Stat of the day: 10.26 million HNWI

According to a new list of individuals with assets between $100,000 to $1 million, or high networth individuals (HNWI), Forbes estimates there are 10.26 million HNWI on the mainland; a number that will increase to 12 million by the end of the year.  More details from SCMP:

More than a third of them were born in the 1970s and the top three industries they were involved in are finance, trade and manufacturing, its study said.

Three-quarters of respondents surveyed said they had no plan to emigrate, but the same percentage expressed a wish to send their children to study overseas. The United States was their first option.

For more about consumer behavior of this demographic segment, see Chapter 9 and 11.

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Another Brick in the Wall: Link Edition IV

Below are a list of business-related links from this past week (mostly in terms of China).  Thanks to Matt S and Sinocism for most of them.  The number in (brackets) is the book chapter that more detailed information about the topic can be found.

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Another Brick in the Wall: Link Edition III

Below are 10 business-related stories regarding China from the past 10 days.  Many thanks to the WSJ and Sinocism for providing some of them.  Feel free to send me any you may come across as well.

Sotheby’s is working with Tefaf, the organizers of one of the largest annual European art fairs.  See Chapter 11 for more about the art market.

All goods and services in the new zone will be sold tax free.  Geared towards arts and entertainment and will be located next to Beijing’s Capital Airport.  Sotheby’s is going to run the art zone and the whole thing will be modeled after Singapore’s Freeport facility.  Supposed to be up and running in 2014.  See Chapter 11 for more about the art market and Chapter 14 about pop culture and entertainment.

Several Italian brands including Prada and Gucci (among others) are playing catch-up in the largest luxury market.  One interesting stat: Hermès, 50% of its sales come from China.  Check out the linked video for how and why.  See Chapter 11 for more about the luxury goods market.

There over a million millionaires (USD) and 2.7 million high-networth individuals (HNWI) in China and according to Hurun 85% of HNWI will send their children overseas.  Where will these families live?  Perhaps in style, in domiciles that are customized to cater to Chinese tastes.  In Chapter 5, footnote 7 I noted that another area Chinese individuals and firms are now investing in is the US real estate and property market.  According to a recent report, “[b]uyers from China also invested almost $2 billion in commercial property in 2011, or quadruple what they spent several years ago.”  One of the recent deals was led by China’s Vanke (the largest real estate developer on the mainland) who agreed to a $620 million project in San Fransico in December 2012.  See Chinese buyers lead foreign investment in US housing market from Fox News, China Vanke Arrives in U.S. from The Wall Street Journal and Lennar Said to Get $1.7 Billion San Francisco Loan from Bloomberg

Although sobering, this is a great story for those unfamiliar with the various sacrifices that parents and families will do to put their kids through higher education.  And the labor market afterwards is hyper competitive (hence the reason why many families with the means, will send their kids overseas or cajole their kin to go to grad school).  I have had about a dozen former students message me over the past couple weeks as they are about to graduate and are facing similar circumstances: a degree without any job prospects related to their field of study.  See Chapter 9 for more about education and the labor market.

Another detailed story, with hard numbers, regarding the skillset mismatch of college graduates and labor market.  According to one survey, 16.4% of new Chinese college graduates are currently unemployed versus a mere 4.2% who quit after elementary school.  One of the reasons why is that those with elementary educations are willing to work in factories whereas many of the college graduates are looking for an iron rice bowl job (铁饭碗).  Furthermore, for most college grads that do get jobs, they typically have to settle for wages that are actually lower than their counterparts who only attended elementary school.  This of course presents an opportunity for new businesspeople to find educated workers to hire at rates significantly lower than their Western counterparts.  See Chapter 9 for more about education and the labor market.

60% of the 194,029 Chinese students studying in the US pay for the education out-of-pocket, through private financing.  And these education bills can reach up to $200,000 for a four-year education (there are over 100 colleges in the US where tuition/fees cost $50,000 a year).  Yet the immediate return-on-investment in terms of salaries upon graduation is less than inspiring, although the article interviews several experts that argue that in the long run, it will payoff.  See Chapter 9 for more about education and the labor market.

This is the same Caterpillar that got burned in a $586 million fraudulent acquisition (a subsidiary bought a Chinese firm that grossly overstated its assets).  See Cat Scammed: How A U.S. Company Blew Half A Billion Dollars In China from Forbes and Caterpillar Still Investigating Chinese Accounting Discrepancy from Bloomberg.  Keep in mind however, that by 2020 China’s urban population will reach 800 million, by 2025 there will be 221 cities with 1 million people and by 2030 there will be more than 1 billion people living in cities.  See China’s urban population to hit 800 million by 2020 from People’s Daily, China’s Megacities from Bloomberg and one of the upcoming challenges that policy makers face with this urbanization is reforming the Hukou, or household registration system.  See also Eight Questions: Tom Miller, ‘China’s Urban Billion’ from The Wall Street Journal.

PE firms with assets of more than 500 million RMB (about $80 million) should register with provincial governments.  For more about PE see Chapter 5.

New documentary about Jeremy Lin (林书豪), the dark horse NBA player who all of my students talked about last year (and even this year).  Of course, being a Dallas-native I think it’s too bad he doesn’t play for the Mavericks, they could use the help.  See Chapter 8 for more on basketball in China.

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Another Brick in the Wall: Link Edition II

Below are 10 business-related stories regarding China from the past 10 days.  Many thanks to Yanli and Sinocism for providing them.  Feel free to send me any you may come across as well.

Weixin has about 300 million users.  I used Fetion a few years back, it had a few of the basic functions that Weixin expanded upon.  See Chapter 12 for more about the popularity of Weixin (WeChat).

In Chapter 1, footnote 43 I mentioned that one of the issues facing policy makers is traffic congestion.  Each city handles it differently, some auctioning off license plates to residents.  The cost of license plates has increased as cities have become denser and more affluent.  In Shanghai for example, in the recent license plate auction held in January 2013, the average price for a plate was $12,000.  See Shanghai’s Newest Luxury Item: The License Plate from The Wall Street Journal and Shanghai licence plates ‘precious as gold,’ says vice mayor from South China Morning Post

In Chapter 3 I detail the milk powder scandal and the subsequent surge in milk importation that continues to take place.

In footnote 26, Chapter 14 I mention that the amount of foreigners residing illegally may actually boost the perceived laowai numbers.  That is to say, many of my Chinese friends and students are under the impression that there are more legal foreign residents than there really are.  For example, at least 20,000 Africans legally live in Guangzhou alone (up to 150,000 Africans are estimated to live there including tourists and those illegally overstayed their visa).  For comparison, between 580,000 and 820,000 Chinese migrants live in Africa.  There are tens of thousands of domestic servants (typically maids from the Philippines) under similar legal circumstances in Hong Kong as well.  See 593,832 foreigners live on Chinese mainland: census data from Xinhua, The Promised Land by Evan Osnos and China cracks down on African immigrants and traders from The Guardian and Eastern Promise in Little Africa from The Global Mail

If you have ever spent much time using search engines on the mainland it is painfully obvious that Bing (from Microsoft) is really bad in terms of producing relevant search results.  So bad that it only has .5% marketshare and it is not even blocked/impeded upon.  In contrast, Google.com, which is continually blocked/redirected/stalled, has about a 15% marketshare.  And Baidu, the homegrown champion has about 78.6%.  See Chapter 12 for more.

360Buy is briefly mentioned in Chapter 7.  It is an e-commerce portal that specializes on electronics.  It turns out that there is a bit of a scandal as employees have been caught in a scheme in which they would help boost traffic for merchants who gave them goods.  This is — so far — a smaller scandal than Alibaba witnessed a couple years ago (see this backstory).  Perhaps they can clean it up their act like Alibaba did, there is lots of current and future potential to provide that incentive.

In summation, there is a 20% capital gains tax on your second home throughout certain areas of China (both Beijing and Shanghai have passed this type of law).  Thus if you get divorced, your partner can technically sell the second property and not have to pay the hefty levy.  Many couples are actually still living together and are only divorced on paper, only going through this process to save tens of thousands of dollars.  While it is hard to say just how many divorces are because of this specific issue, in Chapter 4, footnote 40 I discuss some of the numbers regarding divorce and a few opportunities.  One area that may be relatively untapped is the divorce app market.  For example, more than 5,000 couples divorce each day in China.  Roughly 1.96 million couples got divorced in 2009; in 2011 2.9 million couples got divorced.  In fact, the divorce rate has doubled over the past decade in Beijing and Shanghai and is now nearly 40% (for comparison the national divorce rate is 2.29%).  To be even handed, some of these divorces may be related to avoiding regulations on buying 2nd or 3rd homes.  Yet just like in the West, when children are involved, the custody issues require communication between exes.  Thus online communication through apps may be a potential market.  See Ensuring a long marriage with insurance from China Daily, Joint Custody From A Distance from The New York Times, Divorce: Why the big breakup in China? from CNN, China’s Hot Real Estate Market Takes Broad Toll from NPR, China’s divorce rule dubbed ‘Law that makes men laugh and women cry’ from The Telegraph, Over 5,000 couples divorce each day in China during first quarter from People’s Daily, Divorce rate exceeds one third in Beijing and Shanghai from SINA, Shanghai has 2nd highest divorce rate in China from People’s Daily and Divorce app could help couples decide if their marriage has a future from The Guardian.

Based on current trends, by 2030 China will import 79% of its oil.  As a consequence, many policy makers are wanting to tap into fracking like the US has done, to acquire hydrocarbons and become less dependent on imports.  In Chapter 17 I mentioned that one estimate by geologists is “the nation’s recoverable reserves at about 25 trillion cubic meters, on par with the United States.” Thus both foreign and domestic firms specializing in the natural gas segment (e.g., extraction, storage, transportation) may find new revenue streams in an industry that is expected to pump “6.5 billion cubic meters of natural gas from underground shale formations by 2015.”  Yet despite the aggressive timeline for hydrocarbon extraction, another hurdle is a lack of experience.  None of the 16 firms awarded drilling rights at a recent auction has ever drilled a hole.  See China’s ragtag shale army a long way from revolution from Reuters, Environmental Frets as Frackers Move In from Caixin and China’s “Ultimate Goal Is a Huge Fracking Industry” from Mother Jones

Good short story, with anecdotes, of the real estate costs on the SAR.  Certainly one of the fewer places with more expensive cost of living than here in Shanghai or up in Beijing.

While Beijing is still the top tourist destination, with 5 million foreign visitors a year (see Chapter 4), Xi’an also is one of the biggest destinations for both mainlanders and foreigners.  According to the report:

Last year, Xi’an attracted 78.64 million domestic tourists and 1.15 million overseas tourists, 20 percent and 15 percent rises respectively on 2012, according to official figures.

“This year, we expect to see 1.3 million overseas travelers,” Dong said.

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Stat of the day: Movie screens

The significant ratio is in the last paragraph 13,188 screens (in China) versus 39,500 screens (in the US).  China is now the 2nd largest market for cinematic movies and if businesses like Wanda (the 5th largest private company on the mainland) continue to build theater complexes, Ernst & Young estimates that the mainland market will surpass the US within a decade.

Why the Majority of Chinese Films Never Make it to Theaters from The Wall Street Journal:

Among the 745 feature films produced in China last year, only 315 – or 42% — played in cinemas, media-research firm Entgroup says in its recently released annual survey of the country’s film industry.

That number puts China far behind the U.S., where nearly three quarters of the 818 feature films produced in 2011 were released in theaters, according to the most recent statistics from the Motion Picture Association of America (pdf).

[…]

But the failure of so many Chinese films to make it into theaters serves as a reminder of the limitations the industry still faces, analysts and observers say.

Among the most basic of those limitations, according to Entgroup researcher Kady Yang, is a shortage of screens. “The capacity of China’s cinemas is very limited and their movie schedules are tight,” Ms. Yang said, noting that China is home to 3,680 cinemas with 13,118 total screens. The U.S. has more than 39,500 screens, according to the MPAA.

See Chapter 14 for more details.

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Another Brick in the Wall: Link Edition I

Below are 10 business-related stories regarding China from the past 10 days.  Many thanks to VG, Matt S and of course Sinocism for providing them.  Feel free to send me any you may come across as well.

Electric vehicles are mentioned in passing in Chapter 10.

Public listings and IPOs on the mainland are discussed in Chapter 5.

Jack Ma recently stepped down as chairman of the Alibaba Group, the largest domestic e-commerce company in the world… which still has not had an IPO.  I mention it several times in Chapter 7, 12 & 13.

Ubuntu is the most widely used Linux distribution.  However, as I mention in Chapter 20, there have been a number of top-down directed technology projects concocted on the mainland over the years.  While it may fare better than Jike (a search engine that flopped) I doubt it will replace Android or iOS anytime soon, if at all.

China is both the largest luxury goods and art auction market.  See Chapter 11 for more.

As discussed in Chapter 3, China exports a large number of different food and beverages globally.

As discussed in Chapter 3, Chinese consumers consumed an enormous amount of red wine each year.  In 2011 1.3 billion bottles of red wine were sold.

As mentioned in Chapter 14, China is the largest online gaming market, PC gaming market and now mobile gaming market.  Epic Games are the developers behind the Unreal engine and the eponymous game series.

In Chapter 12 I discuss the internet empire that is Tencent, the largest tech company on the mainland.  They are developers behind the immensely popular WeChat (Weixin) phone app and the golliath that is QQ instant messenger (as well as Qzone and Tencent Weibo).  Add me on it.

82 million Chinese tourists traveled overseas last year.  60,000 traveled to South Africa in the first half of 2012.  See Chapter 4 and 11 for more.

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Stat of the day: PC gaming

According to their new annual report from the PC Gaming Alliance (an industry trade group):

China continues to be the largest and fastest growing market for PC games with record 2012 revenue of US$6.8 billion.  Mature game markets in Korea, Japan, U.S., U.K. and Germany all showed growth in 2012. Together these markets also increased revenue in 2012, to $8.4 billion.

Altogether PC game sales reached $20 billion globally last year.  Be sure to also check out Chapter 14 for more info about the gaming and entertainment industry in China

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An Interview with Kenneth Walker, founder of Bubba’s Texas-Style BBQ

bubbas-sitelogoOn March 25, 2013 I took a taxi out to Hongqiao, a western district in Shanghai, to visit Bubba’s Texas-Style BBQ (now one of three locations).  Having grown up in the Lone Star state it is always interesting to meet fellow Texans in East Asia (there are not many of us… we do not have a reputation for being globe-trotters) and as it so happens the founder of Bubba’s is Kenneth Walker, from South Austin.

Kenneth has spent the last 16 years in Asia, 8 in Hong Kong and 8 now in Shanghai.  Prior to Asia he also had an 8 year stint in New York City, working as a PR specialist for Weber Shandwick, a large global PR firm.  And as he explained it to me, although he enjoyed cooking BBQ as a hobby throughout high school, it was not his intention to create his own barbecue joint in China, rather it was a matter of happenstance.

According to him, “While I was doing PR work in New York and Hong Kong, creating a BBQ restaurant was not something that I had really thought about.  It was not until much later, after I had arrived in Shanghai and sampled the local so-called “BBQ” that I realized there was an unmet market opportunity and I began putting together a business plan.  One of the initial challenges for me then and one of the challenges that all restaurant start-ups today must face in this city is finding a location.  When I finally decided to give this idea a try, I originally tried scouting locations whose tenants were already out of business.  The problem for me was two-fold: the first is that I had actually only been in the metro for less than a year, so I did not have a lot of connections throughout the city.  The second is that in contrast to other parts of the world, after a business closes shop, the ideal time to lease the real estate is not after it is fully closed down.  By then it is too late, as someone else always manages to make arrangements before you do – as I found time and again.  So I changed my strategy to look for establishments that were on their way down – that had seen better days.  The original Bubba’s here, was just that – a woman’s bar called Dragon Bar that was run by a couple of expat women.  A friend noticed the place and informed me about it.  So I stopped by one day and spoke to the lady who was thrilled to hear about the buyout idea.”

Kenneth was able to finally check something off the list: found the location.  And as I mention in Chapter 3, in busy areas like Raffles City (来福士广场), one of the most popular shopping malls in Shanghai, space may cost more than 15 RMB per square meter per day (a rate, which for the typical sit-down restaurant footprint can amount to several million RMB a year).  As a consequence several notable restaurants have closed this past year including Purple Onion, Funky Chicken, Public and The Fat Olive (yes those are real names, visit SmartShanghai for more).

What about supplies and decorations?  For anyone that has lived abroad for any long-term period, it can be difficult to find a number of creature comforts from back home.  And as is the case of football, to the chagrin of North American fans, sport memorabilia can be hard to find.  Yet walking around in Bubba’s, North Americans would feel at home with dozens of sport pennants and authentic jersey’s attached to the wall and even a trophy case with autographed footballs (including one from Tony Dorsett and Mack Brown).

Where did he get these?

“It started with a Michigan State fan a few years ago.  He gave me a Spartan pennant that I hung up on the wall.  And after other patrons saw this, they became riled up.  So I made it an open policy: if you bring it, I’ll hang it.  BYOB: bring your own banner.  So little by little I began to accrue what you see before you today.  Prior to this ambiance, all I had initially brought were a few of things I had with me: a flag of Texas, saddles and a golf club whose Tom Kite autograph was accidentally rubbed off later by a cleaning crew.”

Again, for disclosure purposes I will note that I do not own any equity in his firm.  I even paid for my own baby back ribs.  But as I later told my friends, these were the most authentic tasting Texas ribs I have eaten in this time zone and this is coming from a guy who growing up, regularly ate at Spring Creek and Dickies.  How did he do this?

“As I said, I had sampled the food of other local restaurants and what I found did not meet the standards I was used to back home.  And to make good BBQ you need to actually smoke the meat.  So I began looking for a smoker to import.  I had never done this before and I was unfamiliar with the import laws.  I did find a company in the US called Southern Pride who told me they could sell me one for $15,000 and that they had sold them abroad before.  After hearing they had exported 15 smokers to Asia back in the ‘90s, I then began trying to track down the one that ended up in Shanghai.  Somewhere in this city was a real smoker.  And as luck would have it, I found out that Hard Rock Cafe were the owners of the smoker – and that they closed the restaurant a few years earlier.  I got a hold of their previous GM and he told me that all of the store equipment was now in storage out by the airport and that it was all about to be removed in the next month.  So I drove out to this storage site, climbed around for a couple of hours with a flashlight in my hands and after crawling around old chairs, tables, automobiles and motorcycles, I found the smoker.  While it had been used as a rotisserie oven for chicken, it had never been used as a smoker, so fortunately it did not have any of the old smoker smell stained into it.  I was able to buy it for $2,000 and with the help of about 10 Chinese mover guys we put it onto a flatbed  truck and brought it to the now gutted Dragon Bar.”

While you may not be as fortunate as Kenneth was in acquiring kitchenware for your own restaurant, today would-be entrepreneurs have websites like Craigslist, Shanghai Expat and Delta Bridges to talk with others (both locals and laowai) to find equipment and potential store locations.

So Kenneth has found a location, a smoker and has a team to work with.  How did he turn it into the real deal?

“The next hurdle is finding some type of wood to smoke with.  Any fruit wood would work just fine, and I knew that apple wood was available as some of the Beijing duck restaurants were using it to smoke their ducks.   I found a local duck restaurant that used Applewood to smoke their ducks, and while they gave me a few sample pieces of wood, they would not divulge the supplier name or contact.  Later however, a friend I had placed in charge of logistics tracked down a company in Beijing that sells Applewood by the ton.  I was not very sure what a ton of wood looked like and was told they would deliver it in a 6-ton truck.  Thus I had a dilemma because I did not want to waste the storage capacity either.  At the same time I did not want to scare the neighbors or the authorities, if they saw a new business opening with piles of wood, what would they think?  So while I initially ordered a full 6 tons, at the last moment I cancelled half of the order.  When the truck finally arrived and we unloaded the wood, all 3 tons that were delivered ended up taking up half of the restaurant.  I got lucky because if I had ordered all 6, there would be no room in the restaurant.  Afterwards we manually moved each cord out behind the restaurant wall and this supply lasted for two-and-a-half years.”

Is the rest history?  Not quite, after all, even with everything in place you still need to cook a produce customers are willing to buy.

“Even though I knew how to cook BBQ, the first 3 months were hard.  I was here from 5am to midnight each day.  I eventually taught some local hires how to properly smoke meat and our initial menu included chicken, ribs and potato salad.  Sometimes, for recipes like a breakfast sausage that tastes like Jimmy Dean sausage for instance, I would do a lot of trial and error before finding the right combination of flavors that the customer was used to and wanted.  The restaurant also features my own secret barbecue cause and dry rub.  Later we expanded the menu to include burgers, pizza, seafood and Cajun style fish& chips.  We did have some Mexican food at one point but felt the menu was getting too cluttered so we culled it.  We might expand the menu again though, due to changing customer demand.”

What are some expansion possibilities and opportunities?

“I opened up the first Texas BBQ in all of China.  Because of my professional background I have done a lot of branding for merchandise like t-shirts and now social media.  I also organize an annual chili cookoff and an annual BBQ cookoff with multiple teams made up of local cooks around the metro.  Because the chili cookoff is an officially sanctioned event by CASI, the top 3 finishers earn automatic bids to the world championship held in Terlingua, Texas.  In addition, we have live bands at these events and more than 1,000 people attend, with about an 80% – 20% demographic split (80% foreigners, 20% local), which is about the same demographic customer base at Bubba’s locations.  We even work with Crown Relocations services to help manage the logistics of the chili teams, by picking up the kitchen equipment the day before and setting it up at the event grounds.”

CASI is the Chili Appreciation Society International and all Texans born north of the Guadalupe River are legally required to belong to it.   Crown Relocations services is 45 years old and according to its official FAQ, generates $766 million in annual revenue.

What are some of the challenges that business owners face?

“This can still be a challenging business culture because of the need to maintain guanxi, to maintain relationships with suppliers and various governmental bodies.  But larger cities like Shanghai, Beijing and Guangzhou have become increasingly business friendly.  There is a formal structure with forms and permits that have been streamlined over the years.  Potential business owners should also make sure to set-up a WFOE because it can be very risky creating a JV with a local partner like a friend or wife.  Too many risks associated with that.”

For more about guanxi Chapter 1 and WFOE (Wholly Foreign Owned Enterprise) see Chapter 10.

And other opportunities?

“While it will vary from location to location, but the team that gutted and renovated our first restaurant did so brick by brick.  They used the wood paneling from the bar to construct a ladder and reused the bricks to create a new wall in a different location.  This kind of resourcefulness occurs throughout many other construction sites all throughout the country.  And because of time saving methods like this, we were able to gut and then reopen the restaurant in about 3 months – a process which probably would have taken longer in other cities in the US.  Other opportunities that I see are a “dive” steak restaurant.  It is hard to find a really good steak for a decent price in this city.  When I was working in New York there were a couple of very inelegant restaurants that had nothing but graffiti on the walls, no frills or ambiance whatsoever.  The money you paid for the meat was used to buy the best meat for the money, so you got a great product, a delicious steak.  I think there is room for several of these “dive” restaurants throughout China, especially in bigger cities.  In addition, there are these pop-up trailers that are popular in certain cities of the US.  They are mobile units that cook ethnic food like from Vietnam and I have yet to see them here on the mainland, but could see them being very popular late at night and early in the morning near bars and clubs.”

For a review of these pop-up mobile food trailers in Austin see: Scrumptious Chef

With varnished bar stools hovering around wooden tables, a flat-screen TV with sports on in the background, sport pennants and white walls (as opposed to the pink and black décor of Dragon Bar), Bubba’s illustrates how a simple idea and bit of tenacity and luck can create a successful business in China.

For more info about Kenneth and Bubba’s BBQ see: Shanghai’s First Annual BBQ Cookoff: What’s Bubba got to say about it? from ShanghaiExpat and Austinite who introduced Shanghai to Texas barbecue to compete in Terlingua from Austin360

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Stat of the day: 11% or $9 billion

Chinese purchases of US real estate accounted for 11% of all foreign purchases or some $9 billion worth of real estate last year.  If you are a real estate agent or home owner, you may be able to cater to new clients, especially at the top end.  See Chapter 4 as well.

You can read more at Woman Buys US 65m Manhattan Apartment for Two Year Old Daughter from SCMP.  And you can also watch a CCTV video about it over at Sina: 视频:中国妈妈为2岁女儿买650万美元豪宅 (English-speaking is in the middle of the segment).

Via Sinocism and Shanghaiist

 

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Self-publishing original content, academia, freebies and SEO

Three related questions — and some long answers — that may be of use to aspiring writers globally.

Julia on FB writes,

I wondered, of course, out of selfish reasons — how did you do it? Seriously — if I wanted to publish a book, what would I need to do? Do you have any advice for a novice writer?  I am becoming your number 1 un-official fan… or a groupie, if that’s allowed.

Groupies are more than welcome!  Perhaps one day there will even be roadies…

As far as the self-publication route and things to consider, the short and simple answer is compare Amazon’s KDP program, Barnes & Noble’s PubIt! program and Apple’s iBook program.  For cover art and illustrations you can hire some freelancer at Fiverr.  Finding an editor can be tricky but a few google searches could help narrow the options down.  Then most importantly: create fresh, original content and find your own voice (more on that below).  The longer Ned Flanders answer involves tying this in to a conversation I had a month ago with a French friend of mine who just finished defending his dissertation in physics.

CV from Paris writes,

Hi Tim, I’m starting to explore ways to publish my PhD, and I am not sure how to proceed. Since you are also publishing books, I would like to ask you some advice on the possible plans I have in mind. The desired outcomes are:

(1) Publish my PhD as it will be after the defense, at Vrije Universiteit Press (VUB) Press.
(2) Publish my PhD as it will be after the defense, or slightly improved with Springer.
(3) Publish my PhD as a popular book, which requires some rewriting to make it more accessible and concise.
(4) Publish both my PhD as it will be with options (1) or (2); and then make a more popular version (3).

What do you think? What would you advice? Do you see other options?

TL: DR

The too long, didn’t read response to CV is: because business-related content describes dynamic actors (e.g., consumers), in order to stay relevant content creators will probably need to publish and update more frequently than their counterparts in the hard sciences.

I had 3 or 4 professors in college who jokingly noted that the content of many science textbooks in nearly every classroom globally were out of date.  That is to say, because of the lengthy publication process (e.g., drafting manuscript, proofing, submitting to press, copy editing, etc.) that as cutting-edge as the content may be, it will inevitably take a couple years to reach the end-user, the student.1 This is not necessarily a priori, a bad phenomenon, at least not in the sciences.  For example, last week the team managing the Planck spacecraft (which is currently hanging out in L2 orbit) announced that the Universe is about 80 million years older than previous estimates.  This more refined date, while invariably helpful to the astronomical community is probably not a game changing discovery that nullifies the value of current textbooks (that is what standard deviations and sigma’s [σ] are all about).  Similarly most math books are still useful even if they do not include the latest calculation of Pi (π) from Shigeru Kondo.  For more commentary about this, be sure to check out In Defense of Teaching “Outdated” Material by Brett Lunceford.

On the other hand, business-related topics are inherently not scientific (human preferences change, laws of physics do not).  For example, gravity does not change due to seasonal differences in San Diego yet business models must evolve with economic trends and subjective tastes as well as take into account the dynamic impact from season and climate (e.g., when and where to sell winter clothes or advertise the upcoming spring lineup).  Because prices of supply and demand are effected by subjectivity and intertemporal choices (that is, valuation changes based on different points in time), certain business models may not work in other regions of the world (like the Barbie versus Hello Kitty example in Chapter 7).

Thus, I would argue that while general principles of marketing and management found in a standard college textbook may be applicable to many business operations (like conducting a SWOT analysis or how to motivate employees), other academic literature used in business schools have an increased diminishing utility due to the ever changing business conditions of a globalized world.  For instance, some consumer behavior generalizations made prior to 2004 are no longer useful or applicable in an always-on smartphone-filled social networked world filled with groupbuying websites and check-in-based discounts that simply did not exist a decade ago.  And the consumer behavior landscape will become altered in the near-future once more with the proliferation of wearable products like Google Glass.

While it may be useful to know how consumer spending changes over the long-run, for all intents and purposes those pre-2004 academic passages have become intellectual deadweight and probably do not need to be studied in-depth by the average MBA student (otherwise entrepreneurs would spend all their time studying the entirety of the past instead of creating the future).  Of course there is a fine line between learning from past mistakes like Dreyer’s Grand Ice Cream turnaround versus using Fannie Mae as a successful model to emulate (seriously, it was used in Good to Great).  This also raises another tangential issue: the idea that pop business books sold at bookstores which are typically written by experts with actual business experience and are therefore more practical to entrepreneurs and businesspeople versus subscribing to academic business journals which may be more abstract — which is argued at length in a ten year old AMLE journal article (which ironically is still applicable today): The End of Business Schools? Less Success Than Meets the Eye by Pfeffer and Pfong.  But this is a topic for another day.

While the academic writing and publication cycle is a different process then the world of popular media, my response to CV was as follows:

  • Do you want to work in academia?  If you plan to work in a college I recommend trying to get published in the best journal you can so that way you can improve your chances of getting tenure.
  • Do you want to eventually work at an NGO or some non-academic institute or even the private industry?  Then you would probably have to rewrite portions of each chapter to attract and satisfy that target audience.

Furthermore, since he is looking for a career in academia and because the material he is publishing is not necessarily time-sensitive, I would try to get published in the best, most prestigious journal that he can (perhaps breaking his dissertation into a few parts and submitting them to other journals).

Bringing it altogether

How does this apply to self-publication?  As Barney Stinson might say… wait for it.  And now the third person, Brian on TLS writes,

How can you afford to write a book with so much great information and then make it available for free?

Good question.  There are a couple answers to it, but to start with lets discuss opportunity costs.

