Tuesday, November 30, 1993

MFN Means Trade, Not Human Rights

By George Koo and David Lam

President Clinton showed great statesmanship in pushing NAFTA through Congress. In meeting President Jiang Zemin of China at the recent APEC, the President showed wisdom in opting for dialog over confrontation. However, we believe that the most favored nation (MFN) status is not an effective carrot to exchange for a human rights concession from China. MFN is a trade issue and should remain so.

China has come a long way since the normalization of relations with the U.S. in 1979. It is now the world's top producer of coal, cement, grain, cotton, meat, and fish; third after Japan and the U.S. in steel and paper; fourth in power generation after the U.S., Japan, and Russia; fifth in crude oil output after the U.S., Saudi Arabia, Russia, and Iran. After adjusting for the real purchasing power, China's economy is now regarded as the third largest in the world by the International Monetary Fund, after only the U.S. and Japan. In 1992, China became Japan's second largest trading partner. Much of Japan's new investment has been diverted from North America to China. Just on the eve of APEC, German Chancellor, Helmut Kohl, led a high level delegation to Beijing to sign 17 contracts worth close to $3 billion, including 6 airbuses, a subway system in Guangzhou, and contracts covering power, steel, auto production, and machinery. Obviously, these two major world economies--Japan and Germany-- recognize the market in China and the value of the trade relations with China.

American companies, such as Campbell Soup, Coca Cola, Hewlett-Packard, IBM, McDonald's, Motorola, Proctor & Gamble, 3M, and Xerox, have also been important participants in China's economic boom---an economy that grew at a phenomenal annual rate of close to 10% for the last 15 years. Many smaller and lesser known U.S. companies are also there. American business needs China's market to grow, and China's economy needs American products and technology to continue to develop. Time and again, Chinese officials and entrepreneurs alike have privately expressed their preference for working with Americans. However, as long as the U.S. insists on subjecting China's MFN status to a yearly review and the vagaries of the political slings and arrows that go with the process, it will be difficult for American interests to make long term plans in China and for China to regard the U.S. as a dependable partner.

The purpose of MFN is to promote bilateral trade. Increase in bilateral trade means more jobs for both trading partners. MFN is not a dole, not a form of foreign aid, and not a subsidy, and the United States has MFN status with over 100 nations. In the case of China, because of the unfortunate Tiananmen incident in June 1989, the U.S. has elected to use a free trade promotion tool as a political weapon. Use of this weapon is not only inappropriate and ineffective in influencing China but also damaging to American economic interest.

History shows that individual freedom and improvement in human rights come with economic improvement and not by decree. Recent examples are Taiwan and South Korea where "free economy has led to free men," to quote Dr. Milton Friedman, Nobel Laureate economist. On the other hand, the veneer of democracy, in the absence of economic development, can lead to chaos and cause human misery. One need only look at Russia.

Chinese managers, as they listen to Western joint venture partners' ideas of managing an enterprise, are constantly exposed to Western concepts of egalitarianism; and Chinese entrepreneurs who think about business opportunities are inevitably developing independent thinking and questioning outdated methods. This doesn't mean, however, that the Chinese will necessarily embrace the American model of democracy and human rights.

No country's human rights conditions are without blemish. Even the U.S. has its Rodney King and Waco disasters, not to mention the ever pervasive threat of random violence. China and other Asian countries do not subscribe to the concept that only the U.S. knows how to implement policies relating to human rights. Developing nations like China must find their own way of dealing with human rights as their economy develops and an influential middle class emerges.

The use of MFN as a weapon detracts and undercuts U.S. trade negotiations with China. There are plenty of trade-related issues that the Clinton Administration needs to focus on, such as protection of intellectual property, market access, non-tariff barriers, investment guarantees, repatriation of profits, etc. These are properly within the confines of a most favored nation agreement, and their progress will help American business succeed in China. But if MFN has already been bartered for human rights concessions, U.S. influence would be diminished on critical trade-related issues that remain to be resolved.

