China Forum

The Chinese Communist Party feels the "Domino effect" from Google's pullout

The Chinese Communist Party feels the "Domino effect" from Google's pullout:

Go Daddy stops playing with Chinese companies

I have been deliberately reticent about Google's announcement of its pullout from China until a more definitive picture emerges.  Now, after Google's redirection of its web traffic from China to its Hong Kong search site and the Chinese firewall blockage of the same,  I feel compelled to provide a layman's analysis of this decision and its impact on the growth of the internet in China as well as the hope for greater freedom in the Middle Kingdom.

Firstly, I applaud Google and Go Daddy for standing up for its principles in lieu of short-term profit.  It is often difficult to do the right thing rather than to do things right.  This is especially valid in a rapidly growing marketplace like China that does not have much regards for the right thing.  The media, and increasingly internet media, is under tight scrutiny by the Chinese Communist Party (CCPC), for it can stray popular opinions on a variety of sensitive subjects (e.g., Tibet, Xinjiang, Systematic corruption, endemic public inefficiency, Taiwan, Hong Kong, religious freedom, activism and many more) that are not favorable to the ruling regime and its cronies.  Matter of fact, if information were to flow freely within China, it is estimated that the tyrannical powers that control the Chinese economy, government and society will collapse within 12 to 18 months.  This may be a good thing for the populace who are exploited within the current socio-economic system but is detrimental to the ruling class and its colluding partners.  Therefore, CCPC will and must employ the full might of its resources, including but not limited to its information ministry, state security apparatus and other departments to control directly and/or to intimidate all service providers (foreign or domestic) to toll the party line and to provide otherwise confidential and personal information about their users.  Case in point: the arrest and prosecution of a Singaporean journalist for subversion through his personal emails via Yahoo in 2005.  To the self-serving dictatorship that reigns over China today, these and other tactics are an invaluable tool to its command and control as well as self-survival.  It will not relinquish this power.

What's not surprising is the lack of support or sympathy for Google and Go Daddy’s courageous stance from the American, European business communities and governments.  Microsoft, whose email accounts were breached, and Apple Computers, who prided itself with an anti-iconic image, have been silent on this subject, while multinational companies such as GE, PG, JJ and GM have actually denounced Google for standing up for its principles against the wishes of the CCPC.  Though China has a long and prosperous history and a rich culture, it is not exempt from the rule of laws, universal justice, human rights and dignity.  CCPC is a political party that does not have the support of 1.5 billion Chinese and is not representative of the citizens there.  Its ability to grant favorable access to these companies into its rapidly emerging marketplace with the potential of huge profit can not be deemed just cause for denial of basic rights to its citizens.  If the cowardly management or political leaders in the US and Europe are not willing to stand up for their long-espoused principles (e.g., "Life, Will and the Pursuit of Happiness"), I hope that they would have the decency not to decry the brave action taken by Google and Go Daddy this week.

In the words of Thomas Jefferson almost two and a half century ago:

  " ...  We hold these truths to be self-evident; among them, life, liberty and the pursuit of happiness....... We freely pledge our self, wealth and families to this course ......"

The question remains; Do the founding principles of America still hold true for Americans or does the opportunity to gain economically trump these principles after two and a half century?

Has Americans evolve to a state where self-perservation and obession with material comforts, including but not limited to watching football, baseball and basketball as well as video games on large screen HD televisions, transcend over the values that made this nation into a global superpower and the envy of the civilized world?

Is there the courage and strength to stand up against tyranny and the suppression of free will, liberty and human dignity that form the basis for the US Constitution and our Bill of Rights?

As for me, I say Kudos to Google and Go Daddy.  May God guide their path forward and bless them for doing what's right.   

How to profit from China's Money-led Diplomacy !

