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Chinese educators place a premium on rote learning. Those of a more enlightened consciousness believed that the meaning of what one had memorized as a youth would become apparent at a time of greater maturity.

I witnessed the wondrous benefit of this instructional concept at a luncheon in Taipei many years ago. As we discussed how one went about forging business relationships, a Taiwanese friend suddenly banged on the table, shocking us.

He had evidently experienced a revelation of understanding – of a phrase in The Analects by Confucius that his parents had forced him to memorize as a youth 30 years before. [The Analects in English and in Chinese.] “So that’s what it means!” he said. The value of rote learning is apparent. “Life experience,” as an American might call it, brings the idea held within memory, as a seed awaiting the spring, to life.

However, the literalists are far more numerous, especially in modern mainland China. They demand strict obedience to the letter of the teaching – whatever that teaching may be. The ability to reason and come to conclusions on one's own was and is seen as a danger to the powerful. A dear friend, who is also a brilliant intellectual, told me in 1983 he thought Mao Zedong a great man because he controlled the masses with thought. Shocking as that was to a young American intellectual, as I then was, it is nonetheless instructive of a typically Chinese principle: uniformity of thinking ensures control.

What does all this have to do with business in general and investment in particular?

Having spent my life among Chinese – and having trained many – I have found that the most difficult, and yet most pressingly important, task in a Chinese enterprise is teaching employees to think for themselves. Aside from the occasional micro-manager – whom most westerners would consider as lacking vital self-confidence -- the American manager expects his American reports to have the ability to resolve problems on their own with a minimum of supervision.

Chinese managers represent the opposite pole entirely, surely by education and often out of necessity. That is, complete control of all details at all times. Employees aren't supposed to think for themselves because the manager is to do that for them. But how can one create managers out of employees who never have to think for themselves?

That said, the role of the manager in a Chinese enterprise is in flux. The authoritarian style, while remaining the style of choice, shows fine cracks running up and down its facade.

What are some of those changes and why have they come about? How does the manager augment his staff's individual level of capability and self-sufficiency while retaining strong overall direction of his team? What does an investor look for in the management staff of his target, if he hopes to gauge the potential for success of the business? We will address this topic is greater detail over the next few weeks.

Let’s continue our discussion of the manager in the Chinese enterprise, which I began in "Chinese Management -- Beyond Garbage In, Garbage Out."

Western Flights of Fancy

When I counsel western expatriate managers running businesses in China, I find a few predisposed to flights of fancy. They expect P.R.C. Chinese business managers, and other P.R.C. Chinese in positions of authority, to act benevolently towards their staff, as if the constructs of ancient Confucianism were practical management methods in the modern day.

Measure this against the reality and one will find it very far from the truth. In 20 years of involvement with Chinese companies, I have only met three Chinese nationals -- all elderly, whose formative years preceded the Liberation of 1949 -- who practiced a management style one might call benevolent. (And yet I have encountered many Taiwanese who practice a benign, generous and compassionate “fatherly” authority over their staff, with, in all cases, great success.)

One musn’t blame or ridicule these westerners – they have merely picked up on a fantastic thread running through the western imagination, one unfortunately propagated by academics, journalists and travelers who have known as little of every day Chinese life as non-specialists, with sparse exception. It is emblematic of the long and preciously held western consciousness about China that many still consider it exotic, mysterious, exciting.

The Authoritarian Style

P.R.C. Chinese management style is founded upon the premise that all good flows from the manager. Fear of loss – of job, prestige, income, self-respect – demands that staff placate the manager at all times, regardless of the demand.

“You are my salesman. On Saturday (our usual day off), you will wash my car.” Most Chinese staffers would readily agree, albeit grumbling in secret, to such a demand. Imagine the reaction from an American salesman! (Far more outrageous demands have been made, but I hesitate to include them here, for fear that the reader would not believe me.)

Some Hong Kong Chinese and Taiwanese adopt a similar management style, especially while managing in China. Even their demands exceed one’s usual tolerance for outrage.

As for whatever business problems that must be resolved during the course of the day, the PRC Chinese manager, with exception, of course, is often a micro-manager, causing surprisingly curious and even stammering reactions in staffers. One asked me, in timorous voice and bowing heartily, where I thought certain punctuation should be placed in a presentation I was to give. Only fear could have given rise to such a queer question, for the staffer was extremely intelligent.

But what is one to do, thinks the ordinary Chinese staffer?

So, What is Going On?

The usual explanation is population. There are far too many Chinese for too few employment slots. One in a position of authority can exploit the situation to his benefit.

But I think there is more going on than simply supply and demand.

The urban intellectuals -- Mao, for example, was briefly a librarian at Peking University; Zhou studied in Japan and France -- who formed the peasant-based Communist movement in the first half of this century consciously instituted a rigid discipline over them. One became subject to the exacting requirements of obedient thought and choreographed action in virtually all aspects of life.

That militarizing mode of behavior has served pervasively as the model over the past 50 years. Chinese decision-makers throughout society have been trained – well-trained -- to emulate the authoritarian command of the politically powerful. Concomitantly, those who serve have been trained to obey, with contempt redounding to their detriment.

A Change Coming?

But, as I wrote,

“…the role of the manager in a Chinese enterprise is in flux. The authoritarian style, while remaining the style of choice, shows fine cracks running up and down its facade.”

How has it changed? There is a new Sino-western combination of management styles: one that, while abjuring authoritarian command, allows one to maintain close supervision over staff.

Importantly, without sacrificing results, this style is a kind of carefully managed freedom that allows staffers to better utilize their skills and knowledge to resolve business problems for the benefit of themselves, the management and the business. I have used it with success.

More on this in a future post.

When Westerners discuss Chinese business, they inevitably fall upon the venerable topic of indispensable “guanxi (关系),” or, in ready-bake parlance, “connections.” With a charming innocence, Westerners ascribe to the term “guanxi” an almost mystical power, as if it were a talisman to be worn about the neck. [The pin-yin method of romanization makes it very difficult for newcomers to the mandarin dialect. “Guanxi” should be pronounced approximately like “gwan shee.”]

Why? One with “guanxi,” it is believed, can get things done in China others simply can not. Many Westerner businessmen will regale the listener with stories of a Chinese colleague who, solely by virtue of his incredible “guanxi,” accomplished some task – helping an application through a government office, overturning a denial on a permit, etc. -- once thought impossible. Sometimes these stories ring true; at other times, I have been more impressed with the Western businessman’s willful ignorance to pierce to the root cause of the success.

A personal connection to a decision-maker, wherever on the globe, is valuable. But, it is presumed, Chinese hold far greater sway with any given connection than other ethnicities. There is more than just a grain of truth to that. Most Americans, according to my experience and observation, will generally not perform favors for even dear friends, unless either the request is logical or there is a direct and immediate benefit to the person who receives the request.

Chinese, on the other hand, are quite willing to perform favors -- without investing a great deal of ratiocination -- merely because a request has been made by a personal contact. Chinese are extraordinarily sensitive to the needs of their personal contacts – a faculty one might wish more Americans might develop.

To be fair, Americans open their hearts to strangers asking for assistance, while Chinese give strangers short shrift. The idea of “the public good,” if it ever existed as other than a traditional philosophical idea in the collective Chinese psyche, is in practice severely underdeveloped. As one Chinese manager said to me with no little shame as we walked through garbage strewn streets of Shanghai some years ago – “中国人最缺的就是公德心。[Chinese lack an awareness of the importance and value of the public sphere.]” That isn’t atypical of Americans: drive through the streets of Newark, New Jersey, and one can say the same.

But, really, how important is guanxi in China?

Influence works: pull strings whenever possible. However, while one might get some leverage through a personal connection, the value of guanxi is steadily on the decrease.

Just 25 years ago in China, political and economic power was concentrated in the hands of a very few. There were but a handful of decision-makers. One’s connection to that personage of power might arrange a transfer to a desired work unit, a larger apartment, enhanced medical care, etc.

With experience, one learned to take claims of pie-in-the-sky guanxi cum grano salis. [Perhaps I should not mix my metaphors, or, for that matter, sweet with salt.] In the 1980s, every Chinese waxed eloquent about his contacts, knowing full well their importance to the listener, when he very often but blew the proverbial hot air.

Some people were indeed very close to the center of power. And yet even they were difficult to access; they rationed their guanxi; they negotiated for value in return. They did not give it away to any and all takers.

But enough of the past. In short, that world – where a needle decided for a field of haystacks -- has begun to fade from view. With China's tremendous economic development, there are far more decision-makers now than there have ever been in China’s modern past, and their numbers continue to grow. Some people will still be well plugged in far better than others. But no one can possibly know all of the decision-makers, or even, for that matter, a substantial portion of them. A lock on guanxi is a relic.

Yes, one must acknowledge the vestigial value of guanxi. As I stated, pull strings whenever possible. But do not focus on it. Instead, in the China of today, we must look to the development of a far more important business skill -- that of creating relationships of trust with strangers.

More on how this may be done to good effect in upcoming posts.

[Editor's Note: More than a few multi-national businesses have foregone international adoption of employee stock option plans due to local regulation. Employees in-country may come to believe, wrongly, that headquarters has decided to treat them unfairly when the real obstacle to a corporate benefit is law. A well-intentioned incentive scheme may create a tangle leading to dissension and even disloyalty. Indeed, such a situation has occurred in China.

Over the past few years, Chinese regulators have devoted some thought to a remedy, recently enacting regulation. Today, we turn to Seung Chong, an attorney with Simmons & Simmons in Hong Kong, for a discussion of this development, which, it is interesting to note, involves the non-tradable shares issue. Seung advises on mergers and acquisitions and foreign investment in China.]

Share options give market a boost
By Seung Chong

Last week’s decision by the China Securities Regulatory Commission (CSRC) to allow listed companies to issue share options to employees is a salutary step to boost the domestic markets.

It gives companies the opportunity to add an important constituency to their shareholder base. It also gives the companies a powerful tool to incentivise and retain employees, in particular, senior management who can be rewarded by reference to share performance.

But, in order to take advantage of the regime, a company must apparently have first converted its non-tradeable shares into tradeable shares.

