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Management Tips From Presidential Politics II: The Newtrepeneur

If Mitt Romney represents the archetypical American Corporate style, then his main opponent – former Speaker of the House Newt Gingrich – typifies the US entrepreneurial style of management. The good news is that the entrepreneur has a bias for action and progress. The bad? This kind of manager values action over analysis. He likes progress even if it takes the enterprise in the wrong direction. And he really, really believes what he is saying – particularly when he tells you he is right and everyone one else is wrong.

China managers are well familiar with this persona, as we run into both the American and Chinese versions. The same confidence and conviction that gives them the strength to try something new can also be their undoing. All too often, it is also the downfall of their investors, supporters and those who thought they were partners.

Uber-confident Newtrepreneurs are at their best when things are at their worst, and the success of the organization can actually be an interference. Newt’s narrative is that the world is against us and I am the only one telling you the truth. Popular acceptance is so anathema to this manger that he doesn’t know what a win looks like. Tell him his ideas are accepted and he’ll find an even more extreme position to champion. The Newtrepreneur is never happier than when he can stake out a barely defensible point of view, and then make you accept it. His partners and supporters will watch in dismay as he ignores the path of least resistance and go out of his way to find new challenges that will result in either his glory or everyone else’s tragedy.

What can you look for from the Newtreprenteur?

Ego.

The good news is that Newt is no namby-pamby waffler. He doesn’t lack for confidence – even bending puny reality to conform to his view of reality. The “with me or against me” litmus test will shake out more than a few of your teams best people – and you’ll spend much of your career wondering if you shouldn’t have been one of them.

Ignoring inconvenient facts.

The Newt will talk about moral leadership while forgetting his own infidelities, indulgence and sources of income. To this type of manger, the facts are never at odds with the Vision. Someone else will clean up the mess and deal with the fallout. Unfortunately, it just might be you.

Vilifying the competition instead of building up his own program.

The Newtrepreneur can’t distinguish between his own greater glory and the progress of the enterprise. Sometimes that means that business takes a back seat to ego. Hell – that’s almost always what it means. When there’s a lucky accident and the success of the venture aligns with his personal glory, it’s a Forbes story. Otherwise, it’s someone else’s problem. That would be yours.

Tactical wins, strategic losses

Mandarin translations end to but the distinction between tactics, but the differences are huge and highly significant. Strategy is about goals, tactics about methods and operations. One is not more important than the other and they are clearly linked – but they are not the same thing. Tactical wins often result in bottom line losses.

The Newtrepreneur wins battles but loses wars. Years later, he’ll pour you a glass of expensive scotch and share with you his personal insights about the glory and tragedy. But that don’t put food on your children’s plates – and neither does this type of manager. NGO fighters can indulge in heroism and glory – managers get the job done. And that is the Newtrepreneur’s weakness. He doesn’t succeed. Every once in a while he conquers – most of the time he just plain fails. And he takes down everyone with him.

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By Andrew Hupert – January 26, 2012

Management Lessons for China Bosses from Mitt Romney, The American CEO

Doing business in China doesn’t seem to have much in common with running for President of the United States, but we can learn some valuable lessons that apply to Chinese management situations. Mitt Romney certainly looks like everything his market – the American voter – looks for in a candidate. He seemed to be the ideal candidate – on paper. But his recent campaign stumbles reveal some self-inflicted blunders that western managers in China can learn from.

Mitt Romney is making many of the same mistakes that international managers make in China. How many of these are going on in your outfit?

    Not all success is transferable
    The skills that enabled him to win big on Wall Street are failing him in his new challenge. International managers in China need to be very sensitive to this mistake, because it’s one we make all too frequently. Not only products and services have to be redesigned for a new market – so do management styles and procedures. Don’t assume that your Chinese customers, suppliers or staff have the same priorities or values as the ones back home.

    Attempting to fit the facts to preconceived notions.
    Americans are his market, and he needs to understand the reality on the ground. Mr. Romney has repeatedly failed to separate his own brand message from the needs of his “customers”. Likewise, international managers often try to fit data-points together to support their own business plans. Strategy is vital for a successful China business, but it has to evolve and progress. Being able to collect and process relevant data is one of your main challenges in China. You need to recognize trends and plot a new course when necessary.

