Paul Wallbank – Brilliant Communications

Tag: china

  • Enter the Dragon

    Enter the Dragon

    Once up a time our parents laughed at the tinny little Japanese cars – in the 1960s companies with silly names like Toyota and Mazda could never threaten world giants like Chrysler, Ford and General Motors.

    Within two decades the Japanese had moved their products up the value chain leaving their American and European competitors running scared while governments in western countries offered the new leaders of the manufacturing industries bribes to set up plants in their towns and states.

    It was always obvious China would follow the same course as the Japanese, particularly given the country’s position as the world’s cheap labor supplier had a time limit thanks to the demographic effects of the 1970s One Child Policy.

    So it’s no surprise that Alibaba, China’s biggest e-commerce service, has built its own mobile operating system to compete with Google’s Android.

    If Aliyun follows the Japanese development path, the first version is terrible but within five years – the development cycle of software is a lot quicker than that of cars – Alibaba will be a viable competitor to Google and Android.

    Chinese developers moving into the mobile market is terrible news for the also rans like Microsoft and Blackberry. As Apple dominate the premium mobile sector and Android the mass market, it’s very hard for those running third or lower to achieve the critical mass needed to be competitive. Aliyun makes it much harder for them to gain any traction in high growth developing markets.

    An interesting aspect of the Wall Street Journal’s story is how Aliyun is aimed at the domestic Chinese market for the moment. This is part of China’s economy moving away from being overly reliant on exports, having locally made products that meet the needs and aspirations of a growing domestic economy is an important part of this process.

    Exports though will remain an important part of the Chinese economy for most of this century and value added products like Aliyun will be important for China as the cheap labour advantage erodes over the next two decades.

    Businesses who think their markets are protected because their quality is better than their Chinese competitors may be in for a nasty shock, just like the 20th Century auto makers who dismissed the Japanese were in the 1970s.

    Whether Aliyun is successful or not, we’re once again seeing many of the facile assumptions about Chinese growth being tested as the country’s economy and society evolves.

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  • Six billion pairs of socks

    Six billion pairs of socks

    Ever since the days of Napoleon business people have lusted over the idea of selling into the Chinese market – the idea of a billion people clambering to buy just one widget each brings a gleam to the eyes of even jaded entrepreneurs.

    When Deng Xaioping opened the Chinese economy in the mid 1980s Australian brewers, Swiss watchmakers and German motor manufacturers rushed into the country believing that a billion liberated peasants would rush to buy expensive beer and watches.

    As it turned out, the real opportunities for foreigners were in the other direction. When China joined the World Trade Organisation in 2001 the boom that had already started in the Special Economic Zones along the southern Chinese coast spread across the Eastern provinces as manufacturing from Hong Kong, Japan and Taiwan to find cheaper labour.

    300km South-West of Shanghai the city of Datang became “sock town” where local companies manufactured a third of the world’s sock supply.

    Chinese sock manufacturers became so competitive that their Japanese counterparts were forced to move upmarket in an effort to secure a position in an industry awash with cheap products.

    Today the Chinese sock industry is looking sick as manufacturers go broke and inventories pile up reports The Observer.

    Excess capacity is a problem in many industries, particularly motor manufacturing where governments around the world have supported their local producers resulting in a glut of cars and trucks. Socks are no exception to the laws of supply and demand.

    The travails of China’s sock industry are a cautionary tale for those who project straight lines for Chinese growth.

    Facile assumptions that every man, woman and child on the planet needs to buy two pairs of socks a year, or that China will build millions of steel hungry apartments each year, is not economic analysis and any business built on such shaky beliefs is leaving itself vulnerable when things don’t work out.

    The same is true for nations. Hollow assumptions can put an entire economy on shaky ground. Just thinking that every Chinese family needs six pairs of socks doesn’t guarantee economic success.

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  • Short sharp shocks

    Short sharp shocks

    In Atlantic Magazine’s China’s long history of defying the doomsayers, Stephen Platt and Jeffrey Wasserstrom put the case that the Chinese Communist Party is unlikely to fall in our lifetimes.

    China’s military is presently powerful enough and its diplomacy stable enough that the Communist Party faces no realistic threats from outside. Internally, its control over society is effective enough that, while unrest and discontent may be widespread, there are neither well-organized opposition parties nor rebellious armies that might seriously challenge the central government.

    They are probably right, it’s difficult to see any immediate threat to the power of China’s current leaders.

    Although we should keep in mind that only a few decades ago it was inconceivable that the Soviet Union would disintegrate or the Warsaw Pact dissolve.

    Had someone wrote in 1986 that within five years both would happen, they would have been written off as being foolish. But that’s what happened.

    In the stock market it’s said “the market can stay irrational longer than you can stay solvent” and it’s true for any pundit – you may be right that property is overvalued, the US is in decline or the Eurozone will break up, but the powers that be will may be able to kick the can down the road and sustain the unsustainable for a lot longer than any of us expect.

    Steve Keen found this with the ‘walking to Kosciusko” bet where he was railroaded into giving a fixed date of when the Australian property market would fall. He, nor anyone he made the wager with, had any idea of the billions of dollars governments would throw at the market to maintain prices.

    All too often people make the right calls about property markets, economies or the fall of regimes but get their timing wrong.

    In his book The Sun Always Rises Ernest Hemmingway’s character Mike Campbell describes how he went bankrupt – “Two ways. Gradually, then suddenly.”

    And so it is with empires, nations, ideologies and even the most powerful corporation. When the change happens it’s sudden and unexpected.

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  • Is Australia’s blue sky future making way for a red sunset?

    Is Australia’s blue sky future making way for a red sunset?