Chancellor Kohl's recent trip to Beijing helped secure an order for six airbuses. That corresponds to a direct job loss for the six 747-400's that Boeing will not get to build for China. According to Boeing, that is nearly $1 billion in sales which would create or sustain 10,000 jobs for one year, of which 87% is resident in the U.S. President Clinton has articulated the need to stimulate export to revive the nation's post-cold-war economy and reduce unemployment. To that end, we need to treat MFN, a trade issue, as a trade issue.

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George Koo is Managing Director of International Strategic Alliances, Mountain View, California, a company established to assist American companies form cross-border alliances. He is also a member of the Executive Committee of Asian American Manufacturers Association and is the chairman of its annual conference.

David Lam is president and CEO of Expert Edge, Corp. of Palo Alto, California, a software developer. He also serves as a director of the Asian American Manufacturers Association and co-chair of Silicon Valley Global Trading Center. He recently spoke at the BRIE Technology Summit in Burlingame, California.

Wednesday, October 20, 1993

AAMA Annual conference, 1993

Opening remarks as Chairman of the 1993 annual conference, the fourth in succession of annual conferences that I chaired going back to 1990.

Since this conference is located in the now world famous Silicon Valley, I thought we would kick off the conference with the help of some state-of-the-art high tech presentation gadget. This device is called Media Pro and is on loan from nView of Newport News, Va. The technical brochure is available in the literature handout area for those interested in knowing more. My colleague Jon Goldman is the creator of ths presentation.

Over the past three years or so, the world has been engrossed by the rapidly changing Easern Europe and may have wondered about the business opportunities in that part of the world.

Frequently overlooked has been one part of the world which has been growing steadily and some would say spectacularly for the last two decades. We are referring to Asia of course, and paticularly East Asia.

Since one of the mission of AAMA is to act as the bridge enhancing greater understanding and cooperation between the East and West, we have accordingly decided to concentrate on "Keys to Asia's New Economies" as the topic for the conference for the next two days. To paraphrase a local TV channel, you have questions, we try to provide answers. As you will see, we have invited speakers who understand and have been successful in that part of the world and others from that part of the world to tell you what changes are taking place, what opportunities these changes protend, and how to participate there.

We had originally hope to invite an official from the World Bank to present an overview of that region. Unfortunately, they have other travel commitments, but they were most gracious in sending us the latest compilation of economic data so that we can pretend to be an economist for next five minutes.

The reason for throwing up this slide on Japan's export history is to show that since 1991, Asia has taken over from the U.S. as its largest trading partner. And as you can see, while the export to the U.S. is static, the trend with Asia is steadily climbing. In fact, in 1992 China alone has become Japan's second largest trading partner, second only to the United States. To give you another indication of the growing importance of Asia and China in particular to Japan, last year Japanese companies initiated 1800 new investments in China, equal to the sum total for the preceding 13 years. What is it that the Japanese know that we in the U.S. still don't know or at least fully appreciate? One of the business books Japanese were reading this summer was "China: Japan's only escape route from America's impending bankruptcy."

If you consider what rate of growth for the gross domestic product or gross national product (to us non-economists GDP and GNP are practically the same) has been for the Asian countries compared to the developed economies like the U.S. and Japan, then Japan's interest in Asia becomes easy to understand. As you can see from this slide, the GDP for Asia outside of Japan has been growing at 5-10% per year and is expected to continue. While for the U.S. and Japan, the growth rate when it is not negative, has been in the 1-2% per year. The forecast for the U.S. here may be by a particularly optimistic economist.

If you compare the per capita GDP of the established economies to the Asian countries by the traditional yardsticks, the difference seemed to be vast (for instance the annual per capita GDP of China is only $370 which is considered barely above poverty level) and one would wonder what markets and business opportunities could possibly exist in these countries. Trouble is traditional yardsticks are not comparing apples with apples and has been misleading.

