More than just a PR problem

Here. Background here.

Update: A blogger's dilemma - "I want to keep this blog online in China". At what cost? Perhaps it's a flippant question but that was the gut reaction I had. I'm a hypocrite in that I'm not sure what to say about it myself and as someone who believes quite strongly in libertarian principles when it comes to governance - free markets and free people, this development in Western China and the resulting authoritarian reaction is obviously not good and I fear will not end well.

What they don't tell you about being an Entrepreneur

Too true. I think this is one of those universally shared experiences of entrepreneurs all over the world. This is how Marc Andreessen (of Netscape fame) has described it:

First, and most importantly, realize that a startup puts you on an emotional rollercoaster unlike anything you have ever experienced.You will flip rapidly from a day in which you are euphorically convinced you are going to own the world, to a day in which doom seems only weeks away and you feel completely ruined, and back again. Over and over and over. And I'm talking about what happens to stable entrepreneurs.

Meeting Westernized Expectations

The difficulties in communication because of differing life contexts is a concept that isn't easy to convey. Despite how difficult it is to outsource any project outside your company, to do so half a world away requires even greater care and precision. Like programming, GIGO (garbage in, garbage out) applies. But even when you do that, ensuring that people care about the details isn't easy for staff who most of their lives were concerned far more about bigger life issues impoverished outside of the cities. And then you have the clients who seem to be concerned only about price assuming quality will be there. This post from All Roads Lead to China is pretty accurate.

One good traffic idea from China/Taiwan

I notice they do this in China as well (which may very well be the ONLY good idea that they use when it comes to traffic management). I don't really understand why we don't have countdowns at most traffic lights here in North America. It makes perfect sense. As the link does point out however, the countdown should be on the green (or on the crosswalk) rather than than the red. They do it on the red in HK, and with the way the cabs drive there at night, it's sort of like what I would imagine sitting in the passenger seat of a race car might be like - something definitely to be experienced.

What perhaps irks me the most is how most people seem totally unprepared when the light turns green. They don't even care to anticipate it. I notice that the lag to response time is definitely longer where I live in Canada versus a place like New York or Boston. A little impatience and consideration for the time of all the people behind you isn't such a bad thing.

Of course another way of dealing with things (including China where they put these cameras up all over the place). I've always suspected that it's more about revenues than it is about safety.

Apple's Design Process

Pretty interesting. Companies that are able to consistently create great designs fascinate me. I think it's easy enough to "buy" a few creative people who drive innovation but to be able to institutionalize and implement good design is definitely not easy though definitely to be admired.

Paradox of Labour?

"Cheap Labor is Very Expensive, Expensive Labor Very Cheap". Sometimes you just get what you pay for. (Though redundant, it should be pointed out that sometimes you don't - particularly given the range/state of factories on both sides of the Pacific). Markets for labor are generally inefficient in the short run like most other products, services and inputs.

Playing Chicken Little

Some of the usual suspects seem genuinely alarmed about China's development - not so much within a political /military context but because they worry the world is running out of resources or food. 'Can you imagine', they exclaim almost breathless, 'if 1.4 billion people in China had the same environmental footprint as us'?

I've heard the same argument being made about people in Africa. It's similar to somewhat unrealistic views that we in the west have polluted the rich cultures of developing countries to the point that they crave to become more like our recklessly consumer driven society. It befuddles me as it would seem the alternative they suggest is that we keep those in developing countries poor, starving and technologically backwards. For some fleeting moments I wonder if such views are motivated in some small way by racism.

Malthus is long dead. It is a wonder that respectability for his ideas haven't died with him.

Which comes first?

Which should come first? Representative democracy or economic development? That's what a recent article in Foreign Affairs explores - and while it focuses on Russia, I think some of the points being made are very relevant to China today not to mention many developing countries around the world.

They really do think differently

It couldn't have happened to a nicer guy though I feel sorry for his family. What is perhaps more interesting about the Eliot Spitzer debacle is how it's being viewed from China and elsewhere. The Chinese press (and/or foreign press) is pretty predictable criticising American decadence and hypocrisy and my sense is that they've been to a degree successful at creating the impression that Americans really aren't much different than how the Chinese government works.

Of course, I'm not sure any foreigners know what to make of Barack Obama - a black man (ignoring for a moment his mother was white) with the middle name of - gasp, Hussein who could actually become President. When I first started making friends with people who were born and raised in China, it was almost an assumed that I was discriminated against (in the negative sense) growing up (generally not the case).

Then there's this. The post captures it perfectly. The Chinese are truly fantastic at backhanded compliments.

The Benefits of Trade

Requires a bit of a warped sense of humour.

Report: Many U.S. Parents Outsourcing Child Care Overseas

H/T: Greg Mankiw

Building a Startup

Successful web entrepreneur Jason Calacanis wrote a recent note on his blog about what it takes to build a startup that has even the remotest chance of surviving. In doing so, he generated a firestorm. As Michael Arrington, founder of TechCruch points out, it comes down to two basic requirements: you have to hire the right people and you have to watch every penny. I think both posts are a must read even if you're in China.

I think being at a start up - or small organization, or even as part of a highly leveraged buyout is similar - limited resources help to quickly prioritize and clarify what is important or else you fail. I personally think of my business and those like mine as not being too unlike many tech businesses in that we are tools for other businesses to improve productivity and competitiveness. But getting started isn't easy. It's far better to ask for more money than you think you need because you'll likely end up needing anyway - along the same lines of thought, it's not a bad idea to try to maintain a certain cash reserve for emergencies or to survive and keep valued resources during slower periods.

When it comes to Asia and specifically China, it's a bit different and I think hiring the right people becomes even more important. Displays of wealth seem to be ever more important than here in West. Not everyone will understand why they can't get that raise or recognize what the problem is with clocking out at 5 or 6 pm on the dot - given family pressures, and seeing wages continually on the uptick for classmates, and what has only until recently been a more parochial attitude taken by many firms. But I think you can find them. I'm intensely proud and also protective of the team we've built. We're far from perfect, but for the most part, we are almost always trying to work to get there and do right by our clients.

Update 08.03.13: TechCruch linked to another pretty good but older post on succeeding at a startup.

Proving once again the Bladder Theory of Finance

The Bladder Theory of Finance goes something like this: the more cash you have, the greater the pressure there is to piss it all away. I first heard of it from one of Peter Lynch's books. I should note that Lynch is a person whom I hold in very high regard particularly given his books were what turned me onto finance in the first place (dwarf tossing-related scandal notwithstanding).

China has no small amount of cash. I hope that these returns will help to calm protectionist fears of Sovereign funds (funds invested by governments - particularly given the most recent success of China's government).

Because it's a strategy that's worked so well everywhere else...

Something about this headline makes me want to giggle: China will form 'super-ministries' to reduce red tape

Warren Buffet's Letter to Shareholders

Sorry I haven't been posting. I've been particularly busy doing unfortunate but necessary administrative tasks for work. I think anyone interested in business including how great businesses are run, how great businesses look and how great businesses react should read this year's letter to the shareholders from Warren Buffett:
http://www.berkshirehathaway.com/letters/letters.html

While I don't think that there's that much new from previous years, I thought his focus on how he thinks of competitive advantage (or moats around the castle of superior returns as he calls them) to be inspired. With the continual barrage of faddish ideas - particularly as it relates to China, it's particularly refreshing to get a pretty humble perspective and see that there are certain business principles that are timeless.

Green Screens

You'd think that we've become a trading desk at our China offices what with practically all my staff watching their stocks "plummet" these last few days in China. I say "plummet" because stocks here aren't allowed to drop more than 10% before they are halted until the next day - so it seems on average the markets have dropped about 5% each of the past three trading days. Having lived nearly all my life in North America, it's sort of weird getting the color relationships right - here in China, green is bad/down, and red is good/up (associated with good luck in the Chinese culture).

I'm not sure what other managers doing about the time spent on this, since gambling in stocks seems to be a national past time here. I figure if it doesn't affect their capacity to process work, I don't really care. Don't tell my employees, but not so secretly, I'm kind of happy that they're finally falling. Means they know they need to work harder in the next year. So here's to green screens :)!

