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Gary: What inspired you to write your first book, Supertrends of Future China? Why did you designate China to be your main focus?
Jason: My China business mentor, Dr. James K. Yuann, and I met at Honeywell Specialty Materials in Shanghai where he was the AP CEO and I was a consultant. After we had both left Honeywell, we were separately inspired to share some of our knowledge and experience. In his case, as a top executive and entrepreneur in several multinationals’ Asia or China operations, and in my case as an entrepreneur and management consultant who had been studying China since 1992 and living here since 2004. We had an auspicious conversation which ended up with us collaborating on one book together.
Supertrends of Future China was a distillation of some of the broad ideas James and I had encountered in our China careers, “written by businesspeople for businesspeople.” We wanted to share what we thought were the core opportunities for the next ten years in China, a time-frame we called China’s Olympic Decade, from 2008 to 2018.
As to why I picked China as my career focus, I had a degree in Asian Pacific Studies from the University of Victoria, where I had focused on Japan and China as my areas of study. I had always been attracted by Asia growing up on the west coast of Canada. Since I had already worked in Japan for several years, working in China after completing my MBA from the University of Western Ontario’s Richard Ivey School of Business seemed like a good idea. However, I was not fully convinced of China being the right next step for me until I had spent a semester at Shanghai-based China Europe International Business School. After that I was certain. My only regret now is that I did not come to China earlier, in the 1990s.
Gary: How has your outlook for China changed now that you have written your new book, China’s Economic Supertrends?
Jason: My perspective on China’s economic outlook is little changed, actually: I am still very bullish on China’s economy. One reason I decided to revise and add new material to the original book was that James and I wrote the original in an easy-to-read overview style, and I had heard from some readers that they would like to know more in-depth ideas.
Another reason my outlook remains unchanged is that the original predictions we had in 2008 have stood the test of time. While we were not correct about everything in the original book, many of our predictions came true even faster than we had thought. For example, China’s clean tech industries are already leading the world, exceeding our already optimistic expectations and rising on the strength of China’s sustainability supertrend. Also, we were correct in pinpointing the growing importance of China’s overseas direct investment, but the pace — due to the effects of the global financial crisis — has also been faster than we envisioned. In the service industry, we correctly predicted the growing importance of branding in China and strongly recommended brand consultants and agencies enter China or redouble their efforts here. As it turned out, many brand consultants have entered the market, but they only did so after 2009 or 2010, when their home markets were suffering due to the effects of the global financial crisis.
So, this new book, China’s Economic Supertrends, is the first of a three-volume set that more deeply analyzes the trends of China’s economy, demographics, and political environment for businesspeople, investors and individuals. I like to think that my view and understanding of China is more nuanced given the subsequent four years I spent here after writing the first book. While I remain positive that China will overcome some of its latent economic problems and continue its growth at a more moderate pace, there will be setbacks, to be sure. I do not have pessimistic ideas about the potential collapse of China, as some commentators and analysts do, so my appraisal in the new books is more comprehensive. That is one of the reasons why I split the original into three revised and updated volumes, with the final volume being almost all new material.
Gary: How is the economic and trade relationships between China and the US?
Jason: When it comes to the economic relationship between the US and China, the Bush-era “strategic competitor” designation no longer sufficiently describes its complexity. Historian Niall Ferguson calls it “Chimerica,” a phrase which I interpret as describing a mutually parasitic relationship. I describe the relationship as “reverse globalization,” a shift from the former West-to-East direction of globalization forces to an East-to-West direction.
Reverse globalization implies China’s greater role in defining the relationship’s parameters: China’s economy is quickly coming to dominate almost all facets of the global economy. It is the biggest trading nation, the biggest creditor nation, the biggest purchaser of most raw materials, and will soon be the biggest market (which I predict will happen before the end of the Olympic Decade). Longer-term, China’s renminbi is also emerging as a strong competitor to the dollar in a new type of currency war, as China seeks to supplant the US currency’s status as the global reserve currency of choice through currency swaps with non-US trading partners, support of SDRs and a bigger say in the IMF. China’s economic moves are pushing the US to react. They are fighting over economic supremacy in the next decade. It is too soon to call a winner and I do not count the US out by any means, as it is at its best when facing adversity. For time time being, the economic relationship is in a state of detente. Trade, on the other hand, has already become hostile.
