Otis Business inquiry trip to Shanghai, Beijing 2005
Shanghai reports March 23-April 20, 2005
Business only
March 25th AM met with the commercial attaché at the consulate, Ira Kasoff. Also another senior commercial officer, Jim Golson who is very familiar with the Medical markets here and will be posted to Bangkok in about a year. Good meeting with Ira. His second posting to China. And he’s been studying Chinese for over 20 years. Jim too, but not so long, at the Foreign Service Language School. Net net the toothpaste of China’s growth isn’t going back into the tube. I’d heard that at this rate of growth, China will absorb ALL the Earth’s resources in a couple of decades. So of course the growth will taper off some. But we’re seeing flickers of things to come in rising oil prices and gas at the pumps in the USA. There will be some changes in the world. Of that I’m pretty sure.
On proprietary IP, intellectual property, the Euros are known here to send their older technologies so they are less vulnerable to reverse engineering. The Americans plunge in with state-of-the-art everything and, for that, the Chinese are extremely grateful. And it makes us a bit more vulnerable. You absolutely have to register all proprietary information and file for Chinese patents. Without this you are totally vulnerable and there’s no recourse. With it, you can go to the courts. Litigation and arbitration are becoming more and more common and accepted here. Chinese are beginning to initiate such against us, sometimes, so that’s evidence of it’s becoming part of the new economic landscape.
I met in separate sessions with Jim and the Chinese-Thai woman, Lynn Jiang, after the formal talks with Ira. And after that I dropped in on Peter Neumann who heads up Faegre and Benson here. I’d talked to my old friend, Mike Murphy who is recently retired from Faegre and Benson who put me in touch with George Martin who heads up the China practice from Minneapolis. Peter knew I was coming but the email being down, his messages just bounced back to him. So I wasn’t unexpected but my dropping in was. Happily he was in the office, a relative rarity, and we had a very nice talk. He’s going to Switzerland to ski Monday and then has business trips planned out until April 7th, at which time we’ll meet again.
I told him that my impression was that unlike the US, Japan, and Europe, China was still in its infancy in rule of law governing contracts and IP protection so “Guanxi” or personal relationships were more important here. And thus my desire to be here to make contacts that would be useful in the future. He said historically maybe that was so. And to a degree it still is. But don’t count on it because “everybody” has contacts. They don’t always add up to much. Aren’t always the kinds of contacts you really want. I was told before my trip by somebody who does a lot of business in China, that a key distributor who had had him, the guy, and his family, to his house in China and the guy had had the distributor, and his family, to his house in Minneapolis, and the guy was led to feel they had a tight and “special” relationship with the distributor, found that the distributor was selling competitors’ products “out the back door.” A legal violation of their agreement of exclusivity and a breach of personal trust. Very sad. The guy sacked the distributor ... and, of course, the loss of money was less hurtful than the betrayal of trust. Of course it happens everywhere from time to time. States too. But it always hurts. And it underscored Peter’s admonition to cross your “t”s and dot your “i”s legally from the outset and don’t count overly or unrealistically much on the sweetness and light of “close personal relationships” here. As my sister’s first husband said, “Love many. Trust few. Learn to paddle your own canoe.” And when you do find trust so far away, hold it close and earn it daily.
Back to yesterday a little. In the afternoon, after setting up meeting times with: (1) Paul Swensen from Wisconsin who’s been here forever and is a fountain of information (St. Olaf grad), (2) Fu Ming (last name first, except when it isn’t) an eminent Chinese Lawyer here, (3) Iain McDaniels, (former student of Roy Grow whom I’d had to dinner about a month ago and who was chair of the Poly Sci department at Carleton and who’s been coming to teach here for years and who has written some very good books on China,) who is now the head of the US-Business Council in Shanghai, a very big job, (4) the Denver Rep in China whom I met while at the consulate cause his office is there ... along with Michigan and some others .
Met with Iain (said like “eye” in) McDaniels, a very smart, youngish, very knowledgable, former student of Roy Grow’s who (Iain) has been in China for nine years and is the Deputy Director of the US-China Business Council and chief for Shanghai. USCBC has headquarters in DC with 20 people and offices in Bejing with nine and Shanghai with four. Relatively small but they have 250 members in Shanghai at $2,500 to $7,500 annual membership fees so they are obviously bringing a lot of value to a lot of companies.
Their mission is basically to help any member with any problem or goal they have in China. And the world is proprietary. That is to say, at the AmCham, which is strong here like it was in Tokyo, things can get watered down to the lowest, or safest common denominator because you may be sitting next to your competition. So you come out publicly with strong endorsements for health for everybody and happiness for anyone who wants that and beauty and serenity ... and tough issues like that. I get the feeling that if XYZ member company at USCBC gets its corporate ass in a wringer and is bleeding from the ears (to horribly mix a pretty nasty image), then the USCBC team will hop right on it and fix it ... or get it fixed. These are very good friends to have. Iain is a pistol. Smart as a whip. I so wished I’d brought my tape recorder, my magnetic memory. Some of what I think I remember him possibly saying, but wouldn’t swear to it in court, is (It’s possible he didn’t say ANY of this and I’m making it all up and none of it is even remotely true... let the court be advised):
Bejing:. The Gobi desert is only about 200 miles to the West and every year it gets closer to Bejing. They have sand storms there that rival what our little Empire’s legions are experiencing in Iraq. And with the Olympics coming to Bejing in 2008 (I think), they need to clean stuff up STAT. Desert sand storms just don’t make it when you’re trying to break a world poll-vault record. So they’re planing a lot of trees and grasses and trying to build a “green break” between the Gobi and everything East of it.
