This post seeks to provide you with a possible context in which to view and better understand our trip to China.

I recently touched based with one of our graduates working for a US firm that manufactures its product in China and exports the product back to the US and Europe. His firm is finding that establishing and managing the supply chain in an emerging market like China can be a challenge.  I asked him, “What are you now seeing happening on the ground in China?  And its pros and cons?” and he noted the below:

>Dear Professor Carr,

Good to hear from you. I hope the school year is going well and the students are preparing themselves for the incredible experience that is China. I am still loving the hustle and bustle of China. There is so just much more energy here compared to the US, and opportunities are in abundance.

There are some major changes on the ground here that I have seen in recent months.

One change is the shortage of raw materials, not just in our [XX] industry but in the [YY] industry as well. These are the two industries I have direct contact with but I suspect this change is across the board.

[One of my Orfalea College classmates also in China] has also been telling me how there was a massive shortage of parts for the OEM electronics business and only the big companies who have the buying power were getting what they needed. The smaller firms had to sit and wait for parts. (His company at the time was having one of their bigger customers place the parts orders that other smaller companies needed.) In my industry costs have gone up due to demand, and finding specific lesser-used materials has become difficult. Unless you are a big company and can meet the high order requirements of most factories to run a specific material, you can sometimes be out of luck.

Also, when the downturn in the economy started a year or two back, raw material vendors cut back production in all industries, as they were scared that they would be sitting on piles of stock. But it turns out global production didn’t dip a much as expected thereby causing shortages all over.

Also, the banking crisis and the troubles that small to medium size companies were having in accessing capital, caused many of those factories to go out of business. And China’s growing domestic consumption helped add to this shortage. It is unbelievable how fast this place is growing and changing.

Some companies are moving their manufacturing from the coastal cities to the more central provinces of China. One example I am sure you are aware of is Fox Conn, one of the world largest OEM electronic manufacturers. It has started moving its Shenzhen offices more inland to save on labor costs and to take advantage of some of the tax breaks the local governments are offering there to attract business.  Many other companies are doing the same, or at the least opening second facilities in more remote areas of China, and moving what they can to those areas.

Both at the national and local level (Shenzhen and other already developed cities) the minimum wage has been raised. I have seen the minimum wage increase three times in the two years I have been here, between the national and local increases. This, along with the shortages of raw materials, has caused prices to significantly increase in manufacturing.

The Yuan (RMB) is also going up in value against the US dollar. This, of course, gives us less bang for our buck. This in and of itself is very interesting, as a change in currency value either way will have huge effect on the economy here and abroad. The Chinese don’t want to move the value of the RMB much. However, inflation in China is a huge issue and fear, and keeping the RMB pegged doesn’t help deal with that. But moving it can force many foreign companies to start looking elsewhere for cheaper manufacturing. So this is a catch-22 situation we all face.

Further, I believe, along with other Chinese I know and work with, that China’s real estate is over priced and in danger of a crash. The central government is doing all it can to try and prevent this at the national level, but local governments continue to ignore Beijing’s mandate on this and fund huge development projects, hoping to cash in on what have been super lucrative opportunities so far. This issue continues to have a down stream impact on firms like mine, and our supply chains.

Chinese companies are also now giving preference to domestic consumption and charging many export-based companies premium prices for their goods.  As touched on above the buying power of the middle and even lower class is rapidly growing. The Chinese government wants to make sure that this growth continues and will give priority to domestic growth over the other issues it faces (and there are many).

In this changing environment, some firms will pull some of their manufacturing back to the States or Europe. Others will stay and move a second facility inland. Others will focus less on export and now that they have their China legs under them turn their attention to manufacturing in China and selling mainly to the Chinese domestic market — if you are manufacturing in China you MUST look at China as a market to sell to as well. But challenges will come with focusing on the domestic market as well. Any foreign product that is designed and used as an export product by foreign companies, if sold to the local market, will still be taxed as an import product. This gives Chinese companies the advantage as they can under price the competition. For example, Sony TVs are more expensive to buy in China than in the US, even though they are made there. That goes for computers, clothes, accessories, and everything else.

