Archive for the Uncategorized Category

CHINA TAKES BIG RISKS TO GROW GLOBALLY

Posted in Uncategorized on 02/16/2013 by David Griffith

By Jack Chang, Associated Press | – February 14, 2013

When Venezuela seized billions of dollars in assets from Exxon Mobil and other foreign companies, Chinese state banks and investors didn’t blink. Over the past five years they have loaned Venezuela more than $35 billion.
Elsewhere around the Caribbean, as hotels were struggling to stay afloat in the global economic slowdown, the Chinese response was to bankroll the biggest resort under construction in the Western Hemisphere — a massive hotel, condominium and casino complex in the Bahamas just a few miles from half-empty resorts.
All over the world, from Latin America to the South Pacific, a cash-flush China is funding projects that others won’t, seemingly less concerned by the conventional wisdom of credit ratings and institutions such as the World Bank.
The Chinese money is breathing life into government infrastructure projects that otherwise might have died for lack of financing. For commercial projects such as the Caribbean resort, China is filling a gap left by Western investors retrenching after the 2008 financial crisis.
But some in the Bahamas worry what will happen if the sprawling Baha Mar project fails. They picture an economy saturated with hotels, dragged down by an expensive Chinese white elephant. Likewise, the infrastructure loans are loading financially shaky countries with more debt and letting them avoid economic reforms that other lenders would likely have demanded.
“The Chinese play by other rules,” said Kevin Gallagher, a Boston University international relations professor who has studied Chinese lending to Latin America. “We’ll give you financing with no conditions, and we’ll finance things the International Monetary Fund won’t fund, things others won’t fund anymore, like big infrastructure projects. It allows countries to shop around, which has good and bad sides.”
Venezuelan leader Hugo Chavez talked up his independence last year while highlighting another $4 billion in Chinese loans, part of a wave of money that has translated into new railways, utilities and other projects.
“In a few days, they’re going to deposit 4 billion little dollars more from Beijing,” Chavez told reporters, holding up four fingers for emphasis.
“Fortunately, we don’t depend on the dreadful bank. What’s that one called that you mentioned? The World Bank. Poor are those countries that depend on the World Bank, the International Monetary Fund.”
Venezuela’s Oil and Mining Minister Rafael Ramirez says China has loaned his country $36 billion since 2008, and others put the figure even higher. The Spanish-language version of a report co-authored by Gallagher, “The New Banks in Town: Chinese Finance in Latin America,” estimates it at $46.5 billion.
The loans have added to Venezuela’s $95.7 billion in public foreign debt as of mid-2012, which has risen even as the country rakes in record-high oil revenue. Some analysts say the spending helped Chavez win re-election in October, despite battling cancer.
China has emerged in recent years as the largest provider of development loans not only to Venezuela but also to Ecuador and Argentina, according to the Gallagher report. All three are junk bond countries, ratings agencies say. In contrast, the World Bank and Inter-American Development Bank remain larger lenders in Brazil and Mexico, both countries with higher bond ratings.
In cases such as the tiny South Pacific islands of Tonga, China is lending enormous sums to countries few expect will be able to repay.
What has surely given the Chinese banks courage is the trillions of dollars in reserves the country holds in U.S. Treasury bonds, investments that pay almost nothing in interest. Making that money work harder for a return overseas has become nothing less than a national priority, part of China’s trumpeted “going out” strategy.
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China’s economy is the second largest after the U.S., and many of the deals stipulate repayment in oil and natural gas, locking in the commodities China will need to sustain its growth for decades to come.
In 2009 and 2010 alone, the China Development Bank extended $65 billion in such loans to energy companies and government entities from Ecuador to Russia and Turkmenistan, according to a report by Erica Downs, a China expert at the Brookings Institution, a U.S. think tank.
“If you’re lending tens of billions of dollars to a borrower …, you want to make sure that loan is secured against something,” she said. “In the case of Venezuela, it’s the most valuable thing they can offer. It’s just one way to ensure they get paid.”
In dozens of cases, the Chinese have also demanded that their own companies build the infrastructure that will help governments extract and ship the commodities used to pay back the loans. In Argentina, that means agreements to bring in Chinese companies to revamp the country’s decrepit rail system, which would speed up shipments of soy to Chinese consumers.
“The money goes from one account in the China Development Bank into the hands of small- and medium-sized businesses in China,” Gallagher said, while noting the majority involve big state companies.
The Chinese also hold a valuable trump card: They’re betting that Chavez and other financial pariahs won’t dare alienate their last source of affordable money by defaulting on Chinese loans or seizing Chinese assets.
“The Chinese have the upper hand,” Downs said. “The China Development Bank sees this country that’s thumbed their nose at the IMF. And if they borrowed from the IMF and had to be subjected to IMF conditionality, the regime would fall.”
