Category: China

Crying over spilt Chinese milk

Australia’s missteps in the Chinese milk market are part of a far deeper malaise in the Australian business community.

East Asian based expats have many conceits – the greatest being that they understand Asia.

For a high paid executive based in Hong Kong or Singapore sitting in a comfortable air conditioned CausewayBay or Beach Road highrise it’s easy to not to know what you don’t know.

In Bangkok though the drinkers at Bangkok’s Cheap Charlies Bar are under no illusions about the complexity of Asia as every night brings another surprise.

During the 1990s it was a regular drinking haunt of those working on the ground in South East Asia – aid workers from Cambodia, oil explorers from Vietnam. gem traders from Laos or builders in Myanmar all swapped stories about their trials and tribulations.

One of the toughest jobs was setting up a diary industry in tropical Thailand, no trivial task in an environment that isn’t kind to soft, milk producing cattle.

Through the late twentieth century the Australian government spent millions helping build the Thai industry with the intention of it helping the Aussie industry build markets and expertise.

Sometime in the late 1990s, the Australian industry decided programs like these were all too hard and not only withdrew from the Thai and Malaysian markets but also let the Chinese opportunity slip through their fingers.

Today, as Business Spectator reported last week, New Zealand’s Fonterra is not only beating the Aussies in China but also has substantial holdings in Australia as the company’s website describes;

The company has NZ$11.8 billion in total assets and revenues of NZ$13 billion and employs more than 18,000 people worldwide. In Australia, Fonterra has revenues of $1.9 billion, processes 21 per cent of all Australian milk and employs over 2,000 people. This makes Fonterra very much an Australasian company.

Fonterra’s story, both in China and Australia, illustrates how something went amiss in Australia’s business sector in the late 1990s.

The point of Australia’s deregulations and industry consolidations through the 1980s and 90s was to make local businesses and industries more competitive. Instead those Australian conglomerates have been sold to overseas interests as domestic investors find they aren’t interested in investing.

Instead Australian businesses decided that having being allowed to consolidate they could use their market power to clip the tickets of the industries they controlled rather than innovating or expanding internationally.

At the same time, Australia’s compulsory savings scheme poured billions into the local share market leaving boards under no pressure to perform better than the index.

The lazy investing philosophy forced internationally focused businesses to look for overseas investors and has created the steady flow of Australian business, farming and mining assets being sold onto overseas buyers.

In the meantime, the shock jocks and populists whip up xenophobia rather than holding Australian business community to account for its failure to seek and build new markets.

This doesn’t mean bad news for young Australians, there are opportunities for smart, innovative and hard working entrepreneurs to challenge the country’s staid duopolies.

If we choose not to challenge the comfortable duopolies, it may be the next generation of Aussie expats find more opportunities at Cheap Charlies in Bangkok than at home.

Can Huawei come in from the cold?

Can the Chinese communications technology vendor come in from the cold?

Last Friday the Parliamentary Joint Committee on the National Broadband Committee met in Sydney, I’ll have a story on this in tomorrow’s Business Spectator.

An interesting exchange during the meeting was  between the committee’s chair Rob Oakeshott and Mike Quigley, the CEO of NBNCo.

Rob Oakeshott: “You have advice that either as a department or a statutory body that says there are certain companies that should not be involved with the National Broadband Network build? If so, is that advice still in place?”

Mike Quigley: “Well chair, we work very closely with the appropriate government agencies in this area, obviously there are things we can and things we can’t say, but we have a very close working relationship with those entities and we obviously take their advice on things we should and shouldn’t do.”

“Their advice is still in place and we’re following it.”

I’m going to be in Melbourne tomorrow attending the Australian Davos Committee’s China Forum where, among other luminaries, the Prime Minister and various key people in the Australian-Chinese relationship will be talking.

The company in question is Chinese communications vendor Huawei and their banning from Australian contracts adds an interesting dimension to the discussion on trade relations between the two countries.

