DiligenceChina

Ok. We seem to be back on in China. That’s significant because now I can update the site occasionally.

Lots of work to do bringing other sites back online and dealing with server stuff.

More later. Let’s see if this is really working.

Consumerocalypse Part I

We’ve all been praying for the Chinese middle class to emerge as a powerful consumption force – boosting all of our markets and our profit margins. Forget about cheap manufacturing or raw materials. The China Dream has always been for 1.3 billion consumers. Well, what if we are getting what we wished for? What if we’re seeing the first stages of a shift in consumption patterns?

Then we’re doomed.

Assume that coastal China – the busy, active part, involving a population roughly the same as that of the US depending on how you slice & dice — continues to find itself with ever-growing piles of rumbas. Do you think that there’s any way they are going to seriously moderate their consumption? Conserve? Re-use, reduce recycle? These phrases were punch-lines in the US — and we were raised by hippies. You know who taught these kids about life? Ex-Red-Guards who sang songs while tearing down ancient temples. This country still has restaurants specializing in endangered species – you think they’re gonna worry about dolphins in the nets or particles in the air?

Yeah, so what? What is the upshot of Chinese eco-degradation? Let’s assume it suffers as much and at the same pace as the rest of the economic powers. How will your life as a China manager be affected, in say 15 years?

More planning Tips for the Apocalypse:

A smaller, more crowded China.
I love the clean, green initiatives. I am impressed with the smart buildings and the hyper-designed communities. But the real policies that count in China are still Big Coal and Big Water. China’s landscape looks pretty — but has always caused headaches for its leadership. Not many boring fertile plains. China is all mountains and wild rivers and deserts. Now there’s no more water and the desert is spreading and you can’t breathe in Beijing during certain times of year. Dust storms, drought, toxic rivers, etc. You get the picture. In the likely event that big chunks of the landscape become uninhabitable – where do you think those people are going to move to? The outskirts of the nearest big city, that’s where. Why the outskirts? Because fences and armed guys in uniforms are going to keep them out of the nice parts of town that international businessmen like to go.

DC Hint: Plan for more travel time as checkpoints, military actions, and food riots make an already clogged downtown traffic situation even worse. Be extra careful about hiring non-local Chinese living in different sectors - they’ll always be using ‘stuck at the checkpoint’ as an excuse for being late.

Real estate
Generally speaking, the nicer areas will appreciate in value. New buying points, like security systems, elevated position (in case of flooding), helicopter access, and independent power and water supplies will come into play. Take Shanghai, for example: Pudong Villas look good in case of social unrest and mob violence – but ‘soft’ in the event of rising sea levels (as it was all built on muddy farmland). Fashionable Nanjing Lu gets high marks for in-building security – making it a top choice for the jet-setting Euro businessmen in town for a few weeks a quarter. Hope he doesn’t get caught in one of the upcoming street demonstrations (food, jobs, hate foreigners, hate refugee Chinese) or power outages /floods /infrastructure breakdowns. And THAT’S how flights get missed.

Human Resources & Staffing
Will HR continue to be a headache for top managers in the new China? It’ll be a buyers market for the wretched and refugee, but a bit tougher to fill those middle-management and front office vacancies. With its huge market and uneven skills base, the developed Chinese cities are going to look like an ideal place for adventurous overseas grads to wait out the storms back home. Look for waves of British party-boys to descend on Shanghai and HK if London switches to Sharia law – so it’ll be a buyer’s market for financial services sales help. More Europeans and Overseas Asians are around – but how to use them? Chinese retailers and electronics brands are the hottest places for talented local grads to work.

Logistics
Those with water or who can move water are going to be heroes in the new China. Let the tree-huggers talk about desalinization and conservation all they want. Organizations that control the source or distribution of water are going to be the new OPEC – at least in China. International players should focus on moving water (or ice) into China. Domestic distribution will be too tricky – and trying to control domestic sources of water will be suicidal.

Funny But True: The degradation of the polar ice caps will actually make harvesting the break-away glaciers much easier. How’s THAT for recycling, Al Gore?

International business centers
The rmb will appreciate considerably before long, as China realized it is buying abroad and selling domestically. Big spends on oil were bad enough, but China will become a net importer of food, water, wood and other raw materials as it exhausts or pollutes its own supplies. Since more and more of China Inc’s output is ending up getting sold in-country, it will be an easy decision to let the rmb appreciate. HK will break the peg to trade with the rumba – and even Taiwan will start to be absorbed into the RMB zone.

Businesses that can help western corporates access the Chinese market will do well. Selling from China to the West is starting to look like an outdated business model – there will be more money in Chinese consumption in the days to come.

