Category Archives: China

Is the West Going to Lose the Talent War?

I have to say that I’m worried after reading “grow, grow, grow” in the special report on innovation and emerging markets in the April 17th edition of The Economist. Near the end of the article we are told, point blank, that the best companies in emerging markets treat “talent” as a supply chain that needs to be relentlessly managed, not an isolated problem that can be solved on a piecemeal basis and that firms invest heavily in creating “educational ecosystems”.

While the first thing we do is slash the training budget every time money gets tight, companies in eastern emerging countries dispatch managers to give speeches at Universities. For example, GE has charged its top ten managers in China with cultivating relations with a particular university where they can spot bright youngsters and treat them to campus tours and scholarships (that will grow the brand and attract these future superstars).

While we expect unreasonable exceptional performance for a meager base salary and verbally lash out at anyone who doesn’t exceed her performance metrics by at least 10%, eastern emerging companies celebrate good performers. Haier prominently displays photographs of good performing managers, celebrates outstanding innovators in public ceremonies, and names new products and business innovations after their creators.

While we still assign undue praise to the University you attended instead of the degree you earned, your GPA, or, more importantly, what you actually learned, Infosys has adopted the mantra of “no caste, no creed, only merit” for its modern campus in Mysore. Furthermore, to ensure its employees had a better chance of not only climbing the ladder but becoming a millionaire than if they worked for a foreign multinational, Infosys was one of the first Indian companies to issue stock options.

And while we are the first to walk our best talent out the door every time the market dips, even though we just told them they were our most valuable asset the day before (as we, obviously, lied through our teeth), companies in emerging countries, who are experiencing much more rapid turnover than we need to deal with, will stick by their talent through thick and thin — cutting staff is the absolute last resort, not the first.

All told, it looks to me like we’re going to lose the talent war, which means that we’re also going to lose the innovation war, which we were supposed to win by outsourcing all of the manufacturing and back office to focus on our “core strengths” which, apparently, is middle management, junior art directorship and telephone cleaning, as that’s all we will be able to do if we don’t start focussing on talent, the true producer of innovation.

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Will High Priced Logistics Mean the End of the China Surge?

Last year, David Jacoby wrote in The Economist Guide to Supply Chain Management: How getting it right boosts corporate performance that China’s high supply chain costs are limiting its growth. Noting that, as per a recent study by the US Chamber of Commerce, China’s logistics costs are the second highest in the world at 22% (compared to the global average of 13%), China is choked by the high cost of inbound logistics.

With the rising cost of production in China (as more and more middle class workers demand higher salaries in their quest to maintain a middle class life style on par with their peers in other parts of the world), repeated calls to allow the yuan (which is rising against the US Dollar [WSJ]) to float with the market, and rising raw material and oil costs, it appears that China’s days of being a LCCS destination might be coming to an end if it doesn’t get its logistics costs under control.

Now, you can argue, as Jacoby points out, that China’s government is investing massively in infrastructure, having recently laid out a broad-scale and ambitious programme to improve supply chain performance by creating third-party logistics (3PL) enterprises and deregulating certain transportation areas; promoting the establishment of logistics networks throughout the country; and building 30 modern logistics parks that will serve as distribution centers throughout the country in their 11th five-year plan, but you could also counter-argue the facts that the Shenzhen Dongdao Logistics Co. became insolvent and collapsed on January 25 and Guangdong-based Nan Yue Logistics posted an RMB 190 Million loss in 2009. In other words, it would appear on the surface that logistics are becoming too costly for even the logistics providers in China, yet alone the foreign buyers who need to use them.

So is this going to mean the end of the China surge, and an eventual shift to new LCCS locales when the market returns? Or will China find a way to get its logistics under control? Not Necessarily. For what it actually means, we turn to Dick Locke, SI‘s resident expert in international trade.

Well frankly I don’t believe the US Chamber of Commerce. I don’t think it’s because of their anti-Health Care, anti-regulatory reform, anti-environmental policies but that doesn’t help their credibility.It’s because there is such a trade imbalance from China to the rest of the world that logistics costs into China have been dirt cheap for years. Freight companies were moving 40 foot containers from Europe to China for around $400 back in the boom days.

 

Here’s an excerpt from an academic paper on trade imbalance in container movements in and out of China. TEU means “Twenty Foot Equivalent Units.”

 

On the transpacific trade the imbalance in 2006 was 1:2.6 in favour of eastbound traffic, with demand for 14.3 million TEU eastbound, and 5.5 million TEU westbound. Meanwhile, on the Asian-Europe trade the imbalance was 1:1.8, in favour of westbound with carryings of 7.5 million TEU and 4.1 million TEU eastbound (Robinson, 2007).

 

And the WSJ says the yuan is strengthening? Excuse me? Where do they get that? On the first of the year the dollar was worth 6.8291 yuan. Today it’s worth 6.8360. (oanda.com) Maybe the WSJ is careless about verb tenses and means it will strengthen soon. It might. It might not.

 

When will the China surge be over? That’s a product by product question but the general answer is when you can find better suppliers elsewhere. No one’s buying a third of the way around the world unless the suppliers there are the best. But you need to test other countries periodically. Global Sourcing is like painting the Golden Gate Bridge. You never finish.

