Glenn Kelman, CEO of Redfin, has posted an excellent survival guide for bringing a business through the recession at TechCrunch. I'd highly recommend it for anyone being in business in China or in the US, the same principles apply.
A bit belatedly, these are two must-read overviews of how the global financial crisis will affect China. The first from Elliott Ng (CNReviews) who also in part summarizes the second from Brad Setser summarizing the World Bank China Quarterly (also linked to by just about everyone in the China blogosphere already and also Paul Kedrosky who I also follow).
Mr. Ng provides a cogent argument of why China will suffer disproportionately than the US as a result of the crisis and the World Bank China Quarterly describes the almost overwhelming challenges ahead. Both are worth reading.
Update: Another good (and by comparison, short) read on the changes China needs to achieve in its institutions to continue fueling its long term growth (EastAsiaForum) via Richard Brubaker from AllRoadsLeadtoChina
Here (InstigatorBlog). Lots of good reference links as well. In looking back at the development of our business, if I could do one thing differently it would be to defer investments made in the hopes of winning more contracts, in favor of booking orders first, managing expectations and spending the money after.
Unless you've been under a rock for the past few weeks, you know that it's time to batten down the hatches and it would seem to be nearly consensus opinion that we are heading into 2 years of recession (or possibly worse, but I'm an optimist). This is probably a good time to also do some introspection (Datawocky). While Mr. Rajaraman prefaces his post with that his advice is for VC startups, I beg to differ. For startups there are three possible outcomes: success, failure or zombiehood - "If you are a company founder, and you are considering layoffs to extend the runway (perhaps on the advice of your venture investor), you should look at yourself in the mirror and ask whether you are cutting away your growth opportunity and just choosing a lingering death over a quick one."
Did Second Life predict the current banking crisis? (MSNBC) It's a story possibly made more interesting because my brother in law works at Linden Labs. That said, I doubt the underlying argument made, that the crisis is because of the lack of regulation. There's quite a big difference between what was almost a ponzi scheme in Second Life, and the current financial crisis caused in no small part by government shenanigans (Time). Nevertheless the idea of using virtual communities as simulators is a cool idea. It's still on my list of to do's to build out a primer on the financial crisis to counter a small part of the ideologically driven journalistic idiocy out there.
Update: MSNBC link fixed.
Not really much to do with anything but Paul Kedrosky was right that it is the best news story in quite some time (Singaporean Strait Times):
General to teach aerobics
BANGKOK - A MAVERICK Thai general who has threatened to bomb anti-government protesters and drop snakes on them from helicopters has been reassigned as an aerobics teacher, the Bangkok Post said on Friday.Major-general Khattiya Sawasdipol, a Rambo-esque anti-communist fighter more commonly known as Seh Daeng, reacted with disappointment to his new role as a military instructor promoting public fitness at marketplaces.
'It is ridiculous to send me, a warrior, to dance at markets,' he said, before launching an attack on his boss, army chief Anupong Paochinda.
'The army chief wants me to be a presenter leading aerobics dancers. I have prepared one dance. It's called the 'throwing-a-hand-grenade' dance', he said.
Perhaps not so much overheard as seen on Pearl TV. According to some Hong Kong SME advocacy group, 40% of small and business enterprises have had their credit lines cut in the last month. This doesn't even account for companies who don't pursue or have credit like my own based in Hong Kong. During the same program however, it was also pointed out that China's new labor laws that force employers to offer permanent contracts have hurt companies even more particularly as demand slows down.
A big part of one of my businesses is aluminum extrusions (though I don't currently export too much to Canada). I hope it's not a signal towards increased protectionism but the Canadian government has imposed a (provisional) 119% duty on aluminum extrusions (under a series of select HS codes) being imported into Canada from China.
Let's set aside for a moment the basic arguments of why the idea of duties and dumping is flawed to begin with and how it ends up hurting the poorest. In this absurd decision completely bereft of intelligence, this cost falls directly on Canadian manufacturers and employers with the ultimately people who bear the cost being end consumers and employees particularly when Canadian companies find that they are no longer competitive in the world market because they are essentially forced to buy components at higher prices.
Aluminum extrusions are a secondary manufacturing process. This is to say, they are not usually used to make end products. Canadian manufacturers will buy aluminum extrusions to process it into final goods. Now let's say you are a large buyer of extrusions. You would normally buy the extrusions to turn them into such things as windows, buildings, auto parts, machinery, etc.. Let's say that you looked at buying offshore at one point and figured that a cost savings of 10-15, maybe even 20% wasn't worth the risk of all those China horror stories. Now you're faced with a cost increase of at least 20% if not more on a primary input while you are unable to pass that cost along to your clients. Why would you not consider shutting down your factory in favor of just importing it all from China?
In effect, the Canadian government has yielded to a select few in the short term while sacrificing the rest of Canadian industry, employers, employees and consumers at large. For those like me who would like to achieve a greater amount of value added processing, and who don't currently export as much into Canada, it makes my job that much easier.
I have been working ridiculous hours lately. The last time I ever did these hours was when I was in NYC. Waking up on this comfortable and lazy Saturday morning, it occurred to me that the one noticeable difference waking up there and here in Guangzhou is the lack of brake maintenance. That said, while I can appreciate the silence of living in the boondocks, I find something comforting about the cacophony of humming cars, trucks and the periodic impatient honks.
I just got back to the office having seen Quantum of Solace. I figure if I have time to see movies again, I have time to post. Quantum of Solace was fantastic. With how it's described on imdb - what could possibly be wrong with the movie? And it's about time:
Seeking revenge for the death of his love, secret agent James Bond sets out to stop an environmentalist from taking control of a country's water supply.Perhaps someone should do one of those comparative charts between Dominic Greene and his investments and Al Gore and his.
