wallydownundy

Last week I wrote about Gloria Jean’s Coffee - and yesterday found a Facebook Group organising a boycott. Consumer companies need to fear public backlash. The goodwill that propels a brand to stardom can be fickle. It turns quickly.

Beijing is in the throes of boycott avoidance. The Tibet uprising couldn’t come at a worse time. Over the coming weeks the Olympic flame will visit most major cities - to provide a searing reminder of the issue of human rights.

I am old enough to remember the 1980 Olympics in Moscow. Then the USSR had invaded Afghanistan and was subjected to a global boycott. Many Eastern European nations retaliated in 1984 by avoiding the Los Angeles games.

Today athletes are under pressure to consider personal boycotts of the games. Nations stand like dominoes ready to topple in succession. Each awaits the other’s move.By the Northern Hemisphere summer we’ll see a succession of boycott calls. And many individuals will heed the call. Soon after pressure will grow for nation states to follow.

Don’t book your hotel rooms in Beijing quite yet. It won’t be a politically correct place to visit this year.  

In olden days, China only needed to censor the media and expel foreign journalists. This week video footage of uprising in Tibet has been uploaded to YouTube. In Mainland China access to YouTube is down today. For some quirky reason you can’t get your favourite karaoke, pet tricks or scenes of activists being led away in chains (or in a body bag).  This is the bleeding edge of citizen journalism.

On 11 April the Newseum opens in Washington DC. This is a museum dedicated to news and journalism, and is likely to honour journalists killed in the line of action.  Soon they will have to feature the ordinary citizens who place their life on the line to ensure atrocities are witnessed by all the world.See this clip on YouTube.

And realise this - your ability to watch this means you’re living in a democracy. 

Mike Smith, CEO, ANZ Bank spoke this morning at the China Business Summit hosted by the City of Sydney.

“It’s tough out there, particularly in the financial centres of New York and London.” Sub-prime write-downs now exceed $140 billion (write-downs are bank-speak for losses). This exceeds the GDP of New Zealand. The first bank run in a century occurred in Britain; Northern Rock bank was nationalised this week.

Liquidity is placing pressure on corporate and there is increasing volatility in share markets. “There is no longer a disparity between what is good and what is bad.” Australian banks are being treated with the same discounts as USA and European banks – yet Australians

“Credit worthiness is like oxygen – you don’t notice it when it’s around,” said Warren Buffet. Perhaps he should have said you notice it when it’s not around.

In this environment sovereign funds are welcome relief – and Australia needs to consider carefully policies on these funds.

The Australian economy and banking centre are weathering the current financial storm better than any Western economy. The Asian markets are less dependent on USA so slowing will be modest across the region. Asia is in a much stronger macroeconomic position that in was a decade ago.

The importance of China to Australia’s future…

Today we are at another turning point – by 2015 China will once again be the world’s largest economy. In the 19^th century we had the European century. The last was the American century. We are now in the China century. It is vital for Australia to embrace China and recognise our future must be linked to China.

Our future success for the economy and our businesses is liked to China and to Asia.

In “Conspiracy Theory” Mel Gibson is a crazed homeless man seeking to convince Julia Roberts there is an assassination attempt being plotted. It’s wonderful when the insane engage the sane. You question the separation of insanity and what is normalcy.

Today I sat next to a sane looking businessman here at the China Business Summit. He shared a theory about the future of Australia.

By 2050 Australia will be an outpost in the People’s Republic of China. The 200 million middle class Chinese can’t squeeze into Mainland China so the vast country of Australia seems a perfect outpost. With that longer term view in mind, China is seeding the nation today with some 80,000 students. These pioneers will bridge the cultural and language differences – much like astronauts establish colonies on distant planets in science fiction movies.

But Australia offers more than a great coastal community for over-populated China. The strong natural resource base is mandatory for China’s growth. A pipeline for natural gas is under development. Maybe one day that will offer ways to ship other resources.