One of my biggest worries about the China-US relationship is of the growing potential for an all-out trade war between the two countries. They are each others most important partners for trade and capital. Each nation will have some responsibility if a trade war does erupt. China’s main transgression is creating a web of bilateral agreements, effectively bypassing the WTO’s harmonized tariffs and cutting the US out of the loop. The United States, for its part, is using continued protection of key markets and limitations on certain exports to China, while at the same time being overly litigious in the WTO and even taking unilateral action against what it sees as unfair trade on many Made-in-China products — the bread-and-butter of China’s economy. At present, China and the US are in a state of undeclared trade war.
A full-on trade war, meaning each country erecting tit-for-tat trade barriers in the form of higher tariffs or non-tariff-barriers, is the likely outcome of the major changes in government policy we might see from new political leadership in 2012 and 2013. Trade will be the hot-button issue for elected politicians in the US and Chinese politicians and bureaucrats will fight tooth-and-nail to protect China’s key export manufacturing industries. Meanwhile, China has become the biggest creditor nation to the US. Where China decides to put its money in the future, what markets the US opens up or does not open and how much China can diversify its trade or even decouple from the global economy into a trading bloc (such as BRICS) or as a unitary marketplace, will be the battlefields of the US-China trade war.
Gary: We saw the collapse of the financial market in the US and now the fallout of the European debt crisis. As China’s economy is now becoming a global economy, how much of an impact would there be on the global market if China runs into economic instability?
Jason: China is already the engine that drives the global commodity markets, and it is quickly becoming the biggest consumer market. My position is that, in terms of the global economy, China is to big to fail. A failure in any major sector of China’s economy — real estate, export-oriented manufacturing or consumer spending — would push the global economy into near-zero growth or even a recession. Obviously, nobody wants to see that happen. That said, the effects of the global financial crisis contagion have yet to fully reach China. There is at least one major correction in store during the remainder of the Olympic Decade.
Gary: Now that domestic consumption and a shift to the middle-class are on the rise in China, what kind of domino effect would this produce on the world? Where and how can international companies capitalize?
Jason: Some of my comments about the potential for economic or trade war between the US and China may seem pessimistic. My point is not that I believe they are destined to happen, it is to not ignore the risk of China’s rise to turn into a zero-sum mentality of economic competition and trade war. The US and China must proactively work to avoid that. I think that one of the bright spots of the world’s economy is, in fact, China’s vast and growing consumption potential. The world should welcome and encourage China’s consumption, it will drive the next phase of global growth until India is ready to take the driver’s seat in the 2030s.
I have been writing since 2007 that international companies should be investing in China more. Amazingly, back then, there were still many international companies taking a wait-and-see approach. The global financial crisis changed all that, of course: After 2008, when China was the only major economy still growing quickly, every company started piling in if they were not here already. FDI increased dramatically since 2009, continuing its upward trajectory almost unabated.
Today, companies can still capitalize on China’s economic growth in two major ways: Sinification and Going West. This means, respectively, adapting or even creating products and services especially for Chinese tastes, and moving out of the first- and second-tier cities to go to the third-, fourth- and fifth-tier cities, which usually means moving westward into the central and western regions of China. Doing both these things, which I describe in the book, will lead to faster growth.
Gary: What about the state of urbanization? Is it becoming worse? How has the government looked to resolve this matter?
Jason: I am actually very positive about the potential for business opportunities in what I call the urbanization supertrend. There is a darker side to China’s urbanization dream, however: I would say that urbanization is proceeding as fast as humanly, yet not always humanely, possible. What I mean by that is, China has to urbanize quickly, but a lot of unwise and even disastrous decisions are being made in the rush: poor building construction, shoddy infrastructure and the too-fast pace of high-speed rail development (which I believe was a major contributing factor in the Wenzhou train accident) to name several major issues.