Having said all of the above, I still think any established brand that is not focusing on selling IN China or getting into the game here is really missing out and needs to find a way to get their foot in the door. However, if they don’t partner with a Chinese partner when they do so this will be extremely difficult and the more their brand grows in popularity the more it will be counterfeited and sold on the black markets. But that is just a cost of doing business in China. I feel that in time this situation will improve as China continues to develop and modernize.

The above, of course, doesn’t even take into consideration the vast cultural differences that still exist between Western and Chinese ways of thinking and doing business. The reality is that in doing business in China you are still a foreigner and the locals will always have an advantage over you. Everyday I am in China I am reminded that I am a foreigner, which presents difficulties in some areas but also some opportunities in others.

In summary, there is a lot going on here and in the ever-complex world of China. The opportunities are just huge here and the buying power is too great to ignore this market. I am thrilled to hear you continue to bring students to China. The place continues to blow me away.

I hope to make it back to SLO in the future so we can talk some more and catch up.

XXXX

Question: Your thoughts to this alumni’s view, experience and touch base?

And to build off this post and alumni feedback re: this shift now taking place in China as China continues to develop and ‘modernize’, see these two interesting related posts and perspectives from Dan Harris over at the always good China Law Blog, China Manufacturing:  ‘We’re Bringing It Back Home’ and Where To Locate Your Business In China. This Download Will Tell You.

May 5, 2011 addendum:  Today’s Wall Street Journal had two excellent article that echo and build on this blog post and alumni observation, Will Costs Abroad Drive Firms Home? and Candle Maker Feels Burned: Compamy, With Plants in Asia, Struggles to Open in U.S.

[I am reposting and supplementing this post I ran a year or two ago, after reading an article that appeared last week in the Wall Street Journal on this very topic.]

An FYI re: developments in the MBA marketplace ….

Yale completed a five year process (although I suspect it was longer) to revamp their MBA program and curriculum.  Yale and its secret club Skull and Bones crowd will now require, that’s right require, ALL, I repeat ALL, of their MBA students (they have hundreds) to participate in the very type of international business study tour that you are embarking on in China/India.  One article notes:

“Also as part of its MBA curriculum innovation, Yale School of Management becomes the first major business school to require students to study abroad. In January, between the first and second semesters, students will complete a required two-week International Experience where they will be rapidly immersed in a new environment, engage in intensive study, meet with business and government leaders, and complete a trip project. For this academic year, the list of countries for these faculty-led trips include … China … India, Japan, and Singapore, as well as a combined trip to England and Poland…. The insights students gain during the experience will allow them to bring a global perspective back to class discussions.”

Yale’s annual/yearly MBA tuition and fees (alone) each academic year is now a mere $51,000 PER YEAR. Their program is a full two year program.

You should feel good, and proud, that you are making this capital investment in your education and professional future by visiting the PRC/India to see what your present and future business competition is up to. Now is also the time for you to be thinking about how you will market this capital investment in your education and future on your resume, in job interviews and cover letters, etc. There is a story here that you can tell that others and (the good) employers will value, be interested in hearing about and learning from.

See also my related earlier blog post — MBAs Who Understand the PRC and this CNBC article, Wharton Grads Head to Far East for Jobs.

We are well ahead of the curve on a course like this.  Click on and read this article on international trips for EMBA programs in today’s (9/30/2010) Wall Street Journal.  When I say we are ahead of the curve, here is what I mean:

- Our trip and course is academically rigorous.  It’s focus is not a party in Shanghai or Delhi disco trip.  We engage in prep work during the year and before we leave, and the trip itself is focused on the academic and business experience.

- It is relevant.  China and India are where the growth is and where the puck of business is currently in play.

- The length seems to be just about right.  Most students note they feel it’s not too short and it’s not too long.

- It’s not a cut and past trip that we outsource to a tour agency.  We spend a lot of time reaching out to the Cal Poly family and other networks to pull together a tailored and unique trip that will expose you to things you would not know about or be able to access on your own.

- What we do may not be perfect, but we will always be looking for ways to improve this course and experience in realistic, reasonable, practical and affordable ways.

Go Orfalea College!  Go Mustangs!

