Helping Customers Through Difficult Times

A few of our large customers are struggling in the current difficult economy. We are using our customer business resource concepts to do all we can to help them. It is during these difficult time that being a true customer business resource shows its true value for OPSA and our customers. Because we ask and learn about their entire business, not just the portions our services touch directly, we are able to offer suggestions, referrals, and ideas. It is during tough times that real strong relationships are built.

There's no sugar coating it - this is a difficult time. We'll get through it, but it will take a while.

If you are interested in learning more about becoming a customer business resource, check out Jerry Stapleton's book From Vendor to Customer Resource. It embodies many concepts I learned and have honed during my career at Little Rapids and OPSA. I believe strongly that becoming a customer business resource is the best method for a sales team. I've seen it generate excellent returns and I've seen the alternatives generate lackluster results.

Have a great week!

China Claims Stimulus Will Not Harm Environment

An interesting story out of the AP today quotes a Chinese official comforting the world that the huge Chinese stimulus program will not be used for projects that are not environmentally sound. He claims several projects have already been rejected because of their negative environmental impact. Also, there is $30B US in the stimulus specifically for projects that help the environment.

The end of the article mentions some progress China has made in reducing pollution this year. The amount of sulfur dioxide, an air pollutant tied to acid rain, fell as did the amount of chemical oxygen, a measure of water pollution.

The amount of money the Chinese are spending on environmental clean-up is a huge opportunity for US firms. I've mentioned several times that environmental projects are a great fit for the US economy.

Also, one of my big problems with visiting China is seeing the pollution. It must get better, and I'm confident it will. Here's the article. Have a great weekend!

http://news.yahoo.com/s/ap/20090605/ap_on_re_as/as_china_environment_2

Communication Is the Key in Tough Times

One of our larger customers is really in trouble. Unfortunately they've taken to not responding to questions or providing information. This means we can't respond correctly to questions from the factories we manage for their products. This is absolutely the opposite tactic to take when times are tough.

US companies need to communicate even more often and thoroughly when things are difficult. The Chinese culture is very collective and the Chinese people will respond positively to honest communication about difficulties. With a long-term view it can be an opportunity to build your relationships with your Chinese suppliers.

I suggest supplementing e-mail communication with skype calls and even video calls. A handwritten note of thanks for support and partnership can also go a long way. Using multiple forms of communication will build rapport and trust.

Things overall with the economy are improving and better times lie ahead. Build relationships now when things are difficult so you and your partners can react quickly to the opportunities the improved economy of the near future will bring.

June Starts with Upbeat News

There is data out today that shows manufacturing activity in China grew in May. Two different purchasing managers' indexes were above 50 which means growth in activity. This is good news for the global economy as China appears to be coming out of the recession which will eventually mean most of the rest of the world will as well. The stimulus program in China is being touted as having an impact on this growth.

The global stock exchanges certainly think we are moving out of recession. The Hong Kong market was up 4% overnight and the Dow is up significantly today despite GM's bankruptcy filing.

I believe we will look back on this recession as a very difficult time, but a time that set the stage for further growth and prosperity long-term. Here's a link to a Newsweek article on the above data. Have a great Monday afternoon!

http://www.businessweek.com/ap/financialnews/D98HKJQG0.htm

Two Great Articles in Forbes about US Manufacturing Strength

There are two great articles in Forbes online today on the strength of US manufacturing. I've mentioned before that I feel a resurgence of American manufacturing coming as we move out of this recession driven by several factors.

The first article describes the transformation of tape manufacturer TaraTape. It's a great example of a manufacturer adjusting based on the opportunities and threats facing it. It's a great story. Hats off to TaraTape and continued success.

http://www.forbes.com/2009/05/27/taratape-manufacturing-china-business-rivoli.html

The second article is by former Michigan Governor, and current President of the National Association of Manufacturers, John Engler. He highlights some of the strengths of US manufacturing and also the challenges. He briefly describes three companies/factory locations that adjusted to their opportunities and threats and are now thriving. This is another good read.

http://www.forbes.com/2009/05/27/john-engler-manufacturing-business-america.html

Even at OPSA we are moving to incorporate more US manufacturing and assembly into our service offering. It feels right and it's the right thing for our customers and our business. I'm looking forward to this phase of our transformation.

A Contrast in Directions

There is an interesting contrast in two articles from today's China Daily. The first one describes how the Chinese government is pushing to privatize more industries including oil, power generation, and railways to "boost efficiency". The second article describes how the US government will soon be taking a majority ownership stake in GM.

Who would have thought twenty five years ago that China would be privatizing this quickly while the US government took majority stakes in large banks and auto companies. What a change.

I don't have alternative ideas for the Obama administration that I'd like to throw out to solve the GM or banking situations. I do know that they need to have an exit plan just like any investor, and I hope that exit plan has a short horizon. Government ownership of industry has not shown to be a benefit to citizens or economies throughout history.

