China 1997 - 2013

I presented at Stockholm University yesterday to grad students who had a day about Chindia and I was to give my perspective on changes in China from my 15 years living and working in China. I added the presentation to slideshare. Key takeaways? China is not always what it seems like and don’t overestimate the power of Guanxi – definitely a double-edge sword and for foreigners, more so. Of course, the whopping growth and changes in behavior, consumption and attitudes.

War on the Korean Peninsula? My uneducated layman's view

First a disclaimer: I have no education in crisis and war analysis; nor am I expert in security and military strategies. These are my own thoughts and speculations. And I hope I will be proven wrong

I think we will see military actions on the Korean peninsula as the United States want to remove the threat that North Korean possess. The actual ability for Kim Jong-Un to push the button for a nuclear attack will make US to force a smaller or larger military incident in Korea.

I also believe that US may do this as a preemptive attack. There are too many hormone filled military advisors and leaders that just want to see North Korean gone. But there are also another angle to this and one that has been overseen in many of the discussions. A limited war on the peninsula will seriously weaken China and Korea. From a eco-political perspective, US has all to gain that North Korea heads to war with South Korea and has to be attacked from both South Korea, US and .. China. As China can’t really take the risk of a full-blown nuclear war an hours flight from Beijing, they would have to be involved and supportive of military counter-actions.

This would weaken China politically internationally but also affect their economic position. For Apple and other american brands, Samsung and other Korean products will suffer tremendously by a war outbreak.

If the war can be contained to the Korean peninsula with minor outbreaks to Russia, China and Japan, US will stand strong as the clear winner and really gain power in Asia. Therefore, I think that US may try to provoke an attack from North Korea or even may pre-emptive strike first.

But, I hope all military strategists remember the result of both Vietnam war and Iraq.

China and Corruption

Spinning further on doing business in China and the main topic of the day and for the new leadership in China: Corruption. To be fair, they have other pressing issues as well, like pollution, income disparity, grassroots democracy.

However, corruption is tightly integrated into the whole society and not necessarily in the way that we think of it. For example, it's quite common that sales people do not have salary, nor 'real commission', instead they are advised/told to get the commission from the customer and the seller states what he wants. Say, you are selling software. The company expects to get $1,000 and the customer is prepared to pay $1,250-1,300. The salesperson can pocket $100-150 of the deal and $100-150 goes back to the buyers. The sales person avoids paying salary tax, the company reduces their risk and also not paying social security fees and the buying company probably gets a better price (as if all the costs would be in the product sale, the price might even be higher).

As any macro economist would tell you, this model does not really work well for the society overall as its arbitrary who gets the benefits of the 'tax exemption'. And maybe this is one of the reasons why the government now imposes that kids can not deny to take care of their parents when they are older. The system can simply not take care of elderly in China. But even economists in China argues that the tax burden (link is in chinese) might be too heavy for Chinese companies (as a side note, foreign companies really have to fulfill their duties in paying full taxes).

Another example of how this kind of system really destroys value is water wells. A few years ago, there was a minor earthquake in a city outside Beijing and the city's largest problem was availability of fresh water. But instead of drilling new wells, bottled water was brought from all over the country. Why's that? It turned out that a cost of drilling a well is actually not that high. Say $2,000, but the actual cost for the local government ordering wells were rather close to $15,000 as a lot of leaked out. Thus, cheaper to ship bottled water. 

And the level corruption is unfortunately so deeply rooted that it will not be possible in near-term to extinct corruption; though it is now far more dangerous to be corrupt. With the widespread use of Weibo, whistleblowers can much easier cause trouble. And there are many examples only the last couple of months of government officials owning 10-20 apartments worth tens of millions dollars.

But the Chinese Communist Party strives first and foremost for stability - more important than economic development, human rights and democracy. The China Dream mandates a stable China. I'm not going to dive into the subject of democracy, but stability as the number one objective have implications. One is how/if democracy will be deployed but more pressingly, corruption can only be dealt with to a certain level as the Party needs its people to stay intact.