China's IP Problem

The lack of respect of intellectual property rights by Chinese governments particularly at the local level and in many respects of many locals, probably already costs China a lot of money. I can understand where it comes from - being dirt poor as much of the country has been, it's difficult to convince people in China (let alone from any developing country) that something as intangible as intellectual property rights have value. They just want things cheap.

This however is beyond appalling. Completely brazen, the counterfeiting of ABRO adhesives is frightening in how much support the counterfeiter has received from within China and how much success he has had in rallying nationalist sentiment when it seems absolutely clear that what he has done is wrong. What is particularly remarkable is that the fight isn't over a consumer brand. Because of the industrial nature of the product, it surprises me that presumably more sophisticated buyers aren't fighting back against distributors of the fake product (but maybe they are?). Also covered here.

American History as China's Prologue

China's rapid industrialization, while remarkable, is hardly new - and I'm far from the first to realize this. It's sometimes easy to forget that the US was a third world country only a century ago. Check out some of these photos from the US Library of Congress. From Core77 (a design blog I follow):

The Library of Congress is now sharing 1,600 color images from the Farm Security Administration/Office of War Information and about 1,500 images from the George Grantham Bain News Service on Flickr! These particular photos have been extremely popular with visitors of the Library, are available at high resolutions, and have no known restrictions on publication or distribution.

It's nearly impossible not to see at least some similarities in comparing Chinese industrialization to American industrialization.

Tale of Two Factories

While I'm of the view that incentives ought to reinforce goals rather than drive them, either way it doesn't take a genius to realize that incentives can have a significant impact on results. So it is with our manufacturing partners.

The nature of aluminum extrusions is that it's a capital intensive business. Machines require cash, inventory uses a lot of cash (and you won't find any aluminum smelters offering credit), and you tend to need a lot of space if you want to offer finishing services. Companies that are able to manage rapid growth against these capital constraints are as much fascinating as they are unusual. Progressive incentive structures are difficult to come by anywhere in the world but surprisingly I've come across a number of companies in China that reward based on profitability instead of some arbitrary figure (or the traditional 13th month of salary).

As an example, one rapidly growing factory distributes 8% of profits to managers and directors. While the company probably pays below average for its managers, the profit share means that many of them can make as much if not even more than their annual salaries paid just before Chinese New Year's. Of the remaining 92%, 70% gets distributed amongst the partners and the residual is reinvested.

Interestingly, they also have a borrowing mechanism that allows managers, directors and also shareholders to lend funds back to the company where the company pays interest on those "deposits" at a similar cost to what they would get from the bank. I suspect that like microfinance, where voluntary savings are often an indicator of the trust that borrowers have in their institution/borrowing group, "deposits" here can be used as an indicator for senior managers as an indication of the level of trust and optimism that employees feel for the success of the organization over at least the term. Of course this can also be dangerous depending on the liquidity of the company should one day the level of optimism/appearance of security be less so.

Let's call this Factory A. Now let's compare it to Factory B - with a much more of a command and control type structure, Factory B was purchased from the state by a technocrat at rumoured wholesale prices. About 5-6 years ago both companies were the same size with 8-10 extrusion presses. Now Factory A has over 50 presses while Factory B has 14. While there is undoubtedly more to it, there's little doubt in my mind that culture reinforced by incentives have played a large part.

There is one caveat that may be masked by the rapid growth of the company. The number of people employed per machine is nearly double in Company A versus Company B - which is a little counter intuitive. Within the Chinese context, and this is an area I think culture has played a role - managers are given hiring power and often want to hire more people from their own villages which to my mind somewhat ego driven in that I suspect that the profit that they are awarded is disconnected enough that the trade off in lower profitability for them specifically is offset by the increased stature of having more employees.

As a result, Company A is a little more expensive than Company B in pricing but my confidence in Company A being able to produce consistently to our requirements especially when aesthetic finishes are a concern is significantly higher. I am also told that the books are still rather opaque at both institutions. I've yet to hear of any Chinese companies that practice open book management (I suspect in part because of, er, "tax management") - thus Company A requires that its employees and culture has a great deal of trust in order for the incentive structure to work.

I think smart managers/entrepreneurs realize that while incentives are a cost, managed properly they can also become investments in culture that pay for themselves many times over.

Mind Games

I'm not sure that I'm built to do business with and like your typical homegrown local (and I'm not sure that's a bad thing). Though perhaps not as despairing as "This is China's" experience, the games that are played are somewhat frightening when you step back to think about it.

For the level of ingenuity being used to cheat and fool each other, you would think that China should be one of the most innovative nations in the world. It has been pointed out to me that even in some of China's largest companies, they keep the books numerous sets of books in enclosed rooms that require going through the General Manager's office to reach - such that if the government comes knocking, the computer can be quickly burnt to a crisp. One of the last people you also want to cheat is your accountant because they will simply submit your books to the government (and apparently this is not that uncommon).

That said, not paying your taxes here in China are the rule rather than the exception. Further, 'not paying your taxes is neither unethical nor does it set a bad example for employees'. It has been argued to me that this wasn't "cheating" given how much government officials have been "cheating" the country themselves.

Closer to home, I know of a factory where a trusted employee found all sorts of ways to cash in. From "entertaining" clients/local government officials, buying "official receipts" on the cheap, to pocketing the rent on the factory that was initially comped by the landlord in exchange for signing the lease, to chintzing on the food budgeted for factory workers for meals whenever the owners were not around (which was a lot). Finally, he even held documentation hostage threatening to submit it to the government because of tax evasion. It made me completely rethink the utility of encouraging employees to refer friends and family as most of this was accomplished through the hiring associates who came from his village. Indeed, because of the way the factory was managed different directors/managers attempted to build their own little fiefdoms each with the intention of cooperating to cash as much out of the factory as possible.

Which brings me to my latest adventure. As noted, we are going through the machinations of buying a vendor. One of my associates has taken the lead on the specifics and explained to me what was necessary since we still wanted one of the owners to remain and manage the company. One of our controls will be the hiring of an accountant who will report directly to us. It was like it was straight from the Godfather. He explained the risk that the accountant could eventually conspire with the owner. The associate explained to me that we would hire someone locally (the owner is from a different "village" (of a few million people) entirely) so that we could know where that person's wife, kid(s), brother/sister, grandparents lived so we could "deal with them if anything went wrong." I'm a little worried by what he means by that.

Later during the day, I sat through what I thought was an entirely casual conversation picking up completely different meanings than the associate. The level subtext could require a cultural interpreter. My associate pointed to everything from questioning one of the owner's motivations, to what was being implied. While the specifics are relatively unimportant, in frustration I couldn't help but ask why this guy didn't just come out and say what he meant - to which my associate sighed that I just didn't understand, saying I'm not Chinese and that this is the way things are. Of course going into this, at least I am doing it with eyes (relatively) wide open.

Exclusion

The last two posts reminded me of Seth Godin's recent post on exclusion (that I still haven't decided if I agree with), and my own experience as a co-op student. While I'm sure the idea of avoiding exclusion is generally practical from a general marketing perspective, I wonder what Seth Godin would have to say about hiring co-op students?

Clarification: for most companies that consider hiring students, there is a certain expectation that there can be high turnover and in this light, many professional services firm view the hiring of co-ops and the expense of training them as part of marketing to future buyers of their services. Can the feeling of rejection of those who you don't hire really be avoided?

Hiring Interns

As a follow up to my last post, we hired 11 students and they'll all be working at our vendors and (hopefully) soon to be manufacturing subsidiary. In mid December, I came out of the process of interviewing/hiring them a little shell shocked (and probably breaking every best practice ever taught). My China colleague apparently had maintained very good relations with his profs so we were talked up during classes. We came late to the process but we showed up not being told what to prepare (actually we were even told not to prepare anything) and then we had over 200 people come to our seminar and no forethought of how to sort them!

Imagine this: you're chatting merrily along, taken to an unremarkable door around a corner, you thank the escort and then when you turn around, you have 200+ pairs of eyes staring at you and the room is dead silent. After seeing them, the professor who kindly told you that you need not prepare, asks you - "oh by the way, do you have a power point presentation of your company that you could show"?

