Tag: china

Chinese earthmovers move up the value chain

The Chinese construction equipment industry shows how the nation is moving up the value chain

After yesterday’s post on the motor industry’s relevance in the 21st Century, a related article about Chinese construction equipment appeared in The Economist.

According to CLSA – formerly Credit Lyonnais Securities Asia and itself now fully owned by Chinese investment house CITIC – the quality of Chinese construction plant is rapidly approaching that of the Japanese and US industry leaders.

The Chinese have achieved this in a short period through a combination of joint ventures and strategic takeovers and that should worry its more established competitors.

How the Chinese have moved up the value chain in construction plant is a small, but important example, of how the country is positioning itself as a higher level producer as its economy and workforce matures.

For trading partners and competitors it’s worthwhile thinking how a more affluent and higher tech China is going to affect their businesses, thinking of China as just a cheap source of low quality labour isn’t going to cut it for much longer.

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Finding a role for Hong Kong in the China story

Hong Kong’s role in the China story as Shanghai rises is discussed by Brian Wong of Seacliff Partners.

The Chinese government’s declaration of a Shanghai Free Trade Zone recently made headlines with speculation the region might be exempt from the nation’s internet blocks.

For Hong Kong, the Chinese government’s move is another blow to the territory’s already declining position as the main gateway to the People’s Republic.

As part of the Decoding The New Economy series of interviews, I spoke to Brian Wong of Hong Kong’s Seacliffe Partners about the challenges facing the territory and the role the former British colony will play over the next few decades.

“Hong Kong, I think, is the perfect bridge between East and West, ” says Brian. “But I think Hong Kong has been in search since the change over in 1997 as to where it really wants to focus itself.

The territory is squeezed between Singapore that has established itself Asia’s leading financial hub and now is positioning itself as a creative centre and Shanghai which has become the new ‘Gateway to China’ with its domestic financial centre and deep water port.

Despite the challenges facing the Territory, Brian sees opportunities in the city’s cultural and business environments.

“One of the great things about Hong Kong still is its international community and its accessibility for creative types,” Brian says. “I think Hong Kong is starting to recognise this advantage.”

“You have a large base of Chinese based manufacturers looking to beyond just low cost OEM manufacturing, what they need is creative design and innovation. If Hong Kong can be one of the big suppliers of that then they have a really good opportunity.”

One area Brian sees Hong Kong has an advantage is in its developing a hardware hackers culture that fits in with the massive manufacturing hubs surrounding the territory along the southern Chinese coast.

“I went to a talk where there was a fellow from Mountain View, California who does a lot of product invention,” Brian tells. “He’s set up a lab in Hong Kong to do product innovation because although he recognises China has a low cost manufacturing base, he doesn’t want to live in Shenzhen.”

The challenge for Hong Kong is to encourage a more entrepreneurial mindset, Brian believes. He also sees Hong Kong having an opportunity in being a conduit for the Chinese diaspora looking at investing into the PRC.

Probably the biggest advantage Brian sees Hong Kong having are in its mature legal and capital markets that Shanghai and other Chinese centres lack – “these are world class,” he asserts.

Ultimately though it may be that Shanghai, Beijing, Taipei or Singapore aren’t threats to Hong Kong at all as each city becomes the centre of certain aspects of a diverse Chinese and East Asian economy.

“I think much like in the United States there is not just one financial centre – you’ve got Chicago, New York and you’ve got different roles for different cities, LA for media and San Francisco as the gateway into the United States.”

“There’s room for more than just one. The question is what does Hong Kong want to be and how does it want to be most valuable to the China story.”

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Globalisation with Chinese Characteristics

What are the challenges facing Chinese businesses as they expand globally?

“eBay is a shark in ocean, Alibaba is a crocodile in the Yangtze” film maker Porter Erisman quotes the founder of Alibaba, Jack Ma, in comparing the two online trading sites.

In promoting his film Crocodile in the Yangtze, Porter spoke to Decoding the New Economy about the rise of the global Chinese internet giant.