One of my acquaintances was a very high-level ranked executive in the telecommunications industry. His reputation was that he was fair and didn't accept bribes. He seemed to work for the company's best interest. In comparison with others, he was less interested in personal benefits. However, a few years ago, my friend received suspended death penalty for bribes he took more than 15 years ago. He was caught because one of his young mistresses were trying to gain some personal benefits, using my friends name. And the internal affairs started dig and dig and it seems like everyone has something to hide.

Now, he is one of those who weren't really corrupt and still got caught. Normally, this has been a sign that the person is out in the cold, cut off politically. This is also totally clear in the case of Bo Xilai. But as the Party is somewhat rotten internally from corruption and authoritarianism, it will take time to clean up. This article in Caixin sums up the Bo Xilai story well if you want to read more.

For anyone doing business in China, stay out of corruption of course. First, you don't really know how to play the game and secondly, the implications of being caught are too negative for both individuals and the company. As the case with Bo Xilai shows, never trust guangxi, as you can't predict political power changes in China.

As an anecdote, I just want to highlight that isn't only foreigners who gets scammed in China. Chinese gets cheated too.. I came across a Chinese gentlemen who seems pretty solid and with a good experience in the telecommunications and energy industry. Now, he told me a story that was not very nice. He met a Swedish businessman who he started a JV with and at the end, the Swedish businessman basically stole his company, knowhow and products and started another company. Not only outmaneuvering the Chinese business man but nearly bankrupting him. Everyone needs to do Due Diligence. If done, he would have found that the Swede were convicted for economic frauds and tax evasion in Sweden and escaped to China to avoid prison.

Not easy to do business

Doing Business in China - Scary?

Read another entry in Svenska Dagbladet today (in swedish) about Swedish companies being cheated (again) in China and that 65%, according to Kroll Advisory, was up for a fraud attempt last year.

But when it comes to China, it seems like many people get blinded by the opportunity and seems to forget the basics. You meet a person, maybe through an introduction and all of a sudden, you have Joint Venture going together and transfers heaps of money but also technology. Two years later, you have nothing and been cheated and lost both the market opportunity and money/technology. Basic business rules applies in China as well as in Sweden where normal Due Diligence would make you avoid many mistakes. But as in Sweden, you can still be cheated but at least you have done what you should in order to protect yourself from the easiest mistakes.

The China Law Blog is an interesting piece of information that with anecdotes and real cases highlights basic mistakes we often do. Here’s a piece on ten basic mistakes.

Another common story the last year has been suppliers that haven’t received the payments despite the buyer paid from overseas. What happened? The buyer gets an email stating that payments should be done to a new bank account in another bank in another name. Strangely, the buyer accepts and pays without further questions. Why? Would you do that in your home country without proper documentation?

There are unlimited stories of how to get cheated but apply normal business sense and get yourself some trusted advisors. And yes, it may cost a few dollars but better safe then sorry instead penny-wise and pound-foolish

Volvo and China - Culture Disconnect?

I read an article a few days in Svenska Dagbladet by Jonas Fröberg about the main owner, Li Shufu’s comment about the new Volvo’s only have one problem and that’s the Scandinavian design. I won’t go into the debate whether or not Scandinavian design sells or not or whether Chinese consumer might buy it or not, instead I want to highlight the issues with Chinese management and Swedish organization.

Here, we have a proud Swedish organization expecting their boss to pay attention to what they do, their experience and wealth of knowledge. On the other hand, we have Mr Li, a self-made billionaire who can afford to buy one of best car companies in the world, Volvo, and he is obviously very proud owner. Volvo was acquired and to be run in parallell with Geely, which has been the case, and the focus, at least for Mr Li, was also to increase the sales in China for Volvo.

Mr Li has apparently not attended board meetings and here is, in my opinion, the real issue. He expects to be consulted anyway as he is the main owner and the big boss. He do not understand, not relate to international (Swedish?) way of doing business and running organizations.

The Swedish management (despite not only being swedes there) continues to work as before and it’s based upon autonomy, respect and consensus (am generalizing here) and as a world-class organization well-recognized internationally, Volvo probably thought they could continue to operate in the same manner. However, as painful it might be for us swedes, everyone do not understand our mode of operations, nor acknowledge it as an excellent way of working. Volvo has also been a company operating at loss for quite some time with different owners as well.

