Category Archives: Doing Business in China

Working for a Chinese Company

Author Gary Moreau

Sino-US trade continues to get a lot of attention in Washington, particularly in light of North Korea’s relentless missile testing. And trade between China and the US continues to be characterized as a unilateral issue—from Chinese factories to US consumers.

In reality, however, Chinese companies have now made direct investments in every US state and most congressional districts. From 2000 to Q2 of 2017 Chinese companies have invested $135 billion in the US, reaching $3.4 billion in 2012 alone. Most of these investments have been in US manufacturing assets and have resulted, by one estimate, in more than 140,000 US jobs on American soil.

While it has become increasingly common to hear of American friends and family who now work for Chinese companies in the US, moreover, American companies continue to reap the benefits of China’s economic miracle.

McDonald’s has 2,200 stores in China and sells 1,600 hamburgers every minute. Walmart has close to 450 stores there, employing roughly 100,000 people. (wal-martchina.com), and that’s not counting Walmart’s extensive sourcing operations there.

General Motors, which has, in many ways, been the poster child for the declining US middle class, has 60,000 employees in China (gmchina.com), roughly 1/3 of its total global workforce. It plans to open, moreover, five new manufacturing plants in China in 2018, and sell close to 5 million vehicles there, almost half of its vehicle sales worldwide. (https://www.gm.com/company/about-gm.html)

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It seems quite unlikely, therefore, that American industry will line up behind any attempt to start a trade war with China. And while there may appear to be some poetic justice in giving American companies that moved production out of the US their due, the trend has gone on for too long for a correction to do anything but further compromise the interests of American workers. Imagine what would happen to the GM jobs that remain in the US if the company were to find itself unwelcomed in China today?

The more likely scenario, once the heated rhetoric out of Washington dies down, is that there will be more and more direct Chinese investment on American soil. Wage rates are not as punitive as they once were, largely for the wrong reasons, energy is cheaper in the US than anyplace else on the planet, and local governments are lining up to shower new investments with taxpayer largesse in the form of infrastructure improvements, job training, and tax avoidance.

And what if you are one of those Americans that find you are working for a Chinese company in the future? Well, generalities are always risky, but here are a few pieces of advice:

1. Your Chinese employers will be laser-focused on one thing: results. They will care far less about programs, processes, and general initiatives that are often accompanied by acronyms, posters in the cafeteria, and tee shirts.

2. Your benefits may actually improve. Chinese companies, for example, provide far better maternity benefits than most US companies.

3. Words carry less weight to the inductively minded Chinese than they typically do in the West. Keep this in mind when you find yourself on either side of a communication.

4. The rules of socially acceptable personal questions are quite different. The Chinese will not hesitate to ask you how much you make or how much you paid for your home. They will not expect you to ask them personal questions about their marital status or family size, however. And they will certainly not expect you to invite them to your home.

5. Any questions you may have on issues of work/life balance will be accepted politely but are unlikely to register.

6. The investment horizon for those involved in capital projects will be measured in months, not years.

7. Cash is king. They are likely to have little tolerance for throwing good money after bad, no matter how confident you may be in the ultimate payback of your idea.

8. The inscrutable expressions you are likely to encounter among your Chinese colleagues can be very misleading. The Chinese are far less retentive than perceived and quite comfortable in being downright silly.

9. The Chinese consider Americans to be excessively polite. We’re always saying please and thank you. They are not so inclined and sometimes interpret our behavior in this regard to be a bit suspect.

10. Don’t expect a lot of “hi’s”/”hello’s” in the hallways. They are often baffled by our willingness to acknowledge total strangers. They generally divide people into two groups: Those they have a relationship with and are thus obligated to,and 2. Those they don’t. In essence these people don’t exist.

As luck would have it, I just got off the phone with a gentleman about to interview with a Chinese company. He is of European background and I summarized my experience as thus: I have worked with businesses around the world and the parallels I would draw are that in terms of personal culture, the Chinese are closest to the Latin cultures, particularly Mexico. In terms of business culture, however, I always found the Chinese to be closest to the Dutch. Both are very forthright and matter of fact.

On balance, I believe the Chinese and American economies will continue to mutually integrate. And that will be a good thing.

Keep an open mind. And remember what Confucius said: “Wherever you go, there you are.”

You may contact the author at gary@gmoreau.com
Visit my personal blog at www.gmoreau.com


Here’s what legendary Kirkus Reviews has to say about the author’s new book: “More than a guidebook for managers, this is a manifesto for an intellectually deeper – and happier – world of business.” Kirkus Reviews (starred review)
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The latest in the Understanding Series is now available.
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photo credit: iStock.com/tupungato

The Bicycles are Back

Author Gary Moreau

In the late 1980s I was granted a special visa to travel to Guangzhou, then called Canton. I traveled by plane (a fairly antiquated one, at that) from Hong Kong.

We landed at an airport where the terminal seemed no larger than a modest house. Today’s Baiyun airport, by comparison, handles 60 million passengers per year, more than New York’s Kennedy airport.

Bureaucracy and security were in full view. My paper work was passed along a row of officials, none of whom apparently spoke English or asked a single question. They did, however, stamp with big, loud, mechanical stamps that just sounded very official. Today, China is one of the most automated and digital countries on the planet. Many cities are very close to a cashless economy and there isn’t much you can’t do with just a mobile phone.

The latest in the Understanding Series is now available. Click here.

On the security side there were a lot of young men in military uniforms at the airport holding some fairly serious weaponry, and they had all apparently been trained to look menacing. We were supposed to put our hand luggage (in my case, a briefcase) on a conveyer for x-ray inspection, undoubtedly in search of contraband coming in from Hong Kong. I was so overwhelmed with the scene, however, that I didn’t see the sign directing everyone to do that until I was almost past. I continued to walk by at least three automatic weapons but no one said a word. (Probably because I was a foreigner, I know now.)

And then I walked out the door. There were bicycles and people everywhere. I still can’t put it in words. There were very few cars, although my official host, a representative of the Communist Party at some level, had a car, so I was a given a bird’s eye view of what a swarm of bicycles looks like.

What was most impressive, however, was the total lack of carnage. The cyclists were packed so close together that a single accident was sure to turn into a massive chain reaction. And there appeared to be no rules of the road. Cyclists ignored the cars, what few traffic signals there were, the pedestrians, and each other. And somehow it all worked.