Perhaps with that in mind, more than 30 Chinese consultants toured Venezuela in 2011 and handed Chavez a thick binder with recommendations on everything from exchange rate reform to agriculture.
While news cameras clicked, Chavez held up the book, thanked his Chinese benefactors and pledged to study the prescriptions. Unlike IMF loans, however, the Chinese recommendations weren’t a requirement, and Chavez has shown no sign of curbing public spending.
The investments and loans have contributed to a substantial shift in commerce toward China. Venezuela, for example, saw its trade with the U.S. drop from 26 percent of its GDP in 2006 to 18 percent in 2011, according to an Associated Press analysis of IMF databases. Meanwhile, Chinese trade grew from virtually nothing in 2001 to nearly 6 percent a decade later, much of it in the form of oil to repay loans.
But the money doesn’t necessarily save countries from their own bad financial bets.
Zimbabwe, which has received generous Chinese financing, saw inflation peak at 79.6 billion percent a month in November 2008. At one point, a loaf of bread reportedly cost 500 million Zimbabwe dollars. Gideon Gono, governor of the Reserve Bank of Zimbabwe, suggested one possible remedy: Adopt the Chinese yuan as the official currency. (Zimbabwe eventually overcame the crisis by switching to a mix of Western and African currencies.)
Argentina is fighting off an economic reckoning despite receiving more than $12 billion in Chinese loans, according to the Gallagher report. In 2001, the country defaulted on some $100 billion in loans. It struck a deal with most of its lenders, but over the past year, a group of creditors is insisting on payment in full.
“It’s extremely concerning,” said Margaret Meyers, a China expert at the U.S. think tank the Inter-American Dialogue. “Chinese financing won’t be able to sustain these economies unless they go through substantial macroeconomic reforms. For Argentina, that means open markets, reforming institutions, reforming the banking system, fiscal accountability, ending lots of misspending.”
Some in the borrowing countries have watched with worry as the Chinese bets play out.
Opposition politicians in Venezuela have slammed the deals for locking in contracts for everything from Chinese-made refrigerators to Chinese construction workers while giving Chavez free rein to spend billions of dollars.
“There’s no doubt we’re going to need China, they are an economic powerhouse,” opposition leader Henrique Capriles said last year. “But many of the agreements the government has signed involve political loyalties that don’t interest us.”
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On the beaches of New Providence in the Bahamas, hundreds of Chinese construction workers are toiling around the clock to ready the Baha Mar project for a scheduled grand opening in late 2014.
The project will add thousands of hotel rooms not far from the islands’ biggest resort, the Atlantis.
“Going forward, we have to achieve a sustainable tourism product,” said James Smith, the former state minister of finance for the Bahamas. “If we don’t, Baha Mar could be cannibalizing Atlantis.”
Baha Mar has opened sales offices all over Asia to promote and presell hundreds of pricey condos, hoping to imprint new travel habits on a continent that’s traditionally spent beach vacations in Southeast Asia. It is also working with the Bahamian government to open more consular offices in China to issue visas.
“In general, you would assume that a project of that size is generating its own demand and the idea would probably also be with Chinese money comes an influx of Chinese travelers,” said Jan Freitag, senior vice president of hospitality industry research firm STR. “The Chinese would argue that we can maybe attract a clientele that has not been with you before.”
When completed, the complex is set to boast brands such as the Grand Hyatt, Rosewood and Mondrian, and 313 $1-million condos being marketed to the international elite.
Business leaders have openly questioned the investment as Baha Mar rises just blocks from storefronts left empty during the latest downturn. The Wyndham hotel was closed for all of September and most of October because of low occupancy levels, and on Feb. 8 announced the need for “substantial cutbacks,” including layoffs.
“In a vibrant economy, we wouldn’t be having any concerns. The reason it comes into question is whether it’s right at this time,” said Winston Rolle, CEO of the Bahamas’ Chamber of Commerce.
The project had, in fact, been conceived in a different moment, more than six years ago, when the U.S. housing boom and global tourism seemed unstoppable.
One of the original developers, Caesar’s Entertainment Corp., formerly Harrah’s Entertainment, backed out of the project in 2008, and Chinese financiers stepped in after reaching a deal with project CEO Sarkis Izmirlian. The agreement brought in a state-owned Chinese construction company to build the resort.
“This project is essential to developing business in the Caribbean and into the U.S.,” said Tiger Wu, vice president of the construction company, to Bahamian media. “It’s only the beginning.”
All evidence indicates the Chinese are charging forward. They’ve made their $3.5 billion gamble in the Bahamas. Elsewhere, they’ve promised tens of billions of dollars for everything from dams to railroads. Guyana has hired the state-owned Shanghai Construction Group to build a 197-room Marriott Hotel on the southern edge of the Caribbean.
Meanwhile, traditional investors in the U.S. and Europe have been left on the sidelines. It’s China’s game now. And the rest of the world is waiting to see how the big gambles pay off.