After I got over my wave of panic, over my inclination to take a picture of the red clothbound Communist book of Mao sitting on the prof's desk and finally incredulity that even here, in the middle of nowhere (probably a "small town" of a half million at least), Chinese professors are using Powerpoint on computer consoles, my time served in investment banking finally came up useful and I whipped up a presentation in 5 minutes. My colleague ad libbed droning on about what we did (quite impressive, though I guess he did also used to be class president). We ultimately sorted people by having them all speak and say a few sentences about themselves in front of everyone and what their expectations might be while collecting the standardized forms (which I confess we didn't have time to read) making remarkably subjective decisions on our picks. It was somewhat uncomfortable as I still haven't taken those Mandarin lessons yet so my colleague talked on pointing me who inevitably would stand from time to time with a forced smile waving like the Queen.

It's (almost) scandalous how little we need to pay these people. If you thought co-op students are cheap labor in the US/Canada, when we were discussing pay I suggested a number and I was scolded (yes, I get no respect) by my colleague as being crazy and how they were lucky they didn't have to pay us to learn! Given that these students must find placements for 6 months the starting number proposed by his former professor was 250-300 RMB/month plus room and board! (at today's dollars 7.4:1 that means $34-40 USD per month) .

Apparently we can be cheaper than average $400-500 RMB/month because we are foreign and not from Taiwan (apparently managers from China and - or as my China colleague might say quite indignantly - including - Taiwan can be quite the tyrants). I think they're sort of taken advantage of since these "kids" (my colleague in HK gets offended at my calling them this since I'm young enough to be her kid), have to have 6 months of experience before they graduate.

Fortunately, they do have choices. They can work for a larger company like Haier (company that tried to buy Maytag) or Huawei (company that's often referred to in China as "China's Cisco" or is more appropriately company that often "borrows" from Cisco) doing mind numbing but relatively well paid QC jobs (on the production line) for 2000+ RMB/month, or they can work for companies like us for diddles but get more useful experience with greater opportunities. It seems to work the opposite way in the West. For me, it was the choice between smaller companies that had to pay higher to attract talent of snot nosed arrogant kids like myself versus big name professional services firms that paid less but offered great training and a great name when you left (which I still think is somewhat bizarre).

Ultimately, seeing as I have little to no fear that they will be reading this, I decided that we ought to pay average (500 RMB/month) and in addition we will withhold an amount per month that we will give them when they leave (with the malicious intent that they will in fact be quite surprised and tell all their friends and we will have the pick of the litter next year). I have high hopes and am optimistic. Truth be told, I'm actually a little afraid of hiring more senior people in China. Because of things like this. Students, beyond being ridiculously energetic tend to also come uncorrupted. This internship process can be like a 6 month job interview (not fun for them but fun for us).

We also had quite a debate internally about how to properly welcome them. My China colleague, cheap bastard that he is (I say that affectionately of course), thought we shouldn't be too generous and nice to bring up expectations. Even making the decision to pay for the train tickets in sleeper cars no less was a debate since no one does that. (Side note: traveling on trains in China is an interesting experience especially with my colleague continually whispering in my ear not to fall asleep or else you will be robbed of everything. But it's sitting in this cramped room with 40-50 people that rumbles with everyone staring at each other suspiciously for however long the train ride is).

The train ride direct from the school is 18 hours and the cost of a sleeper car is only 15-20 USD (with seats in the hellish room about half that price)! The rationale of other companies is apparently that there's no point in paying for these kids when they haven't done anything yet (no, they wouldn't even pay for seats in that hellish little room). We also paid for them to have a a decent lunch and dinner, and to spend one night in Guangzhou to tour around before taking them to the factories the next day. I also suggested bringing them to go see a movie (and you should have heard the crap I got into for that - "what, you think these things don't cost money?" still echo in my head though I get that a lot). They ended up being too tired from their trip, but I think we will take them to karaoke and maybe an extra day in Guangzhou at the end of their internships.

I've come away from the process fairly excited and I think I will abscond a kid for a few administrative tasks to report directly to me within the next few weeks at our offices in Guangzhou (they're all currently with vendors now). In the future I hope to develop more of a strategy to hiring interns and cultivating a better relationship with that university through things like competitions, developing case studies, scholarships, and hiring over the course of a few days instead of one.

Oh, did I mention that we only need to actually pay for half of those interns and the other half plus the room and board for everyone get paid for by our vendors/subsidiary? Sure we will be spending a bit of money sending our managers over to train and work with them but any way I look at it, this is a definite score that even if it doesn't pan out, it will be a lot cheaper than many of my other mistakes.

The Real Elixir of Youth

Our co-op students started two days ago. I'd have to say that the boundless energy is both energizing and exhausting. I guess I've been procrastinating about this post since we first went just north of Wuhan to visit a colleague's alma matter (actually I've been procrastinating about a great deal many things).

So there are a few questions that I've thought about in the past but never really had much of a resolution - is it better to hire students straight out of school and be the first to inevitably jade their sense of idealism and purpose and who ultimately run away bitter after spending countless hours on training (hey, we all know lots of people who that's happened to), or is it better to hire older mature workers who cost more but who can also be stuck in their ways - or worse, add negatively to culture? Another problem is that I suspect you're probably more likely to get things like this. Maybe it's not an either/or but combination of. This is ever more complicated by China (and even Hong Kong) and the very rapid change that nearly everyone has seen.

I haven't been having much success at hiring younger staff in Hong Kong. By younger I optimistically mean people even my age (at the ripe age of nearly 30). If it isn't the experience, it's the lack of enthusiasm and lack of stability. My colleague in Hong Kong says that it's about "young people today" which I suppose I should act all offended. Fortunately I have now delegated full responsibility for supervision, hiring and firing to her (though it makes sense since I am never there).

I believe culture matters. I believe it matters a lot. It doesn't take much to poison the pool. Younger workers more easily drink the kool-aid but that isn't to say that there aren't those older and more experienced who won't either. We'll see. Personally my initial thoughts are that students just out of uni are fantastic if given the proper guidance and structure while given the liberty to perform (but isn't that the key for all employees?). The thing I think most companies neglect is the resources for the adequate coaching. Hopefully I'll be ebullient (always wanted to use that word) in the future and have much to report.

Oops

Just a forty percent rounding error. China is a little smaller than previously thought. Off by about the size of Japan's economy as previously covered here. More thoughts on American security implications (or lack thereof here).

That doesn't mean that there isn't still a bubble. As a friend notes: "whenever there is too much money in an economy two things happen: inflation and bad capital allocation." As Tom Burnett, a policy analyst notes in his Foreign Policy Wish List for 2008, #1: "What goes up too fast must come down even faster. This is a question of when, not if. The real uncertainty is how locals will handle the setback. If the G-8 doesn't have a plan, it should get one fast."

It's like some sort of weird Vulcan 3D chess. With the political appetite cooling for global trade, the push to pop the bubble through currency revaluation, and the solvency of China's financial institutions still questionable, China prices could get a lot cheaper after they get a bit more expensive if some American policymakers get their wish.

Details Matter

Just before New Year's I had lunch with a good friend. He came out of the washroom eyes as wide as saucers (ok maybe that's a bit of an exaggeration) and he said excitedly "they use 3-ply". It was a higher end restaurant in a relatively small city but he seemed genuinely surprised that such places existed outside Toronto.

OK so not everyone reacts that way but for the difference in the cost between 2 and 3 ply toilet paper, (regardless of what others might think), wouldn't it be worth it? Details matter - and it's one of those things that are difficult to communicate with my China colleagues probably because they've never had to value those differences. Every point of interaction with clients says something about you as Seth Godin also recently pointed out. It's been excruciatingly difficult in developing the forms just the way I like them for our new ERP system, but fortunately I think attitudes are changing. Though to be fair, it's a point that not only Chinese people struggle with.

Making Incentives Work

Leading up to the holiday season, posting is still going to probably be light (not to mention hoping to close all the loops to get the Getting Things Done methodology going. Here's a short guide to planning compensation plans. Comp plans are one of those things that make a big difference (good and bad) to culture - but I think the key is to realize that compensation isn't just monetary. More on the topic later and some interesting models that I've come across in China.

