Plenty of expat managers in Shanghai still seem to be thinking that maybe this will all go away if we close our eyes and wait a while. Well – something is certainly happening, but it’s not an economic recovery. It’s a set of demographic shifts that is going to affect your choice of target markets.

1.The gap between luxury and middle-class Chinese buyer is blurring.
2.Western, short-term (under 5 years) ex-pats are becoming less common.

Is this going to reverse itself as soon as the economy recovers? I’m sure that Shanghai’s over-the-top restaurant and entertainment industry is going to continue to awe and overcharge, but I wouldn’t expect the expat package to start making a comeback anytime soon. Localization was already working before the recession hit, but global headcount reductions have made western managers an easy target in China.

Changing demographics means changing target markets. Take the slow holiday season to think about who your customers are and where they get paid.

Middle Class and Luxury Markets Are Blurring
The market for goods and services in China’s biggest commercial centers is becoming a bit poorer – and much more local. The top of the market is getting very thin, and promotions and special deals are making luxury purchases possible for Chinese buyers that aren’t related to the famous international companies. The Chinese middle class are here, they’ve got cash, and they’re not particularly impressed. Restaurants on the borderline between ‘nice’ and ‘expensive’ have started showing cheaper menus and more promotions. They’ll have to keep working harder to attract local yuppies who are starting to party like it’s 1999 (and they’re earning ‘99 paychecks).

International Economy vs. Domestic Economy
On the international side you’ve got the westerners, the overseas Chinese, the local Chinese who work for multinationals, and the local Chinese who work in firms or industries that support the multinationals – like outsourcing, F&B, travel, legal, accounting, etc.

On the domestic side you’ve got your government & state employed (including education) and private Chinese businesses that don’t sell to MNCs.

Many expat businesses – particularly the ones in luxury or B2B sectors – have made a strategy out of ignoring or avoiding the pure domestic side of the economy. There was plenty of low-hanging fruit in the downtown neighborhoods – particularly for F&B. ON the B2B side, the domestic businesses were too hard to sell to and too hard to collect from.

Expats – Disappearing, or Evolving?
Expat managers who do the same job - but better – as their average local counterpart are done for. It’s highly unlikely that they are cost effective. They used to be the only part of the executive workforce that got anything done at all. Now they are probably the ones slowing things down – especially if their language skills are weak.

But there will be two new types of expats arriving on the scene. New companies will be setting up in China – as they realize their B2B markets in the US have fallen and can’t get up – and we’ll see a steady line of “accidental expats” who are just now looking at China for the first time. Some will be on their asses – but many will be packing well-known brands, cool technology and lots of retained earnings. They’ll be scarred and battered from 18 months of economic downturn, but plenty of fresh new meat is headed this way.

We’ll also see more global experts. Westerners who usually collect in HK and Tokyo will probably be adding Shanghai to their roster. These are the global consultants, financial analysts, brokers, retailers, restaurateurs and other executives who don’t care what country they are in as long as the numbers work. These people spend a lot, but their numbers are pretty small.

These new arrivals won’t make up for the de-waiguoing of Shanghai or other business centers in China. Their spending patterns will be different then the expats here in China now. And there will be more Americans and relatively fewer Europeans (who all seem to be here already).

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The good news? China is going to weather this thing in better shape than Western economies. The bad news? You may not be in the part of the Chinese economy that will do well. Most expat-run businesses in China focus on private Chinese enterprises or other multinationals. But all of the Chinese bailouts & assistance are focused on State Owned Enterprises.

How does this affect international managers doing business in China?

If you are part of the B2B service chain in places like Shanghai or Shenzhen, then you are operating much closer to the epicenter of the global financial crisis than your position on the map would suggest. In fact, some of you minus well be in NY or London considering all the exposure you have to toxic economic trends. We’re already seeing the number of full-fledged expat packages dwindle. As MNC budgets get cut and headcount capped (or reduced), there will be less spending on other business services…and yes, that definitely includes F&B.

