Thursday, March 6, 2008

March 4th Asia Society Talk Notes

I had the absolute pleasure earlier this week of listening to four China hands talk politics, law, economy, and much more at a meeting at New York's Asia Society on Park Avenue in New York. Moderating this four-person discussion was Howard Chao, Partner and Head of Asia Practice for O'Melveny & Myers LLP. He was joined by Nicholas Lardy, Senior Fellow, Peterson Institute for International Economics, Jonathan Woetzel, Director, McKinsey & Company, and Jimmy Hexter, Director, McKinsey & Company. Woetzel and Hexter's new book, "Operation China: From Strategy to Execution" was available after the talk for attendees. Here are some highlights from the talk:

Dr. Lardy began the talk with an overview of China's macro-economic barometers. One of th things I found most astonishing was that China's current account surplus is between 10 & 11% of GDP. By comparison, he noted, Japan's greatest account surplus in the 1980s was 4% of its GDP. That means that China seriously has a lot more cash stored up than even Japan did.

He went on to say that the jump in China's prices is not restricted to just food prices and the overall CPI, but rather the PPI, a barometer of price movements in machinery, is also up and accelerating more aggressively than the CPI.

Next, he talked about why there was so much craze for investments in stocks and real estate by showing us the following:

CPI: up 7%
Savings % offered by banks: 0.71%

So, your real savings rate is greater than negative 6%. Apparently, this is a textbook case of how you create a bubble in other asset classes. Of course, when you have 300 million people urbanizing, you are going to need huge amounts of capital investment in capital-intensive projects.

Next, Dr. Woetzel noted some interesting trends as well going forward...

Migration: From 1990 to 2007, apparently 250million urbanized, but mostly through establishing new cities and shifting boundaries. That's not going to happen because of land restrictions in the future. Effectively since that time, there have been only 100mm migrants to the major cities. Looking forward, there will probably be another 250mm migrants headed for the cities and a total urban population of 1 billion urban.

That is going to drive macro costs of health, education, and food way up. And the greatest burden will likely be on 3rd and 4th tier cities.

Jimmy Hexter then weighed in on China business strategy by explaining that the winners in China historically were those that executed bold strokes of strategy - whether through gaining advantageous licenses, exclusivity, or other sundry tools. However, as we look forward, the winners will most likely be those that deliver excellence of execution. Specifically, companies that can migrate world's best strategies and get their domestic operations to perform better at sourcing, procurement, manufacturing, sales, distribution, and development will win.

By his account, there is an enormous opportunity to improve performance in China, with increasing outputs by 30-50% via this shifting global best practices to result.

60%+ of exports are machinery and electronics

As far as the effect any rising world raw material prices will have on causing countries to shift to Vietnam and other Asian export economies, not likely to happen any time soon. Dr. Lardy cautioned us to remember that Veitnam's total exports amounted to $40billion in 2007, whereas
China's topped $1 trillion.

There was also a discussion of the transient talent pool in China. Here's why they move from one job to another:
1) Influence - want opp to drive performance
2) Promotion
3) More money

What they really want boils down to greater inclusion and recognition. Until they get it, we're likely to continue to see rates as high as 40% job turnover every year in China (in the US by comparison, it's 20%)

The final major topic that was discussed was capital flows in China. What we are seeing is huge amounts of capital being raised around the world, and a good portion of it is flowing to Asia and in particular, China and India. China has become a gigantic player in trade and finance, yet locally, allocation of capital has been poor because, as a result of the negative savings rate mentioned above, a large swathe of unsophisticated investors operating under duress are forced to enter a capital market that they do not really understand.

There was a great comment made about private equity investments in China. Apparently, right now, the players there that are doing well are small China private equity companies that are doing well investing in small companies with niche regional markets. For large caps, it is difficult right now because of high valuations, struggles for control, and disagreements over management.

This was a great talk put on by the Asia Society and we will continue to update you as more relevant talks occur.