Substitute cars for bicycles and you have the same scenario today. The traffic in places like Beijing, Shanghai, and Guangzhou makes the traffic in any major American city pale by comparison. Imagine New York or Chicago with 25 million residents. And, to this day, while there are well-defined rules of the road, no one obeys them. Or even pretends. And the police don’t care.

This is China. It’s crowded and noisy. And it’s chaotic. (The Chinese don’t normally honor queues either.) But it works.

It works because the Chinese have learned how to cope with chaos. They live it every day. And yet things get done, usually at a speed Americans can’t quite fathom.

Bikes are now returning to the streets of China in the form of ride sharing platforms that work much like Uber and Lyft. It’s not a new idea. Bike sharing has been offered in major US cities for some time now.

Here’s what legendary Kirkus Reviews has to say about the author’s new book: “More than a guidebook for managers, this is a manifesto for an intellectually deeper – and happier – world of business.” Kirkus Reviews (starred review)

The difference, however, is transformative—or disastrous—depending on your perspective. China’s popular bike ride sharing platforms, like Ofo and Mobike, don’t require pickup, drop off, and storage stations. You find the bike wherever the last patron left it, but the app on your smart phone will tell you where that is. And you drop it off wherever you like. And that’s where it sits until someone else wants to use it.

The obvious lack of structure is ideal in solving the last mile problem. It really doesn’t matter where your last mile is. You don’t have to live next door to the subway entrance or bike rental station.

That same lack of structure, however, Americans have already noted, can create visual and pedestrian anarchy. Bikes will just pile up at the entrance to other forms of mass transit, and since there are no racks, and the Chinese typically reject rules, that can create an inconvenience for people just trying to get into or out of the tube.

This, I suspect, will be a much bigger hurdle for the Chinese ride sharing companies trying to expand into the US than they probably realize. I wouldn’t be at all surprised if these companies aren’t banned in otherwise “progressive” cities around the country. A recent article in The Washington Post claimed, in fact, “Opponents have branded Ofo and Mobike a menace, a plague and a public nuisance.”

It will start with the bureaucrats. In San Francisco the City Supervisor referred to China’s Bluegogo, which put 20,000 bikes on the street without permission in January, a “public nuisance,” and threatened legal action. (Of course. It’s the American solution.)

Even though these companies require no support from the cities themselves, since they don’t need racks or real estate, they will have to get a license to operate and they will, without a doubt, be excessively regulated. Local governments will try very hard to tell them where they can leave the bikes, offer the bikes, etc. And the police, of course, will be called upon to enforce the regulations, giving the men and women in blue yet another regulation to occupy their time and dilute their efforts to stop crime.

One of the reasons that the Chinese economy is so resilient is that the regulators don’t worry about the little stuff. If you want to start a small business, just start it. Sure, you technically need a license, but chances are that no one is going to bother you unless you give them a reason to. The police are more likely than not to patronize your business than shut it down.

And the reason that the police are able to keep a tight rein on violent crime is that they do little else. They don’t waste time writing out traffic tickets or fining some hapless predestination for jay walking. If you’re not threatening the Party or public security, the police are likely to leave you alone.

We Americans, on the other hand, are a nation of rule followers and enforcers. And rules are rules. There are no moral equivalents, if you will, when it comes to controlling what people do. Take a trip to your local DMV office and try to do something even remotely out of line with the rules if you doubt that.

The third, and perhaps most significant difference, however, is not that the Chinese won’t eventually see the need to do something about the problem. It is that the people impacted will do something about it. They will figure out some way to overcome the problem without throwing away the benefits.

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Americans, on the other hand, will, I suspect, look to the government to solve the problem. The government will inevitably over-reach, yet other people will get upset, and responsibility will just bounce around in that growing bin of social problems we just can’t seem to find a solution for.

The wealthy, of course, will get helicopter ride sharing apps or buy their own, if they can afford it. The mass middle will get prescriptions for higher doses of Xanax, and the poor will just shake their heads and get by.

Oh, one last thing. The regulators will tell you that they need to regulate these companies in the name of public safety and consumer protection. You will hear all kinds of dire concerns about the bikes being stolen, set afire in the middle of the street, or used in the commission of crime. These are all just red herrings. What is the price of climate change? What is the value of your time sitting in commuter traffic? What is the value of giving people just another simple way to get a little exercise without joining a fancy gym?

Ride on.

Opening photo credit: iStock.com/tupungato

Contact: You may write the author at gary@gmoreau.com
Author’s website & blog: www.gmoreau.com

Hong Kong: 20 Years On

Author Gary Moreau

July 1, 2017 marked the 20th anniversary of the return of Hong Kong and the surrounding islands known as the New Territories to Chinese control. President Xi Jinping himself, in the company of his wildly popular wife, Peng Liyuan, spoke at the commemoration ceremony during his first state visit to the autonomous region.

There was little to no rancor in the streets, as some Western media predicted, and perhaps hoped, there would be. It would appear that the Umbrella Movement of 2014 has lost much of its momentum, although there was a modest march for diverse causes—some having nothing to do with democracy—after Xi’s departure.

Many Western commentators, of course, continue to believe that the passion for American-style democracy runs deep in Hong Kong and that any reduction in crowd size was more a function of government oppression than a loss of enthusiasm. As one CNN contributor put it, Xi’s speech “shows just how deeply Beijing misunderstands Hong Kong.”

As I have maintained in prior posts, I continue to believe that any dissatisfaction with Chinese rule in Hong Kong is more likely to be economic and social than political. Just as many Americans have taken to the streets to voice their dissatisfaction with Washington, I have no doubt that there are some, if not a material many, whatever that means, who would like Hong Kong to enjoy more political autonomy.

Understanding China is available at Amazon in paper and electronic formats.

Political desire, however, more often than not, fails to recognize the dichotomy of our existence. Politics is but one thread in a multi-dimensional tapestry. Citizens around the globe inevitably want to eat their cake and have it too when it comes to politics, which is one of the reasons that politicians the world over are so universally unpopular with the citizens they dole the cake out to.

As is often the case where news is concerned today, moreover, any assessment of the pro-democracy sentiment in Hong Kong is conjecture in the end. Opinions may be supported by personal observations, but observations are greatly influenced by perspective and are conclusive only in a very relative sense. As always, I think it more informative to dig into the context in which current events are unfolding.

