Tuesday, July 28, 2009

China: learning amid a crisis

In our recent EMBA trip to China, the visit to Guangdong province may have been the best opportunity to learn about the real China, and generate ideas to put in practice in Brazil. Guangdong Province is where the opening up started; in 1978 Deng Xiaoping visited the province and created the first special economic zones where the “market socialism” experiment began, using the Pearl River Delta and Hong Kong as fundamental trade and finance supports for internationalization of the Chinese economy. To begin with, the cautious, regional experiment is typical, political risk avoidance is important for the regime.

In the busy, crowded factory like city of Guangzhou, (old Canton) the provincial capital , and in the surrounding cities, our group of executives were able to see the real modern China, visit Chinese universities, and meet Chinese entrepreneurs and public officials. In a traditional Chinese university, students speak English but often the senior professors do not; and interpreters are required; senior executives and public officials usually address us in the Cantonese dialect, and often our mandarin speaking hosts from Peking also need interpreters! In companies, very often the junior managers are the only ones that speak English, and that fact is used as an advantage during negotiations, to gain time and create distinct decision levels.

Entrepreneurs are young, enthusiastic and ambitious. Two young Executive MBA graduates presented their companies producing western-style high end jewelry, and barbecue equipment! Both are focused entirely on exporting to sophisticated foreign markets from the very first moment since creating their companies, with very little interest in their internal market! Another small high tech LED flat screen start-up also has a tremendous market focus, and sells to all over the world from a very small and simple factory near Guangzhou.

In these locations decisions are fast and radical; local government applies all its efforts to attract investments. Special agencies facilitates public authorizations, negotiations with the union, and the necessary energy, housing and transport infrastructure. They claim to be one stop agents for business, and the attitude is definitely yes we can innovate, produce and export our products. The current crisis makes things more difficult, but the Chinese know that they are much better off today than 10 years ago; they feel that they can fix all their problems as they go forward; very real problems of housing, inequality, health, energy and infrastructure.

One recent example of a radical local decision was the ban on gasoline powered motorcycles in the main cities of Shanghai, Guangzhou and Beijing; over the last 3 years millions of them have been replaced by small, slow, quiet, safe and non polluting electric scooters. Dozens of local manufacturers produce these low cost vehicles, in spite of the fact that most of China’s electric energy is produced in coal fired thermo-electric plants.

At the same time we in São Paulo worry about the dangerous motorcycles in our heavy traffic, and suffer with accidents, death of young people, pollution from motorbikes and horrible traffic congestion when the inevitable accidents occur. Worse, 95% of our electricity is of hydroelectric origin, which is clean, renewable, and available at night to recharge batteries when demand is off-peak.

Inspired by the Chinese problems and their positive attitude, some of our Executive MBA alumni are proposing to go beyond the great social work they already do. They are proposing alumni projects for our program like a zero carbon footprint, a permanent public policy forum, and a fund raising program for use of cutting edge classroom technology.

I would very much like to hear your comments and contributions on initiatives like these.

P.S. I’m writing mostly in English because we have an international audience (25% of the readers of our blog) and also, some of our students need to practice their language skills. Feel free to make contributions in Portuguese, English, French or Spanish !


Monday, July 13, 2009

What do China’s constraints mean for business?

Alfredo Behrens
International MBA/FIA, São Paulo
July, 2009

During over a decade we have witnessed the early morning yawning of the Eastern dragon, China grew at astonishing rates for over a decade. Market after market succumbed to lower priced Chinese products.

How long can this last for?
China grew at two-digit rates, but it also increased the depletion of its environment, aggravated income distribution between people and regions and triggered internal migrations to booming coastal cities which have turned into policy headache as China’s export-oriented growth cycle slows down, unemploying over 20 million migrant workers.
The environment issue will take more than the cosmetic “Blue Sky Plan” launched in anticipation of the Beijing Olympics, even though that took abating emissions from the fourth largest iron and steel mill. Besides dealing with the increasing desertification and the sandstorm which dumped
330,000 tons of dust in Beijing in April 2006 - now China must face how to deal with the dust, soot and acid rain resulting from coal-fired energy production targeted at 780,000 Megawatts for 2020. This is almost eight thousand times more than all of Brazil’s installed capacity in 2007. China’s power generation is almost 80% coal-fired. MIT estimated that China will install two 550MWe coal fired plants every week.

Water quality is poor and not enough to go around, certainly not to treble per capita consumption, the growth necessary only to bring Chinese consumption to world average levels. In a country so large there can only be regional disparities. While there are floods in some regions there are shortages in others. But where there is abundance of water it may be too polluted. For instance the Yellow River is so high in ammonia that it might not longer sustain life. But it is not all, up to 40% of China’s GDP is located along the Yantgtze River, however “the ecology of the Yangtze River is facing an extreme crisis, and if it is not addressed there is a fear that the ecosystem will collapse within ten years.” Only five more to go.

In the longer run there are also important demographic trends to pay attention to. China is also fast at being old. Over the next two decades the proportion of inhabitants over 60 years of age will have doubled. Ageing may have happened in any case, because of decreasing fertility rates, but was accelerated by the One Child Policy.

Currently, only 10% of the population takes part in the Chinese pension system; which in 2000 was partially funded by 100 million formaly employed and benefits 32 million retirees. The low coverage means that the majority of old people will have to rely on their savings, as can be complemented by a reduced family system, because of the One Child Policy. How much will these “only children” will agree to pitch up with is to be seen. Singletons share many characteristics of the first born, who, for some time at least, are only children. These tend to be high achievers, assertive and dominant, while laterborns score higher in Agreeableness and are generally more innovative. How these considerations will work out in China is hard to anticipate, but if the theory were correct, one should expect a future mix in the Chinese population which will be still more hierarchical and less questioning of status quo.

What will the waking-up look like?
Indeed, China’s 11 to 13% growth rates underscored a 9% consumption rate. Yet that consumption growth may fall to 5 or 6% if China’s GDP growth rate falls to 8%. Unless, of course, the massive Chinese fiscal policy stimulus manages to prop-up domestic consumption by enough. Even in China there are limits to how much fiscal stimulus the government may resort to without depreciating the currency.

The Yuan had appreciated about 20% since mid 2005 until 2008; an unmanaged depreciation of the Yuan would bring capital flight and a depreciation war with its Asian competitors. If there is a lesson to be drawn from the 1997 currency crisis in Asia is that it is necessary to stabilize the currency rather than let it be determined by the market in a volatile environment.

China has been caught in a difficult situation. At the height of the American-led financial crisis China had revalued its currency, loosing international competitiveness, thus aggravating the domestic impact of the world financial crisis. Besides, China’s growth is ecologically constrained. One avenue to release the latter constraint would be to de-emphasize the coastal-oriented development and regionally rebalance growth towards the Western provinces. This would temporarily dilute pollution pressure on the East and ease the current migration trend to the East of the country. But it would require targeting the fiscal stimulus away from the heart of the domestic crisis - East and South - and into infrastructure to develop communications with the Western provinces. On the other hand, the demographic constraint is harder to release and will lead to emphasizing capital intensive rather than labor extensive industries as its population ages.

Where to invest in China?
This is of course a broad sweep, but if one were to invest in China today I would recommend having a closer look at the mid to Western provinces, providing one’s product is not intensive in water and one can get the products out to a cost effective port, or that, in the longer run, your line of activity would benefit less from cheap labor than from a highly educated and disciplined labor force, in which case, you may rely more on air transportation for business.