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Chinese and Asian Hard Landing? No Worries!

Posted in Uncategorized on 10/08/2012 by David Griffith

By Aaron Task | Daily Ticker

China’s economic juggernaut has been hobbled by Europe’s recession and America’s sluggish recovery. Export orders declined at the fastest pace in 42 months in September, manufacturing contracted for an 11th straight month and China’s purchasing managers’ index (PMI) fell to its lowest level in nearly two years.
Combined with the long-term underperformance of the Shanghai Composite, such lackluster data is giving rise to concern about a “hard landing” in China. Longtime China bears such as hedge fund manager Jim Chanos and Forbes’ columnist Gordon Chang have become more vocal lately — or at least have been given more of a hearing.
On Monday, the World Bank cut its outlook for East Asia, saying the China slowdown could intensify and last longer than currently anticipated. The World Bank cuts its outlook for Chinese growth to 7.7% in 2012 and 8.1% in 2013, down from 8.2% and 8.6%, respectively. A recent Reuters poll forecast China’s annual growth would ease to 7.4% in the third quarter, putting it on track for sub-8% growth for the first time in more than a decade.
Still, over 7% GDP is nothing to sneeze at and Richard D’Aveni, professor of strategic management at Dartmouth’s Tuck School of Business says reports of China’s imminent demise have been exaggerated.
Having just returned from China, D’Aveni believes the recent slowdown is a short-term concern and that China’s long-term prospects remain bright.
“Everybody’s apoplectic about slowing growth but they’re still growing five times faster than the U.S.,” he says. “No matter what happens, they are still sitting on trillions of dollars reserves and the country has little debt.”
Beyond that, D’Aveni is impressed with China’s ability to manage the transition from an export-led economy to one driven by domestic demand. China’s market is the world’s largest and rising incomes will continue to generate demand for goods and services; retail sales are up 14% this year in China, down from previous years but still robust.
Furthermore, he notes the ability of central bankers to successfully manage and direct the economy.
As part of efforts to support the economy, China’s central bank cut interest rates twice this summer and has lowered the level of cash it requires banks to hold as reserves three times since late 2011. In late September, the People’s Bank of China injected a record $57.9 billion into money markets, which helped spur a big rally in local stocks ahead of last week’s Golden Week celebration.
“The Chinese government has many more tools to manage a bubble than we do in the U.S. or than Japan had when their bubble burst,” D’Aveni says. “They have so much control over the economy they can make it work. You can’t count them out. They will stimulate their economy out of this situation.”
But don’t confuse, D’Aveni’s optimism about China with admiration for its state-sponsored model. His new book, Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War, he writes about the threat posed by China and offers recommendations for how the U.S. and other Western powers can address the challenge, as detailed in part two of the accompanying interview

Port of Long Beach Global Biz Conference May 3

Posted in Uncategorized on 04/18/2012 by David Griffith

Want to learn more about import/export? Try the Port of Long Beach’s GLOBAL BIZ CONFERENCE May 3.

Meet Sr.Officials from Port of Long Beach, Homeland Security, Dept of Commerce and many other agencies along with numerous internatl trade attorneys.  $150 includes 3 separate panels, lunch and private tour of port facilities by boat.  Discounted tix available at www.OCTalkRadio.net.

Latest US – China Trade Dispute – Rare Earth Minerals

Posted in Uncategorized on 03/13/2012 by David Griffith

AP source: US to bring trade case against China over materials used for high-tech goods

By Julie Pace, Associated Press | Associated Press 

 

WASHINGTON (AP) — The Obama administration is bringing a new trade case against China that seeks to pressure the rising economic power to end its export restrictions on key materials used to manufacture hybrid car batteries, flat-screen televisions and other high-tech goods.

The new trade initiative being announced Tuesday is another effort aimed at leveling the playing field for U.S. companies.

Senior Obama administration officials said the U.S. will ask the World Trade Organization to facilitate talks with China over its curtailment of exports of rare earth minerals. The U.S. is bringing the case to the WTO along with the European Union and Japan.

Tuesday morning, the EU announced its participation in the case. In Brussels, EU Trade Commissioner Karel De Gucht said China’s restrictions “hurt our producers and consumers in the EU and across the world.”

Obama was scheduled to speak about the WTO action from the White House later Tuesday, according to the U.S. officials, who requested anonymity in order to speak ahead of the president.

The fresh action is part of President Barack Obama’s broader effort to crack down on what his administration sees as unfair trading practices by China that have put American companies at a competitive disadvantage.

China has a stranglehold on the global supply of 17 rare earth minerals that are essential for making high-tech goods, including hybrid cars, weapons, flat-screen TVs, mobile phones, mercury-vapor lights, smartphones and camera lenses. The materials also are used in the manufacture of tiny motors, such as those used to raise and lower car windows and in consumer electronics.

China has reduced its export quotas of these rare earth minerals over the past several years to cope with growing demand at home, though Chinese officials also cite environmental concerns as the reason for the restrictions. U.S. industry officials suggest it is an unfair trade practice, against rules established by the WTO, a group that includes China as a member.

The senior administration officials said Beijing’s export restrictions give Chinese companies a competitive advantage by providing them access to more of these rare materials at a cheaper price, while forcing U.S. companies to manage with a smaller, more costly supply.

On Tuesday, a Chinese foreign ministry spokesman defended Beijing’s curbs on rare earth production as necessary to limit environmental damage and conserve scarce resources.

