Why It Won’t Be A Chinese Century

Sometimes, buried in the Financial Times Analysis stories one finds gems of business intelligence. The Financial Times, despite total liberal-elite cluelessness about America and anything outside the elite experience culturally and politically, remains the go-to newspaper for business news, as the Wall Street Journal under Rupert Murdoch slides into New York Times lifestyle info-tainment.In the story in the link above (go ahead, read the whole thing), regarding Mexican business expansion, the meat of the reason for the expansion is given:

Whatever the model, a third factor explaining Mexican multilatinas push into the US is common to almost all of them: using powerful positions in home markets to fuel their overseas expansion. With few exceptions, Mexico’s business landscape is dominated by just one or two companies operating in a given sector. Competition between them can be fierce but the resulting duopolies produce high barriers to entry for potential newcomers, which tends to dissuade them from trying.

Eduardo Pérez Motta, president of the country’s Federal Competition Commission, or Cofeco, argues that the effect leads to business owners dominating their respective sectors while generally leaving each other’s fiefdoms alone so as not to disturb the status quo. “Mexico has an enormous entrepreneurial talent but many generations have had a feudal vision of the country,” he says.

The result massively inflates profits compared with other markets. In the second quarter of this year, Bimbo’s operating margin in Mexico was 9 per cent compared with just 2.7 per cent in the US; Cemex’s operating margin on earnings before interest, tax, depreciation and amortisation during the second quarter of this year was 35.7 per cent in Mexico and 0.2 per cent in the US. “Mexican businesses generate huge cash flows,” says Mr Pérez Motta. “That is what helps them to expand abroad.”

This is the same for China. Also Brazil. And Russia. And India. The so-called BRIC countries (Brazil, Russia, India, China) generate enormous profits at home. But they founder when up against competitors abroad. Unlike the Japanese, who by focusing on quality along with cost were highly competitive despite a crony-esque domestic market mirroring that of say, Mexico’s, the BRIC nations including especially China will not own the 21st Century. Because cronies are not competitive.

The other day, the Financial Times had an article on the various Chinese sportswear companies seeking to leverage their huge domestic markets to be Addidas, Nike, and Reebok-beaters. Good luck. Cronyism does build up huge capital flows with which to build foreign acquisitions. But it leaves companies completely unprepared to meet foreign competitors with cash and know-how to operate in thin margin environments. The reason so many Chinese companies remain mired in mere supplier status, and are not making Ipads or Iphones themselves, is that their ability to put the other things together, besides sheer cheap-labor electronic production, is totally absent.

As Steve Sailer has noted, Chinese marketing remains stuck in the “Real Cheap. You buy now!” mode that Western and indeed much of other Asian consumers reject. Including, increasingly, Chinese consumers. Meanwhile design is still just a notion, and intellectual property development (as opposed to piracy) is a pipe dream.

Chinese companies are good at making real cheap electronics, car parts, and … poisoned infant formula, lead-tainted ginger, and dog food that kills your pets. That’s not the mark of an export giant ready to topple Nike. Or even Samsung.

What Chinese, and Russian, and Brazilian, and Indian companies are not capable of at the moment, and show little sign of achieving, is creating their own, domestically invented, world-changing products. China remains the world textile production center, yet all the new and interesting fabrics, the ones that change color, wick sweat away, repel bacteria, repel dirt, and don’t wrinkle in the dryer while retaining the feel of cotton … are done elsewhere. In Italy, or the United Kingdom, or Japan, or the US.

Cronyesque business arrangements generate a lot of cash, and make zillionaires like the world’s richest man, Carlos Slim, the Mexican phone magnate. But that captive domestic market is impossible to duplicate. Slim will have lots of luck persuading Chinese and Brazilian governments to give him a sweetheart deal on land line and mobile phone business in those nations. Good luck too, for China’s car parts makers to ever move up to Toyota or even Kia status. Anyone taking bets on Chinese cars passing even the most cursory safety tests of the US, or EU? Let alone Japan and South Korea? Anyone care to bet on the safety record of Chinese produced cars?

Succeeding in international business is hard. It has taken KFC/Yum Brands, decades to achieve the dominance it has in China. Principally by unlearning things that worked in the US, changing menus to suit local tastes, and still remaining true to the good things about KFC and American style fast-food fried chicken. And that ability to succeed was a function of doing so against Taco Bell, and Burger King, and McDonalds, and Wendy’s, and Carl’s Jr, at home in America. Competition in a domestic marketplace produced a management and culture that realized that making money was more than just arranging a sweetheart deal with the government. It required a focus on costs, revenues, marketing, promotion, operational efficiency (like getting orders out FAST, in every location, nearly every time), and product excellence (the food had to be tasty enough for people to shell out renminbis which are hard to come by for most Chinse).