Exports
China will be more about the China market than exports in the days soon to come. OEM production will still goes on, but as a specialty organized almost entirely by a few giant concerns. A rising rmb, skyrocketing shipping and raw materials costs and weakening global economy will make it less attractive economically — though places like Indonesia and Vietnam are picking up the slack nicely. China’s biggest growing export is garbage. For a while Shanghai and the rest of coastal China will just dump in the ocean or ship the trash inland – but the government will step in to enforce pollution laws (with death sentences, if necessary). All waste will get shipped out – to whomever is willing to take it. China will make it clear that if it can’t buy sufficient space to dispose of its waste it will resume ocean dumping.

China’s biggest strength may also be its biggest threat: The Chinese People.

Welcome to the Utopiacalypse.

China’s middle class was the great hope of all the architects of Chinese economic development through the ages (since 1972). If they could rise from the cold ashes of every failed reform and misguided 5 year plan to witness the wonders of 2008 Shanghai, they would praise their ancestors for the miracles that their labors have wrought. This economy has surpassed every rational hope and padded, overly exuberant estimate.

And that’s how the trouble started.

Because now China has a middle class - and two things are true about middle classes everywhere and every time.

1) Middle Class wants more.
2) You screw with Middle Class at your own peril.

What does the Chinese Middle Class want? More than anything, it wants parity with Middle Class all over the world. For centuries rank and file Chinese have been told that they are culturally, intellectually and spiritually superior to anyone else on the planet, and that the moment their day in the sun arrived they would take their proper place in the world. Well, their day is here. And they don’t want everything their international colleagues have – they expect it.

What does this mean for policy makers in Beijing? 2 sticky issues.

Education. The Chinese have a mania for educating their kids. This is already part of the common folklore about China but I just want to make sure that we’re all on the same page here. Chinese people really, REALLY care about education. It’s not an urban myth, outdated quirk or exaggerated stereotype. Education is considered the road to success and respectability in China.

Now, it just so happens that education policy – particularly for the very young – is a cornerstone of Party plans to stay in power for the long term. Next to the Army, the public school system is probably the most powerful lever of control available to Beijing policy makers.

If you’re the guy at the top of the education policy food chain, you are looking at 3 pretty stark choices:

1) Reform you entire system from the ground up – starting with kindergarten – to reflect the needs of an urban intellectual elite that you don’t really trust in the first place.
2) Maintain a dual system – free public schooling for the masses and a free-wheeling system of elite private schools for the Princelings – often run by foreigners.
3) Ban or sharply curtail private schools and maintain the ‘level playing field’ – and control over education of the middle class.

Which one are they going to go with? If recent history is any indicator, they will probably go with some hodge-podge, slapped-together hybrid of conflicting rules and unenforced edicts. Policy makers have already taken a few timid steps towards limiting the growth of foreign-run school — but have been running into trouble. For a while it seemed that the “overseas passport only” rule was helping – but then it turned out that China was one of the few nations where satisfied, patriotic people would actually switch citizenship to get their kids into a better school. If that isn’t possible, they can always ship the little princes off to Canada or the British countryside for a few years.

The nation’s greatest pride may become its greatest peril. If the government doesn’t give its free-spending, jet-setting, barely-contented middle class access to top-notch education, they will either send their kids abroad or take to the streets. If the government reforms education for all, then it loses even more control in the countryside – and the factory floor. If only the elite get good education in the new China then you are moving backwards — to a China where only the elite get a good education.

Media. I Want My MTV – or Prison-Break Season XII. Pirated DVDs and blinky bootleg satellite HBO aren’t cutting it anymore. Chinese yuppies want to take their network global. Everyone likes letting it drop that they still have friends from school in Boston or California. It won’t be quite as cool to mention that you couldn’t watch the video or use the right IM service because it was blocked in China. (Ed note: This site is presently blocked in Mainland China.)

The media access issue goes beyond Youtube and Flickr cruising. Xinhua has already anointed itself the sole provider (or at last final arbiter) of all financial news disseminated within China. Yeah, they haven’t abused or restricted most types of data or sources so far – but up until now the economic news has been uniformly encouraging. There seems to be a little variance between the official inflation figures and the whisper numbers on the street – but the real fear is that we could see China backslide to the bad-old-days of propaganda stats and opaque reporting. Old China hands remember stories of locked-down information flows requiring analysts to count coal-cars entering Beijing to make estimates about Chinese economic activity. Big chunks of the Chinese economy are still state run or controlled (including, to some degree, the oil companies, airlines, telephone carriers, and even the financial press’ darlings Huawei, Lenovo and Haier) – and Beijing will apply all kinds of effective pressure on their managements if the situation seems to call for it.

