The Great Wall: A Philosophy
September 20, 2010
By: Zachary E. Allen

Since the 5th century BC, China has been building walls to protect itself from invaders. As the empire's territory expanded and contracted with successive empirical reigns, so did the size and scope of the wall to protect it's frontiers from the threats of the times. What was originally envisioned to block the advance of spears and arrows from hostile invaders has evolved into an invisible, yet potent, blockade that effectively isolates foreign enterprises from gaining valuable knowledge about domestic markets and practices.

Recent press releases have been dominated by frustrated reactions by some of the worlds largest companies to the situation they find in today's most sought after market. Multinational telecoms, manufacturing titans, financial behemoths, and resource giants have left China in recent months, with a hefty balance sheet but little to smile about. Although they did gain short term profits, in some cases quite a bit, they still walked away with little future potential in what most agree to be the largest potential consumer market the world has ever known.

It is not due to a lack of effort. In fact, far from it. In many cases, it is due to a cultural barrier that is inherent in Chinese business practices. One of secrecy, guardedness, and a simple lack of trust for one's principals. Typical business models that have proved very successful in other regions of the world, have encountered barriers that have proved very difficult to cross by foreign companies looking to dig deeper into the alluring darkness that is the Chinese market.

Many of the foreign principals that seek success in the middle kingdom often come with their quiver of best practices, ready to deliver impressive results to demanding boardrooms in New York or London. It is this naïvety that frustrates upper management around the world when their Chinese units fail to produce the results they expected.

Success in this special market can be quite misleading, however. Markets across most, if not all, industries are in continuous growth mode as the per capita wealth of the population steadily increases. Although sales revenue and volumes may grow between quarters, sometimes at impressive rates, market share may be slowly slipping away as the macro situation continues to expand and further competition from domestic Chinese companies continues to develop.

It is often difficult for western management teams to notice these trends until it is too late, giving an ambitious domestic startup the time and space necessary to establish themselves as a player. Never in modern times have the world's market leaders, of industries both large and small, been so isolated from their ambitions. Especially during a time of economic crises in the US, Europe, and elsewhere, companies are looking with greater emphasis towards the East as a potential bright spot on their balance sheets. However, with a written language that is incomprehensible to most non-Chinese, and a spoken language that is fundamentally different than the lingua franca of the last century, and a Chinese workforce that has little to no talent for spoken English, it is understandable that foreign managers often have great trouble to get in touch with the real situation in the market.

However, beyond the obvious language barrier, there exists a cultural one that is little known by outsiders and poses a far greater challenge than most will ever realize. It is the one that is deeply seated in the early years of China's history and has seen accelerated development since Chairman Mao's cultural revolution against the pressures of capitalism ended in defeat with his death in 1976, and the subsequent rise of Deng Xiaoping and the capitalist influence that, today, is stronger than ever. This rise of capitalism from within the communist party itself has, for obvious reasons, bred a culture of secrecy and opaqueness that is central to business practices throughout the country.

Even the growing number of publicly traded companies, most of them quasi-state-owned enterprises, have not displayed the level of transparency that is typically demanded by shareholders in stock markets elsewhere in the world. Few are familiar with their management strategies and even fewer know just how much a phone call from party leaders can affect the macro mission of the firm.

On the other end of the spectrum, small to medium sized companies who wish to do business in the country are often intimidated to enter the market directly, or simply lack the funds to do so, opting for a partnership with a local firm to act as a distributor of their products. The frequent stories of bad partnerships far outweigh the good, and even the good ones typically leave the principal in the dark about how the local markets actually work, what the motivators are, and how the deals are made. Most corporate leaders are not simply satisfied with a steady income from a far off land without knowing where its coming from, how to stimulate it further, and what the underlying trends are.

There are, however, successful cases that lend a feeling of hope to those ready to throw in the towel and enroll their children in Mandarin lessons. Those companies whom have committed the time, effort, and investment to starting up their own companies inside of China, whether it be a simple representative office (RO) with several staff or a wholly foreign owned enterprise (WFOE) with an entire team, have shown promise for long term success if they can find a balance between the western management styles they bring with them and those they can learn from the local Chinese talent.

They key ingredients, it seems, is to demand open and often communication be an integral part of any relationship, especially between outside sales staff and foreign management teams. Leave no stone unturned, no question unasked. Also important is to learn about the cultural and historical situation (from both domestic and foreign perspectives), as the entire society is built upon these very things. The past 60 years of Chinese history, as written by the Chinese, has done much to mold the hearts and minds of it's citizens in ways that required much patience from western managers if they wish to realize their companies true potential in this vast, and interesting, market.

US remains silent over China investment strategy

The United States is remaining eerily silent over China's dramatic increase in strategic investments around the globe. The majority of China's large resource development firms (in industries like oil, gas, petrochemical, and mining) are state-sponsored institutions that receive hefty support and direction from government leaders to align with the reigning party's strategic allocation of resources around the world.