Australia has followed the US lead in blocking the Chinese communication hardware company from key contracts like the NBN on security grounds and it’s hard to see how this doesn’t test the patience of the PRC.

We’ll see how this issue plays out as it’s one that seems to be largely overlooked when we discuss trade ties and relationships with Chinese companies.

They do it different over here

Microsoft and Apple discover the downside of being multinationals in China

Among expats in Thailand the saying was “the locals can ignore the law, but multinationals can’t.”

Thailand has some pretty strict laws on employee wages, workplace safety and council permits. Pretty well every business ignores them except the multinationals.

Generally Thais don’t complain about businesses not complying with the rules and the authorities are reluctant to take action.

Unless you’re a multinational, in which case the slightest irregularity in pay risks a visit from the police.

A few days in the Bangkok Immigration Gaol while the misunderstanding is sorted out is a good lesson for any sloppy farang country manager who hasn’t been ticking all the boxes.

The recent protests in China against Apple and now Microsoft over warranties illustrate a similar situation in the PRC.

What’s fascinating though is how the complaints against Microsoft and Apple are part of the rising Chinese consumer movement.

It’s a tough life being a consumer advocate in China, leading protests against well connected local companies or their government cronies could be a career limiting move, or much worse.

On the other hand it’s safe to criticise an American corporation and its much more likely to get results.

So managers of foreign companies in China have to be far more responsive to complaints than their local counterparts as Apple and Microsoft have learned.

For multinationals there is an upside to this, foreign companies tend to get better staff as they don’t mess people around with pay and their products are seen as being better because they do honor warranties.

It ends up being swings and roundabouts, but it does emphasise the traps for inexperienced expat managers who can unwittingly get themselves in trouble.

Apple and Microsoft have learned their lesson about customer service in China, you wonder how many others are still to do so.

Australia and the Chinese Mexican stand off

As China rebalances its economy, a new wave of change is about to sweep global trade.

Twenty years ago visitors to Sanya on the south coast of China’s Hainan Island could find themselves staying at the town’s infectious diseases clinic, converted into a backpackers hostel by a group of enterprising doctors.

The Prime Ministers and Presidents attending of Boao Asia Forum this week won’t get the privilege of staying at the infectious diseases hospital as Sanya’s hotel industry has boomed, bust and boomed again following the island being declared a tourism zone in 1999.

Instead, their focus is on the pecking order of nations and for the Australians the news is not good. As the Australian Financial Review reports, the Aussies have been seated well below the salt by their Chinese hosts.

On the Boao list, Australia is outranked by Brunei, Kazakhstan, Myanmar, Zambia, Mexico, and Cambodia – even New Zealand Prime Minister John Key gets higher billing.

Central and South East Asian countries make sense as countries like Myanmar and Kazakhstan are China’s  neighbours with strong trade ties.

That the Kiwis have been given priority over the Aussies by the Chinese government is not surprising in light of this.

An unspoken aspect for the Australian attendees to the Baoa conference is how long Canberra’s political classes can continue their forelock tugging fealty to the US without offending the nation’s most important trading partner.

Mexico’s entry on that list could be one of the most important with consequences for Australia and the world.

During the 1992 US Presidential campaign candidate Ross Perot coined the phrase “the great sucking sound” in his opposition to the North American Free Trade Agreement and the risk of losing jobs to lower cost Mexico.

As it turned out, the giant sucking sound was China – it turned out China’s admission into the World Trade Organisation had far greater consequences for the United States and Mexico than NAFTA.

Mexican manufacturing was one of the greatest victims of China’s rise as US companies found it easier to subcontract work to Chinese factories rather than setup their own plants in Mexico.

Now China is finding its own costs creeping up and labor shortages developing and Mexico is attractive once again. The Chinese and Mexican governments have been working on their relationships for some time.

As manufacturing moves out of China, the shifts in world trade we’ve seen in the last two decades are going to be repeated, this time with Chinese moving up the value chain the lower level work moving to Mexico and other nations.