Over the years I have been a part of some good discussions about wine in China and why California wineries can’t seem to pull the trigger and get into that market.   I have also previously blogged on this topic (click HERE) so be sure to check out this prior blog post for relevant background to this post.

As you will notice when we arrive in the PRC, the French and Aussies are already there. You can find a few bottles of Napa Valley wine here and there, but not many; and I have rarely seen a Central Coast wine on a shelf or in a restaurant in China.

First mover advantage for the Aussies and French?  Time will tell.

Check out this Wall Street Journal article on the subject, “People I Know Still Put Ice and Juice in Wine.” Great article that relates to our trip!

And go ahead and admit it … you or one of your family members has on at least one occassion dropped an ice cube in a warm glass of Chardonnay to chill it. Really, go ahead, admit it. It’s okay. I have done so myself. We still like you.

Can you see the potential for wine sales in the PRC?

Addendum:  See this WSJ article,  Sip These China Stocks and this China Real Time WSJ blog post, Why the Chinese Love Lafite and this article in Foreign Policy, China Goes Sideways.

China’s re-customization to prosperity and the wonders of things like all-you-can-eat buffets and boat cruise dining can make for some interesting YouTube videos.  As China “modernizes” so will some of the dining etiquette. But for now “buffet” in China can be a bit of a contact sport.  See this YouTube video to see what I mean.

And you thought that traffic in LA, the Bay area or Seattle could be bad?  Think again.  Click HERE to read about this recent 60 mile traffic jam in China.

The size and scale of emerging markets like China and India, including their immense populations, can be overwhelming to many Westerners.   The point of this post … not to be a snob, not to be elitist, not to make fun of anybody, but rather to help prepare you to adjust your sense of personal space and distance when we travel to China.  There, when people say a town is a “small town”, that may mean it has a mere two million people in it.

“Yo’ dawg,” as some say.

Click HERE and HERE (scroll down a bit for this second video) and check out this NPR story and two short videos on rap daddy Eli Sweet, who is breakin’ it down in Chengdu in Western China.  For some time NPR has been running such spotlights on China and its growing influence on the world.  I have enjoyed many of these features as I sip my morning cha.

But the purpose of this post is not to suggest that we travel to China to admire and hang out with rappers.

Instead, and notwithstanding the artistic and cultural intrigue of these videos on our man Eli, this post recognizes that Eli the rapper is an entrepreneur and in business, regardless of whether as an “artist” he will cop to such a label.

To be more specific, his hometown of Atlanta appears to be over saturated with rappers, he sees a possible need for what he has in another place - an emerging market called China — he is trying to fill said need, and he is trying to make money doing it (gotta pay the bills).   MBAs and business students could no doubt teach him a thing or two about business, but he could also teach them a thing or two about guts, stepping off the ledge, getting on the plane, and seeing where moving out of one’s comfort zone can take you.  That too, is an unappreciated part of business.

There are also two money quotes in the first video I want you go back and replay and listen to closely.  First, where he says, “There is always a possibility [here in China] that you will see something today that you have never seen in your entire life“.  And second, “I didn’t come [to China] because I thought that the life would be better than it was in America.  I came here because I couldn’t envision a great life for myself in America.”

I agree with most of that, but I am not sure that I would agree that a great life cannot still be had in the USA with some hard work and luck.  But you get the point — emerging markets such as China present business opportunities that we either don’t have or may no longer to be able to reasonably access in the West.  One of the reasons we go to China is to explore its business opportunities (and challenges).

So welcome to the first of these online readings, videos and assignments I give you during the course. They will help bring you up to speed on some of the “China basics” and they will also help keep the drumbeat of China fresh in your mind during the course.   Once we arrive in China, I don’t want that to be the first time you have given any thought to this trip, the firms and industries we will visit, China, and/or any of its history, culture and business practices.

Cal Poly students, “Welcome to the People’s Republic of China!,” where, as the saying goes and as you will learn, “Anything is possible, but nothing is easy.”

- Professor Carr

Check out this Wall Street Journal article on McDonald’s Strategy in China. It’s a hoot to read. Who would have thought beef could be sooo “sexy”?  Yaaaah Baaabby!