Under Mao, there really was some sort of unity. When they tried to kill off some birds that were wreaking havoc with the farmers, Mao asked all citizens to scare these birds away so they couldn’t land so they’d die of fatigue. That's exactly what happened. That wouldn’t happen today.
When Mao asked everybody to build a steel mill, a mini mill, in their backyard, they did it. Stupid economics but strong show of a nation over a billion marching in step to the Chairman’s will. (Mao was a poet. Not an economist). That wouldn’t happen today.
For example,if Bejing told somebody to shut down a certain factory in, say, Zudong. The manager would say, “Oooooo--k, then. And what you going to do with the 600 people that you’re putting out of work, dude?” And Bejing would say, “Hummmm. Didn’t think of that. “Well”, (and here is where Rozanna Zanna Danna comes into the picture), “Never mind.”
And if they tell some guy in Shanghai to go increase the number of print dresses being made to fill a big order in Kansas, the guy says, “Aaaaaalrightie! But I really should be back at my command post at the semiconductor plant that’s putting out $4 billion of product a year and paying your daughter’s way through Stanford through the taxes I’m paying you.” “Good point.” (RRD now, all together) “Never mind.”
China is now in a state of what we call in Japan, “Bara Bara.” Sort of all a jumble and mixed up and nobody really at the controls in any meaningful way and, in a nice, British sort of sounding way, “Sorting itself out.”
On Quanxi and corruption, two different things, he echoed what Ira and Peter had told me. Essentially, there are some very serious crack downs on corruption. I mean people get hung. Killed. Offed. Senior party officials, even. I asked if the implication of that was that there were a lot of people who were NOT corrupt? He allowed as to how that was so ... and getting so-er. Maybe especially in Shanghai. Shanghai is getting mature, growing up, very fast. People are taking to the rule of law to govern contracts. And they’re suing --- Americans sometimes! --- to amend real wrongs. That’s very good news. And arbitrating. Not in Geneva where you can ski on the weekends but here in China where you have to pay attention. Shanghai’s becoming a player. Like New York and London and Paris and Milan and Sao Paulo, (no. not like Sao Paulo ... but, on second thought, maybe a lot like Sao Paulo where taxes are ACTUALLY being used for public goods and services, I’m told), Frankfurt, Madrid, Tokyo, Osaka, Taipei ... you know. The usual suspects.
But the Western part of China remains a big headache for Bejing. They really are afraid of flare-ups. Rebellion. “Ganitcha. Uramayashii. Envy.” When everybody’s poor, they’re cool. When everybody’s rich, they’re cool. When some are rich and some are poor, hey! Like in America! NOT cool. Envy can bring down empires. So Iain told me if they have to close a factory and had promised to pay severance of 3,000 quai to each worker, that’s about $360 US, then it’s cool. But if they pay, like, 600 quai, about $65 bucks and the plant manager is seen by the rooked workers driving away in a new Mercedes, you’ve got trouble. So the government or whoever, usually “buys them off”, i.e., pays them what they were promised under these circumstances.
Don’t rock the boat. You see, most of the soldiers are poor peasant boys from the countryside. I guess from the West. That’s where the poverty is and where the big tsunami of Quai and Dollars and Euros and Yen isn’t seen much, if at all. But now they have TV and internet and better transportation. A guy in his Yurt in the Gobi can pick up his email and find his cousin’s sister, Ying Ying, has just bought a new BMW and is planning a trip to London to go shopping. Well this guy in the Yurt has just had to put down his last Yak because (a) it had been a bad winter for both him and the Yak and both were getting thinner and (b) the deal was that either he’d eat the Yak or the Yak would eat him and in the scheme of things he decided to just take the initiative, assert his “human prerogative”, and kill the damned Yak ... and eat him. The Yak’s name was Zak. Yup. Zak the Yak. The guy got a kick out of that and the Yak had been like a good friend. But he had to kill him, skinny though he was, because he needed to eat him. And then he hears that Shanghai Sally, Ying Ying, is zipping around in a new Beamer and has plans to go to London ..... to SHOP. Well I’m getting myself in quite a lather just making this story up. Think what the Yurt/Yak guy must feel. Pissed. “Uramashii. Ganitchaa. Envy.” It’s a problem here and I’ve only been here a few days.
Iain gave me a copy of last year’s membership directory which is like being given the Holy grail. I have all the names of all the major players here. Now I can make meetings with the more indulgent and generous ones and ride up their learning curves a little. Of course it’s all blind men and the elephant. You know. One thought it was a tree cause he felt a leg. Anther a palm cause he felt an ear. Another a sword cause he felt a tusk. Another his job cause he stumbled on a 50 lb. pile of excrement. Point is you only know your OWN experience which is never the whole story. With luck I’ll get enough to describe a woolly mammoth with a horn coming out of it’s forehead like a unicorn.
Transport’s a mess. You put stuff on a train, your product, right? And the government sidetracks it, literally, cause they needed the car for a higher priority. Truckers are subject to special legal and illegal “tariffs” and fees when going from one province to another. Stuff can get hijacked. So sometimes it’s better to ship it by ship or boat up or down a river. If you can’t fly it. Three major rivers run parallel to each other East and West. So that doesn’t help North and South. All of this will be hashed out over time but right now transportation is a hassle. You don’t have a factory in, say, Shanghai (just for a far out example), and expect to distribute all over China. North, South, Central, and West. You need manufacturing in North, South, Central, and West at least.