Chinese FDI with a catch

Cases of Chinese cronyism and corrupt practices as they relate to China's foreign direct investments ("FDI") in third world countries may be embarrassing but are not unique or exceptional.  Yes, Chinese officials maximize their advantages by exploiting human weaknesses (e.g., greed, lust, gluttony, etc ...) of administrators from Africa, Philippines and other yet-to-emerged countries with vast nature resources.  Its motivation has been clearly documented in news articles such as the above linked report from the New York Times.  I neither condone the perpetuation of corrupt practices from ill-moral Chinese officials, most of whom are indoctrinated into corruption and immoral practices by way of the Party School reinforced through the Cultural Revolution and its aftermath nor care to elaborate more of their well exposed cases.  I prefer to highlight China's strategic acquisitions and investments overseas and how one can benefit from them.

Apart from China's vast needs for resources (e.g., oil, natural gas, iron-ore, copper and other industrial metals as well as commodities), its industries need innovations and established best practices to compete and grow in the coming decades.  The global financial crisis has demonstrated to Chinese industrialists and officials that they can no longer depend on exports and rapacious demand of US and EU consumers for their low-cost and medium-quality goods spewing out of their factories over the last decade and a half.  They further see that world class companies (e.g., Toyota, IBM, Apple, Research in Motion, Exxon, Nestle Foods, Goldman Sachs and others) not only survive economic downturns but gain market share, customers and earnings while lesser competitors fall down.  It is not size or dominant market position that enables a superior competitive advantage but an emphasis on innovations, the ability to provide greater customization, quality, value and enhancements that target the unmet or soon-to-be discovered needs of customers.  Apart from the traditional 5 Cs, 4 Ps and 6 forces that B-school teaches its MBA students, innovative companies anticipate market-needs at the customer level and create products and/or services that are tailored to their audience.  Its one part science and three parts art!  Since this is not a discussion about creating a dynamic and innovative culture within learning organizations, I will focus on China's needs and opportunities to benefit from them.

A simple SWOP analysis will yield clearly defined sectors where China can compete effectively in the coming years and decades.  One needs only to focus on its automotive, consumer electronics (e.g., smart phones and portable internet-enabled devices), healthcare, professional education and financial services to understand its enormous growth and earnings potential.  In terms of applying industry and cross-industry best practices, innovations and advancements (both incremental and quantum), Chinese companies lack essential resources, capabilities and building blocks.  As leading and secondary Chinese companies engage in fierce battles to compete both domestically and globally, suppliers, partners, investors and strategic customers (those who can support channels or add value in the distribution chain) will be highly valued.  It is noteworthy to add that many or all of the missing pieces are available in developed markets (e.g., US, EU and Japan).  This is a great formula for a new generation of cross-boarders M&A.

In my next posting, I will highlight several sectors and Chinese companies that can benefit from either strategic alliance or investment with foreign parties.

How to profit from Chinese's Overseas Acquisitions

 

Innovative ODI (with M&A, FX & Branding)

There are numerous blogs and tweets pronouncing on opportunities presented by Chinese Overseas Acquisitions.  Thus far, Chinese sovereign funds and State sponsored companies have focused their overseas acquisitions in the commodities and resource driven space.  Namely, recent deals and/or discussion with oil producers in Africa and Iraq as well as mining companies in Australia (e.g., Rio Tinto) have drawn much media attention.  Unfortunately, these deals present little to no co-investment and value adding entry for American, European and Asian private equity or strategic investors. 

