Further underscoring that intent, the October 16, 2007 DealBook article on Citic cites Arthur Lau, who helps oversee $50 billion at JF Asset Management in Hong Kong, telling Bloomberg “For China, it’s important to have a platform to learn what investment banking is.” That intent is further supported by Associated Press reporter Joe Bruno in his October 22, 2007 article on the Citic/Bear Stearns deal, wherein he cites Brad Hintz, an analyst with Sanford C. Bernstein, stating “the pact is more important to Citic in the long run as it evolves into a more global competitor”. Lastly, The Economist article cited earlier as respects the Blackstone deal further states “……..providing China with experience it clearly covets on how to set up its own domestic private-equity industry”.
Analyst Note: Under the premise that all China seeks in the Blackstone deal is financial expertise, not necessarily a specific monetary return on its IPO investment, than the international investment community’s focus on China’s investment loss (40% or so (@ $19/20 per share) from the IPO price), is really nothing but welcomed diversionary fanfare for the Chinese. In fact, as respects the specific value decline, with $1.5 trillion in foreign exchange reserves, a “paper loss” of $1.2 billion or so is absolutely meaningless to China. In fact, completely irrelevant and made even more so when noting China makes more than that each and every day in new incoming foreign exchange reserves. What is relevant however is the “PR diversionary return” on its “investment’s” paper loss. That is priceless.
And for the other (most) companies that China (government) has not pro-actively sought out and aligned with, it’s a case of (intentionally) being left out. These two groundbreaking transactions in no way indicate or portray a new attitude about allowing outsiders into the country, as most naïve observers are reporting these deals to reflect. In fact it’s quite the opposite, noting The Economist article stating “This is an advantage for Blackstone……….particularly so when other private-equity firms complain that the impediments to operating in China are growing.”
It is sometimes not even necessary for the Chinese to partner to grab desired expertise. In fact the desired technology in many cases is readily available on the open market to study and learn from. The Chinese are masters at reverse engineering. For example, take a look at what they are doing in the auto industry, where they can have an enormous (negative) impact on U.S/WEAST.
With that insatiable expertise grab rapidly transcending into the auto market, China and its two major car manufacturers Jiangling and Shuanghuan are beginning to leverage their counterfeiting know-how by manufacturing clone-like BMW's and other major global brands; for example the Shuanghuan CEO luxury auto being a dead ringer for a BMW X5 (aesthetically anyway), at a huge discounted price.
As Gary Hoffman, in his Dec. 24, 2007 AOL News article "Are Chinese Automakers Copying Other Brands?" notes the “Chinese countering the counterfeiting accusations “with the argument they were just taking "inspiration" from the allegedly copied vehicles. That wasn't persuasive enough to keep BMW, Daimler and Fiat from going to court to try to keep the cars at bay...At its root....a report from consulting firm AT Kearney and statistics from the U.S. government, counterfeiting represents about 8 percent of China's $10 trillion economy.....There is also a risk to the U.S. economy, and it's not mostly a matter of logos and styling. As the Chinese industry matures, it will learn from the vehicle technologies it is copying and then develop its own high-quality competing products, according to the AT Kearney study. ICG argues that China will "harvest" Western intellectual property and use it to leapfrog to better products.”
It’s worth highlighting too Mr. Warren Buffett’s recent and well publicized trip to China and its impact, mostly if not entirely unseen by the media, in this Analyst’s opinion. Perhaps even better stated as that impact being unaware even to himself, as too the case above for Blackstone and Bear Stearns and their own lack of longer term impact awareness of their respective deals. Another case of the Chinese getting expertise, this time with Mr. Buffet’s visit, in the form of coveted public relations (PR) subject matter.