“We think the policy is in line with WTO rules,” said the spokesman, Liu Weimin, at a regular briefing.

He rejected complaints that China is limiting exports. “Exports have been stable. China will continue to export, and will manage rare earths based on WTO rules,” Liu said.

The spokesman noted that China has about 35 percent of rare earth deposits but accounts for more than 90 percent of global production. “China hopes other countries can shoulder responsibility for supplies and can find alternative resources,” he said.

Rare earth minerals are scattered throughout the Earth’s crust, but only in small quantities, making them hard to mine. However, rich deposits of these rare earth oxides are in China, giving it command of the market.

The U.S. has just one rare earth mining company, the Colorado-based Molycorp Inc. There are also working mines in Australia, and a proposed one in Malaysia.

With the U.S economy slowly inching its way out of recession, Obama has sought to bring a renewed focus to Chinese policies that could hinder U.S. growth.

Obama used an executive order last month to create a new trade enforcement agency — the Interagency Trade Enforcement Center — to move aggressively against China and other nations. In announcing the new agency, Obama said it would bring “the full resources of the federal government to bear” in order to level the playing field for U.S. workers.

Under the terms of the WTO complaint, China has 10 days to respond and must hold talks with the U.S., E.U. and Japan within 60 days. If an agreement cannot be reached within that time frame, the U.S. and its partners could request a formal WTO panel to investigate Chinese practices.

The WTO, the only global international organization dealing with the rules of trade between nations, has sided with the U.S. in previous trade disputes with China.

In 2009 the Obama administration imposed a three-year tariff, starting at 35 percent, on U.S. imports of low-grade Chinese tires. The tariff was approved after imports of those tires rose threefold to about 46 million tires between 2004 and 2008. Last year the WTO rejected an appeal from China and found that the United States acted consistently with its obligations in imposing the duties.

 

Like America, Chinese Politics will Buffer Hard Landing

Posted in Uncategorized on 02/27/2012 by David Griffith

Analysis: Politics cushion China’s economic hard landing risks

REUTERS  February 27, 2012 By Nick Edwards

BEIJING (Reuters) – The politics of China’s need for a smooth leadership succession this year provide the best protection against a hard economic landing, regardless of stuttering exports, faltering capital flows, local government debts and lingering inflation risks.

By the time President Hu Jintao and Premier Wen Jiabao are handing over power in the late autumn, China should be well on course for its slowest full year of growth since they took office a decade ago — and that’s without any economic shocks.

It’s not an auspicious bequest in a system that relies on stability to justify the one-party rule of the Communist Party and is precisely why any significant threats to the economy will be met with an unmistakable policy response.

“That is the only line of thinking,” Paul Markowski, President of New York-based MES Advisers, a long-time investment adviser to China’s monetary authorities, told Reuters.

“While financial risks abound, the composition of debt ownership means the government can brush off hard hits for now,” he said.

Government debt is 26.9 percent of gross domestic product according to IMF data, well below the 60 percent seen as the international threshold for stable state finances, and 2011 fiscal revenue was a record-breaking 10.37 trillion yuan ($1.64 trillion) that produced a tiny 1.1 percent of GDP deficit.

Even allowing for the bad debts in the $1.7 trillion owed by local governments, the $200 billion or so of non-performing loans analysts believe the big state-backed banks are nursing, and any other miscellaneous restructuring costs, the most gloomy forecasts barely get gross debt up above 60 percent.

That said, there are few signs of willingness to repeat the 4 trillion yuan stimulus unveiled in 2008/09 at the height of the global financial crisis as international trade, on which much of China’s growth and employment depends, froze.

The government’s mantra has been about “fine tuning” economic policies — tweaking taxes, cutting red tape and gently easing the required ratio of reserves (RRR) banks must maintain to keep money supply growth steady against a backdrop of fluctuating international capital flows.

CURRENCY FLOWS MIS-READ

Bank of America/Merrill Lynch China economist, Ting Lu, says flow risks are overstated as analysts mis-read monthly foreign exchange transaction data and fail to take into account the impact on currency purchases of China’s concerted efforts to expand the use of yuan for international trade settlement.

Lu says there is no need for aggressive RRR moves and he forecasts a below-consensus two 50 basis point cuts by year end.

But the political implications of a 50 bps RRR cut to 20.5 percent on February 18, two weeks before China’s annual meeting of parliament when the next budget will be announced, should not be underestimated, said Yao Wei, China economist with Societe Generale in Hong Kong.

“The timing of the move may signal more fiscal easing measures at the annual National People’s Congress in early March, which is also in line with our initial expectations,” Yao wrote in a client note.

Quite what the government might unveil is anybody’s guess.

“The complication surrounding China’s economic policy stems from the fact that the Chinese government still controls many aspects of the economy. You would not find so many policy parameters that can be constantly tuned to influence the trajectory of economic growth in advanced economies,” she wrote.

Already 2 trillion yuan is earmarked to build millions of affordable homes in coming years to offset risks from a policy-induced cooling in the private sector real estate market, where a frenzy of speculation was triggered by the 2008/09 stimulus.