The overhang of non-tradeable shares has been blamed for the underperforming stock market, so the desire to issue options may be a powerful inducement to management to convert the non-tradeable shares.

Multinational companies seeking to standardise their global employment practices have been among the first to implement share incentive schemes in China. But the existing legal regime was not devised with share option schemes in mind.

Grey areas can be found in the rules on securities offerings and “safe harbours” designed to implement a share option scheme. There are also practical obstacles such as the difficulty of remitting foreign currency to exercise options. One solution is to implement cashless schemes. Under this plan, arrangements are made for the option holders to fund the exercise of options, and they are paid the net proceeds of the equity sale. But the problem with cashless schemes is that they defeat the very aim of encouraging long-term holdings by employees.

Some multinational companies have introduced phantom stock schemes or share appreciation rights. These are essentially cash bonus schemes, where the amount is linked to share price rises. Phantom schemes are often seen as undesirable because the payment has to be taken through the profit and loss account.

In devising a new regime, it is hoped that Chinese regulators will create a seamless and internally consistent regime for domestic companies and multinationals. But this may be a tall order.

Several factors need to be taken into account. First, the regulator is in the process of introducing new legal concepts such as the prohibition on companies to provide financial assistance to purchase its own shares.

Second, new option schemes will have to dovetail with the expected amendments to China’s company law. Third, any new regime will have to be an inter-agency effort as State-owned Assets Supervision and Administration Commission oversees many companies that may want to introduce share schemes.

Finally, share option schemes can only work in an environment where good governance is the norm. China needs, among others, tighter rules and enforcement on insider trading and an improved culture of compliance.

[Contact Seung Chong directly by e-mail. This article first appeared in the Financial Times, and is posted here with permission of the author.]

Few Chinese would give much credence to the notion that law is at all important to the their businesses, despite the growing number of regulations that impinge upon commerce. Traditionally, to the Chinese, whatever the law might be at the moment depends very greatly on the man who is executing it and your relation to him. This remains true to a large extent even today, especially since Chinese judges need not rely upon precedent, nor need they in practice explain their rulings.

However, given the many tens of thousands of lawsuits proceeding throughout China at this moment, far more than perhaps ever before, as well as the central government's insistence upon what it calls "rule of law," the law has become something like the fly that buzzes constantly around one's head, until one must take notice of it. And that is precisely what I would suggest. Your attorney will guide you through the minimal requirements that Chinese law demands of you in your particular situation, which with exception, will be generally less that what you would find inescaple in the West.

The Chinese Company Law has just been revised. The Legal Daily (法制日报) has reported upon the changes in the law with a brief comparative review, portions of which I have translated. Here is our first installment:

Understanding Revisions to the Company Law: A Comparison of the New with the Old

By Wu Kun

On October 27 [2005], the 18th Session of the Standing Committee of the Tenth National People’s Congress approved by majority vote the revised Company Law, to take effect beginning on January 1 [2006]. This is the third revision enacted by China’s legislative body to the Company Law since its passage on December 29, 1993, at the 5th Session of the Standing Committee of the Eighth National People’s Congress

As all know, the Company is the most important form of enterprise in a market economy. Enterprises with the company form do not represent the largest percentage among all enterprise forms, but their total capital and overall economic contribution far exceed other enterprise forms. At the same time, the company is an important mode by which the modern enterprise system is created. Currently, in China's state-owned enterprise reform, the use of the company structure to implement reform is very important. The revision of the Company Law and China’s company legal system contributes to the strengthening of China’s establishment and perfection of the Socialist market economy, hastening economic development. We may clearly discover, through a comparison of the old and the revised law, what of the new Company law will have various effects on the maintenance of the market economy structure.

1. Introduction of "Piercing the Corporate Veil"

Current law: Not in the current law.

Revised law: A shareholder who abuses the independent position of the company’s legal person and the shareholder’s limited liability to evade obligations, seriously damaging the interests of the obligees, assumes responsibility for those obligations.

To be continued...

As part of his series on international business, Wayne Turmel, host of The Cranky Middle Manager Show, interviewed me recently on the state of Chinese business management. It was an honor to have been asked and a pleasure to have been interviewed. We hope you find it worthwhile as well. Here it is at Wayne's site on The Podcast Network. Alternatively, click this link to listen to an mp3 of the show. After Wayne's preface, we begin conversing at around the 5 minutes and 40 seconds (05:40) into his show.

May I also say that, during the lengthy hiatus from blogging, I was amazed and grateful to many readers for their kind email asking where I had gone to. It was only the rush of pressing projects that kept me away from this site, and I will be back writing within the next few days.

Here is as curious a report as can be imagined. A Sino-British joint-venture dissolved because of one rude encounter between chief executives?

Beijing Guoan Advertising head Yan Gang said the decision [to dissolve the joint venture] came after he was called to London in April to discuss management problems and was allegedly given a brusque reception by WPP chief executive Sir Martin Sorrell.

"I have met a lot of people but never met anyone as rude as (Sir) Martin," Yan told the British newspaper.

"Because of this kind of attitude, we have been forced to cease co-operation with him."

One is stunned as with a brickbat over the forehead. Chinese are supremely practical beings -- a mere snub overwhelming commercial motives? There must be more to the story.

Can any reader, perhaps in the ad business, supplement?

[Editor's note: "Even an idiot can make money in easy times," said a Taiwanese business friend, once one of the largest garment manufacturers on the island and long since retired. "But the test of your commercial ability comes when times are tough. Try staying afloat then."

Shawn Beifuss of Asia Logistics Wrap, discusses these issues in a series of posts beginning today. We are grateful to Shawn for his insight and permission to post on Asia Business Intelligence.]

Part I: Overestimating Japan in its Rise, Western Business Underestimated Japan in its Descent

During Japan’s bubble years throughout the mid- to late-1980’s, there were many books and articles written for the Western business community that advocated the “Japanese way,” and warning the Western business community to either adopt Japanese practices or lose out in head-on competition. A widely read book that exemplifies this period is titled “Kaisha: The Japanese Corporation,” and is reviewed at Amazon as follows:

“Much of the literature on the legendary success of the Japanese corporation has rested on the premise that the Japanese possess certain cultural traits, not easily transferable to the West, that provide them with inherent advantages in executing corporate strategy (see, for example, William Ouchi's Theory Z). Abegglen and Stalk, however, maintain that the successful strategies of the best Japanese “kaisha” (corporations) are more imitable than not. They discuss such learnable, competitive fundamentals as debt financing, high retained earnings, a short-run concern for building market share, and a partnership with labor. While the preoccupation with the Japanese managerial style can become tiresome, Kaisha offers a different interpretation and is recommended.”

I was assigned to read this book during my first visit to Japan as an exchange student at Waseda University in 1996, already about five years into the post-bubble era. By that time, the vulnerabilities of Japanese firms were regularly appearing in domestic newspapers in the form of high profile scandal, bankruptcy and financial mismanagement that extended to large contracts private firms held with the Japanese government. The aura of the Japanese firm’s prowess seemed to be crumbling and looked to give way to the West regaining its sense of superiority as the leader in global business practices. This background context while reading and dissecting Kaisha provided insight into both the origins of Japanese firms’ perceived unrivaled ascension and the sources of their increasingly publicized failures in managing business realities.

One more trip to Japan from January to March of 1998 to complete my senior thesis helped solidify the feeling that Japan was entrenched, at least domestically, in a downward trajectory in terms of its business climate. During those three months I stayed with a good Japanese friend from a wealthy family, and even their household had become quite conscious of their spending, pessimistic about the Japanese economy’s future. Interestingly, my friend’s father, who was president of a large film developing chain, directed most of his criticisms towards the knowledge and education of his sons, and by extension the younger population of Japan. His concerns then about the learning and progress of Japanese youth seem very prescient today, but as I will illustrate in my second post, any wholesale dismissal during this period by Western firms regarding the state of Japanese competitiveness would have been mistaken.

[Part II may be found here.]

[Editor's Note: Today's post is the second in a series by Shawn Beifuss of Asia Logistics Wrap. Shawn continues his discussion of Japanese business management practices begun here.

On the subject of Japanese transformations, you may also wish to read "Major Legal Reforms Expected to Bring Wave of New Lawyers in Japan."]

After graduating from college and entering the workforce in the summer of 1998, I discovered that Japan’s leading companies were learning to adapt in markets outside of Japan quicker than many might have realized, or wanted to believe, in the Western business community. What opened my eyes was a four-year stint working for Denso Corporation as a production engineering liaison. Denso is arguably the world’s current leader in the auto parts industry and Toyota’s lead supplier. I worked in Denso’s Battle Creek, Michigan plant, Denso Manufacturing, MI (DMMI), where approximately 2600 American employees are currently led by a mix of American and Japanese management. The facility was the first established in the USA by Denso in response to Toyota’s own venture into Kentucky, and began production in 1986. A book titled “Small Town, Big Corporation” about the story of DMMI’s establishment is an excellent case study to read, but unfortunately is out of print and difficult to find. However, the point I want to make is that even while the Japanese corporate system was being advocated during the 1980’s and oppositely criticized throughout the post-bubble period, Denso was already establishing a hybrid of American and Japanese best practices at Battle Creek that would become the foundation of its strong business success and resiliency across North America throughout the 90’s and into the 21st Century.

As a liaison, I witnessed on a daily basis the tension of such a hybrid management system, but at the same time observed the characteristics that made the company quite adaptive and competitively stronger than American suppliers, such as Visteon and Delphi. This can be seen in the firm’s resilience and upward trajectory throughout the automotive industry’s struggles post-IT bubble and the 9/11 terrorist attacks—a period during which its customer base was almost 50% non-Toyota auto makers. Steeped in the principles advanced by Toyota via the Toyota Production System, Denso’s management succeeded in bringing about a culture where the predominantly American workforce adopted Japanese best practices and vocabulary in terms of team-driven, quality management and continuous process improvement. For example, words like kaizen, genba and heijunka do not need translation (continuous improvement, work floor, and leveling, respectively). Americans work alongside Japanese peers for every production line start-up and regularly participate in global innovation and quality circle tournaments sponsored by Denso Corporation headquarters.