On relationships: As Peter and Ira before him, Iain said they are getting less and less important here. Maybe for really huge contracts where Bejing, the government, has to be involved, then maybe it helps to know, like, the president or premier. In Shanghai, however, you do your homework, homework, homework (how sick I am of hearing that .... but I guess it must be key cause everybody talks about it .... oh! my whole career is based on doing other peoples’ homework FOR them! So, Good.; HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK. I just wish there were another name for what they’re talking about. Due diligence makes me barf. It’s so prissy. Homework is like having to eat all your vegetables before you can have any pie. “Checklist” is a little better. Like “do your checklist” and then check off all the stuff you have to do to be successful here. Or “feeling the pulse and hearing the buzz” but that’s too “cool” and might miss the very important detail stuff you have to do to protect yourself and do this right.
I had a 30 minute (long) ride through the famous tunnel under the river to a meeting at the China Development Bank in Pudong. With Dr. Fu Ming and his wonderful assistant, a very smart, British educated, peppy young woman with a wonderful sense of humor. Dr. Fu is a senior partner in the law firm, which has nothing to do with the Bank; it’s just an absolutely beautiful building. The firm, “Hao Li Wen” has 40 lawyers and they all have doctorates in jurisprudence. They consider themselves “medium” sized but their client list is impressive, the likes of duPont, Kodak, Best Buy (ya, our Best Buy), and like that. I got the feeling they were not only very engaging personally, but that they were very good lawyers. I’d prepared 15 questions for them. We spent 45 minutes on the first one about patent and copyright protection and IP (intellectual property) protection. Liya Yao, the woman, interpreted for Dr. Fu but I think his English was pretty good. It was a little “set piece”, i.e., “formal”, as in Japan, always, but formality with a twinkle in its eye. Liya was hired by Dr. Fu and yet she operated on an easy, almost equal footing with him. In Japan, she’d have been MUCH more deferential. Of course she was the one doing the translating. But she wouldn’t just say what he was saying. She’d challenge him and make him explain it more clearly until she “got” it. So she could give it to me. Which worked pretty well but some things were still a little vague. What I got is that Shanghai is ahead of the legal curve in China just as economic development in Shanghai is ahead of the curve for China overall. He said at the outset that the laws were equally applicable throughout the country. I had to cut him off there, diplomatically, and said, “Yes. In THEORY.” He smiled, (before translation) and said in English, “Ya. I was going to get to that later.” So we talked turkey. I asked if they place was bugged. They laughed and said it wasn’t. I told him the medical equipment boys (and girls) were hesitant to come to China for fear they’d get reverse engineered and see knockoffs showing up in their home markets. Yes, it could happen but not so much in Shanghai now. A lot of patents are being filed worldwide by smart, inventive, creative, entrepreneurial Chinese these days and THEY don’t want US to reverse engineer them. So now that the shoes are going onto the other feet, especially in Shanghai, respect for the rule of law in contracts is growing. Like Iain yesterday, he stressed the importance of registration of your products here. Without that, you are naked. He said you can make a contract with your importer, (if you’re an exporter) and tell them to protect your IP rights. However, if a third party gets your specs, the importer can not (necessarily) be sued. He differentiated between “technology” which was pretty much in the public domain, and “know how” which was the real secrets you want to protect. The difference escaped me but I didn’t want to get too legal through an interpreter. Or at all.
If you’re having your stuff built here, you enter into a 10~15 year license agreement where your licensee is immanently sue able if they leak your technology or know how.
But what my new friend from Starbucks, who worked as a 6 Sigma engineer for GE for 30 years said, was repeated by Dr. Fu. ANTICIPATE problems before they come up. Really really work hard to predict what could go wrong and address if from the outset. Fu said it was wonderful to have people like me, knowledgeable consultants, to help people get off to a strong start. AND, of course, you needed good legal council from the get-go to draw up contracts that really made sense. Then he burst into an enthusiastic chorus from a revised Oklahoma, “Oh, the lawyer and the consultant should be friends, friends, friends! Oh the lawyer and the consultant should be friends. Oh, my, how I do agree.
I told Fu about Faegre and Benson and how I was related to them through Mike Murphy, now retired, and how I’d met Peter Neumann here and how great I thought it would be if he met Peter and maybe built a relationship. You see, American lawyers and Chinese nationals working for American law firms can not litigate in Chinese courts. So these alliances are critical. I really liked Fu and Yao and I think a partnership with Faegre might be a very productive coupling. But Peter Neuman has been in China for 9 years and might dismiss the idea out of hand. Or maybe not. In any case I’m looking out for Minnesota interests.
Back to Fu. I also made him and Liya Yao aware of that dimension of my interests, coaching. They agreed it could have a monumental effect on the bottom line. They were going to consider who among their clients might be interested. Fu asked if I’d be willing to represent Chinese interests in the US. I said that was priority question #15 on my list and yes, I’d be very interested in doing for Chinese clients in America what I’ve been doing for American clients in Asia, i.e., market studies, JV development, key partner dispute resolution, key management executive search, and the like. So they’ll noodle that too.
