Far East Forum Special Report from Suqian, China: Refining Small Business Development in China- (Posted by 任翔 on behalf of 安东武 )

Refining Small Business Development in China

ZHANG CAIJUN

So I've never set foot inside a developing-world corn oil refinery until today, but after an hour climbing fractured sheet metal staircases to various levels of gleaming freshly-installed machinery, I now have a basic understanding of both the production process and the business challenges facing its ebullient and ambitious owner. At this point a lack of business and management training are pretty much the only hurdles between Zhang Caijun and his goal- selling his own corn oil brand directly to customers. He has already secured access to a line of microcredit through Opportunity International (OI) China's Suqian branch, where I'm working this summer.

Zhang demonstrated the function of each machine in the factory with intimate familiarity, for he had singlehandedly overseen their purchase and installation, and is primarily responsible for their operation, maintenance and replacement. He seemed to take almost a father's pride in sharing the production process with us, from start to finish.

Running at full capacity the factory requires only five additional employees, whom he trains personally. At this point he conducts every administrative aspect of the of the business himself. The result is forty tons of kitchen-ready corn oil per day, which is sold at rock-bottom prices to distributors, slapped with their label, then shipped and sold at much higher cost to supermarkets and food manufacturers. Starting as an uneducated corn oil peddler, Zhang was able to build the factory from the ground up and secure a series of loans to purchase new equipment (the hardware) and refine his product, yet he lacks the training and expertise (software, as he described it in Mandarin) to transition into a company capable of marketing and distributing its own brand.

Zhang's dilemma is how to cut out the middlemen (distributors), when the only public advertisement he has bearing his own label is printed on the sign above the factory, and his brand recognition is limited to a handful of tenants who rent property on the compound during the off-season to help him make ends meet, along with a small cohort of ten part-time* workers.

OI CHINA

Visiting the workplaces of OI China's microfinance clients affords a unique look into business in its infancy- all of the genetic material is present for evolution into a larger and mature entity, but things are underdeveloped, awkwardly proportioned, in need of guidance- often in the form of financial support and professional training.

The CEO of OI China- a personable Australian of Chinese descent and stalwart Christian faith named Aaron White- privately compared his microfinance philosophy to the holistic approach of traditional Chinese medicine. Western medicine and capitalism tend to favor the scalpel: isolate and remove the harmful or unproductive elements, then prescribe and administer an external cure based on what has empirically proven to work best for the greatest fraction of test cases.

Aaron's strategy (paralleling Chinese medicine) evaluates the subject as a holistic individual, determines what is out of balance, and then patiently sets to work remedying that imbalance. Operationally, this can be accomplished through small loans with conditions and repayment plans tailored to the unique business cycle of the client's industry, through financial or management training from volunteer consultants*, or to insurance policies which help hedge against drought and other factors not commonly covered by commercial financial services. (Microfinance institutions (MFIs) abroad often also collect savings, which helps both client and MFI, but government regulations at the state and provincial levels currently prohibit this in the PRC.)

When I ask the clients we meet why the choose OI China as a business partner, their first response usually concerns the flexibility of repayment options, followed by the personal relationships developed through frequent check-ins and visits, and finally the training services offered by the organization. Many clients lack collateral or are seeking such small loans that banks aren't interested in them as profitable customers, so microfinance providers may be their only option. Competitive interest rates relative to the MFI competition, and the use of innovations like mobile banking (using vans to reach more remote clients; when they reach sufficient scale they will look into partnering with China Mobile to provide cell phone banking), are helping OI China to quickly expand into rural areas.

That's all for now out of Suqian. Until next time,

安东武

*I've learned from other site visits that production in many of the areas rurally-based industries is spotty during the harvest season, because higher relative wages (or the farmers' own family demands) gathering wheat, rice, and other crops pull laborers out of the factories.

*One consultant, David Mumma, accompanied us to Zhang Caijun's oil factory- he was involved with shoe manufacturing factories throughout East Asia until retirement. The other intern here in the office with me is Tracy Quek, a former journalist for Singapore's Straits Times and current master's degree candidate at Johns Hopkins' SAIS in DC.

