Doing Business In China: The Next Twenty Years
In this podcast, Jack describes why companies need to stay engaged with China, despite the fact that the relationship between China and the United States, as well as China and the other major industrial countries in the world, are likely to be more frosty in the years ahead than they have been since China joined WTO in 2001.
***
Excerpt: “I think now is the best time to go into China for two reasons. Number one, there’s going to be, I believe, an economic tailwind over the next 18 months to two years. The second reason is that a company’s potential partners, consumers, customers are all going to be very eager to try to make up for lost time and to work with good Western companies that have good products and good technologies to grow their businesses.” Listen or continue reading to find out more.
***
EPISODE TRANSCRIPT:
Doug: Jack, you posted an article on your blog about doing business in China in the post-Coronavirus world. What was the premise of that article?
Jack: What I was trying to point out in the article is that the overall global economic and political landscape, as it has existed over the last 20 years, is going to be substantially different over the next 20 years—that there has been a real sea change as a result of recent events, and that the CEOs of companies are going to need to figure out how to deal with that sea change.
To summarize, for the last 20 years as China joined WTO and grew its economy tremendously, there was a cordial relationship between China and the rest of the world. No country got in the way of China, but due to recent events, there is a much more confrontational attitude. CEOs are going to need to figure out how to deal with that, and then they have some fundamental decisions to make. In this new environment, do I keep doing business in China the way I have for the last 20 years? Do I completely disengage from China as some people suggest? Or do I find some new way to deal with China? These are some fundamental decisions that CEOs will need to make.
Doug: And how would you say we got to where we are—–in your article, you talk about China joining the WTO in 2001 as a starting point.
Jack: At the end of 2001, China acceded to WTO and became a member of the World Trade Organization as a developing country, which meant that many of the international trade provisions didn’t really apply to them as a developing country in the same way that they would apply to a developed country like the United States. That was very favorable to China to be allowed to enter that way. At that point, China was a $1.3 trillion economy, which is a big economy, but it was still emerging, particularly given the fact that China has over one billion people and, with per capita incomes where they were, you could see why that would be a valid argument.
Despite the fact that China was already a large economy, it was still developing its economy. Against that backdrop, China went ahead and grew from about $1.3 trillion in terms of GDP in 2001 to $14 trillion in 2019, more than a tenfold increase—a big, big increase. Along the way, there were many intellectual property violations and other transgressions as far as international trade. By and large, the United States, and the rest of the world for that matter, looked the other way and didn’t really confront China on any of those issues. That all changed in March, 2018 when President Trump announced that, because of these intellectual property violations and other violations that went against the trade agreement of 1974—that because of that, he was going to investigate putting 25 percent tariffs on a big portion of the exports from China to the United States.
The United States is China’s biggest market. Every year, China exports about $500 billion worth of goods to the US. So, Trump’s announcement was a big shot across the bow from the United States to China—a complete departure from the way the relationship between the two countries had existed before. That then touched off roughly about a year and a half of a Trade War and a dozen rounds of negotiations. During this period, the rhetoric between the two countries was terrible. However, that all culminated in the Phase One Agreement that was reached on January 15. As Phase One was signed, you could just feel the heated rhetoric go way down, and all of a sudden it was back to a much healthier, constructive relationship.
Doug: And then the Corona virus hit.
Jack: That’s right. The cooling off of the rhetoric only lasted about five days, because on January 20th, the first Coronavirus case was discovered in the United States and the outbreak came to the fore. And of course, that changed everything. While the Trade War raged, the rest of the world tended to look at it as “Trump’s Trade War.” Or, they tended to look at it as a dispute between the United States and China that didn’t really have an impact on the rest of the world. To the extent that other countries could benefit from better intellectual property protection—great. But, as far as really being willing to confront China over trade, it was basically looked at as a U.S. issue, not a global issue.
The Coronavirus changed all that because the whole global economy was impacted. The IMF has reduced its estimate for global GDP growth in 2020 from plus 3 percent, which is where they were in January, to negative 3 percent which they announced in their April report. So, a swing of six percentage points in global growth and trillions of dollars. Coronavirus is now in 140 or 150 countries.