China is about 50 percent urbanized today, so there are still hundreds of millions more people to be urbanized in the next 40 years. But for this process to be successful, the government needs to drive job creation in the cities and also needs to raise incomes to stimulate consumption. There is an inherent contradiction in achieving both targets, however. The likely shortfall must be made up with tax reform and banking reform, which will combine to enable wealth transfer from the state to the central and western regions, as well as to the low-income population from the wealthier coastal urban population. All things considered, China is between a rock and a hard place. Whether China’s next generation of leaders are able to find a path out remains a big question mark.
Gary: From a Western perspective, China is growing at an enormous rate. Is it a sustainable trajectory going forward? How is the development of China’s infrastructure? And what is China’s growth plan?
Jason: For the time being, the state is building infrastructure everywhere — connecting China by high-speed rail, for example — and building new cities. This is what I describe as the positive benefits of the urbanization supertrend. Those trends can be counted upon to drive, for example, the service sector of the economy and stimulate consumption as people move into the cities. So, China will continue to grow in terms of consumption but new growth is likely to be offset by a decrease of growth in the export sector. Therefore I do not anticipate an return to growth rates above 10 percent like we saw from 2003 to 2007. Growth of under 8 percent is the new China normal.
Under 8 percent growth is nothing to be ashamed of but stability and avoiding a hard-landing are the most important issues facing China now. High growth and inflation are to be avoided. China’s road map for sustained moderate growth is the five-year plan. I write about this in an entire chapter of China’s Economic Supertrends. The 10th and 11th five-year plans are testament to the fact that China achieves much of what it sets out to do. Therefore, the 12th five-year plan (2011-2015) can be similarly relied upon by executives, investors and entrepreneurs to base strategic decisions on.
Gary: The production of solar panels in China is very high. While the technology itself is not the best, the cost is lower than the US’s counterparts. Recently the US decided to increase tariffs on Chinese solar panel imports due to their advantage from support of Chinese government subsidies. On the other hand, do you think clean tech from the Western world can compete in the Chinese market?
Jason: The solar sector is part of the growing China sustainability supertrend I wrote about in the book. This trend is supported by two key government policy goals. First, China has set a target of achieving 11.4 percent non-fossil-fuel sources for its energy production by 2015. Second, China is strategically supporting various types of clean tech (solar, batteries and electric cars to name several) as important emerging industries for the future.
Given what China achieved during the 11th five-year plan with wind energy development by companies like Xinjiang Goldwind, and how it exceeded its targets for installed wind capacity several times, I am confident domestic PV solar installations will do the same in the next five years. Chinese solar companies such as Suntech, Yingli and JA Solar are facing a short-term setback in the European markets with an end to subsidies and the US market with the anti-dumping tariffs, but the support in the domestic market will see them through. I believe these are great investment opportunities.
Foreign clean tech firms, on the other hand, face a very tough competitive environment in China, as they are unable to compete on price. I imagine they will also receive a somewhat unwelcome reception from China unless they come with either large investments or desirable technology transfers. This is part of the unfortunate escalation of the undeclared trade war I mentioned earlier: China protects its strategic industries, much as Japan did in the 1970s and 1980s.
Jason: When we wrote Supertrends of Future China back in 2007 and 2008, my co-author and I wanted to address the business trends of modern China. In those years since 2008, the vision of the supertrends has remained consistent; I have updated them to reflect more for the current economic environment and, in the second book China’s Demographic Supertrends, to be published later in 2012, the current demographic environment.
To me, the most important supertrend of the next 5 years is undoubtedly sustainability, as in China being sustainable environmentally. So in the original book, we put this topic as the final chapter to emphasize the importance then, and I still think it’s the most critical supertrend of the updated series when it comes to China’s impact from within but also to the world. The sustainability supertrend consists of clean technology, clean energy, and other related industries, which are going to change global businesses and the global society.