Taiwan's Soft Power Potential

Taiwan touches your heart -- or so the old slogan of its tourism bureau tells you. Warm fuzziness aside, I've always found the slogan to be a good place to start a discussion on Taiwan's soft power. For whether Taiwan manages to touch the hearts of people outside of its borders is fundamentally dependent on whether it manages to create and employ soft power. The following are some of my thoughts on the subject, fleshed out with the invaluable help of two friends from UC Berkeley.

"Soft power", by the definition of Joseph Nye, is "the ability to get preferred outcomes through the co-optive means of agenda-setting, persuasion, and attraction". This is in contrast to "hard power" -- the coercive power of military or economic might. Taiwan is interested in soft power because, quite frankly, its hard power (particularly military power) resources are very limited. It therefore behooves Taiwan to look to soft power as it designs strategies to secure its goal of gaining a seat and voice in the international community. 

Taiwan's current soft power strategy seems involve an aggressive tourism blitz. It's a good start, but this strategy in and of itself only sets up Taiwan to be the Hawaii of China. It doesn't necessarily improve Taiwan's ability to attract, persuade, or set agendas on the international issues that matter. In short, it's not enough. But then, what would an effective strategy look like?

The Core Messages:
If Taiwan's goal is to gain a seat and voice in the international community, it needs to make sure that its country branding and public diplomacy policies broadcast two key messages:

1. Taiwanese people are warm, open, and generous. 
2. Taiwan intends to be a responsible stakeholder in the international community. 

The first message is important because, in the end, soft power is about making oneself well-liked. The second is important because it implies the notion that international participation isn't about nationalism or secessionist sentiment -- it's simply a matter of being responsible.

The Shining City on the Hill:
Taiwan has several key attributes that it can derive soft power from. It has a strong market economy,  a functioning democratic government, an attractive popular culture, free speech and press, and mostly uninhibited Internet access.

Since Taiwan is governed by the Republic of China, it is often juxtaposed against mainland China, which is governed by the People's Republic of China. Notice that a lot of the power resources listed above are those that the mainland doesn't have. What Taiwan can therefore do is use these to frame itself as the China that the mainland can strive to be --  a possible future for mainland China where a democratic system can co-exist with a reasonably stable (dare I say "harmonious"?) society. This is a variation of what Joseph Nye calls the "city-on-the-hill" effect.

Citizen Diplomacy:
Mainland China primarily uses soft power strategies that are top-down and state-driven. Taiwan should do the opposite -- put citizen diplomacy in the forefront of its strategies. In fact, I would argue that Taiwan should have its youth and students spearhead many of its policies.

There are two reasons for this. The first is that young people are generally better versed with social media and networking. The second is that things that young people say are going to sound a lot more earnest and genuine than anything that comes out of a government bureaucracy.

Student Exchange:
Based on its power resources, a long-term strategy that Taiwan can implement is what I call the "Rhodes Strategy" -- ensuring that a generation of world leaders has set foot in a country in their formative years as students. In fact, Taiwan can frame itself as a potential political future for mainland China, and then augment that "city-on-the-hill" effect by creating an elite student exchange program that teaches comparative politics in the Chinese-speaking world.

This program can be a joint-project between National Taiwan University and Academia Sinica. In it's test-pilot stage, it can form a partnership with University of Hong Kong to attract Hong Kong's top students. If this works out, I recommend branching out to other top schools, perhaps including:

• Harvard's Kennedy School of Government (U.S.) 
• Georgetown's Walsh School of Foreign Service (U.S.) 
• Columbia's School of International and Public Affairs (U.S.)
• National University of Singapore (Singapore)
• Peking University (PRC)
• Fudan Unviversity (PRC)

Colbert Report: The Kim Bojang-ils

The Colbert Report
Tags: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive

Last week, Stephen Colbert poked fun at North Korea and its Dear Leader.

"Without tap dance technology, Kim Jong-il will never be able to crush his people with a jazz hand."

Real Estate in Asia: Where are the bubbles, and where is it safe to invest? Far East Forum Special Edition from Ulaanbaatar, Mongolia

People have been talking about it for more than six months. Various and sundry predictions as to when it is going to happen have floated around analysts desks, newspaper editors ears, and even across the coffee or tea table. Yet, thus far, there has been scant definitive, damning evidence and even less written on the subject. I am of course referring to the Mainland Chinese real estate boom (soon to be bust).