My argument is that now, the issue of China is no longer just a US-China issue. It’s an issue with China and all of the other countries in the world. That doesn’t mean that other countries are going to necessarily be looking to confront China, but I think that the sentiment has shifted to the point where other countries are likely to be less sympathetic to any transgressions in trade by China, and more sympathetic to the United States, which I expect will continue to take a very tough attitude towards China.
I believe that effective enforcement mechanisms were set up in the Phase One Agreement to ensure compliance with what was agreed upon. I fully expect the United States to keep pushing on that. And I think the United States will continue to be willing to confront China on not just economic issues, but on other issues as well. While the U.S. will play this role, I don’t think other countries will necessarily join in, but I think they’re going to be a little more sympathetic. So I think this changes the entire global landscape.
Doug: And potentially in a favorable way as far as getting better trade protections for U.S. and international companies working in China.
Jack: Yes. To the extent that, as a result of the Trade War, and as a result of this new environment, if China becomes more willing to comply with international conventions as far as trade, then that’s going to be positive for the world. It’s going to be positive for companies doing business in China as well.
Doug: Well, let’s say I agree that you can’t stop working with China, the second largest economy in the world. But, how do you deal with this rhetoric now where it seems that politicians want to bash China. The more they can bash China, the better. As a CEO, how do you go to your board and say, “I really want to start a China initiative in this environment?
Jack: As bad as the rhetoric was during the Trade War, it will arguably be even worse as a result of the Coronavirus. You have conspiracy theories in the United States, saying that the virus really didn’t come out of the wet markets—it came out of a lab. And then, some in China are saying that China didn’t really start it. It really started with American servicemen who came to a conference in Wuhan in October. So, you have this really tough rhetoric as a result of the Trade War, the Hong Kong demonstrations, concerns about Huawei and now the Coronavirus, and lawmakers in the United States saying that we’ve got to completely disengage from China.
The rhetoric is about as negative as it could ever be. And so, as you postulate, if a CEO goes to his or her board, how does he or she answer the question of why should I go to China? The argument to me is quite simple. It’s the fact that putting all those issues aside—and I’m not downplaying the significance of any of them—putting all of those issues aside, the fact remains the China is the second largest economy in the world. The U.S. had GDP of $21 trillion in 2019, and China’s GDP was $14 trillion. The two countries combined account for 40 percent of global GDP. Number three is Japan at $5 trillion. Number three is a distant number three!
If you want to grow your business, you can pick up a little bit of growth in various countries around the world. But, there’s only one country where you can really have a significant addition to your sales and to your growth, and that’s China. So I would argue that it is very difficult to completely opt out of the China market because of its size. The other point I would make is that the global leaders in any industry tend to be those companies that have the scale, which means that they’re operating, not just in their own country, but they’re operating globally. If a company is a global leader today, and it opts out of the China market, I would argue that 20 years from now, it’s going to be very tough for them to be a global leader.
To the extent that companies from China or other parts of the world not only get a meaningful share of the China market, but then get some significant share of the U.S, market, they are going to have scale. If you want to continue to be a global leader, I don’t see how you can opt out of the second largest economy in the world, which by the way, is not going away. China’s going to continue to grow, and so it’s going to get larger and larger. It’s very interesting that, in the latest tabulation of the Fortune 500 companies, China has about the same number of companies as the United States.
That’s just a very graphic demonstration of the fact that over the last 20 years, Chinese companies have gotten very large. As China’s economy continues to grow, they’re only going to get larger, and all of them have aspirations to go outside China. So they’re going to get larger, not just from the China market, but also from what they do internationally. A CEO has to be able to articulate those arguments to the board, to the shareholder and to other interest groups, because after all, the CEO’s responsibility is to try to grow the business profitably.
Doug: What about people say that we have to reimagine the entire supply chain?
Jack: This all started in the 1990s, and keep in mind, China’s economy was only $1.3 trillion in 2001, but it was a lot smaller when I went to China in 1992—something like $500 billion. The economy was much smaller, and by definition, when you divide GDP by 1.3 billion people, per capita income was substantially lower. Yes, labor costs were a lot lower back in the mid late 1990s when all of this off- shoring began to take place. Even given those labor costs, though, I believe that companies should have been looking at more than just cost—cost is one consideration. You also need to take into account quality, logistics costs, proximity and safety of supply and that sort of thing.
