How China May Change Your Business

Thursday, February 16, 2006

David Scott Lewis, IT E-Strategies, Inc., http://community.alwayson-network.com/cgi-bin/WebObjects/AlwaysOn.woa/wa/display?id=15007:Person

As providers of business plan software and other tools for business management, we at JIAN are always interested in what/how people think elsewhere in our world...
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Answering the absolute statement that China will change your business.

POSTED: 03.08.05 @16:42

It's rare to see a 10-page cover story on China in a magazine such as Inc. But the March issue cover story is titled, "How China Will Change Your Business." I'm not going to be so bold and make a 30,000-foot definitive remark. I'm much more comfortable saying "may" rather than "will." Maybe it's the Peter Schwartz in me—I like scenario planning, and different scenarios often lead to different results. IMHO, there are too many unknowns, and even at this week's National People's Congress in Beijing, it's clear that the economy is baffling even China's leadership. In a relatively recent survey, even a majority of domestic China experts predicted a major crisis in China within the next five years, and this is given scant attention in the Inc. piece.

The Inc. article is based upon a new book called China, Inc. I'll reserve my opinions for now and simply address the points made in the Inc. article. Okay, I'll make one parting shot: The author may not like the forthcoming reviews that his book will receive in academic journals. However, unlike drivel such as 1421, there's a lot of meat in China, Inc., even if all the arguments are not bulletproof. Each point in the Inc. article is a stand-alone argument, so I'll address each separately.

The article begins with a dated photo of Pudong. Must be at least five years old. I'm not sure which progresses faster, internet "things" or China "things," but I can tell you that the last five years in the life of Shanghai were nearly as crazy as the last five years in the internet craze. The key difference: The internet bubble burst; Shanghai continues it's unrelenting growth. Also, the opening photo gives Ningbo more credit than it deserves: Fun Qingdao has a better port! (Just rooting for the home team. But QD really does have a better port.)

Just prior to making the first outlined point, the author states that China is "moving quickly and expertly into biotech and computer manufacturing." He also notes that "most of China's gains with American buyers have come at the expense of the other countries that once lured American dollars..." and that the "present mood (toward China) is a combustible mix of euphoria, fear, admiration and cynicism." You can already get a sense where all of this is going.

Item 1: China's economy is much larger than the official numbers printed. Probably true. First, official statistics in China are not much better than if the numbers were pulled out of, well, you know where—kind of like what industry analysts do when making multiyear IT sector revenue projections. I've personally experienced this, both as an analyst and in China, but I dare not say more. Second, the underground economy doesn't appear on the books. Third, the books are cooked. Try to find a company in China with only one set of books. Good luck. Some companies have more books than Baskin-Robbins has flavors. Matter of fact, the economy "seems" much larger and has led to speculation that there are closer to 1.7 or 1.8 billion Chinese. (There are other reasons why this may be true, too.)

Item 2: An unrelentingly focus on capitalism makes it seem as if China can will its own growth. True, true and true. It really seems as if the only thing that matters to just about everyone is money. Making money. Making more and more money. I'm convinced that the Chinese are the world's most natural—and most adept—capitalists.

Item 3: When it comes to foreign direct investment (FDI), no country comes close. For all practical purposes, there's no way to argue against this. The other three BRIC countries—Brazil, India, and Russia—receive a minuscule amount of FDI compared to China. China wins; the others lose (relative to China).

Item 4: "China can be a bully." I totally agree with this, but not for any of the reasons stated in the article. Set up a factory; make lots of RMB; expect many visits from local authorities wishing to assist you in spending your newfound wealth. In general, it's not as bad as this may sound. The problem is that it could happen without much notice and in the most bizarre situations.

Item 5: The government doesn't matter; entrepreneurs do. Absolutely true!! I've even read some on AO write about the great planning cycles of the central government. If you really believe this, you're clueless about China. The government could impede growth, but doesn't create it. It's all about China's entrepreneurs—and it seems like just about everyone is an entrepreneur.

Item 6: China is moving up the industrial food chain. This can't be denied at a minimal level, but it's not clear that this is China's glorious destiny. The author thinks so, and I tend to agree. But I'm still skeptical. Not cynical, but skeptical. One thing that is overlooked is strategic planning. Find a company in China with a strategic plan. A needle-in-a-haystack endeavor. But China reacts with speed and determination. In some cases, perhaps in most cases, speed might be a better strategy than anything McKinsey can muster up. (Of course, McKinsey might repurpose "speed" as an idea they created.)

Item 7: The most daunting thing to fear is China's R&D prowess. In fairness to the author, he admits that it's mostly about the D. Fact is, it's all about the D. Basic research is pitiful. But I'm not convinced that China needs to spend a lot on basic research. China should do exactly what it is doing: Focus on development and commercialization. Kick the EU and U.S.'s butt, and anyone else who dares to compete against the world's factory. And China seems to be getting smarter about making sure that it maintains its lead in manufacturing. Some Beijing officials get upset at being viewed as the world's factory, but it is China's prowess in manufacturing that is the engine of China's economic might.

Item 8: China dictates global prices. I agree, but the ramifications of this as spelled out by the author were not terribly compelling. In my view, it's all about the "China price." "Give me the China price"—or lose the business.

Item 9: China's growth makes things more expensive. Certainly true. Think oil. No need to say much about this point. Maybe I'm oversimplifying this; maybe it's not so obvious to those watching The Apprentice in the States. But it's obvious to anyone here. This point would even be obvious to casual observers and tourists.

Item 10: Wu-Mart (I mean, Wal-Mart) gets it. True. Not much to add. Oh, maybe something about RFID. The opportunities in China are handed to you on a platter.

Item 11: There is a cost to doing business here. The Motorola story that the author describes is well known among expats. You may think you have a fair deal. You probably don't. And if you make too much money, the contract may be changed in midstream.

Item 12: Piracy is a bear. We all know this. Guess it had to be included.

Item 13: I'm going to skip this point and leave it to Eric, our resident economic agnostic. As the author states, "China's heavy buying of U.S. debt has lowered the cost of money in the U.S."

The last point is also about economics and not so easy to describe in one sentence (well, at least not in one sentence with much meaning).

The author ends with the perspective that the U.S. should look more toward what is happening in China and with China. I agree. Matter of fact, Americans in general are way too Euro-centric and too insanely focused on the Middle East while pretty much ignoring China. Big mistake. Knuckleheads flying jets into buildings are certainly a problem, but so is the guy eating your lunch.

No need to fear, though. I'm sure Robert Scoble and his merry minions have all the answers. After all, he reads 1,300 blogs. Better info than us mere mortals have. It gives Scoble superhuman powers and insight. John Doerr (and even Bill G.) have nothing on this guy. I hope Bush, Rice, and Rumsfeld give him a call soon.

Columnist David Scott Lewis is the president of IT E-Strategies, a boutique e-services consultancy focused on IT outsourcing opportunities in China.

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