At the US Consulate in Shanghai I met the senior Economic officer, Mary Tarnowka. She’ll be here another three years. Probably late 40s, very professional but rumpled enough in a smart way to be very credible, smart as a whip, very nice. Some of what I remember them saying: (Oh. They confiscated my phone and my iBook. I asked if they were afraid of bombs. They said not really but all this electronic stuff can be sending and receiving. [And we were having a really hush hush meeting]).
1) Don’t think the middle class here is anything close to 200m. True, average annual income in places like Shanghai is $3,000 three times more than in the country side, but if there is a middle class, they aren’t buying a lot of Toro lawn mowers, my definition of a middle class person. Not that they DO but that they CAN and have a reason to.
2) Yes yes yes. Intellectual property issues are sorting themselves out here but there’s a long way to go. But it’s better. DO REGISTER YOUR PATENTS AND TRADEMARKS. OK. We know. Right?
3) High-end tech products are safer. Low end, easy to copy stuff isn’t. Check.
4) Don’t be so paranoid about it that you don’t at least try to sell in China. Anyway, if they want to get your product, they can get in the US, near your front door, put it in their suitcase and bring it back for reverse engineering. You don’t need to be in China to get copied.
5) Shanghai really is a farm team for the big leagues of politics in Beijing. So they want to “keep their noses clean” here so they have a shot at the big time. As a result, they really do clamp down on corruption and try hard to bring IP infractions to light and deliver restitution to the aggrieved. Maybe peanuts and a beer and a heartfelt “sorry.” It’s coming here. Note: More than one mayor of Shanghai has become premier of the country.
6) My $3000:$1,000 split, urban vs. rural may be inflated. Just saw a note of mine that said Mary said people in the sticks make closer to $350 a year.
There is grumbling to the West. I asked if they were WORSE off than under Poet Mao and Mary said not at all. Actually they are a bit better off now. But they are jealous. Everybody is better off now but some are a hell of a lot better off than others.
The government really is afraid of grumbling in the West. If it led to UPRISING it could get ugly. Iain had said if a plant goes on strike, the government deals with it. Usually pays people off. But if two or more labor groups collude to protest something, then the tanks roll in. He didn’t say the tanks roll in but indicated that Beijing deals with any sort of organized protest swiftly and resolutely.
Banking is a problem. They don’t use the credit analysis approach that I personally know so well. Too much quanxie in lending. And if something gets mucked up, the government comes in and covers the losses. It’s not a good situation. Mary felt if there were ever a bank collapse, or a buckling of the banking system, or even a sharp fall off in growth (it’s been 9% per year forever), things could get very dicey indeed. But she foresaw no such eventuality. As in many other things, they are taking some steps to remedy. Like joint ventures with Western Banks; Western as in US and Europe and maybe Japan, although Japan’s banks are in pretty shaky shape themselves. They are also trying to get listed on overseas exchanges. By doing stuff like this, they have to adhere to certain international standards of lending and accounting. It forces them to clean up their act. It’s a very good thing. And for the first time it’s not just Communist functionaries on the boards of directors of banks but they’re bringing in independent directors. Even some foreign directors, she said.
Two surprising things she said were:
1) We have a services balance of trade SURPLUS with China. Of course it’s a drop in the bucket compared with out “goods” deficit of $161 billion.
2) Japan actually has a balance of trade surplus against China. Surprise surprise.
She went on to say that the actual balance of trade deficit we suffer with China isn’t really as bad as it looks when you consider that A LOT of Malaysian, Japanese, Thai, Indonesian, Taiwanese, and other Asian countries are also setting up shop in China and this swells the volume of exports to the US ostensibly from China but in reality from a whole bunch of Asian countries just building in and shipping from here. Interesting.
On specific stuff we can sell China, they said big airplanes, high end computers (which our export controls forbid, so it’s sort of academic), SERVICES, like education and training, and, yes, medical equipment.
My teacher told me something that I’ve seen over and over again. The Chinese are not confrontational. They really do live by the well-known Confucian concepts that we all hold so dear: CHEN SHU, HE XIA, and DENG JI. Which everybody knows is “Modesty, Harmony, and Hierarchy.” So if you win the Olympic diving competition, you bend over backward to say how lousy you are and could have and should have done a better job ... for CHINA. And if you have a problem with somebody, you work it out. And you respect your parents and teachers and stuff. They live this way. And they aren’t very aggressive, like the Euros or the Japanese. “Or the Americans”, I added. “Or the Americans”, he said. Sometimes they’re very surprised to think that China will be America’s “counterweight” in world affairs soon. They still see us as the big dog on the block. No opposition. They seem like a big, clumsy teenager who has no idea of his own strength. A car flips on their friend in an accident and they find they can flip it off their friend ... with one arm. And they think, “Wow. How’d that happen?” BIG PAWS.
Interesting little back and forth with Ms. Yao at the law office. I said it seemed sort of funny that we were talking about the maturation of contract law in China which has been an orderly society, more or less, for 5,000 years. She said that history didn’t count. The Emperors WERE the law and the Communists ARE the law. Commercial law, using international standards, is maybe 10 years old in China. THAT take was interesting.
Bush came up. I just said you (Chinese) have to be a little patient. You’re known for it. Ms. Yao said “Ya. We’ve been patient for a hundred years.” She didn’t say “5,000” years which would have been a whole different reference. I think in a very oblique way, she may have been referencing by implication indignities of the Western, and Japanese Imperialist thrusts into China beginning with the Opium war, maybe about 100 years ago. The puppy has big paws and a looooooooooooooong memory. Better hope the Confucian ethic is strong enough to temper the very normal feeling of “payback time!”