Couldn't help myself.

Heh.

Keeping Meetings on Track

Factoring in the cost of time (let alone in China where I often have to ask what someone meant) and travel multiplied by the number of participants, meetings are expensive. One of the many things I'm thankful for at least internally is that we get some productive discussion and that staff aren't so afraid of me that they remain silent throughout (discussion for another day).

I've been listening to an audio seminar called "Getting Things Done" by David Allen and it has been quite invaluable with innumerable "aha" moments. One of his tips has been to always start meetings off stating what that meeting is supposed to accomplish and before the meeting ends, establish specific next action steps.

What You Need to Know about US-China Relations

From Kiplinger but summarized by All Roads Lead to China. The original title in Kiplinger's specifically relates to investors, but this article applies to a much broader audience dispelling some of the many myths out there.

Does being Happy make you Productive?

Maybe not. Of course I suspect that the best type of an environment is a results-driven workplace where workers are happy not because of the perks but because employers don't get in their way (yes, far easier said than done). Not sure how this ultimately applies in China but where perks don't cost too much and can result in a modicum of dignity and comfort, I'm game. While keeping good employees is common sense, I do think I also fall into the trap that it ultimately just comes down to money. Perhaps the greater lesson from the authors of Freakonomics is that performance is more about who you hire than how they feel. Quoted from psychologist Nathan Bowling:

My study shows that a cause and effect relationship does not exist between job satisfaction and performance. Instead, the two are related because both satisfaction and performance are the result of employee personality characteristics, such as self-esteem, emotional stability, extroversion and conscientiousness.

Mysteries of Travel

I'm waiting to board a flight that's 1.5 hours late. On the way in, I invariably always stop at the local relay/book store to pick up some reading material on the transpacific flight. While I'll grant you that reading business rags can almost be like porn to me, there are two sets of questions that I have to be asked:

• Who buys porn on the airport? And why at the airport? Does this mean I should be even more concerned about the cleanliness factor in the bathrooms? (it's quite the long flight after all)
  
• Why do airline lounges insist on serving foods that cause flatulence?

"Keep Moving Forward"

I was recently reminded of Disney's "Meet the Robinsons" after hearing Rob Thomas's "Little Wonders" (great song by the way) played in the hotel's gym. Hollywood doesn't make enough movies about entrepreneurship let alone inspirational ones. If he were alive today, I believe Walt Disney, one of America's greatest entrepreneurs, would have very much approved.

Truth be told, I don't really like calling myself an entrepreneur as it seems to have a sort of transient type connotation to it (though perhaps those who know me well might think this is why the description might be apt). Entrepreneurship isn't celebrated nearly as much as it should be.

Working for yourself and building something from scratch takes a lot of discipline but most of all I think it takes a near inhuman amount of persistence and to be unafraid of failure. I suspect like many forms of leadership, do it long enough and it can be lonely without the ability to talk to people you think can relate to you and you can trust. I don't doubt that there are many entrepreneurs out there who are building businesses that have little to no chance of real viability. I do suspect however, that most successful entrepreneurs would also tell you that part of the trick is believing in yourself and sticking it out long enough for luck to pay off - whether it be having the opportunities to present your ideas to the right connections or clients to developing the idea that finally catches fire. Until that time you have to find a way to let the optimism vanquish the doubts along the way. This movie illustrated this perfectly.

Keep moving forward!

Long Hiatus. Fresh Start.

Ok. Now that I have gotten rid of what few readers I had, I am back. In the journey to figuring what what's important to me, I have determined that scratching that annoying itch to blog is one of them. I am going to try to keep posts simple and focused on one thought at a time - but I aim to reduce my political rants further though I cannot imagine I will be able to entirely resist. I do think as well that I have figured out what I want to focus on: building a business where a large part of what we do happens to be in China.

Like the now somewhat arcane term 'e-business', I believe the novelty of doing business in China will wear off (if it has not already) into simply a part of doing business. The topics I hope to primarily cover include recruiting/hr, productivity, and legal/tax/regulatory issues with a few random thoughts mixed in.

I do have a few ideas for coming posts including a trip to recruit interns near Wuhan (hiring 11), sniffing around a small potential acquisition and my introduction to the byzantine Chinese legal system, and my journey to "getting things done" having been recently introduced to it by a friend in China.

Minor update: Milestones reached...

It's been a few crazy weeks where I've just been too tired/frustrated to blog but the outcome has been quite positive for us. We're now able to offer credit to our clients without worrying about the risk of default (at a pretty cheap price I might add), I am consolidating my interest in my company, we're buying a decent car, we're finally getting a real accounting system (at a ginormous price) and we're starting to make headway at the process of rebranding / revamping our image.

Now as for this blog, I've been kind of at a cross roads. I'm not going to stop but I'm just trying to figure out how I want to organize it going forwards. I've basically got two passions - politics/economics/development (I see these things as highly related), and business. The latter I've really not really had an opportunity (or rather taken the time) to develop here. It's being overwhelmed by the former as I have a lot more online material that I'm able to exploit (particularly after discovering google reader).

I think of blogging as a bit of a dialogue or even a monologue - but I think I have to focus a bit better. Given the relative size and growth of our business, the numerous political and legal changes that seem to be happening in China, not to mention the speed that it's happening, I feel that a dedicated blog may help in making me focus and flush out my ideas - even if I'm only talking to myself.

I guess it comes back to why I am blogging - and hopefully it's not just an exercise in vanity. Do I want to be seen as a China blogger? An entrepreneur in China? or simply that scary right wing (though I think of myself more as a libertarian) ideologue? Anyway, that's what I'm thinking. It's true what they say though, the older you get, the more you realize what you don't/didn't know. I tend to see the world in black and white, but doing business - particularly here, one seems to always be left with choosing between various shades of grey. I want to talk about that - I just have to figure out how. Anyway, 'till next I blog.

Driving in China

So true... We're also in the process of buying a car in China. Just deciding how to structure it at the moment but there are few things that approach the bizarro world of driving in China.

Hmmmm... I guess I won't have the pork

Link here. "lurid accounts today of pigs staggering around with blood pouring from their bodies in Gaoyao and neighboring Yunfu, both in Guangdong Province. The Apple Daily newspaper said that as many as 80 percent of the pigs in the area had died, that panicky farmers were selling ailing animals at deep discounts and that pig carcasses were floating in a river." Yum.

For Instapundit, the story is that the government is suppressing the news. The funny/scary thing is that I was about to call my aunt about it and a colleague here stopped me saying that I had to be careful about what I say on the cell phone cuz they listen and will arrest people for that type of thing... he seemed serious... how one cannot get lost in the sea of millions of people beats me (I mean I should hope they would have more things to worry about than listening to my cell phone conversations - that must be an incredibly boring job).

Who to believe... According to HK colleagues these things and warnings happen all the time for stuff like fish, vegetables and meat. For contamination perhaps but epidemics? Staff here say that Apple Daily is "always lying" (or perhaps the more appropriate translation is that they're always trying to trick people). I think I'll just avoid the pork. Especially the cheap pork.

Update: Pig death identified.

Be a Happy Capitalist?

Interesting. I suppose it really shouldn't be so surprising that greater liberty for all translates into greater happiness... though I suppose for some, quite the opposite happens (whose numbers, I suspect, are probably overpopulated with elites). Quoting the National Review on the Economist's Free Exchange Blog:

Why so glum? The numbers show that high average incomes, a low unemployment rate, extensive economic freedom, and relatively open labor markets tend to boost happiness levels, while generous welfare handouts, lower levels of inequality, and bigger government have little or no positive effect. The areas where the French do relatively well, such as low inequality and size of government, tend not to make its people feel much better, while the areas where they do poorly, such as unemployment and economic freedom, take a real bite out of happiness.

Some fantastic photos of China

I've been in the process of considering how we want to redevelop our website so I've had stock photography on the brain. Here's a fantastic site of great photos 'humanizing' China (and lest anyone be concerned, no I'm not thinking of pawning of these). Hat tip: Hao Hao Report.