Last week’s WSJ article did a tidy job of explaining where the market is heading in Beijing. There is really no telling how fast this is going to happen. Prices have been skyrocketing in Shanghai and Beijing (in particular) as well as Hong Kong over the past few years. Just this past fall the Beijing government attempted to cool the market via restricting home ownership to two properties per person.

This has a number of important implications for the world, as it could be a burst as opposed to simply a ‘deflation.’ Real estate risk is substantial in China because much of the growth has been predicated on increasing land and property values. This will no doubt have an impact on commodity prices for things like sheetrock, steel, copper (as pointed out in the WSJ article), as well as numerous other building supplies.

In addition to the commodity price downturn, Chinese banks holding mortgages could face problems similar to those experienced by US banks during the financial crisis. If the property values decline by 10-20% (as this article suggests), there could be a drastic increase in default risk.

In Hong Kong, the local government is taking up a number of measures including building public housing, re-zoning land, lowering the mortgage amounts that can be borrowed, penalizing back-to-back sales (they have a multi-tiered penalty system within 2 years, and a 15% penalty if a property is re-sold within 6 months!), and increasing the cost of buying for non-residents. (See the South China Morning Post’s article entitled. “Tough Measures to cool homes market”). All of these measures are designed to slow a market whose prices have gone up 18% in the last year (See SCMP’s “Market boom leads to gloom”).

Even across the Strait in the de-facto independent Taiwanese market, prices are still on the rise (somewhere between 10-20% depending on location). There was a lot of speculation about the sharp price increases after Taipei opened the Taiwan home market up to Mainland Chinese in June 2010. The government in Taiwan has also acted to cool the prices by introducing a luxury tax on properties that reach a threshold value. This has apparently worked to some extent because brokerages reported a 20-30% decline in sales after the announcement of this policy (See the China Post’s article entitled “Home prices rise in May despite luxury tax: real estate firms”).

All this begs the question, where should real estate investors send their money in Asia? Based on my own recent experience, I suggest Ulaanbaatar, Mongolia as a destination. Rent prices here are comparable to many American cities (depending on the place). Even more lucrative than this is a business known as ‘mediation.’ Exactly as it sounds, this involves someone fluent in both English and Mongolian that acts as a go-between for foreign tenants and local landlords. They often charge tenants and landlords $500 US each for ‘facilitating and managing the transaction.’ It strikes me that the value-added of this kind of service is extremely low, and offers huge potential for anyone willing and able to provide similar services.

Offices, luxury brand shopping, and a complete (excepting a single Kenny Rogers Roasters) dearth of western food chains in the city are three of the most lucrative opportunities I have witnessed since moving here. Next to Sukhbaatar Square the Central Tower claims a Louis Vuitton, Armani, and Hugo Boss store. People in UB claim that for at least a short period of time the LV Store was the highest grossing in all of Asia. Right across the street is another new gleaming building, the Blue Sky Tower, which according to MAD investment solutions is the tallest structure in Mongolia (Article). Yet, there is not a single Starbucks, McDonald’s, Pizza Hut, or KFC. Not that any one brand is necessary, it is striking that most developing countries have at least one of these to offer whereas Mongolia has not even one.

Up Next: China’s New Conflict in the South China Sea

Follow-Up Thoughts on KORUS and Free Trade

After writing my previous post on the United States-South Korea Free Trade Agreement (KORUS), I realized that a bit more needs to be said about KORUS, free trade agreements, and Roger Bybee's "Funnel for Exploitation" article in order to do justice to the complexity of these issues.

According to the U.S. Trade Representative's Office, the provisions of the KORUS FTA stipulate:

• 95% of bilateral trade in consumer and industrial products would be duty-free within a 5 year time frame
• South Korea lowers tariffs and non-tariff barriers on U.S. automobiles, manufactures, and agriculture.
• Increased export opportunities for U.S. service-based firms in sectors such as finance, health care, telecommunications, and education.

The cumulative result can lead to gains that (at the very least) increase U.S. export volume from $10 billion to $11 billion. The South Koreans, in turn, could gain from a more efficient allocation of resources to its most productive sectors.

But Mr. Bybee doesn't really care about the specifics of the KORUS FTA, does he? If you read the article closely enough, you realize that the particular group of activists that the article speaks for isn't concerned about the nitty-gritty details -- these activists operate on a fundamental rejection of free trade and globalization. The reasons are varied, but they all stem from a latent fear: the fear of needing to adapt and compete in a global economy.