The part of the Chinese economy that will suffer the least and receive the most support is the state sector - particularly in the rough & tumble interior.

A study being run by www.ChineseNegotiation.com indicates that Westerner involvement with the Chinese economy is almost always through privately run Chinese firms. In other words, we might be barking up the wrong tree here.

Should you rewrite your business model to start accommodating CCP leaders and provincial governments in a frantic back-track to try landing SOE contracts? Only if it makes sense - and for many of you it doesn’t. But you might want to find out who you are already dealing with that makes money off of SOEs or state banks — because they’ll be the ones with the money next year. First secure THEIR business and good will, and then see if there is any way for you to move up the food chain.

Raise your top line or lower your expenses? Both? 2/3 of one, half of the other?

The problem with raising the top line is that it’s expensive and risky. Lowering expenses makes sense – for a while — but it’s not a career. Even in Shanghai we now have enough confirmation of the go-slow economy to go straight to the Big Cuts and get it over with. After that, there is a limited return. CEOs shouldn’t be calling a senior staff meeting to discuss ways to save $6.50 a month on paperclips.

Cost cutting will only take you so far. If we were talking about a problem that we knew was ending soon, you could make it work. But it looks like we’ll be in lousy times for at least 6 months. Cost cutting shouldn’t take that long. If you want to still be in the game when this is all over, you have to find ways to reflate your top line.

Budget – Let’s do a little simple reality-based math. You’ve cut advertising; marketing & promotion budgets by 75 – 99%, and you expect sales to stay strong? Either you were doing some really poor marketing before this or you are blundering into a classic bear-market trap – pulling the fire alarm too early. You can ride your guys hard now – but after 6 months of listening to you rant your sales team is going to grow a tough shell that protects them from you.

Marketing – cheap is good, but don’t go crazy about the marketing budget. You need to stay visible — even if now can only afford a candle in the window instead of the spotlights you used to have. Are you devoting the time to Social Networking? Linkedin, Facebook and Xing are all great ways of reaching the people you care about – but doing it right takes a lot of time and the right kind of energy. Don’t start SN marketing unless you are serious about following through – otherwise it just looks like you don’t care.

Sales – Two great ways to demoralize your team are to expect failure or require impossible levels success. Times are tough and your guys need to know that they have your support. Remember – we’re still in the early days of the downturn, and in China we are entering the dreaded Holiday Dead Zone (from around December 15 to Feb 15). You can only threaten a guy’s job 3 times before losing credibility – so use that power wisely. Try a little encouragement – and look at the wide end of the sales pipeline a little more carefully. Your sales guys are probably all sweating the qualified leads that stand a chance of closing – but is your machine still feeding the pipeline with fresh leads? Run a sales contest that encourages your guys to prospect and network more – and let them win a little cash in the process. Especially good if commission and bonuses are going to be weak.

Promotion – Keep traffic high. People are on the lookout for business failures. Lower prices or change your offering enough to generate steady, predictable traffic. Even if it just breaks even, any special deal, informational seminar or give-away is worthwhile as long as it brings in fresh prospects and generates positive buzz.

Be an expert. Your top people have a little more time on their hands than they should? Write an article, a letter, or comment on someone else’s posts. Do you have an interesting take on managing in China? ChinaSolved.com is always looking for guest writers. Drop us a line for details at admin@chinasolved.com, or go to our Facebook group and get in touch that way.

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I know of more than a few Shanghai-based expat businesses that are suddenly discovering that they are in China. This startling revelation took place almost immediately the herd of cash-rich expat-packaged Americans and Europeans started thinning out. When your big spending Western clientele disappears it’s natural to you start looking to crack the illusive Chinese middle class – or as I like to call them, the MWMs (Mainlanders With Money).

It’s not necessarily a bad plan – if it is a plan. Localizing your market offering may make a great deal of sense – but it’s no quick fix. And it has to be one of the worst desperation Hail Mary plays in the history of commerce. You’ve got to plan carefully to get this right.

