Friday, January 28, 2011

A CEO's Trip to China

A surprising view, for the CEO who expected the highlight of his trip to be The Great Wall of China, was the north pole on the twelve plus hour flight to Beijing from Chicago. While seeing the most northern part of the hemisphere was exciting, nothing could prepare me for the month to come. If you don't care about networking, jump to the middle for "business notes on China"

When applying to graduate programs, to supplement my CEO resume, I made sure to weed out school who did not offer a study abroad program with China. After hearing all about the billions of people in the Far East, and seeing their products on United States shelves everywhere, I felt that a CEO who doesn't make the venture out to see China is not serious about creating a multi-national organization. Although there are a few programs that send students to China, very few are of the caliber of The John Marshall Law School, nor do others have the credentials or foothold in Chinese history of the past years like this small law school in Chicago has built. A CEO should not only go to China with an agenda, but a means to network with high governing officials and intellectuals who can assist both here in the states as well as in the distant land.

Briefly, I walked The Great Wall of China with Chief Judge James F. Holderman from the Northern District of Illinois. I was taught intellectual property by Prof. Guangliang Zhang formerly Chief Judge of Intellectual Property Tribunal in Beijing No. 1 Intermediate People's Court, and sat at the head of tables with executives at the Chinese government's State Intellectual Property Office. I met countless lawyers whom had strong relations with offices in China as well as business professionals from other fields.

If you are a Micro cap CEO, this may be a way to network with the "big boys" and learn something along the way.
After a month there, I came back to take in what I had just experienced. So for the Micro Cap CEO, here are a few business notes that may be worth some consideration:

Banks in the United States can easily transfer money across all 50 US States, where as China’s banking system with a few exceptions, is regionalized so banks in a certain geographical region do not automatically exchange with a bank in another region even if they are the same bank, i.e. Bank of Beijing.[1] As well the check system is not as common as in the U.S. where a check can simply be written and cashed by another party.

By the end of the first quarter of 2009, about 1,888,374,100 (1.89 billion) bank cards had been issued in China. Of these cards, 1,737,901,000 (1.74 billion) or 92% were debit cards, while the rest (150,473,100, or 150.5 million) were credit cards.[2] At the end of 2008, China had approximately 1.84 million POS machines and 167,500 ATMs. About 1.18 million merchants in China accept banking cards.[3]

Although these facts show some opening to the Chinese monetary system, it must still be noted that the Chinese are looking in their best interest, and rightfully so, as they continue to take millions out of poverty. China's
banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy. China's accession to WTO will lead to a significant opening of this industry to foreign participation. The central bank of the People's Republic of China is the People's Bank of China. The "big four" state-owned commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China.

The biggest issue is not so much that internal trade in China is hindered but that externally the exchange rate is still fixed as opposed to floating. This in conjunction with the fact that China has yet to try to become a part of the Forex market, or the currency market, shows that stride can still be taken. If cautiously planned, the opening of the currency may lead China to the world leader position which so many have already deemed it to be.
II-Exchange RateIn The People’s Republic of China 15 American cents will give you one Yuan, a pretty nice exchange rate when just one Yuan can get you a bottled water and two to three Yuan can get you a 40 ounce of beer or “píjiǔ” in Beijing at a local restaurant. This currency difference leaves a grand opportunity available for those in other countries with a stronger currency. When China's Stock Market is having a good day, the screens displaying the tickers are red, the lucky color in China, to signal a stock has increased and green to signal a decrease in price. Regardless of the color, the cheap Yuan is advantageous to many, and big corporations are taking advantage, or should be.

The Renminbi (sign: ¥; code: CNY) is the official currency of the People's Republic of China (PRC), whose principal unit is the Yuan. The currency is legal tender in mainland China, but not in Hong Kong and Macau.[4] The official exchange rate is 1 US Dollar to 6.775 RMB.[5]

Companies like Yum Brands have taken full advantage of this exchange rate and hope to take even more advantage of the population of China. In 2008 the US had over 304,060,000 people while China boosted over 1,324,655,000 people.[6] As of 2009 Yum Brands which owns the like of KFC and Pizza Hut have seen their China profits up 30% a year over the last decade. They see the future as promising with Yum Brands China CEO saying “China has over 1 billion people, and only 500 million are urbanized.” Similar moves have been made by companies such as Nabisco which altered its world famous Oreo Cookie to a wafer to capture the Chinese market.[7]
III-Quantity, Quality, or NeitherChina has had wide spread comment of quality issues with the West, much coming from the American Consumer. But the Chinese are well aware of the issues faced, “even our own people know”, said a guitar maker about the abundance of quantity of product produced without regard to quality. [8] The Chinese have been competing in the world markets based on a price model, with the lowest price winning, china has produced so much quantity that the world could not ignore.