Hong Kong was incorporated into China during the Qin dynasty (221-206 BC), where it remained until the Treaty of Nanking (August 29, 1842) ceded control to Britain, marking the end of the First Opium War (FOW).

The FOW was fought over Britain’s right to sell opium to Chinese citizens, a trade that provided the British with precious silver that they needed to fund trade with India. Recognizing the negative social impact of opium addiction, the Qin rulers attempted to outlaw the use of opium in China, a move the British monarchy had already taken in the UK. Fearing the loss of its primary supply of silver, the British invaded, and ultimately won. And with the military victory came the spoils of war, allowing the UK to add Hong Kong to the colonial holdings of the British Empire.

Tensions with China never really went away, however, and the British were constantly worried that China would re-take that which had been taken from them. In 1898, therefore, at the Second Convention of Peking (the former name of Beijing), the British secured a 99-year lease on the New Territories that made up the border between Hong Kong, Kowloon, and the mainland.

That, of course, was the lease that expired in 1997, at which time Prime Minister Margaret Thatcher decided to return the entire colony, including Hong Kong and Kowloon, the two islands at the heart of what most Westerners know as Hong Kong.

The economic integration of Hong Kong and the mainland, however, was already well underway. The Bank of China Tower, the Hong Kong headquarters of the Beijing-based and state-owned financial powerhouse that has symbolically and literally dominated the Hong Kong skyline ever since, was finished in 1989, nearly a decade before the handover. It was built, in large part, to facilitate the economic integration of Hong Kong and the mainland that was already well underway.

I traveled to Hong Kong during the Bank of China Tower construction as my employer at the time sourced a lot of products there. And at that time Hong Kong was very much a manufacturing center of Asia, although the transition to becoming a global financial and trade powerhouse had begun. Hong Kong companies were already moving their production to the New Territories and to the mainland province of Guangdong, Hong Kong’s immediate neighbor and the most prosperous of China’s twenty-two provinces.

At the dawn of China’s political and economic opening in the late 1980s I was actually granted permission to travel into Mainland China. The trip was arranged by the owner of a Hong Kong supplier and my host was a Communist Party official in GuangZhou, then called Canton. The two men were brothers, a relatively common business scenario at the time, from what I could tell.

Today Hong Kong is a glittering world-class city. It’s one of my personal favorites and I highly recommend a visit if you haven’t made it yet. You can expect London and New York prices, but it’s delightfully easy to get around, the accommodations and restaurants are both plentiful and outstanding, and nearly everyone speaks some English, many fluently. (With a British accent, in most cases.)

Almost nothing is manufactured in Hong Kong anymore. It does, however, export 55 billion USD to the Chinese mainland, almost all of it imported from outside of China. And it imports 273 billion USD from China , most of which gets exported to destinations around the world.

Guangdong Province, Hong Kong’s neighbor whose residents typically speak Cantonese, the Chinese dialect of Hong Kong, has an annual GDP of 1.1 trillion USD, more than 10% of China’s total. Hong Kong, while wildly prosperous, has an annual GDP of less than 1/3 of that, and most of that is a result of the aforementioned trade with the mainland.

And what about the social costs to the residents of Hong Kong’s 7 million residents? One of the critiques I recently read noted, in a rather critical tone, that an influx of non-HK-Chinese is making it harder for Hong Kongers to gain access to health care and education.

There is little doubt that mainland Chinese are seeking access to the world-class services offered in Hong Kong. But accessing the services of a neighboring metropolis is universal. New York City, Chicago, London, and Sydney all experience the same enhanced demand for what services they offer from surrounding areas. The only difference is that these urban centers have had more time to accommodate the demand.

The same opportunity, moreover, is benefiting the Hong Kongese. For the 9 years I lived in Beijing my daughters attended one of the best international schools in the world. And over that nine-year period the student population became increasingly Asian in its roots. And guess what, many of those students were from Hong Kong.

The city of Shenzhen, a metropolis of 11 million people that many consider to be the Silicon Valley of China, sits less than 25 miles away from Hong Kong in Guangdong Province. That’s closer than New Rochelle, in Westchester County, is to New York City. It’s hard not to think of both as part of the greater metropolis, boundaries aside.

Governing is tricky business, as Americans know well. There will always be political dissent in places like Hong Kong, just as there is in virtually any country in the world. And the Western media, no doubt, will continue to give it a voice. Whether that’s news or the cloaked pursuit of its own political agenda is for each of us to decide.

As a practical matter, however, it is no more likely that Hong Kong will be granted complete political independence from China than Houston or San Francisco will be allowed complete autonomy from Washington. Or that a sufficient number of Hong Kongese will even want it to.

Setting all of our opinions aside, that is the context of the matter at the moment.

Contact: You may write the author at gary@glassmakerinchina.com

Understanding Business: The Logic of Balance, the author’s latest book, was released on June 27, 2017 and is now available at Amazon.

A sample:

It is, in fact, the Western distinction between philosophy and science, a gulf that has been expanding rapidly in the last three to four decades, that is at the heart of what ails much of corporate America today. The slide began the minute someone suggested that there could be such a thing as management science. When business schools and management consultants began to market the idea that successful business management could be modeled and graphed, corporate America lost more than its old habits. It lost its equilibrium. And with that, the long stumble began

Copyright © 2017 Gary Moreau

The Duality of Cybersecurity

Author Gary Moreau

On June 1 China began the implementation of a new cybersecurity law that is already being labeled “controversial” by the Western media. The context of this story, I think, is illuminating on many fronts.

That the Internet has become a scary place for citizens, corporations, and governments alike seems beyond debate at this point. Every government on the planet is taking steps to protect its national secrets from foreign hackers. China would be imprudent not to follow suit.

There are three provisions of this new law that appear to be the source of most of the anxiety in the West.

The first is that the law is relatively vague. This, of course, is by design and reflects the polar opposite approaches the US and China take to regulation. In the US the law would be spelled out in mind-numbing detail. And would-be violators would hire an army of lobbyists to craft loopholes and lawyers to exploit them.

The Chinese, in contrast, leave much of the interpretation in the hands of the regulators, not the lobbyists and lawyers. In this way, they largely eliminate the very existence of loopholes.

There are cons to every pro, of course, and the question of which approach to regulation is ‘best’ is no exception. On balance, however, while the Chinese approach opens the door to inconsistent enforcement, the American approach clearly favors those with the money to pay the best lobbyists and lawyers.