The economic numbers stink and your business is looking suddenly vulnerable. Now that we’re approaching the “Dead Zone” (2 weeks before Christmas until 2 weeks after Chinese New Year), the global recession is becoming a lot less abstract and a lot more annoying.

When a few big-spending westerners outweighed a whole lot of Chinese looky-loos, it was a pretty easy decision to go high-service, high price and distinguish yourself as a luxe brand. But now that the westerners are much scarcer and tighter than they were last year you may be thinking about changing directions and focusing more on the local Chinese market.

5 quick tips for the China-market novice

Feasibility study / Market research
Sure, selling to 20 million new customers in your city seems like a great idea to you. But do they agree? Marketing to local MWMs could make sense, or it could be hopeless. Find out BEFORE you redirect the last of your marketing budget. Whether you are looking at Chinese B2B, retail or consumers, you have to test and plan. Step 1 – is this even feasible? I remember working with one group that tried to sell no-money-down luxury property schemes in the Caribbean to Chinese locals. Very few Chinese are familiar with the Caribbean and couldn’t understand what country it was part of. The few that got past the geography tutorial couldn’t grasp the fundamentals of highly leveraged property transactions (lucky bastards). Needless to say, the sales effort as a flop. Step 2 – If you determine that your product or service does have traction with a local market, do a SWOT and competitive analysis to find out how you should approach the market.

All In , Half & Half, or All Things to All People
Depending on your industry and product offering, you may have to retool at least part of your business to accommodate local buyers. That raises a challenge for many expat businesses in China – should you focus on Westerners, Chinese, or both. HINT – If your business is mostly service-driven sales, like real estate, then you can shift between the two demographics pretty easily and accommodate both. If you are working with long lead times, technology or fairly involved manufacturing then you will probably have to make a choice. A few China businesses have managed to serve both locals and international buyers simultaneously, but it is not appropriate for all companies, industries or products.

Manpower planning
The assistant to the western manager you just fired may make a great saleswoman – or she might not. Getting into the China business because you have idle hands around the office is a terrible idea. If you are going for local MWM business, you have to field a new team. If you can assemble a highly skilled staff from the people who already work for you, then that’s great. But if you can’t then you’ll have to spend. Don’t be cheap here – Chinese get as frustrated by bad service as you do.

Localizing vs. Translating
There’s more to localizing than having your product description translated into Mandarin. You are basically creating a new product – and a new promotional strategy. That’s why testing is so important. Localizing a product offering is something you probably can’t do on your own. Again – this is a bad place to try to save money. You’ll probably want to bring in professionals before you are ready to take your act to the MWMs.

Sales materials
Finally, make sure you localize your sales materials. Chinese buyers react completely differently than western buyers. They may see your product completely differently than you do. They certainly approach the buying process differently. Westerners like reading lots of reassuring text with letters, testimonials, lists and tables. Chinese tend to react to different colors & images, and are more oriented towards graphics. Simply slapping together a quick Chinese translation of your standard promotional material is usually disastrous. Think about all those ridiculous Chinglish labels on locally made goods. Funny, right? Well, it’ll be less humorous when you are the one making a mess of Chinese.

Welcome to December. 2008 is almost over – but not quite. Still a bit of business to take care of. For some China managers December is the busy holiday season – for others it is time to do the paperwork and collect the bills from the Christmas manufacturing rush.

This is a great time to think about what kind of message you want to send to your business community. You’ll want to send a thank-you to your existing clients and customers, of course. You should also think about what you should say to your team and professional network before people start taking off for holidays.

China has an extended holiday season. Europeans will start taking off in a couple of weeks for their extended winter vacations, while the Chinese staffers are thinking more about Chinese New Year at the end of January. Don’t loose track of the calendar. You want to use each holiday or special event to send a consistent message to everyone that matters to your business.

