unclechina.org

Remember how China and the Europeans screamed when there was a hint of “buy-American” wording in some of the U.S. stimulus package?  This week China released information on its manufacturing industry stimulus plan, which calls for the outright maintenance of a specific domestic market share for Chinese companies. The “Implementing Regulations for the Equipment Manufacturing Industry Revitalization Plan” sets a minimum target of 70% of domestic market set aside exclusively for domestically manufactured equipment. It is not clear whether foreign companies manufacturing in China would qualify as domestic manufacturers.

The new plan focuses on eight key industry projects including auto, light industry, iron and steel, petrochemical, shipbuilding, textile, nonferrous metal, information technology, electronics and defense.  Among the methods that China will use to favor Chinese manufactuers are government procurements, subsidies for companies that are the first to use domestically produced equipment and requirements for insurance companies to provide insurance against risks, boosting VAT rebates for Chinese exporters of high tech equipment, more export credit for overseas contracting that includes equipment exports.

These are all non-tariff barriers to foreign companies wishing to enter the China market and would seem to be clear violations of WTO rules.  But will anyone object?

For more details on the Buy-Chinese provisions see:  http://www.gov.cn/zwgk/2009-05/12/content_1311787.htm

I was thumbing through a brochure from the Commercial Aircraft Corporation of China, Ltd. (COMAC) today and reading about their new project to develop a mid-sized trunk liner to compete against Boeing and Airbus.  The new plane, known as the 919, is currently set to be launched in 2014.  Currently, western aircraft companies are scrambling to supply parts and technology to COMAC for the 919.   Here’s what COMAC’s brochure says the basic principles are for the 919:

“Keep Chinese characteristics. Everything we do should take into account the real conditions in China, bring into full play of the political superiority of the socialist system which is capable to concentrate all resources to do great jobs.”

You won’t find that in Boeing or Airbus brochures.

You may ask why business should care whether the U.S. has a pavilion at the Shanghai World Expo in 2010 or not.  The answer is complex, but it boils down to national branding, soft power and potential retribution from China.   As this article in the Washington Post points out, the US is only one of three nations that do not have plans to exhibit at the Expo.  The other two nations? Colombia and Andorra.

When 70 million Chinese go to the Expo and find that the US has snubbed them they will take away a lasting impression.   The Expo is a matter of pride to the Chinese government and while we may not be obligated to come to their party it would be very smart of us to show up if we care about winning hearts and projecting soft power.

On a pocketbook level, US companies bidding on infrastructure projects in China should not be surprised if they start losing more and more contracts.   The decisions on who gets these contracts are made by the same government that will be feeling miffed that we did not join the Expo.

On a personal level, Chinese citizens will take the absence of the U.S. as further confirmation of the meme they have had planted in their heads that America is jealous of China and in decline - too poor to show up alongside Iceland and France.  America’s products are tied up in the national brand awareness and will suffer along with our overall reputation.

So why doesn’t the U.S. have a pavilion under construction?  Because Congress in its wisdom passed a law years ago to prevent any government money from being spent on participation in Expos.  They wanted the private sector to pay for our pavilions.  This worked so well that in the last Expo we participated in in Japan, Japanese corporations paid for our pavilion to help us avoid embarrassment.  Our own multinationals were only focused on their shareholders and not on the nation’s honor and soft power.  What a shame.

The Administration and Congress had better get its act together and appropriate some money for a pavilion in Shanghai.  We should know by now that we can’t depend on our large corporations to care about the nation.  That’s our job as citizens.

What many businesspeople don’t realize is that as we go about our business on a daily basis there exists an army of people doing valuable research for us, poking their heads into every nook and cranny of the world, asking the questions we need the answers to, and writing up the results for free distribution to all who are interested.  These people are known as professors, scholars, academicians and occasionally eggheads.  The fruit of their research is available in university libraries, scholarly journals and on online databases such as jstor.org   Only trouble is, the wisdom they have labored to discover for mankind is written like this:

 By taking a learning approach to international cooperative ventures, this study introduces absorptive capacity as a principle governing the relationship between knowledge possession and knowledge search among prospective partners. Two alternative hypotheses are juxtaposed: The first is that firms will seek additional knowledge in the same area in which they already have a knowledge base; the second is that firms will seek knowledge in a complementary area. Data from 90 partner-seeking firms in China show that the possession of complementary knowledge is a prerequisite for knowledge search. Furthermore, in line with the learning perspective, the equity joint venture is the vehicle of choice for firms seeking transfer of tacit, embedded knowledge. 