Recently the United Nations and International Monetary Fund has been adjusting the local GDPs by the purchasing power parity. PPP is economist talk and we do not need to go into it here. Suffice it to say that the same dollar can buy a lot more or less from country to country and the buying power needs to be taken into account. When that's done, all the previously mentioned Asian countries have significant GDPs and indeed the consumer habits and existence of markets more closely reflect the adjusted GDPs that the traditional ones.

In fact according to the UN, when looked upon in that manner, China and India are among the 5 largest economies in the world ahead of all of the developed Western European countries. In light of these findings, Asia should no longer be considered as just a place for low cost labor. Asia represents the most vibrant part of the world.

We have invited some of the most qualified speakers to address the theme of this conference. I am guessing that their recommendations will have certain things in common: The market is global. You need to be there. To be there you need to have an open mind, willing to listen and learn, and ready to be flexible to find ways that will enable you to succeed in each and every local market.
Note by blogger: These remarks were made almost 15 years ago and still resonates in 2008.

Wednesday, June 16, 1993

China's Dynamic Economic Growth and Implications for U.S. Businesses

While the eyes of business executives in the West are focussed over the unification of the European Community and the prospects and threats that such unification portends, along with certain morbid fascination for the struggle of eastern European countries, many are overlooking the dynamic economy in the East, namely, that of The People's Republic of China. Although growth is unevenly spread across the country, China’s economy has been booming at a double digit rate. For the year just concluded, the nation’s economy grew by over 12%, far exceeding the anticipated 6% for the year. (Some official statistics recently released showed positive growth in virtually every sector, see table appended to this paper.) China's foreign currency reserve has reached over $50 billion and increasing and its current account balance is positive. Last summer, China attracted some attention when it plunked down $130 million to buy vehicles from Detroit.

This current economic movement is not driven by political ideology or theoretical concepts of economic reform and certainly not by “democratic reform” whatever that might mean for China. The movement is, pure and simple, fueled by the desire to get rich. The other side of the drive is the fear of being left out. Since August of last year, the central government has basically declared that centrally planned economy is out and "socialistic market driven economy" is in. To state owned enterprises this means that the iron rice bowl is no longer the secure safety net it once was. Internally, the prevailing view is that China will be admitted to GATT (Generally Agreed Tariffs and Trade) in 1993. That will require the removal of protective barriers against imports and the survival of inefficient enterprises will be in jeopardy.

State owned enterprises are already being asked to downsize from the typically bloated work force where a handful do the work while 3-4 times that many sit around,—but get paid all the same. Most of the time, the management of these enterprises are being asked to downsize without the authority to lay off or fire workers. The management of one Shanghai company making automotive components found a creative but only partial solution by opening shops and a restaurant across the Huangpu River in the Pudong Development Zone. Their less or non-productive workers are being asked to commute to Pudong and operate those new and small operations that are otherwise not related to their line of business. The choice for unproductive workers is either wait on tables or stay at home. While staying home still entitles them to their normal wages, everybody understands that they will be most vulnerable to being cut adrift, when and if that becomes an accepted practice. (Pudong has the national mandate to become the next magnet for foreign investment and has been publicly castigated by Deng Xiaoping for moving much too slowly. Now, an anything goes attitude seem to hang over the area, and the factory manager took advantage of this to set up the unrelated stores and restaurant.) Other more progressive managers find equally creative ways to downsize. Nevertheless, no one can be satisfied by half-way measures or half-hearted attempts.

The immediate solution is obvious to everyone in China from foreign visitors to cadres and managers down to the lowest menial worker. The solution is called free enterprise. One only has to compare the desultory service at a state-run store, restaurant or hotel to one that is privately owned or is jointly owned and operated by outside investors to see the difference. Privately owned establishments are clean with courteous and attentive service personnel; their entire demeanor encourages repeat business. State run establishments don’t care. The difference is striking, and exposure to the difference is now a common daily experience.

In China, the quickest way for a state run enterprise to break away from the iron rice bowl mentality is to form a joint venture with an outside partner. These joint ventures are allowed to hire selectively and fire non-performers, provide incentive awards and promote according to merit and performance, plan production according to market demand and for a profit, import needed raw materials if domestic prices are unreasonable, and avoid answering to many layers of bureaucracy. In the west, these “privileges” are taken for granted. In China, these conditions in a joint venture offer a heretofore unreachable opportunity for professionals, managers and entrepreneurs to fulfill and achieve their potential – and make more money.

