China Update

Via good friend Mr. Tony Tsai, EVP - Chief Marketing & Innovation Officer, The Beijing Hualian Group:

"Xie Guozhong: next year may be most unstable year for world economy in past 20 yearsDec. 22, Xie Guozhong, a director of Rosetta Stone Capital Ltd. and independent economist, said that next year may be the most unstable year for the world economy in the past 20 years. It is impossible for the outflow of hot money to overwhelm China. However, the real estate bubble in mainland China is breaking and the bubble exaggerated economic growth."

"Ministry of Commerce: China's foreign trade situation to be more complicated and serious this yearJan. 9 at the National Trade Promotion Work Conference in Beijing, Vice Minister of Commerce Zhong Shan said that trade friction on products exported from China has intensified since last year. Besides labor intensive industries, such as light chemical, textile and steel, other industries, such as telecommunications and photovoltaic, have also been influenced. China's foreign trade situation will be more complicated and serious this year."

"GDP exceeded RMB1tr last year; GDP to grow by 10% this yearJan. 8 at the Shenzhen NPC Conference, Shenzhen Mayor Xu Qin said the GDP in Shenzhen exceeded RMB1tr in 2011. The GDP in Shenzhen will remain at 10% this year."

"Bank of Communications: China's GDP growth in 2012 to reach 8.5%According to the "Outlook of China's Macroeconomics and Finance in 2012" issued by the Finance Research Center of Bank of Communications of China, China's GDP growth in 2012 will reach 8.5%. GDP growth in the four quarters of 2012 are predicted to be 8%, 8.3%, 8.7% and 9%, respectively."

"Total value of China's imports and exports was US$3.64tr in 2011; trade surplus declined by 14.5%Jan. 10, according to statistics issued by the General Administration of Customs, the total value of China's imports and exports was US$3.64tr in 2011, a 22.5% increase from 2010. This includes exports worth US$1.89tr, a 20.3% increase, and imports worth US$1.74tr, a 24.9% increase from 2010. The trade surplus was US$155.14b, a 14.5% or US$26.37b decrease from 2010."

Chinese Goods and US Prices

"The Chinese supply 78% of the footwear imported into the U.S.; 71% of the ties; 55% of the gloves; roughly 50% of the dresses and baby clothing; and 90% of house slippers, according to Commerce Department data."

The article in Wall Street Journal this morning here. The following chart highlights the trend:



The article ends with a quote from Bernard Leifer, chief executive of SG Footwear:

""There's been a shift in who is holding the cards," Mr. Leifer says. "It used to be that the retailers would demand lower prices. Vendors like us would demand lower prices from the factories. And the factories would generally acquiesce. The whole thing has now flipped. The bottom line is the American consumer is going to end up paying more.""

India: Brand overload

Quote from WSJ article:

"India's store shelves groan under the weight of consumer brands. About 900 new food and beverage brands alone have been launched there in the past two years. Yet while shoppers enjoy ever more choice, it is getting harder for companies such as Procter & Gamble and Hindustan Unilever to preserve profit margins."

Consumer Products Goods sector is going to be a very competitive market in this decade to create large values for investors. The winners will be ones who are Unique versus Distinctive. See my previous blog on the subject here, or win on price points.

China Update

Via good friend Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co.:

"Zeng Peiyan urges establishment of free trade zone between China, Japan and South Korea to be accelerated
April 25, Zeng Peiyan, former vice premier of China, urged the establishment of a free trade zone between China, Japan and South Korea to be accelerated. He said that the three countries should enhance their cooperative partnership to deal with international risks and challenges. He made the remarks during the Northeast Asia Trilateral Forum in Hangzhou."

"China is the world's largest consumer of geothermal power
Guan Fengjun, head of the geological environment department at the Ministry of Land and Resources, said that China will further develop geothermal energy over the next five years as it steps up efforts to cut carbon emissions. China will increase the proportion of geothermal power in its energy mix to 1.7%, which is more than 10 times the current amount, by 2015. China is already the world's largest consumer of geothermal power. Consumption of geothermal energy in 2010 was equal to the consumption of 5m tons of coal."

"Development Research Center of the State Council: China's GDP will grow by 9% in 2011
The Development Research Center of the State Council published a report on Monday. It predicted that China's GDP will grow by 9% year-on-year in 2011. China's trade surplus may be further reduced to $140b, or 2% of China's GDP, in 2011."

