By Kevin Meyer
I just returned from a very successful business trip to Shanghai. Contrary to what many companies are doing, mine is selling TO China, not outsourcing. There are several reasons we're able to do that, ranging from high quality to unique technologies and even to a competitive cost situation thanks to lean, but that's not what I'm going to talk about.
It has been a few years since I have interacted this closely with China, and much has changed. So here are some thoughts – and if you make it to the end I'll show you a couple short entertaining videos.
First, the infrastructure has improved immensely. Shanghai is incredible from the wild modern high-rise architecture to modern highways and bridges. Everyone is on cell phones, the internet is fast, although as I'll mention later it is not "complete." Much of this is being paid for by the interest payments on our debt – more on that in a minute.
The bureaucracy is still there. Thanks to a wire transfer that did not happen as planned, I had to change a few thousand bucks at the local Bank of China. The number of forms and stamps required was mind-boggling. Similarly just to make a couple minor payments to subcontractors for our booth at a trade show I spent more time filling out forms and getting crazy approvals than the payment itself was worth. I would have paid out of my own pocket to avoid that mess. There's a significant cost of doing business that needs to be streamlined – and probably will be.
Censorship still exists, but is changing fast. No YouTube, several blogs are blocked (but not Evolving Excellence!), CNN is partially blocked but not Fox News (go figure…). The state-run newspapers are surprisingly open about crimes and even poor economic data. Tibet (aka "the Autonomous Region") is discussed, and there was even a quote from the premier saying that "rapid economic growth means that the political system will need to be changed" – that got people buzzing. And the government is looking at reducing the number of crimes eligible for the death penalty from 68 to 64 – but still including such vices as filing a false tax return. Perhaps that's why a city of 20 million is still so safe.
The local Chinese market is huge – 1.5 billion people becoming wealthier every day. The medical device companies I visited were interested in foreign markets, but now (different than before) more interested in the domestic market. A small product idea has an instant large market – "playing the percentages" takes on a whole new meaning when you just need to capture 1% market share to get rich. And that's what will become scary from an international financial perspective: until now we've been ok with the Chinese owning so much of our domestic debt because we figured they needed us as much as we needed them. As their internal market becomes wealthier, perhaps they won't need our markets as much – then what?
Product quality is becoming more valuable. It's got a long ways to go, but for the first time I actually heard a Chinese medical device company say "price is not a consideration – we need quality" when discussing what my company might provide. Right now I have the upper hand on quality compared to my Chinese competitors – but I wonder how long that will last. I must continue to improve – rapidly.
There is an impending socioeconomic crisis coming. Many Chinese are becoming wealthier, many are not. There are something like 100,000 millionaires in Shanghai alone, yet a bar we went to had five people working for just a couple bucks a day. A chasm is being created, and that is never a stable situation.
The bottom line? China is evolving rapidly, its internal cost structure is increasing, but the market is huge. It will soon become a place too expensive to outsource from, but a market of its own too large to ignore.
Ok I promised you a couple of short videos – I took these with my iPhone 3 so I apologize for the quality. The first is the Shanghai skyline at night, with a full moon, from the Bund. The second is a minute of driving. Drivers have the right of way, even when pedestrians have the light. Top it off with some crazy bicycles and cars backing into busy streets and… well you get the picture. Enjoy!
Saturn says
Except for a small blip in the last couple years due to the global financial downturn and China’s massive domestic stimulus (to make up for the export drop), exports as a % of Chinese GDP have marched ever upward over the past three decades. In that sense, China has never been more reliant on foreign markets than today.
Kevin says
Saturn- if you compare consumption and GDP per capita in a developed country vs China you’ll see that they haven’t even started to tap the consumption capacity of their own population. Once wealth creation, albeit currently uneven, triggers significant consumption internally, the reliance on exports will drop fast. Internal consumption is already accelerating far faster than exports.
Bill Waddell says
Kevin,
For China to develop anything close to a consumer economy there will have to be serious productivity gains, which is fundamentally incompatible with their still pressing need to create jobs. Their official unempoyment figures conveniently leave out as many as 300 million people in the western provinces still living on dirt floors.
An even bigger challenge will be to overcome a terribly corrupt ruling class which is not going to share the wealth willingly. You have only to look to Mexico to see how nigh impossible it is to create a middle class when it requires restricting the upper class’ absolute control.