Monday, May 5, 2014

What I've Been Reading

The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories by Jeffrey Towson and Jonathan Woetzel. Excellent read sans any bias; an hour well spent.

Our big assertion is that six mega-trends are driving most of China’s business today – and its interaction with the West. This is our simple framework. If you remember one thing from this book, it should be this chart.

If you are building cities at a breakneck pace against a huge urbanization inflow, sometimes your supply gets ahead of your demand. That, plus some real estate speculation, gets you a ghost city. And sometimes your demand gets ahead of your supply and you get congestion (e.g., crowded Beijing). Sometimes you get it about right (e.g., Shenzhen). These things should be expected and are not as significant as newspaper headlines would have you believe.

Manufacturing Scale:
This is what investors call economies of scale. It is the point when you are so much larger than your competitors, relative to the market, that you can outspend them on research, factories, fixed assets, marketing and other fixed costs. It’s the point where you are very difficult to dislodge as the leader due to your scale. It’s what Warren Buffett calls the “survival of the fattest.” What we see in China today is exceptionally large manufacturing scale that is actually creating a stronger and stronger competitive advantage over time.

Rising Chinese Consumers:
Because when you look at actual incomes, it is clear that the future of the global economy is China and Asia. Middle class incomes in Asia will dwarf everything else. Forget Latin America (no offense). Forget Africa (same). It is the middle class of Asia that is the biggest economic growth engine going forward – similar to how the American middle class was the growth engine of the past century. Over the next 15 years, Asia will go from 20 percent to 66 percent of the world’s middle class.

Money and Lots of it:
The mega-trend here is not just the amount of money. It is the volume, efficiency and sophistication with which it moves within China. We are interested in the financial architecture itself. And how money moves between projects, companies and financial institutions. Also, in light of recent credit concerns, the system’s stability is a big question.

Ask a simple question like “who controls the Bank of China?” This should be a simple question to answer. Bank of China is, after all, publicly traded. It is certainly run like a banking corporation. And we know who the managers and shareholders are. However, it turns out the CEO does not really report to the shareholders and is not actually appointed by them. He is chosen by the Organization Department of the Communist Party, which technically owns nothing.

The Chinese Internet:
For example, Chinese has already replaced English as the primary language of the Internet. Another is that the money involved has become very large. Chinese e-commerce will likely surpass US e-commerce in total dollar terms within the next two to three years.

It’s not a coincidence that China was the first country to designate Internet addiction as a disease.

Forrester Research classified 47 percent of the online Chinese population as “creators”, meaning they actively create their own content online (blogs, web pages, videos, articles etc.). In comparison, only 21 percent of US Internet users create such online content.

The Brainpower Behemoth:

Chinese children often start their formal education at age two. Having tutors and taking extra classes on Saturdays is the norm. Becoming fluent in English is a given. And math and science skills are all far better than in the West. Right up until entering college, the whole system is very effective at developing valuable skills. 

There is, however, a lot of valid criticism that this system is too demanding. But this is not just a result of the educational system. It’s cultural. It’s historical. It’s something you see in family after family. Education in China is aggressively sought after and highly respected. Jiang Xueqin, deputy principal of Peking University High School said, “Chinese students love learning. They go to class and they have a real attitude that ‘education can change my life.” 

This is, of course, a big generalization. But some generalities are true and this is one of them. Underestimate it at your own peril.

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