At the same time, the predominantly Japanese management developed the ability to lead with the performance-based incentives and directness desired by American employees. Every Japanese president has been known to make regular visits to production lines to converse with employees; management feedback forums are held once per month so that employees can directly bring concerns from the genba to DMMI executives; and a famous process improvement incentive program supports individual kaizen suggestions that save DMMI money, but also over time provide employees with increasingly bigger rewards—the largest prize being a completely new, personally selected automobile via a DMMI customer. DMMI was able to do this through a unique co-management system where American managers pair up with Japanese transplant managers up to the vice president level (the president is always Japanese). Despite regular, ongoing tension regarding information sharing between Japanese and American managers, DMMI has been able to capture the strengths of both cultures in a management system that provides regular reviews, transparency, and a dedication to employee development and empowerment that has made the firm truly a model place to work.

Stepping back to the see the bigger picture, however, these advances by Japanese firms operating abroad often face barriers toward being modified and adopted, even partially, for Japan’s domestic business environment. My next post will look at some of the key challenges domestic Japanese operations face and provide some thoughts to remember for future discussion.

Highly Adaptive Abroad, Japanese Firms Struggle to Integrate Global Best Practices at Home

[Editor's Note: With many thanks to the author for his insight, we conclude Shawn Beifuss's series on Japanese business management practices. Part I may be found here; Part II, here.]

Fast forwarding from my departure from Denso in 2002 to today, and I currently have spent just over one year employed with a Japanese logistics provider based in Tokyo. Operating in the middle market and family-owned since 1924, this firm’s work environment illustrates the fact that the majority of Japanese companies—primarily the 2nd and 3rd tiers—have been heavily insulated domestically from learning the lessons that firms like Denso have by venturing abroad in the late 1980’s. Especially in the Japanese trucking industry, which is fragmented amongst approximately 60,000 firms, the traditional approaches to strategy management and human resource management remain entrenched.

This traditional style of strategy management possesses a decision-by-committee orientation that encourages highly iterative versus transformative initiatives. By iterative initiatives I refer to activities that seek to improve upon past practices without a significant change in management structure, systems and philosophy. Transformative initiatives on the other hand typically require a paradigm shift where the perceptions of and approaches to a firm’s current business realities experience foundational change. In the iterative environment, improvements can “get by” through reliance on the homogeneity of the Japanese workforce to bond together towards a common goal. This approach doesn’t employ communication tools that explicitly link a pronounced strategy or policy to individual objectives—it is assumed “the group” collectively understands their role in relation to policy announcements.

Obviously, such an iterative approach requires a longer time horizon to effect change; in this context, human resource managers can feel at ease with the traditional seniority-based system that defers to length of employment or age level. Training in such an environment also follows an iterative approach—absent any external effort, employees learn at the pace of the firm. In the past, when Japanese firms could rely on a lengthy if not lifetime period of loyalty from their employees, this system made sense or at least was sufficient. But the Japanese employment picture of today has changed dramatically, and Japan’s 2nd and 3rd tier firms along with the Japanese tertiary educational system are struggling to keep up. Data released earlier this year on the program “Up Close” via NHK, Japan’s public broadcaster, showed that more than 30% of all new employees freshly graduated from college quit their job within three years.

From my experience working in my current firm and discussing this trend with our own new employees just out of college, as well as with friends working in other companies, it seems that the following conditions generally exist:

1.) Lack of fundamentals upon university graduation: The majority of university students in Japan graduate with very few of the skills necessary to be successful employees via their own resources. The university system is such that it is still generally based on the old system of deferring to companies to train and educate the workforce to be productive and successful.

2.) Poor utilization of new human capital on-the-job: Since a significant number of graduating students no longer enter companies with the expectation of seeking lifetime employment or with the loyalty traditionally expected of new recruits, a mismatch between training and employee placement occurs. The result is many university graduates learn on the job at a pace below their abilities—I estimate anywhere from only 30-50%—and quit the firm before the company is able to maximize the contribution of that employee—this in a period of 3-5 years. As an example, one ex-coworker of mine spent three years in the finance department but, after leaving the firm, realized in later interviews that his knowledge of financial management and financial tools significantly lagged his peers of the same age.

3.) Death spiral of low expectations hindering corporate performance: With a significant number of new employees lacking the discipline and resourcefulness to self-educate and the majority of Japanese firms lacking the training systems to maximize employee contribution, there is an increasing trend of looking outside the firm for managerial talent. Often, these management hires are older workers forced into retirement in their 50’s and 60’s by larger firms restructuring or descending from the hiring firm’s own customers. In this case, the often lack of knowledge of the firm and its services/products upon employment ensures at least a short-term drop in corporate performance. At the same time, lower-level employees become more and more discouraged with a system that fails to provide dynamic personnel development and promotional opportunities that match pace with the challenges of today’s rapid globalization. A death spiral ensues where the firm continues to rely on older employees with a lack of practical and current business knowledge for management positions while these managers are considerably negligent in developing younger employees to eventually replace them.

The top-tier firms manage to hold their own in terms of training and have done a great deal to adapt to globalization and the use of global best practices. As the first and only Westerner to be hired in my firm, I am attempting to change the approaches and perceptions described above one step at a time. But these types of firms can hire the best talent in the world and they will be relatively marginalized or fail because they work in a system that does not identify, maximize and reward talent. Rather, a system that does cultivate talent in the appropriate manner can turn ordinary employees into stellar performance contributors.

Even being constrained by the type of system described above, I feel my Western education has cultivated in me the resourcefulness and discipline necessary to educate myself as needed to reach my professional goals. I honestly believe that one reason Westerners excel in innovation and leadership more quickly upon entering the workforce than many Asian employees is due to the Western tertiary education system. Although the students of Asian countries excel at the high school level in the testing of math and science knowledge, the majority of these students fall far behind at the tertiary level—in essence, the critical thinking and intensive focus on individual excellence that drives Western education is very absent in Japan’s universities. The difference can be clearly seen when comparing Japanese who have studied overseas at the university level versus the majority of their peers back home. So as a Japanese university student, if the first firm I work for upon graduation is not going to provide the foundation for success, it is up to that student to make-up the gap in moving along the learning curve. Unfortunately, from my experience so far, this perspective and skill set is difficult to transfer to my co-workers without being in a position as their direct superior.

Gradually, as more and more Japanese domestic firms realize that having a domestic-only business doesn’t exclude them from responding to the demands of globalization, those firms are demanding more from their management systems—especially such tools as metric-based performance measurement. This change will be painful and those Japanese firms that don’t initiate such a transformative effort will find themselves acquired by companies that will force it upon them, or gradually fall into bankruptcy, ceasing to exist. The strength of Japanese companies overseas, especially in the automotive industry, illustrates that it is possible for Japanese firms to succeed when the environment demands it. For Japan’s numerous domestic companies, it is of great importance to benchmark these success stories towards transforming their employee management syste

The New York Times reports that IBM has moved its procurement division from Somers, NY to Shenzhen.

Just 20 years ago, IBM had only a handful of staff resident in China, not buying, but selling PCs made elsewhere in Asia and the U.S. Yes, even in the U.S.

Tempus fugits. One is only surprised how long it took IBM to place its most senior procurement manager and his staff nearest its suppliers.

Bloomberg reports that a Beijing court has fingered IBM in the China Construction Bank corruption prosecution of Zhang En-zhao, the bank's former Chairman and once winner of an"Economic Person of the Year" award. Zhang is now the Person of 15 Years, the length of his sentence.

Documents issued by the court state that the company paid an agent US$225,000, which sum was channeled to Zhang. (No, no, we're not talking about Wang Xue-bing, Zhang's predecessor, who was also forced to resign and convicted of bribery. This is the the new guy. Well, not any longer.) We must note, however, in all fairness, that the mere inclusion of this information in a Chinese court document does not necessarily make it true. Regardless, it is now in the public realm.

The idea that one must buy favor permeates Chinese society, even down to the lunch offered by a family member asking for assistance. But bribery and the Foreign Corrupt Practices Act do not mix well. Since most commercial transactions can not be accomplished in China without the former, in one form or another, the latter tends to suffer when sales figures must be met. As to the actual payment of moneys, most corporations in China who fork it over do not do so directly, but instead make use of third (and fourth) parties -- often foist upon them by potential customers, but sometimes selected. Payments may be made within China or even overseas through a wide range of entities that may help mask the payment. One can be as sure of crisp US $100 bills in a satchel as often as numbered Swiss accounts.

An important note: the use of agents does not necessarily shield the American executive from prosecution. Actual knowledge that a payment or a promise to pay will be forwarded to an official is not required: constructive knowledge -- you "should have" known, given the facts -- can make the exec just as liable.

And is it even debatable that Zhang is an official for the purposes of the FCPA, when the CCB is a quasi-governmental organ of the state of China? The big spender [click this link if you want a good time] in China remains the state. How does the exec defend foregoing a big sale to a quasi-governmental organ and a payment to its key decision-maker in a market your headquarters believes will save the company?

(By the way, when senior management passes out copies of the FCPA -- with the notation in biro "read this and make sure you do not violate this law," as once happened to an American I know, it does not mean they care whether you violate the law, but just that they don't.)

The U.S. Department of Justice has grown increasingly serious about enforcement of the FCPA in recent years -- note the FIS investigation already in progress at the DOJ and in China, also stemming from the Zhang corruption case. But the acts of corporate bribery in China are so numerous, the proof for which is at best difficult to develop, that this the notation in Chinese court documents is an obvious anomaly. (Then again, when all the facts are known, it may be as much of a slam-dunk as might be attributed to George Tenet.) A squealer would seem to be the more common route to an investigation.

If you have not seriously considered it before, now is the time to give serious consideration to the value of risky behavior in light of the demands presented by the FCPA, the DOJ and, now, it appears, the Chinese government.

Jack Welch opined on the essential nature of excitement to spur on the managerial ranks. Get your managers excited about globalization, he once said, because it’s a complex task of gargantuan proportions. Get them excited. It sounds like a worthwhile idea.

But is excitement necessary or even beneficial? Is there real and lasting value to creating a buzz inside the organization?

