Archive for Economics in China

China needs home-grown entrepreneurs.

Posted in Business Culture in China, Macroeconomics with tags , , , , on February 10, 2015 by Ben Brown
Chongqing at night

Chongqing at night

The changing economy of the People’s Republic fascinates me.

I remember about five years ago I told a friend of mine I that China’s government would soon be forced to create policy enforcing IP laws and creating an environment more conducive to small businesses, entrepreneurial endeavors, creativity and innovation. I told him my suspicion was that we could look to Chinese banking systems to see when these types of changes were most likely to take effect. I said that in a few years China’s export manufacturing industry would mature. Its growth rate would slow. The booming real estate industry would also outpace the rate of qualified buyers entering the city. Furthermore, a lot of China’s real estate boom has been helped by subsidies in the form of instant property value: unlike the rest of the world, many Chinese in their 50s and above were given houses by the government. When the developer comes to negotiate with the homeowner they offer either cash or a new home. A successful family that had already turned their old communist-era apartment into a rental property and bought their own place could take the cash and buy a car, invest in stocks, buy a home for their children, etc. Nobody had to pay back home loans.

Just by looking around Chongqing, I would guess that the majority of those old apartment blocks have now been torn down. There are still people who own loan-free property but the apartments are fairly new and offers to buy a whole complex by a prospective developer are becoming increasingly sparse. Unsurprisingly, the lack of loan-free equity lying around that supplemented the construction boom has successfully slowed prices even in a city like Chongqing, whose GDP grew at 13% in 2013, making it the fastest-growing city in China.

Export manufacturing has also slowed. This was to be expected. As costs along the accessible coast have risen, low-cost manufacturing jobs have either moved inland or to other neighboring countries like Vietnam.

China still needs growth. The leadership generally looks at GDP, which is not always the best indicator of a stable economy. However, I still think it’s reasonable to argue that in order to have an economy large enough to support a population 5 times the size of the US, China needs a national GDP equal to at least 3 times the size of ours.

In order to grow that large with export manufacturing and real estate both slowing down, China will need to support a more entrepreneurial domestic economy. I currently teach English to the children of China’s wealthy. I regularly ask them to pretend they are a member of the standing committee and tell me what changes to policy they would enact in order to create a more innovative and creative economy that eventually will be able to compete on an even playing field with the west. It takes them awhile, but generally they come down to entrepreneurialism without too much prodding or hinting.

Five years ago I said we’d see Chinese banks start offering more small business loans to Chinese general population as a start of the development of a more open, even playing field that would then lead to IP law enforcement. Instead we’re seeing policy changes opening up certain areas (Shanghai has a district like this) to low or tax-free zones for more and more businesses. The higher-ups are lowering regulations. But without access to funds, a private credit rating system, and assurances that Mr. Wang’s new invention won’t be stolen by the more connected Mr. Chen, we will not see the type of growth this country needs to beef up its domestic economy. Without that strengthening, I worry about how this country will continue to grow to a size and scope capable of supporting a solid middle class. But I remain hopeful I’ll see these things soon.

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Changing Dynamics of Chinese Acquisitions.

Posted in Uncategorized with tags , , , on January 17, 2015 by Ben Brown

Over the past 20 years I’ve been in and out of China as a student, a teacher, a business employee and soon the spouse of a business owner.

I’ve had some interesting experiences along the way. Today I want to discuss the importance of building mutual respect when merging two companies.

I found myself uniquely positioned a few years ago as the employee of a Chinese company that had purchased an American company. I attended high level meetings and watched as the company we bought struggled to respectfully listen to its new Chinese boss. The Chinese side of the table didn’t do much better. They felt they weren’t being respected enough (true) but also treated the purchased company as an asset whose management advice they could ignore because said management failed and had to sell. Had that management been respectful enough, I am confident this still would have happened.

Issues like this will continue to arise, as Chinese companies have made many acquisitions since the global recession in 2008:

China M&A Chart 20140117

Source: WSJ

There were many times in these meetings when the Chinese boss said “let’s be straightforward”. This was usually followed by a lot of very direct criticisms of the foreign company’s decisions. This only managed to ruffle foreign management’s feathers. Their responses were often reactionary. Not at first, mind you, but as time went on. Both sides spoke less and less as time passed. This is the opposite of what should have been happening.

Additionally, “straightforward” and “open” were two different things. I understand sometimes it’s best to keep some information private. But there were plans being executed in China that directly affected the foreign company that the foreign management wasn’t aware of. These plans were going to hinder the foreign company’s operations and bottom line if top management didn’t have an opportunity to form a game plan and give their input.

I know this also happens when companies from the same country merge, but the layers of cultural complexity make it even more challenging. Add to this a young Chinese company that has been very successful in its own market (in one protected industry with no foreign competition, in a booming economy) trying to go international in a different industry without the right experience or consultants, and you end up with one over-confident company handing down swagger-filled orders and ignoring feedback trying to manage a company that has a lot of experience but is no longer in control. It took very little time before both sides were spending time arguing over problems rather than trying to come up with solutions.

As a western-educated American working for a Chinese company, a lot of these problems quickly became clear to me. But my attempts to explain them to all but a few people on both sides of the table failed because by the time I figured out what was going on, things were beyond repair unless someone at a much higher level than me took action. One other man at my company, who was nearer to the top, attempted on multiple occasions to influence this issue and regularly recruited my assistance, but neither of us were ultimately successful.

When acquiring or being acquired by Chinese company, think carefully about this. Every other synergy on earth could exist, but if neither side understands how the other sees them, it won’t matter.

CQ Brew

Come out to Testbed 2 at E'Ling for a craft beer and a great view of Chongqing 来鹅岭印制二厂,享受精酿啤酒,吸引完美的环境

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