Consider, for example, free apps or demos available on smartphones.  Why would a developer such as Rovio utilize scarce resources (time, capital, skilled labor) only to give Angry Birds away for free?  (Note: 25% of all global Angry Birds downloads come from China, see Chapter 13.)  Perhaps developers do this so they can get their name and brand out into the public, to build buzz so that they can later sell a future app.  In the case of King Gillette, while he did not invent the freebie business model he purportedly popularized it: he gave away the shaving handles with the intention that consumers would need to buy his blades to be of any use.  However, contra Chris Anderson, even that is arguably not the best utilization of resources either (see The Razors-and-Blades Myth(s) by Randal Picker). 2

I suspect that many aspiring writers never fully recoup the costs of their own self-published works.  In fact, based on my research over the past several weeks, very few self-published authors make a profitable return-on-investment solely from book sales when all costs are accounted for (many more may reach positive territory if consulting and speaking engagements are included).  Not only would you need to generate enough sales to cover the editing, illustrations, typesetting and promotion (like paid ads), but you would also need to generate more revenue than you would have earned in an alternate timeline, one in which you worked a 2nd part-time job instead of writing a manuscript (e.g., if you spent 20 hours a week working on your book unpaid, what other paid activities did you forgo?).3 These are the unseen opportunity costs and while it varies case-by-case, indie writers should do their own due diligence and cost/benefit analysis.  For instance, last summer Suw Charman-Anderson looked at some of the potential earnings and ultimately came to the conclusion that aspiring writers should focus on building content instead of endlessly promoting your first or second or third book.

What about SEO?

My own opinion of SEO is negative.  In theory it is no different than marketing or advertising.  However, if you spend much time in the industry it is pretty clear a number of SEO gurus treat it as a get-rich-quick scheme.  That if you could manipulate passages and content around special keywords, epic floods of traffic will head your way and with it, advertising dollars.  But this is a fallacy called post hoc ergo propter hoc conflating cause and effect.4 Readers want useful relevant content, not spam.  Keywords do not create lasting readership, content does.  If you are following the advice of some SEO evangelist, then others are probably too and thus all of your content is diluted and becomes indifferent mush from the background noise that is all the other like-minded echo-chamber bloggers doing the same thing.

Specifically, consider the opportunity costs of trying to game and trick the continuously changing algorithm systems.  Every minute spent trying to tweak SEO keyword placement is another minute you could have spent creating original content for an audience.5 Which raises another question: if other people like the gurus are telling you what do and say, you are not finding your own unique voice and style — which is a necessary process each writer must undergo independently, one in which there are ultimately no shortcuts.  Thus for some, SEO becomes a self-defeating, downward spiraling process.

At South-by-Southwest (SXSW) held a couple weeks ago in Austin, Guy Kawasaki asked Amit Singhal (a VP at Google) how companies can improve their search rankings.  Singhal’s response was:

“We at Google have time and time again said—and seen it happen—that if you build high-quality content that adds value, and your readers and your users seek you out, then you don’t need to worry about anything else,” Singhal said. “If people want that content, your site will automatically work… you could make a bunch of SEO mistakes and it wouldn’t hurt.”

In other words, original content is king.

Thus to answer Brian’s question, while I won’t go into specifics today, I do have a long-term plan that does not involve the traditional book publishing model in order to recoup all the seen and unseen costs of producing the content.  A hint: while it does involve creating regular fresh content, it does not involve SEO or books sales.  After all, the web copy is free.

  1. For the exact steps see: Waiting for It from The New York Times and The Book Production Process from About.com []
  2. While Chris Anderson does raise some interesting points in Free: How Today’s Smartest Businesses Profit by Giving Something for Nothing I think that his overall thesis is fundamentally flawed as dissected by Fernando Herrera-Gonzalez in Is Our Future Really $0? []
  3. For good measure you should also calculate how many hours were spent searching and adding your book to e-book promotion lists.  Also, an argument could be made to differentiate leisure activities that produce goods and services versus intentional work, but that is the exception to the rule. []
  4. This is similar to the disconnection inherent to Cargo Cultism, see Chapter 20 []
  5. As Senator Dirksen might have said, a minute here, a minute there, pretty soon, you’re talking real time. []
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The art of cui bono and frowning upon conclusions

MG, an acquaintance, writes:

Tim, the reality is that China remains a society held captive to the Chinese Communist Party, who is committed to stealing intellectual property from American entrepreneurs and companies. Doing business with the Chinese is extremely costly and a strategic mistake for most US companies.  My comments are directed to the broader issues of doing business in China and the Chinese government’s posture on its domestic economic policies, its foreign trade practices, and its unprecedented role in global intellectual property theft. These issues have been the subject of a great deal of analysis here in Washington DC (some of which we’ve engaged in).

Ignoring the agitprop boilerplate about the Party (it exists, it will continue to exist), I mention some of those IP issues in a couple different places and explain to the reader that they should talk with an experienced attorney and IT security specialist before setting up shop on the mainland: see Chapter 10 (legal services) and Chapter 13 (internet security).  In fact, there are several cases discussed in detail in Chapter 13 but rather than rehashing those statements, MG raises a problematic issue here: financial disclosure.

For instance, this past week Bloomberg published a story entitled, “Cybersecurity Lobby Surges as Congress Considers New Laws.”  While cybersecurity is a real, present danger for every firm in any country there is a Latin phrase that summarizes the conflict of interest in MG’s position: cui bono (who benefits).  As Bloomberg notes:

There were 513 filings by consultants and companies to press Congress on cybersecurity by the end of 2012, up 85 percent from 2011 and almost three times as many as in 2010, according to U.S. Senate filings. Twelve firms have submitted new registrations this year on behalf of companies including Google Inc. (GOOG)’s Motorola Mobility unit, Symantec Corp. (SYMC), United Parcel Service Inc. (UPS) and Ericsson Inc., the U.S. subsidiary of Stockholm-based Telefonaktiebolaget LM Ericsson.

“Cybersecurity is a lobbyist’s dream,” Rogan Kersh, provost at Wake Forest University in Winston-Salem, North Carolina, who researches political influence, said in an interview.

How do we know there is a conflict of interest in this segment?  CISPA, or Cyber Intelligence Sharing and Protection Act, is a proposed law which would enable government agencies to monitor and share private electronic communication (similar to SOPA).  This past week, Representative Mike Rogers, Chairman of the House Intelligence Committee accidentally tweeted and then deleted that the “House Intelligence Committee received 15 times more from pro-CISPA groups than anti-CISPA orgs.”  This is another example of cui bono as the same organizations lobbying for the bill are the same ones that will financially gain if it is passed.  Similarly, MG works at a firm that gains financially due to the hype and theater surrounding this issue.

This is not to say that hacking and cybersecurity are not real problems that firms and entrepreneurs should ignore.  Rather consider what General Electric Vice Chairman, John Rice recently said, “Despite hacking and other issues in China, foreign companies need to be there, due to the country’s potential as the world’s biggest marketplace.  The greater risk lies in staying away.”

Thus it comes down to who you want to trust: MG, a contractor who financially gains from hyping a purported threat or John Rice, who is willing to weigh risks and potentially capitalize off knowledge and technology arbitrage (e.g., bringing specific technological know-how to .the mainland).

Experienced expat response

Last night I spoke with David Veksler, CEO of CryptAByte and a cybersecurity professional in China who I interviewed for Chapter 13.  He told me in an email exchange that:

“Doing business in China is no doubt risky.  But betting your company’s future on a stagnating domestic markets is risky too.  Every business must balance the risk of IP theft and broken contracts against opportunities from the world’s biggest consumer market and low cost suppliers.

While Chinese companies are well known for intellectual property theft, we must keep in mind that there is no monolithic entity, even within the Party.  There are many competing interests, and each case is different.  By doing their due diligence, it is quite possible to protect one’s interests and secrets while being successful in China.  To claim otherwise is to say that information security is futile.

In the long run, industrial secrets may be impossible to keep, but in any dynamic industry competitive advantage and profits are made in the near future.  Businesses that substitute innovation with copying the competition will not succeed in a competitive market.”

Unconventional analysis

I also reached out and spoke with a patent attorney about the issues MG raises and spoke with Stephan Kinsella (the same attorney in Chapter 7).  Here is what Kinsella wrote in an email exchange yesterday:

“There may be a grain of truth in the complaint about Chinese companies not respecting Americans’ IP, insofar as some Chinese companies seem less willing or able to abide by contractual restrictions designed to keep certain information proprietary. But this danger exists for businesses in all societies, even in the US, especially as employee mobility increases and employees move back and forth between employers, taking ideas with them.

But the bulk of the complaint seems to be focused on American-style IP law, namely patent and copyright, and to assume that patent and copyright are legitimate types of property rights. This is what permits the author to refer to competition by Chinese companies as “stealing”: he has accepted the IP mentality. But copying and emulating others in the process of competing with them is part of the free market. Patent and copyright are anti-property, anti-market systems designed to protect companies from competition.

Thus, the author here is siding with protectionism and against the market, and Chinese companies who compete with American companies because they have relatively fewer IP laws to shackle them, more more capitalistic. It is true that some American companies whose business model depends on the protection from competition afforded to them by IP law would prefer that other countries, like China, also offer them protections from competition. But this does not mean that such laws make sense.”

Secret central plans

Tangentially related to cybersecurity and hacking is the myth of the secret plan hidden somewhere.  Or rather, the myth that hackers in other countries have of the US — that there is a super secret master plan that directs all activities of the federal government.  This was humorously brushed aside last month by Ezra Klein at the Washington Post, who explained that:

I almost feel bad for the Chinese hackers. Imagine the junior analysts tasked with picking through the terabytes of e-mails from every low-rent think tank in Washington, trying to figure out what matters and what doesn’t, trying to make everything fit a pattern. Imagine all the spurious connections they’re drawing, all the fundraising bluster they’re taking as fact, all the black humor they’re reading as straight description, all the mundane organizational chatter they’re reading.

This weekend Reuters published a story about a cybersecurity program at Jiao Tong university with PLA connections (the same PLA unit in the Mandiat report that made headlines earlier this year).  While formal ties with this college may exist, to be even handed, we should keep in mind that Stuxnet and Flame were designed by the NSA and Israel, to take out Siemens-designed software systems located in Iran.1 However, this raises a number of questions (e.g., when is state-sponsored cyber espionage justified) that detract from the immediate issue at hand.

Some cybersecurity threats are real, others imagined.  Before investing in any domicile be sure to do your due diligence for security threats (even the old-fashioned variety) and speak to a lawyer or risk assessment expert to qualify potential threats.  For more on this hype and cybersecurity, be sure to follow Techdirt and Bruce Schneier.

  1. See Flame and Stuxnet Cousin Targets Lebanese Bank Customers, Carries Mysterious Payload from Wired and Resource 207: Kaspersky Lab Research Proves that Stuxnet and Flame Developers are Connected from Kaspersky Lab []
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Publishing and printing content

David Cordeiro is a good friend of mine back in Dallas and an all-around Renaissance man who has raised two very smart sons.  The eldest, Jacob, at the ripe age of 15, just published his first book: Minecraft for Dummies.

His book was recently reviewed over at Connect With Your Teens (here) and he was also interviewed at Cogito (here).  I wanted to congratulate Jacob on a job well-done, look forward to getting your autograph the next time I’m back in Texas.

So remember, it is never too late to begin writing about hobbies and interests you are passionate about.  In fact, I recently learned a coworker of mine in Shanghai (Doug Pancoast) successfully completed a Kickstarter project last month to raise funds for a paper edition of his upcoming book.

Speaking of which, if you are looking for info about crowdfunding in China, here is an excellent overview: Tapping into Crowd Power with Website Finance from Caixin.

And if you are looking for Chinese-to-English or English-to-Chinese language translation services, I mention several in Chapter 2.  A few of the top China-based translation firms are CLS Communication, Sinophone, Yuyi and Berlo.  The top Western-based services are: Mission Essential Personnel, Lionbridge Technologies, TransPerfect and ManpowerGroup (see: The Top 100 Language Service Providers from Common Sense Advisory).

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The market for massive open online courses in China

A quick update and illustration regarding online education in Chapter 9.  South China Morning Post published an article this morning about massive open online courses (MOOCs) which are increasingly popular in China.

If you are from North America you have probably heard about a couple MOOCs including edX and Udacity.  The SCMP piece noted that Chinese University of Hong Kong is “committing” (does that mean developing?) some classes to the Coursera platform, which was founded by two Stanford professors last year.  For reference, Khan Academy is probably the best known as it has served more than 200 million classes and Wendy Bao cited it specifically in her interview as a future model for education in Chapter 9.

While millions of students are enrolled in these classes globally, it is difficult to track and measure the Chinese matriculation in terms of marketshare because, unfortunately the GFW (Great Firewall) blocks most of these sites.

What are the opportunities then?  What can be done about this?  Are there any domestic startups? From the SCMP piece:

NetEase, a leading China-based internet technology company, said that the number of open course subjects had doubled from last year to the present 12,000. It reported 4.6 million subscribers via PCs and smart phones and about one million student visits a day.

However, John Zhang, co-founder of mainland-based online career and recruitment consultancy Guolairen.com said open courses delivered by internet portals simply served as a “media platform”.

In contrast, he said Mooc platforms provided students with a classroom-setting learning experience and opportunities to receive credit and recognition for their work. Already five subjects provided via Coursera had been recommended by the American Council on Education.

“This is a moment of historic significance in higher education because Mooc is not just a complement to existing higher learning, it opens up a new era of online teaching,” Zhang said.

Guolairen.com which unveiled its own Mooc platform in a low-key launch in October, the first on the mainland, has recorded 35,000 enrolments for 200 courses from 100,000 sign-ups.

Zhang said the company would invest US$30 million in its Mooc platform over the next three years, in co-operation with leading international universities such as Harvard, Columbia University and MIT, to provide a specialised platform for career-minded Chinese youth.

Potentially large numbers

Upon looking at the Guolairen ( 过来人) site right now, it is not very obvious that MOOC is a central part of this portal.  In fact, it is currently geared towards job-seekers, primarily for new graduates (including info about cover letters and interviews).  Thus, if 过来人 is the go-to model, it may be too early to declare any domestic market leader yet.

Again, as I remind readers repeatedly (for good reason), it is incredibly easy to get caught up when big numbers are thrown around or when it comes to potential customers in the middle kingdom.

What are some actual estimates for clientele in this segment?  At the tail end of Chapter 9 I note the following data:

Yet for those willing to face these technical challenges, the financial rewards could be lucrative.  According to one recent estimate, up to 380 million people in China will “need high-quality education and training resources across the country” from 2012 to 2017.1 And a large percentage (~30%) of these people are expected to utilize online services and tools, creating a potential market worth an estimated $11 billion in revenue.  However, to temper any get-rich-quick enthusiasm, the amount of investment into Chinese education companies fell to $46 million in 2012, less than a quarter of the previous year.2 Why?  David Chen of AngleVest – a venture capital group focusing on angel rounds – noted that “the timeframe for growing an education business can be drawn-out, and a challenge for fund managers who have to achieve returns by a specific date.”3 Thus once again, while there is potential revenue there is also required patience for returns on investment.

In addition to infrastructure issues another challenge that MOOCs may face are cultural stigmas attached to learning from non-traditional, non-accredited sources (also discussed in Chapter 9).  This may change though, as the country develops and the middle class begins to seek ways of self-help and autodidactism (e.g., their upcoming Wikipedia generation).  For what it is worth, my current employment is involved on the periphery of this industry, though not at the scale of an MOOC though.  If you are looking to work in this area I would keep your eyes open and try to attend events like 500 Startups or Barcamp Shanghai to find young techy entrepreneurs wanting to create a domestic MOOC.

Odds and ends

I mentioned it several times in Chapter 9, but there are roughly 300 million English learners in China primarily because of institutional inertia at this point (e.g., taught from primary school on up).4  And while there has always been some amount of resistance to teach this subject due to factors like nationalism, over the past few weeks I have noticed a number of op-eds published in a few national newspapers which for me, is a first.

For instance, about 10 days ago, Zhang Shuhua, a CPPCC deputy and head of the Intelligence Research Committee said that Chinese education was facing an unprecedented “destructive” crisis because of the English language requirements.  Another more recent one is from today’s China Daily which discusses reform and removing English requirements from core curriculum and examinations for college majors that do not use it (such as Chinese literature researchers).  While this probably will not be changed over night, it is something to also keep you eye on.  Or maybe you can capitalize off this nascent sentiment and create training centers for those niches.

Via Sinocism

  1. Tencent Eyes Growing Online Education Market in China from Caijing []
  2. China Investors: We Don’t Need No Edukation from The Wall Street Journal []
  3. Ibid []
  4. Chinese Learn English the Disney Way from The Wall Street Journal []
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Where should you buy or sell online in China?

CO, an old friend from grad school sent me this (slightly modified) email this morning:

I work a side job for an endurance coaching service.  We are sponsoring a few races and were looking to include the laces as freebies in race packets.  I may be in the market for about 5,000 pair of bungee shoe laces and found some interesting prices on Alibaba… I’ve never used Alibaba or even heard of it prior to a Google search.  Do you have any recommendations I should look into if I got serious about purchasing?

Unless they have lived in China before, most foreigners are unfamiliar with the Alibaba Group, even though its subsidiaries (Tmall, Taobao, Alibaba) collectively sell more merchandise (by value) than eBay and Amazon combined.  To quickly understand the differences: Alibaba is B2B, Taobao is C2C and Tmall is B2C.

In Chapter 12 I mention that:

Altogether in 2012, e-commerce revenue totaled $196 billion.1During the 2012 Single’s Day (November 11th or 11-11) on the mainland, Alibaba Group e-commerce properties (Tmall and Taobao) purportedly broke the single day sales record with over 100 million visitors and $3.03 billion.2

This is not to say that there have not been significant hurdles that Alibaba had to overcome to reach these new heights.  Two years ago the company was rocked with the revelation that 2,236 sellers had defrauded buyers.  As noted then by The Economist, Alibaba’s reputation was on the line so a slew of personnel responsible were axed and new quality control mechanism were put in place.   And because of its recent concerted efforts to crack down on fraud, Alibaba was removed from the “Notorious Markets” list maintained by the USTR regarding the sale of counterfeit goods.

So to answer CO’s question, while I cannot vouch for all of the material sold by sellers on Alibaba sites, I can say that I usually trust the built-in rating system more today than I did  four years ago.  I am not saying it is perfect or that there is no longer  fraud, but many of my friends (both local and expat) regularly buy products from the e-tailers, including shoe accessories.

Selling to the mainland

In Chapter 7 I spend a bit of time discussing one way foreign firms can sell into China with ExportNow, a turn-key solution that gets your product onto Tmall, to be sold on the mainland.

While I won’t rehash that chapter, I wanted to point readers to a new report published this week by McKinsey & Company regarding e-commerce growth on the mainland.  According to the write-up from the WSJ:

China’s e-commerce market, largest in the world behind the U.S., is booming, with sales expected to reach $420 billion to $650 billion by 2020, up from $190 billion to $210 billion in 2012, according to McKinsey. Around 40% of China’s consumers wouldn’t have made purchases if not for the option of e-commerce, added the report, which used data provided by a major online company to analyze online spending from consumers in 266 cities.

The persuasive power of e-commerce is really playing out with shoppers in China’s smaller cities, where retailers like Swedish apparel giant H&M haven’t expanded. Consumers in so-called fourth-tier cities, like Wuzhou in China’s eastern Guangxi province, are spending as much as 27% of their disposable income online. That compares to 18% of disposable income for big-city dwellers, the report said.

That last statistic is the one that I will highlight to friends, family members and clients.  Consumers in fourth-tier cities are spending more than a quarter of their disposable income online for the same reasons that their peers do so in other countries, lack of local consumer options.  Yet before thinking you may strike a goldmine, consider that the average salary in these smaller cities obviously varies on age but is substantially less than Tier 1 cities which are roughly $9,000 a year.3 And Wuzhou — far from being an Alpha city, has roughly the same size of population as Bengbu, a city I lived in for more than 2 years.  In fact, the average annual salary in Bengbu is less than $5,000.

So keep that in mind before trying to sell boat loads of diamond and platinum coated cutlery nationwide.

Also, if you want to try selling through Taobao (which is C2C) here is a simple, English translation of a step-by-step guide to do so.

Be mindful that if you are looking to sell bulk items into China, you may eventually be able to partner directly with Alibaba.  As I mention in Chapter 3, Jack Ma (the founder of the Alibaba Group) announced that “Tmall will work with [a new customized] center to build a database of international suppliers that Chinese consumers are most interested in.  It would then collect orders to make group purchases.”4 The new system is expected to be rolled out within the next two years and part of the domestic plans is to deliver anywhere on the mainland within 24 hours.5.

Thus, in addition to using ExportNow or hiring someone to list it on Taobao, perhaps you should look into finding an Alibaba account executive to connect your inventory and supply chain into their new streamlined system.

Update: David Schatz sends me this relevant new story from the latest print edition of The Economist: E-commerce in China – The Alibaba phenomenon

[Note: this is not an endorsement of any particular service, I hold no financial or equity stake in any of the aforementioned services or companies.  These were used as examples and illustrations.]

  1. Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg []
  2. See Black Friday in Red China by Evan Osnos and Singles Day: China’s online shopping holiday from the Associated Press []
  3. Guangzhou has highest average salaries for cities in mainland China from South China Morning Post []
  4. Tmall Plans to Link China’s Consumers with Foreign Goods from Caixin []
  5. The plans are being rolled out together however the domestic 24-hour delivery service is expected to be completed within 1 year.  See 马云1000亿建电商物流 目标全国任何地区24小时内送达from ifeng []
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A long strange trip

What began initially as leftover tidbits of research written-up for another persons book about China, momentarily morphed into a newsletter for some potential overseas investors and ultimately culminated into a six month long, part-time endeavor that resulted in my first book.

Since “project-it-is-almost-really-finished” began in mid-October I moved apartments twice in Shanghai, broke a computer, flew across the country, took trains across the country, flew back and forth across the Pacific, nearly cracked my chest and came down with about a half dozen ailments.

There were also other personal trials and tribulations but thanks to the encouragement of my friends, family, coworkers and most importantly naysayers (no better motivation than people telling you, “you cannot do it”), I can finally look my old homeroom teacher in the eye (just the one) with confidence.

Where credit is due

While I mention them in my acknowledgements, I would like to thank the following people in further detail:

Mark Deweaver — it was fact-checking I did for his own groundbreaking book that initially spurred my interest in writing a potential manuscript.  His several hundred (who’s counting) email exchanges provided the basis and direction for the project.  He was also kind enough to write the foreword to the book.

Matt Garner — one of the smartest and well-read persons I have ever met (if you think I cite a lot of references in my book, wait until you meet this walking encyclopedia).  I met him this past summer while working at the American Chamber of Commerce and after reading an early draft of his upcoming book about marketing in China, that little light bulb dinged and the rest is history.  He also has a cooking show coming out, more on that at a later date.

Yanli Xiao — she acted as my personal editor, smoothing out grammatical and syntactical issues as well as providing much-needed Chinese perspective and go-to devil’s advocatery (sic).  Most people do not like being spammed draft-after-draft with revisions, she is the outlier (as is Raffael Danielli).

KY Leong — he provided several additional Chinese anecdotes and backstories that should enable Western readers to better grasp the nuances of Chinese culture (especially regarding guanxi).  Coupled with his economic training and diligent proof-reading, this book is much better off because of this.

Bill Bishop — does the man exist or is he simply a transcended bot powered by IBM Watson?  A few weeks ago when I interviewed Shaun Rein, he asked me “you mentioned Bishop in your acknowledgements, how do you know him?”  I chuckled because like most expats that spend any amount of time in China, you will probably come across Bishop’s fantastic Sinocism newsletter.  He even provided me with a thoughtful quote (in Chapter 12).  I am not sure how he does it, but Bishop manages to read and comb more China-related news that probably anyone on the planet.  Each day he publishes a curated list of 25-some-odd stories, many of which come from undervalued niches (like China Accounting Blog and Li-Ning Tower) that are now must-reads.  I probably would not have been able to complete this project solo if it had not been for this resource (be sure to donate to keep his free newsletter going).

My mom and sister for coming to Shanghai 18 months ago to help an ill son and brother.  And the rest of my nuclear family for fattening their kin up afterwards and teaching him the finer points of being Texan once again.

The Veksler’s, all three of them now (congrats!), for putting up with you-know-who.

Geoffrey Plauché, for giving me back my geek license and answering all of my tech support and Amazon-related questions.

And of course, for all the lunches, dinners, water-cooler-discussions, coffee breaks, phone calls, emails, text messages, Skyping, QQing, random run-ins; many more thanks to all the important people I mention in the acknowledgements who made this book possible.

Notes in the margin

The web-based version of the book is up top in a permanent static page (or you can grab a digital copy off Amazon).  The versions are nearly identical and up-to-date as of 12 hours ago (in addition to clearing out all my China-related RSS feeds, I intentionally waited for the Sinocism newsletter today before submitting the final draft).  One small formatting error is visible in the Kindle version.  There are a couple sentences in a few chapters that should have dashes or list bubbles but unfortunately they came out as ] brackets instead.  If there is a second edition in the future, this will be fixed.  The web version shows them correctly.

Speaking of Kindle, there is a new plug-in that Amazon just released for WordPress users.  I have tested it and it works but I may not use it for a couple of months due to  exclusivity issues with the KDP program.

Also, yesterday friend asked me how many Chinese names were changed to protect their identities.  At least 7, all of the doctors I spoke with in Chapter 19 as well as the Nanjing distributor.  Elsewhere, the TravelSky engineer and travel agent.  Family names are (mostly) correct.

Please let me know if you have any comments, suggestions or feedback regarding the book.  And be sure to bookmark the site, grab the RSS feed or add me on social media.  I plan to continue using this site as a venue for interviews, news and views related to East Asia and perhaps beyond.  Be sure to check back on a regular basis.

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Foreword

[Note: below is the foreword from Great Wall of Numbers]

“Grey,” Goethe tells us, “is all theory, and green the golden tree of life.”  To really understand something, we need more than generalizations and a priori arguments.  We need “color.”

Unfortunately, most of what is written about China these days falls into the “grey theory” category.  Countless pages have been devoted to the China “model,” China’s “rise,” or even its “coming collapse.”  But little of this gives us any real feeling of what it’s like to live and work there.  Often we can’t see the trees for the forest.

This book is different.  It looks not at the “big picture” but at the myriad fascinating details that make it up.  We learn not that China will be “number one” but rather that Shanghai is home to the world’s largest skateboard park.  Not that China has “a billion consumers” but rather that Chinese college kids love NBA apparel.  Not that China is a “locomotive for the world economy” but rather that convenience stores in Bengbu, Anhui Province carry US-made razor blades.

There are less prosaic observations as well.  The Chinese are big Angry Birds fans, for example. China now accounts for 25% of worldwide downloads.  Recently Rovio, the maker of this popular app, even went so far as to turn Shanghai’s skyscrapers green to help launch a native version of its product.

These are exactly the kinds of details that matter if you are trying to formulate a business plan for the China market.  And their relevance goes well beyond the particular industries cited.  For the US exporter, for example, the important point isn’t that there’s a market for NBA apparel and razor blades.  The takeaway is that in China—a country awash in knockoffs—a “made in USA” label signifies a high quality product.

Indeed this book is full of interesting business ideas.  It looks at opportunities in everything from college textbooks to assisted living facilities, from fast food to Android apps.  China, it turns out, is not so much the land of a billion consumers as it is the land of unexplored niche markets.  The growth of the Chinese economy in general—and that of its middle class in particular—has created many surprising new worlds for entrepreneurs to conquer.

Naturally, there are risks to consider as well.  Local partners or employees may expropriate your intellectual property and set up competing businesses.  The regulatory environment can be full of nasty surprises, particularly for those lacking the right local connections.  Profits may be difficult to repatriate.  Again, readers will find a wide range of examples that help to turn China’s “unknown unknowns” into “known unknowns” if not “known knowns.”

As you begin to appreciate all this local color, some fascinating big picture issues come into focus as well.  Consider the potential of 3D printing, for example.  This new technology makes it possible to produce plastic products directly from a computer file, using special printer heads that deposit multiple layers of plastic to produce a finished product.  These machines are now available for as little as $2,199.

This process will enable many manufacturers to by-pass the supply chain altogether, going directly from idea to inventory in a single step.  It’s easy to see the advantages for foreign firms seeking to market specialized products in China.  The manufacturing could be done anywhere and the production runs kept arbitrarily small.

The implications for the US-China trade balance are even more important.  Once this technology is in widespread use, it seems likely that important parts of the Chinese manufacturing machine—e.g. manufacturing toys for export—may either be shut down entirely or have to be converted to serve local markets.

Learning about opportunities in particular sectors leads naturally to an understanding of much larger issues that “big picture” analysts easily miss.  Unlike the common practice of looking at China from “a thousand feet up,” a ground-level perspective provides insights into both the idiosyncratic features of specific industries and the overall macroeconomic situation.

Thus, this book will be useful not only to those looking for Chinese markets for particular products and services but also to anyone with a general interest in learning more about the country.  Whether you are looking for new worlds to conquer or just curious about the China story, this book will help you move beyond the “grey” plane of theory and abstractions into the verdant realm of economic reality.

Mark DeWeaver is the founder of Quantrarian Capital Management and author of Animal Spirits with Chinese Characteristics

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Introduction

[Note: below is the introduction from Great Wall of Numbers]

It has become increasingly difficult to separate hyperbole and exaggeration from the story of China’s development over the past three decades.  This book was written in part to highlight both the opportunities and challenges facing entrepreneurs, companies and businesspeople wanting to do work in China.  I try to be as evenhanded and balanced as I can – this book vilifies neither bulls nor bears.  Rather it serves as a guide to those willing to take risks.

In short, this book is a testament to human ingenuity and entrepreneurship.  For those looking for a particular bias one way or the other, I point to Voltaire’s germane quote, “Le mieux est l’ennemi du bien” or in English, the best is the enemy of the good.

There is no shortage of excuses to invest or not invest in any domicile – irrespective of the political climate, level of debt, who won the World Series or astrological sign – yet it is counterproductive to be a fair weather entrepreneur.  Or rather, it is incredibly easy to complain and do nothing.  Consuming doom, reckoning and gloom, preparing for prophetical collapses that are always around the corner – fear sells and will always be a popular past-times for those wanting a complete reboot, revolution or some Pyrrhic nirvana.

Yet as I try to illustrate in the following pages, you do not have to be born into a family of entrepreneurs to have the desire to start a company and manage it profitably.  You just have to be open to new ways of doing business, even if the conditions are not ideal, perfect or “the best.”

And despite the eye-catching apocaholic analysis from those who have been predicting doomsday and eventual collapse – the Chinese, as I explain throughout, are by and large a hard working lot that have endured nearly every conceivable adjective.  They are constantly looking to improve their living standards, aspiring to the quality of life in the West by learning to uncover the secrets to American and Western innovative prowess.  In short, they are looking to provide a better future for their progeny.  Thus opportunities abound for the entrepreneurial spirited.