    Picked his team based on what he likes, not what he needs.
    A manager’s main job and responsibility is to pick the right people. Mr. Romney has clearly surrounded himself with a team that is telling him what he wants to hear – not what he needs to know. There is no surer path to failure in China than to surround yourself with “yes men”. Chinese managers can be forthright and blunt, or they can be disingenuous flatterers. It’s up to the boss to determine which he hires and what characteristics he values. If you can’t handle bad news then you can’t succeed in China.

    Lack of preparation – market research and competitive analysis.
    It is a manager’s responsibility to get in touch with his market. Mr. Romney is a wealthy ex-banker in a nation increasingly fearful about its economic future. Unemployment and underemployment are major concerns. Shouting at protestors that they need to “get a job” and referring to his annual income from book sales of over $300,000 as “not much money” sends the message that his “foreignness” outweighs his connection to the customer. As an international manager, you have to overcome your own foreignness and find ways to genuinely connect with your staff, partners and most of all, your market.

    Let the other side set the agenda.
    Mr. Romney is engaged in an all-or-nothing competition. So are you. Many international managers in China make the same mistake as Mr. Romney when they fail to take the initiative and set the agenda in negotiations. Being reactive and waiting for the other side to make a mistake mitigates risk, but it also gives up control of the discussion. In negotiation you have to ask for what you want, or you settle for what the other side is willing to give up.

Another lesson that western managers should take away from the Romney campaign is that it isn’t over until you quit. He still has time to turn things around, and he is very much in the race. The moment he quits, however, his political career will be over. International businesses that bail out of the China market too soon will probably not get a second chance, so make sure you have a Plan B in case your primary strategy hits the rocks.

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By Andrew Hupert – January 24, 2012

Doing the China Deal vs. Doing the China Business

Westerners in China find it so difficult to negotiate agreements and jump through the required regulatory and bureaucratic hoops that they lose sight of the real challenge –  successfully executing the actual business.  In China, there is a big difference between winning the deal and running a winning business.  Getting a deal that can’t be executed is worse than not signing a contact at all.

Picture a matrix – a four quadrant box – with “Ease of Doing the Deal”  on the Y axis and “Ease of Doing the Business” across the bottom X axis.  You have four variations.

A)    Easy to do the deal, Easy to do the business.

B)    Easy to do the deal, Hard to do the business.

C)    Hard to do the deal, Hard to do the business.

D)    Hard to do the deal, Easy to do the business.

You’re in China, negotiating with a potential mainland partner.  Which do you choose?

Option A?  Sounds logical, but in most cases you are merely training your competition.  And this being China, there’s an excellent chance that your competition will turn out to be the party thought you were negotiating with.  Even if the enemy isn’t inside the gates, easy to the deal and easy to do the business is a prescription for mass competition and commodity business.  Think about Best Buy or Wal-Mart who were never able to differentiate themselves from local, more familiar, competitors.

Option B is also a loser, but it actually has certain merits.  The problem is that you’ll find lots of eager counterparties who will take your money to help out, sign a contract with you – but then disappear.  This is the old 4th tier SEZ model or consultant matchmaker.  Someone fast-tracks your business registration and sets you up with an inappropriate partner far from your market or supply chain.  You’re so busy building guanxi and making life-long relationships that you don’t do proper due diligence.  This is not a terrible option if you already know the downside, but a disaster if you don’t have all the angles figured well in advance.

Option C?  The advantage here is that you won’t have a lot competition.  The problem is that there is a good reason you don’t have much competition.  This is Facebook, eBay, Groupon, the big US banks, or anyone other foreigner that wants to move into a restricted or sensitive industry.  People will tell you that it will be hard but they can help.  People will tell you that you need the right partner.  People will tell you “in China nothing is easy but anything is possible”.  I’ll tell you that you never bet against the government – any government – particularly China.  If an industry is off limits, restricted or uncompetitive, then avoid it.

Option D is the winner – for the right company and  product.  Most recently this has been Apple.  Before them it was GM and Volkswagen.    International luxury brands also fit into this category. The ideal situation is that your technology or brand is too well known and too sophisticated to be convincingly faked – and that you are regularly updating with new models. It is best if the Chinese market is already clamoring for your brand.

 There’s always a difference between doing the business and doing the deal.  They are different skills.  Doing deals is about relationships and salesmanship.  In China, however, your counterparty may be the one selling you without you knowing it.  Your partner may in fact be your competitor who is after your money, technology, business model or marketing plan.  China Inc. still believes in the copycat model.  Baidu, Youku, Sina’s Weibo, Cherry, Huawei and countless others have all used this technique with lots of sophisticated American counterparties who thought they were negotiating for the keys to the Kingdom of Middle Class China.  Instead they were just training the competition.