The second objection is that the new law requires all state secrets to be stored on servers within China. Many American companies operating in China now keep their servers and their IT on American soil, despite the fact that the IT industry in China is generally on a par with the West.

It’s easy to understand why the Chinese government wants to see this change. You don’t have to be a conspiracy theorist to believe there is a reasonable chance that the US government has access to any server sitting within its borders. Perhaps it’s official; perhaps not. It’s not unreasonable to assume the risk exists, however, particularly given the US government’s openness about using IT to protect its own national security interests, both defensively and pro-actively. (To say nothing of private or foreign government hackers finding their way in.)

The third objection is that the law will require American hardware and service providers to open their products and services to some level of government scrutiny. The fear, one assumes, is that these companies will be circuitously giving their own secrets to their Chinese competitors. It could happen, in theory, although one has to wonder if it would be worth the risk for China. And isn’t there always a cost of entry, even to the US?

Understanding China is available at Amazon in paper and electronic formats.

These are the most vocally noted objections of the West, but I think there are a couple more issues at play, consciously or not.

The first is one I’ve referred to many times. It is the importance of the Chinese Century of Humiliation in the mindset of the current Chinese government. China was invaded and pillaged by foreign powers for much of the nineteenth and early twentieth centuries. And there is a national commitment not to let it happen in the future.

No one is currently attempting to force the import of opium or seeking land concessions. And there are no foreign troops on Chinese soil. Many foreign companies, however, have gone into China over the last three decades to reap the rewards of the second largest economy in the world, but left many of their best paying jobs at home – including many IT jobs.

There is nothing illegal about that. Perhaps nothing even unfair or underhanded given the risks for IP theft that exist in a country that admits it has a less stringent legal system currently in place than in the West. Nonetheless, the line between a legitimate reason and an excuse is drawn with perception. Is President Trump’s proposed immigration law aimed at Muslims even though that word is never actually mentioned in the regulation?

The biggest issue here, however, is what I believe ultimately prevents the West from really understanding China and its motivations. It has nothing to do with government suppression and everything to do with culture.

In the US we put individual rights and freedoms above all else. That, we believe, will result in a free and progressive society and there has been a lot of historical evidence to support that conviction, although a quick perusal of the daily news would suggest that argument might be fraying a bit at the seams.

The Chinese, on the other hand, have much more of a collectivist worldview. They believe that protection of society as a whole will, in turn, maximize individual well-being.

As Westerners we automatically attribute the Chinese perspective to the presumed oppression of a one-party political system (i.e., the Communist Party). That, however, is a bit of an over-simplification. There are many collectivist societies around the world that have no Communist Party. And even many Americans are beginning to accept that even dictatorships aren’t all bad when it comes to keeping a nation prone to civil war and ethnic exploitation at peace. The implosion of much of the Middle East and North Africa has obviously weakened the doctrine of “give them democracy and peace and prosperity will follow.”

The Communist Party came to power in China in 1949. For thousands of years prior to that, however, China was a nation of warring factions. There are fifty-six officially recognized ethnic groups in China today and, depending how you define them, hundreds of different languages and dialects. (Although Mandarin is the one official language, dozens of these languages are unintelligible to each other.)

While the Chinese I have met over the years are just as quick to criticize their government as most Americans are to criticize theirs, as a result, there is a general consensus among the Chinese that China requires a strong central government to insure progress – whether you define that in terms of law and order or economic opportunity.

In other words, the individual rights of the citizens in China are legitimized through government authority acting in the best interests of the collective society. In the US, by contrast, government authority, in theory, is legitimized through individual rights and freedoms.

There are two sides to every argument, of course. And most Chinese, I believe, openly recognize that there are both pros and cons to socialism with Chinese characteristics, as the Chinese refer to it.

I wonder, however, if we aren’t losing sight of that inescapable duality in America today (i.e., the duality of pro and con), and if that isn’t at the core of much of what ails us politically. When we start seeing the world as one-dimensional, whichever dimension that is, and whichever interest we put first, are we not creating exactly what it is we denigrate elsewhere in the world?

Contact: You may contact the author at gary@glassmakerinchina.com

The inevitable duality of pro and con. Do Americans still accept it?

The Rule of Law: Irony?

Author Gary Moreau

One of the byproducts of the yin and yang worldview that defines much of Chinese culture is the acute appreciation of irony. Which, in itself, is ironic given that much of the West thinks of China in quite the opposite terms.

Although China employs a political system tightly controlled by a single political party, restricts Internet access and media coverage, and manages day-to-day life through an enormous bureaucracy, it is the US that is often crippled by its preoccupation with rules and process. While Americans take great pride in “a job well done,” the Chinese are far more concerned with achieving the desired outcome.

One manifestation of this deductive/inductive difference in worldview is the difference our two cultures place on the rule of law. The rule of law, of course, is the foundation of the American way of life and business. And while that comes with many benefits, for every yin there is a yang. We tend, for example, to take decades to build infrastructure projects that the Chinese accomplish in months and our behaviors, in context, aren’t always practical or cost effective.

While the Chinese pass very general regulations and laws and leave it to local officials to interpret them in the most pragmatic way, we are slaves to the details of the law. We thrive on ‘loopholes’ and pay handsomely for lawyers and experts to find them.

Our legal system is the foundation of who we are as a country. But it is an identity that comes with a price tag. And, unfortunately, that price tag sometimes stands in the way of equal justice under the law. ‘Them that has’, you might say, can afford the best legal talent.

Understanding China is available at Amazon in paper and electronic formats.

My Chinese wife reminds of this excess on almost a daily basis when we set out on our daily walk in the suburbs of Detroit, Michigan. We live in a new subdivision of townhomes that have been tastefully and thoughtfully designed and set out. We are very happy here.

In front of each building unit, housing anywhere from 4-6 individual units, is a small turnout where guests and visitors can park. Each turnout is roughly 30-40 yards (25 meters) in length and will hold no more than 3 or 4 cars even with adroit parallel parking skills.

As you can see from the picture above, however, the turnouts that border a public street are equipped with both ‘One Way’ and ‘Stop’ signs, as is most certainly required by law, I’m sure. (The picture was taken with my iPhone and doesn’t do the depth perception justice. The turnout is tiny.)