The book includes dozens of stories, anecdotes and interviews about experiences, opportunities and challenges on the mainland.  I should point out that because of the dynamic nature of all the industries I delve into, the data and statistics cited will become quickly outdated.  This is not a bad trend itself but rather goes to show you the relative vibrancy and opportunities of the creative destruction process which take place in any open marketplace – even a relatively encumbered one on the mainland.

Throughout the book I mention friends, colleagues, experts, professors, businesspersons, former students and acquaintances.  This is not an explicit endorsement of their opinions or services but rather serves as an on-the-ground reference point.  Nor by providing me with quotes do they endorse this book or my opinions.  Furthermore, in the interest of financial disclosure, I do not currently have any equity positions in the firms or companies discussed throughout.

In addition, as Sagan, Russell and Oppenheimer are all believed to have said, “keep an open mind – but not so open that your brain falls out.”  Or as Dean Stamatis recently reminded me: “figures do not lie, but liars do figure.”  In fact, one alternative working title I had considered was “seek truth from facts” (实事求是) a historical expression that dates back to the original Book of Han some two millennia ago.  Thus even though I cite hundreds of references, be skeptical of any claims, especially when risk and uncertainty is involved.  In short, be sure to do your own due diligence.

And as a close friend once told me when I first moved to the East, for those unfamiliar with Asia and specifically China, it is better to know something than know nothing.  That is what this reference guide is for, look a little before you leap into the unknown.  To those trying to find business opportunities in the likeliest and unlikeliest of places: jiayou, jiayou!

Tim Swanson

Shanghai, March 2013

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Acknowledgements

[Note: below are the acknowledgements from Great Wall of Numbers]

I would like to thank my colleagues at the American Chamber of Commerce in Shanghai: Julia Bakutis, Kimberly Chang, Raffael Danielli, Matt Garner, Chia Lian, Eric Meng, Veli-Antti Ruismäki, Miles Vaughn and of course Wally Yu.  Also thanks to my colleagues at EF: Courtney Conching, Ian Flores, Fabian Garcia, Bonnie Gu, David Hopcraft, James Miller, Keegan Mulaney and Neo Wang.  Special thanks to Kevin Ciu, Mark DeWeaver, Jing Gao, K.Y. Leong, Vincent Lu, Geoffrey Plauché, May Wang, Yanli Xiao, Jason Xu and Haifen Yang for their comments and encouragement.

I would also like to thank entrepreneurs, professors, experts and businesspeople like, Eric Azumi, Wendy Bao, Nira Binderer, Bill Bishop, Yolanda Bo, Andrea Chang, Larry Chang, Adam Clemans, Colin Colenso, Harry Ding, Lawrence D’souza, Scott Freeman, Kirt Greenburg, Dan Harris, Gary Isse, Richard Johnsson, Alan Kahn, Stephan Kinsella, Maggie Li, J.J. Liu, Shawn Mesaros, Pieter Nooren, Richard Qi, Jianchu Qian, Shaun Rein, Adam Remington, William Song, Dean Stamatis, Cathy Su, Xuerong Su, Pat Sullivan, David Tang, Mark Thornton, David Veksler, Glenn Wilkinson, Becky Wu, Fred Xu, Jenny Xu, Kyron Yang, Charles Zeng, Lin Zhang, Peter Zhang as well as all of the other unnamed sources and individuals who offered their time to provide quotes and interview talking points.  The names of several sources were changed to protect the privacy of the individual.

In addition, I would like to thank my family for their support and assistance during this past year as it could not have been done with them.

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Chapter 1 – Potential market size

[Note: below is Chapter 1 from Great Wall of Numbers]

Should you and your company come to China?

There is no simple clear-cut answer for everyone.  As you will find out, each market segment is different from the next.  Each faces a wide variety of domestic competition and regulatory hurdles.  Throughout each chapter I attempt to do cursory due diligence by looking at current market statistics and use anecdotal stories to illustrate both the opportunities and challenges of setting up shop on the mainland.  Along the way you will hear the experiences and opinions from a number of experts through a variety of tapped and untapped revenue sources.

For example, Jim Chanos, founder of Kynikos Associates, is a New-York based hedge fund manager and short seller.  Among other cautionary tales, over the past several years he has repeated one particular story about China.  A story of two American men, who spoke Chinese, made the right connections, did their due diligence and yet barely got out of China with their shirts still on.1

His is a shrewd and important tale – a twist of caveat venditor.  And despite their acumen this kind of harrowing story can arguably happen anywhere.  Moreover just like the US muddled on despite the 2008 financial purges and Ponzi schemes such as Bernie Madoff’s, so too will China lumber on irrespective of its booms, busts, frauds and scandals.  This is not to say there will not be large purges of misallocated, unproductive assets.  As Ludwig von Mises might have said, a priori you can never buck market calculation and market corrections.2  Yet this is not to say the Chinese industrialization story will collapse or meltdown either.

A potential market for revenue generation

With more than 1.35 billion people, China is the most populous country in the world and will remain so for at least another 15 years.3

Yet just because there is a large potential market does not mean you can magically sell a $1 cup of coffee to everyone and instantly become nouveau rich.  Or as one of my sarcastic students told me years ago: in China, if you scam everyone in the country just once, you can become a billionaire.  More to the point, as Matt Garner discusses in his forthcoming book on marketing in China, the domestic home shopping industry has been filled with these types of cons and frauds (e.g., buying a gold brick – as seen on TV – yet receiving a flimsy cardboard cut-out in the mail).4 And as I discuss later in Chapter 3, consumers are becoming increasingly savvy and vigilant to such get-rich-quick scams.

So how big is the actual market for goods and services?  Following Deng Xiaoping’s “reform and opening up” in late 1978, GDP has grown from approximately $10 billion to over $8 trillion.  At the same time, one estimate shows that consumer spending as a percent of GDP has fallen from 50% to just under 35% over the past 15 years; yet a newly revised government report suggests the number may be much higher at 55% and another estimate is even higher at 65%.5 Either way, there are still growth opportunities if you know where to look and are willing to take risks.  After all, 35% of $8 trillion is still much larger than 65% of $1 trillion let alone $10 billion.

What does this mean for Western companies, your company?  The US is the 2nd largest exporter and according to the Economics & Statistics Administration exports reached a record $2.1 trillion in 2011.6  In fact, according to BusinessWeek and Bureau of Economic Analysis, September 2012 was another record month for exports, hitting $187 billion.7 Overall exports rose an additional 4.4% in 2012.8 Yet despite the fact that as of 2012, roughly 95.5% of all potential customers (e.g., world population sans the US) and 67% of all purchasing power reside outside of the US, relatively few US firms currently export.9

Moreover, as I discuss later in Chapter 7 according to the US Department of Commerce, as of 2010 in terms of US Small & Medium Enterprises (SME):10

  • Only 1% of US SMEs export
  • And only 10% of those that export, export to China

There are a number of reasons for relatively low participation including nebulous legal frameworks.  But it is also surprising because despite the readily accessible markets made available due to standardized shipping container sizes, liberalized trade agreements, ISO certifications resulting in ‘best practices’ and overall streamlining of supply chains, merchants across the globe – and in the US – have never had it easier than today.11

Yet if you are reading this, odds are your company does not export either.  In fact, depending on the source, up to 95% of US firms simply do not even have an international market strategy.

More to the point, on top of the approximately 30,000 SMEs that do export to China, typically only the top 500 US firms generate significant sales outside of the US.  Why do you and your company not export?  As you will find out, your brand is probably considered a step-above locally made goods and services.  In fact, as I note later in Chapter 4 and Chapter 11, luxury goods and services are one increasingly large source of income for US firms like Howard Johnson hotels and Coach handbags – both of whom have taken advantage of the local market perception that “foreign” is better quality.  Similarly, in Chapter 16 I also discuss how fast-food chains like KFC and Starbucks use a number of logistical and perception strategies and now generate more revenue in China than anywhere outside the US.  Can your company do the same?

In December 2012 I spoke with Kirt Greenburg, then-director of the SME center at the American Chamber of Commerce in Shanghai.12 According to Greenburg, “one of the reasons that there are statistically few SMEs that export is because the US has such a large domestic market capable of sustaining a large pool of local competitors fueled solely by domestic trade thus US SMEs can usually grow quite large just by focusing on North America.  And coupled with obstacles such as known regulations and fears of unknown hurdles, this has prevented many SMEs from looking at ways to export.  Yet there are enormous opportunities in China as it is still a large growth market.”

There are also a large number of resources and support networks.  For instance, “there are several SME centers at other Chambers including the EU and New Zealand that provide open research, business connections and even resources to aggregate and leverage databases from both governments and NGOs.  For example, the SBA program offers a $10,000 grant to US SMEs to ‘go and explore’ in China.  Yet few people, including myself until recently, even knew this type of program exists.  Many SME centers, including ours, also includes both manpower and physical space to help enable entrepreneurs and businesspeople to utilize our knowledge and business connections throughout the day.  In fact, our SME center really could be described as a marketplace for ‘best practices’ and ideas in general.”  Later in Chapter 15 and 20 I detail some of the other subsidies and perks that some Chinese municipalities and trade zones offer to foreign firms, specifically software and engineering companies.

In terms of why there is a relatively low percentage of SMEs that export, Greenburg noted that, “anecdotally it can be a laborious task to find domestic partners, domestic customers and domestic vendors that you can immediately trust on the mainland.  Vetting a partner can take a long time because there is no Better Business Report or D&B report.  Yet through the Foreign Commercial Service, this task may become relatively easier in the future.  Furthermore, one of the reasons why there may only be 1% of SMEs that export in general is that there are a large amount of SMEs in the US and other countries that do not have an easily exportable service, such as one-on-one consultations at dentist offices, barbershops or music lessons.”13

This absence of independent business monitoring may present an opportunity for foreign firms that specialize in business forensics and customer reporting to provide similar services on the mainland.

This is not to say that in a role reversal, exporting products to the US is any easier.  For example, Greenburg thinks “regulations for foreign firms exporting to the US would probably be just as problematic in some cases as they are in China.  Furthermore, most commerce in the US is actually conducted at the state-level, which requires additional legal knowledge just as it does at the provincial level in China.  Yet, one of the issues that SMEs – both foreign and domestic – have to take into consideration on the mainland is the grey regulations that vary from city to city.  Whereas there is an income tax levied by the federal government on all US citizens regardless of location, in China, municipalities have considerable leeway and flexibility to implement national laws.  For example, last year a new social security tax on foreign workers was passed at the national level in Beijing, yet the Shanghai municipality and many others have not begun levying the tax yet.”  On a national level this specific law went into effect on October 15, 2011; I discuss tax issues later in Chapter 10.14

Market access

According to the US Department of Commerce, 91% of world GDP (sans the US) is generated by countries with whom the US does not currently have a Free Trade Agreements (FTA) with, yet FTA countries alone represent 41% of total US exports.15 While there is currently no China-US free trade agreement, there have been numerous bilateral agreements reducing trade duties and restrictions.1617 Furthermore, US firms have invested more FDI into China than any other developing country this decade and the two countries (sometimes referred to as Chimerica or G2), with $446.7 billion in bilateral trade in 2011, are among each other’s largest trading partners.18

After Canada and Mexico, China is the 3rd largest destination for US exports.  In 2011, US exports to China hit a new record of $105.3 billion.  Among the largest products that US firms collectively exported were agricultural, as I discuss later in Chapter 3 (in 2011, China imported $20 billion in US agricultural products).  And due to the domestic demand for safe and reliable products, Chinese consumers are increasingly turning to imported products (also discussed in Chapter 3).  Thus even if you have not looked at the market, there are still untapped opportunities on the mainland, including sports consulting (Chapter 8), software development (Chapter 13) and entertainment (Chapter 14).

Big hurdles

Towards the end of the book I describe at length some of the bigger macro hurdles that foreign and domestic firms will face on the mainland.  There are specific industries that will be more difficult to operate in than others.  For example, at a national level Chinese policy makers consider roughly a dozen areas to be key strategic industries.19

This includes Energy, Media, Telecommunications, Railways and Finance.  As a consequence the national government attempts to foster and nurture domestic firms at the expense of international and foreign competition.  All told there are roughly 110,000 to 150,000 state-owned enterprises (SOEs) supported and managed by townships, cities, provinces and nationally within China (down from 1.2 million in 1995).2021 They contribute to roughly 62% of the annual GDP.22

In addition, roughly 100 SOEs such as China Mobile, Xinhua and Sinopec are afforded the equivalent of VIP status, granted financial priorities and regulatory leeway.

Yet even within these government champions are opportunities for outside, international participation.  While most Fortune 500 multi-national companies have permanently established a presence on the mainland, there is still ample room for foreign SME’s and consulting firms to participate in a bevy of other industries such as education, social media, athletics and even in government procurement.  In fact, in 2011, government procurement amounted to about $179 billion.23 And following a series of reforms, foreign firms are now permitted to bid on government procurement projects.  With that said, China is currently not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA).24

So if you are a bidder in a procurement project, be cognizant and aware that you will be unable to make a case and petition the WTO in the event that issues arise.25

With a $8.28 trillion economy, despite a seemingly Byzantine regulatory climate, capturing even a small portion of market share means there may be opportunities and rewards for those creative and enterprising enough to locate them.26 As I note later in Chapter 5 and Chapter 10, policy uncertainties and hurdles will create challenges for both foreign and domestic companies.

For example, China Securities Regulatory Commission (CSRC) – the equivalent of the SEC – routinely compels a dozen or more SOEs to prop up the stock market, to prevent the Shanghai stock index from falling below 2000; which it momentarily did for the first time in four years in November 2012.2728 While this revelation is neither new nor proprietary it creates a dilemma for investors who are “more concerned with the decisions of regulators than the valuation of companies.”29 This would be akin to refocusing on (and lobbying) referees at a sport event rather than the actual game.

Another requirement for nearly all imported goods is obtaining the CCC or China Compulsory Certificate.  This mandatory CCC mark, which typically takes 4-8 months to receive, is administered by the Certificate and Accreditation Administration, which maintains a list of products that are required to meet this certification process.3031 Failure to obtain and complete the application ends with a denial of market entry.  Another issue is proper labeling and packaging.  For example, beginning April 2013, all imported medical devices will be required to have packages and labels written in Chinese.  Failure to do so will again prevent the manufacturer and sponsor from being able to market their products on the mainland.32

Taxes and duties are another issue that is sometimes overlooked.  The General Administration of Customs (海关总署) periodically revises a list of products and their corresponding tariff rates.  For example, as of April 15, 2012, while some goods are taxed at 10% (e.g., food, beverages, leather garments, furniture), others are levied up to 50% (e.g., cosmetics, tobacco, alcoholic beverages) and still others such as luxury goods are charged a 60% tax rate.33 In some cases if you import goods worth less than 5,000 yuan ($800) then you may not have to pay a tax on them.34 One personal anecdote involves sending jewelry (gold and diamonds) from the US to China via FedEx in December 2011.  The jewelry was held up in customs at Shanghai’s Pudong airport because of import restrictions; I was required to pay a duty tax due to its value exceeding the 5,000 yuan limit.  And as I note later in Chapter 11, it is these types of taxes which incentivize Chinese consumers to travel overseas to buy goods which can then be claimed as “personal belongings” upon return, thus removing tax liabilities and saving money.  There are also 15 special economic zones (经济特区) also called free-trade zones that are allowed to set their own import regulations and duties and as a consequence are relatively popular for establishing joint-ventures and foreign trade operations.3536 In addition to areas such as Shanghai’s Waigaoqiao and Ningbo’s free trade area, these zones also include the special administrative regions (SAR) of Hong Kong and Macau and are credited for the subsequent economic booms in each of the mainly coastal cities.

Another nebulous challenge which varies from location to location is transaction costs involving government and quasi-governmental support and approval.37 In some industries in order to start-up a business you may not only have to acquire businesses licenses but also directly work with governmental bodies to set up operations.  In some instances you may even need to have a government policy and market policy, or in other words, you need to have resources and labor to interface with policy makers as well as with market participants.  There is no set generalized rule about these transaction costs and thus discussing these issues with a lawyer is highly recommended since the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act are both actively enforced (see Chapter 10).

Yet despite all of these known hurdles (more of which are discussed in later chapters), and what your due diligence may discover, there still may be a profitable case for doing business on the mainland.  Failure to do so, your firm could follow the unfortunate footsteps of Caterpillar, who recently took a $580 million write-down at a subsidiary that acquired a Hong Kong listed firm (ERA Mining) off an acquisition price of $654 million.3839

Yet for perspective, China is the world’s largest car market, the largest motorcycle market, the largest smartphone market, the largest art selling market, the largest online game market, the largest population of online shoppers and even the largest gambling market.40 How large are these potential markets?  For instance, in 2009, China surpassed the US as the largest vehicle market globally and approximately 19.3 million automobiles were sold in China in 2012.41 By 2015 it is estimated that the Chinese car market will be larger than the US, Japan and Germany combined.424344 And by 2016, McKinsey & Company – a global management consulting company – estimates that China will surpass the US as top luxury car market.45 There are now 240 million vehicles on the mainland and 20 million more vehicles will be sold this year.46 Furthermore, according to Michael Dunne, an Asian-based car market consultant, “[of] the projected 2.3 million American-branded cars Chinese will buy this year [2012], an astonishing 96% will be made in China.”47 And this growth rate has largely occurred in less than a decade.  For example, in 2004, the market for Land Rover vehicles on the mainland was a mere 1% yet has subsequently surged to 20% of Land Rovers total sales last year.4849 There have been similar growth rates in other areas.  For instance, with 290 million smartphone owners, this market itself is expected to double in size within the next year.50 Can you provide goods and services within these segments?

Local fluctuations

One term you may see throughout the book is the yuan (renminbi or RMB) which is the name of the currency in China.  As of March 2013 approximately 6.22 RMB was equal to $1 USD.  How often does this fluctuate?  In the first half of 2012 it depreciated by almost 1.5% but in October 2012 it gained back .75%.  While all major currencies in the Post-Bretton Woods monetary system fluctuate relative to one another, the key takeaway is that the RMB itself is not free-floating.51 It is managed on a band peg set daily by the People’s Bank of China (e.g., the central bank pegs the rate each day and the currency can move up to 1% in either direction).52

What are the average annual salaries of Chinese residents?  As I noted later in Chapter 15, according to 2011 official figures, the per capita disposable income for rural residents was $1,100 and their urban counterparts was $3,430.535455 But there is also a significantly large outlier at the top-end, according to Hurun’s 2012 list of richest people in China there are now more than a million USD millionaires on the mainland, a number that is estimated to increase to 1.9 million by 2015.5657  And according to a recent Boston Consulting Group study, the number of affluent Chinese (those with disposable incomes of at least $20,000 to $1 million) will double from the current 120 million to 280 million by 2020.58 While these numbers will probably fluctuate and may even dip due to fallout from real-estate bubbles, this suggests that there are potential customers at various price points your company is looking to sell at.

I should also point out that I purposefully avoided analyzing most industries that are nationalized as well as those directly affected by the recent investment business cycle, specifically residential real-estate and commodity exchanges.

Gaining and trading guanxi

While I mention it in passing several times, guanxi (关系) is a unique cultural phenomenon involving personal connections and trust networks and I think Matt Garner describes the phenomenon most concisely for Western audiences:

[Guanxi is] one of the big cultural disconnects I would always see between American and Chinese business people. Americans are results oriented. But Chinese are relationship oriented.  When the Americans come they have a specific set of objectives to meet.  They come to the table with those goals and hope to meet them in a few days.  Asians, on the other hand, typically want to first make the relationship.  It’s like a marriage arrangement. You want both sides to know and trust each other first.  This is especially true in China since contract enforcement mechanisms in most of the country are still developing, thus making trust and mutual respect mission critical.  A first round negotiation is more of a meet and greet than anything that gets tangible results.59

While building rapport and trust is important for all long-term business relationships in any country, guanxi is a unique cultural trait that is established first before any business transaction is carried out.  Moreover, such a relationship (guanxi) can only be built and reinforced over time through repeated virtuous performance, and not easily given to quick introductions and a handshake (as is the practice in the West).  Hence the seemingly endless rounds of elaborate dinners, karaoke nights and mahjong sessions to establish and maintain guanxi.  For example, Anschutz Entertainment Group (AEG) is an American company that operates the Staples Arena in Los Angeles and the Mercedes-Benz Arena in Pudong, Shanghai.  As part of their long-term expansion plan they have hired local salespersons and managers to build guanxi and relationships with local suppliers and officials.  In doing so, they can cement mutual trust among all stakeholders and provide a communication channel for all future business.  In addition it is an expandable resource as whomever you have established guanxi with can now introduce you to their own trust networks and connections.

Is this merely the exception rather than the rule?  No.  For LinkedIn, out of its 200 million global userbase, only 1% comes from China.  Why?  Professor Wei Wuhui of Jiaotong University opines that, “I don’t think the Chinese middle class has the same needs in terms of professional networks as people in the West, because of the concept of guanxi.  In China people do not want to meet with people they don’t know. The Chinese have a culture based on relationships among family members and close friends.”60 Thus do not necessarily count on using Western networking methods to procure and build contacts – or as the expression goes, when in Rome.

And as Larry Chang, Charles Zeng and other entrepreneurs point out in interviews later on, one of the biggest challenges for any foreign firm is initially building these social connections, these trust networks that every Chinese businessperson and consumer has.  Yet overcoming this cultural challenge is a struggle for anyone even mainland residents.  As the saying attributed to Joseph P. Kennedy and Knute Rockne notes, “when the going gets tough, the tough get going.”  If becoming a successful entrepreneur was easy, we would all be fùwēng (富翁).

Takeaway: With the 2nd largest economy and an increasing demand for foreign-made products and services, China may be a new source for customers and revenue generation.  As detailed in the following chapters each industry has differing market access characteristics.  Furthermore, there are a variety of ways to sell your products directly to Chinese consumers, even without physically opening an office on the mainland (see ExportNow in Chapter 7).  Yet there are any number of policy and domestic hurdles that may present challenges to all foreign companies – challenges that as I repeatedly stress throughout the book require you to do your due diligence before making any substantial investments.  Furthermore, how you attract brand awareness, generate leads and manage customer relationships are tactical decisions that will vary according to industry – some of which are detailed in the following chapters.


Endnotes:

  1. The name of the book is Mr. China: A Memoir by Tim Cissold. During his April 12, 2010 show, Charlie Rose interviewed Jim Chanos, Chanos briefly discussed the story:

    “There’s been a couple wonderful books, including one called “Mr. China” about two investment bankers who set up shop right after Tiananmen Square. They spoke Mandarin, they were connected. They hired the kids of the high party officials. And they couldn’t have gotten it more right from a big-picture point of view. And they wrote this book a number of years later on how they were lucky to get out with their skin. They were completely bankrupted by China.” []

  2. Economic Calculation in the Socialist Commonwealth by Ludwig von Mises []
  3. Due to the one-child policy and outward immigration, according to UN demographers, ceteris paribus China will hit a peak population within the next 20 years.  India will likely eclipse China during this time frame in large part because its birth rate remains above the 2.1 replacement mark.  In contrast, China’s birthrate is effectively 1.47 per mother.  This is further discussed in Chapter 18.  See also Birth rule could be relaxed from China Daily, Peak toil from The Economist and One-child policy shift won’t usher in China baby boom from Reuters []
  4. Red Flags: My Years in a Chinese Company by Matt Garner (forthcoming)  []
  5. See China’s Golden Rule of Consumption by Yukon Huang and China unlocks right kind of growth from Financial Times and Chinese shoppers are thriving from Financial Times []
  6. U.S. Exports Top Historic High of $2.1 Trillion, Support 9.7 Million Jobs from the Economics & Statistics Administration []
  7. See Record Overseas Sales Boost U.S. Growth from BusinessWeek and U.S. International Trade in Goods and Services from the Bureau of Economic Analysis []
  8. Surprise! U.S. economy likely grew in fourth quarter from Reuters []
  9. Another reason to export is that the long-term potential for emerging market annual consumption is expected to reach $30 trillion by 2025.  See Winning the $30 trillion decathlon: Going for gold in emerging markets from McKinsey Quarterly []
  10. Opportunities for U.S. Small and Medium Business in the China Market from the American Chamber of Commerce in Shanghai []
  11. The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger from Marc Levinson []
  12. American Chamber of Commerce in Shanghai SME Center []
  13. See Better Business Bureau, Dun & Bradstreet, US Commercial Service and the 2012 US Commercial Service report: Powering Export Growth []
  14. Foreigners Set For Social Benefits from Shanghai Daily []
  15. Free Trade Agreements from the International Trade Administration []
  16. US lawmaker urges investment treaty pact with China from Reuters []
  17. This is not an endorsement that the WTO and managed trade agreements are supposedly the manifestation and embodiment of pure free-trade.  Yet some trade is better than no trade.  Or as Frédéric Bastiat purportedly said, if merchants and goods do not cross borders, armies will.  Yet due to relatively freer trade channels, merchants (especially in the West) have access to more potential trade channels than at any time in history.  See Who Said It? by Don Boudreaux and Biography of Frederic Bastiat by Thomas DiLorenzo []
  18. According to Eric Jay Dolin’s new book When America First Met China, this trade-based relationship goes back 225 years.  See How the China Trade Helped Make America from The Daily Beast, China’s 2011 foreign trade surges 22.5% from China Daily, Statistical Communiqué on the 2011 National Economic and Social Development from National Bureau of Statistics of China []
  19. Historically these “heavy” or “key industries” are called the commanding heights, a term that was first coined by Vladimir Lenin during the first years of the Soviet Union.  See The Commanding Heights : The Battle for the World Economy by Daniel Yergin and Joseph Stanislaw []
  20. China’s PE Industry Grows More Challenging for Foreign Players from Global Intelligence Alliance []
  21. According to a recent estimate, by one measure state employment in China may have decreased 25% between 2002 and 2009.  Although several questions remain unresolved, did the author include listed SOEs (e.g. ICBC) or LLC’s that are subsidiaries that are wholly owned by SOEs?  See A Shrinking Leviathan: State Employment in China Looms Smaller Than Expected from Peterson Institute for International Economics []
  22. It is relatively difficult to gauge the exact number of SOE contribution to GDP in part because numerous suppliers and vendors – while technically private – exclusively do business with SOEs thus further blurring the distinction between private and public.  Another lower estimate is 40% of non-agricultural GDP is generated by SOEs.  For comparison, in 1995 there were 1.4 million SOEs on the mainland.  See China’s New Place in a World in Crisis: Economic, Geopolitical and Environmental Dimensions edited by Ross Garnaut, Ligang Song and Wing Thye Woo, A Glance At Chinese State-Owned Enterprises from CNPolitics and Beijing Lines out Rout for Central SOE Reforms from Caijing []
  23. China government 2011 procurement totals 1.13 trln yuan from Xinhua []
  24. China announces next step in joining Government Procurement Agreement from the World Trade Organization []
  25. Foreign firms in the procurement business also face stiff domestic competition with “buy China” policies at various governmental levels on the mainland.  See Chinese gov’t departments told to “buy China” from Xinhua []
  26. See GDP grows 7.8% to top $8 trillion from China Daily, The state advances from The Economist and China still lags US in trade from China Daily []
  27. In December 2012 it subsequently surged in the highest daily gains since October 2009 due to policy changes in the Qualified Foreign Institutional Investor program (QFII合格境外機構投资者).  See China Scraps QFII Limit on Sovereign Funds, Central Banks from Bloomberg, China’s Stocks Drop Below 2,000 from Bloomberg and China stocks fall below 2000 to 4-year low from South China Morning Post []
  28. On the other side of the coin is the view that these stocks are now relatively cheap or a “bargain buy.”  See Analysis: “Caveat emptor” as foreigners rush to ride China rebound from Reuters []
  29. With Great Power Comes Great Responsibility from Peterson Institute for International Economics []
  30. Certification and Accreditation Administration of the People’s Republic of China []
  31. For a step-by-step procedure, see Starting a Business in China from the World Bank.  See also New Path for Trade: Selling in China from The New York Times []
  32. See China gets tough on labelling and packaging of medtech by Katherine Wang and 国家食品药品监督管理局关于规范境外医疗器械标签和包装标识的通知 from the SFDA []
  33. See China Revises Categorization of Imported Goods and Tariff Rates from China Briefing, Import taxes ‘will be cut’ this year from China Daily and China Voice: Keep China’s big spenders at home from Xinhua []
  34. Some airlines such as Air China explain this duty free limit (5,000 yuan) to passengers who are required to declare assets upon landing.  Mainland airports have similar restrictions as well.  See More duty-free shops in Hainan from China Daily and Customs And Visas from Air China []
  35. Free trade zones are clearly the way to go from China Daily []
  36. Shanghai gives green light to duty-free store from China Daily []
  37. As a Chinese colleague recently pointed out, there is a Chinese saying guan zi liang ge kou (官字两个口).  It is literally translated as ‘the character for “official” (guan) has two mouths’ – but actually means ‘there is no such thing as singular truth in officialdom.’  This explains the distinctive trait of the traditional Chinese businessperson’s distaste and disinclination to involve the official court in all matters concerning business dealings.  Hence, the preference, for many centuries, among Chinese business people, has been to first establish a good and dependable relationship with prospective partners prior to the actual transaction and execution of (unofficial) agreements.  The basis of a good relationship is xin yu (信誉) or a strong reputation for honesty and integrity – this is an important virtue called xin (trust) of the classical Confucian gentleman. []
  38. See Cat Scammed: How A U.S. Company Blew Half A Billion Dollars In China from Forbes, Caterpillar Still Investigating Chinese Accounting Discrepancy from Bloomberg, Ex-chairman of firm linked to Caterpillar fraud “dismayed” from Reuters, Caterpillar Tracks a Wayward China Path from The Wall Street Journal and New twist in Caterpillar-ERA saga from Financial Times []
  39. For an overview of common accounting mistakes that have been used in scandals in China be sure to read: The simplicity of Chinese accounting scandals from Quartz []
  40. China is also the largest motorcycle market.  See Global and China Motorcycle Industry Report, 2012 from PRNewswire []
  41. Vehicle sales overtake Europe in 2012 from China Daily and 2012: Slowing growth, maturing market from China Daily []
  42. An estimated 20.65 million automobiles are expected to be sold in 2013.  See China 2013 Auto Sales May Accelerate This Year to Top 20 Million from Bloomberg, China Slowing Auto Sales Still Eclipse U.S.-Japan-Germany: Cars from Bloomberg and China’s vehicle sales remain in doldrums from Financial Times []
  43. One of the issues facing policy makers is traffic congestion.  Each city handles it differently, some auctioning off license plates to residents.  The cost of license plates has increased as cities have become denser and more affluent.  In Shanghai for example, in the recent license plate auction held in January 2013, the average price for a plate was $12,000.  See Shanghai’s Newest Luxury Item: The License Plate from The Wall Street Journal and Shanghai licence plates ‘precious as gold,’ says vice mayor from South China Morning Post []
  44. Used car sales are increasing faster than new car sales on the mainland and may be an opportunity for foreign auto dealers with experience in this segment.  4.8 million used cars were sold in China in 2012 compared with 15.5 million new cars.  Used car sales are expected to double to 10 million in the next three years.  For comparison, in the US the used car market is four times the size of new cars.  See Coming of age: China’s used car market outpaces new sales growth from Reuters []
  45. China to surpass US as top luxury car market: study from Agence France-Presse []
  46. China Vehicle Population Hits 240 Million as Smog Engulfs Cities from Bloomberg []
  47. ‘Imported From Detroit’ Is a Good Idea in China, if Only… from The Wall Street Journal. []
  48. Modern facilities, global reach for Jaguar Land Rover from China Daily []
  49. Many other luxury cars continue to sell well on the mainland.  For example, in 2011 Chinese consumers overtook the US in purchases of Rolls Royce vehicles; although in 2012 US consumers retook the “torch” which may again be handed off in 2013.  See U.S. Overtakes China as World’s No. 1 Buyer of Rolls-Royce from The Wall Street Journal []
  50. According to Flurry, by the end of February 2013, China had 246 million smart devices compared with 230 million in the US.  See iPhone 5 hits China as Apple market share slips from Reuters and China Knocks Off U.S. to Become World’s Top Smart Device Market from Flurry []
  51. See China to pursue renminbi internationalization on market-oriented basis: central bank vice governor from Xinhua, China’s Next Step on Yuan Is Convertibility, Zhou Says from Bloomberg and Full convertibility of the yuan ruled out from China Daily []
  52. In terms of whether the currency is undervalued or overvalued, the only way of knowing for sure what the open market rate “should be” is to float the currency.  By one measure, according to The Economist’s annual Big Mac Index, despite the appreciation over the past several years, the yuan is still “undervalued” by 40%.  See Calories and currencies from The Economist []
  53. Modern China: A tale of luxury villas and displaced villagers from McClatchy []
  54. According to estimates from the World Bank, gross national income per capita in China was $4,940 in 2011. []
  55. Charting China’s Family Value from The Wall Street Journal []
  56. China has 1m multimillionaires: Hurun report from China Daily []
  57. Why Rich Chinese Are Investing Overseas (It’s Not What You Think) from The Wall Street Journal []
  58. Report: China ‘Affluent’ Population to Hit 280 Million by 2020 from The Wall Street Journal []
  59. Red Flags by Matt Garner (forthcoming) []
  60. LinkedIn, others face challenges against China ‘guanxi’ from South China Morning Post []
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Chapter 2 – Selling books and content

[Note: below is Chapter 2 from Great Wall of Numbers]

In the Spring of 2009, a young freshman named Cena asked me a question (as in WWE John Cena – many men in China enjoy the drama of World Wresting Entertainment).