Greater opportunities abound when Chinese funds target industrial and/or commercial service companies in the US and Europe.  Historically, Chinese companies have fared poorly in such acquisitions (e.g., Lenovo's US$5 Billions purchase of IBM's PC division).  I have previously outlined several key areas of concerns and critical barriers that must be overcome for a successful Chinese acquisition of US and Euro companies.  Without repeating my thesis, I recommend that US and Euro based investment bankers, private equity sponsors and related service providers market their value proposition to would be Chinese buyers, who have both enormous interests and needs in exploring, buying and managing acquisition opportunities there.  Thus far, Chinese companies rely on bankers and service-providers (e.g., Goldman Sachs, Morgan Stanley, Blackstone, Carlyle and Bains) whom they have dealt with in China.  Recently, CITIC committed US$ 2 Billions and joined with Evercore Partners, a NYC based private equity sponsors, to target industrial and commercial businesses in the Americas.  The main impetus for this collaboration lies in an established relationship between an Evercore Partner who was a former Under-secretary of Trade under the Clinton Administration and who was instrumental in delinking China's MFN status with its human rights record.  His work on this policy benefited trades with China tremendously, and the Chinese government always reciprocate with its "foreign friends", whom they believe to have further political benefits.  Former Secretary of Treasury and CEO of Goldman Sachs, Hank Paulson, obviously understood this fact, as he prepared for his continual personal/professional collaboration with China while serving in his office.  Currently, he consults, at exorbitant fees, with multinational companies, investment bankers and institutional investors about monetizing from China's growth and overseas acquisitions.  If other US and Euro based funds and service providers want to benefit from Chinese's overseas acquisition, they need to learn from these highly successful and seasoned players.  Get off the " a_____" and begin marketing and relationship-forming before all the money is committed.

Private Equity Vulgers on the hunt!

Private Equity Investors target distressed Gome

As US and Chinese private equity sponsors eye Gome as its share price plummet by over 78% and its founding CEO/Chairman face charges for economic crimes (e.g., share price manipulation, bribery and corporate malfeasance),  I am reminded once more of the true value of capitalism.  The self-proclaimed "Masters of the capitalistic universe" (e.g., captains of private equity and hedge funds) who routinely enjoy multi-millions dollar $$$ base-salaries with bonuses that exceed $ billions do not create value but effectively monetize and expand/leverage/speculate on the value created by others (e.g., entrepreneurs, strategic investors and stakeholders).  If successful in their latest attempt to buy over 20% of Gome with its current depressed price/valuation and entrenched market position as China's leading electronic retailers, private equity sponsors will once again sit atop the world's financial industry.  Given the risks to rewards ratio of investing into Gome today, their actions could prove their collective genius over the next five to ten years.  The next question is whether there are other equally or exceedingly attractive strategic investments in China and how can US and EU private equity/strategic investors participate and benefit from the current economic malaise in the World's three largest and fastest growing economy (China has just overtaken Germany)?

 

To those who are wise, courageous and patient with deep market and industry knowledge/insight as well as an expansive network of collaborators (Communist- officials, industry executives, market-mavens and potential-benefactors) across China, this is the time to invest well.  To those outsiders looking into this market enviously, try to partner with insiders who can help!

Move up or out

Cheap is out, and value is in

I agree with Jim Jubak's assessment that there's little to no more play in producing cheap goods in China.  Though, there are still over 900 million under utilized people/worker (mostly scattered across rural China), the commodity input and environmental destruction cost of producing plastic, cheap metal and hazardous products is overwhelming China and its inhabitants.  The human and ecological cost to China over the last 15 years is mind-blogging.  What are foreign investors that have already established their production base there to do?

First, they have to re-assess and analyze their own competitive advantage in a rapidly changing market-landscape.  This mean understanding what drives success in their business and what're important and why their customers buy (will buy) from them as well as impacts from regulatory and technological changes.  Secondly, they need to evaluate how their position and manufacturing base in China can help them compete to fulfill the needs of their customers by offering greater value (not price alone).  Thirdly, they need to branch out of their own comfort zone to look innovatively of how their familiarity in their home markets and unique characteristics can gain them a competitive advantage in the marketplace.  The new emphasis is no longer how to produce widget 1 for 25 to 40% less but to customize a widget that offers much more value for targeted customer groups.  More to come in future postings.