We have the only Mandarin speaking Prime Minister in a Western nation. (”I doubt George Bush speaks Mandarin,” said Mike Smith, CEO, ANZ Bank at the China Business Summit. “I question if he even speaks English.”) Was Rudd then sent to study in China much like “The Manchurian Candidate”. Melbourne’s mayor is from China.

So here’s the movie idea (pay attention Universal Studios – you heard it here first): Australia in 2050 with Chinese flags flying and Mandarin-speakers wandering along the beach-front promenade at the Gold Coast. So many things look familiar – it’s good old Sydney beach-side. Yet there’s a strong element of the foreign. Dim Sum and noodle shops have replaced fish and chip shops. A low-flying Qantas plane passes overhead (still with its iconic red tail – but the kangaroo now has a star off its tail). And while rich Chinese eat and shop, second-class citizens originally from Australia serve and clean.

The Gold Coast has become China’s Florida – the beachfront community for rich retirees. Sunscreens had been used to protect the skin – it’s unacceptable for Chinese to have dark skin (that signals a job in the fields – way too plebeian for wealthy). But at this future date silver tennis ball-sized satellites are in stationary orbit above the Gold Coast to deflect the worst of the sun’s rays.

To drive the plot then maybe there’s an insurrection – or just a “Planet of the Apes” style revolutionary who rails against what’s now accepted as normal. Slowly people wake to the change – but isn’t it too late?

Or should I posit – isn’t it too late right now? Isn’t the train hurtling to this destination today? Mandarin is the second most common language in the Sydney basin – after English. Australia’s largest trading partner today is China. Tourism relies on Chinese – today they’re the third highest visitor base.

Come on Universal Studios – this is a great premise!

Speak to my agent…

China is rich. Not like “new money” flash car rich. China is “kingdom of Saudi Arabia” 1980s petro-dollar rich – times ten.

So why haven’t their Sovereign Wealth Funds bought up more of the economy? Australia’s banks and mining companies have to be cheap. After all, what’s a few billion dollars between friendly countries?

Maybe it’s bad PR. After all we commoners still perceive China as a communist state best known for the Cultural Revolution and Chairman Mao. People say China and we think human rights abuses, Tibet, Tianneman Square and bad-fitting collarless jackets. Who wants to swap the set of crooks for another – better the devil you know, eh?

But have no doubt. In time we’ll see more direct ownership of Australian companies by Chinese firms and funds. Today’s acquisitions are through joint ventures, minority shareholdings or via blandly named funds or holding companies. Yet before that can happen – and be acceptable politically – the country of China does need to better develop its reputation among the mass populace.

 Opinion leaders and business professionals are already “on board” with China. Yet that hasn’t driven down to the Late Majority and other large pockets of the population. It also hasn’t reached government - as China and 3Com learned today (see The New York Times).

It will take more than a series of “Survivor China” to gain mass support. But that was a good start!

Today in Darling Harbour the City of Sydney hosted an inaugural “China Business Summit,” sponsored by Austrade, ANZ Bank and KPMG. The Economist was the official media partner – I learned about the session as a subscriber.

For an inaugural conference attendance was good – not an overflow but now empty, either (especially when you consider tickets cost $220 each).

The Hon. Ian MacDonald, MLC, Minister for State Development with NSW Government started the main session. His opening keynote speech highlighted the rationale for the links.

Why China? Australia grew up a distant partner to Europe. In the 20^th century the allegiances shifted to the USA. Today our largest trading partner is China. And the links are more than purely economic. Chinese New Year in Sydney is the largest celebration of Lunar New Year outside China.

Exports are the primary link. Exports account for 1 in 5 jobs in Australia – in rural Australia that’s 1 in 4 jobs. Today the economic relations with China are $50.5 billion – with NSW claiming $15.4 billion. China is the largest trading partner for Australia and NSW. Its annual growth rate last year was 11.4% and puts it on course to overtake Germany as the third largest economy.

Just 20 years after Sydney was founded the first schooner left laden with seal skins for Canton (today Guangzhou). It returned with tea, china, silk, toys and trinkets. Today aluminium, wool, coal, copper are shipped via that same route. NSW exports the highest amount of coal in the world.