Cena said, “Mr. Swanson, what do American college students do with their textbooks after the semester is over?”

I replied, “If the class is offered again, we can usually sell them back to bookstores near campus or to online buyers, though sometimes students simply throw them in the recycling bin too.”

Cena thought for a moment and then said, “Why don’t you sell them to China?  Our books are sometimes of lower quality and outdated.”

He raises a good point, what are the logistical and legal challenges of gathering and exporting used American textbooks to mainland China?  Is there any profitable business model that we can use to compare the potential market opportunity?

Founded in 1972, Half-Price book store is a Dallas-based company that buys and sells used books.  Yet despite this seemingly simple business model – buying used books and selling them – the company has grown to operate more than 100 stores in 15 states.

Could you sell used books like Cena suggested?  While establishing a brick-and-mortar store front in an increasingly digital age probably may not be financially justified, there are also regulatory hurdles worth considering (e.g., obtaining permission from the former General Administration of Press and Publication now called State Administration of News, Broadcasting, Film and Television).

In fact, there has been an ongoing trade dispute between the US and China regarding China’s barriers that limit the importation of books and other media.  In addition to regulating the distribution of foreign material, Chinese policies require that foreign media and books must be channeled through state-owned enterprises (like Xinhua and China Film Group).  In 2009 the WTO ruled that China had “violated international rules” by these limitations.1 After appealing, five months later the WTO appeals board once again ruled that China was “unjustified” in such limitations.23 While this dispute continues to simmer, despite these challenges the domestic book market has grown.  For example, “just 7-8 years ago,” Jo Lusby of Penguin China says that “there wouldn’t have been the market to sustain what we’re doing. Today it’s a challenging business, but it’s commercially as well as literarily worthwhile for us.”45

And while there could be a case either way – depending on future import regulations and oil prices for transportation – perhaps you could find a Chinese partner to create the equivalent of Half-Price on mainland China.  Perhaps one relatively sanguine route would be to source the used books in areas that are non-political like the STEM subjects: science, technology, engineering and math text books in the US to sell through your joint-venture (JV) partnership.  Or while this trade dispute remains ongoing, perhaps foreign content creators could attempt to ‘go digital’ in the interim.  I discuss some other relevant challenges in Chapter’s 10 and 14.

A large demand for content

With 370,000 titles, in 2011 the Chinese domestic book market was valued at $10 billion, displacing Germany and making it the second largest book publishing market in the world (after the US).67 All told, according to the Chinese Academy of Press and Publication “the revenue from publishing, printing and distribution reached 1.46 trillion yuan (US$228.62 billion), up nearly 18 percent from the year before.”8

Furthermore, Chinese readers are becoming as voracious as their Western counterparts.  For instance, the academy also found “the average books read by Chinese in the year of 2011 to be 4.35.”910

How are they reading these books?  According to a 2011 Publishers Weekly report, the “preferred platform” for Chinese readers is now the digital ebook, such as those found on smartphones.11 And despite relatively tight government regulations on all forms of communication and publication, the book publishing industry and in particular the ebook industry continues to grow.

For example, Baidu, China Mobile, Hanvon and Cloudary operate the top ebook platforms and distributors; platforms whose usage rates have grown at double digits each of the past several years.  And because Amazon’s Kindle is currently not being sold in China, many other domestic e-readers have gathered large marketshare.  Hanvon has roughly 50% of the e-reader marketshare and Shanda’s Bambook has captured 28%.12 In fact, Shanda-owned ebook platform Cloudary alone has published 5.2 million titles by mid-2011 whereupon it was spun off into a successful $200 million February 2012 IPO.13 Shanda is now China’s 5th largest tech company by revenue.14

Do you or your company have books or content currently published in the US?  Do you create and provide content for science, technology, engineering or math books or periodicals?  If so, then mainland companies like CLS Communication (the largest in China), Sinophone, Yuyi and Berlo may be able to provide translations of your material so that you can upload and sell the content on platforms like Cloudary.15

Translating your content

If you would prefer to use US-based translation services, there are a number of providers. According to a 2012 report from Common Sense Advisory, in terms of revenue, the largest language service providers in the US are: Mission Essential Personnel, Lionbridge Technologies, TransPerfect and ManpowerGroup.16 Together they generated more than $1.5 billion in revenue last year.

Dean Stamatis, author of over fifty books on statistics, quantitative finance and Six Sigma, has been in the process of locating an English-to-Chinese translation service in China for translating his latest 900 page technical book. 17 In November 2012 he explained to me that on the one hand “you have excellent, yet expensive translation service providers in the US and on the other you have relatively cheaper (though still expensive) translators in China who may be a little more difficult to communicate with across the time zone differences.”  Furthermore locating the Chinese providers can be a laborious task at times as well and as a consequence he personally has traveled to China to discuss the services face-to-face.  This is something that all businesses should take into consideration.

A content plan of action

In Chapter 12 I discuss the social media industry in China and how foreign firms can build and maintain a brand through the numerous social media sites.  Again, while it is important in the long-run to understand the culture and language of your potential customers in China, with a few minutes of Google searches you can start rolling out both your brand and your content to the Chinese public right now, without even knowing any Mandarin.

Just as there was a virtual land rush with the opening of Facebook Pages and other unique domain names in the 1990s, so too is there a land rush for social media positioning in China.  And irrespective of whether or not your local competition in the US acquires brand names before you do in these new Chinese platforms, you have another competitor you do not even know about: hundreds of start-up companies in China that are discussed later in Chapter 12.

Thus without needing to hire a strategic consulting firm, you and your company can and should already establish a beachhead in China by registering and creating a QQ and Sina Weibo account (look at Chapter 12 for more details) and by assessing e-tailers like Cloudary for your digital content.

One last word of warning, if you are looking to get involved with an ebook platform, be sure to study the guidelines and regulations permitted by the former General Administration of Press and Publication (中华人民共和国新闻出版总署).18 Amazon China is currently under investigation for possible violations related to obtaining the proper approvals and licenses for its new Kindle Store on the mainland.19 In fact, as an aside, despite its 8-year endeavors Amazon China has only captured 1% of the $196 billion e-commerce market.20 While the case is ongoing be sure to consult with an attorney (see Chapter 10) before making any substantial investments first.

Takeaway: Looking around at your existing content, you and your company may find China as a new market for revenue generation.  This includes both older and new content ranging from science and technology books to reports your company published in periodicals.  China is the 2nd largest book market and has a number of well-funded, well-developed ebook platforms that your company may be able to sell into.  There are also a number of well-established industry leaders on both sides of the Pacific capable of translating your English content into Chinese and vice-versa.  This move towards online selling also presents an opportunity to establish a brand through Chinese social media sites such as QQ and Sina Weibo that are discussed at length in Chapter 12.  Failure to quickly move into the Chinese market not only presents an opportunity for your domestic US competition but also for your competitors in China with whom you probably are unfamiliar.

 


Endnotes:

  1. W.T.O. Rules Against China’s Limits on Imports from The New York Times []
  2. China Appeals WTO Ruling on Book, Film, Music Imports from Bloomberg []
  3. China loses WTO media imports appeal from BBC []
  4. Chinese Fiction Is Hot from BusinessWeek []
  5. Other genres that are currently maturing on the mainland include fantasy and science fiction which was recently a focus of special issue the Science Fiction Studies at DePauw University.  See “Great Wall Planet”: Introducing Chinese Science Fiction by Yan Wu []
  6. IPA’s Global Ranking of Publishing Markets—US, China on Top from Publishing Perspectives []
  7. Slightly older data (2006) lists the largest book markets as: the US, Germany, China, Japan and the UK.  See The Global 2011 eBook Market: Current Conditions & Future Projections by Rüdiger Wischenbart and Sabine Kaldonek []
  8. What Chinese want to read from People’s Daily []
  9. Ibid []
  10. Mo Yan won the 2012 Nobel Prize in Literature and in doing so brought modern Chinese literature into the spotlight.  Sales of his English-translated works rose to best-seller status on Amazon.com.  Similarly, sales of Yan Lianke works also increased following the announcement of being a finalist for the Man Booker Prize in 2013.  See Man Booker International Prize 2013 Finalists Announced from The Man Booker Prizes, The world has yet to see the best of Chinese literature from The Spectator and Stealing Books for the Poor from The New York Times []
  11. The Global 2011 eBook Market: Current Conditions & Future Projections by Rüdiger Wischenbart and Sabine Kaldonek []
  12. Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg []
  13. Shanda Cloudary US IPO is Finally Taking Off from Tech In Asia []
  14. China’s Top 10 Tech Companies by Revenue from Tech In Asia []
  15. Some of the top China-based translation firms are CLS Communication, Sinophone, Yuyi and Berlo []
  16. The Top 100 Language Service Providers from Common Sense Advisory []
  17. Dean Stamatis is the President of Contemporary Consultants in Michigan. []
  18. Stealing Books for the Poor from The New York Times []
  19. GAPP: Amazon China’s Kindle Store Violates Regulations from Marbridge Consulting []
  20. Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg []
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Chapter 3 – Food and beverage

[Note: below is Chapter 3 from Great Wall of Numbers]

There is a famous proverb in Chinese called min yi shi wei tian (民以食为天) – eating is as important as the sky.1 Despite regional differences in dialects, in regulations and in climate, one universal rule on the mainland is that eating is one of the most important activities of the day.  While this may sound like a fortune cookie truism (which by the way, do not exist in China – I have yet to see one), with recent memories of plagues and famines in their mind, many Chinese residents pay close attention to what their next meal will be.  And how it will be cooked and increasingly, where it was grown.

And while they may have a reputation for spending some of the highest amounts of their annual income on food (28% in China versus 10% in the US, this is called Engel’s Law)2 and are simultaneously highly elastic (e.g., if food prices increase they will switch over to cheaper substitutes), their perpetual gastronomical vigilance is not unwarranted.3

During the summer of 2008, China was faced with a series of nationwide milk powder scandals in which 300,000 babies and infants were poisoned and six died from a chemical called melamine which local producers had added “to save money.”456 As a consequence, there was a subsequent surge in the importation of milk powder from abroad including New Zealand and Australia.7 All told 80% of imported dairy products were from New Zealand in 2012.8 And in Australia, Victorian dairy farms recorded a record $144 million in exports to China in 2011.9 In fact, China is now the largest powder milk importer globally as many families – out of concern of repeat poisoning – currently place higher value on imported brands.1011 As a consequence, Tmall, the largest e-commerce platform on the mainland, has begun importing baby formula from companies such as Nestle and Danone to be sold directly to Chinese customers.12 And milk is not the only dairy product that Chinese consumers are importing.  For example, despite being a new commodity to the mainland $139 million worth of cheese was imported in 2011.13

And to “secure” these supply lines according to Financial Review, China Investment Corporation (CIC), one of the world’s largest sovereign wealth funds, is actively seeking agriculture investment opportunities in Australia and other countries.14 In fact, the Beidahung Group, the biggest Chinese agricultural conglomerate recently purchased and is leasing 100,000 hectares in Western Australia and plans to invest up to $4 billion in Australian agriculture.15

In addition to the melamine fatalities above there have been scandals involving “gutter oil,” whereby cooking oil is collected and dredged from restaurant drains; clenbuterol and other chemicals are added to meat to “enhance” the taste yet is toxic; arsenic in frozen calamari and even tainted steamed buns crop up throughout the year.16 It is not unsurprising then that according to a 2012 survey conducted by Horizon Research Consultancy, a Beijing-based polling company found that 41% of those surveyed said food safety was a major problem, up from 12% in 2008.17 One residual ramification from this stark rise in concern comes from a 2012 report from Ipsos, a market research company, which found that due to food scandals “more than 60 percent of people would choose foreign brands more often.”1819

At the same time, in 2010 China exported $41 billion in agriculture such as garlic and onions, yet even among some of this purportedly screened produce, there have been food safety issues.  For example, this past summer a batch of strawberries originally grown in Shandong ended up poisoning thousands of German schoolchildren.  While the investigation is ongoing, the initial findings were that some of strawberries may have been contaminated with norovirus.20

Not quite soylent green

In a bid to protect consumers, an independent, private consumer watch-dog group called Zhichuchuangwai was started in 2011 to chronicle all of the nationwide stories involving food and beverage containments.21 In addition, the world’s largest food retailers (hypermarkets) including WalMart, Tesco, Carrefour and Metro have spearheaded an independent non-profit quality assurance consortium called Global Food Safety Initiative to produce food safety guidelines, harmonize food safety standards and create a certification framework for suppliers and distributors.

As China develops and the middle class grows, the demand for higher quality goods – safe goods – has led to an increase in opportunities for foreign brands which are perceived as meeting the highest safety standards.  For example, the USDA trade office in Shanghai reported that “the 82 foreign hypermarkets [in Shanghai] accounted for 78.6% of the total hypermarket sales volume in 2008.”22 These same hypermarkets also contain an increasing amount of food products (60% as of 2009).  Collectively the mainland hypermarkets is a $81 billion industry and growing.23 Yet before you decide to jump in and create yet-another-hypermarket, this area is fraught with nebulous legislation.  For example, in an effort to “protect” small and medium suppliers, on December 19, 2011 five ministries and committees issued a joint regulatory plan whereby they arbitrarily removed hypermarkets from being able to charge delivery fees, slotting fees, holiday fees and several other fees.24 This caused a lot of confusion and as a consequence retailers were essentially forced to resign their previous contracts with local suppliers.  In addition, these foreign “big box” companies face zoning restrictions that prevent them from competing with domestic retailers like Suning or Gome.2526

For perspective in this segment, in 2010 the two largest retailers in China were Vanguard and Lianhua, both of whom are state owned enterprises (SOEs), and they both generated more than $10 billion in revenue.  For comparison, privately run RT Mart (owned by Sun Art), Carrefour and Walmart generated 25-35% less, yet with a fraction of stores compared with their domestic competition.  For instance, Carrefour generated almost $7 billion in revenue from 182 stores compared with Vanguard, who had 3,155 stores.  In addition, not all private companies perform the same.  In 2012 Tesco closed several outlets in August and scaled down its expansion plans and Carrefour’s same store sales declined 6.1% in Q3 2012 yet RT Mart has thrived and plans to open 105 hypermarkets in 2013.27

In my own anecdotal observations, these large foreign-owned hypermarkets are continuously filled by Chinese and expats alike, even though some of the products cost significantly more than locally owned supermarkets are charging.  For example, as I mention later in Chapter 6, I had a bad bout with food poisoning while in China during 2011 and as a consequence both my Chinese and American doctors recommended that it is better to be safe than sorry – better to spend more on safer food now than pay for it later as an in-patient.  So several times a week I shop at a nearby CityShop.28 CityShop is an up-and-coming, locally owned and expat managed supermarket with 10 stores in the Shanghai and Beijing areas.  More than 80% of their products are imported from the US, Germany, Australia and other developed countries.29 And like Walmart and Carrefour, CityShop is packed with shoppers – both Chinese and expats – throughout the day.

In March 2013 I spoke with Lawrence D’souza, customer service director for CityShop.  He is originally from Goa, India and has spent his career managing a variety of supermarket chains around the globe.  For the last three years he has worked on the mainland at his current position and in his view there are a couple of challenges that while not unique to China, can be a hurdle for entrepreneurs.

In D’souza’s words, “one of the issues that all grocery stores face when trying to import goods is changes in duties and clearing customs.  So for example, recently it has become difficult to import certain products like organic foods which require the CCC stamp from the government yet may not be approved for a variety of unstated reasons.  On the other hand, items like organic milk from Australia are typically allowed entry.  So supermarket owners need to keep up-to-date otherwise they will have backlogs in their supply chain.  Another reason this is important to a grocery store like ours has to do with location.  Each of our store locations is placed in a different neighborhood with differing demographics.  So for example, one location may cater to a client base that is comprised entirely of mainland Chinese.  Another location may have a mix of businesspeople from Japan, Hong Kong and Taiwan.  And yet other locations may have 50% of their customers that are expats from the West.  As a result, we have to stock each store with different items that the target market wants, thus the consistency and flow of items is different.  Which brings us back again to keeping up-to-date with changes in the import rules so that way we can remain flexible to the demands of our diverse customer base.”  As mentioned in Chapter 1, CCC stands for China Compulsory Certificate and is required in order to import any item.  Furthermore, import taxes such as those on wine or breakfast cereal can vary throughout the year and the list of which is maintained by the General Administration of Customs (海关总署).  Additionally, all organic foods imported or produced locally needs to be approved by the China Organic Food Certification Center (COFCC).30

At the same time D’souza sees several untapped opportunities in this segment.  According to him, “because of the rapid development in the last several decades and scarcity of shelf space, there is a product gap, a lack of certain flavors and tastes as some of the food that supermarkets import on the mainland may not necessarily be of interest to customers from India, Russia or Southeast Asia.  For instance, there are between 40 to 50,000 Indian businesspeople and traders that work in Shanghai throughout the year, yet finding specific food like basmati rice can be difficult to locate in the metroplex.  One example in our own stores is that based on customer feedback we added avocados and guacamole throughout the year due to the popularity of Mexican food.  So other entrepreneurs could likewise satiate demand from ethnic niches and become successful doing so.  On the other extreme is volume and scale: the bigger the store, the more products you can stock.  Entrepreneurs and managers could try to emulate big-box stores such as Costco which may be able to keep costs low and process bulk orders to cost conscious buyers – but this also has its own share of inherent challenges.”

Another challenge that D’souza and others that I interviewed raised that is not unique to China is fixed capital costs.  Or in other words, leasing real-estate.  In busy areas like Raffles City (来福士广场), one of the most popular shopping malls in Shanghai, space may cost 15 RMB per square meter per day.  It is significantly higher in the case of supermarkets, 10,000 to 15,000 RMB per square meter or up to 50% of the total operating costs may come solely from rent.  Entrepreneurs should also be aware of the gestation period in receiving import permits and licenses.  According to several businesspeople that I spoke with, it may take 6 or more months to have all the paperwork processed and approved (photocopied, translated, verified), especially if it is a new type of food or ingredient that has never been sold in China.

However, before you come away thinking that hypermarkets and supermarkets throughout China are filled row-after-row with imported goods, the same USDA report noted that even international retailers “typically carry less than 1% imported SKUs” and that “imports rarely constitute more than 5% of total SKUs” even in high profile stores in large cities like Shanghai and Beijing (an SKU is a stock-keeping unit).  One of the reasons why this is the case is that few of the retailers have been able to build out a distribution network (e.g., cold storage) that they already have in Western countries on the scale that KFC has managed to do (as I note in Chapter 16).  What this means is that by-and-large, these same retailers typically still source their food from local suppliers.  This presents an opportunity to foreign distribution and supply chain management experts – to bridge the wide gulf between an increasingly wealthier consumer that would like to purchase imported products for quality and safety reasons versus the amount of imported goods that retailers are able to continuously stock.

Another opportunity is for cold storage experts as well.  For example, PFS (Preferred Freezer Services) is a joint venture between an American company and a Dalian-based company (Yida Group).  During the next several years they will spend more than 7 billion RMB ($1.1 billion) to build out a cold storage network across China, including a 40,000 ton facility in Shanghai.31 And according to Li Wanqiu, head of Zhongde which is a cold-storage consultancy, “Beijing alone built over 50,000 square meters worth of new cold storage warehouses in 2011.”32 The reason these are needed is that according to Datamonitor, “China’s frozen food market grew 9.9 percent annually between 2004 and 2009.”33  One of the reasons for why this marked increase in consumption has occurred is that as an economic develops and urban residents work longer hours, they have less time to cook.  So the demand for quick, easy-to-make meals such as TV dinners (e.g., Hungry-Man) increases.  Can your firm take advantage of this opportunity?

You don’t need to bet the farm

 In Chapter 16 I discuss the failures and successes of foreign owned and operated restaurants (such as KFC and McDonald’s) but even with their entry there is potential for additional competition.  For example, in October 2012 I interviewed Glenn Wilkinson an Australian who has lived in China for the past 25 years.  He is a Senior Consultant at Beacon Consulting, a Shanghai-based firm that specializes in corporate training and HR staffing.34 In his mind, one of the biggest opportunities for both foreign and local entrepreneurs is in the “food industry,” a very vibrant and dynamic market.

What he means by food for example, are the restaurants I listed above.  One of the reasons this is a vibrant market is that according to the National Bureau of Statistics, the restaurant industry as a whole has been growing 14% annually since 2007 “reaching two trillion Chinese yuan (US $319 billion) in 2011 to account for 11.3% of all revenue in the consumer products category.”35 The food-service industry (e.g., catering) jumped to $99 billion in 2011 also up 14% from a year earlier.36 Furthermore, as noted by Wilkinson and others interviewed, there is a high demand for a quality product due in part to safety concerns and in part because of a growing middle class.  For comparison, retail sales in China have risen an average of 17% for each of the last five years and the luxury goods market (see Chapter 11) is expected to grow 20% a year for the next decade.37

Yet to be even handed, enthusiasm should be tempered due to policy changes from the top.  According to the China Cuisine Association (CCA) that due in large part to Xi Jinping’s (the new President of China) fight to stop waste of public money on extravagant meals, the CCA recently conducted a survey that found, “60 per cent of nearly 100 restaurants saw bookings cancelled recently, with one Beijing-based outlet reporting an 80-per-cent drop in sales.”38 Furthermore, “The survey found that business owners felt pessimistic about the outlook of the industry.  They think it’s necessary to readjust their business models to adapt to the new market conditions.”  Prior to the new national policy, the average monthly failure rate of restaurants was 15% in mid-2012.39 Thus the risks involved in setting up a new food & beverage establishment arguably have changed and that failure rate may increase in the short and medium term.

While each city has different rules regarding local partnerships and minimum registered capital requirements, the restaurant business is relatively open to market participation (e.g., certain districts in Shanghai require a $150,000 minimum in registered capital).40 While you would need to do your own fact-finding exploration to measure the return-on-investment, based on anecdotal evidence, it appears that mainland Chinese are apt to eat foreign food just as voraciously as they eat domestic food.

For example, in 2002, Element Fresh was founded by two foreigners, Scott Minole and Sheldon Habiger, has since opened 13 stores in Shanghai, Beijing and Guangzhou.  While a bit on the expensive side, in my mind the quality of the salads more than make up for the price.   In 1999, Bob Boyce from Montana co-founded Blue Frog with his business partner Kathleen Lau.41 I have visited two of its 9 locations (there are 6 in Shanghai and 3 in Beijing) in part because they have great specials on Monday’s and because the burgers are some of the best in the city.   Also in 1999, John Christensen of Denmark founded Wagas, a delicious sandwich shop that I have personally frequented several dozen times.  There are now 25 and counting Wagas locations in Shanghai alone and one in Beijing.

One of the reasons these Western-style restaurants are finding success is as I note in Chapter 15, you have several million Chinese residents who have lived, studied and worked overseas and some of them now enjoy Western food.  For example, according to one estimate by the government, 186,000 Chinese living abroad moved back to China in 2011.42 According to the China Tourism Agency, 70 million Chinese tourists traveled overseas in 2011 and an estimated 82 million traveled overseas in 2012 (who spent $98 billion).4344 McKinsey & Company estimates this number will climb to 94 million by 2015.45 And by 2020, Boston Consulting Group predicts that “China’s total outbound market [will] likely be three times as big as Japan’s.”46 In addition, nearly one million Chinese students now study overseas, including more than 190,000 in the US alone.47 Thus, the Chinese middle class is increasingly familiar with Western-flavors and styles.  And if my own anecdotal experience is any indication, restaurants like Wagas and Blue Frog, while popular with expats, are also quite popular with locals as well – some nights accounting for 90+% of the customer base.  Perhaps you could create a BBQ or Tex-Mex franchise, both of which there are currently few market participants.

Simultaneously, domestic firms whose management understands these dynamic tastes are not sitting idly by.  For example, the Alibaba Group, the largest ecommerce internet company in China (owner of Taobao, Tmall and Alibaba.com) is developing a new procurement system to bridge consumer demand with foreign, international suppliers.4849 According to its founder, Jack Ma, “Tmall will work with the center to build a database of international suppliers that Chinese consumers are most interested in.  It would then collect orders to make group purchases.”50 The new system is expected to be rolled out within the next two years and part of the domestic plans is to deliver anywhere on the mainland within 24 hours.51

Tastes and flavors from home

In March 2013 I spoke with Charles Zeng, founder of Piro, a restaurant and bar located in Shanghai near Jing’an Temple.  Zeng is originally from New York City and previously worked in the financial industry before moving to Shanghai.  After some cursory research he saw an unmet demand: tasty Western food with a normal price tag.  Thus two years ago he setup shop, teaching himself how to cook, learning as he went.  In his words, “while both of my parents were originally from Shanghai, they moved to the US about 30 years ago.  Yet despite this cultural connection, starting up the restaurants was still difficult for me due to a lack of guanxi and knowledge of the regulatory climate.  The learning curve was steep but based on my research I found that there was not enough American-style food for a price that both expats and locals could afford.  And so despite the hurdles I have turned this project into a profitable business venture and definitely think that there are a wide range of opportunities for more competition in this food and beverage area.”

In his view, obtaining the necessary licenses and permits and meeting the food code regulations are an ongoing challenge that all business owners must face.  Specific opportunities beyond food that he sees are “niches such as micro brews, craft brews – there are currently not many out here despite the enormous consumption of beer and liquor.  More specifically, craft beers that are higher value, top-shelf products.”  In 2011, 50 billion liters of beer were consumed in China compared with 24 billion in the US and 9 billion in Germany.52  With $1 billion in industry profits in 2012, China is the largest beer market by sales and Nomura forecasts that profits will rise to $9 billion in 2021.  Yet according to Accenture, 85% of the domestic beer market is “comprised of low-end domestic beer brands” such as Tsingtao which sells a 330 mL bottle for $.32 (for comparison, a similarly sized Budweiser costs $1).53 Thus, Zeng sees this as an opportunity to serve a niche market that will invariably grow as consumers become more familiar with what the market offers.  Maybe your local microbrew club could find success, like Carlsberg has attempted to do, as it recently bid to takeover Chongqing Brewery Company for $461 million.54

Yet to temper visions of immediate grandeur, consider champagne and chocolate.  In contrast to the large amounts of wine importation (see Chapter 11), the consumption of champagne remains relatively subdued.  Only 1.3 million bottles of champagne were sold in China in 2011 compared with 1.3 billion bottles of red wine during the same year.55 Similarly sales of other red wines to China from areas such as Germany remained muted because of lack of brand awareness (i.e., Chinese consumers are unfamiliar with German brands).56 In other food segments, chocolate consumption also remains low-key on the mainland.  The average Chinese consumes a mere 100g of chocolate a year; in comparison the average Japanese eats 11 times as much, an American eats 44 times as much and a German eats 82 times as much.57

And if you own a farm

Roughly 2% of all American’s work in the most productive agricultural industry in the world; an industry which not only feeds the 3rd largest populace but also grows and exports significant portions of the world’s caloric intake (up to 20%).  In 2011, the US exported a record $137 billion in agricultural products globally and China imported a record $20 billion from the US (surpassing Canada).58 In fact, due to a variety of reasons, in 2011 China became the largest importer of agriculture.59 Among other products, US farms exports soybean, rice, corn, cotton and pork to China.60 And in part because of a variety of domestic policies in China (discussed in Mark DeWeaver’s new book61 ), China is essentially dependent on the US for food security and thus is investing in and buying secure supply channels to improve its livestock.

