I love the Atlantic.   Click HERE for some amazing pictures of this amazing place that just came out in this amazing publication.

Introduction:

For a business person interested in China or doing business in China, a good place to start is to read and study the Chinese government’s ‘business plan’.  Those working in a business space aligned with said plan will find the slogging much easier than those who never read it or who are not aligned with the plan.

We know there are pros and cons to any political system.   In America, we have on-paper democracy, yet our recent state and federal government officials on both sides of the isle can’t seem to succeed at one of their most basic and rudimentary tasks — agree on and pass an annual budget.  There is also little medium or long range strategic planning that takes place in our government and system.  We tend to flit from one two year mid-term election spear throwing cycle, and one Fox News vs. National Public Radio tit-for-tat, to the next.

China does not have an award winning form of western style political democracy, but you have to give them their chops in that they can get a budget passed and they are thinking in terms of five year windows (or trying to) for strategic planning purposes, to move the country forward.

If you spend enough time in China, you will run into more than a few foreigners who complain about how hard the business rowing has become there, how the playing field is not ‘fair’, how the local and national Chinese governments are not supportive of them, etc.  To be fair, there is some truth to these complaints.  On the other hand,  when you ask them if they ever sat down and read China’s most current Five Year Plan and tell you how and why they are aligned with the letter and spirit of said business and political plan, you may see a number of them looking down at the ground, kicking the dirt with their boots while they do so, and giving you a long winded answer to the effect of “Shoooooottttt, Daawwwggg … you don’t really expect me to read that stuff do you?”.

In short, if one tries to succeed in a business space that can be scaled in China, and one where the Chinese government has not thrown its policy weight and resources behind, they do so at their peril.

The Chinese government is actually pretty good (note I did not type or say ‘perfect’) about telling businesses what its goals are and then sticking to those goals. If your business nicely lines up with those goals, good things may happen to you in China. If your business does not line up with those goals, bad things can happen.

The moral:  One way to make business in China harder than it already is, is to not read the most recent friggin’ Five Year Plan before you get on the plane to see if what you are doing or want to do there makes sense.

This same advice can be said, really, for any emerging market one is trying to enter.

So let’s get started …

Preliminary and Required Reading:

Read Patrick Chovenac’s post (a professor at Tsinghau University in Beijing):  Primer on China’s Leadership Transition.  Professor Chovanec offers one of the most concise yet complete overviews I have read of this periodic political event in China, and this material is worth reading and absorbing.

Read David Wolf’s post at his always insightful Silicon Hutong blog:  Beijing vs. the Provinces: A Rethink.  Same goes for his post.  Good stuff.

Read the following posts from Dan Harris’ always excellent China Law Blog:

China’s 12th Five Year Plan. A Necessary Revisiting. Part I

China’s 12th Five Year Plan: The Coming Storm on Wages

China Energy Shortages and Their Impact on Your Business

China’s 12th Five Year Plan:  Infrastructure, Infrastructure, and More Infrastructure.  Did We Say Infrastructure?

China’s 12th Five Year Plan. A Necessary Revisiting. Part II. The Reality

China Healthcare and Education:  As a Business, They’re All Good

Then read the following Wall Street Journal article:

Subsidy Nation:  Can US Firms Compete Against China?

And finally, after doing the above background reading, I need you to invest and read the 12th Five Year Plan — the Chinese government’s most current ‘business plan’.

Here is some more background about that plan …

On March 14, 2011 China concluded the Fourth Session of the 11^th National People’s Congress (“NPC”), while the National Committee of the Chinese People’s Political Consultative Congress (“CPPCC”) concluded one day earlier. These annual meetings, held in March of each year, are one of most important events on the Chinese political calendar.

The NPC is the highest legislative body in China and has the sole responsibility for enacting legislation in the country.  The NPC is also responsible for electing and appointing members to central state organs — including the Standing Committee of the NPC, the President of the People’s Republic of China, and the Premier of the State Council.  The CPPC is the nation’s key political body.

This most recent “lianghui”, as these two sessions are commonly referred, brought together 2,981 members of the NPC, and 2,252 members of the CPPCC.   As best I can tell, the vote to pass the 12th Five Year plan was 2,778 delegates in favor, 59 against and 38 abstentions.    (To nobody’s surprise the CCP wins yet again in China in a landslide victory!).