My wife, however, finds this to be quite silly. “Of course,” she says, “The cars can only go one way and must yield upon exiting. And each car can easily see the other cars. This is all common sense. Who would think otherwise?” The signs, to her way of thinking, simply add unnecessary cost/taxes and contribute to general visual pollution. “It hurts my eyes,” she laments. (There are no real estate taxes in China.)

But this is the land where the law reigns supreme. The right to sue in a court of law is as fundamental as the right to vote. It is, in fact, a legal right you cannot give away even if you are willing to.

Yin and yang.

Irony.

When asked by people in the business world what I relished most about doing business in China I would inevitably say, “There are no lawyers.” When asked to name the most challenging aspect of doing business in China, however, I learned to say, “There are no lawyers. Specifically, there is very little case law.”

Case law, it turns out, is the stuff of predictability. And predictability is the essence of risk avoidance, which we, as Americans and American corporations, are increasingly consumed with.

There is nothing perfect about the American legal system. But there is nothing perfect about much of anything in life, with the possible exceptions of children and love.

It is, nonetheless, better than many of the alternatives. Yes, criminals may get off on technicalities. Frivolous lawsuits may harm corporations and citizens alike. And we may put road signs where they are clearly not needed. Hopefully, however, we can look at those signs and, well, smile.

Irony is okay. Even funny.

Unfortunately, it took the Chinese to help me learn that. And now, as we enter the Year of the Yin Fire Rooster, I share it with you. Do with it what you will.

Contact: You may reach the author at understandingchina@yahoo.com. Mr. Moreau is also available for public speaking and the provision of third-party written content on a wide variety of topics for your website or other communications material.

Currency & Sacrifice: The New Math

Author Gary Moreau

Both before and after the November election President -elect Donald Trump has consistently referred to China as a currency manipulator. The implication, of course, is that the Chinese have pushed the Renminbi (Translated literally, The People’s Money.), or the Chinese New Yuan (CNY), as it is known to currency traders, to artificially low levels to allow their export companies to pick the pockets of Americans.

There is no truth to this claim. I know because during my decade of living there I was paid in US dollars and lived on CNY. And I most definitely felt the pinch of a strengthening Chinese Yuan.

When I first moved to China in 2007 I was converting my US dollar paycheck at almost 8/1. Over time, however, the CNY was up to approximately 6.1/1. That’s more than a 20% appreciation, meaning, of course, that I could buy 20% fewer goods and services with the same paycheck.

Now it is true that the CNY hit a high against the dollar in 2014 and has decreased in value since then. It currently trades at about 6.9/1 against the USD. But that is not 8/1 by the laws of math I was taught in school.

Like so many things with President-elect Trump I don’t really know if he truly believes that China is manipulating its currency or he is just saying that for its political benefits. I am not sure it really matters. He is saying it. Over and over again.

In an Op-Ed piece appearing in China Daily on January 10 contributor Yasheng Huang wrote:

“There is no method to Trump’s madness. In the tweet justifying his phone call, (To Taiwan’s political leader, Tsai Ing-wen.) he also repeated a false charge that China is depreciating its currency to gain export advantages vis-a-vis the US. His knowledge of international economics is either non-existent or 10 years out of date. In reality, China is now hemorrhaging foreign exchange reserves and desperately trying to prop up the renminbi’s value in the face of capital flight.”

Mr. Trump also talks a lot about border taxes. The truth is, however, that China is one of the few countries in the world that actually taxes its own exports. The amount varies by industry but every exporter pays a 17% VAT tax when the exports are shipped and receives some amount of refund when the foreign customer actually pays. (If you don’t get paid you are out of luck on the refund.)

Understanding China is available at Amazon in paper and electronic formats.

And, of course, the US still charges tariffs on a wide variety of goods and services from a wide variety of countries. The US has no free trade with China, as it does with Mexico and Canada. (NAFTA)

It is hard for me to believe that President-elect Trump’s staff isn’t aware of all of this. So why the feint? I honestly can’t figure it out.

The reality is that the cost of making things in China is relatively high today and, as Yasheng Huang noted, the Chinese government is actively trying to support the CNY in order to address a serious problem with the outflow of capital.

The jobs that left the US two decades ago have already left China and moved to other countries in Asia and Central America. Energy is very expensive in China. Factory wages have been increasing 7% – 10% per year for several yeas, and the wages of senior managers in China are already on par with Western pay scales. Corporate tax rates – another Trump favorite – are also fairly high when you add in the corporate income tax, VAT, and a growing number of local taxes being assessed to support education and the cleanup of the environment.

The personal income tax rate in China, moreover, races up to 45% pretty quickly and there are no deductions for things like mortgage interest and health costs. (My Chinese tax return was one page. My US tax return was close to 100 pages.) Chinese executives, moreover, have little access to the many financial tools created by Wall Street to help US executives shield income or defer taxes.

“China cheap”, as it is sometimes called, is more a function of mindset than wages. I will give you one example: When American companies build a new plant they are likely to install energy efficient hot water heaters in the washrooms to reduce costs. Many Chinese companies, however, won’t install any hot water heaters for the washrooms. It’s a question of no cost, not lower cost.

Perhaps it is this difference in mindset that best explains the inability of many Western companies to compete with the Chinese. They are simply playing two different games.

And the Chinese will eventually bring their game to the US. And if you believe that American workers won’t accept some of these sacrifices for the sake of jobs and a better life you should talk to the folks in Trump Country.

At the end of the day I found it pretty painless to wash my hands without the benefit of steaming hot water. Sacrifice is all relative.

Contact: You may reach the author at understandingchina@yahoo.com. Mr. Moreau is also available for public speaking and the provision of third-party written content on a wide variety of topics for your website or other communications material.

Taiwan Redux

Author Gary Moreau

One of the hallmarks of this blog since it launched in 2013 is that I never write on the same topic twice in a row. It’s part of my identity. I aspire to help the reader understand China and since no country or culture is one-dimensional, I believe variety is essential and symbolically appropriate.

This post is an exception. But the 2016 US presidential election was also an exception on many levels and it set the stage for breaking with tradition. Based on the behavior of President-elect Trump during his transition to office, moreover, I doubt very much it will be the last.