Fraser Howie, chief executive of brokerage CLSA Singapore and author of a new book on China, Red Capitalism, believes the last stimulus plan highlights Beijing’s willingness to act and the risks it breeds.

“There are no miracles in China. They haven’t beaten the laws of economics,” Howie told Reuters. “What they did was take a problem that even today is still insoluble for them — which was 20 million unemployed workers — and they substituted that for a bad debt problem somewhere down the road.”

EXPORT ANXIETY

It also helps explain why hard landing fear lingers, especially given an external sector slowdown.

Exports were a net drag on economic growth in 2011, which hit a 2-1/2 year low of 8.9 percent on the year in Q4, as the European Union — China’s biggest export market — fought debt crisis demons.

But some analysts say export anxiety is misplaced.

“Although nearly half of all Chinese exports are destined for the euro area, fully a quarter of that goes to Germany — the strongest economy in the region,” analysts at Lloyds Bank Corporate Markets in London wrote in a note to clients.

Official trade data shows China’s combined exports to the troubled economies of Portugal, Ireland, Italy, Greece and Spain were $62.3 billion in 2011, less than one percent of GDP. Exports to Germany were $76.4 billion.

Meanwhile, there’s solid demand from developing economies which the World Bank estimates have contributed as much as 70 percent of the growth in global imports in the last five years.

Capital flight arguments don’t make sense to Carl Weinberg, chief economist at New York-based consultancy High Frequency Economics, who can’t understand why foreign investors would flee China given still-steady yuan appreciation and risks elsewhere.

“Even if China’s GDP slows this year — which we doubt — it will still grow faster than any other major economy in the world. Huge real rates of return on capital are all but assured. China remains a safe haven from euro land’s woes. We doubt investors will abandon it,” he wrote in a note to clients.

 

Innovation in China

Posted in Uncategorized on 02/18/2012 by David Griffith

Dynamic domestic players and focused multinationals are helping China churn out a growing number of innovative products and services. Intensifying competition lies ahead; here’s a road map for navigating it.

MCKINSEY QUARTERLY  FEBRUARY 2012 • Gordon Orr and Erik Roth

China is innovating. Some of its achievements are visible: a doubling of the global percentage of patents granted to Chinese inventors since 2005, for example, and the growing role of Chinese companies in the wind- and solar-power industries. Other developments—such as advances by local companies in domestically oriented consumer electronics, instant messaging, and online gaming—may well be escaping the notice of executives who aren’t on the ground in China.

As innovation gains steam there, the stakes are rising for domestic and multinational companies alike. Prowess in innovation will not only become an increasingly important differentiator inside China but should also yield ideas and products that become serious competitors on the international stage.

Chinese companies and multinationals bring different strengths and weaknesses to this competition. The Chinese have traditionally had a bias toward innovation through commercialization—they are more comfortable than many Western companies are with putting a new product or service into the market quickly and improving its performance through subsequent generations. It is common for products to launch in a fraction of the time that it would take in more developed markets. While the quality of these early versions may be variable, subsequent ones improve rapidly.1

Chinese companies also benefit from their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competitieness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence.

But progress isn’t uniform across industries, and innovation capabilities vary significantly: several basic skills are at best nascent within a typical Chinese enterprise. Pain points include an absence of advanced techniques for understanding—analytically, not just intuitively—what customers really want, corporate cultures that don’t support risk taking, and a scarcity of the sort of internal collaboration that’s essential for developing new ideas.

Multinationals are far stronger in these areas but face other challenges, such as high attrition among talented Chinese nationals that can slow efforts to create local innovation centers. Indeed, the contrasting capabilities of domestic and multinational players, along with the still-unsettled state of intellectual-property protection (see sidebar, “Improving the patent process”), create the potential for topsy-turvy competition, creative partnerships, and rapid change. This article seeks to lay out the current landscape for would-be innovators and to describe some of the priorities for domestic and multinational companies that hope to thrive it.

China’s innovation landscape

Considerable innovation is occurring in China in both the business- to-consumer and business-to-business sectors. Although breakthroughs in either space generally go unrecognized by the broader global public, many multinational B2B competitors are acutely aware of the innovative strides the Chinese are making in sectors such as communications equipment and alternative energy. Interestingly, even as multinationals struggle to cope with Chinese innovation in some areas, they seem to be holding their own in others.

The business-to-consumer visibility gap

When European and US consumers think about what China makes, they reflexively turn to basic items such as textiles and toys, not necessarily the most innovative products and rarely associated with brand names. In fact, though, much product innovation in China stays there. A visit to a shop of the Suning Appliance chain, the large Chinese consumer electronics retailer, is telling. There, you might find an Android-enabled television complete with an integrated Internet-browsing capability and preloaded apps that take users straight to some of the most popular Chinese Web sites and digital movie-streaming services. Even the picture quality and industrial design are comparable to those of high-end televisions from South Korean competitors.

