I’ll Take China

My first trip to China last week as part of work with a client brought back memories of business from almost three decades ago. It was a different time and a very different place, but ff you worked in business in the 1980’s in the United States, all eyes seemed to be focused on Japan. From cars to copiers, Japanese companies could seem to do no wrong, and US companies seemed to be able to do not much right.

That experience competing with Japan shattered a few companies, and spurred many others to become more competitive by adopting Japanese methods such as quality control to just in time supply chain methods.

Two decades later the presumed economic ascendency of Japan is in shreds, the result of one lost decade” of economic stagnation driven by some false steps in economic management (lessons learned that the Obama Administration was able to apply to the US crisis) and the daunting demographics of a workforce that has a smaller set of younger workers supporting an increasingly larger pool of retirees. Rather than a super power Japan today is an “ordinary global power .”

China at first blush looks different. And if I’m right – and it looks like I’ve got a lot of company nodding in the same direction – it means that the way we Americans think about what we do, where we do it, and how we do it will be altered forever.

In no particular order, here are 9 things you should know about China:

  1. The first thing that strikes you about China is the staggering level of development in process . In the 30 years I’ve been in business I’ve seen booms in Southern California, Denver, and Houston. What I saw surpasses those by booms by factors of 30-50 times: just when you think you’ve seen the last set (multiples of 10 are not uncommon) high rise construction crane you turn a corner and set another set of 5-10 construction cranes with another 5-10 high rise buildings being built.
  2. Labor is ample and labor is cheap . If one person would normally perform a job, it’s not unusual to see three or four. In one hotel at which I stayed – albeit larger – there were five separate individually staffed check-in desks, as well as a separate check-in area to process groups. The roads are swept by hand – daily. With 1.2 billion residents – 20% of the world’s total – the Chinese find ways to employ people who are willing to work.
  3. Though the eastern part of China is some of the most densely populated land in the world, 70 % of China’s population is rural, and the rural areas of China largely lacks basic infrastructure such as adequate roads, sewage, municipal buildings, etc. The gag line I heard was that there is so much that needs to be done in terms of domestic development that you could literally sit in a chair in a field, give directions, and still be considered very helpful – there is literally that much that needs to be done. Along with internal needs comes, comes increased domestic demand fueled by a rising middle class to create an Chinese economy that could grow on its internal market alone , but will likely grow tremendously on both its external and foreign markets.
  4. The structure of the economy is different in that total or majority state ownership of key or interesting industries is common: socialistic capitalism in the phrase that best described the economy and the government holds leading or monopoly position in many businesses and many industries. Though business are state owned there appears to be no state discount to citizens – the increased margins are plowed back into further development by the state, fueling a virtuous circle of development begetting development.
  5. The Chinese people are hard working, and embrace risk . Along with a penchant for gambling (and shopping), Chinese citizens are both entrepreneurial and ingenious. The same geography that made every owner of a rice paddy an entrepreneur gives us people that are willing to work from before sun-up to after sundown.
  6. Intellectual property rights are ill defined and generally any thing that can be knocked off to make money will be, from DVDs to computer chips to pharmaceuticals. Production secrets walk out doors, in part because they notion of IP rights as defined in the West is foreign and not heavily enforced.
  7. Mao gave people a revolution and he also dictated gender equity: albeit imperfect equality, some 80% of women in China work outside the home .
  8. And while ethnic minority issues may yet still abound, the Han ethnic group forms 90% of the population with dozens of smaller ethnic groups. Unlike India, there is no caste (or class) driven segregation: many successful people have come from humble backgrounds.
  9. Last, the level of education is relatively high for the lower level of infrastructure development, and any number of people are schooled in North America or Europe and return home at some point to work in China.

So what does this all mean for you and the rest of us, as in U.S?

  1. As business writer Dan Pink, author of A Whole New Mind might note, anything that can be proceduralized and systematized will go overseas. While Dan’s favorite candidate for much of this work is India (the advantage of speaking English as a former British colony), anything but the need to speak English will find the Chinese very competitive. Any unlike India, China has not experienced quick wage increases as competition for the best talent has taken off.
  2. Whole industries that can be outsourced will be, provided that transportation costs and quality issues are mitigated. Many business company functions such as accounting, law, and engineering will find China home, if they haven’t already gone to India. As I recall my former Barclays Global Investor colleague Ming Yue telling me when he worked with another firm to locate engineering services in China rather than India, while the language in China could provide some challenges, the quality of the work and talent pool was much more attractive than basing the function in India. Given the level of will and determination, “Made in China” should grow to the favorable stature of “Made in Japan.”
  3. Job opportunities for Americans will be in China, and those who come early will likely reap the most benefits. Not unlike a gold rush, early mover status has its advantages. And particularly in the today’s down economy, Americans have already started to make their move and mark in China .
  4. China will compete with other countries when and where it can. Exports to Africa , for example, have skyrocketed in the last decade. It’s not just in the developed countries that China will compete, it’s everywhere except its home markets which it will continue to control.
  5. Mandarin, the official language of China, will be one of the three languages kids should learn, along with Spanish and English. It is a big world, and it includes being able to talk to people in their own language. While Mandarin is not universal in China, it can help you read: written language is similar mostly across the country, spoken dialects such as Cantonese and Shangaiese are verbally quite different.
  6. Despite the eight years of the Bush Administration, people in China appear to have a favorable sense of people from the United States. Locals were friendly, respectfully curious, and incredibly polite wherever I visited: New Yorkers should act half as nice. And there is some favorable history of China-United States relations that goes back to the California Gold Rush. It appears to help that people in China have numerous relatives in the US and vice versa.
  7. Given what appears to be an inevitable growth opportunity, investment will continue to flock to China as well as many other parts of Asia [Disclosure: An asset management firm which has significant investments in China as well as other parts of Asia is a client.] And not unlike the significant investment from China in the US, where investment opportunities occur it’s inevitable that closer relationships – both friendly and adversarial – will develop.

There are obvious blemishes to the China Cinderella story. Centralized government can be efficient but it can be brutal in its efficiency, clearing out people and places when development plans are imposed. Dissent is only mildly tolerated and controlled: no access to Twitter and Facebook for example, as servers are blocked for people from China. Pollution is awful, and not getting better – air quality can be worse than what I experienced in LA in the 1970’s.

So why do I think China will be important to all of us, and why will it be the next great economic super power?

Because China possesses a mix of capital, labor, will, and culture that will position it to be economically ascendant at a time when other economies will be challenged as the Great Recession continues our painful path back to something approaching “normal.” And led by China, it looks like the economy is already taking off to recovery in Asia, ahead of other regions of the world.

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