Instead, and here I do not know the full story, but keeping the Chinese boss fully informed, able to comment and inspect and influence, is incredibly important if Volvo is going to deliver successfully. Without that support, the management will quickly be replaced if numbers do not improve, particularly sales in China.

Furthermore, Mr Li should really handle this internally but the media situation is totally different in China vs Sweden and I am pretty sure that Mr Li do not fully grasp that situation so for him being honest is not meant to be harmful but may also believe that media do not have a strong impact or can be controlled.

Some serious work is needed internally in improving the sino-Volvo communications and understanding. Just a simple example, a Chinese person saying “yes” does not necessarily mean yes unless the person is used and fairly fluent in english language. There is no “yes” in Chinese; instead there is acknowledging or negations. If you are asked if you are hungry, you respond hungry or not hungry. Not yes or no.

I think the Volvo PV management naively have underestimated the issues with having Chinese owners.

Huawei and US

It's been a bit of quiet lately and I know that this is old news, but I still need to voice my opinion

One thing that I have thought about a bit is Huawei's alleged ties to the Chinese government and thus disqualifying them from delivering to US operators - with the suspect argument of being government spy..

The logic being .. Well, I can't follow the logic. The only way the logic would work is if Verizon, AT&T, Lucent (now Alcatel-Lucent), Bellabs, Tellabs, Cisco, Juniper and others would act accordingly and act as spies for the US Government. Could that be the case?

David Wolf, who runs Wolfgroup Asia, has made an excellent analysis - and he should know. He has probably spent more time studying these companies than even I have done in the past. Read his report here

From my point of view, I did a serious in-depth study about Huawei in 2003 and has since followed the company and there are no real ties to the government. There are unofficial ones, as e.g. many contracts have been awarded to Huawei in China due to local tight relationships - but those are not substantially different from what both Ericsson and Motorola has.

On a national view, Huawei has got less government support which definitely undermines the argument of being a prolonged arm of PLA. The only real affiliation is that Ren Fei, CEO and founder, is an ex-PLA officer - but that was more than 30 years ago. 

Notably, ZTE is the company that enjoys preferential government support in deals where China can flex muscles. They have also in the past had better financing support but lately it seems like Huawei also can enjoy the 'free' money, which is one of the Chinese companies strongest advantages vs companies stuck under quarterly report and boards with little endurance.

SvD: I have taken business contacts on free trips

"I have sent business contacts at free trips"

He has worked in China since 1997, e.g. as Vice President at Ericsson China and senior management position at Nokia but also as club owner. Many times have David Almström have closed encounter with the extensive corruption in the country. He himself have also done things with  business acquaintances that might be considered as bribery in Sweden.

This article was posted in Svenska Dagbladet, SvD

 - China is still extremely corrupt. I have been directly asked several times to give and get bribes. It's a kafkaesque system where all takes a lot of time, says David Almström

He has been in direct touch with bribery both within the iT and telecoms as well as in the restaurant business. David Almström's short time as part-owner in a nightclub ended up in a total fiasco, due to the extensive corruption. 

 - It was a lot of those things. I never got to see the daily business, only part-owner, but I did see any money there as well. I tried to recover what I invested but that was impossible.

Today, David Almström lives in Sweden but still owns a cafe in Beijing and works towards China as head of Scandinavia for the software development company, Symbio. And during his 15 years in China, he frequently was subject to bribery and got many requests from customers. 

 - One example was a fairly small deal of $50-60,000 whereby I met the CEO of the customer. He immediately declared he expected a new computer to sign the deal. We said no and also did not get the deal, says David Almström

And it is custom for both local and multinational companies use bribes in their daily business, according to David Almström. However, the Chinese government have increased their efforts to control the bribes during the last years. And when bribes get revealed, it may end quite badly for the parties. One of the top manager at China Mobile was prosecuted last year for accepting briberies from many telecom companies - Ericsson was one of them [NB: I actually did not mention any companies that was involved in the bribery]. Punishment: Death Penalty with a reprieve (normally not carried out).