For example, the New York Times noted this past spring that the US, “exported a record $664 million worth of breeding stock and genetic material like semen in 2011.”62 Who is buying this material?  In 2011, Chinese companies “bought $41 million worth of live breeding animals and genetics.”

Why are they buying this?  The New York Times quoted, Ronald Lemenager, a professor of animal sciences at Purdue University in Indiana, who said, “[w]hen you have a nation’s diet changing as rapidly as China’s, the most efficient way to build up production is to improve your animal genetics. We have the genetics they want.”

Thus, if you own or operate a farm in the US, not only can you export your products to China, but you can probably provide services to improve China’s knowledge base of breeding and husbandry.63

Domestic initiatives in agribusiness 

As I detail later in Chapter 14, NetEase is the 2nd largest tech company in China.  Its founder is William Ding who is investing a significant portion of his personal multi-billion dollar wealth in agriculture.  He along with his company “have set aside $16 million for agricultural investments” such as an organic piggery stocked with 5,000 pigs “raised and sold under conditions that can satisfy health-conscious consumers spooked by China’s many food safety scandals.”64

How large is this organic industry?  According to Du Xiangge, chairman of the China Federation of Organic Agricultural Movements (CFOAM), “Only 1.9 million hectares of land are used for growing organic vegetables in the country, less than 1 percent of all farmable land.  It is possible that the ratio could reach 5 percent over time.”65 Thus there is ripe potential for investors such as SAIF partners a domestic private equity (PE) fund that finances specialty shops like LohaoCity which sells organic health food in Beijing and Tianjin.

And on the other end of the spectrum is Peter Zhang a former-chemical engineer at a large SOE (and an autodidact) who is originally from Heilongjiang in the northeast.  Over the past several years he has retrained and retooled to become an English teacher, yet in an effort to hedge against food safety he has retrained yet again, becoming proficient in agribusiness and has leased several dozen hectares in Southeast Anhui province to grow organic produce, primarily fruits and vegetables, for his friends and family.  Zhang told me in November 2012 that, “I am concerned about food safety issues and have invested my personal savings into growing quality produce for my family and friends.  I belong to the middle class, I should be able to afford the quality of food that previous generations have in the past, yet due to inflation and a number of other macro factors, cannot.  So I have invested our savings into a dozen hectares of crops including carrots, rice, pears, cherries, grapes and even free-range chickens.  And after you get through the inconvenient paperwork, land is relatively cheap to lease outside of urban areas thus making the whole endeavor worthwhile.”  He is leasing roughly 80 acres (around 500 mu or亩) for about 30,000 RMB ($4,800) a year based on a 55-year lease between the government and rural farmers who exchanged the land with him (the typical lease on the mainland is 50-70 years, after which time ownership automatically reverts back to the state).

According to Zhang and others I have spoken to, inflation has pushed the price of chicken past a psychological “100 yuan per pound” line, a price that makes eating high-quality chickens unaffordable to those living, ironically, in larger cities.66 Why have these prices increased?  According to the Ministry of Agriculture, “urban Chinese increased their consumption of chicken 219% per capita from 1983 to 2006.”67 What Zhang is also referring to are consumer price index (CPI) increases which have added transportation and storage costs for farmers that bring poultry and produce from outlying farms due to a nascent supply chain network and cold storage network discussed earlier in the chapter.  For example, while CPI increased at a relatively low 1.7% in October 2012, roughly two years ago in January and February of 2011, CPI in China increased by nearly 5%, led in part by a 10% increase in food costs.6869  Similarly, the CPI index rose 3.2% in February 2013, a 10-month high due to a 6% increase in food costs – more specifically, residents in Beijing pay more per pound than their peers in Boston70 Yet to give you an idea of how this fluctuates and differs according to category, in mid-February the average prices of 21 different vegetables declined 11.2%.71 And since Chinese consumers spend a significantly larger portion of their disposable incomes on food (28% in China versus 10% in the US72 ), even a relatively small increase in price of staple goods is immediately felt.

Zhang also noted that one of the main reasons he and his family have become increasingly vigilante about what they eat is “because our trust and our faith in domestically owned restaurants has been shattered due to milk powder poisoning, gutter oil, fake honey and even moon cake scandals.”  While each region varies, roughly half of all honey currently sold in Shanghai is reportedly fake, comprised of substantially cheaper substitutes made of syrup and gum.73 Moon cakes are a traditional dessert made and given as gifts during Midautumn Festival usually held in September.  Over the past several years, investigations have uncovered several domestic mooncake producers, who in an effort to reduce costs have reused and resold both filling and entire inventories of mooncakes – made from previous years – to customers believing that they were buying newly made desserts.  For example, in 2003 a Shanghai-based company, Guanshengyuan, “was caught making mooncakes with expired and mildewed fillings.”74

He also mentioned that similar scandals have taken place at grocery stores and restaurants that dyed rotten pork to make it look younger and “leaner,” dyed noodles and even sold fake steamed buns.75  He is referring to a scandal in 2011 in which 17 noodle manufacturers in Dongguan added ink and paraffin wax “to give their products the look and texture of more expensive varieties.”76 In addition, while there have been several steam bun scandals, one of the most recent notables cases is the Shanghai Shenglu Food company, which added food coloring to lower costs (e.g., turning corn flour buns into a different color) and repackaged expired buns.77

This is not to say foreign restaurant chains are scandal free.  KFC advertised that its soybean milk was freshly ground, when it was not; and its chicken suppliers in Shandong may have used antibiotics to fatten the chicks faster (same-store sales declined 37% in January 2013 as a result).78 In fact, to alleviate food safety concerns, in February 2013 KFC announced that it was launching a new quality assurance program and cutting out small farmers due to the difficulty in overseeing them.79 Ajisen Ramen (a Japanese noodle restaurant) claimed its soup was made from bone-based broth, which upon further investigation turned out to be highly diluted (e.g., “a concentrate”).80  And a McDonald’s outlet in Shenyang reportedly served laundry detergent instead of a Coca-Cola.81

Yet perhaps by partnering with these entrepreneurs, foreign agriculture companies can establish a foot-hold on the mainland and satiate consumer demand.  And as I discuss later in several other chapters (notably 11 & 12), branding, trust and market perception are distinct advantages that foreign firms typically have when entering the mainland market.  This is in part because of the immense resources invested in quality control programs (e.g. Six Sigma) by foreign brands in order to proactively innovate and prevent any potential quality-based scandals from ruining their company images.  In contrast, this kind of branding issue is not taken as seriously on the mainland as it is elsewhere which itself creates an opportunity for brand marketing consultants.

Changing times

According to China Daily, a substantial portion of businesspeople in Zhejiang have moved away from the low-end, low-margin manufacturing industry to agriculture.82 In fact according to the Zhejiang Provincial Administration for Industry and Commerce, “the average annual amount of money invested in agriculture by Zhejiang businessmen has exceeded 10 billion yuan over the past five years.  The total amount reached 20 billion yuan last year.”83 Could your ag firm work with these businessmen in modernizing their farms?

Or maybe foreign companies that build or design automated farming equipment (e.g., robotic fruit pickers) can find demand for products in an industry that is still largely based on manual labor.  For example, according to a 2010 statement from China’s Ministry of Agriculture, “in corn production, the mechanization rate for sowing has reached 72.5%, but the mechanization rate for harvesting is only 16.9% and has become the bottleneck for corn production.”84 In 2012 this figure was updated and the new estimates for the overall mechanization rate for corn harvesting is now 38%.85 In contrast, in the US both planting and harvesting of corn are fully mechanized.  In fact, through the use of mechanization and genetically modified crops, an acre of US farmland “yields twice as much corn as in China or Eastern Europe and four times as much as in India.”86 Yet mechanization, as shown in the statistics above, is increasing rapidly on the mainland and according to a recent Reuters report, “[m]ore than half of China’s ploughing, planting and harvesting is carried out by machines, compared with a third a decade ago.”87 In fact, the 2011 harvest yields in Heilongjiang province broke nation-wide records, rising 11% over the previous year due to “bigger and better machinery for threshing and plowing.”88

And according to Der Spiegel, one of the reasons German companies purchased the imported strawberries from Shandong in the first place (see the strawberry story at the beginning of the chapter) was because strawberry picking robots capable of washing and cutting are an unknown variable – hence the relatively cheaper labor costs in China provided a cost advantage that neighboring countries did not have (at the time).89  In fact, because of relatively high labor costs in California, farm companies have begun looking for robotic alternatives such as prototypes from Vision Robotics that while still on the drawing board, have the potential to assist and replace manual human labor.90 Similarly, German and Californian agribusinesses may even be interested in a project unveiled two years ago: Japanese researchers demonstrated a robotic system that can identify the ripeness of a strawberry which enables the machines to “cut harvesting time from 500 hours to 300 hours.”91 Thus if you and your company build the agribusiness machines or software that powers the machines, you may be able to find new revenue sources in China.

Yet there are two sides to every coin.  As one Chinese source recently told me, “the potential for opportunities for foreign firms remains high in the agriculture industry because it is still largely underdeveloped.  Compounding the issue is that much arable land has been seized from farmers for real estate development during the urbanization process, and major labor forces have migrated from the farmlands into the cities, which leads to worries that the current food production capacity may not meet the growing food demand for the populace.”9293 For example, between 1996 and 2008, arable land decreased from 130 million acres to 121 million acres.  Another estimate put the loss at 123 million mu (one mu is about 1/6 of an acre).9495 Thus China must either import food or modernize its agricultural industry to increase production to make up for the food shortage.96 Simultaneously there are regulatory hurdles that sometimes require technology transfers from foreign agriculture firms to Chinese companies.  For example, seed companies like Monsanto must team up with local partners in order to gain market access.  Yet, these provisions have not prevented Monsanto from increasing both earnings and market share – and it plans to further boost investment on the mainland.97

Takeaway: as China develops, its middle class will have more funds and resources to allocate towards food and beverages.  US businesses and entrepreneurs are already providing both products and services in the form of agriculture, knowledge and physical storefronts.  Yet because of the continued growth, there are still opportunities to start new restaurants or even restructure and train a largely non-mechanized agriculture workforce to the industrial-scale agribusiness that is the envy of emerging markets.  Chapter 12 discusses how you can establish a brand in China through its diverse domestic social media networks.


Endnotes:

  1. A Chinese friend suggested that I provide an explanation to this phrase.  The complete phrase is wang zhe yi min wei tian, min yi shi wei tian.  While wang zhe means emperor, according to him the key to this is the last word “tian.”  Tian on its own is literally ‘heaven’ or the sky over our heads.  But this phrase should be better appreciated in the context of its originator, a Minister Guan Zhong of the powerful Qi Kingdom of the Spring Autumn (1st half Eastern Zhou) period, who meant to use tian here as in “tian ming” – the mandate from heaven (to rule over the people).  Properly understood, the five character phrase ending should correctly translate to something like “the government’s mandate (king or prince) to rule is founded upon its ability to feed the people.”  Or, in the more sophisticated form of political advice: “hunger breeds discontentment.” []
  2. See Agriculture Commissioner Todd Staples says that Americans spend less of their disposable income on food than individuals in Mexico, China and Russia from PolitiFact and Meet the 2020 Chinese Consumer from McKinsey & Co. []
  3. Seniors aged 55 to 65 in China’s largest cities spend half their expenditures on food and only 7% on apparel, according to Ogilvy data, while those a decade younger allocate 38% of their spending to food and 13% to apparel.  See Targeting Grandpa: China’s Seniors Hunger for Ads from The Wall Street Journal []
  4. See Chinese figures show fivefold rise in babies sick from contaminated milk from The Guardian, Two get death in tainted milk case from China Daily, Timeline: China milk scandal from BBC, and 毒牛奶事件 from Yunnan News []
  5. China dairy industry whistle-blower dies after assault from South China Morning Post []
  6. Another reason milk powder is in high demand is that milk powder companies have successfully convinced families that powder makes babies more “chubby” and therefore healthier than being breast-fed.  See Breastfeeding faces challenges in China from Xinhua  and Breastfeeding flashmobs: Chinese mothers are abandoning formula from The Telegraph []
  7. See Baby food sails out with Chinese crews from The New Zealand Herald and Dollar falls as tariff raised from The New Zealand Herald []
  8. This trend may not last as Chinese consumers and government officials have began investigating a claim regarding dicyandiamide, or DCD that has purportedly contaminated some milk powder from New Zealand.  See Ministry acts on dairy safety from China Daily []
  9. Farmers to milk China’s taste for cheese from The Australian []
  10. Hopes wane for China whole milk imports from agrimoney []
  11. 美赞臣等洋奶粉仍热销 国产奶粉再沦陷消费者失去信心 from Qbaobei []
  12. Tmall announces cooperation with foreign baby formula companies from Xinhua []
  13. Foreign cheese firms eye big slice of China’s market from China Daily []
  14. China targets dairy industry from Financial Review []
  15. Chinese buy farms for food from The Western Australia []
  16. See The Shandong Oilman from Caixin and Maggots in the Pasta: Europe Screens Tainted Chinese Food from The New York Times []
  17. See Survey: Half of Chinese like US ideas on democracy from Associated Press and McDonald’s says food giveaway not tied to China’s TV show on Corporate Shame from South China Morning Post []
  18. The consuming challenge of food safety from China Daily []
  19. For an illustration of why and which foreign items are purchased in China see this excellent infographic: Why Do Chinese Consumers Pay So Much for Foreign Brands? from East-West Connect []
  20. See The Hidden Price of Food from China from Der Spiegel and No contamination found on China-exported strawberries: watchdog from Xinhua []
  21. The consumer report site is Zhichuchuangwai []
  22. China Retail Report from the US Department of Agriculture Trade Office in Shanghai []
  23. Sea Bass With Barbie Dolls Challenge Wal-Mart in China from Bloomberg []
  24. China Retail Report from the US Department of Agriculture Trade Office in Shanghai []
  25. Chinese retailers give global giants run for money from The Hindu []
  26. Walmart, Tesco, Carrefour finding it tough to do business in China from The Economic Times []
  27. Sea Bass With Barbie Dolls Challenge Wal-Mart in China from Bloomberg []
  28. This is not an endorsement of their services as there are other chains that provide high-quality imported food as well, such as Ole’ – which is owned by CR Vanguard (華潤萬家), the largest grocery company on the mainland.  Another competitor is Metro (麦德龙), a German-owned chain. []
  29. CityShop []
  30. China Organic Food Certification Center (中绿华夏) []
  31. Cold storage industry sees a hot market in mainland from China Daily []
  32. In Beijing, cool profits from sub-zero storage from smartplanet []
  33. Ibid []
  34. Beacon Consultancy []
  35. China’s restaurant industry shows strong growth potential from Want China Times []
  36. This double digit increase is expected to decline due to a maturing market and a crackdown on government banquets in 2013.  See New Bureaucratic Diet Takes Bite Out of Restaurants, Hotels from The Wall Street Journal []
  37. Chocolate-makers seek to whet China’s appetite from Asia One []
  38. Mainland restaurant takings plummet as party order cadres to tighten belts from South China Morning Post []
  39. Ibid []
  40. For a step-by-step guide on forming an WFOE see China’s Approval Process for Inbound Foreign Direct Investment from the US Chamber of Commerce.  See also Forming A China WFOE. How Long Will That Be Going On? from China Law Blog and Selling In And Into China. Four Good Tips And Mine. from China Law Blog []
  41. Interview: Bob Boyce, owner of Blue Frog and KABB from Shanghaiist []
  42. Reverse brain drain: China engineers incentives for “brain gain” from Christian Science Monitor []
  43. See Demystifying the Chinese traveler from CNN and Chinese rush overseas for holiday from China Daily []
  44. While Chinese consumers typically trust foreign brands (as shown in Chapter 3) they are increasingly vigilant against scams and cons as well, especially while traveling abroad.  See Tourist: We were conned from The New Zealand Herald []
  45. Chinese Choosing Prada Over Louvre Boost Luxury Shares from Bloomberg []
  46. Chinese check-ins from The Economist []
  47. In 2011, the US embassy in China issued more than 160,000 student visas for Chinese students to study at American schools.  Yet a November 2012 report from Open Doors notes that the actual number is even higher, 194,029.  See Ten Years of Rapid Development of China-US Relations from Xinhua and Students from China add $5b to US economy from China Daily []
  48. The goal Sales at Tmall and Taobao combined to reach $157 billion in December 2012, a new record.  See RMB 1 TRILLION: Alibaba Shopping Sites Hit a Sales Milestone from Alizila []
  49. According to a recent Morgan Stanley research note, Alibaba is worth between $66-128 billion and Alibaba continues to diversify into other areas of e-commerce including notably a new search engine through its Aliyun brand.  See Morgan Stanley’s Latest Alibaba Estimates Suggest It’s Worth $66 – 128 Billion from Forbes and China’s E-Commerce Giant Now Has a Search Engine to Take on Baidu and Google from Tech In Asia []
  50. Tmall Plans to Link China’s Consumers with Foreign Goods from Caixin []
  51. The plans are being rolled out together however the domestic 24-hour delivery service is expected to be completed within 1 year.  See 马云1000亿建电商物流 目标全国任何地区24小时内送达from ifeng. []
  52. China beer consumption hits the 50 billion litre mark for first time in 2011 from Mintel []
  53. In the battle for China’s beer drinkers, the $0.32 brew is still king from Quartz []
  54. Carlsberg launches take-over offer for Chinese brewer from Reuters []
  55. Putting some fizz into the wine market from China Daily []
  56. German winemakers seek to win over the Chinese from Deutsche Welle []
  57. Chocolate-makers seek to whet China’s appetite from AsiaOne []
  58. See US agricultural exports to China become costly in times of drought from Global Post and U.S. chief agricultural negotiator sees bright future for exports from the Agricultural Communication Services []
  59. China Overtakes U.S. as Largest Crop Importer, WTO Data Show from Bloomberg []
  60. Chinese farmers produced 50 million tons of pork in 2012, more than half of the world’s total.  See How China’s love affair with pork is creating a pollution problem from The Guardian []
  61. Animals Spirits with Chinese Characteristics by Mark DeWeaver []
  62. From the U.S., a Future Supply of Livestock for China from The New York Times []
  63. According to one estimate at the US Department of Agriculture that I spoke with, building a new corn or soybean farm in the US may be profitable with current prices, especially since both of these crops are in high demand from China. []
  64. Game Boy: Billionaire William Ding Lei Has A Few Fantasies Of His Own from Forbes []
  65. Backed by Profit-hungry Investors, New Approach to Farming Takes Root from Caixin []
  66. This is not to say all produce has increased in costs.  For example, there has been a cabbage glut that has put many farmers in northern China in a bind.  The cost of cabbage harvest and transportation costs more than what could be made selling the produce at the market.  Thus some farms have allowed the public to gather cabbages for free and in some cases even let the cabbage rot in the fields.  See Cabbage price drop hurts growers, wholesalers, grocers from China Daily []
  67. Cheap food may be a thing of the past in U.S. from Los Angeles Times []
  68. See China’s food inflation leaving a bad taste from Globe & Mail and China’s inflation eases to 1.7 percent in October, giving room for more stimulus from Washington Post []
  69. China CPI in December 2012 rose to 2.5% and has spurred interest in looking for ways to reduce farm distribution costs.  See China moves to cut farm produce distribution costs from Xinhua []
  70. Meat prices add to China’s inflation, policy risks from Reuters []
  71. China’s farm produce prices down from China Daily []
  72. See Agriculture Commissioner Todd Staples says that Americans spend less of their disposable income on food than individuals in Mexico, China and Russia from PolitiFact and Meet the 2020 Chinese Consumer from McKinsey & Co. []
  73. Fake honey sales called rampant, hard to detect from Shanghai Daily []
  74. Bad moon rising: China’s mooncakes won’t keep from Want China Times []
  75. From Milk to Peas, a Chinese Food-Safety Mess from International Health Tribune []
  76. See China wrestles with food safety problems from Los Angeles Times and Noodle makers in hot water from China Daily []
  77. 3 arrested over Shanghai steamed bun scandal from China Daily []
  78. See Yum stumbles badly in China, warns on profit from Reuters, ‘Kentucky Fried China’ no more? from Reuters, Yum’s Yuck Factor in China from The Wall Street Journal, Yum’s chicken in China contained excessive levels of drugs from Reuters, CCTV report says KFC chickens are being fattened with illegal drugs from South China Morning Post and China Chicken Probe Hurts Profit as KFC Ends Deal: Liuhe from Bloomberg []
  79. Yum Makes Cuts to Supply Chain in China from The Wall Street Journal []
  80. Some foreign fast food is harder to swallow from China Daily []
  81. Shenyang McDonald’s apologizes after woman served detergent from Want China Times []
  82. Manufacturing, mining and construction represent approximately 45-48% of China’s GDP; in contrast, services accounted for 44.6% of China’s GDP in 2012.  While there are and will continue to be opportunities for manufacturing, the service industry continues to grow at a fast clip.  Yet as a number of the people I interviewed noted, services are intangible, physical goods are much more tangible so it can be a lot of hard work educating consumers about the value proposition in paying for something less concrete than they are used to.  How long will it take to educate them to appreciate this quality?  How to differentiate your company from local competitors like Newegg tried to do?  See Chinese Graduates Say No Thanks to Factory Jobs from The New York Times and Served in China from The Economist []
  83. Entrepreneurs turn to the land for profit from China Daily []
  84. Another innovation that may assist in the merging, acquisition and development of agricultural land is satellite imagery which is now being used as part of a land reform project being piloted in Anhui.  See China’s big step in rural reform; mapping tiny plots of farm land from Reuters, 加快推进玉米收获机械化 力争2015年玉米主产区机收水平超过50% from the Ministry of Agriculture and All About Corn by Cathy Gao Jing []
  85. 农业部:全国“三秋”农业机械化生产迅速展开 from The Central People’s Government of the People’s Republic of China []
  86. Monsanto Needs to Put Doubts to Rest from The Wall Street Journal []
  87. Analysis: China turns to machines as farmers seek fresh fields from Reuters []
  88. Ibid []
  89. The Hidden Price of Food from China from Der Spiegel []
  90. Farms Fund Robots to Replace Migrant Fruit Pickers from Wired []
  91. Strawberry-picking robot knows when they’re ripe from c|net []
  92. This is not to say similar “eminent domain” cases do not take place in other countries.  See China’s cabinet warns of rural land expropriation from Xinhua, China’s giant, deserted malls wait for reluctant consumers from The Globe & Mail and Henan city refuses to stop clearance of graves to make farmland from South China Morning Post []
  93. This is not suggesting that China is facing a looming plague or food shortage as a whole.  Yet despite a record grain output of 589 million tons in 2012, according to Xinhua, China throws away enough food to feed 200 million people each year.  Another estimate from China Agricultural University states that 50 million tons of food is wasted annually (10% of China’s annual grain output) due to poor storage techniques and rot during transportation.  These statistics have become talking points recently during a government crackdown on waste and corruption targeted at government banquets where food is often left uneaten.  For comparison, according to the Food and Agriculture Organization (FAO), one third of all food grown globally is lost or wasted each year (amounting to approximately $1 trillion).  Another recent report from the Institution of Mechanical Engineers states that as much as half of all food produced in the world ends up wasted each year.  See Curbing food waste from Xinhua, China’s anti-waste campaign revives frugal spirit from Xinhua, Grain supplies still not secure from China Daily, Assuring Chinese Finish Their Live Lobster Sashimi from Bloomberg and Almost half of the world’s food thrown away, report finds from The Guardian []
  94. Shortage of farms and water threatens grain output targets from China Daily []
  95. Shrinking arable land threatens grain security from China Daily []
  96. This is called a “grain security” issue that Chinese policy makers and analysts have been increasingly discussing over the past several years.  Some have noted this is equivalent to the “Western dependence” on Middle East petroleum.  See Keep a red line for arable land from China Daily and Grain supplies still not secure from China Daily []
  97. See Monsanto Sees Greater China Investment on Par With Brazil from Bloomberg and Monsanto Needs to Put Doubts to Rest from The Wall Street Journal []
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Chapter 4 – Hospitality services

[Note: below is Chapter 4 from Great Wall of Numbers]

What I should have done when I first flew into Shanghai four years ago was take the high-speed maglev from the airport into the city.  Instead I was sweet-talked by a suave salesman outside the arrival gate’s entrance into taking a luxury sedan.  500 RMB?  No problem, no way is that expensive – after all it is the same rate that other companies nearby were charging.  The shiny new black Buick was driven by a young college graduate who had studied international trade in Australia.  Throughout the nearly hour long drive along one of the many highways that bisect the metro, Johnny, as he called himself explained what there was to do in each district we were passing through.  In crisp English he answered all of my questions and delivered me at the foot of the hotel my travel agent had previously booked.  And during my stay, the bellhop and front desk staff greeted me in pleasant hellos and how-do-you-dos.  My image of China – my first impression was immediately biased because despite the 300 million English learners in China (see Chapter 9), the stark reality is outside of large metros, English dissipates into the wind.

And this presents an opportunity to any number of educational providers (discussed in Chapter 9) and hospitality training firms.  For example, according to the World Tourism Organization, in 2011 there were 57.58 million inbound overnight tourists that spent $48.5 billion on the mainland.1 Since 2000, the number of foreign visitors to the country has increased 10 percent annually.2 Five out of the top six source countries for inbound tourism in China speak native English at home.3 And in my own anecdotal experience, while cities like Guangzhou and Shanghai are relatively easy to navigate – with their helter skelter smattering of English on highway signs and subway stations – I am still accosted by bewildered tourists wanting to know how to get to Jing’an Temple in Changning, Shanghai.  In fact, China is now globally the third largest inbound tourist destination (after France and the US) and as I note later in Chapter 11, it is one of the largest outbound as well (in 2012, 82 million Chinese traveled overseas).

In February 2013 I spoke with Shaun Rein, the author of “The End of Cheap China” and an expert on Chinese consumer behavior.4 According to Rein, “a lot of commentary has been made regarding retail sales, which only grew 14.7% last month [January 2013].5 This is not to say that Chinese consumption has stopped, rather consumers are moving away from status items.  Instead of buying Louis Vuitton bags to show off, they are now buying lifestyle experiences such as trips overseas.  In short, they are changing habits which is bad for certain segments such as footwear and apparel brands.”

This kind of lifestyle experience and “genre tourism” caters to those wanting to have first-hand exposure to authentic conditions (e.g., ruggedness, safari) and as The Wall Street Journal recently pointed out, is increasingly popular with affluent Chinese in particular.  For example, more than 60,000 Chinese nationals visited South Africa in the first half of 2012, “a 68% jump from the same period a year earlier.”6 And those that visit these locales are “more likely to get private tours and embrace the safari opportunities.”  Consequently, traveling in general is no longer relegated to the top outlier either.  For instance, according to Li Yianqin a professor at Minzu University in China, in terms of tourism economic theory, “when a nation’s per capita gross domestic product exceeds $5,000, foreign travel grows rapidly.”7 And by one estimate from the World Bank, China’s gross national income per capita reached $4,940 in 2011.

Where do these tourists stay?  How can you and your company capitalize on either of these growth trends?

According to the China National Tourism Association in 2009 there were roughly 300,000 hotels on the mainland.8 The 21st Century Business Herald estimates that in 2011 there were 2 million hotel rooms on the mainland, a number that is expected to increase to 5 million by 2016.9 In fact, according to the Boston Consulting Group, “China’s combined domestic and international tourism revenue is expected to increase 14% annually for the next nine years.”10 This would create an estimated $838 billion tourism market.  For comparison, as of 2011 there were more than 4.8 million guest rooms at hotels in the US that generated $137.5 billion in sales.1112

While you may think you could squeeze the margins at the low-end in hospitality with relatively cheaper labor, there are already several domestic hostel and motel chains such as Motel168, Home Inn and 7 Days Inn (all three of which I have stayed in and I recommend) that create a highly competitive environment.13 Rather it is at the top end that has larger margins to work with and is currently comprised of the usual coterie of global hotel chains including Hyatt, Hilton, Marriott and Howard Johnson.14

Howard Johnson is a luxury brand

As I note later in Chapter 11, the management team at Coach handbags has repositioned their products – typically considered mid-level in the US – and through market perception campaigns has moved the handbags towards the higher-end market segment in China.  Their efforts have resulted in large sales growth, which in Q1 2012 increased 40% on the mainland.15 Similarly, Howard Johnson which is considered a mid-level hotel experience in the US is also now repositioned at the top-end of the hotel experience in China (in Chapter 16 I discuss KFC which has benefited from perception marketing as well).  Howard Johnson entered the Chinese market in 1999 and has since expanded across the mainland where it now operates 46 hotels in 29 cities.

Is it too late to enter the market?  Probably not.  In fact, in March 2012, Intercontinental (the biggest hotel company in the world) announced that it would begin rolling out a new brand of hotels in China called Hualuxe to cater to the top-end of the domestic market.  And by establishing a Chinese-focused luxury hotel chain on the mainland, Intercontinental hopes to later roll out similar chains in other countries that are popular destinations for Chinese tourists.  Their plan, which could certainly be emulated in a variety of service industries (e.g., restaurants in Chapter 6), is to build a reputable, trusted brand at home and use a loyalty program to bring back repeat visitors when they are abroad.1617 Furthermore the new Peninsula Shanghai hotel was named the top 5 global hotel for business in 2012 illustrating that there is still room for potential new entrants in this segment.1819

Visa changes and HR challenges

Beginning on January 1, 2013 both Beijing and Shanghai now allow for 72-hour visa free access to their metropolises by tourists connecting to other countries.20 Beijing usually receives 5 million foreign tourists a year and its international airport (北京首都国际机场) was the 2nd busiest globally in 2012 (behind Atlanta’s).  Thus because foreigners typically spend twice as much as local at tourist destinations ($1,000), it is thought that the amount of tourists that are estimated to pass through on this new program will double over the next three years.  Yet expectations should be tempered as previous visa free stays (such as Shanghai’s 48-hour policy) only netted an additional 3,000 visits in 2010.21

With these large tourist numbers, what are the potential issues in moving into the hospitality industry?  What are some of the challenges in setting up a hotel chain?