A key part in Alibaba’s success is taking on eBay on it’s own turf, “if you’re David fighting Goliath you can’t play by the big guy’s rules,” Porter says.

This is exactly what the Chinese company did when eBay entered their market and today Alibaba and it’s subsidiary Taobao have sales exceeding eBay’s and Amazon’s.

“Back in about 2003 Jack Ma came to me and told me about a secret project to overtake eBay,” Porter says. “When we looked at them they looked like a Goliath, they’d never really been beaten in a market they’d entered first and they had a huge war chest with a $150 million committed to the China market.”

It turned out that eBay weren’t as powerful as they appeared, something other entrepreneurs have discovered when giants like Google have entered their markets.

The Chinese Leapfrog

Like many rapidly developing countries, China is leapfrogging various stages of development that Western economies went through with the retail industry and e-commerce being two examples.

“Some people say cellphones will leapfrog landlines, actually the same is due with entire systems,” says Porter. “In China coming from so many years of a command economy there wasn’t a very developed retail culture or even a consumer culture.”

“Taobao came along at a time when all of that was still in the early phases of development and the company basically leapfrogged that whole phase of building out shopfronts and building logistics.”

“E-commerce in China is revolutionary while in the US, or Australia, it is evolutionary.” Porter says.

Porter quotes Jack Ma as saying “e-commerce in the US would be a dessert, in China it is the main course.”

China’s Global Challenge

As companies like Lenovo computers, Hauwei telecommunications or Haier whitegoods have discovered, Chinese businesses face challenges when expanding overseas. Porter sees this as a matter of time and scale.

“Like Japan in the 1970s and 80s there’s a whole wave of companies that have started going global. China’s such a big market that there’s a lot of companies that get big and develop scale before going international.”

“I’d say the biggest challenge in the beginning is cultural,” states Porter. “China’s at a disadvantage because information and the media are so controlled that’s sometimes a rude awaking when a company goes global like a Hauwei and then faces a bunch of political issues it doesn’t understand.”

“One of the reasons I made the film,” Porter says. “I wanted entrepreneurs in China to see it and understand these are the issues Alibaba faced when they went global and hopefully you can learn from some of those successes and mistakes.”

Going to China

Porter’s advice to westerners going into China is to shut up, listen and learn, “don’t assume that just because things are done a certain way in the US or Australia that it’s superior.” The country’s culture and ways of doing business are different to those of North America, Europe or Australia.

“If you look at the way traffic moves in Shanghai it looks crazy. If you drove like that in Sydney it would be a disaster but there’s just different ways of through traffic, getting point A to B.”

“It’s better not to judge, but just step back.”

Regardless of our judgements, China’s move up the value chain means we will see more PRC founded companies going global.

Over the next decade we’re going to see the globalised economy start to take on some recognisably Chinese characteristics.

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Facebook and the Fax Machine

What manufacturing was to the Chinese economy of the 1980s, information is today. How will the country’s leadership handle this?

The South China Morning Post reports the Chinese government is allowing access to otherwise restricted sites like Facebook to those in the Shanghai free trade zone.

In many ways this parallels the original Special Economic Zones set up by the People’s Republic of China at the beginning of the 1980s – these areas’ separate legal, immigration and economic status attracted foreign investment and trigged the economic boom that’s seen China become one of the world’s biggest economic powers.

Just as manufactured goods were the key to the nation’s development 30 years ago, today it’s information as the PRC leadership works on moving China up the global value chain.

For a nation of knowledge workers to succeed, the workers have to have access to knowledge.

It’s claimed the humble fax machine was responsible for the fall of the Soviet Union, how true that is open to debate but an open flow of information is never good for those who rule without the support of their citizens.

With the explosion of Chinese social networking sites, it’s become harder for the government to control the flow of information between citizens and the opening of the internet in parts of Shanghai is another small change.

How the Chinese Communist Party manages to keep the support of its increasingly affluent and better informed citizens will define the course of 21st Century history.