Breaking with four decades of precedent, the president-elect took a congratulatory phone call from the leader of Taiwan, Tsai Ing-wen, on December 2, 2016. And as I noted in my last post, the Chinese leadership in Beijing took strong exception to the unprecedented move but otherwise appeared to signal that all would be forgiven as long as it didn’t happen again. (China considers Taiwan to be a renegade province.)

In the days that followed the phone exchange, however, the president-elect demonstrated in no uncertain terms just how unconventional he would be as the leader of the Western world. He has gone on record noting that he feels no obligation to accept the “one China” policy that has guided US diplomatic behavior since the US transferred official diplomatic recognition from Taipei to Beijing in 1979.

With a population of 25 million people it would seem unlikely that Trump would ultimately jeopardize the US relationship with the world’s second largest economy and the US’s third largest export market. And what would be the justification? Principle? To date the president-elect has not outlined any over-riding personal principles that would seem to support such extreme action.

Except, that is, his fundamental belief in the art of the deal.

As several observers have noted, the president-elect is more than likely using Taiwan as a bargaining chip to extract trade and other concessions from Beijing. And that would be a very, very dangerous strategy indeed.

Understanding China is available at Amazon in paper and electronic formats.

In my book, Understanding China, I advised Westerners to avoid negotiating directly with the Chinese unless they have significant experience in Chinese culture and negotiation. Westerners negotiate to a win-win. The Chinese, on the other hand, negotiate to a win-lose. It’s an issue of worldview and culture.

The Chinese, I am confident, will call Trump’s bluff. They will not negotiate over Taiwan. The only question is whether or not they will take pre-emptive action to clearly demonstrate their resolve.

We must remember that Chinese political strategy today is built on the foundational memory of the Century of Humiliation. That is the period from 1840 (the First Opium War launched by Britain) to 1949 (Mao Zedong’s victory over the Nationalists), when China suffered mightily during invasions by imperialist Japan and the West.

It was a particularly humiliating period for China because Chinese culture turns on obligation, and obligation gives rise to the notion of “face.” Embarrassment is the ultimate suffering.

The Century of Humiliation is often alluded to by Chinese President Xi Jinping and remains a vivid and bitter memory for even the youngest of Chinese, as witnessed this past week by moving memorials to the 1937 Massacre of Nanjing (also known as the Rape of Nanjing due to the number of rapes that occurred), during which 200,000 to 300,000 Chinese, including many entire families, were massacred by invading Japanese forces. (Nanjing was called Nanking at the time and was the capital of China.)

To put Taiwan on the table as part of a larger economic negotiation, in other words, is both insulting to the average Chinese citizen and ignores the basic realities of Chinese history and culture. The desire to rebuild face has propelled Chinese nationalism among all age groups to a level that most in the West would find unfathomable.

The Global Times, a state-run newspaper ultimately controlled by the Communist Party, editorialized earlier this week, that “The Chinese mainland should display its resolution to recover Taiwan by force… If the Chinese mainland won’t pile on more pressure over realising reunification by using force, the chance of peaceful unification will only slip away.”

Just words? Perhaps. But the best compass of truth when assessing potential threats is rationality. And this approach does make sense. Who can honestly say what President-elect Trump will do in the future? There is no body of past political behavior to gauge the risk by. And, in fact, the case can be easily made that the risk of confronting the US on such a scale will arguably be less when the president-elect’s term of office is in its infancy and Americans are overwhelmingly focused on the economy.

I am not a military expert or a career diplomat. My gut instinct, however, based on nearly a decade of living and working in China, is that China has long had the military power to vanquish Taiwan in a matter of days, if not hours. And the Taiwanese know this, raising the distinct possibility that not a single shot will be necessary once intent is clearly established.

The reality is, moreover, that China does not need to take military action to make Taiwan suffer for its transgression. It has many diplomatic and economic tools (e.g. Prohibiting travel between the Mainland and Taiwan.) in its arsenal to effectively crush Taiwan economically and emotionally. And there is relatively little the US could do about it. Taiwan could not even appeal to the United Nations as it is not a member and Beijing sits on the veto-empowered Security Council (as does Russia).

Let us hope that all of this is simply part of the president-elect’s learning process and that the tensions will soon be dialed back. If this is simply a test of Chinese resolve, so be it. In business, however, the failure of a negotiating gambit merely results in the loss of a deal. In diplomacy, the stakes are much higher.

Contact: You may reach the author at understandingchina@yahoo.com. Mr. Moreau is also available for public speaking and the provision of third-party written content for your website or other communications material.

China: The Next Tech Powerhouse?

Author Gary Moreau
Author Gary Moreau

Not that long ago it was conventional wisdom in Western circles that China could make things on the cheap but would not be able to stimulate the creativity and innovation necessary to compete with developed countries in the age of technology. How wrong that wisdom was.

The most common explanation for the inability to innovate was laid at the feet of the Chinese educational system that relies heavily on rote learning and standardized testing. Chinese teachers teach and the students absorb. The students, so the thinking went, were simply educationally unequipped to create the next Apple or Google.

It’s always a mistake to try and drive your car by looking in the rear view mirror, however, and this false perception was no exception. So, where did the ‘pollsters’ go wrong?

For starters, there were more than 300,000 Chinese studying at US universities in the 2014-2015 academic year, according to the nonprofit Institute of International Education (IIE). That’s roughly one-third of ALL international students studying in the US at the time and represents a five-fold increase in the number of Chinese studying in the US in just over a decade. The competition among Chinese students for entry into US universities is becoming so intense, in fact, that middle class Chinese families are now routinely sending their children to attend high school in the US as well, believing that will give them a leg up for US college admissions. (I personally know two families who have followed this strategy.)

The Chinese government is also doing its share. Beijing has sponsored numerous tech incubators and created huge amounts of business infrastructure to support the nascent but rapidly growing tech sector. Beijing itself, in fact, is quickly becoming another Silicon Valley and has the world-class local universities to support it.

Social media, I believe, has also helped to stimulate the boom. While Facebook, Twitter, and other US social media sites are blocked in China, they have their own versions of each. And the Chinese population has embraced them completely. The average Chinese teenager, I would hazard to guess, may be even more wired into social media than their US counterpart, in part because they don’t have as many other options to gather news and have social interaction with their peers. (Chinese educational institutions are generally limited to traditional education – no sports, drama club, or proms. They have special schools devoted to athletics and the arts.)

Understanding China is now available at Amazon in paper and electronic formats.
Understanding China is now available at Amazon in paper and electronic formats.