The only question that remains is what your message should be.

Message to Clients and Customers
You want to communicate two things to buyers. 1) We are in it for the long haul. We will be here next year and for the long term. We’ll get through this together. 2) We are about value, quality and service. Aspirational marketing is out. Look for a quieter, homier Shanghai in 2009. Even if you are selling to a luxe market, you probably want to turn the glamour down just a bit.

Message to Staff
This should be upbeat and reassuring but still realistic. If reassuring and realistic are at odds with one another, you have a problem on your hands – but don’t make it worse by alienating your core staff. Now is the time you want to look appreciative and sincere. Don’t try poor-mouthing to keep a lid on year-end bonus expectations, and don’t treat your people like they’re lucky to have any job at all. Remember that recessions can last for a year or more, and you will need your key people to get through the tough times. In China people aren’t as desperate to hold on to jobs as they are in the US.

Message to Partners
Your partners, service suppliers, professional team and outsourcers should also get a year-end message. Remind them that you are here, that you are strong and will be in building in 2009. Keep an eye out for potential partners, tie-ups and barter deals.

The important thing is to keep visibility high and the lines of communication open. Too many young entrepreneurs adapt a seize mentality when things get rocky. If your staff or customers starts feeling insecure, they might imagine scenarios that are much worse than reality.

Does your China business specialize, or are you a generalist?

The answer to that shouldn’t be a story or a long, vague discussion. If there is a difference between your target market and your actual buyers, then you have a problem on your hands. During boom markets the specialist-generalist dichotomy doesn’t matter a great deal. When markets are growing, many businesses find themselves with more clients than they can handle, so the idea of market segments and targeting seems academic and unimportant.

But now your situation has changed. Suddenly, you have lots of inventory (or in the case of service providers, idle staff) and few buyers. Making sales is no longer as simple as answering the phone when it rings. Now you need to actively convince clients and customers that A) they need some product or service, and B) you are the best choice.

This is a great time to figure out if you should be a specialist or a generalist.

Marketing in Times of Shortage vs. Surplus
If you have goods for sale during times of shortage, then you are in a very powerful position. You can do business with whomever you want to, and you have latitude to set prices (to some degree).

Marketing during times of surplus and oversupply, on the other hand, puts in a weaker position. Often called a Buyer’s Market, there are more sellers than the market needs to maintain a stable, ‘equilibrium’ price, and sellers have to drop prices or raise service in order to clear their inventory.

We can think of recessionary markets as one big surplus. The number of shops and businesses remains the same (or drops over time) — but the number of MOTIVATED buyers plummets. This is particularly true in China, where locals have a strong tradition of saving and are less disposed towards credit.

This is exactly the point where many expat business owners realize that they don’t have a clear picture of who their market really is. I know of one business that has been doing well selling expensive, sophisticated financial services in Shanghai. Who are their clients? They have no idea. I asked them once – the owners told me that they would sell to anyone who has money. Well, during a raging boom that is one really cute answer. But now they are scrambling around desperate to come up with a strategy that will keep their doors open through Chinese New Year. After that, they are simply flying blind.

If you are just now coming to grips with the idea that you have no idea who your clients are or what they want – and yes, this may mean you or someone you work for – then a good place to start your investigation is to determine if you are a specialist or a generalist.

Specialists are very good at a few things
You can specialize in a client type or a product/service type. Specialists have answers and solutions. You are expected to know more about one aspect of your client’s business or challenges than he does. You may sell a product – but specialists always offer value-added knowledge and information as well. If you change, expand or redefine your specialty each time a new prospect appears, then you are NOT really specializing.

In boom-times, specialist can charge more. In recessionary markets, specialists will attract more buyers – though they will still feel pressure to cut prices.