I don’t believe there is, especially when it is manufactured. But the American businessman feels the need to tell the world that he is excited by…what exactly? How about these stimulating events: The release of a mundane software application…the 20th anniversary of an international trade education credentialer...a new financing program for a hardware store (CLOSED SUNDAYS) in the Midwest. Now can you get more blah than that? In fact, you can. Read a few dozen corporate press releases and you will find the excitement word in virtually all of them. But are statements like these professing excitement in the least credible? Do your best teenager impression and shout out: NOT!

Take this pseudo-excitement cannoned out towards the world and throw it back into the organization. Pep rallies for the sales force might make sense, but in very limited circumstances. All but the novice salesman is skeptical about management hype intended to stimulate action. The more seasoned salesman is disinclined -- on the basis of experience -- to swallow the hot air emanating from the etheral regions of upper management. [Does that make sense? Hot air should rise, but this stuff sinks.] Commiserating over a second martini after work, I have heard salesmen often say “Give me a product I can sell and the tools to sell it with” rather than “Give me more of that hogwash promising the world.” Dilbert fans working in the corporate world know what of I speak.

And yet American business managers insist upon generating excitement within their corporate structure, imagining it an equal to Fairy Dust. Countless consultants concur. (Chinese executives do not care whether staff is excited and refuse to excite them for any purpose, with very rare exception.)

[One may dispute whether the evangelicalism that permeates American business mimics the missionary zeal of American populist preachers – a parallel perhaps worth exploring, given the concomitant rise to influence of religious evangelicals in American political life.]

In business, however, I consider the need for “created excitement” to constitute, at the very least, a flaw in thinking, a generous waste of time and an effort in deception, if not self-deception.

Business is generally dull and repetitive work. There it is, I said it. Call me a contrarian, but while I surely recognize the joy in being given a challenge to one’s wits and experience, the details attendant to its resolution are rarely more exciting than a collection of 19th century door hardware. And yet a job well done, personal growth and a paycheck may make the grind very much worthwhile in one’s eyes.

Manufactured excitement intended to spur on the faithless to greater faith can not change the objective fact of daily dreariness; it may, to the contrary, make staff less likely to plod through the muck of minutiae. Indeed, in my experience, Chinese, the most unexcited of business managers, are far more likely to stick through the really hard work with far less complaining than Americans. There, I said it again. Americans wax eloquent about how hard we work, but, frankly, we come up short in comparison.

The nuts and bolts of business requires commitment and focus over lengthy periods of time. Excitement is brief – sustaining it requires a constant flow of propaganda. How much time and energy will you devote to creating the fantasy that corporate life is one big Orgasm? How many on staff will see through transparent efforts to manufacture a buzz? Welch’s excitement appears to have been a natural result of an effusive personality. Having never met him, I can only guess. But I have personally worked with only one leader who exuded a natural and genuine excitement on the job that was comparably infective over a long period of time.

The rest of the American managing world would best set its sights on simple professionalism – a plain honesty that recognizes the task at hand for what it is and, despite manifest hardships, sets to its resolution. American staff understand the value of a straightforward approach to their daily work. If you want to be a role model for your staff, don't try pulling the wool over their eyes. Avoid the hype and simply get down to work.

While McKinsey spins a positive take on the potential for growth in Chinese consumer spending, foreign businesses in the consumer luxury space respond in the negative.

When Eric Douilhet opened China's first Paul Smith and Moschino fashion boutiques in 2002, he didn't expect they'd be making money by now. He didn't think they'd be losing this much, either.

``I was definitely expecting sales to be higher, the losses to be smaller,'' says Douilhet, 43, president of Bluebell (Asia) Ltd., which also operates Jaeger clothing and Davidoff cigar stores in China. ``People are too optimistic about China.'' He declined to quantify the losses.

We find this extremely interesting, considering that it has recently been reported in the Taiwanese press that over half of the largest 250 Taiwanese entreprises in China are barely profitable.

調查指出，國內前兩百五十大集團，大陸投資佈局呈現「三高兩低」！投資金額高、營收規模高、負債比率高，不過，平均稅後純益低、平均純益率低；將近五成虧損，平均每家純益率只有百分之二點零五。

Which idea do you buy into - a future Fort Knox or a grinding money-pit? Perhaps both are fundamentally correct. The snail's paced growth of a consumer market in China does not necessarily dovetail with one's hopes for a consistently profitable revenue stream.

As we have stated consistently over many years, investment in China must be approached skeptically. Expect less where more seems possible. Temper enthusiasm with caution.

So who's making money in China? You'd be surprised to hear who isn't...

What? Bribery, McDonalds, Whirlpool, McKinsey, Shanghai -- all in one paragraph? Without further comment (as I am working feverishly on a project), let me direct you to this New York Times article.

James Fallows reports on yet another rags-to-riches megalomaniac. Mr. Fallows's report, perhaps unknowingly, has caught in a 5 minute video all the usual characteristics of this Chinese type: xenophilia (but at a distance), imitation of "best practices," massive display of wealth, rigid enforcement of conformity among his employees, the creation of a personal ideology and, of course, assistants crowding round hoping to collect every tit-bit of his wisdom.

Danone is now sadly forced to wash its dirty linen in public:

"After a long investigation, Danone officials concluded that their closest partner in China, Wahaha’s longtime chairman, Zong Qinghou, was operating a series of secret companies outside the joint venture — companies that were mimicking the joint venture and siphoning off millions of dollars."

This has happened numerous times in the past -- the most famous case being the American paper company which set up a joint venture factory in the early 1990s, only to find that its partner had set up a factory across the street in competition with it, making use of the machinery, workers and expertise the American company injected into the venture.

Who says history doesn't repeat itself?

Today's post contains a few questions I'm hoping some of my readers might be able to answer.

This WSJ article on American labor union officials and labor activism in China is an interesting read.

The All-China Federation of Trade Unions (ACFTU) is a government department. Its management does not take its cue to any degree from laborer members, who, by the way, must, without exception, join. There are no benefits to speak of - except perhaps for the annual ticket to see a movie (forget a first run) and perhaps a box lunch.

[Here is a video interview with Andy Stern, President of the Service Employees International Union, speaking on his union's involvement with Chinese unions. Thanks to Bob Kapp for the onpass.]

It strikes me as incredible that American union officials have any sway without explicit approval and active participation of the Chinese Communist Party (CCP) at the highest levels – and certainly the encouragement of labor activism in general is not at the top of the Party's “to do” list.

So here are a few questions to my readers:

1) Can anyone point me to research on CCP control and oversight of the ACFTU? Is anyone working on AFL-CIO involvement in the Walmart “unionization?” The WSJ story does not refer to sources other than foreign union spokesmen, and I wonder if scholarship has been done on the subject.

2) This may be well out in left field, but it strikes me that there exists some American legal stricture upon union mobilization in connection with Communist controlled labor unions. Am I mixing something up? Call this a junior moment, if you will, but some legal thread somehow perhaps related to COCOM of years ago is telling me some federal prohibition exists.

Because American states must, in most cases, enforce a judgment issued by the court of any other American state, Yanks in business tend to take for granted that fabulous feature of our legal system, known as "full faith and credit." [A dear relative was wont to say "for granite," but the malapropism is nevertheless just as valid, i.e., written in stone.]

But nations do not fall within the American constitutional system: American court judgments aren't not often enforced outside of the U.S. Unless, of course, there is a treaty between the U.S. and a foreign nation, there is little chance a court of that nation will recognize and enforce an American judgment. And, lest we forget, vice-versa.

For this brief post to be of any value to you, I must mention Don Clarke, who teaches at Harvard. He's written a brief article, entitled "The Enforcement of United States Court Judgments in China: A Research Note," and even if you are not an attorney, it is worth your time. Don says, in essence, that Chinese courts do not recognize and haven't enforced an American judgment.

My point in recommending you read Professor Clarke's article is this: here lies an important lesson for American companies who do business with China. Don't expect you can take an American judgment against a Chinese company to China and sue upon it. Your American judgment will not be recognized. Your more likely remedy would exist when the Chinese company has established sufficient presence in the U.S., such that you can sue the company in an American court. But unless that Chinese company has assets in the U.S. upon which you can levy, you are unlikely to recover very much at all.

What implications does this have, exactly? For importers, for example, the Golden Rule is to guard your money carefully -- before you even enter into a transaction with a Chinese exporter. Do not pay up front and then expect to receive product. You may not receive it once the money has left your hands. You will simply have no recourse.

The wise prefer to spend the extra fee to open a letter of credit, payable upon your acceptance of the product, rather than resort to prayer. Now prayer is a good thing, but its efficiency in trade is yet to be proven. Who wouldn't spend the extra? Many inexperienced traders. Perhaps you. Especially if you are new to importing -- and some I've spoken with are sourcing via the internet without even visiting the physical location of your provider -- you should never blindly pay cash up front. [If you haven't visited your supplier, you are neglecting essential due diligence.] But even if you have longstanding relationships with your suppliers, I would not recommend anything but L/C based transactions, except in the rarest circumstances (emergency circumstances where a mold needs to be opened immediately, etc.). Continue to pray, by all means, but, with some recourse in your own country, you won't need to pray so very urgently.

More on the practical aspects of Don's article in upcoming posts.

A shameful kow-tow.

"Our reputation has been damaged lately by these recalls," Thomas Debrowski, Mattel's executive vice president of worldwide operations, told China's quality watchdog chief, Li Changjiang, in the Chinese capital.

Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people and all of our customers who received the toys."

"But it's important for everyone to understand that the vast majority of those products that we recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in Chinese manufacturers."

As of 1300 UTC on the date of this posting, the Mattel website does not display any such statement.

Beware, all ye who dare to accuse.

UPDATE (2100 UTC):

Even the Wall Street Journal, that supposed bastion of the free market ideal, and its interviewees miss the point entirely:

it also would also seem logical for Mattel officials to take a respectful stance toward Chinese officials, as 65% of its products are built there. Drew Thompson, the director of China Studies at the Washington-based think thank, the Nixon Center, says maintaining good government relations is crucial for companies that want to build a lasting corporate presence in the country. "It's incredibly important," Mr. Thompson said. "It's everything." Bates Gill, who has worked as a China specialist at the Center for Strategic & International Studies, agrees, noting that while it's important to maintain good governmental relations in most countries, it might be more so in a country like China. "The government has a lot of control over the full range of factors of production in China," Mr. Gill said. "From land usage, regulatory questions, licensing, labor, all of these inputs for profitable production in China are, you know, controlled and can be manipulated by state authorities. So you have to be cautious and make sure that those relationships are positive."