Recently, there has been a relatively little publicized competition going on in Africa for control of major oil & natural gas fields in several countries. The main players in this heated battle are major US & Chinese oil companies. Chinese players utilize very persuasive tactics to lure the development contracts into their corner. Construction projects, focusing on roads and local infrastructure, has begun with the claimed intent to diversify their investments in the region. In almost all cases, the preemptive construction projects are soon followed by approved bids to control regional resource development. The nature of these projects distinctly resemble the common use of "kick-backs" that are standard in China business practice.

The question that begs to be asked is if the Chinese government's direct involvement in these companies, who are so aggressively acquiring assets around the world, is a violation of the WTO's (World Trade Organization) agreement on Subsidies and Countervailing Measures. The last time this WTO agreement became commonplace in western media, the fight was between Boeing Aircraft Company and the the European Union's Airbus. Airbus was accused of unfairly receiving subsidies from several major governments in the EU.

Now the fight is between western companies and those directly sponsored by the Chinese government and their strategic ambitions. The Obama administration, and US lawmakers, have remained quiet about the issue. There is an eery silence in the US hanging over most issues involving China these days, especially among topics of trade and currency.

Keeping quiet in the face of unfair competition, especially during a strung-out financial crisis, seems a bit like bringing a knife to a gunfight. China's strong-fisted authoritarian policy tactics cannot be effectively combated with passive negotiations and bilateral solutions that leave western companies at a severe disadvantage.

Despite China's recent growth and consistent increases in GDP, they have a long way to go before they catch up to the United States, mainly in terms of per capita metrics. Western media, however, has been portraying China as on the brink of taking over the #1 position. Let us not forget that China is ranked 133 of 229 for per capita income meaning, on average, Chinese citizens make only $6,000 per year (2008 estimate). China's strength lies in the sheer size of the population, which often makes the numbers seem to be in their favor. Historically, it takes education, income, and opportunity to make a country truly competitive for the long term. Not size of GDP.

In times of a global financial mess, one should allocate their resources to come out of it with some strategic advantage over the rest. Current US policy makers are bickering about relatively insignificant issues while leaders around the globe are competing in a power grab to pick up the pieces that are being dropped by the country that has seemed to have lost it's ambition to be a great leader.

Redesigning Design Itself

Our current system is based on the rights and interests of humans. Our laws, policies of ownership, and concepts of economic success are developed for the progress of humans via the consumption of nature, in all of its forms.

So, how can we recognize the value of nature?

How can we recognize the rights of nature?

Well, to achieve a sustainable balance between humans and nature, we must recognize the true value that nature has in our lives. It is the most valuable asset in our, and every other living species', lives and we should recognize this value accordingly.

In the globalized economic system that we have today, we have to develop a way to recognize this value in every decision that is made. To achieve this, every transaction should be taxed, in one form or another, to accurately assess the impact that that decision will have on nature. This will immediately demand emphasis on those decisions with the least impact, inevitably leading towards the development of cleaner and more sustainable technologies.

Our system, however, cannot operate efficiently unless these rules are supported by enforcement to ensure that they are properly followed. This enforcement, in our society, comes from the recognition of rights. Currently, only humans have rights. Those rights are universally for the consumption of natural resources (i.e. food, water, energy, land, etc.) at the unrecognized expense of other species, the environment as a whole, and especially our own species' long-term survival. Perhaps recognizing the rights of future generations to a sustainable inventory of natural resources could lead to effective policies to address the problem..

Government polices must be accepted and enforced, on a global level, that are formed to appreciate a balance between our need to consume and our need for nature, in all of its forms, to be able to sustain itself.

Political and economic differences are going to have to be put aside if this is going to work. It will not work unless all humans can accept our common situation and work together for a solution that will benefit everybody.

US must take responsibility, move forward

China Quarterly Update - The World Bank

China has been blamed for the job loss of American workers. Is the rationale reasonable?

I don’t think it is fair to blame developing countries such as China for loss of jobs in developed countries like the U.S. The total net job creation in a developed country is primarily the result of the country’s own macroeconomic and structural policies. If an economy is not generating enough jobs, there are macro and micro tools to correct this. My own view is that job creation depends primarily on the incentives for innovation and long-term growth. In the case of the U.S., things that would help would be reform of healthcare to take the cost off of the employer, immigration reform to ensure a steady flow of workers with different skills (especially the high-tech skills in short supply), fiscal policies and incentives to raise the savings rate, and expanded investment in critical infrastructure (both hard infrastructure such as transport and soft infrastructure such as universities). In the short run trade can accelerate shifts from one type of job to another and that can be a serious problem for particular workers and communities. I favor a forward-looking policy of helping workers adjust. Trying to preserve particular jobs through import protection has always failed in my reading of history.