Diligence China

NOTE:  This article is largely based on material taken from a DiligenceChina piece published about 6 months ago.  Much of the older material from this site was lost due to technical problems, but we will try to salvage and repost pertinent material from time to time.  Thanks for you patience.  -editor

In a major economic shift — such as the global recession we’re now experiencing — recovery and transformation go hand in hand.  The bankruptcies are easy to see — new competitive advantages and exploiting new opportunities are not apparant until years later.    These are the forces shaping China’s development over the next 2 years.  When it comes to a recession, it’s not about who falls first — or even who falls the furthest.  It’s about who gets up 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 3nd & 4rd tier cities up and down the coast. Shanghai and Beijing will always have too many places to shop, but the outskirts of 2nd cities and smaller villages (sub 5 million residents) tend to have fewer options so it’s low-hanging fruit for an organization that can open branches on a systematic schedule.  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 (SOEs) crumble under the weight of skyrocketing fuel & material costs. Mainlanders With Money (MWMs) have grown into senior management positions at the SOEs 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, everywhere.

China ‘s pampered business class has long been willing to sacrifice democratic freedoms for nice apartments and a Santanas 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, Godaddy, Flickr, the BBC, technoratti, and Youtube  at various times over the past year – and doesn’t show any signs of loosening control over the media in general – and the internet in particular.  Chinese yuppies have needs - and if those needs are of a fashion or business 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.