Why is it that, when discussing China, shameful bootlicking subservience under threat, a requisite of behavior before the ancient Imperial court, is tolerated by the most modern of businessmen and academics? Why is it blithely explained away, simply as an act of necessity, even of survival? Lord Macartney refused to bow to Qian Long:

In Peking Macartney refused to kow-tow, or make the nine prostrations, unless a magistrate of equal rank would kneel, and bow nine times before a portrait of George III. Both sides declined to yield. Finally, not in the palace, but in a garden, informally, the British minister obtained audience of the emperor, but in reality he was received and treated as tribute-bearer from a vassal state. Trade was opened at Canton, but the British foreigners agreed to obey the local magistrates. In a word, there was no "extra-territoriality" as yet. The foreigners' place of business was called a "factory."

[Note: If enough readers ask for it, I will find the incident in Macartney's journal of the trip, published ca. 1793.]

Bravo for that Brit! Who has the spine now?

Mattel's apology should be publicly and vociferously deplored, not simply for the craven act itself, then for its assuredly lasting after-effects upon other foreign firms, who will now find themselves pressured to act similarly, at pain of who knows what sanction.

I regret to say I can not commiserate with Mattel executives on their decision to cave. Instead, this is a lesson to all those who would foolishly place most of their eggs in one basket. I've been saying it for years, boys, China is a tough town. They play for keeps. Diversify or suffer. Or they're going to have you by the short and curlies. If they don't already.

The American Consumer Product Safety Commission has issued another set of product recalls involving leaded toys and jewelry from China. (Golly gee willickers, but don't they look so cute!)

In Bejing, Commerce Ministry spokesman Wang Xinpei on Thursday said: "Our attitude toward the toy problem has always been the same, that the problem is one in a thousand."

With several million products already recalled and many more likely to follow, that ratio may be somewhat erroneous.

The $64,000 Asia Business Intelligence question: which of the American companies involved in the recalls will be the next to suddenly appear with Chinese officials, apologizing deeply, humbly and profusely to the government, exporters, manufacturers, factory workers, transport carriers, freight forwarders, longshoremen and God knows who else in China?

Gordon Fairclough of the Wall Street Journal visited Chery's main auto plant in Wuhu City in Anhui Province. As you may recall, Chery was -- remains? -- a focus of intellectual property disputes and safety concerns (crash test pix here; video, here). Rather surprisingly, Fairclough was allowed to video the main production line. Then again, perhaps not. Chery's deal with Chrysler to sell cars under the Dodge name in the U.S. is ample reason to garner positive publicity. Here's the WSJ video, courtesy of the WSJ site:

We briefly posted on the Danone-Wahaha scandal in June. Now comes the sound of the other shoe dropping. From the Wall Street Journal:

A Chinese beverage maker won a trademark arbitration ruling against joint-venture partner Groupe Danone SA, the latest legal twist in a closely watched case and one that is unlikely to end the dispute.

The Hangzhou Arbitration Commission said the period had lapsed during which Danone was eligible to file its case against Hangzhou Wahaha Group Co. The case was aimed at forcing Hangzhou-based Wahaha to honor alleged obligations to transfer ownership of the Wahaha brand to the companies' joint ventures, a key aspect of Danone's effort to re-establish control over the Wahaha business in China.

Paris-based Danone said it is "shocked" by the result and is studying its options.

Shocked!

On a related note, a Harvard Business Review study of the supposed influences of Mao on modern Chinese managers, refers to the CEO of Wahaha:

High-profile Chinese business leaders who have used...Mao-style tactics to dominate their managers include Zong Qinghou, the founder and former CEO of Wahaha, the French-Chinese beverage joint venture. Zong recently circumvented the formal organizational procedures during a dispute and mobilized Wahaha employees to publicly denounce the French management. As of this writing, no settlement of the dispute was in sight.

Is it accurate to state that managers emulate Mao? Any case, apparently analogous, requires one to trace an influence from cause to effect, which the authors do not seem to attempt. And what is the benefit of an analogy so tenuously tied?

Instead, it is more accurate to say that mainland Chinese in positions of authority, and to a lesser degree Chinese outside of the PRC, share a purposefulness in their methods, often ruthless, usually creative, straightforwardly ambitious, enormously resourceful and extraordinarily authoritarian.

From the New York Times: China Agrees to Post U.S. Safety Officials in Its Food Factories.

Embedded, like Judith Miller in Iraq?

Michael O. Leavitt, secretary of health and human services, said he expected that Food and Drug Administration officials would eventually be embedded in China’s food safety bureaucracy to help train Chinese officials and keep records on their inspections.

Did Mr. Leavitt make use of the word "embedded" in conversation with the interviewing journalist, Steven Weisman? Or did Mr. Weisman himself choose that word, pregnant with negative connotation, while lacking a direct quotation from Mr. Leavitt?

China and the United States, seeking to ease the furor over the safety of food exports, signed an agreement Tuesday calling for a greater American role in certifying and inspecting Chinese food products, including an increased presence of American officials at Chinese production plants.

This should help, shouldn't it? English speaking inspectors in an entirely Chinese environment. Many thousands of factories to be monitored -- extraordinary cost of bringing American inspectors to China, housing and feeding them, etc...

This agreement will provide an opportunity to have our people here on a continuous basis with expertise so that we can work with our Chinese colleagues in helping to develop good practices,” Dr. von Eschenbach said.

People is plural, meaning at least two. But the precise number of inspectors was not actually specified.

American officials said that the agreement did not cover all the food products sought for tighter inspections, but that it could be expanded. It is to cover some preserved foods, pet food ingredients and farm-raised fish, all products that the United States has said were tainted.

But, wait! Only a few food groups would undergo any inspection at all.

One may conclude that this initiative has been a major failure, from conception to implementation, on the part of American food and safety officials. Can one, however, consider this a public relations success?

While it may be true that tax collector is one of the two oldest professions, no pejorative comment affects the fact that tax collection, wherever it may occur, will put its hand in one's pocket and scrounge around for even loose change. The multinational, whose pockets are considered fertile territory for treasure hunting, feels the touch of many-fingered hands of all nationalities.

Thus, when a national tax code changes dramatically, as in the case of China's new corporate income tax, not only does the multinational itself encounter often obscure changes in reporting requirements and the amount of tax it must pay, but its effect upon the tax law of other nations in which the multinational reports taxes can be complex and ill-understood.

For example, the IRS has issued new guidances on how non-US companies controlled by US persons can achieve deferral of income tax. Specifically with regard to American businesses operating in China, how does one rationalize Chinese and American corporate tax regulations so as to minimize the total tax paid to both? What is the effect of the changes to the tax regulations upon transfer pricing? Should US subsidiaries operating in China conduct themselves in a certain way with regard to third-party subcontractors so as to ensure minimization of corporate tax, both in China and the US?

To answer these important questions, Strafford Publications has announced the following online audio seminar to be presented on Thursday, August 7, 2008 at 1:00–2:40pm Eastern:

China's New Business Income Tax
Shielding Non-China Income From the Expansive Enterprise Income Tax
Plus: The Impact of IRS Contract Manufacturing Regs for U.S. Operations in China
A Live 100-Minute CPE & CLE Teleconference with Interactive Q&A

Speakers:

Peng Tao, Of Counsel, DLA Piper, New York.

Melanie Chen, Managing Director of China Group, UHY Advisors, New York

Alan Granwell, Partner, DLA Piper, Washington, D.C.

For more information and to sign up for what promises to be a seminar of great interest to corporate management, their attorneys and accountants, click this link.

Der Spiegel reports that one out of five German companies has ceased or is planning to cease production in China due to rising costs.

"The big story here is that globalization is for real -- and China is no longer what it was," says Ronald Haddock, a vice-president at consultant Booz Allen Hamilton...

Corporate fright at seemingly unstoppable upwardly moving human resources cost, the rapid turnover of highly trained workers, the insufficiency of energy supplies coupled with fast rising demand, the slight appreciation of the RMB and a revulsion by many consumers in the West at the prospect of seeing their local shops stocked entirely by Chinese -- all contribute to the "China no longer is what it was" phenomenon. Elsewhere on this blog, I have suggested as much, viz., a decrease in the increase of the rate of at which Chinese goods find their shores in the US. Even so, read this:

Chinese companies, too, are increasingly outsourcing production abroad, Eddy Henning, the head of corporate banking at Deutsche Bank in Beijing, told the newspaper. "Someone who just wants to produce T-shirts is more likely to go to Vietnam or Africa," he said.

As energy prices make container transport unprofitably expensive for heavy products, some furniture manufacturers in North and South Carolina in the United States have brought back production from China. But has the tide turned back to the countries that have lost their manufacturing? Not likely:

In only four years, from 2002 to 2006, the value of furniture production in China has nearly tripled in value, from just under $20 billion to just under $60 billion. As production has increased, China's furniture exports have experienced a similar boom. From 1997 to 2006, the value of furniture imported to the US from China has increased more than nine-fold, to hit $14.4 billion in 2006. The percentage of US furniture imports from China rose from 32% in 2001 to 50% in 2005. Due to a weaker currency and state regulations, Chinese manufacturers can produce finished products at much lower costs. In fact, the average wage of a Chinese furniture production worker is only four percent of the average wage of a worker in the U.S. This fact combined with China's modern, high-tech plants make them a huge threat to the stability of the industry in North Carolina.

One wonders whether the German companies profiled by Der Spiegel are smaller companies which should never have been in China in the first place. The Chinese export engine continues to hum. Visit the ruins of the American manufacturing industries throughout the US and one will see what it really means to pull production.

Hmmm... Now everyone is jumping on the China downturn bandwagon.

Textile exports fell 4.2 percent in June from the same month last year, a serious blow to an industry that employs millions of people. Overall export growth in June was 18.2 percent, down from May's 28 percent rate.

Note the change in overall export growth means that there has been a decrease in the rate of increase, but that exports continue to grow.