 - It a fairly tragic situation. I know him for a long time and he had a reputation of being one of the more honorable in the industry, someone who do not accept bribes. But as it turns out, 15 years ago he accepted a bribe. And in China, almost every one at that level has done something not acceptable.

Though David Almström explains he himself has avoid the bribes, he has been in the gray zone. Traditionally, it's been important to maintain a good and close relation with the corresponding business partner in China, and it's not uncommon for companies to 'all-inclusive' nights out to pure tourist trips, he says.

 - I have myself taken a person on a trip. Surely, we had some meetings but it was definitely a covered tourist trip, he says

 - But today the situation is different, the relationships are cleaner. Multinationals keep bribery on an arm lengths distance, looking the other direction and pray all is good.

As the government been much tougher on corruption, the bribes have been far more sophisticated, says David Almström. One strategy to escape the government's sharp eyes is to use antiques to laundry money. The one who wants to give a bribe buys an antique for e.g. $250,000. Thereafter makes a copy at a fraction of the cost, to be able to show something during a revision. The original is being give as a bribe. The bribed returns to the antique dealer and sell it back and gets his $250,000 in cash.

 - As antiques are very difficult to trace, it has become an efficient way of laundry money. There a quite a few of these advanced methodologies to hide the bribes, says David Almström

If you as a businessman stays away from the bribes, you certainly will lose some deals, explains David Almström.

- But question is if you want those contracts. You may have something on the person you bribe, but if gets exposed, you yourself will suffer as much, he says.

What do you do as a businessman if you do not want to participate at all in the corruption carousel?

 - Primarily, you have to work with people that you trust, manage as much as possible by yourself and accept failure before cheating to be successful.

- But it is impossible to be 100% fault tolerant. You can sign clauses in the contract of zero tolerance; keep a tight control of your business, but it's really difficult to be sure that everything is according to the book.

Column: "Avoid expensive and inefficient consulting purchases"

This was posted in CFO World yesterday

Swedish consulting buying companies are stuck in an ineffective purchasing model. To be able to compete globally, the CFOs have to start thinking strategically, says this week's guest columnist. 

Most Swedish companies still choses to have IT-consultants permanently located in their offices. In principle, they are like employees with the largest exception of being more expensive for the company. Also, competence development often gets de-prioritized. Neither the manager at the customer nor the consulting manager takes responsibility for the consultants competence. The prior wants the consulting hours they pay for and the latter as many billable hours as possible.

By migrating from today's fixed consulting team to more flexible alternatives, the buyers would be able to regularly adapt competence according to need in various development projects. Instead of using, for example, a team of 6 consultants on-site, a company could - without increasing its costs - have 2 consultants locally and some ten consultants offshore, e.g. in China.

The consultants onsite will then act as a bridge between customer and the outsourced consultants, securing scaling up and down the team and ensure adequate competence at any given time. Consultants based in Sweden can support several projects and keep up-to-date with the latest technical developments. At the same time, it is crucial to have a project manager locally off-shore - in China as in the example - with responsibility to build and retain the local competence.

With this setup of right-shoring, companies can reduce its costs given lower rates and at the same time keep competence competitive. Additionally, productivity increase by leverage time differences, shorter and more spread out vacations, etc. E.g., a Korean employee works 2 193 hours p.a. in average and the average Swede, 1 644 hours, according to OECD.

In the two examples below, I compare traditional project set-ups with right-shoring models. Example two is from a real customer whereas the first one is based on standard calculations:

1a) A project in Sweden operated during 12 months with three local consultants to deliver a project. Assume the cost is 800 SEK p.h. and they work 1,600 hours each. Total cost equals 3,840,000 SEK.

1b)An alternative solution is to source a part time project manager, working about 2 days a week with project management and delivery: a team of 5 developers and 1 tester in China working about 1,600 hours and a part time project manager in China. Assume hourly rates for the Swedish project manager is 1,200 SEK: for project manager in China 300 SEK, developers 250 SEK and tester 200 SEK. The project can be delivered at least two months earlier; given shorter vacations and less holidays, the Chinese team can be productive even when the Swedes have time off. Most likely, the end result will also enjoy better quality and more thoroughly tested as the larger team can include more specialist functions, such as a dedicated tester. The total estimated cost 3,328,000 SEK.