Generalists add value by being all things to all people.
Think of generalists as shopping centers or department stores. They offer a wide range of goods and/or services, and their main value-added is convenience and variety. If you tout yourself as a “one stop shop” or the place to solve a wide range of problems then you are a generalist. Generalists can be very successful, but only if they understand their real value to the customer. Convenience, low price, and high service. Generalists often use a loss-leader approach, where they attract customers with one high-value, low-price product, but then sell the client more goods or services.

What about Service?
Both specialists and generalists need to offer service, but they are different.

Specialists need to be expert in some aspect of their client’s business. They are the doctors of the business world. Specialists fix problems, offer alternatives, provide solutions and are a resource for the client’s business or life. Specialists who can actually solve problems have a great deal of leverage with prospective buyers, and their advice is an important competitive advantage. Beware of building a “specialty” business around one or two anonymous experts but staffed by low-paid clerks and salesmen who don’t have sufficient experience or knowledge to provide value.

Generalists have to be good at process-oriented service. Deep inventory, wide variety, new products, sufficient staff, convenience, ease of transaction and acceptable after-sales service. If you think of yourself as a generalist but hear your staff saying things like, “we don’t have that here, we don’t do that, you’ll have to talk to the manager and I don’t know when he’ll be back, etc”, then you are dropping the ball. Generalists are about convenience. Once a customer has to go somewhere else to solve a problem then you may never see them again.

Deciding if you are a specialist or a generalist is a great first step towards overhauling your business model and creating a more competitive business.

We’re getting a little more visibility into the nature of this crisis, and the good news is that we are starting to understand the bad news. China isn’t going to be a safe haven – though it may not be battered as badly as the US and Europe.

But just because China will be less damaged, it doesn’t mean that all you have to do is wait for things to become ‘normal’ again after Chinese New Year. Your business model is going to change over the next few quarters. The only choice you have is about what will drive those changes – you, or the market.

This is one of those times when not deciding is a decision – and a poor one.

Not everyone will be equal
In a recession, not all companies are created equal. Trusted brands tend to outperform commodity sellers. Low cost operations survive while companies with high burn-rates tend to get washed away. Low debt, high cash flow is good – negative cash is bad. Strong teams with good morale stick together – staffs that hate their boss and the company tend to fall apart.

But surviving a global downturn goes beyond hygiene issues. Now is the time to take a long, hard look at your business model and operating procedures and decide how they will change under a number of scenarios. Just in case you’re wondering, the near-term environment will probably see the Chinese economy go sub-7% growth for at least a couple of months in Q1-09. Business demand for goods and services will continue to drop, and consumers are going to lock-down their spending. It’s a buyers market – and you’re a seller.

Who benefits?
When the killing fields are strewn with bodies then scavengers get fat. Don’t fall into the trap of “waiting this thing out”. Plenty of expat managers I know are hunkering down and crossing days off the calendar, waiting for this economic illness to pass. Unfortunately only surgery will cure this set of ailments – and when the global economy starts cutting it uses a very sharp, very wide blade. But it won’t cut all businesses. Big competitors with cash in the bank, low debt and good operating procedures will be expanding and acquiring. As soon as the Western economies hit bottom and show signs of a recovery, look for the big multinationals to start pouring more resources into their China marketing plans, since this will be one of the stronger markets left in the world. You only THINK that you’re in a holding pattern – in fact, you may be losing ground by inches every day.

Cost cutting / Price cutting
Every time you want to cut your costs it means that someone else is lowering their price. (Suppliers are giving you a better price when you buy, but also have to lower prices to attract other buyers to replace you when you don’t buy.) When your customers try to cut costs, they are demanding that YOU lower prices. That means that simply reducing your operating expenses is not going to get you clear of this thing. You need to change the basic way your business operates.

Any good news?
You now have a rare opportunity to adjust your business model – so long as you don’t alienate your market. I know of plenty of expat businesses in China that grew ‘organically’ – which usually means no plan or structure. They stumbled upon a niche and started coasting on the success of one or two offerings. Well, now is a great time to take what you have learned and reinvent your business. Now is the time to do a little market research, talk to your core customers, brainstorm with your top managers, take a walk on a warm beach – do whatever you have to do in order to come up with an answer to 2 simple questions:

1) Who will our customers/clients be in 18 months?
2) What kind of organization should we become to add the most value to those buyers?