Making the jumps across the Pacific is still somewhat disruptive to my rhythm of habits, not the least of which is my bowel movements (tmi?). Unfortunately blogging was a casualty this last time around and there really is no good reason aside from the fact time just got away from me (though quite frankly I let it).
I was hoping to post a basic primer on some of the details of the financial world falling apart from my somewhat jaded yet idealistically libertarian perspective and that's what I still hope to do. There's especially no reason now that it would seem that blogspot is happily unblocked from within China.
I don't think this can be seen as anything but good news for Africa: Mbeki resigns (Bloomberg via Instapundit). PSA: Poverty and hunger are caused by government policies - not the lack of resources.
All told when you look at the surviving financial giants on Wall Street, there's been an incredible level of value destruction. Consider that in the last year, Citigroup's market cap has dropped from $236.7 b to $97.8 b and Bank of America from $236.5 b to 150.2 b, the numbers are staggering - totaling $4 trillion dollars (TechCrunch)- and that doesn't even include what US taxpayers will ultimately be on the hook for!
We've felt some of the effects ourselves with our primary credit financing firm closing its service in China given that most of this venture was funded by hedge funds (which is a big part of all the headaches we've had to deal with in recent months in order to meet the requirements of our US/Canadian clients). As a side note, it seems bizarre to me that we aren't able to find a service that will take "risk" of receivables that are fully insured against bad credit, for a price that we (or more accurately our clients) willing to pay of close to 36% per annum!
With the US government taking on full responsibility for AIG despite the fact that 70% of AIG's business was foreign, I tend to agree with Paul Kedrosky who asks where the President and Congress are in all of this? With the level of risk and potential costs that may ultimately exceed even the Iraq War, don't they have a responsibility to "get out in front of growing voter anger and confusion before it's too late"?
PS For those who are interested, here's a fairly accurate sounding prediction of how investment banks will ultimately look like after this debacle (Information Arbitrage). The one thing I probably disagree with is the question of whether or not Bank of America and Merrill will make a good fit. I suspect that this had as much to do with their wide reaching brokerage services as it did their investment bank / trading groups.
Update: Funny and sad - particularly in light of the US Treasury's intervention - "The strength to be there" (via Paul Kedrosky):
A recent article makes the claim that the root cause over the contaminated milk is "an ethical gap in China's business" (Christian Science Monitor).
There are a few parts to this scandal - from quality control to the likely cover up with the Chinese partners in the venture resisting an effort to recall the faulty product. I'd disagree that it's a question of ethics in China business - but rather, the lack of a free media. Thankfully the article notes that regulation isn't the only answer (though in any other society, what was done is criminally negligent - so I'm not even sure more regulation is the answer). It should be clear to anyone with half a brain that in a broader context, adding a chemical that would cause kidney stones in babies would be a net loser - I mean seriously, after this, how many people are going to buy Sanlu milk?
So what's the answer? Companies must be held responsible for testing the products that they sell. Laws should be enforced, consumers should have the opportunity to seek compensation and penalties that are significantly greater than any possible savings that could have been achieved by using the chemical substitute, and the government should open the markets to greater foreign competition to allow for greater choice and force a rush towards improving standards.
Update: More on the growing scandal (Imagethief). Yet another reason why I don't partake in dairy products in China.
From Gary Bland, a Lehman limited partner, the State Investment Officer of New Mexico (via peHUB) - which is perhaps, only somewhat reassuring:
Q: So you’re saying this is a good thing.
A: From here on out the wizards of Wall Street that still use Clearasil have learned some valuable lessons. Magic is magic. It’s not real.
Q: It’s good that you can look on the bright side of all this.
A: You have to. If the world ends, who cares?
Good news, from the WSJ: "In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families -- mother and father in the home -- rose to $78,000, an all-time high."
Of course it's probably not something you'll be hearing about particularly with the meltdown today in the financial markets. On that note, it's sort of sad to see two storied financial institutions disappear, but I think the US government finally did the right thing. In recent years the media has been spinning a tale of woe that the economy hasn't been "fair" rewarding the rich over the poor but as the editorial notes, there has been a 25% improvement since 1983 in the living standards of the bottom quintile of Americans. This in itself should be remarkable and celebrated - just don't expect to see those headlines in your paper any time soon (unless you subscribe to the WSJ).
Arthur Laffer & Stephen Moore (WSJ):
When you put "tax fairness" ahead of economic progress, you produce neither.
I found this commercial remarkable for a few reasons. First, you can definitely tell at the end that it's for a hair product - and in that, it's quite effective (and sort of funny as well). Second, it's an inspirational message for the disabled (and any underdog really) in an Asian society where the attitudes towards the handicapped leave something to be desired. Another thing you also notice is that while it's probably not as polished as it could be, it's way longer than any commercial you see here but it does communicate a message and I think it does it well. Youtube via Trendhunter:
...when it's not your money (Greg Mankiw). Shouldn't those who suggest governments should do more to help cause xyz (UN Dispatch) be the first to lead by example?
Unlike Mankiw, who presumes forethought and planning, I can't say I'm surprised. Using the heavy hand of taxes and government is coercive at best and corrupt at worst (Accuracy in Media) working best when you have the freedom to spend on behalf of others - especially when you think you're better than everyone else (Pajamahadin / Never Yet Melted).
PJ O'Rourke (via Instapundit):
When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.
Finally, some good news. There are a large number of developing countries who are making significant attempts at large-scale regulatory changes to unleash markets (WSJ). This will do more to eradicate poverty than any of the often self serving commentary by the liberal elite (Times UK). It is ironic that in recent years the countries that have made the greatest strides in championing markets and capitalism are those like China. As the IFC notes:
Countries with liberalized business regulations frequently grow faster than their peers and are more resilient when tough times hit.