The leaders at the Baoa conference have their work cut out for them in dealing with another decade of global change.

Bringing manufacturing home

How GE is reviving its American manufacturing operations

In the 1980s General Electric, like most US companies, sent most of its appliance manufacturing offshore.

Now its coming home.

The Atlantic Magazine looks at how General Electric is resuscitating manufacturing at Kentucky’s Appliance Park as management finds US workers are more skilled and productive than their equivalents in Mexico or China.

An important part of the article is how critcal supply chains are; manufacturing hubs rely upon having a community of skilled service providers and suppliers around the factories while being close to customers improves and simplifies logistics.

In the latter case, it now take hours or days to deliver products to customers’ stores or warehouses rather than the five weeks it takes from China.

The cost of those goods is lower too, the Kansas made GeoSpring heater sells for $1299 while the Chinese product sells for $1599.

What is most notable though is how designers and managers now have a better understanding of the manufacturing process; where under the oustourced model the difficulties in assembly were none of their business, now they are far more deeper and directly involved.

This really goes to the core of what an organisation does – in the 1980s it was fashionable to talk of the “virtual corportation” where everything the business did was outsourced except for the managers who were employed solely to pocket their bonuses.

In the 1990s and early 2000s that “virtual corporation” became a reality as manufacturing and customer support were offshored and logistics was outsourced.

One of the best examples was customer support where looking after the needs of those who buy the company’s products were secondary to the need to cut costs.

This focus on cost cutting over customer service hurt Dell badly in the 2000s and it continues to hurt many organisations – particularly telcos and banks – today.

The weakness in the “virtual corporation” model was the company ended up adding little more value than the brand name and eventually those offshored manufacturers and call centres took control of the business’ goodwill and intellectual property.

Eventually the hidden costs of offshoring became too obvious for even the most craven, KPI driven manager to ignore and suddenly manufacturing in the Western world became competitive again.

Sadly, the fixation on dirt cheap labour has damaged many industries beyond the point where they can be salvaged with too many skilled workers lost and the ecosystem of capable suppliers destroyed. These are costs where tomorrow’s managers will rue the short sighted actions of yesterday’s corporate leaders.

Australia in the Asian Century – Chapter Three: Australia in Asia

Chapter two of Australia in the Asian Century attempts to predict the development of the region’s economies over the next decade

This post is one of the series of articles on the Australia in the Asian Century report. An initial overview of the report is at Australian Hubris in the Asian Century.

The third Chapter of the Australia in the Asian Century report, “Australia in Asia” attempts to define the role the country currently plays in the region. In some ways this is the most constructive part of the paper in that it describes the lost opportunities of the last 25 years.

Much of the early part of the chapter traces the development of Australia’s engagement with Asia after World War II; Chifley’s post war efforts with the United Nations, Menzies’ engagement with Japan, Whitlam’s going to China, Fraser’s opening to Vietnamese immigration and Hawke’s work on building the APEC agreement are all noted.

Again are the major wars that also formed Australia’s current position in East Asia – World War II, the Malayan Emergency, the Korean and Vietnamese wars – are barely mentioned. This trivialises some of the major influences in today’s complex tapestry of relationships

Of Australia’s closest Asian neighbour, the fall of Sukarno gets a brief nod but Suharto’s removal, the rise of Indonesian democracy and East Timor are all removed from the narrative. There is also no mention of other internal dislocations like the Cultural Revolution or the Indian Partition, all which still have echos today.

In the introduction the Colombo Plan gets a mention and it’s worth reflecting upon its effects.

When I worked in Bangkok in the early 1990s there were a number of business leaders who had been educated in Australia under Colombo Plan scholarships.

That investment by Australia paid dividends through the 1980s and 90s as many of those scholarship students were ardent supporters of Australian businesses and government.