In China, execution is a completely different function from negotiating an MOU.  Between government interference, difficult supply chains, regulation and technology theft and rising prices, successful implementing production and marketing plans has never been easy in China – and it is getting tougher as the global economy slows and dents Chinese profits.  Americans are notorious for skimping on due diligence (see ChinaLawBlog for an expert take)  in China – often relying on their partners and suppliers for vital market information.   Before you celebrate getting the deal, make sure that you won’t mourn getting the business.

 

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                     China Negotiation/Execution Matrix

Easy to do deals

Connections can’t save you now.
Enemy inside the gates.

Ideal – for you and  the competition.  Hard work for a little money.

Hard to do deals

Avoid if you can.

Information is your key variable.  Get as much as you can while giving away little.

   Your best bet for success – if you have the brand and product.

Hard to do business

Easy to do business

 

 

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By Andrew Hupert – January 19, 2012

The Evolution of Chinese Strategy: This New Year’s resolution is to go after your market.

First is was capital, then technology. China Inc.’s next big move is to go after global markets – including the one in your backyard. Happy Year of the Dragon.

Chinese business strategy has been evolving steadily since Deng Xiaoping opened the PRC to the international economy. China has had three big items on its acquisition “to do” list, and it has already ticked off two of them.

The first big “get” was foreign capital and know-how. Strange as it may seem now, during the 1990s China needed access to western capital. It also needed basic management know-how. The main lever of strategy in those days was the older generation of State Owned Enterprises (SOEs) and provincial/municipal governments. This was the age of the government investment trusts – the ITICS. CITIC (China Investment Trust Investment Corporation) was the western darling; GITIC (Guangdong’s vehicle) was not – particularly after it defaulted on its bonds and the “implied backing” of Beijing turned out to be the “erroneously inferred fantasy” of Hong Kong based investment banks. The economic realities were very different at the time, as China was still operating in an environment of shortage and relative poverty. The plan to sell off state assets and privative moribund SOEs worked, and China Inc. started to take shape – with funding and management know-how from the West.

The second item on Beijing’s shopping list was technology, and it spent much of the 2000s climbing the “value ladder” and learning to produce, build and assemble things as quickly as possible. This was the era of the entrepreneur or privateer, who were acknowledged by the party for the first time in 2006. This was also the period when the WOFE became a viable business structure for many overseas businesses. Beijing continued to reform the SOEs, but now the goal was to create a network of sophisticated pillar industries and companies that would be the vanguard of China’s efforts to close the technology gap with the West. SEZs (special economic zones) attracted clusters of high-tech manufacturers, and China’s export-oriented (some would say mercantilist) policies insured that the factories were kept humming as MNCs outsourced their production. China Inc. was learning not only how to manufacture using 21st century methods, but also figuring out how to design, measure, perform quality control, manage and set up a supply chain. (Whether or not they actually did all of these things is another issue – they certainly saw how it was all done). China’s economy was cruising steadily from shortage to surplus, and it looked like smooth sailing for both private and state run companies – until the financial crisis of 2007-2008 roiled the waters.

The 2010s saw an entirely different PRC emerge on world markets. Beijing had the wherewithal and firepower to deliver a huge stimulus package that not only buoyed the economy but also shifted the policy focus back to state sector. Two big trends are shaping the future of China Inc. to start accessing western markets directly. First, the state sector is developed enough to start acting on its international ambitions. SOEs like SINOPEC, state directed monopolies like China Mobile and private champions of governmental policy like Huawei, Lenovo and China Eastern Air are all looking to access overseas markets through acquisition or by building their own distribution channels. Second, Chinese entrepreneurs and private businesses are also trying to open foreign markets – albeit for different reasons. Whether they fret about their future in a policy-driven economy or they want to raise their children abroad, the moneyed Mainlander seems to be clamoring for distant shores in droves – and bringing their investment funds and business plans with them.