Another reason for the drive to form joint ventures comes from the desire of local authorities to develop certain resources and enterprises which are not being funded by the national coffers due to the limited national budget. Thus, the climate and conditions for forming joint ventures have changed markedly since the late ’70s and early ’80s, when I first got involved with Sino-American joint ventures. Enthusiasm was probably as high in those early days, but now the Chinese are more knowledgeable about the process of forming a joint venture, more willing to be flexible and creative in finding arrangements that would be mutually satisfactory, and show a more openly cooperative attitude.

An important example of increased flexibility is the issue of balance of foreign exchange. In the old days, Beijing was driven by the fear of outward drain of foreign exchange and insisted that every joint venture show at least a net zero balance of foreign exchange at the end of the fiscal year. This meant that in order for the foreign partner to repatriate its share of the profit, it had to help the venture earn enough forex to at least offset the dividend it was taking out. Some form of compensation trade was usually tied to the deal. Needless to say, not every project or type of business lent itself to this kind of stipulation and many frustrated discussions and negotiations were stymied and never came to fruition.

On my recent trips, I found that many in responsible positions in China now recognize that not every joint venture has to be able to export to be viable. In cases where China does not have advanced technology or economies of scale to compete in the international market, the insistence on export makes little sense. The passenger car is one of the most obvious examples. The Volkswagen Santana is being built by a joint venture in Shanghai and sells for more than RMB 180,000 inside China, or more than $30,000 by the current official exchange rate, which is at least three times its market value on the international market. Inside China, the Santana with local content exceeding 80% couldn’t be made fast enough to satisfy domestic demand. The approximately 150,000 passenger cars being made annually in China under Santana and other brands (all with foreign partners), though inefficiently made compared to international standards, replace direct imports of an equivalent number of foreign-made cars and are obviously saving the nation in overall forex. This kind of macro view is beginning to find acceptance and should loosen the parameters in which a joint venture can be established.

Given China’s eagerness to form joint ventures with foreign participation, what’s in it for the American companies? In the early days of China trade, those active in the business used to sneer at those naively rushing into the market because of the potential of the proverbial 2 billion armpits. While still not a dream market for deodorants, China is now a significant market for many consumer products from hamburgers to soft drinks, cosmetics and jeans.

Ten years ago, I felt uncomfortable taking any of my Chinese relatives to the “Friendship Stores” specifically for visitors, because any souvenirs I could buy seemed ostentatious in light of their income. This time, my cousin had many opinions about the price and aesthetics of the souvenirs and gifts I was buying, and I no longer felt like such a big time spender. The point is that China is becoming more consumption-oriented thanks to dramatic economic development over the last decade.

Businesses from Japan, Hong Kong, Taiwan and Singapore have been actively building their bases in China to participate in the current and future market. By and large, U.S. companies have been missing out. Yet American companies have the technology, market presence and product know-how that China needs, and are in the position to strike attractive deals with favorable long term returns.

China is one of the few places in the world where anything American still carries a special cache, a feeling dating back to World War II. Too bad more American businesses are not taking advantage of this vast reservoir of built-in good will.

Of course, going to China to seek a joint venture partner or form some other strategic alliance is still not a piece of cake. For thousands of years, China considered itself the middle kingdom that waited for the outsider to come to it. In ancient days, the visitor brought tribute and was in turn handsomely rewarded. Now China still expects the outsider to be the proactive party and bring in their ideas. Those who take the trouble to formulate a project, carefully outlining the benefits and required contributions for both sides are more likely to claim the reward they seek.