China and US Bonds

Via good friend Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co.:

"China has reduced holdings of US bonds for three consecutive months; China reduced holdings of US Treasury bonds by $5.4b in January: March 15, according to statistics issued by the US Department of Finance, China reduced holdings of US Treasury bonds by $5.4b in Jan. China has reduced holdings of US bonds for three consecutive months. China is still the largest holder of US bonds. China's holdings of US bonds were reduced to $891.6b by Dec. 2010."

How green was my Valley!

As the president of TIE Carolinas, an entrepreneurial non-profit, I engage with business men and women from across the world. A trend is clear and omniscient - the world at large, specifically Asia and Africa, have a populace that is aspirationaly committed to improving their lot... from the mother living in the Mumbai ghetto whose girls are working as data entry clerks to the Asian billionaires building the 21st century multi-nationals. I do not find it true of business men and women in the USA, where I have found the entrepreneur unable to "dream" for the past three years... dreams, which are essential to risk taking. Are things improving... they will and can though in a new paradigm yet to emerge.

Thanks to Financial Times for an excellent analysis of the reality of technology driven leadership and entrepreneurism in the the USA... Mr. Richard Waters writes in "A dip in the valley" - "Early stage investors appear to be losing interest in the painstaking work needed to sustain America's lead in the advanced industries that can generate many future jobs."

An example showcasing a macro trend in full swing (though it impacts micro economics as well) is: "When Massachusetts came up with $58m of incentives in 2008 to encourage Evergreen Solar to build a plant, it looked like the US state had found a new lease of life for a disused military base. Until last week, that is. Evergreen is shutting the facility with the loss of 800 jobs. The future location of Evergreen’s wafer making: a plant in Wuhan, China."

[Click to enlarge the graphic in the right.]


Again I am reminded of Gordon Moore's (Intel co-founder) lament that chasing returns has left a gap in invention in the USA. More strongly worded though is: "The belief that American individuality and creativity somehow assure future leadership is “a clear exposition of the arrogance of empire”, warns Michael Moritz, one of the Valley’s leading start-up financiers. Freed of “the debilitating effects of affluence”, he adds, “the need to succeed is far greater in the emerging economies”."

The article discusses US's inability to turn out enough engineers, decreasing share of its world R&D spending, sense of decline in the US, some of the existing invention's business being lost to Asia (ex: LED), etc. The article documents Mr. Moritz statement,"A company that loses its ability to develop its own manufacturing is on the road to oblivion."

And of course, such a conversation cannot end without evaluating current and desired policy - One area being talent, growing it, acquiring it and maintaining it: "Sophie Vandebroek, a Belgian engineer who moved to the US in the mid-1980s to train, says that at the time it was “the place to be – this was where the hot research was happening”. Ms Vandebroek stayed and eventually became chief technology officer at Xerox – in spite of the low status accorded to engineers in the US: “It’s kind of at the bottom of the professions.” Now, she and others warn, US immigration rules that make it harder for foreign students to stay, along with the availability of good jobs at home, are causing the country to leach much-needed foreign workers."

The second, the conduction of business: "If it is not to become left behind in businesses such as [solar, energy storage, green tech], the industry’s leaders say, it is time for a policy rethink. “Simply put, the US needs to decide it is ‘open for business’ and willing to compete in the global marketplace for factories and jobs,” says Paul Otellini, chief executive of Intel. “Costs are higher here, not driven by labour rates but rather by lack of incentives or tax credits that are available to US corporations in most other countries.” Without education reform, there will be a “critical engineering skills gap [that] will ultimately translate into fewer jobs and inventions in this country”."

The article concludes with the Valley still has a spark, "But for the country at large, it would not pay to take that much for granted."

See the complete article here.

China Update

Via good friend Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co.:

"China reduces holdings of US Treasury bonds two months in a row; Japan may become the "biggest creditor" of the US: The US Department of the Treasury said on Feb. 15 that China reduced its holdings of US Treasury bonds two months in a row in Nov. and Dec. last year to less than $900b. Even though China is still the biggest holder of US Treasury bonds, the gap with Japan has narrowed to less than $8b."

"State Council publishes policies encouraging development of software and integrated circuit industries: The State Council publishes a series of policies encouraging the development of software and integrated circuit industries. The State Council reiterates that the software industry and integrated circuit industry are the state's strategic emerging industries and they are an important basis for the national economy and social informationization."