The Dragon takes flight
Chinese firms, be they private, state owned, or somewhere in the middle, are going to make a move on US and European markets. Some Chinese firms are ready now – others will be soon. You’ve got 3 choices

  1. Ignore it and hope it goes away.
  2. Fight the trend and stymie China’s expansion plans.
  3. Get out in front of it. Make it work for you.
  • Right now, Option 1 seems attractive to many international managers and corporations. The US market is finally showing signs of firming up but Europe is still shaky and weak. Most American firms have decided to hunker down and ride out this rough patch – even though there is still plenty of cash gathering dust in corporate treasuries. Easier just to ignore the very real possibility that a new threat to top line sales is gathering offshore.
  • Option 2 – Fight the future. This has been a political favorite – and we’ll hear plenty more about it in the election campaigns of US Presidential hopefuls. China has made this the path of least resistance, clumsily leading it’s international efforts with messy natural resource buys or by pushing politically incorrect choices like Huawei in sensitive industries.  Denial and delaying will probably work great for a while – and then not at all.
  • Option 3 – Make the trend your friend and start using your hard-won international skills. When you first arrived in China you didn’t know what you were doing, and couldn’t seem to get a handle on standard operating procedure. Now the situation is reversed. You know everyone here in China and have plenty of contacts back in the States. They want access to the US market – you want to develop your China distribution channels. International managers in China may finally be getting some bargaining power again, but only if you can offer what the other side needs. International markets is the only item left on their to-do list – for now.

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By Andrew – January 17, 2012

The Chinese Innovation Conundrum

It’s common to hear that “Chinese can’t innovate or create”. It’s not wrong – but it’s not accurate. Chinese can be very innovative, but not in the way Westerners expect or desire. In other words, not in a way we know how to make money off of.

Pure research vs. applied research
In some ways, it boils down to same pure science vs. applied research gap that we’ve been hearing in Asia ever since the 1980s when Japan was the flavor of the month. Americans, led by their university researchers and big, expensive corporate R&D teams, think that innovation and originality are the same thing. Asian researchers, driven by a combination of Confucian conservatism and market-driven practicality put a premium on refinement and adaptation.

Americans like blue-sky research. We look for category killers that have never been imagined before. We favor inspiration and originality. Steve Jobs was our reigning king of geekdom, and our motto is “build it and they’ll come (to buy)”.

Chinese techies are resourceful problem-solvers. In the pre-Deng bad-old-days when China was struggling with shortages and poverty, these were the guys who could make the machines work without parts, tools or instructions. They are incremental refiners. Chinese techies want to know what it will do before they try anything. They favor adaptation and adjustment. “When they come we’ll build it.”

One approach is not better – or even more profitable – than the other, but they aren’t interchangeable.

Managing Inspiration: Lightning strikes vs. Stepping Slowly
This will be a key challenge for international managers, because as China becomes a crucial market and regional management center we’ll all be looking for Chinese to apply their knowledge and creativity to shape organizations, design products for Chinese (and global) markets, and devise distribution and supply chains. Many western HQs, however, still view China as a nation of factory workers, clerks, middle managers and of course, consumers. That’s a pretty sterile and unproductive view coming from people who pride themselves on “the vision thing”.

Maybe the problem isn’t really about creativity at all. It’s more about management, communication and organizational behavior. Chinese innovation and creativity are there, but Chinese are not comfortable shouting out ideas at brainstorming sessions.

In China, if you want creativity then you have to negotiate for it. Americans volunteer how smart we are, Chinese guard it. Sometimes they are embarrassed to stand out from their group, but sometimes they simply don’t want to give it away for free. “Knowledge is power” is taken to extremes in China, and smart people don’t give away something valuable for nothing. As international managers, we have to make innovation and problem-solving part of the bargain.

Tapping into Chinese creativity is part-and-parcel of the relationship building process. We have to align goals, build trust and explicitly build communication channels. Western managers must stop expecting locals to follow the same linear thought process that characterize our definition of intelligence. Sometimes the best thing for leaders to do is spell out the challenge, discuss goals and then walk away. Let them sort it out in their own messy process.

Driving your team on, or driving them out?
American managers see themselves as motivators – as the stick that drives the organization forward beyond old limits. To a Chinese colleague, however, this can seem like a betrayal of the terms governing your professional relationship. For many old-school western bosses, their main managerial contribution to the creative process is either approval or dissatisfaction. International leaders have to add value – or prepare for obsolescence. Our Chinese partners don’t want yes or no. They would prefer some synthesis of our technological inspiration and their incremental refinement.

Americans who buy into the mantra of the “uncreative Chinese” risk being left in the dust by a local partner or employee who innovates just fine when it comes to striking out on his own with a tweaked, improved version of your technology or business plan.

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By Andrew Hupert – January 13, 2012

Huntsman plays the China card

Huntsman played his China card in his New Hampshire “3rd place victory speech”, but it wasn’t the one many people expected.  The hand he will be playing is that he, the former US ambassador to the PRC, is America’s best bet for out-competing the Chinese.

