Third Plenum Outlook by DJ Peterson Dec 12, 2013

Trip Report: China on the Eve of Reform

DJ Peterson
December 12, 2013

This note presents observations from a recent visit to China. A number of themes dominated discussions, including consumer sentiment, investment patterns, and the environment. The visit coincided with a landmark Central Committee meeting at which the new leadership rolled out its economic policy roadmap. The direction China would take in the near-­ and medium terms was on everybody’s mind and discussants offered a wide disparity in views and reserved outlooks for the future.

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 03C China Corruption  [download]

This is the third in a series of lessons from this article about corruption in China:

Corruption in China and Elsewhere Demands Board Oversight

Published in NACD Directorship July 23, 2013 by Eric V. Zwisler and Dean A. Yoost

http://www.directorship.com/corruption-in-china-and-elsewhere-demands-board-oversight/

July 30, 2013:  Short excerpt from above article with my comments in blue italics:

The reality remains that business practices in China are widely noncompliant. Practices that are commonly regarded as corrupt by global standards, or serious if not blatant conflicts of interest, may be the norm. Anticipating and addressing corrupt activities requires management awareness, a clear commitment, a company culture that values compliance, and a robust management system to monitor and assure compliance.

To protect against charges of corruption, companies need to keep books, records, and accounts that accurately reflect transactions and the disposition of assets. Internal accounting and management controls must be maintained and aimed at preventing and detecting FCPA violations, establishing policies and procedures that explain how business is to be conducted, perform due diligence on and monitor third parties, and conduct training for employees and business partners.

Don’s Observations: I worked with a China manufacturer of high technology displays. One of our customers was a well known Fortune 500 technology firm in San Jose, with a satellite operation in China. Our primary contacts were with the HQ operation in San Jose. Occasionally we interfaced with their satellite operation in China. Early in our relation, their China managers asked for a kickback to allow us to maintain the business. We refused, and reported their request to the HQ operation in San Jose. We were advised that this was “standard operating business” for China, and that the HQ refused to take any action. It is important to realize that many Western companies will “look the other way” if the corruption involves their own satellite operations.

01A China Trends  [download]

Here is an exciting article addressing upcoming trends in China that will directly affect our electronic industry:

Gazing Into the Future of American Business in China

By Lillian Cunningham, Published in Washington Post, July 22, 2013

Interview with Christian Murck, President, American Chamber of Commerce in China

http://www.washingtonpost.com/blogs/on-leadership/wp/2013/07/22/gazing-into-the-future-of-american-business-in-china/

July 30, 2013:  Short excerpt from above article with my comments in blue italics:

Trend 1:  China has had rapid growth over the last 30 years.  Going forward, China has to switch from exports to internal consumption to allow continued growth.

Trend 2:  China is no longer the low labor cost manufacturing capital.  Wages will continue to increase.

Trend 3:  China’s government is facing a growing retired population and a shrinking labor force.

The challenge for China in the past was managing rapid growth (15% to 20% per year). This growth is slowing to half or less. Now the challenge is to manage increasing costs: wages, land, utilities, raw materials, etc.

Don’s Observations: Due to its growing economy, China is becoming an increasingly important market for Western businesses. China manufacturers are relocating their factories to SE Asia (Cambodia, Thailand, Vietnam) to remain competitive with lower cost labor for manufacturing. China’s “one child per family” policy is increasing the median age of the population. This will change the profile of target customers for products to be sold in China. As China matures economically, the issues facing China manufacturers are beginning to resemble those facing companies based in North America & Europe.