China & IP

From John Gapper's blog on China and IP

"[In China] a pattern is developing. One company cedes its intellectual property to a Chinese SOE and then all of them are then squeezed to the margins of China's domestic market, and face a new competitor. None of this is accidental, or a case of over-eager SOEs crossing the line. China wants to transform from being the factory of the world to an advanced economy and is using its market power to take a short-cut by "digesting" others' intellectual property. One State Council report called for the "absorption, assimilation and re-innovation of imported technologies.""

West's Decline & Mr. Gordon Brown's Insights on Recovery

It is always helpful to know what the leaders of nations are thinking during crisis, which may be driven by economics, climate, etc. What is even more interesting is to see the realization of the "what" into the "how", which usually is a bit farther away from the desired.

In his article "How the west can reverse a decade of decline" in the Financial Times here, Mr. Gordon Brown highlights an obvious fact - "Within a decade a richer Asia will be home to a middle-class revolution equivalent to the consumer power of two Americas, becoming the main driver of world growth... This shift can be the most effective exit strategy from the crisis, and help to rebalance the world economy – but only if Europe and America re-equip, and are able to export their superior innovations and global brand name goods to Asia’s new billion-strong middle class. Yet delivering these value-added, technology-driven, custom-built products and services will only be possible with high levels of investment."

Here is a fallacy - Western innovation is not superior, and if it is, for example, internal combustion engine, it is being leapfrogged as China is focusing on electrical vehicles and in a decades time frame will be delivering commoditized electric vehicles and/or their components to the world.

Mr. Brown though highlights a key consideration and this is where his "what" is right on, though the "how" to manage it is already looking like as he predicts - "The descent into trade and currency wars, bans on cross border takeovers, and excessive restrictions on skilled workers are also counterproductive, risking access to the world’s biggest new markets just at the time they could benefit us most. History will judge these newly fashionable orthodoxies as wrong as the false certainties of the 1930s."

Here is an example of how reacting to fear due to lack of knowledge, just like GM not adopting the electric vehicle option, gets popularized, and Mr. Brown's statement above may come to be:

As a senior South Asian diplomat friend of mine says, "But what to do??!!" :)

China Requesting US Technology Export Deregulation

Via Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co.:

"Ministry of Commerce urges US to recognize China's market economy status as soon as possible
Dec. 15, Yao Jian, spokesman for the Ministry of Commerce, says that the 21st Sino-US Joint Commission on Commerce and Trade (JCCT) is a good opportunity to promote cooperation between China and the US. China is urging the US to recognize China's market economy status as soon as possible. The US should deregulate the export of new and advanced technologies and products to China."

China Update

Good friend Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co. forwards key China updates:

"Five future development trends of China's foreign trade. Five future development trends of China's foreign trade are analyzed by Liu Jingdong, a researcher at the International Law Research Institute at the China Academy of Social Sciences. The five trends are as follows: 1) China will maintain its leading position in worldwide foreign trade for a long period of time; 2) the structure of China's imports and exports will change and energy and resources trade will play important roles in China's foreign trade; 3) legislation and policies regarding the environment will have a significant affect on China's foreign trade; 4) the renminbi will become the main currency for China's foreign trade settlement; and 5) trade protectionism against China will exist for a long period of time and trade friction between China and its major trade partners will increase."

"Three big mountains" for Chinese economy: housing vacancies, the trade surplus and foreign exchange reserves. Chinese decision-makers will lie awake all night thinking of three numbers. The first is 65.4m, the number of vacant houses in China. Second is $28.7b, the estimated value of China's trade surplus in July. The third is $2.45tr, China's foreign exchange reserves. The three numbers reflect the distorted part of the Chinese economy. China is encouraging investment by suppressing the cost of capital and other factors. The cost to get this investment is the sacrifice of the interests of consumers. Low salaries and low deposit interest rates have suppressed the purchasing ability of consumers."

"Vice governor of People's Bank of China: China to gradually deregulate restrictions on cross-border use of renminbi. Aug. 31, Hu Xiaolian, vice governor of the People's Bank of China, says in an interview with foreign media that China will gradually deregulate restrictions on cross-border use of the renminbi. However, variation in the exchange rate will not solve the China-US trade imbalance. China is also considering allowing enterprises to invest in overseas markets with the renminbi."

"China expands scope of property tax pilot program; evaluation technologies become mature. The Ministry of Finance and State Administration of Taxation has expanded the property tax pilot program across the country. Each province can select one city to take part in the pilot program. In addition, the State Administration of Taxation has accelerated technical training of local tax officials in property tax evaluation."