One wonders how today’s students who’ve been treated as milk cows by Australian governments and “seats on bums” to education institutions will feel about the country when they enter business and political leadership positions over the next decade?

The examples of Australian business engagement in Asia are interesting – Blundstone’s is a straight out manufacturing outsourcing story which doesn’t really describe anything not being done by thousands of other businesses while Tangalooma Island Resort is a light of hope in the distressed Australian tourism industry.

A notable omission is how digital media, apps developers and service businesses are faring in Asia. There are many good case studies in those sectors but the writers seem to be, once again, fixated on the trade patterns of the 1980s and 90s rather than success stories in new fields and emerging technologies.

Generally though the description of the Australian economy is again more of the same; a combination of self congratulations on having a government AAA credit rating, hubris over avoiding a GFC induced recession and stating how the services sector has risen to replace the manufacturing that’s been outsourced by companies like Blundstone.

Overall Chapter Three of the Australia in the Asian Century report illustrates the opportunities missed in the last 25 years. Had this report been written twenty years ago it could have forecast a booming relationship in the services and advanced manufacturing sectors. It almost certainly would have included an observation that the days of the Australian economy depending upon minerals exports is over.

What a difference a couple of decades make.

The engagement of Australia with Asia concludes with a look at the changes to the nation’s immigration intakes and demographic composition. This point is, quite rightly, identified as an area of opportunity.

Having Thai restaurants in every suburb and Indian doctors in most country town isn’t really taking advantage of the opportunities presented by having a diverse population and workforce. Chapter Four attempts to look at how these factors, and others, can help Australia’s engagement with the Asian economies.

Australia in the Asian Century – Chapter Two: The future of Asia

Chapter two of Australia in the Asian Century attempts to predict the development of the region’s economies over the next decade

This post is one of the series of articles on the Australia in the Asian Century report. An initial overview of the report is at Australian Hubris in the Asian Century.

“Asia’s economic resurgence is set to continue” is the bold statement at the beginning of Chapter Two of the Australia in the Asian Century report and with that the chapter immediately falls back to warm motherhood statements;

Average living standards are set to improve dramatically and transform the way people live and work. Asia’s economies are projected to expand at a strong rate. The region’s expansion and development will change the contours of Asia and the globe—opening up exciting new opportunities, while also posing some challenges.

All of this is true, however the report struggles to identify exactly what those challenges and opportunities are as Asia develops and where Australians fit into the region’s evolving economy.

Demographics will matter, but they are not destiny

The constant mantra through the report is “demographics will matter, but they are not destiny.” Yet, despite the headline, Chapter Two illustrates that so far it has been destiny.

Graph 2.6 of the report shows how Japan’s, and now South Korea’s, productivity has tailed off as the population has aged. This is to be expected when economic expansion has been based on labour intensive manufacturing, as China’s is today.

Frustratingly, the report acknowledges this with the following paragraph;

But the fruits of adopting new technology and adapting it will become harder to harvest. A point will come, though it’s still some way off, where the growth of labour productivity in developing Asian economies will slow—opportunities for gains from importing foreign technology and for shifting workers from agriculture to industry will diminish.

“Some point in the future” doesn’t wash when the rest of the chapter shows off various ‘firm’ numbers estimating ‘base’, ‘low’ and ‘high’ growth rates. If you can quantify those growth assumptions, then it should be fairly trivial to estimate the turning point where aging populations start to affect China.

Luckily others have done this work, the Australian Macrobusiness site suggests that turning point could be as early as 2015. In which case, unlike Japan and South Korea, China will have got old before it got rich.

If this true, then IMF’s projected growth rates will miss their targets – particularly the ‘low growth’ scenario which is almost identical to their ‘base scenario’.

Rise of the middle class

Much of the emphasis in this view of Asia’s development is on the rise of the middle class and the report features a case study of Hitesh, a middle class stockbroker in Ahmedabad.