In other words, the cost of logistics is all relative and it’s the total cost that matters in the end. While China, and its suppliers, remain highly competitive, it will be the location of choice.

The reality is that while logistics costs in China might be “high” relative to its GDP, they’re still “low” in absolute cost compared to costs for moving the same volume in the developed world. The yuan may be “rising”, but it really hasn’t risen much against the American dollar, so it’s still not an issue. And wages may be rising, but they’re still rising by pennies, not dollars, and the wage costs are still relatively insignificant. In other words, all the noise you hear is just much ado about nothing … and it’s time to go and buy another can of vibrant orange paint.

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Is China Proving that International Trade is a Zero-Sum Game?

Recently, state-controlled Sinopec spent $4.65 billion (US) to become the first Chinese multinational to buy a direct stake in a major producing oil-sands project in Alberta (Canada) and buy out ConocoPhillips‘ 9% stake in Syncrude Canada Ltd (which is the trophy of Canada’s oil sands projects, producing 350K barrels a day). According to the Globe and Mail, the deal represents the next stage in Chinese investment in the oil sands, as Beijing-controlled companies scour the globe for energy resources and look to diversify the country’s growing imports away from the Middle East.

Sinopec is a subsidiary of China Petroleum & Chemical Corp., which started buying into Canadian Energy projects in 2008 with an initial purchase of a 40% interest in the proposed Northern Lights project in northern Alberta. (It is now a 50-50 partner with France’s Total SA.) China Petroleum & Chemical Corp. is also active in Canada, and will acquire a 60% stake in Athabasca Oil Sands Corp.’s Mackay and Dover projects, a 20% stake in Vancounver-based Teck Resources Ltd, and, in turn, a 20% share in Suncor Energy Inc.’s Fort Hills oil sands project. This is in addition to other holdings in Canada, Venezuela, Brazil, Argentina, and the Middle East.

Wondering what it all meant, I asked Dick Locke, SI’s resident expert in international trade. This is what he said:

Well, it means that sometimes international trade is a zero-sum game. That’s when multiple countries chase a disappearing resource.

 

The US is ill-equipped to deal with this one. Our government and opinion-makers are captured by the duology (if you’ll allow this as a word) of oil producers and car manufacturers who are very conservative about energy strategy. Our population patterns have way too many people living on large lots beyond the reach of effective public transport. China is doing a great job in both solar and wind power development. You probably saw that Applied Materials moved their solar cell manufacturing site and technical expertise to China (Technology Review).

 

While the Chinese government has real problems with human rights, it does think long term and is doing what’s best for its people in this aspect.

In other words, China knows that it needs more energy than it’s currently producing if it’s going to continue to support and modernize its population, and that, just as the world is looking to China as a producer of consumer goods, China needs to look to the world as a producer of energy … and will have to spend much of what it is making to acquire that energy. At some point, the outflows will have to equal the inflows and international trade will China will become a zero-sum game.

Dick Locke, Global Supply Training.

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Rio Mino … Rio Bribo … Rio Gono!

If you’ve been following the news, four executives of Rio Tinto, a mining and exploration company, recently admitted to a court in the Chinese city of Shanghai that they took bribes totalling over 10 Million Yuan (BBC). Not long after, they each received prison sentences of between 7 and 14 years in addition to large fines and confiscation of their personal assets. Liu Caikui received seven years, Ge Minqiang received eight years, Stern Hu received ten years, and Wang Yong, accused of receiving the largest bribe, of almost 9M, received 14 years (CNN).

This should send a very strong message to foreign companies wanting to do business in the new China. Play by the rules (and definitely respect “face” [HBR]), or do the time.

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Is China the Home of the New Cyber Criminal?

A year ago we had GhostNet, a massive cyber espionage network rooted in China that went well beyond simple allegations of spying on Tibetan Institutions. After a 10-month investigation, a network of over 1,295 infected hosts in 103 countries was discovered that included computers at ministries of foreign affairs, international organizations, news media, and NGOs.

Then we had massive cyber attacks that originated in China, including one against Google last December, and now even Google is pulling out of the country (as it must do no evil).

And now, we find out that GhostNet was but a shadow of a much larger Shadow Network (The Globe and Mail) which has compromised sensitive data from at least 16 countries from compromised computers in at least 31 countries (including computers used at Honeywell and NYU), which have been used to gleam Indian missile defence secrets and Canadian Visa applications from its citizens travelling abroad (including applications from the UK). The full findings will be revealed today in Toronto, as the network was cracked by researchers at the University of Toronto’s Munk Centre for International Studies, the Ottawa-based security firm SecDev Group, and a U.S. cyber sleuthing organization known as the ShadowServer Foundation, the real-world Internet Lone Gunmen.

The Full Report is available on line on Scribd and documents how much of India’s defence network has compromised as the computers and systems of the National Security Council Secretariat, Military Engineer Services, Military Personnel (including the Artillery Brigade and the Air Force), Military Educational Institutions (including Army Institute of Technology, the Military College of Electronics, and the Mechanical Engineering College), India Strategic Defence and Force magazines, a number of corporations (including YKK India Private Limited, DLF Limited, and TATA), and Maritime India (including the National Maritime Foundation and the Gujarat Chemical Port Terminal Company Limited) were all breached.

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