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zglobal
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U.S Recession Good for China?

With all the talk of a U.S recession, could it in fact be good for China?

I don't make any assumptions one way or the other, but perhaps worth considering.......

EXPORTS
We all know that U.S spending power would decrease.
However, is it possible that Chinese exports would not be greatly affected?
A U.S consumer making that buying choice may well choose the lower priced Chinese product.
Certainly higher priced brand names are more likely to suffer.
U.S pre-Christmas retail sales seem to confirm this.

INFLATION.
Perhaps the biggest challenge for China is inflationary pressure.
A U.S slowdown could well be what's needed.

LABOUR COSTS
This is a tough area. Chinese labour costs are rising too fast.
We all want to see the poorest Chinese people with higher wages, but it needs to be controlled.
There is no point having wage increases sucked up by inflation.
The end result of this would be less real wealth and an economy under pressure.
I hope Chinese workers have the patience to understand this.

EFFICIENCY
There is no doubt that in periods of growth, efficiency suffers.
Industry runs by the seat of its pants and often has no time for efficiency.
Chinese Companies would be forced to take a good look at how to improve efficiency.
I don't think they are inefficient by any means, but they could do more.

BRANDING
There is no doubt that developing brand names is China's greatest challenge.
OEM suppliers have no strength. They are like fat people that can only see as far as their next meal.
Brand names give muscle to Companies and a real future.
This is tough because China does make use of foreigners well.
How many times do we see expensive commercials, signs etc with poor English?
Would a foreign Company market to China without real Chinese people to do the marketing?

GOVERNMENT
I think China currently has the cleverest government in the world, hands down.
Not only good, under Hu Jintao there appears to be more focus on those in need.
They likely face the same challenges as business where incredible growth makes government hard to control.
Perhaps a period of stability, with strong and manageable growth would also help to get efficiency through all levels of government.

2008-1-11 09:50 PM

interesting (Steven Schreiber)
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The answer is no.

A recession in the US means that there is less money in the world; China's relative standing will increase but its absolute standing is diminished in the long run. Recessions anywhere generally help no one in the long run.

2008-1-12 10:58 AM

tongluren (tongluren)
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A Recession Means

Even a threat of a recession is causing Bernanke to open up the spigot.  The Feds have indicated that they will do whatever it takes to reflate, prudence be damned.  In the last 6 months the Fed has already pumped over a Trillion of liquidity into the American system.  Look at the BOA announcement yesterday, to "buy" Countrywide for $4.1B.  Countrywise is actually worth minus $100 Billion - whomever takes it over also takes all the liability from the $1.5 Trillion sick mortgages it is servicing.  Instead of letting that fail and really go into depression right now, the Feds cut a backroom deal with BOA, and guaranteed that BOA will not be harmed from the nonperforming mortgages.  What that means is that in that one transaction alone the Fed will have to come up with $100B.  Multiply that by 100 in the next two or three years.

Nope, this recession DOES NOT mean less money, it means a flood of central bank "minted" thin-air liquidity.  There will be a change of ownership of much of that wealth (as the existing shareholders get wiped), but there will be lots of cash.

As part of that reflation, indeed the Fed will try its best to encourage consumption.  Buying from China means lower cost (30% lower than from anyone else), and thus less chance of inflation, compared to buying from the rest.  Have you noticed that in the last couple of weeks the rhetoric about blocking Chinese imports has actually died down a bit?  The candidates, having been read the riot act by Paulson, have seen the light.

The only rational thing for China to do would be to put in new law to ensure that exports will be profitable - new laws must be promulgated to negate the powerful negotiation positions of the multinationals, who eat all the meat and suck the marrow, leaving the Chinese manufacturers/exporters with "chicken rib bones".

2008-1-12 11:14 AM

interesting (Steven Schreiber)
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Meh. I'm not going to split between currency totals and value totals with ZG.

2008-1-12 11:25 AM

zglobal
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I forgot one more very important point.

What happens when someone has no money?

A garage sale?
A fire sale?