Here are a few things Premier Wen Jiabo had to say about the plan:

“The lowering of the (GDP) target (to 7%) not only demonstrates the government’s determination but also indicates a major move to transform the country’s economic growth pattern.”

“We should make full use of this opportunity to adjust the economic growth pattern and address the unbalanced, uncoordinated, and unsustainable factors that have existed in China’s economy for a long time.”

“The more the economy develops, the more attention we need to pay to strengthen social development and ensuring and improving people’s well being.”  - Premier Wen Jiabao

Now, please click HERE, to access and read the full translated version of the 12th Five Year Plan, in English.

Questions and Assignment:

1.  After reading the above, analyze and answer the below primary question on your own blog.  You are free to consult and cite additional and other relevant resources in your response:

Primary Question:  What are some of the main overarching implications of the most current Five Year Plan that are likely to affect businesses operating in China (both domestic and Western)?

2.  After reading the above, the secondary questions to also answer on your own blog (again, feel free to consult and cite additional relevant resources in your response):

- What are some of your key observations and takeaways from the 12th Five Year Plan?

- Some economists argue that 8% GDP is the minimum growth floor China needs achieve to create enough jobs for its market and stability.   The most recent plan appears to shoot for growth for most of 2011-2015 at 7%. Can China achieve such 7% growth over the next four or five years?  What may happen for them, and for us/the USA, if they come in lower than that number?

- What are some of this plan’s targets and longer-term priorities?  How do these differ from our priorities in the USA, and why?

- What were some of the accomplishments (and failures) from some of China’s previous Five Year Plans?

- Do you think this type of strategic planning is possible in the USA?  Would the pros outweigh the cons, and what would be some of the pros and cons of a Five Year Plan in the USA?  If a Five Year Plan option was presented to American voters as a constitutional amendment, would you vote for or against it, and why?

Eat Drink Man Woman.  What a wonderful movie!  This Taiwanese movie is about a father who tries to show his love for his family through the food he takes the time to select and prepare for them.   He is a poor oral communicator in the traditional sense, he struggles to show feelings and emotion, so he tries make up for this trait by showing love for his family through food.  Yet, initially his children are too self absorbed to notice his love for them in this regard; but in time they come around and unite as a family.  And, of course, they eat some amazing food along the way.

The opening scene from this movie is the father preparing a meal (click HERE to watch the clip).  This opening scene is also a metaphor for part of the business world in China.

How, you say?  Notice how many different things and tasks he takes on to prepare the meal.  Also notice that during much of the scene he uses the same, big knife, to do the chopping, basic cutting, then the fine cutting and mincing, etc.

When we visit China  you may see that many (not all, to be sure) Chinese business people tend to be more generalists and a “jack of all trades” than their counterparts in western firms.  In the West, we tend to focus on what we specialize in (e.g., “Go talk to marketing, I only handle finance”, or “Look, I just do _____[fill in the blank], you tech guys needs to fix the problem with the product” or “That’s not my area, I deal with the SEO stuff”).

Your thoughts and experiences on this issue?  The same?  Different?  What have you seen and experienced out there?

I am looking forward to reading the book Henry Kissinger just came out with, “On China“.

Click HERE for the Wall Street Journal book review of the book.

Click HERE for The China Challenge excerpt by Kissinger that appeared in the Wall Street Journal

And click HERE for the Wall Street Journal interview of Kissinger about China and his new book (”Henry Kissinger on China.  Or Not.”).   It appears the interview did not go so well and that Henry was less than forthcoming.  But to be fair, a dummy, Kissinger is not, and he is not a fellow that is easily led into potential journalistic traps.

Not really. Just kidding. I think Zakaria is a bright, thoughtful fellow, he is much more knowledgeable about many things than I am, and I am one of his biggest fans.

I just needed a controversial post title to grab your attention.

Per the assigned book review for this quarter, I generally see that students like, in general agree with and find comfort in the overall theme and premise of his book, The Post American World.  No problem there.

I am sometimes surprised by how his arguments also sometimes seem to be given a free pass and the benefit of the doubt. On this note, see, for example, this WSJ article, Multilateralism Cuts Both Ways.