Monday, March 1, 1993

Jing Wen Zhun Xi

I get exasperated and frustrated with my friend from Asia. He has many endearing qualities. For example, he is loyal, generous and unfailingly supportive to his friends. He has one major fault. He starts many projects with great enthusiasm but brings hardly any to a satisfactory conclusion. After many discussions and exhortations, I have reduced the issues to four Chinese characters: jing, wen, zhun and xi (精稳准细). My hope is that the slogan would become entrenched in my friend’s consciousness and thus helps him toward becoming a more effective person.

Everything starts with jing. To be jing(精) is to be focused and organized, to have a purpose in life, to know one's abilities and limitations, and to concentrate the energy and resources for maximum effectiveness in achieving those goals. No wasted motion, no dabbling and no day dreaming, so to speak. An organization is jing when it has a clear mission and objectives consistent with that organization's mission, strengths and capabilities. This means they do not chase after impossible dreams. They do not waste their time or energy on tasks of no value or with no chance of success. They are realistic. They know where they want to go and what they are capable of and want to accomplish. They do not waste either their time or energy.

People without focus tend to pick up tasks and interests on whim without any aforethought. Organizations without clearly defined objectives are easily swayed by outside stimulus and tend to change their direction as easily as the shifting wind. The consequence is that the person will waste a lot of time and energy and not accomplish very much. He/she will launch into projects carried away by external factors such as latest trend without seriously considering whether the project has achievable rewards and whether this person has the qualifications to reap the rewards. The organization will take on to many projects, thus dilute the efforts and fail to bring any to commercial fruition.

Many organizations from China show another aspect of lacking in Jing. These organizations know that they need foreign partners for their ventures, but they have no focus. They have not defined their own strengths and resources, and therefore they do not know what kind of partner(s) they need and should pursue. They ended up pursuing any and all opportunities equally. Prospective partners, seeing that they have no focus, do not take them seriously. The result is that these organizations do not succeed in attracting any outside investment and or cooperation.

Next is wen (稳), meaning stability and steadfastness. Those who know the meaning of wen have their feet firmly planted on the ground. They are able to think objectively and realistically. They select business, product, or career path based on realistic assessment of their capability, of their relative advantage vis a vis their competition, and of the market conditions and prospects. They actively seek facts and is able to separate fiction from the actual. They do not indulge in flights of fancy or wishful thinking and their assumptions, when they make them, are solidly grounded on actual conditions. They see reality for what it is and not what they would wish it to be. When they make decisions, it is based on rational analysis of hard data and information.

The merit of zhun(准) is probably easiest to understand and perhaps most difficult to achieve. To me, zhun means precision and exactness. While perfection is nearly impossible to achieve consistently, I believe to be successful in life, a person must practice being zhun, i.e., must strive for perfection. To an organization, success and long term survival must be equated to flawless quality, i.e. being zhun should be a habit. A person who is sloppy and is frequently guilty of getting by马马虎虎will soon be known as unreliable and not trustworthy. An organization that continues to put out shoddy goods will soon lose credibility in the market and go out of business. Alas for China, many organizations have not felt the full brunt of competition and have not yet appreciated the importance of quality to their long term survival in the world market.

Xi means fine, detailed and meticulous. In other words, the fourth component of qualities to succeed is attention to details. Only with a habitual attention to details, can a person avoid mistakes from oversight and anticipate problems and the action of the competition. Xi is a person or organization that thinks of everything. While at first glance this seems to contradict the first tenet of jing, it is not. Jing emphasizes that one should concentrates ones attention to its core objectives. Xi is to make sure that the attention is carefully spent and implementation flawlessly complete. Chinese sayings are full examples that pair jing with xi, such as jingda xisuan, (精打细算) meaning careful calculations and strict allocation; jinggeng xizuo (精耕细作) meaning intensive and meticulous farming.

I believe that if my friend would practice jing wen zhun xi, he would become more effective and productive and he will take greater pride in his work and thus improve his self image. An organization that subscribes the same principles will be more productive, more likely to survive and grow. The Chinese are partial to slogans and I hope jing wen zhun xi could become a battle cry for the betterment of its people and raise its competitiveness. Surely, anyone practicing jing wen zhun xi, and can perform his or her allotted tasks promptly, must be on the road to success.