Once you know the answers to those questions, then you can start planning your immediate survival strategy. Until then, you are just running up the down escalator – with no idea where it goes.

This recession is going to have a strange affect on your local Chinese staffers – and customers. They’re going start aging before you eyes until they turn into their own grandparents. Physically they will appear the same as they ever were – but emotionally and mentally they are going back in time to a time 15 or 20 years ago when Chinese life was characterized by shortage, deprivation and insecurity.

The good news is that suddenly a steady job is one of the most important things in the world to them as they save every mao in anticipation of tough times ahead. The bad news is that Chinese customers and purchasers are going to do pretty much the same thing.

Ostentatious consumption is out. Paranoid saving is in.

I know this script well. My grandfather was an accountant at Western Union when the Great Depression hit. He felt it was his duty to indoctrinate all of us grandkids to be good savers and to beware of the specter of ‘hard times’. I grew up during the optimistic go-go years of the 60s and early 70s, but my parents would often invoke the spirit of Grandpa Sol and the Great Depression to get us to waste less and save more. Even though those particular hard times ended 60 years before I was born, they still made up part of my consciousness and identity.

Local Chinese have the same type of memories – but theirs are stronger and more recent. China has only been open to the West since the late 70s, and wasn’t really prosperous until very recently. Sure, they love to spend and to job-hop so much that it seems like part of their DNA. But that’s a blip on the radar of Chinese history. Deep down, the Chinese consumer is skeptical, conservative – and a cutthroat negotiator.

If your market includes Chinese middle-class buyers, you may want to moderate your approach. Try a tack that is less aspirational and high-status, and more practical and value-oriented. This item is more expensive- but not because it is European or the same one used by movie stars and royalty – it costs 20% more because it will last 75% longer. It is a better value.

Local workers are going to become more dedicated and committed to their jobs – which is both good and bad. Of course it will be great to field a team that really cares about holding on to their positions – and will be a refreshing change from the revolving door HR reality that plagued managers in the past. But you can also forget about voluntary head count reduction or furloughing unneeded staff until business picks up. If you have gotten used to Chinese staffers who don’t even bother to show up to tell you they are quitting, then you’re in for a shock. Any western manager who tries to fire Chinese staffers had better consult with their HR specialist AND a well-informed lawyer before moving forward. There will be trouble.

A recession in China will clear out the underbrush – but the survivors will be tougher and more competitive than ever. You need a new business plan that will do two things: help you survive the downturn – but also position your business for the next growth phase.

Use your down-time constructively. You’re up against two dangerous trends, but you can use both to your advantage. First you have to survive – but you also have to transform to meet the needs of a post-recessionary China market that is more sophisticated, demanding and value-oriented.

A recession in China is going to wipe out a lot of marginal businesses. Your first priority is surviving the downturn. But in China, simply surviving isn’t going to be enough. When this economic meltdown is finally over, the landscape will be different. China will become a more sophisticated, competitive and service-oriented economy. That’s why your second priority should be to re-engineer your business to take advantage of the new Chinese economy.

Look for these trends in a post-recession China.

1.More sophisticated consumers. They’ll pay more – but will demand more. It’s not about low cost – it’s about higher value. In the past, there were 2 Chinese economies – the high end luxury market and the mass low-cost, low-value market. Lux is going to take a hit, but the masses of Chinese consumers are going to be much more conscious of value and service.

2.More competitive SOEs. China’s State Owned Enterprises are not going away. A severe recession in China is going to make them stronger as it wipes out competitors and starves smaller companies of cashflow. Anyone who competes directly with state-owned companies had better plan on seeing them grow their market share and come out with new products and services. Chinese SOEs have been the real engines of growth and transformation, and that trend will intensify.