Business only
March 25th AM met with the commercial attaché at the consulate, Ira Kasoff. Also another senior commercial officer, Jim Golson who is very familiar with the Medical markets here and will be posted to Bangkok in about a year. Good meeting with Ira. His second posting to China. And he’s been studying Chinese for over 20 years. Jim too, but not so long, at the Foreign Service Language School. Net net the toothpaste of China’s growth isn’t going back into the tube. I’d heard that at this rate of growth, China will absorb ALL the Earth’s resources in a couple of decades. So of course the growth will taper off some. But we’re seeing flickers of things to come in rising oil prices and gas at the pumps in the USA. There will be some changes in the world. Of that I’m pretty sure.
On proprietary IP, intellectual property, the Euros are known here to send their older technologies so they are less vulnerable to reverse engineering. The Americans plunge in with state-of-the-art everything and, for that, the Chinese are extremely grateful. And it makes us a bit more vulnerable. You absolutely have to register all proprietary information and file for Chinese patents. Without this you are totally vulnerable and there’s no recourse. With it, you can go to the courts. Litigation and arbitration are becoming more and more common and accepted here. Chinese are beginning to initiate such against us, sometimes, so that’s evidence of it’s becoming part of the new economic landscape.
I met in separate sessions with Jim and the Chinese-Thai woman, Lynn Jiang, after the formal talks with Ira. And after that I dropped in on Peter Neumann who heads up Faegre and Benson here. I’d talked to my old friend, Mike Murphy who is recently retired from Faegre and Benson who put me in touch with George Martin who heads up the China practice from Minneapolis. Peter knew I was coming but the email being down, his messages just bounced back to him. So I wasn’t unexpected but my dropping in was. Happily he was in the office, a relative rarity, and we had a very nice talk. He’s going to Switzerland to ski Monday and then has business trips planned out until April 7th, at which time we’ll meet again.
I told him that my impression was that unlike the US, Japan, and Europe, China was still in its infancy in rule of law governing contracts and IP protection so “Guanxi” or personal relationships were more important here. And thus my desire to be here to make contacts that would be useful in the future. He said historically maybe that was so. And to a degree it still is. But don’t count on it because “everybody” has contacts. They don’t always add up to much. Aren’t always the kinds of contacts you really want. I was told before my trip by somebody who does a lot of business in China, that a key distributor who had had him, the guy, and his family, to his house in China and the guy had had the distributor, and his family, to his house in Minneapolis, and the guy was led to feel they had a tight and “special” relationship with the distributor, found that the distributor was selling competitors’ products “out the back door.” A legal violation of their agreement of exclusivity and a breach of personal trust. Very sad. The guy sacked the distributor ... and, of course, the loss of money was less hurtful than the betrayal of trust. Of course it happens everywhere from time to time. States too. But it always hurts. And it underscored Peter’s admonition to cross your “t”s and dot your “i”s legally from the outset and don’t count overly or unrealistically much on the sweetness and light of “close personal relationships” here. As my sister’s first husband said, “Love many. Trust few. Learn to paddle your own canoe.” And when you do find trust so far away, hold it close and earn it daily.
Back to yesterday a little. In the afternoon, after setting up meeting times with: (1) Paul Swensen from Wisconsin who’s been here forever and is a fountain of information (St. Olaf grad), (2) Fu Ming (last name first, except when it isn’t) an eminent Chinese Lawyer here, (3) Iain McDaniels, (former student of Roy Grow whom I’d had to dinner about a month ago and who was chair of the Poly Sci department at Carleton and who’s been coming to teach here for years and who has written some very good books on China,) who is now the head of the US-Business Council in Shanghai, a very big job, (4) the Denver Rep in China whom I met while at the consulate cause his office is there ... along with Michigan and some others .
Met with Iain (said like “eye” in) McDaniels, a very smart, youngish, very knowledgable, former student of Roy Grow’s who (Iain) has been in China for nine years and is the Deputy Director of the US-China Business Council and chief for Shanghai. USCBC has headquarters in DC with 20 people and offices in Bejing with nine and Shanghai with four. Relatively small but they have 250 members in Shanghai at $2,500 to $7,500 annual membership fees so they are obviously bringing a lot of value to a lot of companies.
Their mission is basically to help any member with any problem or goal they have in China. And the world is proprietary. That is to say, at the AmCham, which is strong here like it was in Tokyo, things can get watered down to the lowest, or safest common denominator because you may be sitting next to your competition. So you come out publicly with strong endorsements for health for everybody and happiness for anyone who wants that and beauty and serenity ... and tough issues like that. I get the feeling that if XYZ member company at USCBC gets its corporate ass in a wringer and is bleeding from the ears (to horribly mix a pretty nasty image), then the USCBC team will hop right on it and fix it ... or get it fixed. These are very good friends to have. Iain is a pistol. Smart as a whip. I so wished I’d brought my tape recorder, my magnetic memory. Some of what I think I remember him possibly saying, but wouldn’t swear to it in court, is (It’s possible he didn’t say ANY of this and I’m making it all up and none of it is even remotely true... let the court be advised):
Bejing:. The Gobi desert is only about 200 miles to the West and every year it gets closer to Bejing. They have sand storms there that rival what our little Empire’s legions are experiencing in Iraq. And with the Olympics coming to Bejing in 2008 (I think), they need to clean stuff up STAT. Desert sand storms just don’t make it when you’re trying to break a world poll-vault record. So they’re planing a lot of trees and grasses and trying to build a “green break” between the Gobi and everything East of it.
