Diligence China

Look out past this week’s headlines.  Forget the statistics and details for a moment.  What are the Big Trends that we’ll all be living with for the next 10 – 15 years.  Stop fretting about the next 18 months - look at what could happen.

A Smaller, Smarter USA

The US takes its lumps.  Obama champions a more moderate, mature, forward-looking America.  Look for GDP to be slashed.  Higher interest rates will be needed to pay for the excesses of previous generations (including ours) so consumption will be lower.  Taxes will be higher and there will be more regulation.  We’re looking at a lower-growth scenario for the next 10 years – and that’s a best-case scenario. (If Obama or the G20 fail us, we could be looking at a more serious recession or even a depression – but that will moderate our spending as well.) We’ll be living within our means – one way or another – for a while at least.

China also goes to a slower-growth scenario – leveling out about 3% points lower than it has been.  Look for 8% to be the new mid-range target going out a few years.  (The Economist says it might be 7%.)  This isn’t necessarily a bad thing, but it’s going to be different. 

The Revenge of Sarbanes Oxley

Both sides of the water are likely to be affected by much higher levels of oversight, regulations and bureaucracy.  The weekend’s G20 is more an agenda-setting introduction than a decisive action-plan. The US disdain for regulation AND coordinated international policy is about to give way to satisficing belief that ‘bad law is better than no law’.   Europeans and Chinese negotiators won’t ever agree to much – but they will converge in their belief that today’s problems are due to the US of yesterday.  All balls, no brains.  Since the new Democratic administration is likely to be of the same mind, the only question is how soon and how bad the new regulatory regime will be. 

 Best-case scenario?  The UN gets a new big-budget council or committee and we all promise to be more careful.  Worst case?  Trade war, bitter recriminations about currency and policy — and the cold long winter of trade restrictions and protectionism.  Most likely:  a multilingual Sarbanes Oxley on steroids that makes certain types of international investment and credit very difficult but leaves most of the international regulatory landscape unchanged.

 Globalism threatened?

There’s also a good chance that both countries get more inward looking – at least for a year or so.  Once the recovery starts, there will be plenty of opportunities close to home – and very little credit to crowd the field.  In the long term, the growth will be in China, but it looks like things may be shifting to 3+ cities (3^rd tier or lower).  These markets will be harder to run from offshore, and local Mainland firms will develop cash cows that can fund operations and R&D for years.  Both sides are likely to develop / re-flate their own domestic demand before looking offshore for a while.  

But the mid term trend is going to shift.  Look for western companies to start actively seeking Chinese partnerships.   This time the westerners are looking for rich markets instead of cheap factories.  If the year is 2014, you’ve got your sights set on Fortune 500 and are looking to build out your first overseas market presence, there’s a great chance you’ll be looking at establishing a Shanghai beach-head.

The Chinese, on the other hand, are going to be ready to take their act on the road.  This time, watch services and niche hi-tech.  Outsourcing is going to look good in higher value-added areas.   Plenty of those hip little JVs that formed up a few years ago will be looking to compete for business in big US cities, backed up by plenty of well-trained, cheapish Chinese work forces.  What kind of services could start showing up in American offices 5 years out?  Design. Internet. Engineering.  Marketing.  Media. Advertising.  Fashion.  F&B… Look in the classifieds in That’s Shanghai.  Any one of these people could be going international – back at the US – in a few years.  (Yeah – NY and San Francisco may soon be ranked alongside China’s second cities.)

I’m also watching what China is doing with smart phones, tiny computers, and other cool screen-based electronics.  And you had better watch China’s electric car initiatives.  Could turn out to be nothing – but if they get mass production ramped up before anyone else – damn.  Damn! 

Which brings up the question of energy.  China needs better access to energy too, and pollution is getting bad here.  They have the political will to make it happen, too, and that could make all the difference.   A decade out, the scene is now set to see China end up with two or three key technologies like good batteries, electric cars, a new generation of hand-held devices, or something good in solar.  

The good news?  China is going to get serious about IP and contract law.  The bad news?  They’ll be the ones collecting the royalties and license fees.