In effect, while the academic institutions of China may not provide the right mix of innovation and rote learning just yet, the young Chinese have essentially taught each other. Through prolific sharing they have, in essence, complemented academia, with its heavy emphasis on mathematics and science, with the tools necessary to apply that knowledge effectively and to disburse it widely.

On November 11 for example, the informal anti-Valentines holiday celebrated by single Chinese, Alibaba, the online shopping giant, has created the largest shopping spree on the planet. During this year’s Singles’ Day, also called Double-11, Alibaba sold $17.4 billion (yes, USD) of merchandise in just 24 hours. That’s more than Black Friday and Cyber Monday combined – and that’s one company. (More than 80% of the volume in the first few hours, moreover, was conducted via smart phones.)

The surge in China’s tech sector is not due solely to the growth in e-tailing and social media, however. The number of patents granted in the first nine months of 2016 grew by 44% compared to the prior year. And tech manufacturing grew by more than 10% over the same period. The sector, in fact, may currently account for as much as 15% of China’s total GDP.

It’s been a seldom-acknowledged revolution outside of China, for sure. Western politicians are still focused on China’s dominance of the global steel, rare earth metals, and toy markets. The Western political narrative, in other words, has been all about jobs, not innovation and technology.

While these statistics about the growth of the tech sector in China are telling, moreover, they don’t begin to tell the whole story. That requires context.

Fully 70% of the US economy – the largest in the world – is driven by consumer spending. In China, by contrast, consumer spending currently accounts for less than 40% of GDP and that is up considerably over the last five years. And China, of course, has 1.4 billion residents, compared to 315 million residents in the US. You can do the math in terms of future growth opportunities in China. (Scale is critical to advancements in technology, of course.)

Now consider the fact that the top ten brands in China over the last decade or two were virtually all foreign brands. In the tech sector, up until recently, Apple was the brand to beat. Samsung and LG, both Korean brands, have given Apple and others a run for the money but it is the Chinese brands – Huawei, Hisense, Haier, Xiaomi, in addition to Alibaba and Tencents’ WeChat, that are the brands to watch going forward.

Part of the reason China’s tech future is so bright, I submit, is that a solid brand is easier to build in the electronic and tech spaces than in the apparel and fashion spaces. The tech consumer is motivated by features and value, whereas the fashion industry is driven more by intangibles such as country of origin, longevity, perception, etc. (Value can, in fact, be an inhibitor.)

Add to the mix that the Chinese are uber-nationalistic and motivated by value and it’s easy to make the case that the future of Chinese tech is bright indeed. China has incredible scale, has shown itself able to innovate, and has the economic infrastructure and government support it needs to make good on the opportunity.

If you are an investor or manage a US tech company you’d better get over there before the boat leaves the dock. It is the future. Of tech, no less.

Trade War

Author Gary Moreau
Author Gary Moreau

What will happen if President-elect Trump makes good on a central campaign promise and begins an aggressive trade war with China? With 100% certainty they will retaliate. And that could bring down the entire global economy.

Starbucks, Coca-Cola, General Motors, Apple, Microsoft, and many other elite US companies have all made huge investments in China. And they will inevitably suffer if the US does initiate a trade war. I don’t think the Chinese government has to do anything. The Chinese people just won’t buy from them. The level of nationalism in China is hard to over estimate and the entire population is wired together through Chinese social media. As I’ve noted before, they already tend to see the US as a bit of a bully due to recent friction between China and the US on hot button issues like the South China Sea. The Chinese won’t need much to turn away from our corporate front line if it is perceived that we are trying to curb the country’s rise to power.

While it is certainly true that the US lost good middle class manufacturing jobs twenty years ago when US corporations moved production overseas, the jobs issue is not as simple today. As the manager of a Chinese plant belonging to a US multi-national it is true that my Chinese company only provided direct employment to two Americans. But we helped employ dozens of US engineers, technical specialists, accountants, lawyers, bankers, and IT staff that supported us from the corporate offices. These are among the best paying jobs in any corporation.

And we exported almost none of our production to the North American markets. Almost all of our production was sold in Asia, so we had virtually no impact on our US plants. In fact we only shipped to the US when there was a temporary lack of capacity here and the company would otherwise have to walk away from additional sales opportunities.

Would the US plants see incremental opportunities to sell in Asia if the China plant didn’t exist? No. Even if the product could be made at the same cost as that of a Chinese competitor, the transportation alone would make the idea impractical.

And the reality is that the US industries whose jobs were hit the hardest have already moved out of China due to rising wage costs. The production of furniture, textiles, and shoes has already been moved to other emerging countries in Asia and Central America. Other industries, such as steel, are sure to follow as China attempts to reign in its pollution problem. (The government, in fact, is already encouraging steel makers to relocate capacity out of China.)

The US President-elect actually has the problem upside down. While Trump’s solution may have helped twenty years ago, it is outdated today. The biggest problem facing America’s economy today is not cheap exports from China, but US access to China’s growing markets. In many key industries, where US companies might enjoy a significant competitive advantage, foreign companies continue to operate at a significant disadvantage to their Chinese competitors due to non-tariff barriers that often have little to do with central government regulation.

Understanding China is now available at Amazon in paper and electronic formats.
Understanding China is now available at Amazon in paper and electronic formats.

In terms of return to the US economy, in other words, Trump would be better served pushing for unfettered access to the Chinese economy than slapping tariffs on products that China no longer relies on anyway.

Unfortunately, the tide is working against the President-elect. As China strives to move its economy up the value chain and away from cheap, labor-intensive exports, there is an understandable tendency for government officials to want to support emerging Chinese companies. Trump’s trade war would only give them the ammunition they need to justify it. And they will; make no mistake about it.

But if Trump really wants to boost the US economy I think he would be better served to concentrate on US exports to China rather than US imports from China. China is already the US’s third largest export market and could easily be number one or two.

Perhaps the biggest constraint, which never came up during the campaign, is that the US has strict limits on the products and technology that US companies can sell to China. These are the products the Chinese are most interested in and would pay top dollar for. And the products that are least impacted by the cost of transportation.

The controls, of course, were initially justified on the basis of national security. It’s a good cause, for sure. But a restrictive ‘list’ is a blunt instrument, particularly when drawn up by politicians and bureaucrats with local constituencies and agendas.