As I noted above and discuss later in Chapter 15, staffing sticks out towards the top of issues.  For instance, according to a 2008 report by Emmanuel Hemmerle, “there are less than 40 local professionals with proven experience in the Development function within the hotel industry in the whole of China, of which only 10 have over five years experience in the field.”22

You might be thinking that your hospitality company can merely start small and build up slowly from their footholds.  This might be possible but could be problematic in this specific industry.  For example, while those low numbers – 40 local professionals – have probably changed considerably since the Beijing Olympics another concern that Hemmerle’s report touches on is retention.  What happens to competent productive managers in the hospitality industry in China?  According to Rene Schmitt, president of Kempinski Hotels, “[m]y one greatest, and constant, challenge of operating over the past 15 years in China has been to attract and retain staff. We are constantly building and rebuilding our leadership across all the cities in which we operate. You train them, and then you lose them to other hotels or airlines.”23  Kempinksi is a German-based luxury hotel company that operates 14 five-star hotels on the mainland.

Yet with these challenges come opportunities to foreign firms that specialize in training hospitality-related services.  For example, Les Roches is a Swiss-based hotel management school (one of the largest in the world) that teaches all of its courses exclusively in English.  It has teamed up with a local college called Jin Jiang in Shanghai to create a joint international hospitality management training program.  Together they are already partnered with many of the hotel chains – both foreign and domestic – across China.  Can your company provide similar training services?

Hotels Rising

In January 2013 I spoke with Fred Xu, a native of Shenyang who is completing his MBA at a university in Switzerland.  He previously worked for the luxury hotelier, Shangri-La, based in its flagship Shanghai location.24 According to him, “the hospitality industry on the mainland still has large swings in seasonal volatility and a lot of traffic actually depends on the location of the hotel.  For example, China has two “Golden Weeks for Tourism” (黄金周) – May 1st and October 1st.  These peak seasons unsurprisingly bring a large amount of travelers and tourists from across the country which dramatically affects the occupancy of hotels.  In recent years, the gap between slack seasons and peak seasons has diminished.  This is largely because China itself has attracted more and more international travelers throughout the year.  And as a long term consequence, due to the process of ‘reform and opening up’ and globalization in general, the hospitality industry continues to develop and the trend is now towards catering to both business travelers and tourists alike.”

One of the HR challenges for all hotel management according to Xu is that, “traditionally speaking, Chinese people typically do not think the hospitality industry is an ideal career.  Simultaneously, because of the intense competition between graduates and non-graduates alike, people who choose hospitality usually receive a lower salary [e.g., limited supply of positions, large supply of potential employees].  And as a consequence, individuals with less educational background actually prefer to have this job due to its upward promotion mobility despite its initial low salary.  The dilemma facing managers however is that they prefer skilled people, especially those with language skills irrespective of educational attainment.  In their mind, they think it is a waste of resources to cultivate highly educated yet unskilled employees yet in the long-run this has caused a serious outflow of talent as skilled workers can easily move to competing chains.”

In January 2013 I also spoke with Xuerong Su, a native of Sichuan and six-year veteran who is a manager at Mind Group, a real estate company that builds hotels and luxury apartments.25 Her most recent project is developing the new Mandarin Oriental Hotel in Chengdu.  According to Su, “in my opinion, Chengdu is one of the best locations for projects because of its winding mountainous scenery, home of the panda, its incredibly long [2000 years of] history, famous rivers nearby and a well-known culinary culture.  And despite the recent governmental policies that place pressure on housing prices [see Chapter 10] many large luxury projects have been largely unaffected thus far, especially those catering to an affluent demographic.  As a consequence I think there are continued opportunities to build and manage five-star facilities across the mainland, especially in larger cities inland such as Chengdu.”

One of the challenges that Su thinks others should be cognizant of is that “acquiring the necessary technology to build luxury hotels and apartments can be quite cost prohibitive.  Because when you build the tallest building in a city like Chengdu, it will ultimately become a landmark and in fact, most of our projects are landmarks.  Thus to maintain our brand and image we buy the best technology from around the world, hire the most experienced consultants around the world (all of them are from some of the most famous companies in the world) and as a consequence this can be very expensive.  Yet this is a cost of doing business in our industry and something that customers have come to expect.  They want the best and demand it.”  However one challenge that should be acknowledged, although perhaps temporary, is the crackdown on government-financed “extravagant” galas and banquets that have taken place at hotels over the past decade.  As a consequence many hotels have faced a rash of cancelations due to the austerity and “anti-corruption” policies currently being implemented.26

Real estate and marriage

As I mention later in several other chapters, following the 4 trillion RMB stimulus (扩大内需十项措施) enacted in 2008 by the Central People’s Government, there was subsequently a large real-estate bubble that grew across the entire country (fáng dìchǎn pàomò).  As a consequence policy makers have attempted to cool it down, to create a soft landing.27  While the efficacies of these efforts are debatable, there are still opportunities and demand for firms that specialize in high-end condos and townhouses.

In fact, while I touch on it in Chapter 15, the relatively expensive property is one area that is sometimes ignored when recruiting talent from abroad (e.g., paying for expat lodging).  For example, while the residential real-estate bubble is largely considered “plateaued” relative to 2-3 years ago, the most expensive property ever sold in China was recently acquired in Shanghai at a price ($8,000/ m²) that most locals and expats alike typically could not afford (the average salary in Shanghai is roughly $9,000 a year).  Yet there is still continual demand for domestic investment opportunities due to a close capital account (see Chapter 5).28 Furthermore, land sales in Shanghai and Beijing continue to reach new highs due to this issue.  For example, at a recent auction in November 2012, one parcel of land sold for $5,431/m² in Beijing.29 And this phenomenon is not relegated to houses and apartments on the mainland as Hong Kong is now home to the most expensive parking spot globally which costs $82,600.30

One of the reasons that these prices may continue to stay at these relatively high levels in larger Tier 1 cities is that migration to these cities continues from around the country side (roughly 48% of the population still lives in rural areas).  And in order to get married, many would-be brides (and their families) require that the groom provide fully paid for apartments and homes to live in.  As a consequence, the groom and his family pool their savings together to purchase these homes, all in the hopes of marketing their sons as attractive mates (over 60% of home purchases are made with “significant backing from the parents”).3132 One reason why this is important is that due to the gender imbalance (approximately 117 males are born for every 100 females) over the coming decade, there will be 40 million men who will be unable to find a mate.33 Thus women (and their families) are increasingly picky and unsurprisingly demanding when it comes to finding life partners.

With the largest population is it unsurprising that China is the largest wedding market.  According to one estimate 13 million couples got married in 2012 and the wedding industry has grown 10-12% a year over the past three years.34 At $9 billion in purchases during 2011, China became the 2nd largest consumer of diamonds (behind the US, overtaking India) and 4 out of 5 couples in Beijing and Shanghai bought engagement rings in 2012.35 Simultaneously 200 million RMB ($32 million) was spent on wedding dresses (4.77 million sets) in 2011.36 As a consequence, as of 2010 the wedding industry was worth $57 billion and the average wedding now costs 200,000 RMB ($32,000).37 This relatively high price tag relative to annual salaries (the average salary in Tier 1 cities is less than $9,000 a year) is feasible due again to the pooling of family resources (e.g., since many families only have one child, the parents will only host one wedding and can therefore spend more on it).  And it provides opportunities for wedding planners and photographers, perhaps even your firm.

In addition, Christine Ng of Bartle Bogle Hegarty (BBH) recently noted that some of the new management offices in hotels are positions such as “director of wedding” primarily because nearly all weddings are held in hotels.38  This is one additional revenue stream that could be tapped into by the hospitality industry.  And with weddings often times comes babies.  And as a result there are business opportunities for those in the maternity industry.  For example, Gome, one of the largest appliance retailers in China is now investing $150 million in a new maternity-focused e-commerce site. 3940

Takeaway:  As China’s infrastructure and cities develop, more travelers – both domestic and international – will visit and tour regions of the mainland.  The hospitality industry, while filled with both local and foreign incumbents, still has potential room for growth and more competition especially at the top-end.


Endnotes:

  1. Tourism Development in China (2011) from the UN World Tourism Organization []
  2. Plan to reduce minimum stay for foreign workers from Shanghai Daily []
  3. The top 10 tourist source countries to China are: the US, Australia, Singapore, the UK, Malaysia, Canada, India, Germany, Indonesia and France. See China Tourism from TravelChinaGuide []
  4. Shaun Rein is the founder of China Market Research Group and the author of “The End of Cheap China.” []
  5. China Lunar New Year Festival Retail Sales Gain 14.7% from Bloomberg []
  6. For Affluent Asians, Africa’s Appeal from The Wall Street Journal []
  7. Chinese rush overseas for holiday from China Daily []
  8. Building boom in hotel industry from China Daily []
  9. Luxury hotel boom leads to oversupply in China from Want China Times []
  10. Meet Hualuxe, China’s Newest Upscale Hotel Brand from The Wall Street Journal []
  11. 2011 At-a-Glance Statistical figures from the American Hotel & Lodging Association []
  12. According to STR Global as of February 2012, globally there are 13.4 million hotel rooms.  See Reader quiz: 16% guess worldwide hotel room count correctly from USA Today []
  13. 7 Days Inn was recently acquired by Carlyle Group for $688 million.  See Carlyle-Led Group Buys China Hotel Chain for $688 Million from Bloomberg []
  14. Hilton is the parent company of DoubleTree and operates more than 30 hotels in China. Marriott is the parent company of Ritz-Carlton.  Marriott operates 56 hotels on the mainland and has another 44 being built.  See Marriott International Announces its 100th Hotel in China from Marriott []
  15. Strong overseas, US sales lift Coach 1Q profit from BusinessWeek []
  16. Meet Hualuxe, China’s Newest Upscale Hotel Brand from The Wall Street Journal []
  17. If your firm is looking to cater to Chinese tourists you may be interested in learning from the mistakes of previous companies that have used stereotypes and clichés to conduct business so as to avoid their pitfalls.  See The cultural cliches the travel industry uses for Chinese tourists from Skift []
  18. The Peninsula Shanghai is Acclaimed as the World’s Best Business Hotel by Travel + Leisure Magazine from PRNewswire []
  19. Another Shanghai hotel recently received an international award for its interior design and decoration.  See The Swatch Art Peach Hotel Shanghai wins prestigious prize for daring design at the Tatler Travel Awards 2013 from Travel Daily News []
  20. See Beijing to offer 72-hour visa-free stay for foreign visitors in 2013 from People’s Daily and 45 countries listed for 72-hour visa-free stay in Shanghai from Global Times []
  21. Coming Soon, Visa-Free Beijing Visits from The Wall Street Journal []
  22. Leadership in China’s Hopsitality Industry Begins at the Head Office from Heidrick & Struggles []
  23. Ibid []
  24. Shangri-La will open its 71st hotel this year.  Headquartered in Hong Kong, these are all high-end 5-star accommodations.  See Billionaire Kuok Says His Empire Can Last ’Generations’ from Bloomberg []
  25. Mind Group []
  26. Hotels feel the pinch as banquet business slumps from Xinhua []
  27. While a lot of focus from journalists (both foreign and domestic) has been on real estate prices in Tier 1 cities, bubbles formed in other tertiary cities as well, such as Yingkou in Liaoning province.  See Beijing issues new rules to limit house purchase from China Daily,王安顺:北京房地产调控决不动摇from Yicai and Real Estate Bubble Expands to Third and Fourth Tier Cities from The Economic Observer []
  28. This is not to say that these properties will lay dormant, especially as the middle class grows and rural migrants continue to move to Tier 1 cities.  See Who Says China is Building Too Much? from The Wall Street Journal Shanghai Sells Year’s Most Expensive Land as Market Recovers from Bloomberg []
  29. See Shanghai property sold for US$35,000 per square meter from Want China Times, Average salaries rise by 10.9% from Shanghai Daily, Land price at record high in Beijing, Shanghai from China Daily and Four Land Parcels in Beijing Sold for CNY 3 Bn from ChinaScope Financial []
  30. The $640,000 parking space from CNNMoney and Hong Kong Parking Costs $387,000 as Cash Moves From Homes from Bloomberg []
  31. In terms of average age for first-time home buyers, at 27 years old, Beijing actually has the lowest average in the world, due in part to parents and relatives pooling savings together.  See First-time house buyers are youngest in China: survey from Want China Times []
  32. China’s Hot Real Estate Market Takes Broad Toll from NPR []
  33. See China’s gender imbalance alleviates but still grave from China Daily, The Plight of China’s Favored Sons from The New York Times and Bride Shortage in China from Facts and Details []
  34. In 2009 there were 11.45 million marriages and increased to 13 million in 2012.  See China reports more divorces, marriages in 2009 from Confucius Institute and Loving China: Romance, Dating & Weddings from Thoughtful China []
  35. See China to overtake U.S. in diamond consumption from Xinhua and Diamond Demand Slows in China from The Wall Street Journal []
  36. Profound Evaluation and Development Trend Forecast of China’s Wedding Dress Market, 2011 to 2015 from Huidian Research []
  37. Loving China: Romance, Dating & Weddings from Thoughtful China []
  38. Ibid []
  39. China’s Gome Invests CNY1 Billion In Maternity E-commerce Website from China Tech News []
  40. Dating sites are also increasingly popular for a variety of reasons and by 2014 these sites are expected to generate an estimated $318 million in revenue.  The largest, Jiayun, has 68 million registered users.  Yet another area that may be relatively untapped is the divorce app market.  For example, more than 5,000 couples divorce each day in China.  Roughly 1.96 million couples got divorced in 2009; in 2011 2.9 million couples got divorced.  In fact, the divorce rate has doubled over the past decade in Beijing and Shanghai and is now nearly 40% (for comparison the national divorce rate is 2.29%).  To be even handed, some of these divorces may be related to avoiding regulations on buying 2nd or 3rd homes.  Yet just like in the West, when children are involved, the custody issues require communication between exes.  Thus online communication through apps may be a potential market.  See Ensuring a long marriage with insurance from China Daily, Joint Custody From A Distance from The New York Times, Divorce: Why the big breakup in China? from CNN, China’s Hot Real Estate Market Takes Broad Toll from NPR, China’s divorce rule dubbed ‘Law that makes men laugh and women cry’ from The Telegraph, Over 5,000 couples divorce each day in China during first quarter from People’s Daily, Divorce rate exceeds one third in Beijing and Shanghai from SINA, Shanghai has 2nd highest divorce rate in China from People’s Daily and Divorce app could help couples decide if their marriage has a future from The Guardian.  See also Why China’s Internet Dating Sites Are Booming from Worldcrunch and Dating in a Digital World: Trends in 21st Century China from Knowledge@Wharton []
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Chapter 5 – Financial services

[Note: below is Chapter 5 from Great Wall of Numbers]

Since Deng Xiaoping’s “Southern tour” in 1992, China has consistently been one of the top recipients of foreign direct investment (FDI), totaling $85 billion in 2010 and $574 billion overall.  In contrast, up until recently the US still led in both annually received FDI ($194 billion in 2010) and $2.58 trillion overall.  Even though its full year FDI received fell from the year before – a decline that continued through February 2013 – in the first half of 2012 China actually overtook the US for received FDI ($59.1 billion versus $57.4 billion).1

And while US firms and institutions currently invest more FDI within China than Chinese firms invest in the US (in 2011, Chinese companies invested $6.3 billion in the US representing 0.15% of total foreign investment in the US) this will probably change – despite a closed capital account (discussed in Chapter 10).234 For example, among other deals, a Chinese firm was recently granted approval in December 2012 to purchase bankrupt Massachusetts-based battery maker A123 Systems for $256.6 million.5 As a consequence Chinese outbound investment in 2012 such as mergers and acquisitions reached $8 billion for the first time in the US, globally increased to $93.09 billion (compared to $13.58 billion in 2007) and its outbound direct investment (ODI) is expected to reach $150 billion by 2015 due to deals such as A123 Systems.678 One example of continued investment is from ENN Group, one of the largest private companies in China.  Through a joint venture with CH4, a Utah-based energy company, ENN plans to open a network of 50 natural gas stations across the US this year.  Each station costs about $1 million to build and the joint venture has a goal of building 500 stations altogether.9 For comparison, the EU collectively receives twice as much FDI from China than the US currently does (due in part to political trepidation).10

Where are the potential investments that Chinese firms have looked at in the US?  For example, during the build-out of the enormous Haynesville natural gas fields in the Texarkana region, one of the investors courted by local energy companies was CNOOC (the 3rd largest oil company in China), which at the time reportedly wanted to invest $750 billion into the North American energy business.11 It is unclear as to how much they did end up investing (or if they returned a profit) but several Chinese energy companies have now moved up to Canada and invested $3 billion in a new pipeline project in the tar sands as well as put together a “$15.1 billion deal to acquire Nexen.”1213 In February 2013 the deal closed marking the completion of the largest overseas acquisition by a Chinese company.  And depending on regulatory conditions North American energy firms may or may not continue to do business with Chinese firms, yet there is one area that foreign experts can provide inside of China right now.

So what opportunities are there for foreign financial professionals?

While it has become almost cliché to say, finance is one of the industries that is undergoing “reform and opening up.”  This involves building institutions, physical infrastructure and a legal structure – all of which is thoroughly discussed in both Mark DeWeaver’s new book as well as a Brookings Institute report in June 2012.14 Yet reforms in general are always just around the corner.15

For example, because of pent up savings due to relatively few investment vehicle choices on the mainland, once larger liberalizations begin, there will be opportunities that can come from not just asset management and private equity (PE) markets but through the large expertise requirements in the relevant fields that currently do not exist (e.g., debt structuring).  As part of the once-in-a-decade leadership transition that began in November 2012, one expectation was and is that there will be a “big bang” of reforms in the coming months.1617 One immediate, visible reform was the creation of super-ministries referred throughout this book (e.g., Ministry of Health dissolving to become National Health and Family Planning Commission).18 Another case in point, on November 19, 2012 the State Administration of Foreign Exchange (SAFE) announced that it “ended 35 foreign-exchange approval rules and simplified others.”19 By reducing paperwork and shortening approval processes, such liberalizations are done with the intention of attracting FDI.  On December 12, 2012 the Shanghai stock index surged to its highest daily gains since October 2009 due to policy changes in the Qualified Foreign Institutional Investor program (QFII合格境外機構投资者).20 As a consequence sovereign wealth funds such as Qatar Holdings and central banks are now allowed to raise more than the $1 billion previously permitted for investing in the securities market.21

Another instance is on December 17, 2012, where a number of new liberalizations were implemented such as reducing regulatory approval and remittance of profits for foreign-owned companies.  Continuing this trend, on February 28, 2013, the government expanded its short-selling program which will now enable select brokerages to borrow shares from preapproved publicly traded companies.22 And on March 15, the China Securities Regulator Commission announced that effective immediately, brokerages could convert loans and other assets into securities, paving the way for securitized business.23 On a provincial level, financier Harry Ding (see below) explained to me, that pilot regions throughout China are also enacting reforms to make it easier for entrepreneurs to begin operating.  Shenzhen and Zhuhai in Guangdong announced that effective March 1st they have streamlined 18 different business licenses, created a new version of business licenses which no longer requires lengthy documentation procedures and removed some of the registered capital restrictions.24

Another specific area you and your firm may be able to literally capitalize on shortly is building a local bond market in structured debt.  Over the past several years there have been attempts to roll out local government bond markets on the mainland.  In November 2011, Shanghai issued China’s first local bond issuance yet eight months later, all of the programs were scrapped.25  Yet a year later, in November 2012, the China Securities Regulatory Commission (CSRC) approved a plan from ICBC (the largest commercial bank in China and in the world) to start a pilot program of selling bonds known as asset-backed securities (ASB) beginning in 6 months.26 The local market of this local debt, based on several estimates of over 10,000 local-government financing vehicles (entities that were set up to bypass these kinds of bans) is between $1.7 trillion and perhaps up to $5.4 trillion, which I discuss later in Chapter 17.27

Foreign firms specializing in managing distressed loans have already capitalized on opportunities on the mainland (with mixed results), including Shoreline Capital Management who raised $300 million for a new fund last year specifically to invest in distressed Chinese debt.28 DAC Capital is also in the process of raising $300 million for a new Chinese-focused fund.  The gamble is while investors in such debt may receive returns if and when a borrower repays portions of the loan, local government policies and a nebulous court system can make returns lower than they would have otherwise would have been (e.g., transaction costs and opportunity costs).

In October 2012 I spoke with Shawn Mesaros, CEO of Pamria an asset management firm located in the financial district in downtown Shanghai.29 Despite these setbacks above, in his view SOE banks will “eventually become facilitators, that they will offload debt which can then be restructured.  As a consequence there will then be a bigger market for sovereign debt.”  In addition, even though public capital (through SOEs) is currently cheaper than private capital Mesaros thinks that private equity (PE) is still a relatively good business, “it is not as easy as you think because domestic companies typically would rather not share equity in exchange for your capital.”  For perspective, according to the consultancy Bain, “the total value of mainland private equity investments jumped from US$3.7 billion in 2005 to US$15.2 billion in 2011.”30 And nearly $230 billion worth of deals were collectively completed between 2001 and 2012.31

Yet to give you an idea of the soft PE market today in China, according to a recent report from the Wall Street Journal, both foreign and domestic PE firms have been struggling over the past two years.32 The value of PE deals in 2012 declined 27% to $21.9 billion in part because of the domestic stock market performance.33 Between 2010 and 2012 the Shanghai Stock market declined roughly 37%.  Fortunes however, may continue to fluctuate in the future as the main benchmark index regained about 9% in the first six weeks of 2013 then lost 7% over the following month through mid-March.34 However because many investors cash-out of their positions through the securities exchange, fewer firms have wanted to go public.

Subsequently, private-equity firms which provide this junction have been affected as well.  In fact, in 2012 there was a 70% drop in initial public offerings (IPOs) – in the first half of 2012 alone there was a 37% drop in IPOs, from 218 during the same time last year to 138.35 PE deals as a whole “fell an unprecedented” 43% last year.36 Furthermore, of the 10,000 PE deals conducted between 2001 and 2012, 7,500 remain “unexited” as the firms cannot go public on Chinese exchanges.  And whereas PE firms in China raised 75 yuan-denominated funds in 2011 and raised another 52 yuan-denominated funds last year, only 2 new funds have been raised in 2013 (both focused on real-estate investment).37 This is in part because there has been an across the board red light from Chinese regulators since last summer (as of January 31, 2013, a record 873 companies have filed for IPOs in China yet have to wait) and Chinese firms trying to list on American credit markets are essentially persona non grata due to regulatory oversight from the SEC and disagreements with Chinese auditing regulators.383940

However despite these drops, there is still an active set of foreign and domestic PE activity, including Jiuding (the top domestic PE firm) who has averaged an internal rate of return of 30% since 2010 (an IRR is one gauge of how profitable investments are).41 Furthermore, this “softness” in the PE market may have a silver lining as well.  For example, according to Peter Plakidis of Deutsche Bank, “[a] softer equities capital market has meant that private equity is not competing as much with public money, and depressed public valuations have improved the returns for private-equity firms.  Hence, private-equity firms now have more companies on their radars as attractive investment opportunities.”42

In addition to PE, according to Mesaros, one large SOE bank on the mainland is already filling an office floor just for fixed-equity investments.  And if they are doing it, then perhaps other SOEs are close behind.  What this means to Mesaros is that eventually the big spreads “that can roll over price takers will become smaller.”  This also means that there is potential for foreign experts in this field to also train and get involved at a variety of levels within the periphery of this investment field.

Human capital

And in both the long and short-term, irrespective of growth trends on the macro side (which I discuss in later chapters), expertise in these two areas is in short supply.  At the same time, as noted above one challenge in this type of training is retention.  I was told by an another American source that a very large US bank (top 3) has trained numerous local financial experts in some of these sub fields (like forfaiting and futures) yet was unable to retain them due to an insatiable demand for such experts at mainland institutions.  Or in short, since talented human capital in certain areas is scarce, training may be a risky endeavor.43

Natalia Shuman, the new COO of Kelly Services’ in China recently explained the labor supply issues of financial experts in this region,

[…] the lack of supply and high demand is reflected in compensation.  If you look at Shanghai’s market today it’s not only financial analysts.  There are multiple positions and multiple functions where salaries are very competitive compared with global.  People are getting the same salary, maybe even higher, particularly in Shanghai and Beijing, compared to New York or London nowadays.44

And recruiting local talent for financial positions is also a seller’s market in Shuman’s view “Chinese with Western experience who are coming back here; they could easily get more money here than they would get in New York or London.”45 Further human resource constraints including retention issues are discussed later in Chapter 15.

For perspective in December 2012 I spoke with a Chinese financial manager at Fosun International (复星国际有限公司) in its Hong Kong corporate subsidiary.  Fosun is the largest privately held company in China, generating 25.73 billion RMB ($4.12 billion) in the first half of 2012.46 According to him, “I have colleagues who have a lot of career experience in the financial industry on the mainland but they currently do not have a competitive edge over their international counterparts when applying for finance positions in Hong Kong or elsewhere.  Yet simultaneously, if they want to further their career they would prefer working outside the mainland because both the experience gained and the compensation in the international marketplace is significantly higher than anywhere on the mainland.  And since the financial infrastructure and investment instruments in Shanghai still have not reached ‘critical mass’ it is basically more of a regional financial center compared with Hong Kong, which itself is filled with experienced staff in dozens of specialties that do not exist yet on the mainland.  Concurrently, because there are more and more banks in China and more and more people that have financial backgrounds and overseas educations they also want to pursue careers in this industry making it very competitive in certain specialties compared with previous years.”47

On the other hand, he still sees opportunities as “the mainland industry needs experts to train local people how to work in all areas in this growing market because there are relatively few providers doing it today.  Not just in debt markets, M&A, private equity or IPOs, but also in all forms of international trade such as letter of credit, trade finance, arbitrage and export finance.  Since there is a lot of overseas businesses that want to do business in China these banks will continually need to hire people capable of not just fulfilling relatively basic financial services today, but also the more advanced investment instruments and complex transactions in the future.  And since nearly all of corporate finance on the mainland still depends on bank loans for credit, banks typically provide most finance and capital for nearly all companies.  Thus foreign service providers can potentially bring their knowledge to our young industry for a mutually beneficial exchange.”

What are these salaries like?  A recent Bloomberg report similarly noted the demand for qualified financial professionals and experts for China, yet also found that managing directors now earn less than they would in the US and roughly “on par with those in Europe and the U.K.”48 For example, managing directors in Beijing and Hong Kong earned between $900,000 and $1.3 million in salary, bonus and stock options last year – while their counterparts in the US earned $1.2 – 2.01 million and their peers in the UK and Europe earned $850,000 – $1.77 million.

Wealth management

In November 2012 I spoke with Richard Johnsson who was the President & CEO of Soderberg & Partners in Beijing.  Soderberg & Partners is an independent financial advisory targeting high-net worth Chinese citizens since 2007.  According to Johnsson, “one of the challenges early-on was to establish a business in a field that didn’t exist in China, and few could see the benefits of independent advice.  The competition was all about returns, as opposed to for example tax planning; and the commissions were very low.  But lately, the industry has expanded very fast.  And one of the opportunities is of course that it is highly likely that the tax system and regulatory setup will look more and more like in the West.  This will mean complicated tax systems and tax deductions will make planning hard for people, thus driving sales.  On the other hand, other parts of government will try to control the industry, driving extensive compliance.49 But the former will likely come before the latter.”  All of the Big Four auditing firms and Big Three management consulting firms have long ago established mainland offices; can your firm provide similar services?

In January 2013 I also spoke with Harry Ding, a native of Guangdong who has worked as a manager in the finance industry on the mainland for the past five years.  According to him, “one of the opportunities for activities like day-trading and forex trading is that you do not need to have a PhD in finance to understand and be successful or even profitable in these segments.  As a consequence, the companies I have worked with over the past several years usually involves training new college graduates with finance backgrounds how to use econometric models and computing technology to conduct their trades.  While there are licensing and training fees as well as a learning curve, in the long-run their relatively lower labor costs usually acts as a profitable form of arbitrage.  That is to say, that because they can effectively trade on exchanges like the Toronto Stock Exchange, they are usually several times cheaper to hire and manage than local talent in Canada.”  Forex means ‘foreign exchange’ and typically involves the buying, selling and trading of foreign currencies (e.g., JPY, USD, GBP).

Ding also sees a few challenges in that, “because of the numerous restrictions on the financial industry and because of its overall developmental status, there are not as many investment tools and instruments available and those that exist can be difficult to trade profitably at large volumes.  As a result, many individuals and institutions have turned to overseas investment.  And by virtue of the fact that much of a firm’s activities are conducted overseas, it normally requires investors to transfer money out of China which oftentimes makes domestic clients feel uncertain as their assets are not physically close by, creating a psychological insecure feeling (e.g., uncertainty) especially in recent years as Western countries have had numerous financial scandals that have shaken investor trust and confidence.  In addition, China has a capital transfer restriction that strictly prevents citizens from transferring assets to a broker or investment firm outside the mainland over an annual limit of $50,000 USD.  Thus any amount beyond that requires other legal ways to process and transact it.”  These capital restrictions are discussed in Chapter 11.  Furthermore, can you or your company utilize local talent like Ding’s firms have?

Ding’s point regarding a dearth of investment instruments was recently echoed by Nick Yim head of Goldman Sachs China Market.  According to Boston Consulting Group, the total value of private investible assets in China reached $12 trillion in 2012 (a 14% increase year over year).50 Where are these assets?  According to Yim, most of his high-network clients only have “have 20% to 30% of the funds parked offshore, the rest remains onshore.”51 And because of the global financial crisis and relatively slower domestic growth, these clients “have become more conservative and now behave more like U.S. clients.”  This means they are looking for safe, conservative lower yield products.  While there are a limited number of investment products and a scarcity for seasoned bankers, which he considers to be the two biggest challenges, Yim sees a lot of growth potential due to improving legal and regulatory frameworks.  And ultimately, because China also has a single culture, currency, language and regulator, he thinks that there are a lot of opportunities for Western private banks to provide diversification, risk management and retirement planning services in what may become the world’s largest economy in the next decade.