We're already seeing that.

China has the chance to slip in there and get some U.S brand names at bargain basement prices.

After all, China has the money.

2008-1-12 11:55 AM

interesting (Steven Schreiber)
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ZG,

Most of the suffering is in the real estate market. Unless China wants to buy a mortgage lender or float a tiny portion of the market capitalization of a large finance firm, they're mostly out of luck on bargain hunting for the time being. If the credit crunch creates an insolvency crisis in businesses, then it will have the opportunity to buy second and third tier brands as they are spun off to raise capital for the main brand. But that's not likely to generate much and I suspect that most of the brands will be worthless to China (a US telecom brand isn't worth much to them, not like a consumer goods brand).

A better bet would be to start shopping around for ailing European luxury brands pushed out by some of the bigger names and now need capital to claw back market share. There are also Japanese brands that continue to suffer under the ongoing liquidity crisis, they are good targets. Ford is spinning off brands because it's mismanaged and the brand-buying strategy was silly to begin with (seriously, Ford should never have kept bloating their portfolio of brands). So China could purchase British mainstays like Jaguar or Land Rover.

But this is all drop-in-the-bucket stuff. Purchasing brands from others simply won't get the job done. China needs to develop its consumer markets and start building its own brands. There is plenty of potential--Meizu and Chery come to mind--but China has a lot of trouble marketing outside its borders on any basis but cost because they usually fail to communicate well. If China wants to go shopping in the US, it should buy advertising firms, localization specialists and marketers; they will take some hits from the slowdown in the finance sector and that whole industry seems to be always going off on the cheap.

Anyhow, all this talk of "fire sales" and "bargain basements" is quite silly. We're talking about something that is actually quite minor, there simply aren't any bargain basements available--it's not a bargain if its in the basement for good reason. Mostly you're feeding off people like Tong who like hysterics and possibly his more professional brethren in the financial press (which has never not called a sneeze a plague). "Buyer's markets" and "has the cash" is all meaningless: nothing is going to be deeply undervalued and thus nothing is going to suddenly be cheap. Even where "bargains" seem to appear, all that's actually happened is that future capital sales have been moved closer in time; if they are successful, then those firms will not have to make those future sales anyhow. It will all zero out, no questions asked. There is some undervaluation, but China has no advantage: the undervaluation is due to information issues concerning what assets certain players are holding, China doesn't know what they hold and thus they can't make any better bets.

So the choice is they can either buy expensive, ultimately underperforming (think profit/price) ego properties like Saudi Arabia likes to, or they can actually start the hard work of developing valuable brands of their own and growing current underdogs.

[ Last edited by interesting at 2008-1-12 09:59 AM ]

2008-1-12 12:05 PM

zglobal
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Well, I think what you say has some merit.

However, my thoughts are "if" there is a recession in The U.S.
Such a recession is likely to include a tightening of credit and may push some well known names to seek equity partners.

I do totally agree that China needs to develop their own brands. Sadly, they seem totally incapable in this area at the moment.
They do not yet value the power of brand names and marketing.
This will be China's greatest challenge and I hope they don't leave it too late.

2008-1-12 12:30 PM

interesting (Steven Schreiber)
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ZG,

The consumer goods piracy rates (my favorite) indicate that the Chinese well know the value of brands but I suspect that they dismiss their own brands out of hand. This is somewhat a classic case: the wealthy will cheer Chinese successes but put their money on a Louis Vuitton and a Benz the second they get the chance (Americans do the same). Internal confidence in China's ability to produce a brand that other Chinese can really respect is the first issue and probably what keeps brand growth low and derivative.

That's another reason why acquiring US and European brands, especially with SWF money, is probably not a bad idea: it reinforces the idea that success means getting something that's not "made in China" or, at least, not branded there. Right now, the officials have taken most of the visionary lead--mostly by plowing money into architecture--but I don't see the bourgeoisie following suit. The US, for example, built stellar brands when people like Walter Pepke started to take notice and get a serious interest in the fundamentals that make up brands--design and lifestyle modeling. Until the Chinese capitalist class is done playing Hollywood, it will be a dark time in China.

