of innovation, only of market share. In fact, when presses on how Lenovo kept innovative and creative workers, he said that they were usually working in one of Lenovo’s overseas offices. How can China move from an economy that mimic’s Western innovation, and then produces it for much cheaper, to an economy that is innovative itself. While it is easy to dismiss China, if you dig a bit deeper, signs of change are all around. People in China value innovation, and they value the real thing. Many Chinese people I talked to mentioned how Westerners gobble up the faux name brands while vacationing in China, while Chinese people were loath to be seen with a fake good.
I spoke with a Chinese nurse my last night in Beijing, and she told me about her annual exchange program with a hospital in Chicago. Doctors from Rush Hospital come to China and teach the Doctors here, while Chinese Doctors and nurses go to Chicago to learn and observe. She spoke at length about how much she loved the “openness” of the society, if not the bland food. Chinese food is very spicy, by the way.
This conversation was not unique, and it seems there is an undercurrent of dissatisfaction with the top down authority of the state in mainland China. Look at Lenovo, look at the Chinese space program, the Chinese military build-up of Chinese weaponry, the amount of curiosity that Chinese hold towards other cultures, and you can perceive the shoots of change poking from the ground.
In my personal opinion, China will look very different, both politically and socially, in the next twenty years. The society, and the market, is opening. Even if the crack of the door is a reluctant one, it is impossible to reverse. The current whispers of discontent will erupt into a chorus calling for change. That is my humble two cents.