Takeaway: With more than 57 million inbound tourists that spent $48 billion last year, the domestic Chinese tourism industries is one of the largest in the world.  Training staff and putting together a brand positioning campaign are just two areas of many that foreign expertise can bring to the growing industry (which may grow from 2 million hotels today, to 5 million in the next four years).  In addition, financial service companies may be able to find opportunities to not only to train local financial firms on bond technicalities but also provide ancillary services to fixed-equity investment programs.  And in addition to conducting your due diligence it is also recommended that you read through Chapter 10 regarding legal and regulatory risks and uncertainties.


Endnotes:

  1. See China’s Foreign Direct Investment Declines for Eighth Month from Bloomberg, China 2012 FDI suffers first annual fall in three years from Reuters and China Overtook US as main Destination for FDI in First-half 2012 –UNCTAD from The Wall Street Journal []
  2. Investment from China in US reaches record high from China Daily []
  3. According to the World Bank total overseas investment by Chinese firms reached $21.4 billion in Q1 2012.  This is substantially higher than $17.8 billion in all of 2009.  See China Buys Overseas Assets from The Wall Street Journal and China’s overseas direct investment strategy from finfacts []
  4. The Shift from East to West: Chinese Investment in North America from Firmex []
  5. See Chinese company buys battery maker that got recovery funds from The Washington Post and Investment from China rises amid concern from The Washington Post []
  6. See Chinese Investment to the U.S. Speeds Up from Caijing from Caijing, Chinese outbound investment accelerates from China Daily, Investment from China rises amid concern from The Washington Post and Make It for China to Buy U.S. Businesses from Bloomberg []
  7. Another area Chinese individuals and firms are now investing in is the US real estate and property market.  According to a recent report, “[b]uyers from China also invested almost $2 billion in commercial property in 2011, or quadruple what they spent several years ago.”  One of the recent deals was led by China’s Vanke (the largest real estate developer on the mainland) who agreed to a $620 million project in San Fransico in December 2012.  See Chinese buyers lead foreign investment in US housing market from Fox News, China Vanke Arrives in U.S. from The Wall Street Journal and Lennar Said to Get $1.7 Billion San Francisco Loan from Bloomberg []
  8. See A Gateway to the U.S. by Daniel Rosen and Thilo Hanemann, China’s outward FDI to reach US$150bn by 2015 from Want China Times and FDI with Chinese characteristics from The Economist []
  9. Chinese firm puts millions into U.S. natural gas stations from Reuters []
  10. Chinese Investment: Europe vs. the United States from Rhodium Group []
  11. After the Boom in Natural Gas from The New York Times []
  12. Another segment Chinese firms are expanding into in the US and Europe is construction equipment.  Sany is China’s largest heavy machinery manufacturer (e.g., excavators) and aims to become the largest globally in the world.  As a consequence it is looking abroad for mergers, acquisitions and joint-ventures.  Perhaps your firm could find a new partnership with them.  See Sany Tries to Gain Traction in the U.S. from The Wall Street Journal []
  13. China takes new step in oil sands from The Globe And Mail []
  14. See Animal Spirits with Chinese Characteristics by Mark DeWeaver and Achieving 2020 from the Brookings Institute []
  15. See Foreign capital rules eased from China Daily and China Capital Account Restrictions Loosened for Foreign Investors by Stan Abrams []
  16. China Big Bang Seen Like London in New Regime: Cutting Research from Bloomberg and Reins on Shanghai set to be loosened from South China Morning Post []
  17. In addition to QFII, a recent report suggests that citizens of Taiwan, Hong Kong and Macau could invest directly into mainland stock exchanges.  See Mainland to allow overseas citizens in stock market from Xinhua []
  18. Graphics: Super Ministry from Caixin []
  19. SAFE Issues New Rules to Further Relax the Foreign Exchange Controls over Direct Investment from King & Wood Mallesons []
  20. See China Scraps QFII Limit on Sovereign Funds, Central Banks from Bloomberg, China’s Stocks Drop Below 2,000 from Bloomberg and China stocks fall below 2000 to 4-year low from South China Morning Post []
  21. See Qatar granted $1b QFII quota from Reuters, China’s Qualified Success In Attracting Qualified Foreign Investors from China Bystander, China pledges to expand QFII, RQFII programs from China Daily and 64 More Institutions Enter China via QFII, CSRC Official Says from Caixin []
  22. China to Expand Short-Selling Program as Part of Reform from Bloomberg []
  23. China Allows Brokerages to Conduct Securitization Business from Bloomberg []
  24. 深圳、珠海商事登记改革3月1日起正式实施国家工商总局支持两地启用新版营业执照from Guandong Province Administration for Industry & Commerce []
  25. See Shanghai makes China’s first direct local-bond issue from Reuters and China Scraps Trial of Local Government Bonds, Studies Risks from Bloomberg []
  26. Regulator Allows Bank Subsidiary to Sell Special Bonds from Caixin []
  27. According to Shang Fulin, chairman of the China Banking Regulatory Commission, as of September 2012 the local government debt collectively amounted to $1.48 trillion.  See High local debt levels coming under control from China Daily and China averts local government defaults from Financial Times.  Other higher estimates can be found in China tells banks to roll over local govt loans: report from Reuters and Are Chinese Banks Hiding “The Mother of All Debt Bombs”? from The Diplomat []
  28. Back in Fashion: China’s Bad Debt from The Wall Street Journal []
  29. Pamria Asset Management []
  30. No exit from China Economic Review []
  31. Private Equity in China: Which Way Out? from The New York Times []
  32. Chinese Headwinds Beset Private-Equity Highfliers from The Wall Street Journal []
  33. China Private Equity Chilled by ’Old Days’ Asking Prices from Bloomberg []
  34. See China’s Stocks Slump to Two-Month Low on Property Curbs from Bloomberg, Finding Investment Opportunities in a Tough Market from The Wall Street Journal and China IPO Hiatus May Prompt Smaller Firms to Seek HK Listing from The Wall Street Journal []
  35. This decline in IPOs is not a new phenomenon; even Hong Kong has had difficulties this past year.  See Bankers See Fees Fade as China Era of Jumbo IPOs Draws to Close from Bloomberg and Hong Kong Has Tough IPO Road Ahead from The Wall Street Journal []
  36. China Private Equity Chilled by ’Old Days’ Asking Prices from Bloomberg []
  37. Doubts Over Returns Hit Fundraising in China from The Wall Street Journal []
  38. See China IPO Hiatus May Prompt Smaller Firms to Seek HK Listing from The Wall Street Journal, Private Equity in China: Which Way Out? from The New York Times, Auditing Spat Dividing U.S. and China Turns Ugly from Caixin and MNCs in China and PCAOB deregistration from China Accounting Blog []
  39. Foreign auditing firms such as the Big Four are stuck between the proverbial rock and hard place.  On the one hand the SEC requires that these firms hand over audit documents to be verified and audited by the government, yet due to Chinese laws, the same auditing firms sometimes cannot hand over some of the documents as the audit documents are considered “state secrets.”  See Deloitte sued over audits of ChinaCast Education from Reuters and MNCs in China and PCAOB deregistration from China Accounting Blog []
  40. The IPO process has been frozen for six months in China because the security regulators are currently reorganizing both the process and the personnel involved in the approval process.  See Finding IPO Alley from Caixin []
  41. The private equity (PE) market has also been directly affected by other policies recently discussed in With Great Power Comes Great Responsibility from Peterson Institute for International Economics.  On the other side of the Pacific, PE and Chinese firms were recently discussed in Chinese Firms Take Lonely Buyout from The Wall Street Journal []
  42. In China IPOs, the Upside of Scarcity for Private Equity from The Wall Street Journal []
  43. Another short term area for opportunities may be as an auditor due to the large dispute between the US and China over potential delistings of Chinese firms from US credit markets.  See What U.S.-China Auditing Dispute Means for Chinese Business Culture from The Wall Street Journal, U.S. audit watchdog chief hopeful on China dispute from Reuters, Auditing Spat Dividing U.S. and China Turns Ugly from Caixin and MNCs in China and PCAOB deregistration from China Accounting Blog []
  44. Developing a Competitive Edge from Insight []
  45. Ibid []
  46. Fosun International Announces 2012 Interim Results Revenue and Net Portfolio Value Continue to Grow from PRNewswire []
  47. For a detailed explanation of criteria and challenges regarding Shanghai’s push to become an international financial center see Achieving 2020 from the Brookings Institute. []
  48. China Bankers Earn Less Than New York Peers as Pay Dives from Bloomberg []
  49. See Starting a business in China from the World Bank and New Path for Trade: Selling in China from The New York Times []
  50. Private Banks Enter ‘Golden Period’ in China from The Wall Street Journal []
  51. Ibid []
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Chapter 6 – Games, health and robotic related services for the elderly

[Note: below is Chapter 6 from Great Wall of Numbers]

In October 2011 I had a bad bout with food and ended up having to stay in a hospital for a few weeks in provincial China.  In contrast to the modern facilities at Huadong hospital in Shanghai (which I have also visited), all three public hospitals in Bengbu, Anhui were at the time, less than sanitary and for residents of the West, a seemingly step-backwards-in-time.  During my stay, I befriended one of the surgeons who had studied in Switzerland.  Dr. Wang or “Charley” as he affectionately called himself, gave me a tour of the in-patient facilities I was staying and said, “Tim, look around, we can barely cope with medicating and treating these patients – how could we possibly take over the world as some media outlets suggest?”

He raises a visceral point.  Despite the abundant growth over the past three decades, one of the industries that has had its share of growing pains is the health care sector (see Chapter 19 for more).  While the debate over government versus private ownership and maintenance of the industry continues on in China, there are a number of opportunities that US medical companies can capitalize on. For example, while the pharmaceutical industry is basically tied up with patent and legal proceeding and negotiations on both sides of the Pacific, US-based medical equipment and medical device manufacturers now have a liberalized export channel compared to just a few years ago.

Overlooked yet increasingly important

On a national level, life expectancy in China has grown from 65 in 1976 to 73 in 2010.  While its increase may have plateaued, reaching farther back in time illustrates how prolonged life expectancy is a positive spillover effect due to economic growth.1 For instance, according to Xinhua, the average life expectancy in Guangdong (the wealthiest province) has risen from 31 in 1949 to 75 in 2008.234

Assuming the retirement age is not increased, by 2050, it is estimated that 31% of China’s population will be near the age of retirement.5 In contrast, today about 14.8% of China’s population is over the age of 60.67

Yet with these demographic changes come different opportunities as well.  According to Zhao Baohua of the Gerontological Society of China, he notes that in terms of entertainment and “toys” for the elderly, “[a]bout 99 percent of Chinese toy factories just produce items for children, but in more-developed economies about 40 percent of toys are designed for older people. It may take China 30 years to catch up with some countries in this area.”8

Here is an area where Western-based toy, games and entertainment companies can export goods and services to a market ripe with potential.  For instance, Amazon.com has several pages of “toys for the elderly” and “toys and games for senior citizens.”  And as described below, there are a number of other made-for-the-elderly products that are currently available in the West but not in China.

This also raises the question, what activities do elderly populations in other countries have access to?  One potential answer to that could be the apartment complex where I currently live in Changning, Shanghai which has a small playground that is typically used by both toddlers and the elderly alike.  According to a Reuters report, “there were over 15,000 pieces of elderly workout equipment parks across Japan.”9 This same report noted that “an elderly playground starts at 8 million yen ($87,220), including the installation of equipment and instructors’ fees.”  Thus there is a potential business opportunity for US firms that develop playgrounds to export their products and services to China.

What about demobilizing conditions?  In the Netherlands, a village was recently built that “doubles as a nursing home,” serving clients suffering from dementia and Alzheimer’s.10 Similarly in Switzerland, a $26 million village has been built catering to the elderly afflicted with Alzheimer’s as well.11 In 2007, six million Chinese suffered from Alzheimer’s and that number is expected to grow markedly as the population ages.  In fact, one third of all Alzheimer’s sufferers live in China.  Shanghai alone has 120,000 residents with Alzheimer’s or dementia.12 While the debate and conversation over how to help treat these patients is still on-going, many Chinese families have now found solace through new treatment centers opening across the country.13 And with new centers comes potential markets.

What can foreigner medical experts do on the mainland?

In November 2012 I spoke with J.J. Liu who is originally from Beijing.  After completing graduate school he moved to California and worked in the bio-med industry for about 20 years before returning and now is the marketing manager for QIAGEN’s operations in China.  QIAGEN is a German biotech firm that builds and designs technologies to diagnose and measure biological specimens (e.g., when you give a blood test, they make the machine that analyses it).  Liu mentioned that as China ages the potential to provide services for the elderly increases as well.  For example, he noted that because of the economic boom in the 1990s and early 2000s many of the elderly now have more assets and funds to spend on improving their health, including the possibility of residing in assisted living facilities – or as he observed, “villas and hotel-style living that are arguably more culturally acceptable.”

Historically, Liu explains, “in the past the average resident did not have the resources to receive medical treatment – while the medical knowledge and facilities were lacking – families simply did not have the assets and resources to finance medical treatments.”  As a consequence, many families simply self-medicated through the purchase and consumption of relatively cheap drugs and TCM (Traditional Chinese Medicine or 中医) at local pharmacies.  While this self-medication phenomenon still takes place, Liu and others expect that these consumers will be able to utilize modernized Class 3 hospital facilities (the top flight), many of which are now stocked with the latest medical equipment.

What other opportunities can foreign companies become involved in?

In Chapter 3 I noted that Chinese consumers largely perceive foreign brands as premium quality. Liu noted that pharmaceutical brands are no different, as “Chinese patients are partial to imported products.”  Yet one of the limiting factors has been relatively high prices.  And some medicines like insulin for diabetes have few generic substitutes.  This price inelasticity means that the 92.3 million diabetes sufferers alone (China is now the “capital of diabetes”) have created an additional $3.2 billion drug market.14

Liu also expects that the current health care reforms being implemented by various levels of government via the 12th Five-year Plan will have “wide-ranging effects, most notably in terms of pharmaceutical costs.  Previously multinational companies [MNCs] were given a preferential pricing policy that allowed them to charge 100-200% markups on medicines whose patents were already running out in the West.  In the next several years this markup will be reduced to a mere 10-20% while simultaneously generic brands are introduced.”

Prior to these reforms, Chinese policies required that in order for MNCs to have access to the market they would need to produce and manufacture the pharmaceuticals on the mainland.  In doing this, policy makers expected a knowledge transfer would take place – as in the auto industry, which I briefly discuss later in Chapter 10 – as MNCs would need to train local staff and administrators.

Subsequently, while very little original research and development has taken place on the mainland over the past decade, going forward many MNC pharmaceuticals have opened up regional headquarters in China to take advantage of both the increased resources being placed into the health care industry as well as recruiting from a well-trained local talent pool.

What does this mean for you and your company?

In six years since it was established, QIAGEN’s Asia Pacific sales have grown from zero to accounting for almost 20% of global sales.  Simultaneously its Shanghai headquarters has grown from 1 employee to 400.  How has it done this?  Its double digit growth rates comes from selling medical systems – like those described above – through distributor channels to hospitals and clinical research facilities (QIAGEN as a whole generated $1.17 billion in 2011).  And because of the various reforms being enacted in all cities, counties and provinces, there are substantial areas of growth for medical providers, both domestic and foreign.  One other area where Liu sees specific potential opportunities for foreign experts is to help set up and train staff at a wide-array of facilities, including retirement villas.  Thus if you and your company already provide health care services you may be able to find new opportunities and revenue streams in China as well.

Lack of products presents opportunities

While services such as LifeCall’s medical alarm (creators of the catchphrase: “Help, I have fallen and I can’t get up”) have been offered to US residents for more than 15 years, there are few equivalents in China at this time.  Even though it is debatable whether or not such a service would prove to be popular in China, one possible product that has gone under the radar and could appeal to elderly Chinese consumers are e-Pants, designed by engineers at Virginia Tech.15 Embedded in the pants are several electronic gyroscopes and accelerometers that communicate to nearby computers via Bluetooth and can detect whether or not a wearer has fallen down.  Similarly a team of researchers at the University of Adelaide are using RFIDs and software to detect sensory movement and help monitor the activities of the elderly so that these aged consumers can continue to live both independently and safely at home (e.g., alert emergency providers if an accident occurs).16 Maybe you or your company can integrate LifeCall’s functionality with e-Pants.  Or perhaps your firm can take a page from Fujitsu who in February 2013 unveiled a “smart” cane called the Stylistic S01.17 Embedded in the handle of the cane is a GPS with LED lights that can help point the user in the correct direction.  In addition, built-in sensors can monitor temperature, heart rate and even humidity.  Their target market is the elderly as well.

Because of Japan’s rapidly aging population (it has the highest average age in the world) its engineers are also at the forefront of innovating and producing both machines and robotic solutions to provide support for the elderly.18 For example, the AGNES suit allows its wearers to feel what it is like to have limitations in physical motility.  The Hybrid assistive limb (HAL) is a new robotic exoskeleton developed by Tsukuba University in a bid to help improve the physical capabilities of its users.19 In the UK there is Hector, a mobile “assistive” robot that can follow its owners and take commands via a touchscreen.20 In the US, there are a number of social and domestic cleaning robotic projects such as the PR2 from Willow Garage and the Roomba from iRobot.21 And since China is rapidly aging as well, this presents an opportunity not just for foreign robotics companies but also IT firms to export their solutions to China (see Chapter 13 as well).22

Digital demographic differences

While personal computer ownership in China continues to increase over the past two decades, as the average urban salary is about $3,430 a year, the typical urbanite usually does not have the funds to pay for one at home.23 That serves as a reason why, internet bars or net cafes (wangba) are substantially much more popular than their Western equivalent.  Xinhua estimates that as of 2009 there are more than 138,000 “cybercafés” in China.24 And 70% of the customers are between the ages of 18 and 30.

So where does this leave the aged and elderly?

As I mention later in Chapter 13, both the iOS and Android app marketplace’s in the US have a number of simple games that some older audiences have gravitated towards.  And as smartphone proliferation continues in China, this presents Western developers and programmers with an opportunity to port and translate their games to a similar demographic across the Pacific.

For example, in 2012 approximately 189 smartphones were sold in China and at the end of November 2012 there were now 1.104 billion phone users on the mainland – 233.4 million were 3G users (3G adoption will increase by 100 million in 2013).2526 This past summer China overtook the US to become the largest smartphone market.27 Flurry now estimates that as of February 2013 there were 246 million smart devices in China compared with 230 million in the US.28 It is thus unsurprising that China is also the fastest growing market for iOS and Android devices.29 Yet in terms of demographics, the vast majority (~90%) of smartphones on the mainland are owned by users who are less than 55 years old.

As I mention later in Chapter 13, in the US, 50% of Solitaire and FreeCell players are senior citizens and 44% of US seniors have played solo games online.3031 Yet a 2012 Flurry Analytics report found that only a mere 3% of US users aged 55 or older, play games on their phones.32 However, in terms of total tablet and smartphone ownership, according to Flurry, in the US this same elderly demographic group (55+) represents 17% of the total tablet and smartphone ownership.

While open market research is relatively scarce on the Chinese side, CNNIC (which is part of the Ministry of Information Industry) estimates that the internet penetration rate for those over 50 is the lowest, at 7% in 2010.33 A 2010 IDC report found only 7.1% of those aged 55 or older play computer games in China.34 One estimate from iiMedia was that 10.1% of Android users in 2011 were aged 45 and older.35 iResearch estimates that 3.8% of iPhone users in 2011 were 45 and older.36 Similarly, a February 2012 report also from iResearch found that approximately 6% of Chinese mobile internet users were 45 and older.37 And Askci estimates that only 1.5% of 50+ year olds in China had a smartphone by the end of 2011.38 So in short, smartphone and computer penetration is relatively subdued within older demographic brackets.

Why is there such a disparity between the US and China?  Why does it matter?

I posed this question to a number of Chinese students and colleagues and they noted that the vast majority of the elderly in China were born and raised on farms and are unfamiliar with the latest technology (e.g., only 51.3% of the population is currently urbanized).39 Another issue could be illiteracy rates.  For example, an older New York Times report noted that many of the less developed more rural regions of China have much higher illiteracy rates.  In 2001, parts of Tibet had up to 42% illiteracy rates.40 Yet trends could be changing as We Are Social estimates that there are at least five million shoppers and increasing over the age of 50 in China.41

Apps that cater to the elderly

One argument against investing resources towards this demographic group is that you do not, with such relatively low market penetration why invest the resources for a risky return on capital?  However one unseen opportunity is the ‘long tail’ – that the simplified game you make could find an audience with other demographic groups such as primary school students at the other end of the population pyramid.

For example, Brain Age is a best-selling Japanese puzzle game for the Nintendo DS (a handheld gaming console) that is popular and successful in part due to its simplicity and ease of use for a wide-range of ages.  Perhaps Western developers could look to the simplified user experience design (UXD) in Brain Age as they port their games over to Chinese markets.

In my own anecdotal experience I think an overlooked, yet important phenomenon regarding elderly Chinese is that they are incredibly social and often even physically active.  On any given night you will see large groups of seniors dancing in plazas, practicing qigong and playing mahjong along the roads.  As my students noted above and the CNNIC data illustrated, if a developer could make accessing apps and the internet itself relatively easier elderly customers may find smartphones less imposing and confusing (e.g., tap on a big simple picture of the person you want to talk to).42

And in addition to using easy-to-see objects, be sure to modify the games to include Chinese traditions, symbols and cultural tie-ins – or in other words ‘Western video games with Chinese characteristics.’  For example: the color red, number 8, and the Chinese knot (Zhōngguó jié) are all considered lucky.  In the early 2000s a knock-off of Red Bull completely redesigned their can to fit the Chinese penchant for red and gold.43 Perhaps creatively integrating these symbols into your game would prove crowd-pleasing.

Also, even though gambling is currently banned on the mainland, this has not prevented small-scale gambling activities from taking place (e.g., in 2007 Macau overtook Las Vegas in gambling revenue).444546 From my observations, a large part of gambling is done in person on pieces of cardboard in the streets or in little game houses (e.g., tea houses and mahjong parlors).  This is not an endorsement of these illicit activities.  Rather this consumer behavior presents an opportunity for app developers to focus on both simplicity and the social aspect of any app that is created.  And since gambling is popular across many demographic groups, perhaps designing a “social” fortune-style game or a non-monetary betting app would find success across the mainland.

Thus while there is viable market potential for game and entertainment developers to create applications for both sides of the Pacific, careful due diligence of age and technology distribution and proliferation is recommended.

Service with a smile

Another possible area for business opportunities is senior care services.  In a December 2012 email exchange with Qian Jianchu, a professor at Shanghai Institute of Foreign Trade,47 he mentioned to me that “elderly nursing will be the most prosperous industry in China in the next 10-50 years.  The market is currently at a relatively low penetration level at present due to the lack of management experiences and promotion.  Therefore foreign firms with experience may find many opportunities in this segment.”  Why is this the case?  Because as noted above, assuming the retirement age is not increased, by 2050 it is estimated that 31% of China’s population will be of retirement age; and within 40 years China “will have nearly 500 million elderly people.”48 Yet despite this increasingly larger demographic bracket, “only 8% of elderly Chinese consumers feel that marketers adequately target them with advertising and products.”49

There are exceptions such as the US-based hedge fund Fortress Investment Group who is investing in and working with China Senior Care to provide “elderly care and retirement facilities.”50

And while assisted living and senior living centers have become increasingly popular in Western countries, aside from several token centers in China, they are virtually non-existent.  That is to say, only 1.6% of people over 60 on the mainland (compared with 8% in developed countries) are accommodated in some way by care facilities.51 Or rather, all but a few of the affluent do not currently receive services from an assisted living center.  Yet according to a report from China’s National Committee on Ageing, about 12 million Chinese over the age of 60 would consider retirement villages an option.52  This potential is one of the reasons why J.J. Liu recommended the market segment for potential entry by experienced foreign firms.   In fact, Fortress is investing $1 billion over the next several years to build and operate centers in larger cities like Shanghai and Beijing.  And the sky may be the limit, as the most expensive 7-star nursing home in Hainan province targeted and tailored at seniors recently opened in Haikou, charging between $1,283 to $2,444 per month.53

In contrast, a 2008 study noted that approximately 1.4 million Americans currently live in several thousand assisted living centers and nursing homes.54 Thus the potential opportunities in China to not only train the staff but also to sell and equip the centers with vital materials provide Western firms and entrepreneurs with new revenue streams in the immediate future.

Some critics may argue that firms like Fortress Capital are getting ahead of themselves, that there may be very little genuine demand – regardless of costs – for assisted living.  For example, Shanghai International Medical Zone (SIMZ) had a tough time starting up several years ago.  It was initially planned to be a luxury retirement village targeting wealthier retirees.  However as part of its marketing push its owners “boasted an investment partnership with Augustinum Group, a leading provider of retirement homes in Germany.”55 Yet work on SIMZ actually stalled for a few years and Augustinum said it never made investments on the mainland.  SIMZ has since been completed and subsequently foreign firms such as Eli Lily (a large US-based pharmaceutical company) and Parkway (a Singapore-based health care provider) have begun operating in the zone.56 Thus even though there is potential due to an expanding market driven by a rise in living standards, investors should still be cautious.  Another argument notes that one of the three Confucian ideals that children are taught is filial piety (xiào): take care of their parents when they grow older.57 Yet because of cultural dynamics, home healthcare may eventually become an accepted alternative as Liu noted above.  Just as generational changes in the West led to outsourcing care of our aged parents, so too may the post-1980s generations (bā​líng​hòu) do in China.

I also spoke with Adam Clemans who echoed similar rationales and prospects.  Clemans is an American pharmacist who works at an international hospital in Shanghai.  According to him, “while somewhat tangential with the filial piety idea, many Chinese children do not necessarily want to (or cannot afford to) spend enormous amounts of money on their parents, but rather they want to get them things that seem like they might be expensive.  The simple fact that something is imported or made by a foreign company makes it seem valuable and special.  For example, relatively mundane “low-tech” items like slip-proof rugs or handle bars for getting on and off the toilet could be attainable hits.  In addition, I think there might be a third market (upper-middle class) for elderly care as well.  Not necessarily super-luxury, but with more Western characteristics (like clean floors & privacy).  Right now it seems like there seems to only be two options, cheap or extremely expensive.”

With a middle class currently numbering 300 million – and estimated to grow to 600 million by 2020 – these alternative care options could become increasingly possible for consumer and suppliers alike.58 Yet again it should be pointed out that middle class is defined as those with at least $3,000 a year in disposable income (e.g., earn between $10,000 and 60,000 pre-tax).5960 So while they have more funds for supporting their elderly relatives, they may not have enough to buy a product like a walk-in bathtub quite yet.  In addition, your company may be able to cater to clients from the Greater China region such as elderly Hong Kong pensioners.  According to the Guangdong provincial government, 69,000 elderly Hong Kong pensioners now live in retirement homes throughout the Pearl River Delta – the bulk of which (more than 10,000) reside in Guangzhou.61 One of the main reasons is that the quality of care is purportedly the same as it is in Hong Kong yet the labor costs are significantly lower thus enabling retirees to live more flexible in terms of finances.

Takeaway: The rapid demographic changes within China present health care providers, robotic manufacturers and game developers with opportunities.  What products and services can you and your company invent and export to China?  These solutions can range from the seemingly obvious, personal movers like the Rascal to something less evident such as old-age proofing doors and cabinets or even simple smartphone games.