By the way, a company like Toyota is a prime example of a company that looked at the whole picture. Toyota never really bought into the strategy of “Let’s source from the lowest cost country.” Toyota always believed that the best strategy was to have your suppliers close to where the products are being used. So, there’s one example of a very smart company that took that approach. Nonetheless, many companies prioritized lower cost, and the pendulum swung very hard in the direction of offshoring, and products moved off shore. Well, a lot has changed since then.
Even before this pandemic, China’s per capita income was over $10,000, and obviously, the country’s labor cost advantage has been diminished quite a bit. With the pandemic, people were shocked that many products from critical industries like pharmaceuticals and medical supplies are all coming from China. All of a sudden, everyone is vulnerable to a single source of supply. My guess is that everyone is going to look very hard and rethink their supply chain.
Many companies are going to say, “Hey, we can’t have all of our products or components being made in one particular country. We need to diversify our risks.” I think companies on their own will diversify their sourcing risk. Customers may also start telling any supplier that wants to bid for its products, the decision won’t be made just on price, but it’s going to be conditioned upon having at least some manufacturing capability in the United States. Customers will not want to get back into a situation where it is completely dependent upon China or any other country.
Finally, governments like the United States could start to put in place tax incentives and other favorable policies in order to encourage companies in key industries to keep making at least some of the product in the United States. So, I believe that you’re absolutely right. I think there is going to be a rethinking of the supply chain. I think it’ll back off from where it was at its peak, but it’s not going to go all the way back to where it was in the early ’90s.
Doug: If I’m the CEO of a company with manufacturing in the States, I no longer have an incentive, or I’m no longer driven to go to China just for the lower cost manufacturing. But the market opportunity is still there. Can I address the China market with my U.S. manufacturing?
Jack: No, you really cannot. There are some products like basic commodities and energy, where China is energy short and needs agricultural products, where this can be done. Because China can’t reproduce enough food for its people, there are key areas where China needs to import. For any manufactured product, though, there are very few products where a company can really be economically competitive by shipping from a factory outside China into China. If you want to take advantage of the China market, the decision you’re making is the need to have a physical presence in the country. And that means having a factory and having people on the ground and committing to the China marketplace. China is a big market, but you can’t take advantage of it by shipping in from the outside. You need to be there.
Doug: And so if I am going to be manufacturing in China, where am I as far as the intellectual property protections that we left off with the trade war? How do I deal with those issues?
Jack: The IP violations, or alleged violations by China, were a big part of the reason for the Trade War—that was the reason why it started. And of course, how that IP gets protected, or whether China stops the practice of coerced technology transfer, were all big negotiating points.
The good news in all of this is that, step-by-step, over the last 20 years, China has eliminated foreign ownership restrictions in virtually every industry. No matter what industry you’re in, you most likely can have a hundred percent ownership of what you set up in China. That negates the whole issue of coerced technology transfer, because it used to be that, if you weren’t allowed to have 100% ownership, you had to have a JV partner.
Doug: In other words, you had to transfer technology to a potential competitor?
Jack: Right. And China said if you want to come into China with this product, this technology, that you have to do a JV, and you have to transfer all your technology to the joint venture, which is essentially a Chinese entity. Well, if now you can own 100 percent, that situation goes away. You no longer have coerced technology transfer being a big issue. If you can 100 percent control your operation in China, you don’t have to have anybody else involved other than your own managers. It doesn’t completely eliminate the IP risk, but I would argue that it substantially reduces that risk.
Doug: Would you say that now is a good time to go into China in some respects?
Jack: I think now is the best time to go into China for two reasons. Number one, there’s going to be, I believe, an economic tailwind over the next 18 months to two years. Like the rest of the world, China is going to have a very tough first half. The first quarter was bad, but China has now been back to work since the end of March, so the second quarter won’t be as bad, but it’s not going to be great. The government is putting in stimulus measures, and so economists that I know are predicting a sharp recovery in the second half. The IMF is essentially projecting that China could grow by 9 percent next year.
