[Rhodes22-list] China Report

[Bradley, David]

Reporting in from the second China expedition.  An amazing week in
Shanghai.  Totally different experience than Beijing, where I had been
several times.  In Beijing, you literally feel the presence of a
communist government.  Shanghai is an economics lesson.  It has the most
exciting skyline of any city I've ever seen.  If you wanted a postcard
to label "21st Century," it would be the Padong section of Shanghai.

Oh, the boat stuff.  I have the names of a few established sail makers
that my local colleague is in the process of screening.  The
recommendation of several people is to work with an established firm vs.
a mom and pop.  It should be feasible to get boom rooms, pop top
enclosure, sails, cushions, etc. made.  It will take some leg work.
There is no pleasure boat market in China (see below), but there is a
lot of boat manufacturing, especially in the southern cities near Hong
Kong.  Stay tuned.  

So Stan, count me in for everything - and keep way more than your fair
share of the savings as profit.

For those who care to read on and perhaps have a diversion from the
terrible events in the Southern US, here is a view of the situation in
China.  I had an opportunity to sit through an intensive presentation
given by two principals from the Economist Intelligence Unit.  Here are
some interesting factoids and opinions:

China is 4% of world GDP and 6% of world trade.  Their economy will not
continue to grow at the double digit rate it has, but it will sustain
itself at a high rate vs. rest of world.  One reason for the slow down
is that the demographics wont' support the past growth rate.  I won't
comment on their birth control policies in human terms.  In economic
terms, it's part of their 100-year plan, to get the infrastructure built
out to support the population and to get to a sustainable economic
growth rate.  Sustainable in 100-year terms.  

150 years ago, when the world was still largely an agricultural economy,
China was the world's leading economy at roughly ONE-THIRD of world GDP.
(To put that in context, the US today accounts for about one-third of
world GDP, and is projected to be about one-quarter in 2025.) The
concept of China as an emerging nation is a uniquely Western view -- in
their view, they are working through a 70-year recovery.  Their biggest
fear is that the banking system fails to maintain stability and the
levels of bad dept don't come down.  The fact that they are in their
first or second generation of managing in the context of modern global
capitalism makes the bad debt levels easier to understand.  It takes
some time to learn how to manage to a profit -- plenty of US managers
still have things to learn.  And there are some manufacturing categories
here that are unbelievably competitive.

Make no mistake that capitalism has replaced communism.  Capitalism
appears to be doing just fine there (after all, they did invent it)
through a combination of state-controlled industries and private
ownership.  But the government allows it to happen on their terms.
Again, I'm not making a political comment, but it's hard not to compare
this to the federal regulations that have ensured continuity in a number
of US industries, from banking to utilities to transportation to
infrastructure to investment in technology centers.  But the political
system is still absolute, especially when you leave the coastal areas.

China as an important consumer market is believed to be another
generation away -- it's a myth that there is a large middle class
emerging now.  Today, there are only 12 million households in China
making more than $12,000 per year, the threshold level where a car can
be bought.  That's of 1.2 billion people.

IP theft is obviously a huge issue.  My company makes business software,
so in a sense we are an "arms supplier" to the trading economy in China
and we need to make our money now (which we are) and assume that we are
helping to create our future competition (which we are).  However, I
don't believe our being in the market is necessarily a prerequisite for
our products to be reverse engineered...   But the interesting thing is
that, as Chinese companies themselves globalize (recent purchases of
Maytag, IBM's PC business pretty good indicators), they recognize the
need to play by the rules, at least in the rest of the world.  You can
buy a fake Rolex on the street, or a fake Mercedes, but the same company
that markets a counterfeit VW in China will soon be exporting its own
brand to the US.  

Foreign investment is still a huge crap shoot.  Companies that have
relaxed their investment standards under the assumption that they will
retain a large share of the domestic market are dreaming.  

Thanks for indulging me -- long plane trips seem to lead to long
e-mails.  I found all this to be quite fascinating -- I guess if you've
gotten this far you don't mind reading a long mail. 

Best regards,

Dave Bradley

P.S.  Slim, it's not easy to work in Shanghai given the red tape, but
all the 5-star hotels have very active clubs and lounges with constant
live entertainment.  Someone suggested you try to work through the hotel
chains, or find an agent in Singapore.  One fellow is going to see if he
can get the name of an agent he had heard of who books talent for the
hotels in Shanghai.  I spent more hours than I care to say in the bar at
the Westin listening to three Filipino guys with an Irish front man.