Under Mao, there really was some sort of unity. When they tried to kill off some birds that were wreaking havoc with the farmers, Mao asked all citizens to scare these birds away so they couldn’t land so they’d die of fatigue. That's exactly what happened. That wouldn’t happen today.
When Mao asked everybody to build a steel mill, a mini mill, in their backyard, they did it. Stupid economics but strong show of a nation over a billion marching in step to the Chairman’s will. (Mao was a poet. Not an economist). That wouldn’t happen today.
For example,if Bejing told somebody to shut down a certain factory in, say, Zudong. The manager would say, “Oooooo--k, then. And what you going to do with the 600 people that you’re putting out of work, dude?” And Bejing would say, “Hummmm. Didn’t think of that. “Well”, (and here is where Rozanna Zanna Danna comes into the picture), “Never mind.”
And if they tell some guy in Shanghai to go increase the number of print dresses being made to fill a big order in Kansas, the guy says, “Aaaaaalrightie! But I really should be back at my command post at the semiconductor plant that’s putting out $4 billion of product a year and paying your daughter’s way through Stanford through the taxes I’m paying you.” “Good point.” (RRD now, all together) “Never mind.”
China is now in a state of what we call in Japan, “Bara Bara.” Sort of all a jumble and mixed up and nobody really at the controls in any meaningful way and, in a nice, British sort of sounding way, “Sorting itself out.”
On Quanxi and corruption, two different things, he echoed what Ira and Peter had told me. Essentially, there are some very serious crack downs on corruption. I mean people get hung. Killed. Offed. Senior party officials, even. I asked if the implication of that was that there were a lot of people who were NOT corrupt? He allowed as to how that was so ... and getting so-er. Maybe especially in Shanghai. Shanghai is getting mature, growing up, very fast. People are taking to the rule of law to govern contracts. And they’re suing --- Americans sometimes! --- to amend real wrongs. That’s very good news. And arbitrating. Not in Geneva where you can ski on the weekends but here in China where you have to pay attention. Shanghai’s becoming a player. Like New York and London and Paris and Milan and Sao Paulo, (no. not like Sao Paulo ... but, on second thought, maybe a lot like Sao Paulo where taxes are ACTUALLY being used for public goods and services, I’m told), Frankfurt, Madrid, Tokyo, Osaka, Taipei ... you know. The usual suspects.
But the Western part of China remains a big headache for Bejing. They really are afraid of flare-ups. Rebellion. “Ganitcha. Uramayashii. Envy.” When everybody’s poor, they’re cool. When everybody’s rich, they’re cool. When some are rich and some are poor, hey! Like in America! NOT cool. Envy can bring down empires. So Iain told me if they have to close a factory and had promised to pay severance of 3,000 quai to each worker, that’s about $360 US, then it’s cool. But if they pay, like, 600 quai, about $65 bucks and the plant manager is seen by the rooked workers driving away in a new Mercedes, you’ve got trouble. So the government or whoever, usually “buys them off”, i.e., pays them what they were promised under these circumstances.
Don’t rock the boat. You see, most of the soldiers are poor peasant boys from the countryside. I guess from the West. That’s where the poverty is and where the big tsunami of Quai and Dollars and Euros and Yen isn’t seen much, if at all. But now they have TV and internet and better transportation. A guy in his Yurt in the Gobi can pick up his email and find his cousin’s sister, Ying Ying, has just bought a new BMW and is planning a trip to London to go shopping. Well this guy in the Yurt has just had to put down his last Yak because (a) it had been a bad winter for both him and the Yak and both were getting thinner and (b) the deal was that either he’d eat the Yak or the Yak would eat him and in the scheme of things he decided to just take the initiative, assert his “human prerogative”, and kill the damned Yak ... and eat him. The Yak’s name was Zak. Yup. Zak the Yak. The guy got a kick out of that and the Yak had been like a good friend. But he had to kill him, skinny though he was, because he needed to eat him. And then he hears that Shanghai Sally, Ying Ying, is zipping around in a new Beamer and has plans to go to London ..... to SHOP. Well I’m getting myself in quite a lather just making this story up. Think what the Yurt/Yak guy must feel. Pissed. “Uramashii. Ganitchaa. Envy.” It’s a problem here and I’ve only been here a few days.
Iain gave me a copy of last year’s membership directory which is like being given the Holy grail. I have all the names of all the major players here. Now I can make meetings with the more indulgent and generous ones and ride up their learning curves a little. Of course it’s all blind men and the elephant. You know. One thought it was a tree cause he felt a leg. Anther a palm cause he felt an ear. Another a sword cause he felt a tusk. Another his job cause he stumbled on a 50 lb. pile of excrement. Point is you only know your OWN experience which is never the whole story. With luck I’ll get enough to describe a woolly mammoth with a horn coming out of it’s forehead like a unicorn.
Transport’s a mess. You put stuff on a train, your product, right? And the government sidetracks it, literally, cause they needed the car for a higher priority. Truckers are subject to special legal and illegal “tariffs” and fees when going from one province to another. Stuff can get hijacked. So sometimes it’s better to ship it by ship or boat up or down a river. If you can’t fly it. Three major rivers run parallel to each other East and West. So that doesn’t help North and South. All of this will be hashed out over time but right now transportation is a hassle. You don’t have a factory in, say, Shanghai (just for a far out example), and expect to distribute all over China. North, South, Central, and West. You need manufacturing in North, South, Central, and West at least.