In his book, Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game, Paul Midler attempts to explain why some Chinese-made products suffer from poor quality. Part of the problem, he says, is rooted in miscommunication and misunderstandings between American companies and the Chinese manufacturers they are buying from.[9] This argument is enhanced by China's eagerness to do business with the world evidenced by economic zones and the emergence of English and other foreign language websites from Chinese factories and manufacturers.

“Business dictates market share, if the market share to be gain is bigger than the drawbacks…” business will usually be done in that region of the world.[10]

It seems that the ease of sourcing in China will continue to see manufacturing in the region. Manufacturers in China will say to an importer, “all we need is your sample,” and the factory will work out the details. For this kind of convenience, importers are actually willing to pay a little bit more, and this has been a less talked about contributing factor to rising prices out of China.

There will be problems in the production process related to quality, but the convenience factor is still there anyway. For these reasons and more, I think China will continue to be a place where our consumer goods are made.[11]

In the World’s biggest population, quantity or quality may neither be the issue. Hunger, shelter, and the like are still prominent in many parts of Asia and with these issues on the loom, other western issues may have to take a back seat. If manufacturers or companies are interested in doing business with China, specifications must be the focus of negotiations and problems will more likely be minimal. China wants to do business with us but they will not do it at the expense of not feeding their own.


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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The MicroCapCompany.com a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on PushYourRank.com

About MicroCapCompany.COM: MicroCapCompany.COM (The Blog) is a blog focused on providing articles, news and information on the micro cap sector and start-ups.  The Blog is a free service offered by Cervitude™ Investor Relations (a micro cap investor relations firm) and offers compensated research reports and business plan writing services for micro cap companies and penny stocks.  If there is a particular topic you would like to see covered on The Blog, email CervitudeNetwork@gmail.com, If you would like to advertise on The Blog, click here

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[1] Testimony by Aurthor Yuan, administrative support for The John Marshall Law School, had trouble opening an account for a cousin in Beijing China in the summer of 2010. As told by him, banks from other regions had trouble transferring funds because as he stated, the banks are “regionalized”
[2] http://www.pbc.gov.cn/showacc2.asp?id=2370
[3] http://www.pbc.gov.cn/detail.asp?col=100&ID=3189&keyword=%D6%A7%B8%B6
[4] Renminbi (simplified Chinese: 人民币; traditional Chinese: 人民幣; pinyin: rénmínbì) translates as people's currency. The renminbi is issued by the People's Bank of China, the monetary authority of the PRC. A yuán (元) is also known colloquially as a kuài (块 - "piece"). One yuán is divided into 10 jiǎo (角) or colloquially máo (毛 - "feather"). One jiǎo is divided into 10 fēn (分). In Cantonese, widely spoken in Guangdong, Hong Kong and Macau, kuài, jiǎo, and fēn are called mān (蚊), hòuh (毫), and sīn (仙), respectively. Sīn is a word borrowed into Cantonese from the English cent.
[5] As of July 20, 2010 12:00pm
[6] The World Bank Indicators
[7] Made In China-People’s Republic of Profit CNBC Original (may be viewed at www.hulu.com)
[8] Made In China-People’s Republic of Profit CNBC Original (may be viewed at www.hulu.com)
[9] http://money.usnews.com/money/blogs/alpha-consumer/2009/4/23/explaining-chinas-quality-control-problems Explaining China's Quality Control Problems By Kimberly Palmer
[10] Said by Sean Hansen in a phone interview on July 19, 2010. Mr. Hansen is an employee of Crocs, a shoe company I called to comment on China’s trademark infringement issues.
[11] Answered Paul Midler, Author of Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game, when asked: Why has China become such a huge exporter of factory-made goods? Do you think it still will be in 10 years?


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