Several years ago, I was surprised to hear from a number of friends at the midpoint of their careers who expressed the desire to work in China. A number of them were, as we say, "on the beach," but the suntan lotion had dried up. A few had significant international experience, some had none. All of them needed to work.

(A handful asked how quickly it would take them to become fluent in Mandarin. Two to three years of intensive study will bring you to the barest of minimums and most likely not even conversational ability. For those who speak Mandarin, there are more opportunities, of course, unless you wish to teach English.)

I applaud the courage to search elsewhere for work -- born of necessity -- but valorous nonetheless. Doron Vermaat, Managing Director of NewChina Career, has asked me to blogroll his site, which is a job search site for China, Now, I have never myself used this website, and I don't know Doron personally, but I've surfed it. For those readers who wish to work in China, here is a site which is, as Doron writes, "100% free for job-seekers."

Readers who've had positive experiences with other China job sites are welcome to write about them in our Comments section directly below this post. (Please don't use this as an opportunity to plug your product -- I will delete comments that do so.)

Looking to work in China? Listen to a brief introduction to a China job site.

Chinese, as we well know well, are supremely capable of putting in long hours. Indeed, suffering quietly is a badge of honor. Hong Kong Chinese work even while asleep (or so it seems). Well, they do often pass the evening in the office or factory. Taiwanese follow as close runners-up only because they are known to give up Sundays to spend with family. I've not found Mainland Chinese workers to be self-starters, but generally resist little when compelled by circumstance (poverty) or a berating management. Pleasure or entertainment is, without doubt, not a focus of Chinese existence. Does the quality of life suffer as a result these profoundly held ideas?

Americans, to the contrary, are no longer willing to suffer much -- the Protestant work ethic has just about gasped its last breath. We would rather be safe, fat and happy. Americans believe they work long hours, but generally maintain a 5 day schedule lasting perhaps 10 hours. Lazy? Perhaps...

Lazy!

Zhang Yi-mou（張藝謀）, film director and Olympic Impressario, describes to Southern Weekly (南方周末）the frustration of working with Western artists, whom he had the displeasure to direct:

南方周末：外国人还感叹，看开幕式之后，至少他们在评论中使用的语言，想象不到还有谁用这样的资源，制作这么大一个作品出来，他们在对你的采访提问中有这样的误会或疑问吗？

张艺谋：他们都没有说这个，他们只是觉得——其实我觉得我们是两种东西在一起，1+1产生的效果，就是人的表演。我老跟他们开玩笑说，说我们人的表演是天下第二，天下第一是朝鲜，就是整齐到了一个相当的程度，整齐死了！就是这种传统的整齐的动作带来的美感，这一步我们中国人能做到，中国人通过严谨的训练、刻苦的训练能做到。像那活字模，那完全是口令，代表一听口令，完全做到，像电脑一样，外国人很惊叹，这是我们中国人的志气，我们把人的表演通过我们的努力和聪明能做到这一步，这是人的表演，这一步是很多外国人做不到的。

我排过西方的歌剧，那个麻烦呀！一个星期只工作四天半，中间要喝两次咖啡，不能加任何的班，稍微有一点不舒服都不行，因为人权，那个排练能把人急死，哎哟！一个星期，我都觉得咱早就能把它排整齐了，他有时候队伍还没站整齐。你还不能说谁，他是有组织的人，也很严格的，就是明儿“哗”给你换一批人来了，你刚有点熟了，又换一批。他都是有各种制度，工会制度。咱们不是，咱们刻苦，能吃苦耐劳，咱的训练一个星期下来绝对是他两个月的层次，所以我们可以把演员做到这样的表演质量，我觉得是除了朝鲜，世界没有一个国家能做到。

The Washington Times translates this interview, in part, thus:

"North Korea is No. 1 in the world when it comes to uniformity. They are uniform beyond belief! These kinds of traditional synchronized movements result in a sense of beauty. We Chinese are able to achieve this as well. Through hard training and strict discipline," he said. Pyongyang's annual mass games feature 100,000 people moving in lockstep.

Performers in the West, by contrast, need frequent breaks and cannot withstand criticism, Mr. Zhang said, citing his experience working on an opera performance abroad. Though he didn't mention a specific production, he directed an opera at New York's Metropolitan Opera in 2006.

In one week, we could only work four and a half days, we had to have coffee breaks twice a day, couldn't go into overtime, and just a little discomfort was not allowed because of human rights," Mr. Zhang said of the unidentified opera production.

[Editor's Note: Tan Dun's The First Emperor, Dec. '06.]

Chinese Film Director Zhang Yi-mou teaches Westerners a thing or two about the laziness of Western workers. A lesson about opinions commonly held by Chinese in business.

[Editor's Note: I continue to write for Chinese Americans about legal issues relevant to their communities. The article below -- on how desperate things can become when a business partnership dissolves -- was published in the August 31, 2008 print issue of World Weekly (世界周刊）．]

法律之窗 ／柯亦清 (Richard Kuslan, Esq.)

生意興旺時，華人合夥人意見不同，就通常能夠自己解決。在商業環境裏，合作的確不是爲了慈善的動機：是確保各自利益的手段。雙方認爲為了小事情而爭論會浪費賺錢的寶貴時間。雙方最好盡量合作。

可是，小公司成立后卻不見得一定會成功。按照美國中小企業局(Small Business Administration)的發表研究，將近三分之一的小公司成立后兩年就會停業。成立后四年只有44%還能生存。

在糾紛演變嚴重，合夥人爲了保護自己經常會放棄溝通而進入「打仗狀態」， 這樣就提高解決衝突的複雜性。何況在生意失敗的情況下！此時因爲雙方盡力挽救資產或減少個人須負擔的債務，合夥人相互指責使得感情分裂更激烈。某一方決定通過法律的途徑來解決問題，會有效嗎？

因爲跟美國法律接觸不夠多，很多華人對美國法律體系懷抱著一個理想：法律是客觀的萬能武器，用起來保證處罰邪惡的敵人並且會讓人得到適當的賠償。偶爾有如此積極的結論。盡管如此，總可以經過法律途徑而獲得該得到的觀念是不怎麽符合事實的。

律師甲和律師乙為客戶打官司。律師甲的目的是，提交足夠的證據説服法官按照可適用的法規接受他的賠償請求。對方的律師乙也是同樣的目的。法官可以接受甲或乙的説法或憑他自己的看法下判決。在這種情況下，任何一個律師都向客戶難以保證結果。假如由6到12個人當陪審團下決定更難預測結果。所以，律師只能以他的知識與經驗而為客戶盡力。在一般情況下，雙方出庭前能夠和解就省時間，金錢和痛苦。

在美國組成公司的華人合夥人自然地以中國人的生意模式營業：非正式，口頭上交易多，以現金爲主要付款方式，缺少書面記錄等，這種做法導致證據遠離完善的情況。有些人以爲把自己的看法說給法官聼就可以得到好結果，但口頭的解説不夠：法院要求的是更有説服力的證據。因此，沒出庭過的人認爲絕對成功的案子並不一定能成功。

證據是什麽？其範圍相當廣泛，譬如，合約紙或電子收據；物體和抽象的個人財產（像音響系統或電子部件的專利），本人當證人或第三人(專家)的説辭，等等。如果律師無法向法官提交有説服力的證據又怎麽能夠證明他的説法呢？

非正式的生意模式比較方便簡易，省掉日常的麻煩。除外，也有其他不單純的用處，包括：隱藏職員的非法移民身份，逃稅漏稅等。因此緣故，生意興旺的時候，對於未來可能會發生的壞事華人基本上不在乎。 向華人提起此可能性，華人通常輕鬆地回答：「沒事就沒事了。有問題，到時候再説吧。」

華商的世界觀很簡單：因爲誰也無法預料未來，所以問題出現才解決。設想營業計劃來預防可能不會出現的難題是大浪費。進入美國法庭的環境之後，一般人會後悔這個想法。

打官司時中國人生意模式所引起的困難，我們以兩個假想的故事來解釋一下「預備」的價值。

缺少書面記錄：投入資產的證據沒了？糟糕了！

組成公司之前，合夥人商量而決定各自投資的額度。可以投入的資產取決於州法的制定與合夥人互相之間的承諾，包括許多種類，如金錢、個人財產、不動產或職業服務等。譬如說，合夥人王和陳一起開公司。王和陳簽的書面營業協議制定各自投入一百萬元。在理論上，王和陳每個人擁有公司50%的股份 。按照營業協議，利潤和虧本照股份分配。王和陳兩個人都認爲可以分享利潤的50%，虧本的話也同樣的情況。

（營業協議是什麽？合作夥伴簽署營業協議來記錄營業方面的同意，包括資產投入，營業方式，分解程序等重要題目。不少商人根本沒有任何書面營業協議。口頭協議卻又缺簡樸。沒有書面文件好像最自由，可以隨時調整夥伴的協議，不過風險很大。到時候有衝突的話，就難以證明口頭協議的内容。）

我們來進一步了解王和陳的實際資產狀況。其實況不如預期，就與書面營業協議已非常不同。王開了25萬元的私人支票直接投入新公司的支票帳戶。陳投入10萬元現金，但他的方法不正規。因爲公司辦公室需要裝修，陳叫他親戚從國外銀行的私人帳戶直接匯錢到裝修商戶頭來付清債務。陳在美國也有一棟小倉庫，同意投入給公司。陳知道倉庫的價值為10萬元。王不了解不動產市場，但因爲資本不是公司非常需要倉庫的投入，就受騙而同意40萬的價位。不動產市場最近非常不景氣。前營業協議後，兩個合夥人再也沒有投入一毛錢進去。合夥人疏忽履行協議。

按照營業協議，陳和王每個合夥人具有50%的股份。按照以上的投資數目，這就不合實際。在表面上，王的投資達到25萬元而陳的投資高達50萬，所以按照實際資產投入，王可能只有三分之一的股份，而陳就又三分之二。

可是，王的投入的證據比較可靠。陳則很難證明10萬元的匯款原來是他的資產。對於倉庫來講，也可能有點問題。當陳把倉庫投入公司的時候，市場價就不一定達到40萬元。除了予人欺騙的把柄以外，陳或王怎麽能夠證明這筆資產的價值？可能必須要通過商業不動產的專家估價師來評估才能搞定。公司股份的支配比率到底如何？利潤怎麽分配？債務該誰負擔？