Acumen, Healthcare and Microfinance

Hat tip to my sister, Beata, for emailing me this one. I may have fallen in love (no, not with my sister). I am now following way too many blogs too many of whom post regularly with 3050 posts read in the last 30 days (I mean Instapundit alone posted 863 - which is a wonder that he gets anything done during the day). Anyway, just had to share this quickly as I am way behind on practically everything.

Acumen is a charity that advocates entrepreneurial solutions. It linked to a speech by Laurie Garrett (a medical and sci fi writer for Newsday). Here are a few quotes (as chosen by Beata):

"For decades global health has been treated as a charity. Billions of people the world over have, for decades, been dependent on the kindness of strangers for their health and survival. While other fields of development may have encouraged capitalist solutions, health has been treated as if it were too sacred to be besmirched by profits. In the wealthy world every aspect of health, from record-keeping to pill-making; ambulance driving to hospitalization, is a profit center. We seem to feel that if you are living in France, Denmark, Canada, Japan – in those places it's ok for hundreds of companies and thousands of individuals to realize profits from the health enterprise. We just don't think that is ok in poor countries.

"I think it's time to tell truth to power: The charity model of global health is racist. It assumes that the health leaders of the poor nations of the world will endlessly get on bended knee, and with outstretched arms beg for alms. It doesn't matter to whom the begging is directed – the World Bank, USAID, Bill Gates, Bono – it is still begging. The charity model offers no supply or resources guarantees over time. Yet it expects targeted achievements, realized in very short time windows, allowing the donor to brag about the numbers of lives saved, thanks to his beneficence.

"I think it's time to get out of the charity model, and get serious about investment. My take-home message is this: Invest in small businesses, even micro-finance approaches to health. Do not invest in models that promote health by subsidizing outside corporate interests. Rather, build local economies and businesses, employ the unemployed, and do so aggressively."

Breathtaking. May many hear and heed her words.

"Simple Explanations"... for Stupid People?

I'm often accused of being overly defensive of Americans and overly cynical of the mainstream media. Perhaps somewhat foolishly, I poke fun at the nationalism of a few of my close colleagues at work by saying stuff like "I'm not Chinese, I'm from Hong Kong" or that kind of thing (the reality, is that I view myself as being Canadian first).

That said, in reading and watching the news abroad, you begin to get a greater appreciation for the level of quality that the Wall Street Journal strives for. Certainly their stories aren't always free of bias but at least they strive for accuracy and facts first versus the likes of the New York Times and to a lesser degree, the Washington Post who write stories framed within their world view and then arrange the facts accordingly (or even sometimes irrespective of the facts). I had a bit of a disagreement, not so long ago, with a China blogger / journalist over what constituted bias after a surprisingly inaccurate comment by a journalism professor no less.

But if you thought they were bad (and granted, many do not), the international press is far far worse. I figure it just comes down to plain jealousy - the US can do no right - as the world's only superpower, when it uses this power, it is accused of being imperialist, but when it does not, it is accused of being isolationist. Further, from the Chinese context, I have found that my one colleagues views are not that unique - that the reason China has not industrialized is because of "the man" in the form of Europe and the US (ok fine, he didn't really phrase it like that), keeping it down. My uncle even went so far as to suggest that the killings of Chinese workers recently in Ethiopia were the result of the CIA who were attempting to disrupt China's own imperialist ambitions in Africa - because of "jealousy" (i.e. if Halliburton can't have it, no one should).

This however really scrapes the bottom of the barrel. Milenio is a newspaper in Mexico that apparently put out an ad with the picture of Uncle Sam + Mirror = picture of crazed Seung-Hui Cho holding a gun (the mass killer at Virginia Tech). At the bottom is the text "Such a complex world needs a simple explanation" - to which I can only wonder, that if it's really that complex if you would really want stupid and possibly insane people to be interpreting it for you. Following his hate filled rant, I'm not clear whether Milenio is in fact suggesting that Cho was because of American values? Or perhaps it's about the US Military?

I mean, there were a number of articles easily debunked immediately following the massacre that proclaimed that this was uniquely American because of America's "gun culture" as if the US brought this on itself. Of what I saw of his diatribe from NBC's ill advised broadcast, (other than the fact that we know he was totally insane), it could have come from any number of unhinged "activists" decrying the corporatization of America, multinationals, race and class wars. Maybe that's what the Milenio was saying? As per usual, the Wall Street Journal did a decent piece on some of the numbers being pushed by both sides of the gun control debate (unfortunately on the other side of the pay wall).

Update: Fred Thompson makes some points on American popularity abroad. Why current American political leaders don't say stuff like this beats me. Hat Tip: Instapundit.

Yep, that's China...

I don't think there's anyway in getting around the fact that things happen a little different here in China. Check out Bill Dodson's post on what happened at his friend's factory. The ways that some people go about trying to make a buck around here is nutty enough to shake your head and think that if they put their minds to doing something productive, they'd be truly rich.

Much has been made of China's attempts at establishing rule of law, but the will of Beijing seems to be slower to reach some of the industrial areas of China. On one hand, I tend to agree with those who think that China's development isn't so much different than others - from Russia to other Asian Tigers and even to the West. I usually think of China as the wild wild East. There are however, three key differences I think: technology, population and speed. While I don't think this changes the substance of industrialization, it certainly makes things more interesting.

A Healthy Sense of Fear?

An article from TCSDaily exploring why Americans feel less secure economically despite very tangible evidence that they've never been better off. Is this uniquely American?

Convincing Americans that their economic security is actually embedded in a kind of economic insecurity is, admittedly, a tricky argument to make in the political arena. But it's made easier by the fact that America remains a genuinely entrepreneurial society. This is one of the things that distinguishes the US from continental Europe and other parts of the globe.

Fight or Flight in the Developed World

For all the fears that outsourcing will steal jobs, as previously noted, the easy counterpoint to make is the rock bottom low unemployment rates in the US (and Canada, though the same can't be said for most of Europe). That said, this only proves there are a lot of companies who "get it" and understand how to compete against their global competitors. Quoted in the Economist's Free Exchange Blog:

... if we're going to cost more here, then we'd damn well better have a reason for it. Deliver something that can't be had so easily in Hyderabad [insert any country, city or even company here], is my advice.

Too true.

Immigrants, Emigrants and Bigots

For those who bother to pay attention to the facts about immigration, it's sometimes difficult to not to believe the concerns of those who fight against it are based on something more than simply fear. In context, it's bizarre that the level of demagoguery over both trade and immigration resonate so strongly despite record low levels of unemployment. From Sebastian Mallaby in the Washington Post:

People accuse immigrants of gang violence, drunken driving and a general contempt for the law. But in 2000 the incarceration rate for immigrants was just one-fifth the rate for the population as a whole, according to Kristin Butcher of the Federal Reserve and Anne Morrison Piehl of Rutgers University.

People say immigrants are feckless and lazy. But in California in 2004, 94 percent of undocumented men ages 18 to 64 were in the workforce, compared with 82 percent of native-born men. Far from being part of a shiftless underclass, the act of coming to the United States makes immigrants among the most upwardly mobile groups in the nation, only a bit behind hedge-fund managers.

Hat Tip: Greg Mankiw. While I'd happily point to my parents and their respective siblings/siblings-in-law, as first generation immigrants who have done quite remarkably in aggregate as pretty much all accomplished professionals, there are inevitably those who cling to erroneous stereotypes.

Figuring out where to put the decimal place...

Talking numbers here, as it's not enough to try to figure out where all the conversions are, but the Chinese think in increments of 10,000 - not thousands. So to say to someone something's one hundred thousand dollars, you would actually say that something is 10 'ten thousands'. If you said it the other way around - that it's 100 thousands, they would just look at you funny, giggle and think it was the most ridiculous thing they'd heard in a while.

This isn't so much of a problem when you're talking one number or two, but when you're working on quotes and estimates and then throwing in currency conversions, it's not something you want to screw up being off by a factor of 10 - far worse than a mere metric-imperial conversion error. We've had near heart attacks in running jobs and then wondering after the fact if we'd done it properly. It's been 3 years since I started working on production in China and I'm still not used to it. This may say more about me than the job, but I digress.