Lying with Statistics

Latest Statistics about China's economic growth

When I was a graduate business student, I learned well about the concept of lying with statistics.  In short, the most effective liars are those who can deceive with the truth.  This definitively applies to the latest statistical figures of the Chinese economy.  As the latest numbers project, the Chinese economy is still growing quickly at about an 11% annual pace, and foreign direct investments are still increasing.  Though factually accurate, statisticians only measure the official (government-regulated) part of the Chinese economy and neglect unofficial commerce, investments and consumptions that provide for at least half of the real economical activities within China.  For example, all (nearly 100%) of Chinese government officials (from the Minister to Governors, Mayors, Departmental-directors, supervisors and clerks as well as employees of State and private enterprises depend heavily on un-regulated income (bribes, extortions and kick-backs) to maintain their livihood.  How else can people who earn officially less than US$2,500 annually pay for their lavish lifestyle (multiple apartments, luxury cars, Rolex watches, jewelries, nightly meals at super-posh restaurants and mistresses)?  Though the Chinese Communist Party can invest more into the official economy and creates the deception of unstoppable economic growth by fudging with contractual and real investments, the word on the street is that hard times are coming down fast.

Already, the majority of China's citizens (over 700 millions in the rural regions and 500 millions migrant workers living below subsistence level in squatter sites along the coastal regions) have to do without enough food and clean water.  This can potentially create huge social instabilities and political turmoil across China. 

Though the 250 million+ permanent residence/inhabitants (with Hu-Kou) in primary and leading secondary cities (from Beijing, Shanghai, Shenzhen and Guangzhou to Chong-Qing, Dalian and Wuxi) are doing better, they are also facing enormous inflationary pressure brought on by a hyper-inflated real estate and stock market.  Undoubtedly, they too will feel the impact of a slowing global economy with raising inflation where their living and production-input-cost goes up and their production value goes down.  What we will see in Chinaover the next 5 years is

1.  a rapid devaluation of Chinese assets/wealth (from their current unrealistic and unsustainable level),  which will result in negative consumption in the official economy stemming from 250 million+ city dwellers living in primary and leading secondary cities.  This will impact directly economic growth in China.

2.  foreign direct investments will slow to a stop as the RMB shoots up to compensate for raising input costs.  This will dramatically reduce China's competitiveness and will force its enterprises to compete through product/service differentiation and higher value-adding capabilities.

3.  governmental orchestrated initiatives to spur consumption and to attract investments, technologies and know-how to help transform the Chinese economy to a more productive, high-value-adding, environmentally-sustainable and quality/safety conscious place.

4.  faster adoption of market-driven principles with oversights, comparable to those practiced in the US, Japan, Australia and Europe.

The biggest challenge for the CCPC is time.  Will it be able to transform the Chinese economy with all of its pressing problems (hyper-inflation in core products, slowing-growth in exports/consumption, environmental/ecological-disaster, accelerating discontent of citizens and desperation of the great mass of unemployed ...) before the people get feed-up with its unabating corruption and complete-ineptitude and overthrow this regime.  History gives us a clear course of action, but will the tyrants that run China today heed the call of humility and change course now?

More analysis to come soon!

You ain't seen nothing yet!

Chinese equity market fall by more than 40% since 10/2007!

As the old saying goes, "you ain't seen nothing yet'.  To those in the know, we expect both the public and more importantly private equity market to fall further and in a much more dramatic fashion.  While the majority of companies listed in the Shanghai and Shenzhen stock market have already seen a sizable discount of their capitalization, private equity investors do not have the same opportunity to unload their much hyped investments.  The same risks (e.g., decreasing sales domestically and overseas, increasing cost of commodities, labor and local environmental compliance, appreciating value of the RMB and emerging competition from lower cost countries) are equally affecting non public Chinese companies that face enormous global and local competition at the same time.  Instead of selling shares, investors in private equities must wait out economic downturns and work diligently towards a resurgence in economic activities.  Until this happens, they have no choice but to sit quietly for either a white knight or a black magician.