有關職員的身份記錄：聘請非法移民，老闆本身要不要負責？

某華人公司爲了減少工資，逃避向政府繳收入稅加以免除支付州法定的勞動賠償費，聯邦醫療保險稅（FICA）等的負擔，就決定聘請非法移民。兩個合夥夥伴梁和董自己身份已經合法了。他們決定不保留任何有關職員的書面記錄，且用現金支付工資，認爲因此就不會有事。梁和董同意只要把非法移民的身份隱藏起不告訴任何人，就好了。据他們的判斷，若職員發生事情的話，絕對不會影響他們兩個合夥人。

按照非法移民計劃公司安全地營業一段時間后，兩個人聽説有賺外塊的妙方法：幫人家申請勞動簽證。董的親戚有朋友在大陸認識蛇頭。親戚不是律師，但自己在中華街創辦了移民簽證事務所，好像很賺錢。兩個人就開始拍賣公司的職位，收每人一大筆錢。與聯邦勞動局規格相反，他們認爲從海外過來的人沒有任何學歷或工作經驗也無所謂。夥伴決定僞造重要文件，認爲誰也不會發現。他們不承諾任何人會有任何保障。如果得不到簽證不會是他們的問題。梁和董很有信心一切都會順暢。兩個人処得很好，以爲互相之間絕對保密。

非法移民廖在公司工作一段時間，對待遇和安全情況不滿。提出抱怨時，合夥人很快就把他解雇了。可惜的是，輕舉妄動的廖氣得快吐血了，向地方警察局和移民局打小報告誇張梁和董又實行非法計劃又進口毒品，使得政府開始調查。“絕對不會有事”很快就變得嚴重了。由於密告事由，梁和董的計劃就由此導致入罪。

按照聯邦移民和勞動法再加一般州法，公司不能不保留有關職員的記錄，並且必須要繳支法定的稅．９１１事件后，勞動與移民的監管更拉緊了。各老闆爲了保護自己的利益，責怪對方才是黑手。儘管過去很順暢，一旦發出嚴重問題，整個情形顛倒了。證據稀薄，哪個合夥夥伴也難以駁回政府的控告。在這種情況下公司能活多久呢？

結論

爲了保護自己的利益，華人在美國必須採取美國人也必得不疏忽的預備措施。譬如：
• 商量並達成合夥人書面營業協議，了解並履行條款内容。協議有變化時，條款照樣修改。
• 按照法律的要求和自己最明智的判斷，保留個交易的書面記錄，包括資產投入，消費，收入，職員信息等。
讀者該為未來採取保護性的措施。其實，中國古時候最出名的將軍也照樣建議了：

夫未戰而廟算勝者，得算多也﹔
未戰而廟算不勝者，得算少也。
多算勝，少算不勝，而況無算乎！
吾以此觀之，勝負見矣。
《孫子兵法》計篇第一　　　　

As a further response to the credit crisis (crash?), the American Internal Revenue Service issued a temporary guidance last Friday allowing multinationals to borrow cash from overseas subsidiaries for as long as 60 days, three times a year, without incurring corporate tax.

"Recognizing current liquidity constraints, we issued this temporary guidance," said Andrew C. DeSouza, a Treasury Department spokesman. He declined to comment on whether any specific companies or their representatives had pushed for the move. "I think we're recognizing there were companies out there that were having liquidity constraints," he said.

Those of you located outside the United States may find headquarters tapping you on the shoulder for your cash somewhat more often.

Bloomberg reports that the credit freeze is expected to reduce the number of international shipments banks commonly guarantee:

``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''

Companies completely dependent upon product purchased overseas by means of letters of credit could be badly affected if L/Cs will not issue. Very few will purchase product from China T/T and who will ship D/P? Primarily self financed manufactured goods (not many of those, one expects) and domestic manufacturers may be somewhat better off.

One would expect effects to be seen at American and EU factories dependent upon foreign parts and retail stores within a matter of weeks. What possible effects? fewer imported products? increased difficulty of obtaining product? Higher prices, if demand remained steady? Production ramped up in the US and scaled down in China?

We’re opening up a new era, not just new offices...a permanent F.D.A. presence in China.

So claims Mike Leavitt, Secretary of Health and Human Services for the Bush administration. Well, at least there will be a physical presence -- but whether or not this office will be able to inspect any of the factories it wishes remains to be seen. It is unlikely the Chinese government will give the American government the access it wishes. Let us not forget similar programs which have come up against extraordinary stonewalling, e.g. Validated End-User (VEU) inspections under the BIS, requiring on-site inspections in China for certain technology items requiring a license prior to shipment.

The American public barely knows of that program and its frustrations, failures and very limited successes. Imagine the potential publicity of American inspections in Chinese factories where access is unfettered! No, indeed, there will be epic battles between Chinese and American regulators over destination factories. American regulators are sure to be on the short end of the stick. One hopes that the stories of these bureaucratic tangles will find their way to the press -- I will be pleased to post a report of anyone so involved, especially any of the eight inspectors who are supposed to be manning the office. You may remain confidential...

The American Foreign Corrupt Practices Act seeks to criminalize bribery of foreign officials -- not of American officials -- by regulating and punishing the conduct of Americans doing business globally. In its "Report of the Committee on Banking, Housing and Urban Affairs to Accompany S. 305...May 2 (legislative day, March 28), 1977," the U.S. Senate noted:

The statute covers payments made to foreign officials for the purposes of obtaining business or influencing legislation or regulations. The statue does not, therefore, cover so-called "grease payments" such as payments for expediting shipments through customs or placing a transatlantic telephone call, securing required permits, or obtaining adequate police protection, transactions which may involve even the proper performance of duties.

The word "corruptly" is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position in order to wrongfully direct business to the payor or his client, or to obtain preferential legislation or a favorable regulation. The word "corruptly" connotes an evil motive or purpose, an intent to wrongfully influence the recipient. It does not require that the act be fully consummated, or succeed in producing the desired outcome.

Did you too see the word? I had to read it twice to make sure "evil" was not a typo. Hmmm.... This is, without doubt, activist legislation that seeks to influence global behavior indirectly by holding Americans to account. Does that sound right to you, when many of the nations it seeks to indirectly regulate employ bribery as a common and ordinary way of life? Isn't it their responsibility to clean up their own mess? Why am I to be punished for behaving as they would in their own land?

The EU and its member countries have enacted similar legislation. For those doing business globally, especially in the third world, where "gifts" are expected, anti-corruption leglislation in one's home country is a serious obstacle. In China, one of the most corrupt nations, those who require the assistance of government walk the wire of violating US and EU anti-corruption leglislation.

Once thought to be safe from the same level of scrutiny, payments to charities are not immune. Schering Plough's $76,000 contribution to a legitimate charity -- the favorite of a senior Polish official -- resulted in a $500,000 fine in June 2004 when the company failed to account for the payment as the bribe that it was deemed to be.

Government enforcement, at least in the U.S., will apparently be redoubled.

The U.S. Securities and Exchange Commission expects in the next two to six months to slap larger penalties than in the past on a number of companies that have allegedly violated the Foreign Corrupt Practices Act, reminding lawyers in the field that the regulator is taking a tougher stance today on international bribery.

"The dollar amounts in the cases that will be coming within the next short while will dwarf the disgorgement and penalty amounts that have been obtained in prior cases," said Scott Friestad, the SEC's deputy director for the Enforcement Division.

I have never understood why the American government has made -- over three decades -- the extraordinaty effort to reach into its taxpayer funds to prosecute the bribery by Americans of foreign officials. Where will the money come from to increase enforcement efforts of global activities? Ah, timing, timing, never to be forgotten -- this must be part of the Obama stimulus? Clean up the world, in our image, and have the American government pay for the enforcement of it. A missionary purpose, one with which I find it hard to agree.

But that is the law as it stands and we must follow it. Businesses dealing with China must thoroughly understand the effect FCPA has on even something as seemingly unrelated as its client development efforts. Thinking of showing the Import/Export Development Official of City X and his colleagues around your factories in the US and then taking them for a weekend jaunt in some city where you have no business interests? What are you going to pay for? Do you plan on giving them "spending money?" Do you risk going afoul of the FCPA? To answer those questions, the extent of your exposure needs to be determined up front. Your business activity needs to be vetted by your company counsel.

Here's fish for thought: are the activities of Chinese national employees of American subsidiaries, who may never have left China in their lives, also regulated by the FCPA? We will deal with that question in a forthcoming post.

I'm pleased to present Dr. Eileen Wibbeke, author of the textbook, Global Business Leadership, who recently gave a talk to Google executives on international business leadership at Googleplex.

Recommended: this story -- Jailed Billionaires Show New Face of China as Markets Unravel -- rich in detail, like this:

Greaves hasn’t seen or spoken to Huang, 39, since. One morning in November, the dapper, baby-faced tycoon failed to turn up, along with his Maybach limousine, at Gome’s Beijing headquarters, where he normally worked such long hours that he had installed a double bed in the office adjacent to his own.

Well-worth reading.

Now what might this be about?

The Obama administration will propose a series of measures "over the next several months" to reform taxes on the foreign profits of multinational companies, and to crack down on abusive offshore tax shelters used by firms and wealthy individuals, Mr. Geithner said.

A former divisional merchandising manager in charge of Home Depot's hard flooring products was sentenced to 63 months in prison for tax evasion and wire fraud, and ordered to pay $1.1 million in restitution to Home Depot. You can read the brief blurb about it here.

He is one of three former executives who have pleaded guilty to receiving millions of dollars in kickbacks from foreign suppliers in return for placing their products in Home Depot stores across the nation.

The article does not detail the scheme, but instead focuses on a lavish lifestyle the extra cash in pocket enabled the manager to lead. For the uninitiated, let me tell you how it happens.

A buyer in a national or even regional chain store controls millions of dollars worth of purchasing power. He is responsible for choosing suppliers, wherever they may be, and ensuring goods in his department are competitively priced, of sufficient quality and delivered on time. The buyer is paid a static wage which appears puny in comparison to the amount of purchasing power he wields through his organization.