Gary: A few years ago, I had very negative view about China primarily due to my exposure to mostly Western media outlets. During that time, I often read about China’s rejection to the carbon cap, urbanization, and forcing locals to move out to make way for infrastructure development of the Beijing Olympics in 2008. But my friend expressed that China is currently in its own Industrial Revolution. The question back to you would be how can sustainability be achieve when you are still in full force in the Industrial Revolution stage?
Jason: First of all, I understand the perspective of how the Western media tends to portray China and only focus on certain aspects. I am not saying it’s not justified; there are a number of aspects under China’s development that are not sustainable and not positive for society.
However, China is in a very unique situation in terms of the large size of its economy, fast pace of development, and large population. The situation here is that China couldn’t have developed in the same way a Western country developed. It didn’t really have time to go through, as you put it, its Industrial Revolution, and then start to think about clean energy and clean environment, as Western economies have done Rather, it has to do everything all at once and that’s why you see these contradictory signals.
For example, on the one hand, you have the problem of industrial pollution from energy generation and factories, which have become the biggest carbon emitters in the world for the last couple of years. But on the other hand, China is now leading the world in clean energy technology and has started to institute some of its own environmental regulations which are very strict and comprehensive when you look at how global regulations are written.
The key is enforcement. I think that is the growth area. As China starts to enforce the existing laws that are on the books, this would create enormous opportunities for businesses that are operating in China – compliance, testing, and clean tech solutions — which would be open to Chinese companies as well as foreign companies.
Gary: Can you explain more about the opportunities Western companies can have around sustainability in China?
Jason: A lot of Western companies have led the way in terms of sustainability and clean technology. We can look at the development of the solar industry, for example, in which most of the innovation took place in North America and Europe. And China literally in the last decade has arrived into this industry and now leads in manufacturing. But a lot of the technology itself came from the West.
So a lot of other practices like LEED, the architectural standard that was developed in West, can be applied here in China.
That said, there are still barriers in key areas for foreign companies, and one of those is energy generation. So if you want to be one of the energy producers in China, there are some barriers. But if you are developing the technology in China or selling the technology in China, there are very few barriers.
In fact, China’s 12th Five Year plan encourages a lot of clean tech industries to come to China to bring their technology, their investment, and their research and development and take advantage of the programs here, in terms of subsidies. And these subsides are becoming fewer in Western countries at the same time. For example, some European countries just recently cut their solar subsidies while China has just instituted its own solar subsidies. We can expect solar energy use will grow in China in the near future.
While China is leading in clean energy manufacturing, Western countries will remain leaders in know-how, installation, and the effective use of the technology. Western countries and companies cannot compete on the basis of manufacturing; they can however compete on the basis of being a better service provider, information provider, consultant, and in other areas.
Gary: In my interview with Mr. Sheldon Dorenfest, who does healthcare consulting in China, he spoke about in order to enter China; he had to offer them what they have never seen. And once it has been adopted, there is a great chance a Chinese alternative would have be developed. Then in order for foreigners like him to stay competitive in China, he would need to provide even more Western practices and innovation.
You said China is all for support of Western companies coming to China to provide the research and innovation but can they have a thriving business?
Jason: If we look at technology transfer and innovation, there a lot of incentives from China for foreign companies to develop new business and new business models. But, at the same time, China puts up barriers for them to become leaders in the field or allows copycats to emerge. So how do you solve this dilemma? There are two ways to minimize the risks, at the business structure level and at the operational level.
The One issue of copycat competitors came about through the use of the joint venture in the past. If you worked with a Chinese company and then eventually break up the JV, you would have usually created a competitor. Or even if the JV doesn’t break up, the Chinese partner might still establish its own competing venture. We saw that in the case of Wahaha and Danone in the drink industry in 2009. So it does happen.