    Australia’s political and business leaders are convinced the nation will ride on the back of a fast growing China for the foreseeable future.

    Having climbed off the sheep’s back during the 1980s and moved from being an economy dependent on agricultural exports to a ‘clever country’ exporting high value services and products, in the late 1990s Australia turned its back on building a modern economy and decided to stake the future on a never ending coal and iron ore boom driven by Chinese industrialisation.

    Smarter than Bill Gates

    Australia’s success in riding China’s coattails allowed the Reserve Bank Governor Glenn Stevens in 2010 to boast how he and the nation’s politicians were smarter than Bill Gates who nine years earlier warned Australia about being over reliant on commodities.

    Despite the hubris, there are real risks in the Chinese economy that the blue sky mining school of Australian economic management needs to plan for.

    China warnings

    The warning to US Presidential candidates on trade with China by Professor Patrick Chovanec of Beijing’s Tsinghua University’s School of Economics and Management is a good starting point.

    In his warning Professor Chovanec points out that Chinese growth in recent years has been driven by the construction sector, even if building activity were to stay constant this would shave off half of China’s growth rate. The options for stimulating the economy in manner similar to 2008 have narrowed.

    China’s economy is not just slowing, it is entering a serious correction.  The investment bubble that has been driving Chinese growth has popped, and there are no quick “stimulus” fixes left.  There is the very real possibility of some form of financial crisis in China before year’s end.

    China’s stimulus package was the world’s biggest response to the 2008 Global Financial Crisis, followed by the South Koreans (another Australian commodities customers) and Australia itself.

    While the Chinese commodities boom drove most of Australia’s trade, it was domestic spending driven by the Rudd government’s stimulus package that saved Australia from entering recession.

    Squandering a century’s boom

    One of the notable things about Australia’s commodity success in the 2000s is just how little a dent the booming coal and iron ore exports put in the trade deficit. Despite record terms of trade, Australians still manage to spend as much on imports as they make on exported goods.

    Not that this worries Australia’s leaders who seem to spend all of their time worrying about pandering to a tiny number of marginal seat voters who listen to fear mongering talkback radio hosts which is what has driven the last two weeks’ obsession with a few hundred asylum seekers.

    Professor Chovanec points out the Chinese leadership is distracted as well with their struggles over a messy change of Politburo leadership, risking that the policy makers might miss any opportunity they have to engineer a ‘soft’ landing for their economy.

    The biggest risk is that of a crisis engineered to distract a discontented population warns Chovanec;

    in a worst case scenario, China may be tempted to provoke a conflict in the South China Sea to redirect popular discontent onto an external enemy.

    Already such things are happening, as anti-Japanese demonstrations step up around China over an island dispute.

    There are no shortage of island disputes in the South China Sea and almost all scenarios involve allies of the United States – the only one feasible dispute that doesn’t is Vietnam and China’s leadership has had their nose blooded in such disputes with their southern neighbour before.

    Even if we don’t see military tensions between the US and China, we certainly are going to see trade and political disputes in the next few years as both countries adapt to their places in a changed world.

    For Australia’s business and political leaders, it means being prepared for a world more complex than one where a country can get by just lazily skimming a few dollars of easy iron ore exports to China.

    We have to hope Australia’s leaders are capable of dealing with the challenges of a much more dynamic and difficult world where huge growth of one friendly trading partner is not assured. The stakes are too high to be distracted by suburban apparatchiks scoring meaningless political points off each other.

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  • Refocusing on Asia

    Refocusing on Asia

    One of the interesting things about Australian society and business in the last twenty years is how the nation seems to have turned away from Asia.

    In the 1980s and early 90s, the country was focused on exporting services and building long term relationships in sectors ranging from Malaysian construction, Thai diary farming and legal services in China.

    Twenty years later, Australian businesses and government seem to have given up with the consensus among industry and political leaders now being that all the nation can export is raw minerals, bulk agricultural goods with a sprinkling of third rate educational services.

    Globally focused Australian businesses – particularly those in the startup sector – look to Silicon Valley for funding, inspiration and markets. Only a minority are looking North to Asia rather than across the Pacific.

    ViDM – Ventures in Digital Media – is one of those businesses and CEO Willie Pang of the Sydney based advertising technology startup believes the time is to seize opportunities in growing Asian markets rather than concentrating on Silicon Valley financing and exits.

    “Focus on building a great business. If you have a great business someone will buy you,” says Willie.

    The opportunity ViDM sees is in advertising trading platforms bringing together publishers and advertisers across the digital, print and broadcasting channels. Willie expects this market to be worth eight billion dollars across Asia within five years.

    Many of those opportunities in the Asian market are in business-to-business markets such as advertising platforms which is another difference to the largely consumer focused Silicon Valley model.

    For Australian business, Willie doesn’t see funding as being an issue with money being available for smaller startups and mature companies.

    Like in Silicon Valley the real problem lies for business in the middle stages of their development where they are too big for angels and smaller funds but not interesting for the bigger investors. That grey zone lies between two and ten million dollars.

    For the companies that do raise the funds and go hunting in Asian markets, the rewards can be great. Not only do this economies have great growth rates, the diversities of Asian countries mean there are different opportunities lying in each nation or even provinces.

    Right now, US businesses are focussed domestically or just on a narrow range of opportunities catering to affluent Chinese consumers in Beijing, Shanghai and Guangzhou.

    Willie sees that as another opportunity, while US and European companies are distracted it’s a good time to be entering the Asian markets. But that window of opportunity won’t last forever.

    “We’ll either play in that space or the Americans will do it” says Willie.

    The opportunity is open to us. Will we grab it?

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