Alternative 1b provides several benefits: 13% reduced cost, shorter delivery times and a better end-result.

2a) A company wants to hire six people to develop several mobile and embedded applications for different systems and terminals. For sure, it'll take at least four months before all six can start (in best case). The cost in Stockholm would be about 100,000 SEK p.m. p.p.  The total cost ends up at 600,000 SEK p.m. and potentially a half million SEK in recruitment fees.

2b) The alternative could be to have two consultants onsite and four developers and two testers in China. The team is fully operational within two month. The consultants may cost about 120,000 SEK p.m., each developer 40,000 SEK and each tester 30,000 SEK p.m. Thanks to a larger team and shortened start-up, the new products can be delivered and launched at least two months ahead. The total cost is 460,000 SEK p.m.

Alternative 1b provides several benefits: 23% reduced cost, and significant shorter time-to-market.

I hear a lot of people having or knowing about bad experiences in off-shoring. I dare saying that most of these issues relates to experiences from off-shoring childhood some ten years ago. At that time, the conditions for communication were far from what we have today with horrible phone and data communications.

Today, significant improvements are in place and the competencies in countries such as China is nowadays almost as good as in Sweden.

When it comes to develop of physical products, many large companies already have product development distributed all over the world. Corporate managements should also think alike for system and software development, which tends to become core business in many companies. If Swedish companies' system development is more expensive and slower than competitors, we risk to lose our global competitiveness.

It should be in all CFO's and finance managers interest to engage in how its organization uses its resources for system development and purchases of consulting resources. Those leveraging right-shoring's flexible team setup do have the chance to reduce costs, improve its efficiency and shorten time-to-market. Thereby delivering future innovations and shine on the global market.

The Foreign Dilemma

The current Anti-Foreigner campaign is the strongest since US bombed the Chinese Embassy in Belgrade in 1999 and it is directly targeted at a foreign life-style rather than illegal immigrants. Clearly, there can not be that many spys who cheat chinese innocent woman and not that many that commits serious crimes, but the campaign is focused on those issues and it is becoming quite ugly.

Mandated by Public Security Bureau, the police targets Beijing primarily with Sanlitun (bar/restaurants area) and Wudakuo (university area with a lot of foreigners) in focus; the Ministry of Propaganda is on their feet. Most noticeable, Yang Rui's anti-foreign comments on weibo has spurred debates. Yang Rui leads Dialogue (CCTV9) since many years back, which is a program in English to stimulate dialogue between China and the rest of the world. But his comments rather displays an ugly attitude to the foreign trash that destroys China's purity. 

But why now? 

I have two thoughts and one could be that it is actually about illegal immigrants or visitors with doubtable visa. E.g. there are many younger people that is in China working on visitor's visa as they either can't find an employer or want to avoid paying taxes. Given the US campaign to clean out visa for chinese teachers, the campaign could be an action towards US to be more flexible.

More likely though, I think this an effort to get the focus away from internal affairs. The Bo Xilai scandal and the move away from leftish state-driven politics along with the escape of house-arrested dissident Chen Guangming have caused a lot of trouble with and for the Chinese leadership. Add that to ever-increasing issues with humongous corruption cases emerging now, there is not a very strong trust in the leadership - and with the new leadership soon to take place, they need peace and quietness to get into the office neatly. 

Quite often in the past, the leadership has then directed the discussion on external issues - be it Taiwan, Tibet, Japan or US. This time, the campaign fuels the anti-foreign sentiments where it has become more difficult to get visa and where the campaign is directed against illegal immigrants, it has strong a focus on bad behaviors by foreigners - that is not necessary illegal, just not nice.

Luckily though, it doesn't seems to affect daily life too much :) Here is a sunshine story with comments alike.

For more information, Anne Henochowicz wrote a great article in Foreign Policy. 

Changing Culture?