"China creates new regional economic structure; breaking regional economic development imbalance problems. From May to Dec. 2009, nine plans for regional development were upgraded and made strategic national plans. This indicates China is trying to reverse the imbalance in regional economic development across the country and transforming its export-oriented economic development model, which depends excessively on external demand, as well as exploring an overall way to combine energy-conservation, environmental protection, ecology and civilization."

"China to accelerate construction of credit system in rural areas. Du Jinfu, deputy governor of the People's Bank of China, says China will accelerate the construction of the credit system in rural areas, further supporting agriculture through financial measures."

Biggest IPOs in History

Culture and Consumer Choices

The article "Cultural research tour reveals who likes what" in the Financial Times discusses the disparities in consumer behavior when it comes to jewelery here.  For the astute, this also provides insights in luxury and aspirational consumer goods and services as well.  In emerging markets of China and South Asia (India, Pakistan, Bangladesh), jewelery provides the deepest insights as it represents social standing as well as continuation to brand loyalty as it can be a significant both monetarily and as an emotive purchase.

"In the US today, the average price of a piece of diamond jewellery is $199, while in China it is $1,000 - David Rudlin, Japan-based global marketing director for De Beers’ Forevermark"

The article did not highlight though whether the jewelery industry is a follower or a predecessor to overall consumer markets trend?  Or does it stay constant?  That would be valuable information.

Few more interesting trends, for example, the difference in American and Japanese consumers overall are highlighted simply:

"In the US, 80 per cent of diamonds sold are for the bridal market. The American market is more ready than the Japanese to sacrifice quality for size... “The Japanese reject anything with even invisible flaws,” says Mr Rudlin."

"The biggest jewellery chain in the world, Chow Tai Fook, has 1,000 stores in China and will have 2000 by 2020. In China, 70 per cent of the market is made up of solitaire wedding rings, which are relatively easy to design and manufacture."

"“India, with its jewellery culture inspired by maharajas, is unlike anywhere else in the world,” says Mr Rudlin. “The demand is skewed to elaborate multi-stone pieces, with a focus on necklaces, earrings, bracelets and bindis and hair jewels.”"

Innovation in Emerging Market: New Business Models

In Economist's recent report on innovation in emerging markets here, the article "Here be dragons" talks about three specific business models that - "are not only important innovations in their own right but have serious implications for the way that Western companies run their affairs".

The three business models discussed and shared below are designed for the culture and society that is under pressure of growth and has a deep desire to fulfill its aspirational goals. The West cannot copy and paste these. It can only succeed if the society is willing and driving its own transformation. Will it? In another article from the report, "The power to disrupt":

"Anand Mahindra, vice-chairman of the eponymous family firm, says that these days when Indians go to bed at night their dreams about their country’s future “are not just colourful but steroidal”. His compatriots are at last beginning to believe that “the sandcastles we build in our minds are not going to be simply washed away by the morning tide.” The same is true across the emerging world, whose “sandcastles” are now being built on the solid foundations of business innovation. They will endure, changing not just emerging markets but the rest of the world as well."

Business Models -

The first business model is "scaling out, which means involving a wider range of people in the process of production and distribution, something that has been made much easier by mobile phones and the internet. The most successful examples of this are clinics on wheels, but there are plenty of others. Nutriset, a French manufacturer of fortified food for malnourished children, has outsourced production to local franchises in Africa. The company maintains quality control and the franchises are close enough to the children to make distribution quick and easy." This is in comparison to "scaling up".

The second business model is "“pull” model ..., designed to help companies mobilise resources when the need arises. Hong Kong’s Li & Fung or China’s Chingquing Lifan Group can use their huge supply chains to produce fashion items or motorcycles in response to demand. Taiwan’s Quanta and Compel can produce cheap computers and digital cameras for a fashion-conscious digital marketplace." this is in comparison to the "push" model.

The third business model is "the application of mass-production techniques to sophisticated services. This started with India’s outsourcing firms, which demonstrated that economies of scale and scope could be reaped from services that used to be highly fragmented and geographically rooted. These outsourcers are still expanding and moving upmarket. Indian consultancies are now challenging Western ones in complex services, not just dealing with customer complaints."