Endnotes:

  1. Life expectancy in China Rising Slowly, Despite Economic Surge from The New York Times []
  2. Life expectancy increases by 44 years from 1949 in China’s economic powerhouse Guangdong from People’s Daily []
  3. Residents of Shanghai has the highest life expectancy at birth on the mainland, at 82.41 years.  See City keeps top life expectancy on mainland from Shanghai Daily []
  4. Guangdong has led GDP provincial output on the mainland since 1989.  In 2012 its GDP output was 5.7 trillion RMB ($920 billion) which is half the size of India’s.  See Guangdong GDP up 10.2 percent in 2012 from NewsGD, Jiangsu unchained: Top in per capita GDP, Guangdong in its sights from Want China Times and Guangdong leaders fear they will lose economic pole position to Jiangsu from South China Morning Post []
  5. Empower elderly to be active participants from People’s Daily []
  6. See Age will weary the Chinese miracle from BusinessSpecator and Elderly population to surpass 200 mln in 2013 from Xinhua []
  7. China’s Achilles heal from The Economist []
  8. Age of disillusion haunts senior citizens from China Daily []
  9. Japan’s elderly playgrounds show fun is for everyone from Reuters []
  10. Alzheimer’s Disease: Dutch Village Doubles as Nursing Home from ABC News []
  11. Switzerland’s ‘Dementiaville’ designed to mirror the past from The Independent []
  12. See China in Alzheimer’s double bind from BBC and China, in a Shift, Takes On Its Alzheimer’s Problem from The New York Times []
  13. China, in a Shift, Takes On Its Alzheimer’s Problem from The New York Times []
  14. This upfront cost is on top of the $26 billion in annual healthcare and lost productivity.  See China Diabetes Triples Creating $3.2 Billion Drug Market from Bloomberg and China’s diabetes epidemic exacerbated by one-child policy from News Track India []
  15. E-Textile Pants Identify Fall-Prone Elderly from PhysOrg []
  16. Computer science helping the aged stay home from The University of Adelaide []
  17. Fujitsu prototype GPS cane hands-on: the future of monitoring and protecting the elderly from Engadget []
  18. For an in-depth discussion on assistive robots, see Population Ageing and Socially Assistive Robots for Elderly Persons: The Importance of Sociodemographic Factors for User Acceptance from the International Journal of Population Research []
  19. Robot Suit Hal from Cyberdyne []
  20. Hector: Robotic Assistance for the Elderly from Forbes []
  21. Another robot that could potentially assist both the elderly as well as manufacturers is Baxter.  See Small Factories Give Baxter the Robot a Cautious Once-Over from MIT Technology Review []
  22. With their increased popularity in North America, selling walk-in bathtubs may also be another market opportunity although transportation inland may be difficult. []
  23. Low rate of ownership to lift PC buying from Shanghai Daily []
  24. China saw 138,000 Internet cafes as of 2009 from Xinhua []
  25. China Mobile alone sold 60 million TD-SCDMA (a domestically developed radio technology) devices in 2012.  See Check Out 3 Years of Stunning 3G Growth in China from Tech in Asia, China’s Smartphone Sales Grow 189 million Units in 2012 from MIC Gadget and China Mobile Sold 60 Million TD-SCDMA Devices Last Year from China Tech News []
  26. See China Had Over 1.1 Billion Mobile Phone Users By November 2012 from China Tech News and China Has Over a Billion Mobile Phone Users, 192 Million 3G users from Tech In Asia []
  27. China smartphone market to overtake U.S. in 2012 from Reuters []
  28. China Knocks Off U.S. to Become World’s Top Smart Device Market from Flurry []
  29. Flurry: China Is Fastest Growing Market For iOS & Android devices, Chile comes in 2nd from TechCrunch []
  30. Vintage PC Video Games Still Thrive in World of App from Nielsen []
  31. The Data Digest: Digital Seniors from Forrester []
  32. Flurry Game Accerlation Program from Digital Analytics Association Symposium in June 2012 []
  33. China Internet Insights — Incitez, p.11 from China Internet Watch []
  34. See Table 3, p. 9 China Gaming Market End-User Survey, 2010 from IDC []
  35. See 2011年中国Android智能手机用户年龄分布 from iiMedia and 2011 年中国Android 智能手机用户年龄分布 from China Mobile []
  36. 中国iPhone用户用户年龄段偏成熟 from ChinaPP []
  37. China Mobile Internet User Age Distribution from China Internet Watch []
  38. 2010-2011年12月中國智能手機與非智能手機網民的年齡分布比較 from Askci []
  39. See China urbanization rate exceeds 50 percent from Xinhua, China’s Urban Population Exceeds Countryside for First Time from Bloomberg and Crossing the 50 Percent Population Rubicon: Can China Urbanize to Prosperity? by Kam Wing Chan []
  40. China’s Long — but Uneven — March to Literacy from The New York Times []
  41. Social, Digital, Mobile China (Jan 2013) from We Are Social []
  42. Part of the problem in terms of relatively low penetration rates has to do with the User Experience (UX) that is still being refined.  Phones like SafeTalk (“as seen on TV”) are designed specifically for seniors and others who may have vision difficulties. []
  43. Red Bull still waiting for approval to enter China from Just Drinks []
  44. Despite initial reports that suggested a new pilot program was starting at a casino in Sanya, Hainan province (called Jesters), gambling on the mainland is currently banned.  Macau is the only nearby domicile where this is allowed.  Mainland residents must still apply for an entry visa in order to travel to Macau and are typically only allowed to visit it a few times a year.  There are exceptions, for example, if you live nearby in certain cities of Guangdong or if you have relatives living in the SAR.  See Sanya Says It Never Licensed Any Form of Gambling Activities from Caijing, Chinese authorities close cashless casino bar in island resort from Reuters, Macau Casinos Decline on Visa, Credit Limit Concerns from Bloomberg, Macau’s Casino Revenue Reaches Record After Holiday Week from Bloomberg and China Tightens Reins on Macau from Bloomberg []
  45. Revenue hit $38 billion in 2012 and is expected to reach $44 billion in 2013.  See Rolexes Pawned in Macau Signal Further Gains for Casinos from Bloomberg, Macau gaming revenues hit $33.5 billion in 2011, no slowing seen from Las Vegas Review-Journal, Broken Tooth and New Macau from Foreign Policy and Door is about to slam shut on high-rolling holidays to Macau from The Times []
  46. Despite visa issues, MGM and other resorts continue to invest in building casinos on Macau.  See MGM to build new 15.5bn yuan casino in Macau from Shanghaiist []
  47. Qian Jianchu is also the editor-in-chief at China Commerce and Trade Press []
  48. See Empower elderly to be active participants from People’s Daily and Rise in China’s Aging Poses Challenge to Beijing from The New York Times []
  49. Targeting Grandpa: China’s Seniors Hunger for Ads from The Wall Street Journal []
  50. Big money bets on China growing old, and rich from Reuters []
  51. China faces ‘timebomb’ of ageing population from The Guardian []
  52. Growing old in China: The business of going grey from BBC []
  53. 7-star nursing home opens in Haikou from China Daily []
  54. See Nursing Facilities, Staffing, Residents, and Facility Deficiencies, 2001 Through 2007 from PAS Center and Nursing Homes from the AARP Public Policy Institute []
  55. Growing old in China: The business of going grey from BBC []
  56. See About Shanghai International Medical Center, Shanghai from Parkway Pantai and Covance China and Eli Lilly Pharmaceutical Signed an Agreement on Strategic Cooperation from SIMZ []
  57. For a detailed, illustrative case study on filial piety in modern China see: In China, Betting It All on a Child in College from The New York Times []
  58. 600 million middle-class Chinese by 2020: think tank from Xinhua []
  59. China’s middle-class boom from CNNMoney []
  60. While it may be momentary exception to the trend, the stereotype of “Chinese generational savers” may be coming to an end.  According to a recent CNN report younger Chinese consumers born in the 1970s and 1980s have a savings rate near zero.  Shaun Rein author of “The End of Cheap China” similarly observes that today’s “20-something generation” are veritable spendthrifts with “an effective savings rate of zero.”  See China youth have savings rate near zero from CNN and Getting Chinese to stop saving and start spending is a hard sell from The Washington Post []
  61. In terms of specific numbers, in Guangzhou, “[t]he Shouxing Building is the city’s largest private rest home and home to about 50 pensioners from Hong Kong.”  See Hong Kong elderly go north for retirement from China Daily []
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Chapter 7 – Exporting manufactured goods

[Note: below is Chapter 7 from Great Wall of Numbers]

When I was teaching at a college in Bengbu, Anhui there was a small supermarket across from the main campus entrance called Joy Mart (合家福).  While a new Carrefour had just been built downtown, most students and faculty still regularly shopped at the nearby Joy Mart due to its physical proximity.  While I had originally brought a number of extra spare shaving razors from the US and Korea (where I had worked previously) I eventually ran out and needed to shop for more.  During my first trip along the shop aisles, I noticed one razor package that stood out among the rest: “Blades: Made in the USA.”  I got a good chuckle out of it because of all things you picture as a US export, razor blades is probably not one of them.

Which brings up a good question: being the world’s 2nd largest exporter, what exactly does the US export?  Who does it?

In case you skipped ahead I mentioned in Chapter 1 that, in its August 2012 SME Viewpoint, the US Department of Commerce noted that small and medium-sized enterprises:1

  • Only 1% of US 28 million SMEs export to any country
  • And only 10% of those that export, export to China

If you are reading this, odds are you do not work for a company that exports products and services to China.  There may be any number of reasons why.  The same publication notes that legal uncertainties and property rights protection rank among the top reasons preventing US firms from doing business in China.

But what if you are willing to take the risk and attempt to generate revenue through customers in the 2nd largest economy?  How would you do it?

ExportNow is a turnkey solution provider founded by Frank Lavine, former U.S. Ambassador and Undersecretary of Commerce for International trade.2 It is a streamlined central sales platform that allows US firms – small and large – to export their products directly from the US all the way through customs into the hands of Chinese customers.  There is no need for warehouses or store fronts as ExportNow promotes and markets the products through China’s largest online retailer, Taobao (Tmall).345

Who goes shopping online in China and how much do they spend?  Nearly 60% of Taobao’s userbase is between 25-35 years of age.6 For comparison, according to Quantcast, nearly half of Walmart.com shoppers are under the age of 34 and more than a quarter of Amazon.com’s customer base is 45 years or older.7 To give you an idea of how large online shopping is in China and how fast it has grown consider that Boston Consulting Group (BCG) published last year noted, “nearly 173 million people in China shop [online], and the e-commerce space is expected to exceed $118 billion gross merchandise value for last year [2011].”8 In 2012 that increased further to $196 billion and 242 million shoppers.9 The BCG report also estimates that China’s e-commerce market will become the world’s largest in 2015, with 329 million online shoppers (each spending roughly $1,000 annually online).10 In fact, Analysis International projects that China’s e-commerce market will hit 2.57 trillion RMB ($410 billion) by 2015 and $457.6 billion in 2016.11 And Ali Research Center estimates that if B2B transactions are not included, by 2020 sales of consumer goods via e-commerce on the mainland will reach 10 trillion RMB ($1.61 trillion).12

And if you would prefer to look around for other e-tailers, in addition to Taobao, US firms looking to tap into the Chinese e-marketplace should also consider Yihaodian (an online grocery store), 51buy.com (a subsidiary of Tencent) and 360buy (which specializes in electronics) all three of which have had double digit growth rates over the past several years.13 And these are hardly fly-by-night operations.  For example, in February 2012, Walmart increased its ownership stake to 51% in Yihaodian and by December 2012 had over 20 million registered users and 400 supplier partners.14 And in October 2012, 360buy introduced its native English channel to allow easier access for international buyers and sellers.  Furthermore, In February 2013 Saudi Arabia’s Kingdom Holding’s investment group announced it had paid about $400 million for a strategic stake in 360buy.15

So the first step is less ambiguous as you now know who you can sell your wares to in China and how you can sell them.  Chapter 12 discusses the social media and social marketing aspects of promoting your products and services in China.  But what about services and supply chain improvements?

Industrial robots

While most Westerners are under the impression that you cannot compete with China’s millions of relatively low-skilled workers, there are still opportunities in the future.

For example, as its economy has developed, wages in China have increased dramatically as well (in economics this is called the Lewis turning point16 ).  According to Ernst & Young, “[t]he average labor cost in China has nearly doubled in the past five years, going to more than 40,000 yuan ($6,400, 4,900 euros) a year in 2011 from less than 25,000 yuan a year in the beginning of 2007.”17 In fact, these higher costs are forcing many Chinese firms to relocate and automation is becoming increasingly popular (see below).  According to one Chinese official, nearly one third of manufacturers in provinces like Zhejiang and Guangdong (who produce textiles, shoes and garments) have relocated overseas to neighboring countries in Southeast Asia such as Vietnam and Malaysia in a move that has been called “the great transfer.”181920 This is not to say that manufacturing on the mainland is faltering, in fact for the third year in a row, FDI reached over $100 billion in 2012 on the mainland spurred in part by firms trying to “move up the value-added chain.”21

As a consequence, firms such as Hon Hoi Precision (Foxconn), which make the iPhone and other electronic devices, plan to move inland to provinces where wages are lower and install 1 million robots in their new factories and plants by 2015.  For example, in 2011 Foxconn only used 10,000 robots throughout their factories yet planned to have in place 300,000 by the end of 2012.22 In fact, following the 2013 Spring Festival (春节), Foxconn announced a hiring freeze on the mainland where it currently employs more than 1 million workers.23 The company will use this time to install robots throughout their factories in Shenzhen and Zhengzhou, replacing manual labor.

In 2011, China as a whole was home to 74,300 robots, up 42% from 2010 due in large part to a collective acquisition of 22,600 robotic units.24 The number of industrial robots sold on the mainland quadrupled between the five years spanning 2006-2011.25 All told there are approximately 21 robots for every 10,000 workers on the mainland.  For comparison, Japan is home to the largest number of industrial robots (more than 250,000) giving it the highest density of robots to manufacturing workers (339 per 10,000).2627 Thus Chinese firms with robots, of which there are next to zero per capita, have a long way to go before such densities are reached.  One of the reasons why the robot per capita rate is relatively low is that at 140,000 RMB to 160,000 RMB ($20,000 to $25,000) a piece, these robots (or “Foxbots” below) cost more than four times the annual salary of an assembly line worker.2829  On the domestic side, Sun Zhiqiang is the managing director of Risong Group based in Guangzhou, Guangdong.  For the past 15 years they have been developing robotic automation systems and their revenue has increased 20-fold since it was founded due in part to firms switching as a result of increased costs of human labor.  This means there may be potential long-term opportunities for foreign robotic design firms, especially at lower price points.

While Foxconn plans to use domestically made “Foxbots” for some of the work, this trend towards automation provides possibilities for Western robotic manufacturers, designers and programmers to export their goods and services.  All told, 80% of robots currently being used in China are imported from abroad (in 2011 imports increased 62% to 38,000 robots).30 For example, to improve efficiency and reduce prescription errors, many US pharmacies like CVS have rolled out automated robots in pharmacies.31 Similarly, companies like Philips and Tesla Motors have installed robots that help load and unload shipments from trucks, saving time and reducing physical stress.32 Thus firms providing robotic solutions in these segments like pharmacies and shipping may find new customers on the mainland.

Do you or does your company currently design, manufacture or maintain robotic systems?  Perhaps you can find new clients in Zhejiang and Guangdong.  Cities like Yiwu and Dongguan are some of the largest and most developed manufacturing hubs in China and as a consequence are areas where workers wages have also risen.  In fact, because wages have doubled since 2007, the return on investment of installing a new robot may outweigh the costs of hiring relatively more expensive human labor.

A distributed decentralized manufacturing process

But what if you have a small business that already manufactures goods on a small scale?  How can you compete with large OEMs?

There is a disruptive technology on the horizon and currently moving out of hackerspaces, garages and hobbyist circles called 3D manufacturing.33 As futuristic and seemingly science-fiction as it sounds (and barring legal hurdles), 3D printers and rapid prototypers have finally begin to mature into economically viable tools.34

There are a number of ways a 3D printers can work, the most common of which now is ‘additive.’  Much like a printer nozzle lays ink, commonly used 3D printer nozzles add additional plastic layers on top of one another to build the widget.35 For example, using computer-aided design (CAD) software you can design a customized object like a plastic toy for your young nephew.  Using relatively inexpensive hobby kits or even professionally manufactured 3D printers, you send the CAD file to the 3D printer.  The 3D printer then builds this toy, layer upon layer – right in your home (giving it the nickname of “desktop manufacturing”).36 And as I mention below, several of these 3D printers are now sophisticated and versatile enough to build much more complex objects than your average, everyday coffee mug.

A new report from SmartPlanet suggests that 3D printing can “make global supply chains” increasingly unnecessary.37 The report notes that while the technology is still in its germination, maturing phase, the potential to decentralize manufacturing can save on transportation costs by completely removing the costs and time of shipping from China to the US.

For example, US-based manufactures, both small and large can now purchase relatively precise 3D printers from a number of vendors.  This includes the highly acclaimed MakerBot, Fab@home and Reprap among many others.3839 The award winning MakerBot allows users to turn CAD files into physical constructions, starting at $2199 (the top-end model is $2,799).  Thus if you currently own or work for a US-based manufacturer, regardless of size, you have the potential to build and export anything from miniature toy action figures and playable guitars, to goods of all shapes and textures such as automotive parts, football cleat, artificial ears, cell phone faceplates, stainless steel dice, James Bond cars, UAVs, fuselages, microscale figurines, prosthetics, face jugs, robotic dinosaurs, civil engineering dams, houses, life-sized robots, conductive thermoplastic composites (carbomorphs), marine life models, stem cells, lunar structures and even photo booths.4041

This also presents a good opportunity for independent entrepreneurs looking to start-up a part-time project.  For example, entrepreneurs do not even need to purchase 3D printers as they can contract the physical manufacturing process to a nearby fabrication owner, allowing the entrepreneur to simply design the product and export it to China or elsewhere.  One such US-based company that already provides this content-to-print service is 3D Systems.42

Other firms such as US-based Stratays will lease 3D printers and prototyping machines to users at a monthly rate.43 One business opportunity could be renting one of these Stratasys machines and subcontracting and in-sourcing work orders from both international and domestic clients.  For example, Staples, the office retailer, will begin to integrate and install 3D printers into its printing facilities beginning in Q1 2013 making subcontracting and decentralizing relatively easier.44

In terms of legal considerations, in February 2013 I spoke with Stephan Kinsella, an author and intellectual property lawyer specializing in patents.45 According to Kinsella, “3D printers are a disruptive innovation that will probably face substantial legal hurdles depending on the jurisdiction.  49,000 3D printing systems were sold worldwide in 2011 and even in the face of copyright and patent lawsuits I suspect that tens of thousands more will be sold.46 Furthermore just as bit-torrenting and encryption have enabled file-sharing as means to avoid copyright law, ultimately the prospect of 3D printing may do something similar for patents.  And just as the RIAA sued Napster, patent holders will unsurprisingly fight to prevent this innovative process from occurring as Wired and the EFF have pointed out.”  Wired recently showcased 10 patents that could stifle the homegrown 3D printing market and the EFF is a non-profit organization that has chronicled how patents stunt innovative advances.47 For instance, last November 3D Systems (noted above) sued Formlabs for patent infringement.48 Formlabs is a startup that plans to sell a new 3D printer based on a processing technique called stereolithography that 3D Systems claims to have patented.

Despite these legal issues Kinsella still sees business opportunities, noting that “once we have sophisticated 3D printers that can make copies of themselves like the RepRap project aims to do and are capable of printing out objects retrieved on the Internet from sites like Thingiverse via encrypted files, then patent holders will find it much harder to stop 3D printing which will lead to further proliferation and economies of scale as CAD files are distributed and decentralized globally.  The traditional manufacturing business model will eventually have to change either way and since two-thirds of all 3D printers are currently made in the US, there are still several ways profit from this disruptive innovation without the need to open a factory in China.  For example, any first-mover fashion trend such as designing a creative accessory (e.g., Lady Gaga-inspired purses) and being first to print, ship and sell it to a distribution channel or even to end-customers themselves.  Information, which is what CAD files are, will ultimately become “free” – so to futureproof your business model, entrepreneurs should factor in this change sooner rather than later.”  RepRap is an open-source 3D printer project with a goal of being able to build an identical copy of itself using everyday material (in situ).49 Thingiverse is a site facilitating the sharing and distribution of user-created digital files (CAD).50

Just how large can such the 3D manufacturing process be scaled?  On October 19, 2012, New York City mayor, Michael Bloomberg, cut the ribbon to a new Queens-based 3D manufacturing facility that will soon be home to 50 large industrial-scale 3D printers capable of producing millions of customized consumer goods.51 All told, Wohler’s Associates estimates that the 3D printing industry will be a $3.1 billion market by 2016.5253 And the Consumer Electronic Association estimates that printer sales would rise to $5 billion by 2017 (up from $1.7 billion in 2011).54 These goods can in turn be sold domestically, or as illustrated above, sold to Chinese customers through ExportNow or a variety of other e-commerce providers.

Would Chinese consumers be interested in buying your 3D printed objects?  Perhaps they might, depending on what it is.  For example, in 2011 mainland toy sales increased by 18%, generating $8.58 billion in revenue.  As a consequence Toys ‘R’ Us is not only expanding by building smaller brick-and-mortar stores but also stocking them with more education-focused products like toy microscopes because “[a]bout 35% of sales in existing stores in China are tied to education, compared with 21% in the U.S.”55 In fact, Lego, the plastic build block company, announced in March 2013 that it was building a new factory in China, its first mainland factory to cater exclusively to the Asian market; a market that has seen annual sales growth of Lego’s increase 50% for each of the past several years.56

But remember, even though the Asia-Pacific region is expected to become the world’s largest toy market in 2016 and just because you make a product that is popular in the West, does not mean it will also be popular in China.  For example, in 2009 Mattel opened a $30 million six-story flagship store in Shanghai that included not only the world’s largest collection of Barbie dolls but also other branded goods and services such as customized furniture and even a fashion runway.  Yet the store shut down two years later in large part because Chinese consumers prefer the “cuteness” of Hello Kitty over the “sexy” blonde icon.57 Thus, performing market research on consumer behavior is just as important in the East as it is in the West.58

Takeaway: In the US, only 1% of SMEs export and only 10% of these firms export to China.  This amounts to roughly 30,000 SMEs.  And odds are your company is not one of them.  Yet solutions like ExportNow make it easy for any American company to export and sell their products directly to Chinese consumers online via Taobao.  And because of labor arbitrage, developmental economics (specifically the “Lewis turning point”) and specialization, it is becoming increasing expensive to own, operate and scale manufacturing plants in hubs like the Pearl River Delta and Yangtze River Delta regions.  As a result, US firms specializing in automation (specifically robotics designers and producers) now have potentially new sources from which to generate sales.  In addition, US firms specializing in 3D printing also have the ability to disrupt and modify existing supply chains, enabling CAD designers in the US to compete directly with Chinese-made products (specifically just about anything made with plastic today).

 


Endnotes:
  1. See Opportunities for U.S. Small and Medium Business in the China Market from the American Chamber of Commerce in Shanghai. []
  2. It is called ExportNow.  I would like to thank both Eric Meng and Matt Garner for bringing this service to my attention. []
  3. While some Western sources consider Chinese auction e-tailers to be less than trustworthy, Alibaba (Taobao’s parent company) has implemented a number of policies to improve the quality, reliability and service of Taobao.  As a consequence it was recently removed from the USTR “notorious markets” list.  See Alibaba Group’s Taobao Removed From “Notorious Markets” List By U.S. from TechCrunch []
  4. Another reason to export is that the long-term potential for emerging market annual consumption is expected to reach $30 trillion by 2025.  See Winning the $30 trillion decathlon: Going for gold in emerging markets from McKinsey Quarterly []
  5. In Q3 2012, online ad revenue in China surpassed newspaper ad revenue: 14.53 billion RMB ($2.33 billion) versus 14.39 billion RMB.  See China Online Ads Market: Review and Prospect from China Internet Watch []
  6. Nearly 60% Taobao Shoppers Between 25-35 Year-old from China Internet Watch []
  7. See Demographic Differences Are Key in Amazon-Walmart Online Battle from CBSNews. For recent data from Quantcast see Amazon and Walmart []
  8. Wal-Mart Set to Cash In on Chinese Online Boom from The Motley Fool []
  9. See Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg and China Had 564 Million Netizens By End Of 2012; Fewer Using Desktop Computers To Surf from China Tech News []
  10. Saudi Arabia’s Kingdom Holding Invests in 360Buy Jingdong from The Wall Street Journal []
  11. See China Now Has 242 Million E-Commerce Shoppers, Spending $40,000 per Second from Tech In Asia, E-commerce in China – Statistics and Trends from Go-Globe []
  12. China E-Commerce Market to Reach 30 Trillion Yuan in 2020 from China Internet Watch []
  13. Over the past three years, sales at 51buy.com “increased by nearly 20 times.”  See Tencent Adjusts E-commerce Subsidiary Structure In China from China Tech News []
  14. Walmart’s Chinese E-commerce Initiative Takes Further Shape from China Tech News []
  15. Saudi Arabia’s Kingdom Holding Invests in 360Buy Jingdong from The Wall Street Journal []
  16. Named after economist William Lewis, this eponymous law describes the transition from relative subsistence to a modern industrialized economy with higher wages (e.g., capital accumulation leads to prosperity which leads to specialization away from subsistence agriculture).  See How to blow away China’s gathering storm from Financial Times, What Does the Lewis Turning Point Mean for China? A Computable General Equilibrium Analysis by Huang Yiping and Jiang Tingsong and The Lewis Turning Point in China and its Impacts on the World Economy by Andong Zhu and Wanhuan Cai []
  17. The rise of the robots from China Daily []
  18. See Economy Higher costs forcing firms to relocate from China Daily, Chinese Graduates Say No Thanks to Factory Jobs from The New York Times and What Worker Shortage? The Real Story of China’s Migrants from The Wall Street Journal []
  19. On the other hand, remaining factories may be moving up the value chain.  See Analysis: Investors make $100 billion bet on China’s drive up value chain from Reuters and China Still The Place For Manufacturing from ChinaLawBlog []
  20. Mexico is increasingly competitive in manufacturing as the maquiladora’s in border cities continue to grow in experience and talent.  See Mexico: The New China from The New York Times []
  21. For example, Samsung is investing $7 billion to build a chip plant in Xi’an and another $1.7 billion to expand production capacity at an existing plant in Kunshan, Jiangsu.  See Analysis: Investors make $100 billion bet on China’s drive up value chain from Reuters and Samsung Ups Chinese Manufacturing Investment from China Tech News []
  22. Will your next iPhone be built by robots? from IT World []
  23. 富士康暂停招工机器人将上岗from Sina []
  24. Another estimate puts the increase at 51%.  See Chinese robot wars set to erupt from China Daily []
  25. Ibid []
  26. See What’s Behind Japan’s Love Affair with Robots? from TIME and The Rise of the Machines from IEEE []
  27. Another robot that could potentially assist both the elderly as well as manufacturers is Baxter.  See Small Factories Give Baxter the Robot a Cautious Once-Over from MIT Technology Review []
  28. The average salary for assembly line workers in Guangdong is typically around 30,000 RMB a year.  See 富士康机器人上岗:每台成本14万 智商七八岁 from TechWeb []
  29. Another estimate from Wang Tianmiao, head of the State High-Tech Development Plan is that “a typical industrial robot costs around 300,000 yuan and has annual maintenance costs of 20,000 yuan. The total layout of 500,000 yuan over 10 years is considerably less than that for a 6,000-yuan-a-month technician, and robots can work three times more efficiently.”  See Chinese robot wars set to erupt from China Daily []
  30. Ibid []
  31. Will Robots Steal Your Job? from Slate []
  32. Skilled Work, Without the Worker from The New York Times []
  33. Hackerspaces are small, community owned shops typically owned, run and managed by hobbyists (like independent researchers and engineers) to allow for tinkering and education.  China now has several hackerspaces including perhaps its best known, XinCheJian in Shanghai.    See Created in China by Silvia Lindtner and David Li []
  34. How Big Business is Stymying Makers’ High-Res, Colorful Innovations from Wired []
  35. You can even used recycled plastic to refill the spool used in a 3D printer with the new Filabot which successfully completed its Kickstarter goal.  See Turn Your Plastic Recyclables Into 3D Printing Spools With Filabot from Singularity Hub []
  36. See The Desktop Manufacturing Revolution from Fast Company, Desktop Manufacturing’s ‘Macintosh Moment’ from Wired, Disruptions: On the Fast Track to Routine 3-D Printing from The New York Times and Print me a Stradivarius from The Economist []
  37. See 3D printing may put global supply chains out of business: report from smartplanet, Mr. China Comes to America from The Atlantic, The Insourcing Boom from The Atlantic, 3D Printing and the Future of Shopping: Shapeways CEO Peter Weijmarshausen from Reason, Big Data and cloud computing empower smart machines to do human work, take human jobs from The Washington Post and What’s the Deal with Copyright and 3D Printing? from Michael Weinberg []
  38. The New MakerBot Replicator Might Just Change Your World from Wired []
  39. There are more than a dozen publicly released 3D printers available to consumers.  See The shape of things to come: A consumer’s guide to 3D printers from Engadget and Formlabs Co-Founder Describes Their Stereolithographic 3D Printer from Slashdot []
  40. See Completely Customizable 3-D Printed Figurines from Wired, The World’s First 3D Printed Guitar from BusinessWeek and voxeljet builds Aston Martin models for James Bond film Skyfall from 3ders []
  41. Student Engineers Design, Build, Fly ‘Printed’ Airplane from UVAToday, Everything you need to know about the Lumia 820 and 3D printing from Nokia, Microscale 3D printing of a spaceship from Nanoscribe, Weighted Companion Cube Die – Stainless Steel from Etsy, 3D Printed “Exoskeleton” Lets a Little Girl Lift Her Arms and Play from Stratasys,  Robohand: How cheap 3D printers built a replacement hand for a five-year old boy from ArsTechnica, A Simple, Low-Cost Conductive Composite Material for 3D Printing of Electronic Sensors from PLOS One, Nike launches its first 3D-printed football cleat from Engadget, Bioengineers print ears that look and act like the real thing from Chronicle Online, Recreating 19th-century face jugs with 3D scanning and printing technology from BoingBoing, Robotic Dinosaurs On the Way for Next-Gen Paleontology at Drexel from Drexel NOW, Honey, I Shrunk the Dam! from US Army Corps of Engineers, Dutch architect to build “endless” house with 3D printer from 3ders, Print your own life-size robot for under $1,000 from CNN, 3D printing: The world’s first printed plane from NewScientist, Airbus Explores Building Planes With Giant 3D Printers from Forbes, Colony: beautiful 3D prints, reminiscent of marine life-forms from BoingBoing, Edinburgh scientists use 3D printing to produce stem cells from BBC, Foster + Partners works with European Space Agency to 3D print structures on the moon from Foster + Partners and 3D Printing “Photo Booths” Popping Up Across the World from Singularity Hub []
  42. 3D Systems []
  43. Stratasys []
  44. Staples to Use Mcor IRIS in Copy Centers from Fabbaloo []
  45. KinsellaLaw []
  46. New Industry Report on Additive Manufacturing and 3D Printing Unveiled from Wohler Associates []
  47. How Big Business is Stymying Makers’ High-Res, Colorful Innovations from Wired and EFF []
  48. 3D Systems Sues Formlabs and Kickstarter for Patent Infringement from Wired []
  49. RepRap []
  50. A free open-source repository of CAD files for 3D printing is actively maintained at Thingiverse and Autodesk recently released an iOS app called 123D Creature that allows users to design and print 3D creatures. []
  51. See Giant 3-D Printing Factory Opens In New York City from Popular Science and Inside The World’s Biggest Consumer 3D Printing Factory from Forbes []
  52. Next Year’s 3-D Printers Promise Big Things — Really Big Things from Wired []
  53. Stratasys recently merged with Objet to become the largest 3D printer company (ahead of 3D Systems).  See After Merger, 3D Printing Industry Has A New Leader from SingularityHub []
  54. Domestic research and development of 3D printing is a nascent industry on the mainland.  According to Wohler’s Associates, two-thirds of 3D printers sold in 2011 were made in the US compared with just 3.6% from China.  See China’s 3D Printing: Not a Revolution – Yet from Caixin []
  55. Toys ‘R’ Us Grows in China, With ‘Tiger Moms’ in Mind from The Wall Street Journal []
  56. Lego Ramps Up Production for Asia from The Wall Street Journal []
  57. See Why Barbie Stumbled in China and How She Could Re-invent Herself from Forbes and What do Chinese consumers want? Not Barbie from CNN []
  58. In addition to studying the 250 million members of the emerging middle class and their shopping habits, another area of potential research involves that of the consumer behavior of only-children which may impact the sales of the goods and services from your company.  See Ambition and angst: inside China’s middle class from The Times and Little Emperors: Behavioral Impacts of China’s One-Child Policy from L. Cameron et. al. []
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