After being back for a months or so now, a few things strikes me as common amongst all culture and that is the need of being local. I guess you all heard about the 80s and 90s theme about Think Global - Act Locally - basically build global solutions and localize them for each market's need. Very much the foundation of Nokia's world dominance (and now also Apple's) but more and more that is becoming more uncommon.

A few other companies have shown a different route to success, which is the reverse - Think Locally - Act Globally; in the sense where local market requirements, opportunities or skills can create global opportunities. Not totally different but creates a different mindset of how to operate and run a business.

But surprisingly in the industry where I now operate (software development/outsourcing), the need to think and act locally is far stronger than I expected. And it does not really differ from Finland, Stockholm, Malmö, Oslo or Copenhagen. Whoever I talk to, the need to speak local language and reside locally is equally important despite the obvious advantage of off-shoring test and development work. For example, in Oslo, there are no free IT resources. Unemployments is close to zero and the cost of hiring or sourcing consultants locally are amongst the highest in the world. Still, the thinking is to hire locally.

I would have thought that the ever-increasing globally competition would force companies to further drive cost-reductions, productivity enhancements and shorten time-to-market. In the case of Norway, productivity per hour are the highest in the world but the output is not that high, given the few hours worked, which slows down deliveries.

What are the change drivers? Will it ever change or?

Another reflection is the constant need to complain about how limited their local community is and the dream of how exciting other cities (read Beijing, Hong Kong) are in comparison. Amazingly actually as both Stockholm and Oslo are quite interesting, though a bit expensive, but the grass is always greener on the other side.

Back In Da Jing

Back in Beijing again and this post is not about technology, nor about my return to Sweden but rather about what really annoys me in Beijing and still really gets to me when I come back to Beijing after only five weeks. These things really bothers me and as time goes by, things will change and my memories fade, but still.

The smell and the smog - see the two pictures to the left - bothers me a great deal. First thing you feel when you get out of the plane is the "Beijing Smell" - the smell of burnt coal and the pollution is a combination of China still using 75% coal to fuel its energy needs, the tripled number of cars in four years paired with a dysfunctional public transportation and limited road infrastructure (in all fairness, who could have foreseen this tremendous growth in cars?) and a disability of understanding how to operate a car in order to drive smoothly. 

Clearly, this will improve - as public transports are being built out and roads improve and people's knowledge increase (often aligned with traffic tickets). And China has an ability to gets things done, when they get it.

Secondly, though not right in my face, it is blatantly obvious that the only thing that matters is me, me and me and that I get more money, can show off my success and brag about all the money I get. This creates respect among equals and the less fortunated. Unfortunately, it comes at a price and the price is that nothing else matters. The China Law Blog reported (unscientifically) that the number of violent cases in business have tripled and the murder of Mike Hayward is just another example thereof. KIds that dies or gets seriously injured because milk is tainted with Melanin is another example. And the list just gets longer and longer day by day.

Thirdly, the foreign Beijingers.. I do not know what it is with them and it is not true for all of them (us) but some of us behave utterly arrogant and unpleasant and display a view of racism that "these low-level chinese uneducated creatures" can not read their mind, understand their winks and most of all, appreciated and learn their superior use of the English Language. A lot of times, and I must say I also apply a great deal prejudice here, most of these guys are not able to score the type of job and salary they have in Beijing; nor get access to the restaurants and clubs in their home towns; nor pick up the girls and crowds. What I can't understand is the lack of appreciation, being in the country of opportunities, where they can afford everyday's luxury and appreciate the struggle that all of us has here (locals, migrants and immigrants). You see bad-ass behaviors at bars, at work, in taxis, at restaurants. It can be good to remember who are the guests here. Even if I lived in Beijing more than half of the population has, I still realize I am an outsider, a guest and will also be, but I have had my lowlights as well (I am not a saint)

In Sinica's podcast, The End of the Expat Package, you can here a nice analysis about the situation but the truth is just because you speak chinese (hey, 1.3B does) and that you are foreigner (hey, you are not the only one) does not mean you have a great future in China. I may not agree upon all their thoughts, but insightful indeed. Maybe time to be humble and integrate into the society.

The good thing is that things are achange and only time will tell but I have good hopes of China's future development.