For this year. The IMF has reduced its estimate for China from about 6 percent to 1.3 percent now. The good news is that growth is still positive. The bad news is that that is a big drop from where China was, but then they’re expecting a very strong recovery next year. From an economic point of view, I think there’s going to be a good tailwind. The second reason is that a company’s potential partners, consumers, customers are all going to be very eager to try to make up for lost time and to work with good Western companies that have good products and good technologies to grow their businesses.
Doug: Are there any areas that you see as particularly promising?
Jack: Well, the good thing about China is that they tell you where they want to go. You don’t have to guess! China does five-year plans, which by and large, they follow pretty closely. If you’re an entrepreneur or a company in China, you read that five year plan and you read where China wants to head as far as its economy. And that tells you a couple of things. Number one, it tells you where the government’s going to be putting favorable policies. But it also tells you where the capital’s going to go, because capital sources are looking at that and they’re saying, “Okay, China’s focused on this industry, or they want to develop this industry, therefore, that’s a good industry to invest in.”
Going out to 2025, China has identified a half a dozen or more key industries where China believes it needs to develop, and where it wants to be a global leader in that industry by 2025. These industries include new energy vehicles, data storage, 5G, railway and aerospace. If you are the CEO of a company and you listen to what we’re saying here and you say, “Okay, now I want to go to China, which products, which technologies should I take?” I would argue that any technology that helps China to achieve those industry leadership positions in 2025 is going to find very willing partners in China.
It can be very exotic technologies, but it also can be more established industries. Take a simple thing like steel. China has by far the largest steel capacity of any country in the world. However, China imports a lot of high end specialty steel, because as large as their steel companies are, none of them have the capability to make the kind of steel that’s required for high end applications. And so, China needs to import from steel companies in the West, Europe, Japan and Korea. It doesn’t have to be exotic industries. It can be what you might consider to be very fundamental industries, but you really need to just consider, where does China want to go? Which industries do they want to have a leadership position in, and what technologies does it need as a country to get there? If your company can help fill that need, that’s going to be a tremendous opportunity.
In this podcast, Jack describes why companies need to stay engaged with China, despite the fact that the relationship between China and the United States, as well as China and the other major industrial countries in the world, are likely to be more frosty in the years ahead than they have been since China joined WTO in 2001.
***
Excerpt: “I think now is the best time to go into China for two reasons. Number one, there’s going to be, I believe, an economic tailwind over the next 18 months to two years. The second reason is that a company’s potential partners, consumers, customers are all going to be very eager to try to make up for lost time and to work with good Western companies that have good products and good technologies to grow their businesses.” Listen or continue reading to find out more.
***
EPISODE TRANSCRIPT:
Doug: Jack, you posted an article on your blog about doing business in China in the post-Coronavirus world. What was the premise of that article?
Jack: What I was trying to point out in the article is that the overall global economic and political landscape, as it has existed over the last 20 years, is going to be substantially different over the next 20 years—that there has been a real sea change as a result of recent events, and that the CEOs of companies are going to need to figure out how to deal with that sea change.
To summarize, for the last 20 years as China joined WTO and grew its economy tremendously, there was a cordial relationship between China and the rest of the world. No country got in the way of China, but due to recent events, there is a much more confrontational attitude. CEOs are going to need to figure out how to deal with that, and then they have some fundamental decisions to make. In this new environment, do I keep doing business in China the way I have for the last 20 years? Do I completely disengage from China as some people suggest? Or do I find some new way to deal with China? These are some fundamental decisions that CEOs will need to make.
Doug: And how would you say we got to where we are—–in your article, you talk about China joining the WTO in 2001 as a starting point.
Jack: At the end of 2001, China acceded to WTO and became a member of the World Trade Organization as a developing country, which meant that many of the international trade provisions didn’t really apply to them as a developing country in the same way that they would apply to a developed country like the United States. That was very favorable to China to be allowed to enter that way. At that point, China was a $1.3 trillion economy, which is a big economy, but it was still emerging, particularly given the fact that China has over one billion people and, with per capita incomes where they were, you could see why that would be a valid argument.