Beyond exports Sydney is now exporting intelligence – PTW Architects designed the Beijing Olympics aquatic centre. Called the “Water Cube” the centre can host 17,000 spectators and uses advanced building technology. Some say it looks like a cube covered in bubble wrap.

Those visiting the Beijing Olympic Games can take advantage of Austrade’s business club – a “matchmaking service” for business professionals taking place in Beijing during the Games.

Support for America’s foreign policy reached new lows today, as polls reveal Australians hold the USA in similar regard as China.  (See today’s editorial in The Sydney Morning Herald.) 

I admire many aspects of China and its rich culture.  Foreign policy is not one of the country’s achievements.  And as an American by birth, my home country was always respected and admired around the world.  Until now. 

Thankfully Australians recognise the difference between a country and its temporary Administration.  Yet the damage done to the image of the USA will take a decade to repair - or longer. 

China rising?

At this morning’s session the Q&A session lasted longer than my laptop battery.  U of M’s Lieberthal was asked, “If you were in China at a conference, what advice would you give them about USA?”

He says the primary view is that the USA’s policies all aim to help China fail.  Such as the policies towards Taiwan - the belief is to keep China distracted so it will invest in defence and then not have the money to develop the economy.  The USA also is contributing to the economies and military strength of democracies encircling China (Taiwan, Philippines, Australia). 

If Lieberthal could give China advice, it would be two-fold:

1. Accelerate the civil society of China, such as the liberalisation of religion (which Lieberthal says is a stabilising force and not a destructive force).
2. The current attempt is to modernise under an autocracy - that cannot and will not work.  China uses examples of Taiwan and Korea as former dictatorships that made the transition.  These were not made under high economic growth along with high information flows. 

The Olympics pose one of the greatest communications challenges - this is “The Coming Out Party for China.”  The problem is that China views 2008 as the biggest event and a lot of “face” is involved.  Any demonstrations by NGOs will potentially damage the “face” of China. 

“I am glad I’m not GE,” says Lieberthal.  It will be almost impossible for GE to balance the issues of civil society and human rights in the USA - without ruining relations with China.  China is seeking all kinds of advice but are likely to over-react. 

Also - China has less than 1/2 of per capita minerals and resources needed - hence the strong growth of mining in Australia and the continued investment in Africa. 

Hard to wake despite an 11 hour sleep - the alarm went off at 11:00 pm Sydney time, making it an early California morning.  Thankfully Linda at The Ritz-Carlton hotel was willing to find the espresso machine and make a double to start the heart.

The first session is entitled, “The Impact of Globalisation.”  A panel has been invited to address the issues.  They include:

• Kirk Stewart, EVP, APCO Worldwide
• Dr Kenneth Lieberthal, University of Michigan
• Geoff Davis, Unitus
• Debjani Deb, EmPower Research

The focus of this panel is on Asia Pacific, with an emphasis on China and India. 

Dr Lieberthal began the address, “Challenges Presented by China and India.”

Dramatical reductions in costs of transportation and communications has fundamentally changed the way we do business.  The re-schaping of the world through globalisation has happened with leadership from the West.  But as China takes the lead and India grows we’re getting new perspectives.

China’s record is fantastic - 10% growth in GDP every year since 1978.  Some argue it’s as high as 13% to 14% per annum.  Foreign trade has increased 30% per year every year over 30 years.  The increase last year alone was larger than all of India’s foreign trade.  China now has largest foreign trade reserves of any country - ever. 

China is working hard to be the point of final assembly, and move up the value chain to be adding higher value.  Much of this has been driven by the five-level political system, where national encourages regions to grow GDP, etc.  This has made it a highly competitive system where all territories are cometing to grow.  The Chinese Communist Party has used competition and reward to drive growth across the country.

China has welcomed growth and is willing to undertake social changes as a result.  Yet India has not been willing to make similar changes.  “China has been willing to break some domestic eggs,” said Lieberthal. China is exceeding because they started in 1978, whereas India did not begin until 1991. 

In India, change is accelerating and growing.  English is spoken with total fluency, world-class technical and managerial systems, deeply-rooted politcal systems, and dyaspria spread across the globe yet still connected to the home country.  Media is pushing for continued economic reform. 