On a serious note, I will try to get you into a KFC, Pizza Hut or McDonalds or two while were are in China or India. This article does a great job laying out some of the differences you will see there in such stores, and why, and how to localize these types of multinational products for an emerging market.

For example, after reading this article, you should better understand why you see chicken (and fish) everywhere in China (and dog in Canton, now Guangzhou), and not as much beef (too expensive for most folks).

Your thoughts?

I know some people who consider dollar stores to be beneath them. I have heard elitists mock those who shop as dollar stores as being white trash (WT).

I love dollar stores. So, yes, I guess you can call me WT. Really. Go ahead. It won’t bother me as I have been called worse. I can get lost in a dollar store killing time. I like the people who work there. I like their business model. I also love swap meets. I can take my two young daughters to a dollar store, let them spend an hour running around looking for things (I always frame it as our “own treasure hunt”), I buy them each the promised one item (and resist their screams and pleas for two or three items each), and I come out of the store with only a $2.14 bill — that’s the cheapest baby sitting venue you will ever find (aside from a public park).

Plus, it’s educational in that it teaches my kids to practice their letters, words and numbers by reading labels, boxes and packages, they have to make priority decisions in the midst of a mad scramble to decide what they want to select (as I tell them “girls, only eight minutes left until the bell to go home rings!”), it gives us a chance to talk about where the goods in the store come from, where China is and how far away it is, why pops goes there each year, they learn how to address an adult respectfully and with confidence when they take their item to the cashier, etc.

Here is a great Times Online article (”To China For the Holy Grail: A Price of 99p”) about a day-in-the-life of a British buyer in China buying product for dollar stores (yes, folks, most, if not all of what you buy in a dollar store comes from China). Amazing stuff. Talk about a cut-throat business where margins are tight and the line between profit and going broke is razor thin …

Dollar stores, golly gee. WT, I guess that be me.

Post by Professor Jay Singh.

The below videos provide you with foundational information to get you thinking about India, and business issues related thereto.

1. India Rising - (10:14 minutes; ABC News)

An interesting commentary on the reasons behind the emergence of India as a global leader. Check out the comments by Nandan Nilekani, CEO of Infosys regarding the number of applicants applying for IT jobs with the company. The Indian IT industry has a reached a point where they are now starting to employ US graduates. This largest and most diverse democracy is identified as the most pro-US country outside of the US. Comments by Thomas Friedman, the author of The World is Flat, illustrate his sentiments on the peaceful nature of this country as well as the tremendous potential that he sees in the population that comprises of 700 million citizens (that is almost 2.5 times the US population) under the age of 35. The video also explains how entrepreneurship does not bias against the poor in India.

2. India Shining by Colin Mutchler (6:04 minutes)

A narrative by a professor from INSEAD business school with campuses in France and Singapore. He mentions his experiences from a class that included 20 students, 2 professors and several entrepreneurs, business persons and venture capitalists in the cities of Mumbai and Bangalore. Phrases used tro describe India in this video are functional anarchy, chaotic democracy, lumbering elephant, and 20th century head on a 19th century body. It also mentions how the rapidly improving services sector in India is causing a brain gain rather than a brain drain. Up to 70,000 business leaders from the likes of the Silicon Valley are heading home annually to take advantage of the booming economy. The quote at the end of the video very aptly summarizes the professor’s experience.

3. Amitabh Bachchan recites India Poised Anthem (2:13 minutes)

Amitabh Bachchan is the biggest super star the Indian movie industry (Bollywood) has ever seen. He has also had his fair share of successes and failures as an entrepreneur. When he speaks India listens. In this video he truly motivates the Indian population to feel a sense of pride and optimism. He talks of optimism versus skepticism that is India.

4. Taj Mahal (8:31 minutes) (do search noted above)

Should we again be able to add India into the trip one of the treats for all students on the International Business Trip, 2009 will be the Taj Mahal that has recently made it into the 7 wonders of the world. This beautiful mausoleum, made entirely of white marble inlaid with semi-precious stones, was built by Emperor Shah Jahan for his wife Mumtaz Mahal over 400 years ago. More information on this a UNESCO World Heritage Site (1983) is available here. Enjoy the toe tapping bollywood music in the background.