Or, hopefully, those guys will see the rug tugged out from under them by young upstarts. Frankly, I hate the often crass tastes of the real estate and investment classes, it would be nice to see some smaller companies get a leg up. The issue they face is that without a consumer growth policy, they can't get much traction.

2008-1-12 12:40 PM

zglobal
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The trick for Chinese is to develop for overseas markets and then tackle local markets.
The same rules apply for any Company.
If you can succeed at exports you can succeed locally.

The problem is that the value of maketing is not tangible.
You can't physically hold it in your hand.
So, they do not value it as they should.

Until they do, I worry that China will grow as it should.
If real wages are to increase, so must margins.
This cannot happen while China remains a cheap commodity supplier.
They will remain so until they start to tackle marketing problems seriously.

2008-1-12 12:49 PM

interesting (Steven Schreiber)
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ZG,

I disagree with the idea that the focus should be "act global, hope local". The history of branding suggests that it really is "act local, think global" for branding.

2008-1-12 12:55 PM

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zglobal
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We can disagree.

Your method is the slow way that brand names have used in the past.
Not by design. Rather they started locally and then expanded to export markets.

In order to get a brand working quickly and efficiently you methid shows a lack of understanding of modern marketing.
For example, you might find a logo that works in the U,S but is useless in many world markets.

Common sense really.

2008-1-12 01:18 PM

#11

interesting (Steven Schreiber)
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ZG,

Sure, but branding isn't just marketing. If there's no product behind it, it rarely gets off the ground. More importantly, China will be China's largest market anyhow so this isn't an issue like what Australian brands might face, for example, because their home market isn't large anyhow.

2008-1-12 01:24 PM

#12

zglobal
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The product is as much a part of marketing as brand name.
You never heard of the old three P.s?
The Chinese have more respect for brands that are successful overseas for obvious reasons.
That's why the export focus is very important in China.
It does depend on the product of course but a global strategy from day one is the ony way to introduce a new brand.

2008-1-12 01:37 PM

#13

interesting (Steven Schreiber)
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Really, I think that's a sad state of affairs.

2008-1-12 01:45 PM

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zglobal
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Why do you say that?

Quite normal in any developing country.

The problem has been exacerbated in China due to growth.
Exports have come too easy to Chinese firms in the past.
When that busy, the fundementals often suffer.

It will develop in time, although it remains the biggest hurdle.

2008-1-12 01:49 PM

#15

msaeed
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Deterioration in the manufacturing and consumer sectors does not necessarily means worldwide deflation. The present administration has already committed to increase military spending. Less money would be spent in the consumer sectors, but given the corruption in some countries, defense and military spending in the US will remain strong in the foreseeable future.

[ Last edited by msaeed at 2008-1-12 03:28 PM ]

2008-1-12 03:04 PM

#16

msaeed
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According to a goldman's conference, they actually wants to see worldwide recession. I think one of the reasons is because, during a recession, more money will go to US treasury bonds. This is how the present government raises money for military spending.

2008-1-12 03:24 PM

#17

zglobal
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Recessions don't win votes and I doubt many would be planned.

2008-1-12 08:50 PM

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interesting (Steven Schreiber)
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You don't think it's sad that the Chinese will avoid a brand because it's Chinese?

2008-1-12 11:04 PM

#19

zglobal
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No I don't.

In fact they don't avoid a Chinese brand but will expect it cheaper.
That is no different to foreign countries.

China is a manufacturer of lower end products.
Some are high quality. Proof of that is that they are rebranded by foreign companies.

I would say that is a normal cycle in a developing country.

My point is that to be successful and afford higher wages and living standards, brands will be more important year by year.
As those brands become established they will develop reputations and so will life the reputation of all Chinese products.
It's exactly what happened with Japan and Taiwan and not rocket science.

I do feel this will be China's greatest challenge

2008-1-12 11:12 PM

#20

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