Inidia invests more in infrastructure than any other nation one earth. 

What does this mean for mulitnationals? Both countries are important but in different ways.

India provides outsourcing opportunities and are starting to compete globally.  The government is usually the problem, not the solution.

In China there are major domestic market opportunities.  If you’re not involved in China as a global manufacturer your competitors certainly are.  China cannot be ignored and the pressures the country places on changes in the global economy make it impossible to ignore.

How do MNCs treat China today? Many enter with products developed elsewhere and make minor modifications and sell them domestically.  There is also a use of CHina manufacturing. 

Yet six major issues are changing the way MNCs interact with China - ignore them at your own peril. 

1. Managing Reputational Risk: Many companies have multi-level supply chains in China (contractors with sub-contractors, etc).  This exists in an environment with inadequate regulatory environment - the economy is growing too fast).  Poor business ethics.  “Let me change that - no business ethics,” said Lieberthal.  The economy has grown to fast and there were no business ethics to begin.  Drive for low cost and terrible corrpution.  Leads to environmental and safety issues, as well as product quality.What does this mean for companies? First, who is part of your company - contractors lie to inspectors.  Second, how do you set up corporate communciations to manage reputation irsk.  Bad news travels immediately -sometimes by Chinese competitors work to spread the bad news. How do you protect yourself with inadequate law enforcement? Someone is hurt and they’ll sue your MNC.  “The deep pockets are not in China,” said Lieberthal.How far is it reasonable to push cost savings? Suppliers are keen to get the business.

   The brand “China” has poor reputation  and it can bring your company down.  

2. Relations between China Team and Global Business Units: China management need to have the resources to get work done - so they need authority to act.  How do you manage the relations with head office leaders?  Leads to challenegs with authority - they make decisions fast.  How much of the decision-making do you devolve - and will you get good quality decision?  In Lieberthal’s opinion no MNC has solved this to their full satisfaction.
3. Product development: Typical MNCs bring in products developed elsewhere and make minor modifications.  There are costs to sticking with that approach.  It limits your customer base to the top of the pyramid.  For you to get a broad customer base you need to drive 60% to 70% of the cost out of your product.  There is an enormously large middle market - that is mainly owned by Chinese companies.  They use this knowledge and expertise to then attack the top of the pyramid. So how do you compete for the mass market? Deeply research the problems in the market from a Chinese situation.  Then specify the price point that any solution will need to be to achieve mass market penetration.  Then turn it over to your Chinese team. The implications are very disturbing.  You want to use technology to drain cost out of the price point of your product - not to add value or enhacements.  China and India are vital sources for new products that are developed locally and then can be exported globally.  Then you have to find ways to leverage your knowledge globally. How do you do this - when most MNCs are set up with IP and systems developed at WHQ then deployed globally, versus top-up.  You may need to base a mjor division in China.
4. HR Issues
   How do you instill HR systems that deal with corruption, teamwork, quality.  Employees join your company and have no prior experience with any of these issues.  How do you recruit experience - when there’s no grey hair in China?  How do you identify and leverage the pertinent cultural differences?  If you don’t resolve then you’ll fail to leverage your people.  You need to build your training programs from the bottom up (HR training assumes employees bring a lot of skills).
5. The Business Model Change: MNCs are used to operating using the “Washington Consensus” -”the west knows best” is the old model.  Now are we heading towards a “Beijing Consensus”? China is succeeding without using the typical Western model.
6. Challenge of Shifting Centres of Initiative: Globalisation started in the West.  But now China and India are using technological innovations to create disruptive business models.  You can’t assume the West will remain the only centre of technological development.  The shift in attitudes is already being seen in areas such as IP.

 Conclusions: Implications of the rise of China and India.  Major impacts of international supply chains, differences in human capital, environment, speed of innovation. 

More important China sees its success and sees it as the rightful new power in the global economy.  The old “West is best” model is being superceded with a shoft towards the East.  Global competition is changing - and this impacts corporate communications dramatically.