5. Indian Institute of Technology, Kanpur (8:22 minutes)

The Indian Institutes of Technology (IITs), are an elite group of seven autonomous engineering and technology oriented institutes of higher education established and declared as Institutes of National Importance by the Government of India. The IITs were created to train scientists and engineers, with the aim of developing a skilled workforce to support the economic and social development of India after independence in 1947. Admission is very competitive, given the huge population of India; the undergraduate acceptance rate through JEE has a low ratio, around 1 in 55, with about 300,000 annual test takers for about 5,500 seats. Imagine that!! The IITs were ranked third-best worldwide for technology, after MIT and University of California, Berkeley.

This video gives an excellent overview of one of the institutes.

6. The William Jefferson Clinton Science & Technology Center (6:23 minutes)

While the video titled Indian Institute of Technology, Kanpur helps illustrate the high standards of engineering and technology education in India, this video provides an example of the paradigm shift in mass education in the world’s second highest populated nation. Vinod Gupta, an IIT’ ian, moved to the US to seek a career as did a record 70% of his fellow graduates (this is what they mean by brain drain, which has dramatically decrease to about 30% in recent years). With President Clinton’s support he established a school that helps provide cutting edge education in science and technology at high school level to over 550 students from nearly surrounding 31 villages.

7. India ‘Vision 2020′ - A Creative Documentary (7:21 minutes)

This documentary provides a vision of an India in 2020 where:

The annual GDP growth rate will be 9% (presently at 6.8%)
Only 10% of the population will be below poverty line (presently at 25%)

Nuclear power stations will provide 20,000 MWe power
Remote services will contribute $133-315 billion in revenues to the Indian economy

This documentary may have romanticized some of the facts but is not too off from the future that is India.

8. The Simpsons - India Outsourcing (7:28 minutes)

This episode was good enough to cause belly splitting laughter but it appears to have been recently removed. This episode makes light of the outsourcing issues that had the pundits in the US running scared not too long ago. Last heard, Homer was deported from India wonder why …

What are some of your takeaways from one or more of these videos?

A hat tip to Gary Chou for sending me the below link. I am a National Geographic subscriber, remember the below issue coming out and reading it, but I forgot to put up a post and the issue had since disappeared into the mess on my office desk at home.

Click HERE to check out these great pics on China’s Instant Cities (the photo gallery link is on the right side of the page; the commentary by Peter Hessler is top notch, as is all of his work - e.g., Two Years on the Yangtze). And reading this very good Wall Street Journal article, On the Move: Chinese Officials Want More Farmers to Migrate to the City; But They Are Also Aware That Migration Brings Problems, will put these photos into a good big picture context for you.

Finally, last month, April 2008, National Geographic published a special issue only on China called, China: Inside the Dragon. Check it out. Again, some great short pieces by Peter Hessler and the usual amazing pictures. You can also click HERE to listen to the China Business Network’s recent podcast interview of the Editor-in-Chief of National Geographic Magazine, Chris Johns, about this issue on China. I also had no idea National Geographic is read by 40 to 45 million people each month. Cha-ching. And talk about a company that has put on a clinic for others re: how to manage and build its brand ….

Enjoy.

Prof. Carr June 13, 2008 addendum: see also this related post on instant city Shenzhen I just made (Shenzhen is located in southern China).

I am impressed and humbled by those who do non-profit work who can stretch a few dollars a long way to make a significant different in the lives of others. A good example of this is Tom Stader at The Library Project. Tom is one of the entrepreneur panelists I have lined up for you to have the opportunity to meet in China, should you elect to attend and participate in the hutong event I set up for Sunday, June 22 (see your info booklet for more information and the cost).

Click HERE to see his amazing pictures of a recent school in China where he and his team delivered and set up a library (you need to scroll down a bit to get to the pics). The joy on the faces of these kids is inspiring and beautiful.

What business questions can you think of to ask him when we meet with him?

Prof. Carr April 29, 2008 update: Click HERE to check out the latest delivery Tom and his crew made to a school in the An Hui Province in China. The kids in their band uniforms are priceless.