“I saw this nation from 10,000 miles away, and I saw the nation with the greatest people on earth.”

He said that from his vantage point in China that when he looked at the Unites States he saw stability, rule of law, private property, great universities, the oldest functioning constitution, and the most innovative & entrepreneurialism of any nation.  He sounds like a successful Chinese entrepreneur lining up for a green card – of course they can’t vote.

When Huntsman says, “America First” he means “and not China”.

His message is that he’s seen what can happen if the global status quo doesn’t shift – and that this is scary to the US.  Moreover, he’s in a position to do something about it.  He has seen the enemy – or at least the rival – and it’s China.

This is the new expat message.  In the 2000s,  China pros said “I can open that China opportunity”.  In the coming decade, their  line will be, “I can help you keep the Chinese at bay.”

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By Andrew – January 11, 2012

A Smaller World After All

Recent research shows that we are increasingly inter-connected with one another – but does this make China’s commercial and social position in the world more or less central?

Long before it became a high school drinking game staple featuring Kevin Bacon, the notion of “six degrees of separation” was an important indicator of social connectivity. Put forward by Stanley Milgram in a controversial 1967 Psychology Today piece entitled “The Small World Problem” the theory stated that any two people could be connected by five intervening network links. New research indicates that the space between us is shrinking, and that we can now make contact with anyone anywhere in the world via only 4.7 (or 4.3 for US citizens ). Even as the global population tops 7 billion, the world is in some ways getting smaller. Online platforms like Facebook and Twitter are contributing to the phenomenon – and that raises some interesting questions for economies like China’s that have effectively walled off their own piece of the global internet. International managers need a strategy for managing their brands and marketing in an environment of firewalls, censorship and government internet controls.

Walled Garden, Island Fortress or Virtual Forbidden City?

Even while Facebook, YouTube, G+ and other platforms are making the world smaller and more tightly integrated, China is moving in the opposite direction. While it is easier to network within China using sanctioned tools like Weibo and QQ, it’s getting increasingly difficult for ordinary Chinese citizens to connect to the world. The technology of filtering and censoring has improved to the point where VPNs (virtual private networks) no longer guarantee an effective tunnel below the Great Firewall. Beijing has not only blocked western sites and platforms, but also coopted homegrown communication networks. Experts like Bill Bishop expect Beijing’s control of Chinese internet and micro blogging to increase. (For more on Chinese internet & micro blogging trends, read Sam Flemming of CIC regularly – here’s a good start.)

China has effectively walled off its internet from the rest of the world. The average Chinese citizen is growing further away and less connected from his counterpart on the other side of the firewall that separates us. What are the business implications for international managers in China?

Scenario 1 – China as walled garden

The “digital divide” will favor China in the 21st century, just as the geographic divide favored America in the latter half of the 20th century. China will take on the role of the USA in the post WWII era. Yes, of course we Americans are brilliant, hardworking and innovative. Sure. But a leading contributor of Americas post-war rise to global dominance was the two oceans that buffered us from the worst of the conflict – and created a secure, isolated space in which we could develop industries and standards. Likewise, China may be poised to benefit from its ability to isolate itself from the western internet. Beijing’s digital cloister allows Chinese companies space and safety to develop their own brands, companies and products. In post WWII America, we had resources like land, minerals, and manpower. In the post Financial Crisis world, China has resources like educated digital workforce and a language that lends itself to isolationism. Once the Chinese entrepreneurial class has had a chance to build and fine-tune products and services, they will be in a position to defend their market and export home-grown brands.

Takeaway: This seems to be Beijing’s official view – that interaction with the west is an unnecessary pollutant to Chinese society, and anything that can be done to weaken or eliminate the connection between Chinese citizens is positive. Companies like Baidu and Youku owe much of their success to firewall and censorship restrictions. International managers should jump on the bandwagon and join the MNCs in developing a China-only internet presence.

Scenario 2: Fortress China falls behind

An isolated China becomes a digital North Korea. China cuts itself off from its own markets, and faces a slippery slope of segregation and hostility towards a world that seems increasingly unified in opposition to the values and goals of Beijing. Unable to build global brands and finding it too expensive and difficult to work with foreign brands, China rolls back post-Deng era “opening” policies and reverts to protectionism and seclusion. Citizens who have the money and power to connect with overseas networks will flee – the rest will stagnate in a China that can’t communicate with the rest of the world in a meaningful way.