As China shifts from being a low cost manufactured goods supplier to a more sophisticated, diverse and expensive economy the government has no choice to face these challenges.

Beijing’s cadres would be hoping our children aren’t talking about Facebook in 2012 Shanghai in the same way that we talk of fax machines in 1982 Leningrad.

Image of a fax machine courtesy of Kix through sxc.hu

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Ordos and Detroit – A tale of two cities and two economies

The problems of Detroit and Ordos tell us much about the differences between the US and Chinese economies

This week bought news that that two cities, one in China and one in the US, had fallen into deep financial trouble.

While the bankruptcy of Detroit is very different to the developers of the Ordos new city failing, there is a strange symmetry between the two stories.

Detroit is the biggest US city ever to enter bankruptcy with an estimated $20 billion in debts, dwarfing the previous record of Alabama’s Jefferson Country’s $4 billion default in 2011.

The fall of Detroit wasn’t unexpected as the New York Times tells.

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

Like most industrial hubs, Detroit grew became the centre of the US motor industry due to geographic and commercial advantages along with a few historical accidents but as the economy changed, the city’s importance faded.

It’s sad for the people of Detroit but it isn’t the first industrial hub to fade away; Ironbridge, once the cradle of the English industrial revolution, is today an open air museum and a charming rural spot.

Ordos on the other hand is an example of 21st Century government planning with the Inner Mongolian provincial leaders building the city of the basis of build it and they will come.

They haven’t.

The collapse of Ordos is going to be an interesting test of the Chinese economic model. Many of the country’s local and provincial governments – like Australia’s – have become dependent on the revenues from property sales. Now the market is  drying up, local councils are having trouble paying their bills as Bloomberg reports.

Some Ordos district governments had to borrow money from companies to pay municipal employees’ salaries, Economy & Nation Weekly, published by the official Xinhua News Agency, said in a July 5 report on its website.

So while Detroit illustrates the stresses in the US system, so too does Ordos tell us about the problems facing Chinese governments.

The tale of these two cities also shows the difference between the US’ industrialisation of the early Twentieth Century and today’s economic development in the PRC and reminds why the results of ‘Capitalism With Chinese Characteristics’ may be very different to the modern American consumerist economy.

For Detroit, at least there’s good news as one US city manages to works its way out of bankruptcy. For the developers of Ordos though, things must be looking very grim.

Ordos image courtesy of Bert van Dijk through Flickr.

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Can mobile networks build Myanmar’s economy?

Myanmar, or Burma, is emerging from being a backward economy, can mobile networks help the nation’s economic development?

Fifty years ago Myanmar, or Burma, was one of Asia’s most affluent nations, but a succession of poor governments have seen the country become one of the world’s poorest. Can mobile phone networks be part of Myanmar’s econmic recovery?

The potential economic impact of mobile communications in Myanmar is a report prepared by Deloitte Consulting for network equipment vendor Ericsson claiming that rolling out cellphone networks across the nation will create 90,000 jobs in the emerging economy.

Myanmar is starting from a low base with only 2% mobile penetration rates, compared to over 40% in Timor-Leste and Laos while the average across South-East Asia is over 100%.

Myanmar lags south east asia mobile penetration rates

To address this the Myanmar Post and Telecommunications Department is looking a splitting the existing phone monopoly into three or possibly four licenses.

Ericsson’s report looks at the economic effects of rolling out these networks and some of the opportunities for local entrepreneurs and communities.

The biggest employment effect identified in the Ericsson/Deloitte report is through the reseller networks with 50,000 of the 90,000 jobs created by new mobile services being in the sales channel.

What’s striking about that prediction is how it doesn’t look at the broader effects of modernising the country’s phone network. The report’s authors do mention they believe the overall benefits could boost the Burmese economy by over 9% in a best case scenario but don’t fully delve into where they believe that growth will come from.

myanmar-gdp-effects-of-mobile-networks

It can be expected there’ll be many more indirect benefits as Myanmar’s communications networks jump into the 21st Century, the report itself has a chapter citing various benefits mobile networks have delivered to countries as diverse as Kenya, Chile and Bhutan.