I can tell you from first hand experience that our US-owned plant in China was prevented from buying very simple machines from US suppliers for the simple reason that they had electronic control systems that fell within the restrictions. And I can assure you that this technology had no military application whatsoever and was no better than that which was available from Chinese suppliers.

The policy is all quite disingenuous in this Internet age anyway. Trade secrets are not exchanged the way they used to be (by reverse engineering). It’s impossible to seal the border from the flow of information. It just can’t be done. And technology doesn’t have to be obtained illegally (by hacking, for example). There is nothing illegal about a foreign university graduate returning to their home country after they have had access to some of the best technology the country has to offer.

Obviously, there should be limits. But they should be carefully thought out. And I don’t believe they have been. If we were to do no more than review the list of products and technology that can be sold to China and elsewhere I am confident it would have an immediate and material positive impact on the US economy – and create more high paying jobs.

The US economy has two primary advantages in terms of global trade – efficient capital markets and an ability to innovate. The Chinese and others are catching up fast on both counts. But they still represent our best chance of promoting economic growth and the creation of good jobs.

China understands this, which is exactly why they are trying to pivot away from the kind of manufacturing jobs that we lost twenty years ago. It would not be prudent for us to simply trade places with them. We will only end up where they were twenty years ago, not where we were.

Contact: You may reach the author at understandingchina@yahoo.com

Just for fun. A Giant Panda cools off from the sweltering heat of summer on a block of ice at the Beijing Zoo.
Just for fun. A Giant Panda cools off from the heat of summer on a block of ice at the Beijing Zoo.

Lessons Learned

I have traveled internationally all of my adult life. And I’ve found that, without exception, every time I visit a foreign land I end up learning more about myself than my destination. For the nine years I lived and worked in China, the lessons I learned profoundly changed the way I live and evaluate my life.

Here are a few of the key lessons I learned:

  • Trust v Obligation

How we live our lives, and the stress that flows from our choices, often comes down to our ability to predict the behavior of others. And in Western cultures, more often than not, that ability of prediction often comes down to trust. Westerners put great stock in trust, which is why we put such great cultural emphasis on telling the truth.

Chinese culture, by contrast, turns on obligation. Trust plays a secondary role. And, as a result, so does telling the truth, at least in the Western sense. Without a concrete expectation of obligation, in fact, the Chinese trust no one.

And I think they are on to something. Perhaps I’m just fed up with the 2016 presidential election, but I’ve come to believe that obligation is a much simpler and more practical way to determine behavioral reaction to the behavior of others. The rules of obligation, in a conceptually structured culture like that of the Chinese, are very straightforward and easy to understand. A child is obligated to his or her parents. You do me a favor and I owe you one. You respect your elders.

Trust, on the other hand, is a much more challenging judgment. There are many variables at play, including the ability of one party to act out the tenets of trust. With trust, you often have suckers.

I’ve concluded that the beauty of obligation, beyond its simplicity and predictability, is that obligation is naturally a two way street. If you demonstrate obligation to me, I am naturally inclined to feel obligation to you. It’s just how we’re wired.

Even if I trust you, however, I may not be able to assume that you will put your interests above my own when the two are in conflict. That’s a crapshoot that requires a fair amount of guesswork.

  • Result v Process

Deductively – minded Westerners typically put great emphasis on process. A job well done is to be praised even if the objective is not realized. Businesses, in particular, spend much of their time codifying processes in the belief that this will lead to more predictable results with minimal risk.

The Chinese, in contrast, typically focus exclusively on results. A job performed according to a pre-defined process brings little satisfaction if the desired result isn’t achieved.

And doesn’t the Chinese perspective make more sense? There have to be boundaries to the process, of course. If everyone cheats or breaks the rules, you have anarchy. Nonetheless, it’s the W that really matters.

Which is why the Chinese would surely applaud the women’s Swedish soccer team for knocking out the Americans at the 2016 Rio Olympics with a slow down strategy of conservative play. America’s goalie, Hope Solo, on the other hand, mocked the Swedes for leaving their womanhood in the locker room and not giving the Americans more chances to win. (I have to go with the Chinese on that one.)

  • Speed v Longevity

Everything happens faster in China. Buildings go up seemingly overnight. Online purchases often arrive the same day. Elaborate houses can be gutted and totally refinished in a matter of weeks.

In Beijing, a city of 22 million people, they recently replaced (replaced, not repaired) a 10-lane overpass, complete with lane markers, in 43 hours. (You can watch it in time lapse on YouTube.) The state of Michigan, by contrast, recently announced a construction project to improve one of the main arteries into Detroit that will last 16 years. Yes, almost two decades!

Speed is money, of course, at least in the short term. Longevity, on the other hand, can be money in the long term. If a building needs to be replaced in X years, it may not be cost effective in all cases to cut the corners that allowed you to build it quickly.

But the world is changing more rapidly every year. Who knows what our needs will be 20 or 30 years from now. That, in my mind, increasingly gives speed the edge.

  • Acquisition v Fulfillment

While the millennial generation is changing the game, Americans typically like to acquire things. It’s no wonder that personal consumption drives 70% of the US economy.

The Chinese acquire, too, of course. Newly acquired wealth, in fact, often leads to conspicuous consumption. China now represents the biggest luxury market in the world.

The Chinese, however, use acquisitions to define their success, not who they are. I’ve met some very wealthy Chinese. Many have gained and lost multiple fortunes. Seldom, however, do they define themselves by their things. In their minds, that’s just business; that’s not life.

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I’m not suggesting the Chinese are ‘better’, or even right. I do believe, however, that self-reflection is always a good thing. And there’s no better way to promote it than to immerse yourself, even temporarily, in a foreign culture. That assumes, of course, that you can do so with an open mind. If you can’t, save your money. You’ll just get frustrated.

For more about the lessons I learned in China, read my book, China – There’s Reason for the Difference. It’s available on Amazon in paperback and Kindle editions.

Contact: You may contact the author at understandingchina@yahoo.com. I am available to share my China experiences at corporate or other group events.

There are, of course, exceptions to every rule. A lot of Chinese architecture, and much of its culture, has endured for hundreds of years. That is part of the beautiful duality of China. You can never figure it out completely.
There are, of course, exceptions to every rule. A lot of Chinese architecture, and much of its culture, has endured for hundreds of years. That is part of the beautiful duality of China. You can never figure it out completely.