This scenario puts a serious crimp in the popular narrative about Chinese companies climbing the technology ladder and going global. The Chinese firm’s biggest resource is an almost endless supply of educated, bilingual, digiratti kids – young grads with the skills and savvy to help Chinese enterprises crack global markets. Firewalled companies can still get plenty of contract manufacturing jobs – Foxconn doesn’t need connections to the rest of the world to make razor-thin margins producing Apple gadgets. But Chinese companies that want to sell their own products or develop a global market base are going to need more facility with Facebook and Twitter – not just Kaixin or Weibo.

The takeaway for international managers is that while the firewall may cramp their personal style, it does give them a little competitive breathing room. Not only does it inhibit China’s global competitiveness, but it helps make western managers relevant again to local partners and clients who have outgrown them in the mainland market. Their unemployed friends and contacts back in the US and Europe may end up becoming an important resource for Chinese entrepreneurs who can’t find the talent they need to bring their message to western markets.

Scenario 3: Internet become the new Forbidden City.

Same elites, new privileges. China’s 1% gets all access passes, while the peasants languish in the digital weeds. Connectivity becomes the new class divide – and badge of privilege. The children of the rich and powerful get easy access via private VPNs (virtual private networks) while the masses are restricted to the heavily monitored and propagandized domestic China wide web. Restive or politically doubtful regions will be shut down completely (as has already happened).

The status quo is that Shanghai party girls flock to Facebook with status updates about what they’re wearing to MINT while the official line is that western culture is corruptive and must be resisted. Princeling kids get Klout , but the government has clout. Commercial VPNs, which occupy a legal gray-area in China and are routinely shut down, are the only lifeline for young Chinese and businesses wishing to access the global community. If they are completely banned, the Chinese internet will be effectively isolated.

Instead of a wide-ranging network of cross border contacts we will see a handful of carefully monitored toll-bridges to the international internet. Access to the outside will be considered a privilege and a reward – but one with a keystroke record and digital footprint. The promise of mobile digital comes with a chilling dark side – as phrases like “always connected” and “superfast response time” get applied to the public security bureaus.

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By Andrew – January 9, 2012

High School Quarterbacks at the Chinese Deal Table.

Picture a high school quarterback.  He’s got a 32 inch waist, magnificent hair, an entourage of popular-crowd kids and the confidence that goes with all of that.  He starts paying attention to the cute but ordinary girl down the block – and she can’t believe her good fortune.  She’ll do anything, make every compromise, suffer any indignation just to keep him interested.   When he proposes marriage, it’s her dream come true.

Now fast forward a decade or two.  High school is over.  His tight butt and flowing locks are both distant memories.  The popular crowd has dispersed, and the stories about throwing touchdown passes have gotten very stale.  If high school hotshot has adjusted his standard operating procedure and is bringing home a nice paycheck, changing a diaper or two and remembering to put the toilet seat down, then there probably won’t be any problems.  His role in the relationship has shifted, and he is holding up his end of the new bargain in an appropriate fashion.  But if the ex-jock is still trying to live off his past glories without pulling his weight, then that wife is going to start getting very impatient.

Why is this a China story?  Because you may be that pathetic high school hero trying to live in the past while your cute but ordinary Chinese partner has become poised, confident and independent.  When you first got together, you had technology, brands, and innovative methods that your Chinese partner couldn’t hope to master on his own.  You were very demanding – possibly much more than you knew – and very, very expensive.  Still, you delivered the goods.  But now the Chinese side has learned everything you know and a lot of things that you don’t – like how to apply your know-how to the Chinese market.

So where is this story heading?  That depends on you.  If you adjust to the new realities of the situation and redefine your role in the relationship, then you may have a long and happy future together.  But you have to acknowledge that your relative positions have changed, and will have to reassign roles and payouts.   This may mean supplying new technology, methods or products.  You may have to start sharing your home client list or developing new markets that your Chinese partner can’t.  It may mean ceding some control and profit to the Chinese side.  The alternative is to try to live off past glories – and you know how that generally ends.

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By Andrew – January 5, 2012

ChinaSolved Predictions for China in 2012

Predictions for China in 2012

And we’re back…   This year ChinaSolved will be writing about China, but not from it.   That means better access to news services, but less first-hand  access to the people and events making the news.  If there is anything you think ChinaSolved needs to know, give a shout out on the LinkedIn group at China Solved  , Twitter @chinasolved or at chinasolved@gmail.com.  Looking forward to hearing from everyone in 2012.