Debunking Lou Dobbs

Now known more for his anti-trade anti-immigration screeds than any business acumen he once seemed to have, Lou Dobbs recently testified before Congress. Donald Luskin does a thorough debunking. I can't say, given Dobbs' history of "finding isolationism" (not unlike seemingly finding God for the man) not to mention sporting a new hairdo while he stared into the depths of plummeting ratings, that it seems to have been much of a difficult task.

Update: Club for Growth quotes Luskin as being funny but true:

"The advocates of free trade have on their side over 200 years of settled science in economics, going all the way back to Adam Smith. The advocates of protectionism have Lou Dobbs." -- Don Luskin

The Point of Globalization?

Christopher Sciacca of the "Who says Supply Chains are boring?" Blog, says:

I would prefer to be called "an emerging market" or "a cool, hip country with really smart people that want to work". Because if you are outsourcing simply for the lower wages you are missing the point of globalization in the first place.

I tend to agree - I'd even include lowest sticker price to the lower wages bit. The point of globalization is lower overall costs through comparative advantage. In working with new clients, I get two sides - there's one set that have heard of all these benefits to sourcing from China and want to jump on the outsourcing bandwagon expecting savings to simply fall like mana from the sky, but then there's the other side, a more skeptical bunch who have heard the horror stories or experienced them themselves. The same is true for some foreign manufacturers who expect to open a factory in China with ridiculous expectations and ultimately get robbed blind - especially when it comes down to day to day management. One client would used to repeatedly order from the suppliers that priced cheapest despite knowing that there would be rework in the US (I suspect it had to do with poor project accounting since they weren't the ones responsible for the cost of the rework and simply for getting the best price).

Now more than a few years ago, I encounter far more of the latter who have experienced challenges first hand. It's these clients that I hope for, since they're far "stickier" and have far more grounded expectations. On the flip side of it, it's a far longer (and sometimes frustrating) sales cycle, but all things considered, I wouldn't have it any other way - especially given the impatience it would seem of many Chinese suppliers who think they want to begin supplying overseas.

The relationship between intelligence and wealth

This is the relationship between intelligence and wealth:

Says Paul Kedrosky:

While it doesn't stand up to statistical scrutiny, an eyeball check of the above figure does make it look like there is a soft inverse relationship. In other words, maybe we should be accusing random foolish sorts among us of being smarter than they're acting: Hey, if you're so dumb, how come you're not rich?!

I think it's one of the best lessons I got from investment banking and to a lesser degree, auditing/accounting. Rich people really aren't that much different than the rest of us - I think it's a combination of luck, recognizing an opportunity, going after it in a meaningful way and then a great deal of persistance.

Business Cards for Accounts Receivable Clerk?

This is pretty cool (at least for those with a somewhat warped sense of humour).

Paul Wolfowitz at the World Bank

A few people have asked me what I think about what's been happening at the World Bank. When the story first broke, I was quite disappointed given the facts that were being disseminated given Wolfowitz's strong anti-corruption push. I was though somewhat skeptical given the number of people who have it in for the guy who seemed to advocate such radical ideas as accountability and good governance. The media seemed entirely complicit and continues to be - pushing the story that Wolfowitz intervened, giving his girlfriend a nearly 50% raise.

It turns out that he was setup:

The World Bank released its files in the case of President Paul Wolfowitz's ethics on Friday, and what a revealing download it is. On the evidence in these 109 pages, it is clearer than ever that this flap is a political hit based on highly selective leaks to a willfully gullible press corps.

Mr. Wolfowitz asked the World Bank board to release the documents, after it became possible the 24 executive directors would adjourn early Friday morning without taking any action in the case. This would have allowed Mr. Wolfowitz's anonymous bank enemies to further spin their narrative that he had taken it upon himself to work out a sweetheart deal for his girlfriend and hide it from everyone.

The documents tell a very different story--one that makes us wonder if some bank officials weren't trying to ambush Mr. Wolfowitz from the start. Bear with us as we report the details, because this is a case study in the lack of accountability at these international satrapies.

On the other hand, another man who I respect greatly given his books, William Easterly faults Wolfowitz for other issues entirely. I can't say that I've followed what's been happening at the World Bank beyond knowing that Wolfowitz has been challenging the status quo. While Easterly makes a good argument that his approach has lacked consistency and a focus on simplicity, I wonder if the effect of decentralizing what he describes as "the world's largest repository of development knowledge and experience", would help to develop more local organizations in a better position to fight poverty than the large behemoth the World Bank has become. Further, in carrying forward his comparison to the Iraq war, I'm not sure that Paul Wolfowitz's departure is the message to send to nations who have been dead set against even the idea that the institution requires any sort of any reform.

Lying in Chinese

Bill Dodson @ This is China! has a great series on the specific characteristics of lying in China. This has got to be one of the most frustrating aspects of working in China. It sometimes feels like everyone is lying to you - either out of sympathy, protection or deliberately with malicious intent - and it's not always easy to sort out which is which.

Working with suppliers this can be of particular annoyance because you're not quite sure what to believe - especially when goods aren't being produced on time or attempt to pass a large price increase down to you. Suppliers can come up with the most fantastical stories - but fortunately as Dodson notes, most of them aren't particularly clever about their lies that are easily resolved with better information. Of course, once you have that information and you know someone is lying, it's another issue altogether as "face" is truly a big thing and you don't want to antagonize anyone to the breaking point because you really don't know what might happen especially depending on who you're dealing with (seriously).

An employee of mine told a big lie. He did it in the attempt of hiding something that was no fault of his own but that he hoped to correct quickly and easily on his own (sorry about being vague). I can't say that I was particularly proud of myself afterwards, but I entirely blew up and publicly berated him over what I saw as a betrayal (apparently a standard western response as Dodson later points out. On the other hand, if culture is the result of both what is said, and what is not said, while I think what I did was directionally correct, the execution could have used some work. In that respect, I guess I'm somewhat fortunate in that we're a fairly young company and are able to correct some bad habits.

The implications of lying however, are somewhat far reaching - and I would argue, extend to such things as corruption (here, some are absolutely brazen in the lies they tell to coverup self dealings) and more likely than not, to financial reporting. This, I think, does not bode well for the stability of the securities industry that hasn't gone in many directions other than up in recent years.

Happy Birthday Lenin... err... I mean Earth Day

When it comes to their records on population control, Lenin or Stalin are mere footnotes compared to Rachel Carson's success at getting DDT banned. A quote from Club of Rome's co-founder Alexander King:

In Guyana, within almost two years, it had almost eliminated malaria, but at the same time the birth rate had doubled. So my chief quarrel with DDT in hindsight is that it greatly added to the population problem.

While this might be a shocking revelation to the average humanitarian, I guess that's the point, ardent environmentalists can't also be humanitarians. Environmentalists must make an implicit or explicit choice of what they value more - humanity or "the environment". I was at a meeting of donors where a radical proposal for market based primary heathcare was being proposed for East Africa and a donor asked in all serious, "what if you're really successful? what about the impact of overpopulation to the environment?" After having discussed the impact this could have on kids - especially targeted group for the intervention, I think the rest of us sat stunned for a few moments.

As a bit of disclosure on my dark descent into economic libertarianism and media skepticism, it was my interest in the environment that did me in. I began with the premise that no, not all business people are evil and that there exist rational reasons for opposing measures to save the environment. I started out pretty good, even being the co-chair of the environment club in Grade 8 (yeah I am/was a geek). In high school, with an interest in business, it became a somewhat uncomfortable point that my interests were on a collision course for what I thought seemed and felt morally right. Then I discovered Julian Simon.

I'd suggest getting acquainted with a few more environmentalists as quoted by John Berlau at Open Market to see how much you really agree with. Then consider Ron Bailey's Earth Day article on the environment from 2000 on why the state of the Earth's environment has never been better.

Then reconsider one of the first leaders of the environmental movement, a woman who some say started it all - Rachel Carson who got DDT banned and if not, severely restricted:

The World Health Organization now estimates that there are between 300 and 500 million cases of malaria annually, causing approximately one million deaths. About 80% of those are young children, millions of whom could have been saved over the years with the regular application of DDT to their environments.