The triggering reason for his trip was to visit new plants in China and Korea for a new Berkshire Hathaway company, and one which breaks the BH tradition of only buying U.S. companies. The company is an Israeli based manufacturer called Iscar Metalworking. While Mr. Buffet went as a good will ambassador for Iscar and certainly succeeded, amid all the hoopla, the Chinese stealthily procured in the aggregate, a treasure trove more with his visit. Not only did he formally say on CNBC the Chinese plant was “the best factory he’s ever seen in his entire life”, he too was met with senior military and political officials and an army of Chinese media. He was given the royal treatment wherever he went, spewing glowing praise of China and his hosts to Chinese and global media outlets. With China recently reeling from global denouncement of its manufacturing operations quality, Mr. Buffett, God bless him for all the good he’s done for the U.S. and his forever merit based intentions, including this China visit, but unfortunately he seems to have misread or misunderstood his China reception and takeaway impact. Apparently unaware of his real impact here on this China visit, he perhaps may have turned that impression regarding poor Chinese manufacturing quality/safety around in a big way with but a few seemingly benign, goodwill comments. Comments that the Chinese are certainly not going to be shy to exploit, time and again when challenged going forward by the U.S. WEAST on their manufacturing/product quality and safety. Their expected future challenge response might be “Well, Mr. Buffett thinks differently”, as they know that will tend to stifle most critics. Afterall, when “The Oracle” speaks, the world listens.
Bottom line, his glowing praise of this particular factory and China in general could not have been scripted better by the Chinese to maximally exploit his visit for their own aggregate and expanding global PR purposes. What better validation of what you’re doing to fend off critics than to have perhaps the most revered and esteemed business leader on the planet validate even but one aspect of your operations. A bit of an interesting “exploitation parallel” might be drawn here when comparing the way Charles Lindbergh’s great global public persona was unwittingly and unwarily exploited by another emerging superpower in the ‘30’s.
Anyway, quite extraordinary the future ripple effect impacts one factory (comment) might likely have. In fact, while clearly with nothing but good intentions seeking to further capitalism and constructive business relationships, Mr. Buffett’s visit and comments instead quite unwarily and unintentionally, likely furthered Commulism. With all due respect to Mr. Buffett, perhaps his staff and/or the government might next time provide counsel on the potential downside of such a perceived all upside goodwill visit. In fact, there does exists huge downside risk.
Finally, to really underscore just how ravenous and pervasive the parasitic nature of China is as respects securing its “partners” coveted knowledge/technology/expertise, one need only consider that even its key strategic partner Russia is not immune, having fallen prey time and again.
As a harbinger for the future, Blackstone, Bear Stearns and U.S./WEAST governments should read and heed this excerpt from an Aug. 27, 2007 article on Domain-b.com stating:
“Moscow is unhappy with China''s massive production of copycat versions of Russian weapons. Russian arms manufacturers have been taken by surprise with the sheer speed and scale of China''s copycat capabilities. On their part, Russian dealers are outraged over blatant Chinese imitations of their weaponry, built from designs supplied on an explicit understanding that the weapons were to be purchased Often, Chinese dealers say they want to buy Russian arms, begin negotiations, and ask as many technical questions as possible. They then take photos and videos of the weapons, request all available documents, and repeatedly come back to the table to discuss technical issues. After major document exchanges and extensive technical negotiations, the dealers disappear. Two or three years later, a Chinese copy of the weapon that was under discussion appears on the market.”
Analyst Comment: All companies thinking of doing business in China seem to believe it’s the promised land. They should step back and realize that even its most important strategic partners like Russia are quickly cast aside once China has what it wants.
So the real messaging in the “carrot for expertise” approach to unwary partners and their respective countries is that for those entities China (the government) needs, China is “best friend today and soon to discover, cut-throat ejector/competitor tomorrow” in true, no loyalty “love’em and leave ‘em” fashion. Perhaps even better characterized as the Jekyll and Hyde effect. Jekyll when making the deal. Hyde when the relationship is no longer needed. And for those China does not need from the get go, it’s simply a case of “Not interested. Look elsewhere – And oh by the way, have a nice day”.
The Analyst’s contrary viewpoint to others and offered/supported above, that China is in fact NOT opening up to the outside should provide food for thought to those wallowing in the euphoria that the great wall to doing business in China is finally coming down. In fact, that naïve assessment is a recipe for disaster for any particular firm or entity going into China, particularly if it lacks even short term air cover from the Chinese government. One might describe such irrational exuberance as a clear case of premature jubilation. Going forward, a bit of self control before popping the champagne corks, may be in order.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