Said article, in my view, highlights one of the main weaknesses with the Zakaria and his argument for us “all to just get along.” This article is right to point out, and it is perfectly fair to highlight, that now that Bush and Cheney are gone, the rest of the world don’t have their softball easy targets and big bad bogeymen to attack and use to criticize America for their own unwillingness to “man-up” on difficult geopolitical problems and challenges, and they will now have to get in the game and put their money and own budgets where their mouth is.

Your thoughts?

Relatedly, see this WSJ article, Auction Bidder Protests Looting by Refusing to Pay, about a Chinese art collector who was the successful bidder on some Chinese art at a Christie’s art sale in France, but then refused to pay because he wanted to kill the buy-sell process as an act of political protest. While some would say this is admirable, for me, it highlights a facet of China’s growing (understandable) patriotism and confidence (this also relates to some of our other predepature readings).   But more importantly for the purposes of this post, it also highlights China’s ongoing national schizophrenia and paranoia. To wit, one day the CCP and a percentage of its Chinese citizens may claim to be victims of past historical and colonial injustices (for those familiar with recent Chinese history you know the various historical events to which I refer) and they want some form of payback or recognition for those past wrongs, and then the next day they want respect but don’t want to be held to the same international and rule of law standards that the rest of us big boys have to play by (e.g., China had its day in court on the pieces of art at issue and lost).

The argument being that if one wants to be a true global power that is given respect and accolades, said country can’t have it both ways. This too, in my view, is where Zakaria’s books falls short — it does not take this flip flopping by other countries into account (e.g., France, anyone?).  He only focuses on the flip-flopping of the USA.

Your thoughts?

And again, for the record, I really am a Zakaria fan.  He is a very sharp dude and from what I hear, an even nicer person.

Click HERE to read this short Businessweek article and interview.

The money quote:

Charlie Rose Question:  ”You urge people to go to China.  And then you ask them how many books they’ve read [before they go]?”

John Mack Answer:  ”I don’t ask them about the books.  I just want them to go….”

What is your takeaway from this short article and interview (not just the above quote)?

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.

China the next Tunisia or Egypt?   Bet on the likes of Libya, Saudi Arabia, Yemen, Venezuela, Bahrain, Cuba, Myanmar, Yemen, etc.  Forget China.  E.g., interesting on-the-ground post on the topic and how this is percolating in China by the ChinaGeeks blog (click HERE).

Fascinating one page article and story in Businessweek (click HERE) from Evergreen Solar CEO, Michael El-Hillow that touches on some differences between the US and China re: fiscal policies, tax breaks, regulatory environments and approaches, and industrial policy.  I know very little about this firm, it’s product or the industry.  What are you seeing out there on this topic?  And your thoughts and feedback on this article?  Is this his problem?  Your problem?  My problem?  Other?  If you don’t like what you are seeing here, what is your solution and does it stand a chance politically of being successfully implemented?

I received this email from a China trip alumni who does business in and with China:

>Hi Chris,

I was just watching this TEDx video about the rise of China.  From my  experiences 99% of what is being said is what I see and what people in the US need to start being aware of.  This speaker (Martin Jacques, author of When China Rules the World) is talking to people in the United Kingdom and addresses their ignorance towards what is going on, and I fear that in the the US it may be worse the the UK.  I hope your students will watch the video (hopefully a few times) before they visit China and use this knowledge when they are seeing things first hand.   Some of the things they see they may never fully understand from a week or two trip to China, but still it’s important to go there and get a feel for what is going on.  The thing I only disagreed with was how today people view the state in China.  What he says hold true for I would say up to 20 years ago, but I think the today’s youth (in the cities) view the state a bit more ‘Westernly’.  Anyway, I hope the students get something out of this.  All the best,  - XXX

Prof. Carr Addendum:  And in the interest of balance, here is a counterpoint to the above TEDx video …

See this nice blog post by Dan Harris at the always excellent China Law Blog (click HERE to read the post) where he discusses some of the pros and cons of the soon to be released book by Troy Parfitt, Why China Will Never Rule the World.  Be sure to read and check out the comments to Dan’s post.