In a world where lying is defined to include statements made in ignorance though one may have been intentionally deceived, what does this make environmentalists who continue to support the ban on DDT? What of environmentalists who oppose industrialization and economic liberty for fear of the mass consumerism that it would bring while intentionally ignorant of the mass poverty, hunger and strife without it?

"Sales Eats First"

I've been following this blog for a while now. This post brought something of an epiphany describing a scenario where "two senior execs at Honeywells Building Solutions group execute a turnaround that increased sales 70%." From the cited article:

It all changed the day the president of the organization stood up and told everyone that sales eats first." Madden says that one statement has allowed his salespeople to drop the baggage and stop feeling like victims of all those things that they could not control. At that point, every single sales rep knew where he stood.

Operations serves at the pleasure of sales, and sales advocates on behalf of their clients and customers. As long sales incentives are aligned with corporate goals, that's the way it ought to be. Working with Chinese manufacturers can be highly rewarding until problems arise but this lack of client focus is quite common amongst the industrial manufacturers we work with. While this is frustrating, I also recognize it is one of the reasons businesses like ours thrive. When it comes to our own organization however, while we have a long ways to go in building a truly client focused organization, I do feel we have been making progress.

More on Records and Movies

In looking for a decent place to eat other than McDonald's, I stumbled into a small CD and DVD store. I may have been a bit premature in thinking that labels and studios being entirely out of touch. I bought a legit copy of Shawshank Redemption, one of my favorite movies, for my co-workers for a grand total of 30 RMB. New DVD releases were being sold for 45 RMB, while CD's were from 20-45 RMB (you can pick up the Backstreet Boys 4 CD set - again, for legit copies - for a grand total of 45 RMB - about 6 bucks USD; though in this case, I can't say that the price was sufficiently attractive).

If it weren't for the fact that I can't watch the DVD cuz they're not Region 1's (which is such a scam) I'd be buying the real thing instead of the stuff on the streets which are hit and miss at best. It's a lesson they might learn for North America as well - and while they would sacrifice higher profits per unit, it'd be a bold move that, who knows, might more than exceed expectations in volume.

Of Fake Rolexes, Pirated DVDs, Property Rights, and Incentives

On one level, I can't say I blame the MPAA and RIAA for what they do. The ease and rapid proliferation of high speed bandwidth seem to have left the way their members have traditionally made money in the dust.

The issue is not dissimilar to the pirated brands you can get in China and, to a lesser degree, Hong Kong. I was in Hong Kong a few days this past week with a few friends. Beyond the usual tailored shirts and the like, we found a less than upstanding storefront of fake watches. These weren't the bad fakes you can quickly find on the streets of New York or on the streets of Shenzhen (though they seem to have cleaned this up some in the last few years).

To say this place was dodgy is an understatement. After first showing our passports to prove that we weren't cops, they led us behind the store front through a short hall and behind a dirty curtain, to a small badly decorated closet. There were a few stools set up and they handed us worn books with pictures of everything from Rolexes, Tag Heuers, Bulgaris, etc.. There were already a few other foreigners sitting around and negotiating. The way it worked was that you chose from the book, the "salesguy" tells a runner what you'd chose, who in turn came back with the product 5-10 minutes later. Perhaps the greatest part of the experience was watching my friends, whose fight or flight responses were obviously triggered. One refused to sit, and looked totally nervous (his wife told me he was talking about it for days as he thought we would be robbed). As a side note, I would never do this in China, but this was HK in the heart of Tsim Sha Tsui.

Anyway, the reason why I mention this is that the fakes were pristine - it's like the real life equivalent of the charicature of people who break down the door only to find out the door was open all along. Excellent quality, detail and precision. I confess that another friend bought an automatic a few years ago which still runs quite well. Compared to a real Rolex, it seems to be the same weight and was indistinguishable. These fakes didn't come cheap though - at about $90-120 USD a pop (after extensive negotiations - we were there for almost an hour).

There's another prominent shop in HK that also goes to great lengths in selling their pirated software. You have to go through the colour copied covers of empty cd copies, write down the number that you want, pay the cashier about $1.50 USD/disk and then you wait for about an hour and go to the top of the stairs where someone hands you a paper bag of the software. I'm told they only operate on Sundays because that's when the cops who focus on such stuff have their day off.

Now at the bottom of the apartment complex I'm live in (in Guangzhou), there are a bunch of fake DVD hawkers. The one thing here that I find remarkable, is how professional the packaging appears for DVD's that haven't even come out on the market yet. Mind you some of them are horrible looking in-theatre copies, but you wouldn't be able to tell from the packaging that appear professionally developed

I think the lesson here for marketers who seek to control what in essence is the intellectual capital developed by music, movies and brands, is to understand the value they create and provide economic alternatives and price accordingly. For record labels and distributors, technology may have dealt them a fatal blow given their dependence on the medium, not the value of message. The disconnect/gap between the value their traditional customers have and the cost they charge is too wide. Though I think they get it, they understandably cling to what's been a profitable business.

The war on drugs also proves instructive. Burning down the fields of farms without crop alternatives/destroying the livelihoods of people doesn't exactly win hearts and minds - particularly in places like Afghanistan and Columbia. I don't believe this is to say that I think Rolex and the like price too high - given that they're selling aspirational ideas, part of the cost of doing business is enforcement but I wonder if another alternative is co-opting. What if the Rolexes of the world, (or even working with the Timexes of the world) with strong knowledge of distribution channels contracted some of these companies instead to produce a value brand watch? The machines that would be required to make such impressive fakes do not come cheap (think at least a million dollars, given the precision). As both Brink Lindsey and Hernando de Soto point out in their respective books, informal enterprises also carry significant costs/barriers and have difficulties in achieving growth, and it doesn't get much more informal than this.

China Scholars Bought and Paid For?

I'm not sure this is anything new or surprising. As per usual, follow the money.

A Tax by Any Other Name...

Following tariffs on Chinese coated paper, here's an overview of what it means to American consumers:

Those who applaud the imposition of punitive tariffs on American consumers of Chinese paper products must at least explain why they don't count the higher costs caused by China's still-immature capitalist economy against the allegedly lower costs made possible to paper producers by the government in Beijing. Economic -- if not political -- consistency requires such an explanation.

If you have the time, read the whole thing. The arguments for the tariffs have seemed dubious at best. From Greg Mankiw a few days ago:

Industrial subsidies are bad policy, but they are bad policy for the country paying for the subsidy. The country buying the subsidized goods benefits from cheaper imports. Think of these subsidies as the opposite of OPEC--another country conspires to sell goods below competitive prices. For the same reason that high prices from a cartel hurt us, low prices from a subsidy help us. It is common sense that when you buy something, you would rather pay less than more for it. That is as true for a nation as it is for a household.

The bottom line: The Chinese taxpayers should be complaining about these subsidies, not the American government.

Other than in limited cases of national security, I'm not sure I buy many of the trade protectionist arguments. There's no avoiding the economic reality that a tax on suppliers becomes one on consumers (i.e. the small and large businesses who are the largest consumers and ultimately everyone else who buys from these companies). The arguments that trade is 'unfair' and is 'taking away from American jobs' might elicit sympathy if it weren't for the rock bottom US unemployment rates and growing American prosperity.

What's not been said about the Trade Deficit with China...

I've questioned before what the "trade deficit" really means. Sometimes it seems as if the media loves to hate the current US Bush Administration so much that it's willing to ignore any form of good news and portray bad news in the worst possible light. Maybe that's why people don't watch the news on TV or read it in newspapers as much anymore.

When it comes to the economy, stock markets are again soaring and unemployment in the US is below those under the Clinton Administration. But when it comes to the trade deficit with China, assuming you think it matters, there is some good news that you probably won't hear on the actual news - but to summarize:

It won't be many years before the trade balance between the two nations is roughly equal or in the USA's favour. EU's imports from China have increased at an average rate of 18%, similar to the USA rate, whereas the exports have changed at a Clinton era rate of 14% compared to a Bush era USA rate of 24%

Hat tip: Instapundit.

It's a small world after all... (Cheap calls overseas)

Every so often, the progress of telecommunications is so thrilling that you want to break out into singing "it's a small world after all..." - well, maybe not you specifically.