I’m going to start the year off by casting my lot with the soft landing crowd.  I think that most of the bad news is known and that Beijing will be able to engineer a relatively mild downturn.  At the risk of sounding positively optimistic, I would say that taking a few percentage points off the GDP growth rate might actually be a good thing for China’s economic development in the medium term.

That being said, China in 2012 will be no picnic.  It’s not the economy, Comrade, but rather a perfect storm of domestic discontent and international political tensions that will characterize the coming year.  As a new hard line administration prepares to take the reins, Beijing will begin 2012 looking even more Hu than Wen, as party doctrine kicks reformers to the curb once and for all.

Assumptions:  China eases into a semi-controlled soft landing while the US economy gradually builds strength.  Europe is down for the count, but that is looking like a 2011 story.  The ChinaSolved view is that Obama will win the 2012 election after a particularly ugly campaign that sees both sides blaming China for America’s woes.

 1. Wealth flight from China to the US accelerates.  As the Chinese economy slows and the US perks up, MWMs (Mainlanders With Money) start taking flight in even more visible – and permanent – ways.  Those involved in higher education have been watching the groundwork laid for years – wives and young children are sent across the water to get educated & green carded while the husband stays in the mainland and tends to business.   In the old days, the assumption was that the kids would eventually come back to China with their western learning to take over the business.   Now that the relative strength of the two super-economies is starting to shift, you’ll see more and more Chinese entrepreneurs try to break into the US market – maybe even pulling up stakes from the mainland if they are successful.  I’m not talking giant SOE or listed companies, but rather smaller privateers who lack the heavyweight political connections to defend their fiefdoms if the economic pie stops expanding.  They’ll have to buy their way into the US market.  Handled correctly this can be extremely win-win.  Chinese bring in money and jobs, Americans get investment and paychecks.  Handled poorly, it will lead to racist recrimination and hostility.

    • Expat managers will have plenty of opportunity to put their hard won Chinese negotiating and management experience to work on the other side of the trade – helping Chinese deal with US partners, regs and clients.

 2. Chinese foreign policy flips from sour to sweet towards the US over the course of 2012. With Europe down and out and the rest of the world looking more unstable than ever, China is going to come to the same realization that corporate America was forced to make about China in the 1990s – there is really no one else to negotiate with.  Warts and all, the US is the only partner worth having.  Sure, China’s new administration will be far more hardline than the Hu & Wen lineup, but that is just what will give them the political cover to start making quiet but significant deals with Washington.  The Republicans and Occupy Wall Street populists will start the year swinging – lashing out against the PRC on everything from job loss to IP theft to human rights.  A 2nd term Obama admin will rediscover its populist roots, especially since it no longer needs Wall St. beneficence.   Beijing and Washington will lock horns and bash each other for a while, but in the end they will realize that it is simply too expensive and distracting to go back to Cold War.   Look for public deals on trade, IP protection, technology transfer and corporate regulation (on both sides).  Quieter deals on cyber-security and Taiwan.  Forex will continue to be the noisy, fake, non-issue it always has been.    Iran, Pakistan and North Korea will stay dicey forever.   Climate and environment fade quietly away.

    • For expat managers, there will be more noise than real danger, but the general environment will continue to deteriorate and informal technology transfers (i.e.: IP theft) will become an even bigger problem.  Most of the expats I know are already resigned to this, so it’s more an issue for those considering entering the market.

 3. Beijing will keep its friends far and its enemies close.  Iran, Pakistan and North Korea form China’s core entourage.  Russia is more of a competitor than colleague, but the relationship will stay drama-free for the foreseeable future.  Troubles on the South China Sea and the ASEAN nations  will continue to be sore spots for China.  The US effort to energize and unite SE Asia to resist Chinese military influence has been one of the significant foreign policy successes of the Obama administration.  If Sec of State Clinton resigns (as she is expected to), it won’t necessarily spell good news for Beijing.  She brought years of experience to bear, and handled the tense situation deftly and professionally.  Her replacement may get occupied with other issues – or he may botch it with a ham-fisted show of force.  Either way, countries like Philippines,  Malaysia, Vietnam, Japan and South Korea will find that they have no choice but to square off with the PLA and its fishing boat flotillas to secure their waters and resources.  Look for 2012 to be tense on the South China Seas – and for Beijing to maintain its public support of some of the world’s scariest regimes.