Despite the fact that China was already a large economy, it was still developing its economy. Against that backdrop, China went ahead and grew from about $1.3 trillion in terms of GDP in 2001 to $14 trillion in 2019, more than a tenfold increase—a big, big increase. Along the way, there were many intellectual property violations and other transgressions as far as international trade. By and large, the United States, and the rest of the world for that matter, looked the other way and didn’t really confront China on any of those issues. That all changed in March, 2018 when President Trump announced that, because of these intellectual property violations and other violations that went against the trade agreement of 1974—that because of that, he was going to investigate putting 25 percent tariffs on a big portion of the exports from China to the United States.
The United States is China’s biggest market. Every year, China exports about $500 billion worth of goods to the US. So, Trump’s announcement was a big shot across the bow from the United States to China—a complete departure from the way the relationship between the two countries had existed before. That then touched off roughly about a year and a half of a Trade War and a dozen rounds of negotiations. During this period, the rhetoric between the two countries was terrible. However, that all culminated in the Phase One Agreement that was reached on January 15. As Phase One was signed, you could just feel the heated rhetoric go way down, and all of a sudden it was back to a much healthier, constructive relationship.
Doug: And then the Corona virus hit.
Jack: That’s right. The cooling off of the rhetoric only lasted about five days, because on January 20th, the first Coronavirus case was discovered in the United States and the outbreak came to the fore. And of course, that changed everything. While the Trade War raged, the rest of the world tended to look at it as “Trump’s Trade War.” Or, they tended to look at it as a dispute between the United States and China that didn’t really have an impact on the rest of the world. To the extent that other countries could benefit from better intellectual property protection—great. But, as far as really being willing to confront China over trade, it was basically looked at as a U.S. issue, not a global issue.
The Coronavirus changed all that because the whole global economy was impacted. The IMF has reduced its estimate for global GDP growth in 2020 from plus 3 percent, which is where they were in January, to negative 3 percent which they announced in their April report. So, a swing of six percentage points in global growth and trillions of dollars. Coronavirus is now in 140 or 150 countries.
My argument is that now, the issue of China is no longer just a US-China issue. It’s an issue with China and all of the other countries in the world. That doesn’t mean that other countries are going to necessarily be looking to confront China, but I think that the sentiment has shifted to the point where other countries are likely to be less sympathetic to any transgressions in trade by China, and more sympathetic to the United States, which I expect will continue to take a very tough attitude towards China.
I believe that effective enforcement mechanisms were set up in the Phase One Agreement to ensure compliance with what was agreed upon. I fully expect the United States to keep pushing on that. And I think the United States will continue to be willing to confront China on not just economic issues, but on other issues as well. While the U.S. will play this role, I don’t think other countries will necessarily join in, but I think they’re going to be a little more sympathetic. So I think this changes the entire global landscape.
Doug: And potentially in a favorable way as far as getting better trade protections for U.S. and international companies working in China.
Jack: Yes. To the extent that, as a result of the Trade War, and as a result of this new environment, if China becomes more willing to comply with international conventions as far as trade, then that’s going to be positive for the world. It’s going to be positive for companies doing business in China as well.
Doug: Well, let’s say I agree that you can’t stop working with China, the second largest economy in the world. But, how do you deal with this rhetoric now where it seems that politicians want to bash China. The more they can bash China, the better. As a CEO, how do you go to your board and say, “I really want to start a China initiative in this environment?
Jack: As bad as the rhetoric was during the Trade War, it will arguably be even worse as a result of the Coronavirus. You have conspiracy theories in the United States, saying that the virus really didn’t come out of the wet markets—it came out of a lab. And then, some in China are saying that China didn’t really start it. It really started with American servicemen who came to a conference in Wuhan in October. So, you have this really tough rhetoric as a result of the Trade War, the Hong Kong demonstrations, concerns about Huawei and now the Coronavirus, and lawmakers in the United States saying that we’ve got to completely disengage from China.