3.More nimble competition. They rent-collectors are going to get wiped out, but a new breed of fast & furious local competitors will emerge. There is an army of Chinese entrepreneurs who have been crowded out of the service sector by international competitors with deep pockets and international marketing savvy, but in the post-recession Chinese economy these fast, smart, little service companies are going to steal someone’s lunch. Make sure it’s not yours.

4.Networks are not a buzzword – they’re people who are connected by a common need or interest. It’s not enough to build up big lists. You need to interact and to monetize. Social networks are real – but they aren’t an end unto themselves. You can’t just shout your message – you need to monitor and analyze and listen.

5.Trends are friends – or bad ends. Parts of the Chinese economy will come back to double-digit growth – but it will be a different kind of growth. No more advantage for first movers. You won’t get paid for showing up in the new China. Whether your firm services multinational corporations or markets directly to consumers, you are going to find yourself in a more competitive, demanding marketplace after the world economy rights itself. You can use this to your own advantage by positioning your company to meed the demands of the new China market - or you will be playing catch-up with a host of new competitors who focus on delivering value.

Things are slowing down at a lot of international firms here in China. Use the down-time to your advantage. Put your top people in a room and make them imagine that it’s November, 2010. What will your industry look like? Who are your customers and clients? What will THEY consider your value-added services? What does the 2010 Chinese consumer look like, and why will they care about your business?

Later this afternoon I will be interviewing Kunal Sinha from the Ogilvy Corporation on ITV-Asia about “China’s Creative Imperative” – his new book and, apparently, our new buzzword. A quick search through the search engines and you’ll see that creativity is a significant Cool New Thing (CNT) for China-watchers to talk about.

Like most long-term residents of China, I have long been aware of the creative potential and practice of the Chinese. I have collected art and ceramics – and I have listened to the excuses of employees and lies of contractors. This raises the main question that we’ll all be dancing around if this new buzzword turns out to be an actual ‘thing’.

Is there Good Creativity and Bad Creativity?

Westerners tend to view creativity as a hierarchy, with ‘lightening-strike’ flashes of genius occupying the top spot. We romanticize the tortured genius and the idiot-savant professor. Westerners like ground-breaking innovation and paradigm-shifting revelation. Pure research inspires awe, but it doesn’t put profits on the bottom line. One pic of a starlet’s crotch earns a fortune in ad revenue, while the Hubble Telescope’s awe-inspiring photos of unseen galaxies were given away free on the internet.

During the 1980s, Japan was at the peak of their commercial arc – and their corporate R&D departments were filing for more patent applications than their US counterparts. But Japanese innovation tended to spring from ‘applied’ as opposed to ‘pure’ research. They took existing products and made them better or cheaper or added features. While this is a potent market strategy for the guy playing catch-up, it tends to run out of road when you are the market leader.

The 800 pound gorilla in the Chinese creativity room is Bad Creativity. Like when semi-literate farm-hands figure out that melamine will pass for protein in milk. Scams, swindles, cheats, counterfeits, piracy, and anti-competitive practices are all forms of creativity. They require no less intellect, wit and genius than other forms of creativity. Chinese people have long bragged that these are just the types of creative techniques that leave outsiders at such a disadvantage in business here.

The rocket scientists on Wall Street and the swindlers in the Chinese dairies were both displaying tremendous creativity – and were quite well-rewarded for it (at least for a while). Our challenge is to make sure that we are not the ones paying the price for Bad Creativity. In a perfect world, creativity and genius are put to the service of society at large. In our world, melamine and mis-priced mortgage-backed securities are the creative solutions that pay the most.

Creativity is not always beneficial. International managers and owners here have a lot to gain from the more creative China – but we can’t be dazzled by flash. As times get tougher in the market, you’re going to start hearing more creative ideas for making bigger profits. Be very sure that you understand what you are really getting involved in.