In other words, this is a study on how joint venture partners decide who to partner with and why.  But if you are a normal human being, a normal businessperson at that, it is a painful experience to struggle through the paper and try to understand what the professors are trying to say.  Which is odd, since you’d think that the people who could most use the information are businesspeople.  But businesspeople are among the last readers with time to try to translate academic gobbledegook  into plain language.  It’s as if the secrets to eternal salvation were written in Latin for the lay people of old England (it’s been tried).

China moved quickly this week to ban hog and pork imports from Mexico and parts of the United States the Chinese agriculture ministry and the General Administration of Quality Supervision, Inspection and Quarantine said in a joint statement on Tuesday. Perhaps confused by the facts, the Minister of Agriculture apparently thought that swine flu was being passed from pigs to humans.  When questioned by reporters that asked why he wasn’t listening to world health authorities that report that all swine flu cases have involved human-to-human transmission the Minister covered his ears and began singing loudly.

All transmission of the disease so far appears to have been human-to-human and not from animal or other contact, according to the WHO. “There is no danger from eating pork,” a WHO spokesman said. “If you cook pork well, if you cook all meat well, it kills all virus.”

There’s some confusion among American businesspeople regarding the American Chamber of Commerce/s in China so now’s a good time to clear it up.  There is not one AmCham (as the Chambers are usually called) in China - there are several.   Yes, the one in Beijing calls itself “the American Chamber of Commerce in China” but it really only covers the Beijing area and as 2700 members.  The largest AmCham in China is the American Chamber of Commerce in Shanghai, with over 4,000 members, it’s the largest AmCham in Asia now.  There’s also the American Chamber of Commerce in South China which is headquartered in Guangzhou.

Some businesspeople join one or the other AmCham in one of these cities and think that they are automatically members of all the AmChams in China.  This is not the case.  In fact there is significant competition between the AmChams and cooperation between them is on a case by case basis.  Readers of their websites will notice that they rarely refer to each other.  The AmCham China (Beijing) website for example claims to represent American companies doing business in China but does not even make reference to the AmChams in Shanghai or Guangzhou.

The AmCham in Beijing is the only AmCham in China which has a license to operate as the American Chamber of Commerce in China.  The other AmChams function, as most non-profit organizations in China do, as unlicensed organizations that are nevertheless quite accepted by the government.  Because of China’s paleolithic legal system for non-profit organizations the PRC will license only one Chamber of Commerce from a given country.  So while the Chinese know their system isn’t up-to-date and doesn’t recognize the reality of the situation, they nonetheless accept the existence of these other, quite seperate Chambers.

American drug and supplement exporters should read this Reuters article published here in the The Peninsula of Qatar.  As the writer points out, the pharma market in China is poorly regulated but flush with products making unsubstantiated claims.  Chinese consumers don’t trust Chinese medicines as a result and are turning to foreign imports which they trust more.

What the article doesn’t mention is that many of the “foreign” medicine brands are being counterfeited in China and as more problems arise with fakes that are packaged as if they were from famous foreign companies Chinese consumers are growing wary of purchasing the real imports also.

Factors including exchange rates, transportation costs and small volumes are bringing some outsourced manufacturing back to the U.S. from China according to this report in the San Francisco Chronicle.  Labor and materials costs have risen to an extent in China that for low-volume high-value production runs many US manufacturers are pulling orders out of China and giving them to their fellow Americans.

One cost of outsourcing to China that is not mentioned in the report and is often overlooked by US outsourcers is the cost of unforseen problems such as broken contracts, poor quality, returns, stolen IPR, etc.  It’s difficult to figure these costs but they are very real.

We recently exhibited at a trade show in Shanghai that was organized by a municipal agency.  The agency’s representative called us about a week before the show was to open to tell us that they would like to give us the Best Exhibit Award for the show “if we’d like to pay the award fee”.  They had no idea what our exhibit was going to look like but they were willing to give us the award if we paid their government bureau about US$ 1,000     We declined their kind offer and the award went to another foreign-owned company.

As Adam Minter mentions in his Shanghai Scrap blog, at least one large conference that was scheduled for China in late May has been rescheduled because would-be foreign attendees are having trouble getting visas.  The reported reason that China has tightened up on issuing visas is because of the upcoming 60th anniversary of the founding of the PRC.  However, it is more likely that it has to do with the June anniversary of the Tiananmen Massacre in 1989.  China may fear international attention if media or dissidents draw any attention to that anniversary.  Nevertheless, it may mean that businesspeople that intended to visit China in May or June may have difficulty getting visas.