And it is the third model that is creating impact beyond the traditional information technology driven growth: "[Indian entrepreneurs] see a huge market for legal services requiring a high level of expertise. Dr Shetty is only one of many Indians who are applying Henry Ford’s principles to health care. LifeSpring has reduced the cost of giving birth in a private hospital to $40 by looking after many more mothers. Aravind, the world’s biggest eye-hospital chain, performs some 200,000 eye operations a year. It takes the assembly-line principle literally: four operating tables are laid side by side and two doctors operate on adjacent tables. When the first operation is done, the second patient is already in place."

Innovation in Emerging Market: Consumer Spending

"To flourish in this atmosphere, it helps to have the spirit of a frontier settler, not a corporate bureaucrat." states the article "Grow, grow, grow" in Economist's recent report on innovation in emerging markets here.

Innovation in Emerging Market: Data Points

"The engineering gap" in the January Economist states:

"According to the [Aspiring Minds, India], only 4.2% of India’s engineers are fit to work in a software product firm, and just 17.8% are employable by an IT services company, even with up to six months’ training. A larger share could cope in business-process outsourcing (call centres and the like). These findings are even gloomier than the 25% figure for employability that has been bandied about since 2005, when McKinsey released the results of a survey of international companies."

Download the complete report here.

The article "Grow, grow, grow", in Economist's recent report on innovation in emerging markets here, states: "McKinsey reckons that only 25% of India’s engineering graduates, 15% of its finance and accounting professionals and 10% of those with degrees of any kind are qualified to work for a multinational company."

The emerging market growth is fantastic, yet reviewing the thorough report from the Aspiring Minds raises or should raise questions for the multinationals. Also, curious if this level of employability applies to the Indian scientists as well?

In the report on innovation in emerging markets, the following statistics provide food for thought:

"The number of companies from Brazil, India, China or Russia on the Financial Times 500 list more than quadrupled in 2006-08, from 15 to 62. Brazilian top 20 multinationals more than doubled their foreign assets in a single year, 2006...

Multinationals expect about 70% of the world’s growth over the next few years to come from emerging markets, with 40% coming from just two countries, China and India...

Fortune 500 [companies] have 98 R&D facilities in China and 63 in India. ... General Electric’s health-care arm has spent more than $50m in the past few years to build a vast R&D centre in India’s Bangalore... Cisco is splashing out more than $1 billion on a second global headquarters—Cisco East—in Bangalore... Microsoft’s R&D centre in Beijing is its largest outside its American headquarters in Redmond... a quarter of Accenture’s workforce is in India."

Jeremy Grantham on Financial Bubbles - Excellent!

Jeremy Grantham states - "Bernake has happily picked up the mantle, and seems totally unconcerned about creating another bubble.  He has got interest rates so low, banks can't possibly not make a fortune, savers are being penalized, anyone who wants to buy cash faces a painful experience... so we are all tempted into speculating, which is apparently what he wants and we have just had one of the great speculative rallies in history second only to 1932-33."  Watch the complete interview here.

Shin-kansen: Japanese High-Speed Trains!

"The oldest and busiest Shinkansen corridor - Central Japan Railway's 550km Tokaido line, which connects Tokyo with the western city of Osaka - carries 400,000 passengers a day and has run since 1964 without a fatal accident. The average delay last year was 36 seconds, with most of that caused by typhoons."

The Financial Times talks about the Japanese Shin-kansen in "Tokyo bites hte bullet on Shinkansen" here becoming available to the world after close to five decades in use.  Great competition for the likes of Chinese and German train manufacturers.

Trend In-Motion: Future of Transportation

Excellent articles in the Financial Times today on high-speed rail. In "China on track to be world's biggest network" here, the newspaper writes about the future being bleak for the Chinese airline industry while China continues to spend on building new and redo existing airports. Yet, the thing the Chinese airline industry has to focus on is the consumer aspects and why they would choose rail over air:

"Flights in China are almost always delayed and passengers must arrive early so that they can pass through rigorous security checks.

Once on the aircraft, the service is perfunctory, the toilets often filthy and the food barely edible.

In contrast, China's shiny new high-speed trains are clean, fast, smooth and almost always on time. There are no excess baggage fees for heavy luggage, security checks are perfunctory and passengers can use their mobile phones."

I believe, if the US ends up being serious about high-speed rail, it will face the same concern as above.

The East Rising

The Economist states: "The East is undoubtedly rising but its new day has barely begun." Excellent graphical representation of regional growth comparisons.