    • This should be a neutral for most expat managers, though those in the oil, finance and high-tech industries had best be careful about jumping into bed with the wrong JV partners.

 4.  Less freedom at home.  More censorship, less tolerance.  Following a trend that has been accelerating since the mid 2000’s, China will continue cracking down on both the technologies and personalities that stray from the party line.  Beijing has racked up a great record on silencing dissent and controlling the media over the past few years, and there are few signs that it will let up in the near future.  The big local companies are on board with the status quo, and foreign companies continue to be shut out of the media market.  Look for unauthorized VPNs to become less effective and for the Party to take a heavier hand in controlling the message.

    • I still say that media restrictions, the firewall and censorship are awful for international businesses operating in China, but I don’t seem to be in the mainstream on this.  My view is that censorship and media controls dilute the brand equity and management efficiency of global companies.  Others, however, maintain that since censorship and repression affect all players, they don’t represent a competitive disadvantage to anyone.

 5. Slowing economy and  growing discontent brings the CCP  to its “Come to Jesus Moment”.  When the country was booming and everyone thought that their lot in life was on the way up, corruption and inequity were manageable.  In 2012 the prosperity pie will stop growing – and for many will actually shrink.  It’s possible that officials at all levels of government rediscover their revolutionary zeal and love of the people, but it’s more likely that they will accelerate their land grabbing, corrupt ways while there is still opportunity.  Wukan showed the party boys just how expensive public discontent can be, and Beijing will ban any mention of corruption or official misconduct in the media and online forums – further undermining its legitimacy.

    •  2012 could be an awkward time  for the Chinapologists out there.  You know who you are.

2012 will be a rough year for China, but the economy is the least of its worries.  What could have been the PRC’s moment to take its rightful place as a true superpower will likely be squandered by an increasingly inward-looking party leadership.  Back in 2008 China had the chance to step up and help secure the integrity of global markets, but instead opportunistically extended its trade surplus and amped up unfair trade practices.  In 2011, it flipped off the Eurozone in much the same way.  The CCP has failed to step up to any global challenge, opting to heed the voices of its own lesser angels.  2012 may be the year that it finally begins to pay the price.  Its own best and brightest are fleeing while the peasantry are more discontented than ever.   Though the economy will offer plenty of  challenges,  party legitimacy and international relations will be Beijing’s biggest problems.
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Posted in China economy, Doing business in China, Trade Tensions.

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By Andrew – January 2, 2012

Honolulu APEC as Copenhagen Redux – US Postures, China Pouts

US and China both need a time out on international trade

The APEC conference in Honolulu should give those few remaining optimists pause for thought. Neither the US nor China is serious about fixing a broken global trade system. They lack the mandate from back home, the political will, and quite frankly – the diplomatic chops – to stave off a disastrous global meltdown. Interesting times.

Washington continues to be stymied by the concept of “exit strategy”. While most Westerners engaged in China business are heartened to find that someone is willing to openly discuss trade restrictions and unfair regulations creating an unequal playing field in the PRC, the Obama administration manages to appear simultaneously cowardly and bullying on trade. How is Beijing supposed to react to being called “childish”  under the glare of the APEC spotlight?  The President and his administration tend to wait for just the wrong moment to launch dramatic blow-ups that have no chance of leading to substantive discussion, let alone a credible solution.  Geithner has spent his tenure as Sec of Treasury kowtowing to Beijing as though it were his full time job, occasionally whispering about unfair currency manipulation when the coast is clear.  Sec of State Hillary Clinton is the only member of the team who understands how to apply pressure consistently and credibly – but she is largely absent from the stage.

China is not winning any prizes either. The ordinarily staid & steady PRC has been displaying a chilling tendency towards hysterics at international sit-downs. After the theatrics at 2009’s Copenhagen climate summit, the APEC “we only play by the rules we negotiate” histrionics demonstrate that China is its own worst enemy when it comes to getting the international recognition it says it deserves. It is well known that the PRC doesn’t care for public multilateral forums, preferring to settle matters one-on-one behind closed doors, but that doesn’t justify turning each uncomfortable meeting into a meaningless farce. Just as it did in Copenhagen, Beijing set up a low ranking official to undermine a potentially serious conference with outrageous, irrational behavior. China has to decide whether it wants to lead global institutions or neuter them.

International managers who have been trying to gauge the economic climate for 2012 and beyond had best break out the foul weather gear, because it looks like a storm is coming.

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By Andrew – November 15, 2011