The rhetoric is about as negative as it could ever be. And so, as you postulate, if a CEO goes to his or her board, how does he or she answer the question of why should I go to China? The argument to me is quite simple. It’s the fact that putting all those issues aside—and I’m not downplaying the significance of any of them—putting all of those issues aside, the fact remains the China is the second largest economy in the world. The U.S. had GDP of $21 trillion in 2019, and China’s GDP was $14 trillion. The two countries combined account for 40 percent of global GDP. Number three is Japan at $5 trillion. Number three is a distant number three!
If you want to grow your business, you can pick up a little bit of growth in various countries around the world. But, there’s only one country where you can really have a significant addition to your sales and to your growth, and that’s China. So I would argue that it is very difficult to completely opt out of the China market because of its size. The other point I would make is that the global leaders in any industry tend to be those companies that have the scale, which means that they’re operating, not just in their own country, but they’re operating globally. If a company is a global leader today, and it opts out of the China market, I would argue that 20 years from now, it’s going to be very tough for them to be a global leader.
To the extent that companies from China or other parts of the world not only get a meaningful share of the China market, but then get some significant share of the U.S, market, they are going to have scale. If you want to continue to be a global leader, I don’t see how you can opt out of the second largest economy in the world, which by the way, is not going away. China’s going to continue to grow, and so it’s going to get larger and larger. It’s very interesting that, in the latest tabulation of the Fortune 500 companies, China has about the same number of companies as the United States.
That’s just a very graphic demonstration of the fact that over the last 20 years, Chinese companies have gotten very large. As China’s economy continues to grow, they’re only going to get larger, and all of them have aspirations to go outside China. So they’re going to get larger, not just from the China market, but also from what they do internationally. A CEO has to be able to articulate those arguments to the board, to the shareholder and to other interest groups, because after all, the CEO’s responsibility is to try to grow the business profitably.
Doug: What about people say that we have to reimagine the entire supply chain?
Jack: This all started in the 1990s, and keep in mind, China’s economy was only $1.3 trillion in 2001, but it was a lot smaller when I went to China in 1992—something like $500 billion. The economy was much smaller, and by definition, when you divide GDP by 1.3 billion people, per capita income was substantially lower. Yes, labor costs were a lot lower back in the mid late 1990s when all of this off- shoring began to take place. Even given those labor costs, though, I believe that companies should have been looking at more than just cost—cost is one consideration. You also need to take into account quality, logistics costs, proximity and safety of supply and that sort of thing.
By the way, a company like Toyota is a prime example of a company that looked at the whole picture. Toyota never really bought into the strategy of “Let’s source from the lowest cost country.” Toyota always believed that the best strategy was to have your suppliers close to where the products are being used. So, there’s one example of a very smart company that took that approach. Nonetheless, many companies prioritized lower cost, and the pendulum swung very hard in the direction of offshoring, and products moved off shore. Well, a lot has changed since then.
Even before this pandemic, China’s per capita income was over $10,000, and obviously, the country’s labor cost advantage has been diminished quite a bit. With the pandemic, people were shocked that many products from critical industries like pharmaceuticals and medical supplies are all coming from China. All of a sudden, everyone is vulnerable to a single source of supply. My guess is that everyone is going to look very hard and rethink their supply chain.
Many companies are going to say, “Hey, we can’t have all of our products or components being made in one particular country. We need to diversify our risks.” I think companies on their own will diversify their sourcing risk. Customers may also start telling any supplier that wants to bid for its products, the decision won’t be made just on price, but it’s going to be conditioned upon having at least some manufacturing capability in the United States. Customers will not want to get back into a situation where it is completely dependent upon China or any other country.
Finally, governments like the United States could start to put in place tax incentives and other favorable policies in order to encourage companies in key industries to keep making at least some of the product in the United States. So, I believe that you’re absolutely right. I think there is going to be a rethinking of the supply chain. I think it’ll back off from where it was at its peak, but it’s not going to go all the way back to where it was in the early ’90s.
Doug: If I’m the CEO of a company with manufacturing in the States, I no longer have an incentive, or I’m no longer driven to go to China just for the lower cost manufacturing. But the market opportunity is still there. Can I address the China market with my U.S. manufacturing?