It may be a bit trite to say that there's nothing to fear but fear itself, because the pain felt by workers in traditional blue-collar industries is very real. But on a broader level, it's important to understand that jobs in these industries are not coming back -- that other countries now have a comparative advantage in those industries. Rather than to try to preserve the low-skilled manufacturing jobs that are getting outsourced to developing countries, it makes a lot more sense to focus on export industries where we have a comparative advantage: high-tech machinery, financial services, education etc.

Think of it this way: Don't fight Schumpeter's gales of creative destruction (a catch-all term for job creation and destruction via the forces behind globalization). Compete in the global economy by utilizing it to your advantage. Redirect the blows of creative destruction with economic aikido. That's the type of mindset that workers and policymakers facing a free trade regime should adopt.

One final point: activists like Mr. Bybee who (explicitly or implicitly) claim that we need protectionist policies to weather a recession should go back to their history textbooks and read up on the 1930 Smoot-Hawley Tariff, which was passed during the Great Depression. No self-respecting economist -- or educated person, for that matter -- would argue that workers were helped by the era's protectionist policies. In fact all studies indicate that it exacerbated the Great Depression.

South Korea FTA: Reports of Exploitation are Greatly Exaggerated

Recently there's been more talk in Congress about the United States-Korea Free Trade Agreement (KORUS). As one would probably come to expect by now, the anti-globalizers are angrily shaking their fists and crying foul. Yet they do so for all the wrong reasons.

Check out the In These Times article "South Korea 'Free Trade' Deal: Another Funnel for Exploitation", which was re-posted today on Global Trade Watch's official blog. According to the article, KORUS opens the U.S. market to goods that are 35% "Made in Korea" (meaning that 65% can by low-wage labor in developing countries like China -- which the article equates to as "21st century slavery"). It basically argues that outsourcing to East Asia means exploiting labor abroad while impoverishing labor at home.

Scary stuff, right? What's actually scary here isn't the reality of the free trade deal, but the mish-mash of textbook fallacies and unwarranted anxieties that the article presents as its key arguments. Here's my take on these arguments:

(1) "Job Loss"
Trade doesn't unilaterally destroy jobs. Trade, by definition, involves quid pro quo -- you import something while exporting something else. It's funny how the article never mentions jobs that would be created in industries that would be supplying our exports to South Korea. These industries, according to the Brookings Institution, include finance, telecommunications, law, accounting, health care, and education. So while the ALF-CIO could potentially lose out as a result of KORUS, people in these industries stand to gain. This is on top of the fact that both American and Korean consumers would have access to better quality goods and services at cheaper prices.

(2) Social Safety Net -- "Shove 'em Off the Cliff"??
What the article lambasts as "ensure them a safety net, then shove 'em off the cliff" is actually a very responsible economic policy. The Heckscher-Ohlin Model of international trade shows that since the economy as a whole benefits from trade, the best way to help displaced workers is to promote freer trade and then compensate the workers through unemployment benefits or job retraining.

(3) "Exploitation"
The indictment that traded products will be produced in conditions equivalent to 21st century slavery is moralistic nonsense. As Nobel-winning economist Paul Krugman explained in his 1997 Slate article "In Praise of Cheap Labor", jobs in China or Myanmar at low wages and spotty working conditions (by U.S.-standards) is better than no jobs at all. By arguing for what is essentially "good jobs in principle, no jobs in practice" for workers in these countries, the "Funnel for Exploitation" article is effectively saying that the workers deserve to stay in abject poverty.

The fact of the matter is that KORUS is rather economically benign for both South Korea and the United States. Or to borrow from Mark Twain's immortal quip: the reports of exploitation are greatly exaggerated.

"There's only one China... composed of two separate and completely different Chinas"

A friend of mine from Taiwan brought this to my attention. It's a brilliant tongue-and-cheek explanation of Taiwan Strait Issue by Michael Chamberlain and Charlie Pickering of The Mansion, a 2008 Australian satirical news show.

Professor Robert Berring of UC Berkeley once called the Taiwan Strait Issue an unusual (and perhaps unnatural) situation in international law. From this video, it's pretty self-evident as to why.