A lot of people like to think China will be an unstoppable world-beater. China will be important, no doubt. The size of its domestic marketplace even with most of its people in abject poverty by Western standards, insures this. But a world-beater of companies like Nike, or Apple, or even Ford, it is not. And likely never will be.

It is true that Japan and South Korea, in varying amounts (many products for Japan, only a few for South Korea) have become world-important nations with world-standard companies that sell products known and desired around the world. Samsung, Hyundai, and Kia for South Korea, and perhaps also LG. For Japan, Sony, Seiko, Nikon, Toyota, Honda, Kawasaki, Suzuki, Uniqlo, are just a few.

But this happened with US intervention in their markets to dial down the cronyism somewhat, and introduce some levels of domestic competition. This was not the Mexican model. Which is ultimately a failure.

Cronyism leads to domestic markets that are fat and lazy. Without much ability to seize foreign markets, where real competition happens, and management and workers alike must respond rapidly to challenges. Much of the China hunger among US and Western multinationals stems from this fundamental fact: Chinese companies are simply not capable of competing on quality and innovation. China has had to subsidize, heavily, Chinese bids for railways in Africa (basically giving them away for free to win mining concessions). This works on a barter system: rails for resources, basically. On a continent where the ability to pay is questionable anyway.

That model of subsidies doesn’t work, naturally, for consumer goods, and even the Chinese government can’t give away rail systems to the West. Particularly since Chinese systems tend to crash into each other, with horrible results.

No, China will be a global force. But unstoppable world-beater? When the government cannot even keep Chinese companies from selling poisonous baby formula, I think not.

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About whiskeysplace

Conservative blogger focusing on culture, business, technology, and how they intersect.
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8 Responses to Why It Won’t Be A Chinese Century

  1. Polichinello says:

    IIRC, Burger King and Taco Bell are under the same umbrella company that owns KFC.

  2. Dan says:

    Actually I think what makes US companies so efficient is this:

    Pay of US workers is very high and therefore every single position must be made measurably productive and every person must justify their very high costs. This is not so at all in, for example, China.

    In America, the total cost of a McDonalds minimum wage employee are at least $10 per hour. If you look around, everyone has a job to do at every minute. Every motion is engineered, with lots of machinery and timers everywhere, and each uneducated person turns out massive quantities of decent food, or rings up more than a hundred sales an hour or something.

    I have seen businesses in very low income parts of the world that have lots of people just standing around in a way that would never happen in America because wages are too high here. I have seen this in restaurants and hotels and construction alike. In India I once had four busboys all working together to try to help with my bags which consisted of like one suitcase (awkward).

    If a US company goes abroad, they are bathed in the ease of low prevailing wages, having learned to turn a profit amid far higher wages. The result is much higher margins.

    If a Mexican company comes to the US, it will have be far less profitable because workers will suddenly be much more expensive.

  3. idealart says:

    Western workers are paid more because they live(d) in a wealth-producing culture. A culture that produced the industrial revolution and responded to poor working conditions, sometimes through violent protest and union organization, to produce a true middle class. There is no middle class in China or India. There is no Social Security, government subsidized healthcare, pensions, paid vacations or worker’s compensation in either country, to my knowledge. There is no concept of the Golden Rule either. Big fish eat little fish, in spite of communist and socialist slogans.

    The Chinese traded one kind of emperor for another. Except now, by destroying age-old social controls, they’ve got a police state.

    Losing face is part of the problem. India, China not so much, has a rigid class system. You aren’t allowed to make your superior look bad by questioning his poor design.

    Its not so much how far India and China will rise but how far the West falls.

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  5. I like your comments on Carlos Slim.Its despicable that the guy who was,for a bit,the richest man in the world(tho not the most interesting,ha ha.)got his riches by getting the Mexican gummint to outlaw all competition. What an asshole!

  6. Moses says:

    I’ve lived in SE Asia for 6 years. Comment #2 is right on. Last time I was in Pizza Hut I counted no fewer than 22 staff. Most were standing around. Productivity is ultra-low, and as a result so are wages.

    Ditto for crony capitalism. Most successful businesses here get that way due to cozy relationships with the gummint. They don’t have real competition. They become fat and lazy, addicted to their gummint-sanctioned monopolies and artificially crazy high salaries and chauffered Benz’s.

    We have nothing to fear from China. They can only copy, not innovate. Totally true.

  7. bjk says:

    Book “What Chinese Want” makes similar points, by JWT ad exec in China. Essentially the Chinese know only one way of competing, producing more for less. The whole concept of ROIC is foreign to China.

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