Particularly interesting with Myanmar’s development will be the Chinese influence in rolling out these networks – the PRC is already the biggest foreign investor in the country having largely ignored western sanctions on the military regime and it can be expected players like Huawei and China Mobile will be well positioned in bidding for licenses and contracts.

For local entrepreneurs the complex Burmese language is a natural opportunity for app developers and programmers to develop localised versions of successful applications, the lack of English and Chinese language skills among the population – another terrible neglect by successive governments – will hamstring Myanmar’s digital media export opportunities.

Probably the biggest risk to Myanmar’s success though is the role of the military who are expected to get one of those mobile licenses.

Burma’s terrible economic performance over the last fifty years has been largely due to the incompetence, greed and corruption of various military rulers and, while their continued influence in the nation’s economy may be necessary to placate them and their cronies, the legacy of these people may act as a break on a really open economy or fair markets.

For Myanmar, the opening of cell phone networks is great opportunity. Hopefully the vested interests that have held this nation back for so long will resist the temptation to further damage the country’s prospects.

Burmese landscape image by ZaNuDa through sxc.hu.

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IT industry feuds are buried as business models collapse

The collapsing personal computing and server markets are forcing once powerful competitors to bury animosities and feuds as industry giants face a troubled future.

The collapsing personal computing and server markets are forcing once powerful competitors to bury animosities and feuds as industry giants face a troubled future.

Samsung’s exit from selling desktop computers illustrates how quickly the PC industry is collapsing which underscores Michael Dell’s urgency in his attempts to take Dell Computer private along with the spectacle of once hostile competitors like Oracle and Microsoft embracing each other.

Earlier this week Microsoft Australia hosted a briefing at their North Ryde office to show what the company is doing with their Azure cloud computing service, which is part of the company’s quest to find revenues in the post-PC world.

Microsoft are quickly adapting to the new marketplace. This week in Madrid, the company hosted their European TechEd conference where they showed off their Cloud First design principles of software built around online services rather than servers and desktop PCs.

One important part of Microsoft’s cloud strategy is establishing pairs of data centres to provide continuity to the various zones, including China, across the globe. Each individual centre is at least 400 miles apart from its twin to avoid interruptions from natural disasters.

Interestingly, this is the opposite of Google’s data centre strategy and quite different from how Amazon offers its data services where customers can choose the zones and level of redundancy they want.

There’s no real reason to think any of these three different philosophies are flawed, it’s a difference in implementation and each approach brings its own advantages and downsides which customers are going to have choose between.

While Microsoft is showing off its new direction, HP CEO Meg Whitman was in Beijing proclaiming that “HP is here to stay” and laying out the company’s path to survival in the post-PC world.

Like Microsoft, HP is putting bets on cloud computing and China, Whitman emphasized the work she’s been doing engaging with Chinese companies while promising “a new style of IT” and that “HP is in China for China.”

A key difference to Microsoft and Dell is that HP is doubling down on its desktop and server businesses with a focus on selling into the Chinese market. This is a high risk move given China’s investment into high speed networks and the global nature of the cloud computing movement.

One of the boasts of Whitman and her management team is that HP have added a thousand Chinese channel partners over the last twelve months, this is an effort to replicate Microsoft’s market strength in mature markets which has given the software giant breathing space against strong, cashed up competitors like Google and Apple.

Whether this works for HP in China remains to be seen, in the meantime Microsoft are trying to move their huge channel partner community onto the cloud with various offerings that give integrators who’ve traditionally made money selling servers and desktops some opportunity to sell online services.

A selling point for Microsoft is yesterday’s announcement they will offer Oracle databases on their Azure platform. The ending of animosities between Microsoft and Oracle is an illustration of just how the collapse in the PC and server markets is forcing market giants to forget old feuds and build new alliances.

With the server and personal computing markets being turned upside down, we’re going to see more unthinkable alliances and pivoting corporations as once untouchable industry giants realise the threats facing them.

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