Even if the international finance machine gets the numbers it wants the way it needs them, China’s media & censorship policies are still looking ludicrously out-dated. When China was the Poor Man of Asia the government could justify a Stalinist information policy. But as Shanghai sharpies and the rest of China’s middle class get set to muscle their way in to foreign markets, lack of basic data is going to put them at a severe disadvantage. Chinese businessmen who have never seen a viral video on YouTube or read on editorial about western attitudes towards Tibet can still buy western brands and equipment – but they will have a considerably harder time selling their products or services overseas. Foreigners who come to China to do business have to accept culture gaps and blind-spots. Westerners shopping in their local malls don’t.

If China wants to compete in international markets with its own brands and intellectual property, than it is going to need every resource and advantage it can get. Right now media access and outdated education policies are playing to the strengths of giant Multinational Corporations (MNCs) who have the wherewithal to hire big teams, train (or retrain) them thoroughly, and supervise them with an international coterie of experienced managers. If China wants to climb the value ladder, it’s going to have to build a stronger foundation to support its efforts.

Screw you Al Gore. You promised me endless summer — one long sultry tropical nightmare. A tropicapalypse if you will. Instead I’m freezing my ass off in snowy, slushy Shanghai. It was never like this before you ran for the Nobel Prize. Lousy Democrats.

So this is probably a good time to talk about green-technology and the coming boom in eco-business – and a couple of big business trends that may rebalance the relationship between the US and China. We are used to hearing westerners lecture emerging markets about free enterprise and government non-involvement in business – but we may be proving our point most dramatically through our own folly.

After decades of oil-company inspired energy policy (and cars designed for maximum fuel consumption) we are witnessing a slow collapse of the US auto industry. While we send divisions overseas to secure oil sources, VCs and investment banks are deploying and maneuvering to secure China’s solar cell and alternate energy startups. And other US industries that are protected or artificially controlled also look vulnerable. Look for Chinese brands to make big moves in electronics, telecom, wireless networking, alternative energy, and transportation.

Three areas were IP transfers may reverse in the next few years:

Small screen devices. You can call them phones, smart-phones, PDAs, or micro-computers. Companies like Dopod, O2, Asustek and HTC have already leap-frogged stodgy western tech houses with their innovative designs and wide range of options. Asians upgrade mobile technology and try out new services all the time — while US consumers constrained by a disgraceful web of monopolistic restrictions are simply not exposed to cutting edge technology. As Microsoft and Apple continue to bloat-up their offerings and make US consumers choose between tech-tyranny (MS) and the cult of exclusion (Apple), Chinese firms will offer buyers a wide range of innovative, inexpensive devices that are easy to use and interconnect. These little hand-held computers are getting more and more powerful – and versatile. While US makers build in more security and anti-cracking measures, Chinese manufacturers are redefining the category with new functionality and cutting edge design. I’ve seen lots of people switch from Motorola to Dopod — I don’t know of anyone who has gone the other way.

Green tech & infrastructure. China has a problem with fossil fuel and pollution, and it knows it. The US has a problem with fossil fuel and pollution but is in denial. The upshot is that Chinese companies (and multinationals based here) involved in solar power, wind power, biofuel, clean coal, and smart building design are attracting lots of attention from international investors and VCs. Will these technologies all work? Probably not. But when industries are in flux, all it takes is one winning idea to dominate the category. US policy on alternative energies has been a disaster. Contradictory, self-serving, overpriced and ineffective, US responses to oil shortages and environmental degradation have probably caused more harm than good and reduced ‘green technology’ to the status of quirky micro-industry.

Travel & transport. Air & auto. Ok, these aren’t likely to be strong export items – but as China takes on a dominant role in transport-related industries, new technologies and usage patterns will leave US providers playing catch-up. Lacking an oil-auto oligarchy to convince ordinary urban families that they absolutely require pairs of massive, gas-guzzling SUVs to be happy, China has been able to explore some very innovative approaches to transport. You may not be able to tell from your morning commute, but Chinese authorities have put two sets of policies in place that may allow them to preserve their environment and develop an important new industry at the same time.

First, China has been committed to building an integrated transport infrastructure for at least 20 years. The Chinese have been laying asphalt and stringing cable far and wide for decades. While it’s not as sexy as constructing the world’s tallest building or super-fast levitating trains, the low-tech approach has enabled Beijing to activate economic development throughout the country. China has also built more airports, light rail systems and fast intercity trains than any other country in the world. The Chinese may not be able to export roads, airports and networks – but they can sell the equipment, materials and consulting expertise needed to design and build that infrastructure.