And As a result, foreign companies now prefer to enter China as a wholly owned foreign enterprise (WOFE). That would also be my recommendation if the foreign company wants to control its operations and its technology better in China. With that said, there are still a lot of industries that prevent 100% foreign ownership, so ultimately you still need to be careful about how you define your business and the acceptability of having a Chinese partner.
The second way to stay competitive and reduce risks in China is by taking advantage of establishing trademarks and intellectual property inside China, not relying only on international regulations. The Chinese government has been very positive in establishing its own intellectual propertyand gives precedence to registrations in China (whether by foreign or domestic companies).. Many foreign companies remain unknowledgeable about this. We saw this recently in the case of Apple and Proview, where the case appears to hinge on Apple relying more on international law and not having transferred the official mark inside China through the China intellectual property office.
So, to sum up, foreign companies may want to avoid joint ventures to prevent loss of IP and the creation of additional competitors. Also, they should register their own research and trademarks through the Chinese channels: Chinese courts are more favorable to Chinese registrations. These are some ways for foreign businesses to remain more viable in China.
Gary: How will China’s manufacturing transform as its labor cost increases? What would that do to the export GDP? Would China remain as the outsource destination for manufacturing?
Jason: I am not one of the people predicting the end of cheap China. The end of cheapest China, maybe. The most basic light industries, such as textiles and apparel, will be done more often in countries such as Bangladesh, but foreign manufacturers leave China at their peril: First, foreign supply chains may not be as integrated or as robust as China’s have become. Second, many of these cheaper foreign markets are not attractive to sell into, only to export out of, while China’s domestic consumption has become the second highest in the world.
Having a Made-in-China label is actually an advantage when selling domestically, to avoid import restrictions in the coming trade wars if nothing else. Many Chinese consumers are also starting to buy Chinese brands. Look at the success of Lenovo computers or BYD cars in recent years. So, China may have lost its status as the cheapest manufacturer for outsourcing low-value-added products, but smart companies are staying put and finding ways to increase productivity to avoid the problem of higher labor costs.
When it comes to higher-value-added manufacturing, on the other hand, China is still an extremely competitive country and will become even more so now that it has built up capital for investment. While China was dependent on its cheap labor for high growth in the 1980s and 1990s, now China’s companies will invest in R&D, automation, and other types of productivity increases, such as industry consolidation and larger economies of scale via M&A of domestic and foreign competitors. Foxxcon is a great example. While it has had a terrible record of employee suicides and other controversies in the last few years, it is “Going West” as I described earlier to keep some of its low cost labor advantage and, at the same time, also investing in robots and automation: Foxxcon made an announcement last year about plans to install one million robots on its production lines in the near future.
Gary: Entering China is a long-term investment, what are some areas we can expect would be great business opportunities in 5 years? in 10 years?
Jason: Winning in China for foreign companies means paying attention to the long-term supertrends for the best growth. I will write about the demographic supertrends in my second book later this year, and the political supertrends in a third book following that. As you might guess from my comments thus far, I am bullish on consumption-oriented investments, particularly in the service sector, where foreign companies have built up sophisticated business models. This is at least a 10 year trend. Rather than waiting for Chinese competitors to clone Western business models, entering China quickly, going into the lower-tiered cities first, and using Sinification to develop better products and services are key long-term success strategies. Yum! Brands in general and KFC in particular are great examples of how to do this. Starbucks recent announcement of major expansion plans is another.
Another sector I am positive about is mobile Internet. This is a 5 year trend because foreign companies should act now otherwise Chinese competitors will become too entrenched. I have been talking about this since 2008, when it became clear that China was a country of mobile Internet users (mobile phone subscribers then outnumbered Internet subscribers 2 to 1). China’s Internet and eCommerce future is a mobile future.
If you want to know more, you can visit www.ChinaSupertrends.com for some of my latest ideas and research.
Thanks for the opportunity to address your readers. I hope they all can profit from China’s supertrends in their business, investments and careers.