We observe the same home-grown innovation in business models. Look, for example, at the online sector, especially Tencent’s QQ instant-messaging service and the Sina Corporation’s microblog, Weibo. These models, unique to China, are generating revenue and growing in ways that have not been duplicated anywhere in the world. QQ’s low, flat-rate pricing and active marketplace for online games generate tremendous value from hundreds of millions of Chinese users.

What’s keeping innovative products and business models confined to China? In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad. In many cases, the skills and capabilities of these companies are oriented toward the domestic market, so even if they want to expand globally, they face high hurdles. Many senior executives, for example, are uncomfortable doing business outside their own geography and language. Furthermore, the success of many Chinese models depends on local resources—for example, lower-cost labor, inexpensive land, and access to capital or intellectual property—that are difficult to replicate elsewhere. Take the case of mobile handsets: most Chinese manufacturers would be subject to significant intellectual property–driven licensing fees if they sold their products outside China.

Successes in business to business

Several Chinese B2B sectors are establishing a track record of innovation domestically and globally. The Chinese communications equipment industry, for instance, is a peer of developed-world companies in quality. Market acceptance has expanded well beyond the historical presence in emerging markets to include Europe’s most demanding customers, such as France Télécom and Vodafone.

Pharmaceuticals are another area where China has made big strides. In the 1980s and 1990s, the country was a bit player in the discovery of new chemical entities. By the next decade, however, China’s sophistication had grown dramatically. More than 20 chemical compounds discovered and developed in China are currently undergoing clinical trials.

China’s solar- and wind-power industries are also taking center stage. The country will become the world’s largest market for renewable-energy technology, and it already has some of the sector’s biggest companies, providing critical components for the industry globally. Chinese companies not only enjoy scale advantages but also, in the case of solar, use new manufacturing techniques to improve the efficiency of solar panels.

Success in B2B innovation has benefited greatly from friendly government policies, such as establishing market access barriers; influencing the nature of cross-border collaborations by setting intellectual-property requirements in electric vehicles, high-speed trains, and other segments; and creating domestic-purchasing policies that favor Chinese-made goods and services. Many view these policies as loading the dice in favor of Chinese companies, but multinationals should be prepared for their continued enforcement.

Despite recent setbacks, an interesting example of how the Chinese government has moved to build an industry comes from high-speed rail. Before 2004, China’s efforts to develop it had limited success. Since then, a mix of two policies—encouraging technology transfer from multinationals (in return for market access) and a coordinated R&D-investment effort—has helped China Railways’ high-speed trains to dominate the local industry. The multinationals’ revenue in this sector has remained largely unchanged since the early 2000s.

But it is too simplistic to claim that government support is the only reason China has had some B2B success. The strength of the country’s scientific and technical talent is growing, and local companies increasingly bring real capabilities to the table. What’s more, a number of government-supported innovation efforts have not been successful. Some notable examples include attempts to develop an indigenous 3G telecommunications protocol called TDS-CDMA and to replace the global Wi-Fi standard with a China-only Internet security protocol, WAPI.

Advantage, multinationals?

Simultaneously, multinationals have been shaping China’s innovation landscape by leveraging global assets. Consider, for example, the joint venture between General Motors and the Shanghai Automotive Industry Corporation, which adapted a US minivan (Buick’s GL8) for use in the Chinese market and more recently introduced a version developed in China, for China. The model has proved hugely popular among executives.

In fact, the market for vehicles powered by internal-combustion engines remains dominated by multinationals, despite significant incentives and encouragement from the Chinese government, which had hoped that some domestic automakers would emerge as leaders by now. The continued strength of multinationals indicates how hard it is to break through in industries with 40 or 50 years of intellectual capital. Transferring the skills needed to design and manufacture complex engineering systems has proved a significant challenge requiring mentorship, the right culture, and time.

We are seeing the emergence of similar challenges in electric vehicles, where early indications suggest that the balance is swinging toward the multinationals because of superior product quality. By relying less on purely indigenous innovation, China is trying to make sure the electric-vehicle story has an ending different from that of its telecommunications protocol efforts. The government’s stated aspiration of having more than five million plug-in hybrid and battery electric vehicles on the road by 2020 is heavily supported by a mix of extensive subsidies and tax incentives for local companies, combined with strict market access rules for foreign companies and the creation of new revenue pools through government and public fleet-purchase programs. But the subsidies and incentives may not be enough to overcome the technical challenges of learning to build these vehicles, particularly if multinationals decline to invest with local companies.

Four priorities for innovators in China

There’s no magic formula for innovation—and that goes doubly for China, where the challenges and opportunities facing domestic and multinational players are so different. Some of the priorities we describe here, such as instilling a culture of risk taking and learning, are more pressing for Chinese companies. Others, such as retaining local talent, may be harder for multinationals. Collectively, these priorities include some of the critical variables that will influence which companies lead China’s innovation revolution and how far it goes.

