Monday, July 12, 2010

Trip to China 2010

Read in Portuguese

The impact of the modern burying the past reaches with force when the magnetic levitation train reaches a cruising speed of 300 km per hour, well below the maximum normal 410 km per hour. The trip from the international airport to Pudong, the brand new business centre in Shanghai, is made on eight minutes, smooth and silently. Alongside the elevated train tracks, bulldozers and cranes build new structures with similar speed; from one year to another, new avenues, impressive buildings and new consumption habits appear.

In this 2010 study tour, we visited and met with managers from eight different companies; a history of growth of 33% per annum is normal, and the managers goals for growth are often nearer 40% per year. In this context the challenge is to build new factories, hire, train and retain the workforce, as well as develop local managerial talents, a task that is not trivial. To face the inevitable local imitators, companies must innovate to be always one step ahead in technology products and processes. Brazilian and other international companies operating in local B2B markets indicate that it is essential to focus on the high end of the markets and always bring up-to-date products; this pressurehas forced these companies begin to do research and development in China, and in some cases, push products developed specifically for the local market, sometimes surpassing the requirements of the Brazilian markets, as in the case of high end refrigerator motors, which must be quieter tha US or Brazilian models, due to the small size of chinese apartments, where living rooms often serve also for sleeping.

This perspective on innovation is explained by the size and dynamics of the Chinese market; for example, the World Expo 2010 in Shanghai expects 70 million visitors over six months; just tickets sales are forecast at 1.8 billion dollars. On a sunny day in June, nearly half a million people were there visiting exhibits of companies, trade associations and countries, including the football friendly and green Brazilian stand. The Chinese exhibits, all grandiose and futuristic, portray the concern with urban growth, energy, transport and sustainability of a society that is still 60% rural, where the urbanization pressure is huge, due to the 130 million migrant workers coming to the cities every year to work.

These migrant workers, who do not have the right to permanent residence or citizenship in the rich urban metropolis of the Eastern seaboard, provide the labor for the factories that churn out all the products that the West imports from China . These workers remain registered as citizens of their hometowns, where they return to annually in the New Year, and where they will eventually set up a family and reside after saving up the wages earned in the large factories of Shenzhen, Guangzhou, Shanghai, Suzhou, and Beijing, among other mega cities. But the people visiting World Expo 2010 are not the poor peasants observing the wonders of the Western world; they are the new Chinese consumers, with shopping bags in hand, composed of couples, almost always with one child and grandparents visiting, eating, consuming and displaying their confidence in China's future.

Our timing was special for other reasons; all the lectures in universities and industry emphasized that the Government faces new pressures and challenges that arise at every moment. On the very day our group arrived, the Chinese Government announced that the yuan would finally be allowed to, a measure requested with insistence by Western Governments and that brings a little more balance to the terms of trade, requiring more effort from the Chinese exporters and improving the competitiveness of products from the West. But the main news during our stay was the emergence (and permission of it’s disclosure) of a sequence of suicides of workers in the huge Foxcomm factories. These suicides are the result disillusion of the younger generation of migrant workers with their not-so-low wages and lack of future prospects. As a result, there were many labor strikes, followed by significant increases in wages across the coastal region. Increases of up to 62% were granted in Honda and Toyota, and average annual wage increases around 18% were common in the companies that we visited.

In well structured Chinese companies like Foxcomm, living conditions are reasonable, in spite of the intense work with up to six 12-hour days per week. Foxcomm has a factory with 500 thousand employees, and offer good dormitories for the workers, cinemas, a library, health care, fitness gyms, internet, etc. in a closed community – which is now being reconsidered. Formally employed workers in China have mandatory health insurance and social security, but some university speakers pointed out that less than 20% of the country's manufacturing jobs do in fact comply with these worker rights.

Another impact that amazes travellers is evidently the low prices of goods and services in the internal market; you can have a local meal, (in terms of comfort and general hygiene not very great for us Westerners) for less than a dollar. Markets trading local products impresses with ability to offer such low prices. Part of this is explained by the capital structure of Chinese companies, by the low price of inputs, and by the enormous competition in the offering of products. So companies with a state supported source of capital has primarily employment and sales turnover goals, not return on capital employed. The capital cost is low, and in some moments has a negative real cost, reducing the pressures for efficiency in logistics through the value chain, and essentially eliminates the cost of capital in Chinese price formation, as well as having fiscal incentives to export.

In the domestic Chinese market, there is an enormous competition, for with low cost of capital and little concern with intellectual property rights, there are few barriers to entry, fierce competition follows. In sectors such as refrigerators, we have 4 manufacturers in Brazil, and more than 250 in China, about 10 automobile manufacturers in Brazil, and 84 in China, and so forth. This voluptuous offer effectively force prices down, generating enormous competition among Chinese manufacturers.

Finally, one cannot fail to be impressed by China’s ability in articulating public and private sectors to offer an attractive business support infrastructure. Industrial parks offer plots with access by highways, railroads, ports and bonded warehouses; industrial installations, spaces for construction of housing for migrant workers, unions that are willing to cooperate with employers and centralized city offices, where one stop relationship with government is offered; a company with investment up to 100 million dollars is promised that all your licenses for operation can be cleared within 30 days.

There is updated legislation on environmental pollution, even if put into practice primarily in regards to the new foreign investments, tolerating in many cases the existing emissions of Chinese projects. Power generation is a challenge, because 75% of energy comes from coal, which will continue to be a major source for many decades. Although investments in hydroelectric plants are much larger than those of Brazil, and nuclear power and wind energy are fast growing sources, the fact is that coal, extracted in precarious and deadly Chinese mines will be the major driver of energy growth in China for many years yet.

The challenges are many; the cities grow at breakneck pace, wages rise, young people want more comfort and better prospects than previous generations, and the pressure on income inequalities and human rights spread across the country. But all those that get to know China, experience its growth and entrepreneurial force find that the center of world economic growth will gravitate towards Asia over the coming decades, and businesses and markets of China will have an increasingly important role in global business.