Only a few experienced private equity investors are seizing this window of opportunity and targets leading niche manufacturers and/or service providers to either enter into strategic markets or to enhance the value of their platform investment-companies in China.  As Chinese companies compete in an ever increasingly competitive and cost conscious environment, they look enviously at their own value chain.  Soon, they realize that they do all the work while their value-adding distributors, branding-controlled marketers and other intermediaries are seizing the lion-share of the profit.  Though some Chinese enterprises (e.g., Lenovo, Haier Group, others) are trying to build direct marketing, branding and distribution channels in their end-user markets, the overwhelming majority are either too afraid or incompetent to do so.  Thereby, lays an unique opportunity for private equity sponsors with significant knowledge of customers, competitors, industries and marketing/branding/customer service-relationship management expertise to capitalize/gain from this unraveling of relationships in an established marketplace.  Stay tuned for a follow up discussion of what must private equity companies do to take advantage of this emerging Chinese industrial transformation.

Reality sets in on Chinese equity market

Shanghai and Shenzhen Market fall

Is this the beginning of the end for Chinese equity, both public and private?

Will sanity return to the much hyped markets?

What will investors do, if China experiences a prolonged market correction?

Is the Chinese economy in danger of collapsing?

What are the impact of a falling stock market on foreign direct investments and private equity funds there?

Are there winning strategies for foreign investors and multinational companies that are vested in China today?

Stay tuned for observations and opinions from both experienced Chinese and foreign operating companies in the coming weeks!

Chinese private investments overseas will surge

Bear Stern does not kill the Chinese apetite for overseas investments

Yes, Bear Stern was ugly, and Chinese investments into Blackstone and IBM have not yield fruits.  That does not mean that China will stop or slow its appetite for overseas acquisitions/investments (especially private equity in the Americas and Europe).

As the Chinese manufacturing base move up the value chain, it need advanced production, financial/enterprise planning, dynamic-organization-structure, strategic management, marketing/branding/sales-management, customer service, systems/process and know-hows.  All the wonderful things that American, Canadian and leading European companies have perfected under 80+ years of intense domestic and global competition as well as stringent worker-safety, consumer-rights and environmental-wellbeing regulations are desperately needed by Chinese enterprises as they strive to differentiate their goods and services on quality, innovations and superior customer response.  No longer are these leading Chinese companies satisfied with producing large quantity of widgets at a lower cost than anybody else.  If anything, these companies are pursuing a strategy of flexible manufacturing where the economy of scope (the capability to customize items to the distinct needs of different customer groups) over the economy of scale.  The only avenue for leading Chinese enterprises is to merge/align with corresponding American, Canadian and/or European companies (Japanese, Korean, Taiwanese, Singaporean and other Asian based conglomerates are secondary targets).  There lies an incredible opportunity for private equity companies to help bridge the gap in this fifth wave of Chinese enterprise transformation.

Already, a small number of private equity groups are investing into and leading Chinese companies in their transformation to become a globally competitive force.  Among them are GE Capital Antares, Caryle, Blackstone, the Jordan Group, MidMark Capital and others.  What can we learn from these brave pioneers and how are they helping to transform their acquired/invested Chinese companies?

Changes in strategy regarding Chinese investments

Inflation increasing and export slowing

As the mortgage market continues to melt-down in the US, the Chinese economy is confronted by a double whammy of rapidly slowing export (to the US, EU and other developed markets) and hyper-inflation, caused by excessive buying of US treasuries, CDOs and other fixed income assets.  At the same time, its break neck growth of the last seven years has created enormous social problems (rampant pollution, lack of medical/healthcare for its hundreds of millions of workers, lack of education support for over three quarters of its population and other imminent concerns) with escalating tension for the precariously situated communist party.  What does all this mean for foreign investors in China's changing market conditions?

1.  Investments into export driven companies, given their excessive capacity in a shrinking global marketplace are not worthwhile

2.  buying up overly inflated publically traded stocks or privately held equity is a big mistake

3.  strategic alliance without a deep understanding of the players, evolving market conditions, levers and drivers for both success and failures can be catastrophic for foreign investors

4.  without a bold initiative based on knowledgeable insight and actionable intelligence, foreign investors will very likely miss-out on any opportunity presented by the forthcoming market transformation in China

Look carefully at what some very savvy businessmen are doing now to guage the future of the Chinese economy and its prospect in 2008 and 2009.