Deeply understanding Chinese customers

Alibaba’s Web-based trading platform, Taobao, is a great example of a product that emerged from deep insights into how customers were underserved and their inability to connect with suppliers, as well as a sophisticated understanding of the Chinese banking system. This dominant marketplace enables thousands of Chinese manufacturers to find and transact with potential customers directly. What looks like a straightforward eBay-like trading platform actually embeds numerous significant innovations to support these transactions, such as an ability to facilitate electronic fund transfers and to account for idiosyncrasies in the national banking system. Taobao wouldn’t have happened without Alibaba’s deep, analytically driven understanding of customers.

Few Chinese companies have the systematic ability to develop a deep understanding of customers’ problems. Domestic players have traditionally had a manufacturing-led focus on reapplying existing business models to deliver products for fast-growing markets. These “push” models will find it increasingly hard to unlock pockets of profitable growth. Shifting from delivery to creation requires more local research and development, as well as the nurturing of more market-driven organizations that can combine insights into detailed Chinese customer preferences with a clear sense of how the local business environment is evolving. Requirements include both research techniques relevant to China and people with the experience to draw out actionable customer insights.

Many multinationals have these capabilities, but unless they have been operating in China for some years, they may well lack the domestic-market knowledge or relationships needed to apply them effectively. The solution—building a true domestic Chinese presence rather than an outpost—sounds obvious, but it’s difficult to carry out without commitment from the top. Too many companies fail by using “fly over” management. But some multinationals appear to be investing the necessary resources; for example, we recently met (separately) with top executives of two big industrial companies who were being transferred from the West to run global R&D organizations from Shanghai. The idea is to be closer to Chinese customers and the network of institutions and universities from which multinationals source talent.

Retaining local talent

China’s universities graduate more than 10,000 science PhDs each year, and increasing numbers of Chinese scientists working overseas are returning home. Multinationals in particular are struggling to tap this inflow of researchers and managers. A recent survey by the executive-recruiting firm Heidrick & Struggles found that 77 percent of the senior executives from multinational companies responding say they have difficulty attracting managers in China, while 91 percent regard employee turnover as their top talent challenge.

Retention is more of an issue for multinationals than for domestic companies, but as big foreign players raise their game, so must local ones. Chinese companies, for example, excel at creating a community-like environment to build loyalty to the institution. That helps keep some employees in place when competing offers arise, but it may not always be enough.

Talented Chinese employees increasingly recognize the benefits of being associated with a well-known foreign brand and like the mentorship and training that foreign companies can provide. So multinationals that commit themselves to developing meaningful career paths for Chinese employees should have a chance in the growing fight with their Chinese competitors for R&D talent. Initiatives might include in-house training courses or apprenticeship programs, perhaps with local universities. General Motors sponsors projects in which professors and engineering departments at leading universities research issues of interest to the automaker. That helps it to develop closer relations with the institutions from which it recruits and to train students before they graduate.

Some multinationals energize Chinese engineers by shifting their roles from serving as capacity in a support of existing global programs to contributing significantly to new innovation thrusts, often aimed at the local market. This approach, increasingly common in the pharma industry, may hold lessons for other kinds of multinationals that have established R&D or innovation centers in China in recent years. The keys to success include a clear objective— for instance, will activity support global programs or develop China-for-China innovations?—and a clear plan for attracting and retaining the talent needed to staff such centers. Too often, we visit impressive R&D facilities, stocked with the latest equipment, that are almost empty because staffing them has proved difficult.

Instilling a culture of risk taking

Failure is a required element of innovation, but it isn’t the norm in China, where a culture of obedience and adherence to rules prevails in most companies. Breaking or even bending them is not expected and rarely tolerated. To combat these attitudes, companies must find ways to make initiative taking more acceptable and better rewarded.

One approach we found, in a leading solar company, was to transfer risk from individual innovators to teams. Shared accountability and community support made increased risk taking and experimentation safer. The company has used these “innovation work groups” to develop everything from more efficient battery technology to new manufacturing processes. Team-based approaches also have proved effective for some multinationals trying to stimulate initiative taking .

How fast a culture of innovation takes off varies by industry. We see a much more rapid evolution toward the approach of Western companies in the way Chinese high-tech enterprises learn from their customers and how they apply that learning to create new products made for China. That approach is much less common at state-owned enterprises, since they are held back by hierarchical, benchmark-driven cultures.

Promoting collaboration

One area where multinationals currently have an edge is promoting collaboration and the internal collision of ideas, which can yield surprising new insights and business opportunities. In many Chinese companies, traditional organizational and cultural barriers inhibit such exchanges.

Although a lot of these companies have become more professional and adept at delivering products in large volumes, their ability to scale up an organization that can work collaboratively has not kept pace. Their rigorous, linear processes for bringing new products to market ensure rapid commercialization but create too many hand-offs where insights are lost and trade-offs for efficiency are promoted.

One Chinese consumer electronics company has repeatedly tried to improve the way it innovates. Senior management has called for new ideas and sponsored efforts to create new best-in-class processes, while junior engineers have designed high-quality prototypes. Yet the end result continues to be largely undifferentiated, incremental improvements. The biggest reason appears to be a lack of cross-company collaboration and a reliance on processes designed to build and reinforce scale in manufacturing. In effect, the technical and commercial sides of the business don’t cooperate in a way that would allow some potentially winning ideas to reach the market. As Chinese organizations mature, stories like this one may become rarer.