Second, many Chinese cities have policies in place that would allow them to restrict auto ownership (though you wouldn’t know it from the number of cars clogging the roads). Through a cumbersome series of regulations, fees and auctions (for license plates), Chinese citizens have grown used to the idea that private auto ownership carries restrictions. They are also willing to experiment with a wider range of hybrids and quirky designs (tiny cars, electric bikes, alt-fuel buses). The notion that individual auto ownership is NOT an inalienable human right may very well end up being the most significant transportation-related trend of the 21st century.

These changes aren’t going to transform the relationship between the US and China overnight, but they will be the first visible manifestations of a China’s rise as a new type of commercial power. Everything up until now has just been prelude.

Just when I thought I was out, they pulled me back in. I’ve been gone for a while, so let’s just skip till right now…

Chaos, despair and terror. I’ll confess it – I’m all about the Bear. Bull markets piss me off – swarms of smarmy little day traders, all glib & smug. Give me blood and wonder. Give me awe and faith in that which is mighty enough to destroy. Give me terror and flint. Give me the strength to see my enemies fall before you take me.

Make no mistake about it – something big is in the offing. You look at Drudge or the NYTimes, and they’re going on about who is OD-ing and who is going to be next. They talk about the debates and the carbon in the air. They’re frantic about the flotsam – ignorant of the tectonic shifts dragging the world into some new shape.

China and the US are having it out right now. The circling & staring part of the event are over. Someone’s gonna walk out of this standing tall — the other is going to have to wait for his day. Maybe for a while. It’s not about who crashes first. It’s partially about who crashes harder – but it’s REALLY about who recovers first.

Here are a few scenarios that may play out over the next few months.

China Inc may dodge the worst of a global downturn by focusing on its own large & notoriously weird domestic market while Japanese and Western industries stumble and fade. China could leapfrog the US on the value chain in specific industries (small-screen computers/smart-phones seem a good bet, but I hear green technology is also interesting). If they ever learn to brand and market they stand a chance of penetrating western markets towards the top of the food chain – and then exploiting the toehold for some big market impact. (You listening FoxConn & Shinco?)

US and Western corporates may take advantage of a global downturn to leverage their presence in China and other emerging Asian markets — and dominate 2nd & 3rd tier cities up and down the coast. Shanghai and Beijing will always have too many places to shop – the outskirts of 2nd cities and smaller villages (sub 5 million residents) tend to have fewer options. I’ve been noticing that some of the new industrial zones have sprouted malls and commercial districts that look a lot like Long Island. The really scary part is that if the numbers work in one anonymous commercial or industrial city then the numbers will work pretty much the same in all of them. If the western economies go dark for a couple of years there may not be any other growth options – and Beijing would welcome any move that brings jobs and development to the regular folks in the sticks.

Chinese entrepreneurial class may get their first real shot at the big time, as State Owned Enterprises crumble under the weight of skyrocketing fuel & material costs. Mainlanders With Money (MWMs) have grown into senior management positions and they have a completely different agenda from their fifty-something bureaucrat bosses. Private enterprises get all the headlines in the western business press, but government policy has always treated SOEs like the favorite son. It’s going to take a pretty big shock, but if Beijing & the bureau banks ever start letting private businesses borrow money and expand their operations like their competitors do, then it may be a whole new ball game – for everyone.

China’s policymakers have probably noticed that their economy and that of the US are heading in opposite directions. I don’t want to get all dismal and economystical here, but China’s dirty rmb float is going to have to give. Fine. No one will be sorry or surprised to see the rumba dance free. But where exactly is that going to leave HK? If the rmb appreciates against the US$ by 25% in the next year (not a crazy notion – particularly as China raises interest rates to control inflation and the US drops rates to stave off stagflation) then the rmb ALSO appreciates by 25% against the HKD. Beijing may swallow that for a while – but it’s just a matter of time before we start hearing whispers about switching the HK peg from the dollar to the rmb. Good thing China doesn’t have a developed banking system, or people might someday start talking about the Chinese currency as the Asian standard. Can you say “Renmenbi Zone”?

China’s pampered business class has long been willing to sacrifice democratic freedoms for nice apartments and a Santana – but that may be changing. No, the Chinese middle class haven’t had backbones implanted. (Ok, that would have been funnier if some intern from the Bush administration wasn’t reading my mail right now.) China has either banned or restricted Wikopedia, various blogging platforms, Flickr, the BBC, technoratti, and Youtube (banned by the end of this month, according to unreliable third-party rumor). Chinese yuppies have needs – and if those needs are of a fashion or entertainment variety, I pity whoever gets in their way. China’s middle class expectations have never been higher and media & press restrictions are starting to cramp their style.

Other possibilities? Drop me a line with your thoughts. This globalization thing is starting to get interesting.