I discovered Jajah.com following a reference at techcrunch.com. It's an amazing service that allows you to spend about the same cost of long distance domestically - but you use your own cell phone or land line. The way it works is that you enter your contact numbers on the web (or also on your cell phone) and then the number of someone you want to call anywhere in the world, and Jajah will connect you by calling you first and then calling the other guy. Call quality is pretty much only limited by the quality of your own local lines (which tend to be far better than the internet here which limits my ability to use SkypeOut.

Calling from Asia overseas has been enormously expensive. Before I found Jajah, I was basically spending more than half the cost of my hotel by calling direct off my cell phone. Now the cost is generally around $0.035 cents USD - which is even better than Skype plus I'm no longer at the mercy of the connection speed! This compares to a cost of $0.40-50 USD calling direct from my cell phone even using a "cheaper" dialing prefix (17951). Another fantastic feature I've been using is the ability to use the conference call feature which lets you call a bunch of people at once. Stuff like this makes travelling and running a global enterprise far easier to keep in touch and considerably less hard on the wallet.

Ching Ming "Festival"

I went into Shenzhen for meeting yesterday. In what should have been a 1 hour trip took nearly 3 hours (left at 8.30 on the train for an 11 pm meeting figuring that you just never know about crossing the border as a non-resident/foreigner). It was nuts. I would have taken a picture but there wasn't enough space to reach into my bag and grab my camera - it was that crowded.

I initially thought it was because of Easter (Hong Kong had Thursday, today and Monday off) so I thought people were just going on vacation but apparently not. I've never seen the Lo Wu station leaving on the Hong Kong side full until yesterday. This time there were several train loads of people backed up. Any respect for queues that the British supposedly left behind wasn't particularly evident either.

Such was the Ching Ming Festival - which translates into "Grave Sweeping Festival" - which incidentally, doesn't strike me as particularly festive, but I digress.

For Peace, Love, and Liberty

McDonald's has garnered some bad press here lately and in point of fact for quite some time. I'm happy to report from Guangzhou, the source of the latest scandal that McDonald's is doing very well (but further reports to follow if I'm able to convince/force my quirky nationalist coworker to eat at McDonalds). This picture was taken at 10 pm on Thursday. (Sorry, it's a blurry, I'm a bit shy in the real world, so I took the picture and quickly hid the camera after it flashed.)


McDonald's Rocks! Forget about trying to reform the UN, the unifying force for peace, love and liberty in the world is McDonald's. I decided this as I was eating two double cheeseburgers. I'm far from the first one to suggest this, and not even the first China blogger to talk about McDonald's this year. I wonder if it's a universal second generation emigrant experience? (I wonder if Mike from ShenzhenUndercover also plays a musical instrument)

[As an aside, a tip for ultra-fresh burgers is to have them made "my way" and ask for stuff like extra pickles - of course it makes some my friends cringe and think I'm asking for the world when I do this - but that might be because I also substitute my fries for a salad with french dressing or apple pie but I take this "my way" business seriously.] McDonald's is truly a global phenomenon - as you can see from the picture, in China, you have tailored offerings - everything from the lack of queues to taro pies (ugh!).

I've been spending an extraordinary time at McDonald's - and not necessarily entirely by choice. There really isn't much convenient to me - and where I'm living in Guangzhou at the moment. Thankfully, it turns out that Morgan Spurlock lied, and I'll survive (a big Mac is far healthier than a quiche lorraine according to French nutritionists Jean-Michel Cohen and Patrick Serog). Even when I was working in New York, eating at the McDonald's next door was my favorite restaurant and far less pretentious than Rue 57. It's one of two experiences I really missed while I was East Africa.

The best part of McDonald's is that it's fantastically cheap. One can easily survive living in China on less than 10 USD's a day with a healthy part of that being McD's (they just raised prices which is an indication of creeping inflation last week but a sausage egg mcmuffin meal with OJ instead of coffee is RMB 16, a Big Mac medium meal, plus two pineapple pies is RMB 26).

Heck, even though they say they hate it, the French can't get enough of McDonald's reporting revenues in France of 3 billion - McDonald's most profitable subsidiary in Europe selling over a million sales a day and that was 2003! Eating at McDonald's may be the most populist and liberating statement you can make (except for maybe this). It's become the one true common cultural denominator - particularly here across from the train station - people with suits, the threadbare, the elderly, the young, foreign, local, all appearing to thoroughly enjoy the experience. Yes, indeed, McDonald's may in fact be the second happiest place on earth and loved by nearly all (the bulk of those who don't are elitist snobs I say).

Until the Clinton Administration's illegal bombing of the former Yugoslavia, no two countries with McDonald's franchises ever attacked each other (apparently first noted by Thomas Friedman). I pointed this out to Kyle, a friend of mine who said something to the effect it "was correlation without causation" to which I responded that he was a "warmonger" and that shut him up pretty quickly - yeah Kyle (who claims to read my blog but perhaps no longer), the truth will set you free.

In recent days, much has been made by the desperate moves of Iran in kidnapping British Soldiers in some bizarre attempt to forestall war by committing an act of war. This was all entirely unnecessary. Iraq didn't McDonald's. Egypt does. Iran does not. President Mahmoud Ahmadinejad do take note.

PS if you want a good analysis of why McDonald's may truly be the unifying force for peace in the world, do have a look at this link.

China in Africa: Friends one can do without...

I've not really commented here about the investment in loans, credit and aid that China has been making in Africa - particularly after the African summit in Beijing and Hu Jintao's trip to Africa. On Friday however, the Investor's Business Daily ran an editorial on Zimbabwe following the meeting of the Southern African Development Community:

African leaders often point fingers at the West for "not doing enough." [...]

Mugabe's 27 years of misrule have taken a country that was once prosperous — the breadbasket of Africa, it was called — and turned it into a poverty-stricken hellhole rife with famine, genocide and terror, and lacking rule of law. [...]

Given that performance, you'd think Mugabe would come in for a bit of criticism by other leaders in the region. [...]

At the SADC meeting, 14 leaders issued a communique in which they, as the Times of London put it, "reaffirmed their solidarity" with Mugabe. That is, they supported a murderous dictator and even called on the West to drop sanctions against his regime.

(H/T Instapundit)

Though the editorial doesn't speak specifically to China's role, China's policies have been in stark contrast to other leaders who generally have at least some sense of reluctance in providing aid to despots. The shame and culpability of France in Rwanda may prove instructive to China in thinking that any gains a mercantilist power is able to achieve may be limited and short term at best. For those who agree with China's stance, they might do well to remember the benefits of long term trade can only result from two parties free of coercion (besides, some of this "aid" borders on ridiculous including huge mostly unused stadiums in the middle of nowhere like the one on the outskirts of Kampala, Uganda).

I visited Rwanda in 2002 - and stayed at Hotel Milles Collines in Kigali. This was before we knew Hotel Rwanda was coming out about this very hotel (though the hotel looked nothing like the one in the movie as I remember it). Wandering Kigali itself, there were still visible bullet holes in the walls of buildings. One other thing that was clear was the unemployment, what with a very large number of people doing a whole lot of nothing (and much to my chagrin at the time, not much to do in Kigali but the sometimes harrowing journey through canyons with an endless sea of unblemished emerald tea plants on the way down made the trip well worth it). I remember the US embassy being even smaller than the Chinese embassy at the time.

I can't personally speak to horrors of Zimbabwe (thankfully), but China ought to remember that when governments change, people aren't quite so fast to forget who their friends and enemies were. A few months prior to my trip to Rwanda, I went down to Kabale (Uganda) to see the director of an orphanage (a Rwandan) with the Canadian charity that I had been representing, and the tales he told of the time detailing the depths of human depravity were heart wrenching. A man of God, he was nearly seething when he described the role of France.

Following the new regime in Kigale, the change has been rapid with the Kagame Administration swearing off most things French - including the language. I have been told the clamour to learn English and even breaking away from the Francophonie was fast. Most recently Rwanda has broken off all relations with France.

China has been establishing itself where other aid agencies deliberately do not go. Maybe China has allowed criticism of how it treats its own citizens cloud its judgement. Whatever the reason, may it tread carefully.