Jack: No, you really cannot. There are some products like basic commodities and energy, where China is energy short and needs agricultural products, where this can be done. Because China can’t reproduce enough food for its people, there are key areas where China needs to import. For any manufactured product, though, there are very few products where a company can really be economically competitive by shipping from a factory outside China into China. If you want to take advantage of the China market, the decision you’re making is the need to have a physical presence in the country. And that means having a factory and having people on the ground and committing to the China marketplace. China is a big market, but you can’t take advantage of it by shipping in from the outside. You need to be there.
Doug: And so if I am going to be manufacturing in China, where am I as far as the intellectual property protections that we left off with the trade war? How do I deal with those issues?
Jack: The IP violations, or alleged violations by China, were a big part of the reason for the Trade War—that was the reason why it started. And of course, how that IP gets protected, or whether China stops the practice of coerced technology transfer, were all big negotiating points.
The good news in all of this is that, step-by-step, over the last 20 years, China has eliminated foreign ownership restrictions in virtually every industry. No matter what industry you’re in, you most likely can have a hundred percent ownership of what you set up in China. That negates the whole issue of coerced technology transfer, because it used to be that, if you weren’t allowed to have 100% ownership, you had to have a JV partner.
Doug: In other words, you had to transfer technology to a potential competitor?
Jack: Right. And China said if you want to come into China with this product, this technology, that you have to do a JV, and you have to transfer all your technology to the joint venture, which is essentially a Chinese entity. Well, if now you can own 100 percent, that situation goes away. You no longer have coerced technology transfer being a big issue. If you can 100 percent control your operation in China, you don’t have to have anybody else involved other than your own managers. It doesn’t completely eliminate the IP risk, but I would argue that it substantially reduces that risk.
Doug: Would you say that now is a good time to go into China in some respects?
Jack: I think now is the best time to go into China for two reasons. Number one, there’s going to be, I believe, an economic tailwind over the next 18 months to two years. Like the rest of the world, China is going to have a very tough first half. The first quarter was bad, but China has now been back to work since the end of March, so the second quarter won’t be as bad, but it’s not going to be great. The government is putting in stimulus measures, and so economists that I know are predicting a sharp recovery in the second half. The IMF is essentially projecting that China could grow by 9 percent next year.
For this year. The IMF has reduced its estimate for China from about 6 percent to 1.3 percent now. The good news is that growth is still positive. The bad news is that that is a big drop from where China was, but then they’re expecting a very strong recovery next year. From an economic point of view, I think there’s going to be a good tailwind. The second reason is that a company’s potential partners, consumers, customers are all going to be very eager to try to make up for lost time and to work with good Western companies that have good products and good technologies to grow their businesses.
Doug: Are there any areas that you see as particularly promising?
Jack: Well, the good thing about China is that they tell you where they want to go. You don’t have to guess! China does five-year plans, which by and large, they follow pretty closely. If you’re an entrepreneur or a company in China, you read that five year plan and you read where China wants to head as far as its economy. And that tells you a couple of things. Number one, it tells you where the government’s going to be putting favorable policies. But it also tells you where the capital’s going to go, because capital sources are looking at that and they’re saying, “Okay, China’s focused on this industry, or they want to develop this industry, therefore, that’s a good industry to invest in.”
Going out to 2025, China has identified a half a dozen or more key industries where China believes it needs to develop, and where it wants to be a global leader in that industry by 2025. These industries include new energy vehicles, data storage, 5G, railway and aerospace. If you are the CEO of a company and you listen to what we’re saying here and you say, “Okay, now I want to go to China, which products, which technologies should I take?” I would argue that any technology that helps China to achieve those industry leadership positions in 2025 is going to find very willing partners in China.
It can be very exotic technologies, but it also can be more established industries. Take a simple thing like steel. China has by far the largest steel capacity of any country in the world. However, China imports a lot of high end specialty steel, because as large as their steel companies are, none of them have the capability to make the kind of steel that’s required for high end applications. And so, China needs to import from steel companies in the West, Europe, Japan and Korea. It doesn’t have to be exotic industries. It can be what you might consider to be very fundamental industries, but you really need to just consider, where does China want to go? Which industries do they want to have a leadership position in, and what technologies does it need as a country to get there? If your company can help fill that need, that’s going to be a tremendous opportunity.