While there’s no doubt Hitesh and his family’s income and standard of living are rising, the idea that several hundred million Indian and Chinese will jump to European or North American income levels before 2025 is improbable.

Most stockbrokers in New York, London or Sydney earn between 30 and 300 times Hitesh’s $5,000 a year and in 2010, average Chinese income was a tenth of the US.

Even if the Indian and Chinese middle classes did manage a tenfold growth in income over the next decade, the assumption they would adopt the debt driven high consumption patterns of the US or Australia isn’t a given as we see in how the Japanese middle classes haven’t aped the spending behaviour of their profligate Western friends.

The credit and banking points in this chapter illustrate the hubris mentioned in my original overview of Australia in the Asian Century.

And with financial systems in advanced economies unwinding the high debt levels built up before the Global Financial Crisis, financial institutions in stronger economic positions, such as those in Australia and elsewhere in the Asian region, will have opportunities to expand into new markets.

Given the dire records of Australian banks in expanding overseas along with the “stronger economic position” being due more to government guarantees during the GFC and the desperate political desire to prop up Australia’s property market at all costs, it’s difficult to see exactly what Australian institutions have to offer Asian savers except to further underwrite the never ending down under housing bubble.

Chapter two of the Australia in the Asian Century report finishes with an overview of the current geopolitical situation which is notable more for what has been left out. This is again probably due to Canberra public service politics and the report suffers for it.

One major region left out is Central Asia and Russia – outstanding given the report’s view  that a resource poor Asia (that Japanese assumption again) will need Australia to fuel its energy and resources needs – which ignores the construction of pipelines and railways to China and India.

Also missed are the projects to upgrade China’s railway and road links to Europe and Central Asia. These in themselves may trigger major geopolitical changes over the next few years, as we’re seeing today in Tibet and Xinjiang after railways were built to Kashgar to Lhasa. Yet none of this is considered.

Not the ‘Stans should feel aggrieved, like the rest of the report the emphasis is on China and India with scant mention of other Asian countries.

For Australia, much of the hope in the report seems to be in providing raw materials for Asia’s industrialising and urbanising societies along with being a holiday destination and education provider. This is all lazy 1980s thinking which projects Australia’s Japanese experience of thirty years ago onto China and India today.

The predictions of Asia’s future in the Australia in the Asian Century report are largely are a continuation of the status quo. If this report had been written in 1960, it may have picked the rise of Japan over the following twenty years but the main focus would have been on Burma as Asia’s richest independent country.

Exacerbating the report’s weakness are the assumptions that development paths will follow the same course as Japan, Taiwan or South Korea in the late 20th Century.

Development wasn’t a smooth path in all three of those countries and each had their own unique political and economic upheavals in that time, the failure to recognise that similar disruptions will happen in Asia’s emerging economies as they develop is probably the greatest weakness in the entire report.

It’s very easy to draw straight lines on graphs based on ‘best case’ IMF projections but history is rarely linear. This is probably the greatest intellectual failing of the white paper.

Gift giving in China

Giving gifts in Asian cultures can be fraught with risks

A terrific little infographic from cross cultural PR firm Illuminant shows the right and wrong ways of giving gifts in China.

The first faux pas listed is giving clocks and the advice “if you happen to receive a clock from any Chinese source, get your butt to airport pronto” is marvellous.

Giving gifts in sets of six or eight is also a great little gem.

One of the cultural differences between East Asia and the west is the habit of giving small gifts of appreciation and it’s easy to get this wrong. What is acceptable in the People’s Republic of China might be a grave mistake in Korea or Thailand.

A handy little app for dealing with cross cultural misunderstandings is Hooked In Motion’s World Customs and Cultures that lets you dial up the basic protocols like not touching heads or hand gestures which should be avoided. Sadly it doesn’t cover gift giving.

Illuminant’s infographic and Hooked In Motion’s app remind us that the whole world isn’t being homogenised by the web and global communications as each culture takes today’s tools and adapts them to their own worlds.