China hasn’t yet experienced a true innovation revolution. It will need time to evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common. The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change—and determine who leads it.

China and US Try to Make Trade Progress to Save Global Economy

Posted in Uncategorized on 11/21/2011 by David Griffith

Global economic outlook grim, China tells U.S. trade talks

Reuters November 21, 2011

By Chris Buckley

CHENGDU, China (Reuters) – Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Wang said an “unbalanced recovery” may be the best option to deal with what he had described on Saturday as a certain chronic global recession, suggesting Beijing would bolster its own economy before it worries about global imbalances at the heart of trade tensions with Washington.

“An unbalanced recovery would be better than a balanced recession,” he said at the annual U.S.-China Joint Commission on Commerce and Trade, or JCCT, in the southwest Chinese city of Chengdu.

The comments, echoed by Vice Finance Minister Zhu Guangyao, stopped short of suggesting China would try to boost exports as it had done during the 2008-2009 global financial crisis when it pegged the yuan to the dollar.

Instead, U.S. Commerce Secretary John Bryson told reporters that China had confirmed to U.S. officials that it planned to spend $1.7 trillion on strategic sectors in the next five years.

Beijing has previously said these sectors include alternative energy, biotechnology and advanced equipment manufacturing, underlining its aim to shift the growth engine of the world’s No.2 economy to cleaner and high-tech sectors.

The investment amount of 10 trillion yuan ($1.7 trillion) is more than two times bigger than the eye-popping 4 trillion yuan stimulus package launched during the global financial crisis, plans first reported by Reuters a year ago.

“Global economic conditions remain grim, and ensuring economic recovery is the overriding priority,” said Wang, the top official steering China’s financial and trade policy, at the start of the second day of talks with the Americans.

His comments suggested that Beijing should attend to bolstering China’s own growth before it worried about global imbalances. In other words, a strong Chinese economy that brings a continued trade deficit with the United States would be better for the world economy than a slowdown in China itself.

“As major world economies, China and the United States would make a positive contribution to the world through their own steady development,” Wang told dozens of trade, investment, energy and agricultural officials from each government seated in a conference hall.

ALARM OVER ECONOMIC RISKS

Policymakers globally have voiced alarm over economic risks, which mainly stem from the euro zone debt crisis.

On Monday, Singapore and Thailand said their economies would shrink in the fourth quarter and Japan posted a bigger than expected fall in October exports. Some central banks, including those in Brazil and Indonesia, have cut interest rates.

On Saturday, Wang gave the most dire assessment on the world economy from a senior Chinese policymaker to date.

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news agency.

The remarks weighed on Chinese and Hong Kong stocks, while world markets were also weak as investors fretted over the euro zone debt crisis.

China’s growth slowed to 9.1 percent in the third quarter from 9.5 percent in the second-quarter and 9.7 percent in the first quarter, but the rate remains in Beijing’s comfort zone.

After tightening monetary policy to fight the threat of inflation, the central bank has since loosened its grip on bank credit in a bid to support cash-starved small firms and pledged to fine-tune policy if needed as economic growth slowed down.

“It’s clear now that Beijing is ready for policy fine-tuning (to support growth) at a time when the overall domestic and foreign economic situation is not optimistic,” said Hua Zhongwei, an economist with Huachuang Securities in Beijing.

ON TRADE, FRICTION AND PROGRESS

U.S. officials said the discussions yielded progress on the question of forced technology transfers to Chinese companies, long a sore point for U.S. businesses.

In particular, China committed not to require foreign automakers to hand their new energy vehicle technology over to Chinese partners, or to establish Chinese brands as a condition for market access, said U.S. Trade Representative Ron Kirk.

“China also confirmed that foreign-invested companies will be eligible on an equal basis for any subsidies or incentive programs for electric vehicles,” said Kirk.

Although the JCCT talks do not address exchange rate policies, U.S. officials at the talks warned Wang and his colleagues that they could not ignore rising American impatience with China’s trade policies and investment barriers.

U.S. gripes about China’s trade-boosting policies spilled into President Barack Obama’s meeting with Chinese Premier Wen Jiabao on Saturday in Bali, when Obama raised China’s exchange rate policies, which many in Washington say keep the yuan cheap against the dollar in order to help Chinese exports.

However, Zhong Wei, an influential economist at Beijing Normal University, said the benefits to the United States of yuan appreciation “are nearly zero.”

“Cheap Chinese goods have been a subsidy for the poor in the U.S., and now the U.S. government wants to eliminate such subsidy while it’s having difficulty creating jobs,” he said.

At the heart of the trade friction between the two countries is a U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009.

Bryson told the talks the United States welcomed more expanded trade and investment, on balanced terms.

“But a reality also is that many in the U.S., including the business community and the Congress, are moving toward a more negative view of our trading relationship, and they question whether the JCCT is able to make meaningful progress,” said Bryson.