On relationships: As Peter and Ira before him, Iain said they are getting less and less important here. Maybe for really huge contracts where Bejing, the government, has to be involved, then maybe it helps to know, like, the president or premier. In Shanghai, however, you do your homework, homework, homework (how sick I am of hearing that .... but I guess it must be key cause everybody talks about it .... oh! my whole career is based on doing other peoples’ homework FOR them! So, Good.; HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK HOMEWORK. I just wish there were another name for what they’re talking about. Due diligence makes me barf. It’s so prissy. Homework is like having to eat all your vegetables before you can have any pie. “Checklist” is a little better. Like “do your checklist” and then check off all the stuff you have to do to be successful here. Or “feeling the pulse and hearing the buzz” but that’s too “cool” and might miss the very important detail stuff you have to do to protect yourself and do this right.
I had a 30 minute (long) ride through the famous tunnel under the river to a meeting at the China Development Bank in Pudong. With Dr. Fu Ming and his wonderful assistant, a very smart, British educated, peppy young woman with a wonderful sense of humor. Dr. Fu is a senior partner in the law firm, which has nothing to do with the Bank; it’s just an absolutely beautiful building. The firm, “Hao Li Wen” has 40 lawyers and they all have doctorates in jurisprudence. They consider themselves “medium” sized but their client list is impressive, the likes of duPont, Kodak, Best Buy (ya, our Best Buy), and like that. I got the feeling they were not only very engaging personally, but that they were very good lawyers. I’d prepared 15 questions for them. We spent 45 minutes on the first one about patent and copyright protection and IP (intellectual property) protection. Liya Yao, the woman, interpreted for Dr. Fu but I think his English was pretty good. It was a little “set piece”, i.e., “formal”, as in Japan, always, but formality with a twinkle in its eye. Liya was hired by Dr. Fu and yet she operated on an easy, almost equal footing with him. In Japan, she’d have been MUCH more deferential. Of course she was the one doing the translating. But she wouldn’t just say what he was saying. She’d challenge him and make him explain it more clearly until she “got” it. So she could give it to me. Which worked pretty well but some things were still a little vague. What I got is that Shanghai is ahead of the legal curve in China just as economic development in Shanghai is ahead of the curve for China overall. He said at the outset that the laws were equally applicable throughout the country. I had to cut him off there, diplomatically, and said, “Yes. In THEORY.” He smiled, (before translation) and said in English, “Ya. I was going to get to that later.” So we talked turkey. I asked if they place was bugged. They laughed and said it wasn’t. I told him the medical equipment boys (and girls) were hesitant to come to China for fear they’d get reverse engineered and see knockoffs showing up in their home markets. Yes, it could happen but not so much in Shanghai now. A lot of patents are being filed worldwide by smart, inventive, creative, entrepreneurial Chinese these days and THEY don’t want US to reverse engineer them. So now that the shoes are going onto the other feet, especially in Shanghai, respect for the rule of law in contracts is growing. Like Iain yesterday, he stressed the importance of registration of your products here. Without that, you are naked. He said you can make a contract with your importer, (if you’re an exporter) and tell them to protect your IP rights. However, if a third party gets your specs, the importer can not (necessarily) be sued. He differentiated between “technology” which was pretty much in the public domain, and “know how” which was the real secrets you want to protect. The difference escaped me but I didn’t want to get too legal through an interpreter. Or at all.
If you’re having your stuff built here, you enter into a 10~15 year license agreement where your licensee is immanently sue able if they leak your technology or know how.
But what my new friend from Starbucks, who worked as a 6 Sigma engineer for GE for 30 years said, was repeated by Dr. Fu. ANTICIPATE problems before they come up. Really really work hard to predict what could go wrong and address if from the outset. Fu said it was wonderful to have people like me, knowledgeable consultants, to help people get off to a strong start. AND, of course, you needed good legal council from the get-go to draw up contracts that really made sense. Then he burst into an enthusiastic chorus from a revised Oklahoma, “Oh, the lawyer and the consultant should be friends, friends, friends! Oh the lawyer and the consultant should be friends. Oh, my, how I do agree.
I told Fu about Faegre and Benson and how I was related to them through Mike Murphy, now retired, and how I’d met Peter Neumann here and how great I thought it would be if he met Peter and maybe built a relationship. You see, American lawyers and Chinese nationals working for American law firms can not litigate in Chinese courts. So these alliances are critical. I really liked Fu and Yao and I think a partnership with Faegre might be a very productive coupling. But Peter Neuman has been in China for 9 years and might dismiss the idea out of hand. Or maybe not. In any case I’m looking out for Minnesota interests.
Back to Fu. I also made him and Liya Yao aware of that dimension of my interests, coaching. They agreed it could have a monumental effect on the bottom line. They were going to consider who among their clients might be interested. Fu asked if I’d be willing to represent Chinese interests in the US. I said that was priority question #15 on my list and yes, I’d be very interested in doing for Chinese clients in America what I’ve been doing for American clients in Asia, i.e., market studies, JV development, key partner dispute resolution, key management executive search, and the like. So they’ll noodle that too.
At the US Consulate in Shanghai I met the senior Economic officer, Mary Tarnowka. She’ll be here another three years. Probably late 40s, very professional but rumpled enough in a smart way to be very credible, smart as a whip, very nice. Some of what I remember them saying: (Oh. They confiscated my phone and my iBook. I asked if they were afraid of bombs. They said not really but all this electronic stuff can be sending and receiving. [And we were having a really hush hush meeting]).