Buyers on the take generally expect 1% of the total value of order to come back to them. A buyer who controls $25 million of annual spending can rack up $250,000 a year, and many become quite wealthy over time. If he doesn't get caught...

The convicted individual lived life a little too obviously large:

...more than $1 million in cash, luxury cars and real estate...including $269,000 to a California real estate development firm that sold Robinson two Tennessee properties, $135,000 in deposits to Robinson's investment accounts, and funds that paid off Robinson's loans on a 2004 Cadillac Escalade and a new Infiniti sports utility vehicle.

Who pays the 1%? Not the seller, because he adds that 1% to the value of the order. The buyer's company ends up paying. Business acquaintances have told me several buyers demanded currency, so that there be no trace. (One factory owner I knew gave his buyer a birthday card loaded with cash while singing, "Happy Birthday!") The payoff is expected before the order is placed. Simply because the payoff is made does not allow the seller to provide shoddy goods. One is given no quarter. There is such competition to get product into an established distribution channel that a deadbeat supplier will be dumped and a paying, hungry, effective supplier found quickly enough.

Management suspects buyers of being crooked. (Years ago, one buyer I knew told me "They suspect me even if I am pure, so why don't I just go ahead and do it?" I thought it pointless to suggest the benefits of uprightness to him) Some companies, especially those with experience, shift buyers from department to department every few years and engage investigative services in an attempt to ferret out dishonesty.

Executives with any intellect know what's going on. I am reminded of the CEO who said to me over drinks, "Bob X in Purchasing just bought a new house in that subdivision. Son of a b--- must be on the take. Didn't he just buy a Caddy, too?"

Purchase from overseas manufacturers enables greater camouflage, such as overseas bank accounts in false names, the establishment of trading companies which masquerade as the producer (sometimes established with buyer capital) and gifts bestowed in overseas venues (gold coins, women, gambling forays, etc.).

The "savvy" buyer who is on the take does not disclose his relationship to any but the one decision-maker in the organization from whom he is taking his payoff, refuses to discuss payoffs in close quarters even with that executive (preferring a space where he cannot easily be recorded) and makes sure his department is extremely profitable.

It is surprising how few are caught and publicly made an example of. Partly, management may prefer a simple termination rather than arrest, the publicity and the negative implications for their control over staff. But even if management discovers the buyer's fraud, it may choose to keep him on, considering the 1% simply as another expense. Yes, I have known this situation to have actually occurred, and can only assume I gained a glimpse of a more general practice.

The New York Times reports:

Exports from mainland China slumped 22.6 percent in April from a year earlier, official statistics showed — a fall that was not only larger than economists had expected but also bigger than that in March, when overseas shipments declined 17.1 percent.

Bob Compton, producer of Win in China, talks about his film and the business plan competition it documents.

See below for a video clip from the film: Win in China (www.wininchinamovie.com)

While it is well-known that advertising revenue has made CCTV, the provincial and regional stations superb examples of the proverbial cash cow, we find out from "Li Lisi of the Creative Power Entertaining Co., Ltd. (“Creative Power”) in Guangzhou" how little they are willing to pay for their programming.

Animation demands a large amount of upfront capital, particularly from the beginning; the cost may amount to 10,000 Yuan per minute. Later, the cost might be reduced to a few thousand Yuan per minute. However, China’s TV stations can pay very little and differ greatly. Some small TV stations may only pay 10 Yuan per minute, and the fee may increase to 80-100 Yuan per minute for larger stations. The largest China Central TV may pay a few hundred Yuan per minute.

Obscure TV stations have even asked you to pay the cost. Therefore, it can be said that you “lose a penny as you put a penny” in developing original animation. Then you may do sums, on average, we would be able to recover the investment, in theory, only when the animation was broadcasted on dozens of TV stations. In general, we are able to recover 40% of our investment through TV media.

“Media is always a losing proposition in China.”

I was thrilled to read Anne Stevenson Yang's forthright and accurate assessment of foreign involvement in Chinese media. Finally, a non-Chinese within China is willing to state the obvious to a public audience. Brava!

And what elicited the comment? Google's threat to pull out of China because of cyberattacks, originating in China, leading to theft of company intellectual property and instrusion into Gmail accounts, ostensibly belonging to users with connections to human rights movements. Don Clarke's post on the topic is worth reading.

Perhaps 30 years ago, I came into possession of a 1960's US Department of the Army treatise on China, entitled, "China: Ruthless Enemy or Paper Tiger?" It may still sit on the shelf in my library. Is Google a Paper Tiger?

Note: the company announced it was "considering" quitting the market.

These attacks and the surveillance they have uncovered--combined with the attempts over the past year to further limit free speech on the web--have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.

What does Google hope to gain announcing a mere possibility of "withdrawal" from China? Surely, by now, the company has accumulated enough wisdom to know that they have been on the losing end of a hopeless battle with the Party. Furthermore, the abrupt decision to end compliance with government censorship requirements is a direct assault on the leadership, akin to the jester throwing down the gauntlet at the Black Knight -- within his castle. The company cannot hope to alter the activities of its massive and muscular propaganda organ, it's vast surveillance functions, all freely exercised. Party leadership will be incensed and take appropriate action, as one might expect of them. I do not see any way back from this precipitous decision.

On the other hand, business has been tough for Google in China, partly because of the business model which they had hoped to transplant, dependent upon substantially greater freedoms of expression than the Party is willing to tolerate, even from foreign entities with clout. As a result, Baidu -- with its hand-in-glove relationship with media censors and administrators -- has eaten Google's proverbial lunch. This seems as good a reason as any for Google to surrender while appearing to save face.

Google has announced a delay in China of the launch of mobile phones using its Android software.

One must question this move as simply more Google shadow boxing. Despite its threat to remove web filtering, Google does not appear to have done so. Similarly, a postponement is simply that. The delay of a marketing expense will have no effect on top-level cadres, other than to demonstrate weakness of resolve. Why?

Because Google can't extricate itself from China. Think of the likely effect "leaving China" on the introduction into world markets of the Nexus, the new Google phone. After all, the product itself will be manufactured in China (where else?). Apple must be jumping for joy.

(Even were Google to leave, Chinese authorities would still welcome revenues resulting from the contract manufacturing of the Nexus, but the threat of being cut off from supply would remain.)

If Google's Board believes its announcement serves to generate public pressure from foreign investors, I think it is much mistaken. Could they suffer from grandiose notions of its importance in Chinese affairs? China can do very well without Google. After all, China has its own Google: Baidu, modeled in its image.

Google is vulnerable, and in China the strong prey upon the weak without mercy. American manufacturers and even end-users, including the United States armed forces, now plainly see how vulnerable they have become to the agglomeration of manufacturing resources in China, the purported need to sell in China and the compromises that must be made to do so.

Breaking news at WSJ:

Google CEO Schmidt at Davos: 'We like what China is doing in terms of growth ... we just don't like censorship. We hope that will change and we can apply some pressure to make things better for the Chinese people.

Uh oh.

This is worse than merely shooting oneself in the foot, is it not? Direct foreign criticism of Chinese "internal affairs" declaimed to the world's elite political leadership.

Commercial espionage among nations should not come as a surprise to anyone involved competitive businesses. I am a proponent of the idea that American intelligence should practice it far more than we already do, which is either so brilliantly executed as to stay below the radar of public view or relatively inconsequential.

Not so Chinese commercial espionage, which is far from a new story. I distinctly remember in the early 1990s the Taiwanese visitor to a certain bearing manufacturing in the United States, discovered wearing shoes with magnetized metal soles to catch iron filings during a factory tour.

But Chinese commercial espionage is "evidently" well-funded and coordinated. An MI5 report, leaked to the Sunday Times, contains details of interest, including this:

A leaked MI5 document says that undercover intelligence officers from the People’s Liberation Army and the Ministry of Public Security have also approached UK businessmen at trade fairs and exhibitions with the offer of “gifts” and “lavish hospitality”.

The gifts — cameras and memory sticks — have been found to contain electronic Trojan bugs which provide the Chinese with remote access to users’ computers.

Granted, given the prevalence of virus activity and the near absence of antivirus applications in use in China, it is always possible that rogue applications find their way onto "gifts." It has also been rumored -- and I believe unproven, correct me if I'm wrong -- that applications to ease ingress by hackers have been installed unto computer hardware at certain Chinese factories.

Need I say it? if you are senior executive or assistant to such an officer in a sensitive industry or multinational, beware of strangers -- especially PLA or PSB people -- bringing gifts.

More hollering about the value of the Yuan. This is simply Washington window dressing on the more profound problem to which none of the "best and brightest" supposed to be leading this country seems to care deeply enough about to create a solution for. Are there any newly instituted and significant incentives aimed at encouraging American business to bring manufacturing back onshore? (That was a rhetorical question.)

Richard McCormack, editor of Manufacturing & Technology News, writes:

The United States is not a desirable place to build a new semiconductor wafer fabrication (fab) plant. Such plants are massive, costing upwards of $8 billion and generating thousands of direct and indirect high-paying jobs, spinoff revenue for local communities and massive investments in research, equipment and materials. Semiconductors sit at the top of the electronics industry pyramid. The United States invented the technology, but it's become a small player as measured by global production.

In 2009, 16 fabs began construction throughout the world. One of them was in the United States, according to Daniel Tracy, senior director of industry research and statistics at Semiconductor Equipment Materials International.

...

China led the world last year in new semiconductor factory construction, with six fabs, followed by Taiwan with five, and Korea, Japan, the European Union and Southeast Asia, all with one apiece.

...

The United States does lead the world in one category, however: closures. In 2009, 27 fabs closed worldwide, with 15 of them in the United States (followed by four in Europe, four in Japan, two in China, one in Korea and one in Southeast Asia). The number of closures last year almost doubled from the previous year, when 15 fabs were shut down worldwide, again, with the largest number in the United States (at four).

Why is the United States losing out on the next phase of the semiconductor boom? "It's not direct labor," says George Scalise, president of the Semiconductor Industry Association. "It's not materials -- they cost the same everywhere. If you go down the list of expenses, every-thing is the same, except for tax policies and subsidies." [Emphasis added.]

Read the rest here.