Monday, March 3, 2008

Non-communist Officials - What a Joke

Boy this type of article really pisses me off...I simply do not understand this: "China to opt for more non-Communist officials." [1]

The article begins by stating, "More eligible non-Communists are expected to become high-ranking officials in China following last year's appointments of two non-Communist ministers, said a spokesman of the forthcoming annual political advisory session. Many non-Communist personages have taken up posts at government departments and judicial bodies since China started its reform and opening up (toward the late 1970s), said Mr Wu Jianmin, spokesman for the First Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC). Mr Wan Gang, of the China Zhi Gong Dang (Party for Public Interest), was appointed minister of science and technology last April as the first non-Communist party cabinet minister since the late 1970s. Two months later, Mr Chen Zhu, non-party member, became minister of health. Their appointments represented major moves of the Communist Party of China (CPC) in enhancing socialist democracy and pushing forward multi-party cooperation and political consultation under the leadership of the CPC, Wu said at a press conference on the eve of the annual political advisory session."

Sorry folks, that is what is known as propaganda and I have a real problem with it - the same type of irk I recall when reading about the labor unions in WalMart that were headed by communist party members. Here's what bothers me so much. It's the way that the central communist party believes that things are really different in this dynasty. They're not. The power structure is still in tact - strong central monarchy backed by a unifying military and pervasive dissidents throughout the provinces with growing wealth. The only difference this time around is that Beijing has to deal with the whole outside world, and not just 'the old barbarians at the gate.'

Now we get this...two minsiters appointed from without the ranks. Can they defy the party? Can they provide some basis for checks and balances? Can they survive by taking a position of dissent? Let's ask Zhao Ziyang how that worked out for him. That's like an all-star game in basketball - you know, the type of game where everybody is really on the same team, nobody's fouling, nobody's playing defense, and the outcome is really just nominal. That's my microcosm for these appointments. The message is clear: Life is quite good in the political spheres of China these days.

[1] 3 March 2008 The Statesman The Financial Times Limited. Asia Africa Intelligence Wire. All material subject to copyright. (c) 2008 All rights reserved

Sunday, March 2, 2008

China Technology Gap Narrows

Interesting article yesterday in Maeil Business about the technology gap shortening between Korea and China...

With Chinese enterprises pursuing at a frightful speed by means of an industrial spy or imitating industrially advanced nations, the technology gap between chief industrial corporations of Korea and China was found to be narrowing at a fast rate. According to the Korea Institute for Industrial Economics & Trade (KIET) on Sunday, a research conducted November last year, on 608 major companies in 10 core industries such as automobile, electronics, shipbuilding and semiconductors, evaluated the overall technology gap between Korean and Chinese manufacturing industries at 3.8 years. Technology gap between Korea and China had been evaluated at 4.7 years in 2002, 4 years in 2004 and has continued to narrow down.[1]

Now, I really have no idea how you would effectively measure this; it seems so onerous and dubious, yet at the same time it does seem to me that Cherry cars are about 4-5 years behind Hyundai cars and Haier is about the same length behind Samsung in electronics. But, I am not so sure how far you can go with this. For instance, there really are no major Korean lap top manufacturers out of Korea that we see competing on a global level on a daily bases. Moreover, when was the last time you saw a Korean telecom company try and bid for a US telecom company. Moreover, Chinese companies are on spending sprees to buy technology abroad - and they currently have much deeper pockets than their rivals in Korea. For that reason and the following additional reasons, we think this convergence will accelerate in the coming months:

1) Economies of Scale - Korea cannot possibly compete with China in numbers or foreign reserves to buy companies/technologies abroad
2) FDI - China is just crushing Europe here, let alone Korea
3) Technology transfer - astute China policy necessitates this in many investment deals
4) Reputation - now this needs some qualification. I am referring specifically to biotech and an incident in which one of Korea's most famed scientists, Hwang Woo-suk, falsely advertised successful fabrication of human embryonic stem cells by cloning. You will not see many Americans going to Korea for stem cell surgery - but they're flocking to China. The technology gap here in terms of revenues per unit of technology is most likely in China's favor and if not it will be within a year or two, not four.

[1] Korea-China Technology Gap Narrows to 3.8 Years 2 March (c) 2008 Maeil Business Newspaper