1) Don’t think the middle class here is anything close to 200m. True, average annual income in places like Shanghai is $3,000 three times more than in the country side, but if there is a middle class, they aren’t buying a lot of Toro lawn mowers, my definition of a middle class person. Not that they DO but that they CAN and have a reason to.
2) Yes yes yes. Intellectual property issues are sorting themselves out here but there’s a long way to go. But it’s better. DO REGISTER YOUR PATENTS AND TRADEMARKS. OK. We know. Right?
3) High-end tech products are safer. Low end, easy to copy stuff isn’t. Check.
4) Don’t be so paranoid about it that you don’t at least try to sell in China. Anyway, if they want to get your product, they can get in the US, near your front door, put it in their suitcase and bring it back for reverse engineering. You don’t need to be in China to get copied.
5) Shanghai really is a farm team for the big leagues of politics in Beijing. So they want to “keep their noses clean” here so they have a shot at the big time. As a result, they really do clamp down on corruption and try hard to bring IP infractions to light and deliver restitution to the aggrieved. Maybe peanuts and a beer and a heartfelt “sorry.” It’s coming here. Note: More than one mayor of Shanghai has become premier of the country.
6) My $3000:$1,000 split, urban vs. rural may be inflated. Just saw a note of mine that said Mary said people in the sticks make closer to $350 a year.
There is grumbling to the West. I asked if they were WORSE off than under Poet Mao and Mary said not at all. Actually they are a bit better off now. But they are jealous. Everybody is better off now but some are a hell of a lot better off than others.
The government really is afraid of grumbling in the West. If it led to UPRISING it could get ugly. Iain had said if a plant goes on strike, the government deals with it. Usually pays people off. But if two or more labor groups collude to protest something, then the tanks roll in. He didn’t say the tanks roll in but indicated that Beijing deals with any sort of organized protest swiftly and resolutely.
Banking is a problem. They don’t use the credit analysis approach that I personally know so well. Too much quanxie in lending. And if something gets mucked up, the government comes in and covers the losses. It’s not a good situation. Mary felt if there were ever a bank collapse, or a buckling of the banking system, or even a sharp fall off in growth (it’s been 9% per year forever), things could get very dicey indeed. But she foresaw no such eventuality. As in many other things, they are taking some steps to remedy. Like joint ventures with Western Banks; Western as in US and Europe and maybe Japan, although Japan’s banks are in pretty shaky shape themselves. They are also trying to get listed on overseas exchanges. By doing stuff like this, they have to adhere to certain international standards of lending and accounting. It forces them to clean up their act. It’s a very good thing. And for the first time it’s not just Communist functionaries on the boards of directors of banks but they’re bringing in independent directors. Even some foreign directors, she said.
Two surprising things she said were:
1) We have a services balance of trade SURPLUS with China. Of course it’s a drop in the bucket compared with out “goods” deficit of $161 billion.
2) Japan actually has a balance of trade surplus against China. Surprise surprise.
She went on to say that the actual balance of trade deficit we suffer with China isn’t really as bad as it looks when you consider that A LOT of Malaysian, Japanese, Thai, Indonesian, Taiwanese, and other Asian countries are also setting up shop in China and this swells the volume of exports to the US ostensibly from China but in reality from a whole bunch of Asian countries just building in and shipping from here. Interesting.
On specific stuff we can sell China, they said big airplanes, high end computers (which our export controls forbid, so it’s sort of academic), SERVICES, like education and training, and, yes, medical equipment.
My teacher told me something that I’ve seen over and over again. The Chinese are not confrontational. They really do live by the well-known Confucian concepts that we all hold so dear: CHEN SHU, HE XIA, and DENG JI. Which everybody knows is “Modesty, Harmony, and Hierarchy.” So if you win the Olympic diving competition, you bend over backward to say how lousy you are and could have and should have done a better job ... for CHINA. And if you have a problem with somebody, you work it out. And you respect your parents and teachers and stuff. They live this way. And they aren’t very aggressive, like the Euros or the Japanese. “Or the Americans”, I added. “Or the Americans”, he said. Sometimes they’re very surprised to think that China will be America’s “counterweight” in world affairs soon. They still see us as the big dog on the block. No opposition. They seem like a big, clumsy teenager who has no idea of his own strength. A car flips on their friend in an accident and they find they can flip it off their friend ... with one arm. And they think, “Wow. How’d that happen?” BIG PAWS.
Interesting little back and forth with Ms. Yao at the law office. I said it seemed sort of funny that we were talking about the maturation of contract law in China which has been an orderly society, more or less, for 5,000 years. She said that history didn’t count. The Emperors WERE the law and the Communists ARE the law. Commercial law, using international standards, is maybe 10 years old in China. THAT take was interesting.
Bush came up. I just said you (Chinese) have to be a little patient. You’re known for it. Ms. Yao said “Ya. We’ve been patient for a hundred years.” She didn’t say “5,000” years which would have been a whole different reference. I think in a very oblique way, she may have been referencing by implication indignities of the Western, and Japanese Imperialist thrusts into China beginning with the Opium war, maybe about 100 years ago. The puppy has big paws and a looooooooooooooong memory. Better hope the Confucian ethic is strong enough to temper the very normal feeling of “payback time!”
posted by Duncan Otis at 7:42 PM
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