These sure are interesting times. Here are links to the two articles:

http://www.chinadaily.com.cn/china/2009-05/27/content_7948433.htm

http://www.chinadaily.com.cn/world/2009-05/27/content_7948681.htm

Memorial Day Remembrances

Memorial Day weekend is upon us. This is one of my favorite holidays of the year. Not only is it the traditional start of summer, but it's a very meaningful holiday for me. My father was a Air Force veteran, my father-in-law and his brother were both Army veterans who fought in WWII, and my partner Dan Cook and his wife are both Navy veterans. I sometimes wonder how my life might be different if I had entered the military either before or after college. I do strive to serve our country and community in very significant ways, but it still doesn't match the service and commitment required of those who join the military.

I am a bit of a history buff and hold in very high regard those who have sacrificed for our country by committing to military service. My family enjoys the lifestyle we have in this country in large part due to the service and sacrifice of millions of veterans. Thank you so very much for your service.

Our work in China relates in a small way to the security of the USA. China and the USA are the two main powers in the world right now. By fostering business relationships and cultural understanding, our two countries can work together to make the world a safer and better place. In my small way I'm working to advance this cause.

So, enjoy the holiday weekend. Please take time to fly Old Glory and reflect on the sacrifice of those who've served in the military, especially those who've died or been wounded in that service. I will do so several times this weekend and will be humbled when I do.

An "Edge" for China in Energy Efficiency?

Hopefully not. An LA Times opinion piece today notes that China is becoming the leader in wind and solar energy products manufacturing and in electric cars. Most new technologies are coming from the US, but China is pushing hard to become the main manufacturer in these markets and also develop new technologies.

I've long stated that the US needs to move into energy and water technologies hard as these are the next great high-tech growth industries. The article discusses how the investment markets drying up in the US during the recession is giving China an edge. China is opening the "public purse strings" to fund energy technology development and manufacturing. Both private industry and the US government need to step up and keep the US in a leadership position in these key markets. Here's the article:

http://www.latimes.com/news/opinion/commentary/la-oe-silver19-2009may19,0,6622766.story

Beijing Touts China's Recovery Status and Plan

There are several articles out today on the Chinese government's positive comments on its recovery and project 8% growth rate for this year.

The article linked below from Forbes is the best example of these reports. In it a top figure in China's economic planning body says the government has a handle on the economic situation and still has additional measures it can take if necessary. The article describes well the tax reductions Beijing has implemented to help manufacturers.

He also touches on domestic consumption in China and exchange rates which should be stable for the foreseeable future. Here's the very interesting article on this good news for the global economy.

http://www.forbes.com/2009/05/18/china-stimulus-growth-markets-economy-recovery.html

Four Year Anniversary with OPSA

May 9, 2005 was my first official day at OPSA. Four years is a bit of a milestone in our culture. Both high school and undergraduate college degrees are earned in four years. Presidential terms are four years and the Olympics occur every four years as well.

My four years with OPSA has been a roller coaster. There have been great high points and some tough low points. We've grown significantly and reached annualized profitability. We've experienced many of the typical challenges of a start-up and some not so typical.

I am fine telling everyone that we haven't reached our financial goals. It's been an extended "beans and franks" period for our families. However, we are investing in and building a new business that will support our families and those of our employees. It's just taking longer than we expected.

We are not immune to the impact of the economic downturn. Some of our larger customers' sales are down, so their purchases from us are down. When we all get through this time we will have stronger businesses.

The last four years have been an outstanding ride. I've learned more and experienced more than I ever could have working for someone else. I would change some of the decisions we've made and not made as a company, but I wouldn't change the decision to join Dan and Joel in this adventure. I'm not sure what the next four years holds for me or OPSA, but I take all I've learned the last four years and look forward to new challenges and successes.

Happy Mothers Day (one day late) to all Moms out there. Mine is the best ever.

China Battles Protectionism in Europe

Here's a link to a China Daily article on discussions between China and the EU on trade. It talks about China sending teams to Europe on "buying missions" and calling for the EU to reject trade barriers.

http://www.chinadaily.com.cn/china/2009-05/08/content_7755335.htm

When the economy is weak and unemployment rises, countries naturally turn protectionist. We are certainly seeing that in the US and this article shows the EU is having similar strains. A review of history will show that protectionist measures worsened the Great Depression. As I've mentioned before, free trade is the way to go.

Importance of Being Present with Chinese Vendors

At OPSA we've cut down on our travel from the US to China just a bit over the last six months in order to conserve cash in case the recession continues impacting our customers and their purchases from us. I'm sure many companies that do business overseas are doing the same.

My word of caution in this regard is that it's vitally important to maintain live communciation when you can't be there in person. We use Skype for calls to our HK office and other locations in China. It has worked well for us and the quality has improved over the last two years. The video option has also been helpful for project management with our HK office.

To summarize - Being there in person is still important in successfully sourcing in Asia. However, when there are times that you can't be there as often as you'd like, it's important to use multiple communication tools (not just e-mail) to keep in touch with your Asian vendors. I need to remind myself to call more often this year.

A Rebound in the Chinese Manufacturing Sector

April marked the first month since July 2008 that the Chinese purchasing manager's index showed expansion. The number of new orders increases also for the first time in nine months. Export orders continued to contract, but at the slowest pace in many months. GDP growth is also forecast to increase now for the second quarter. Here's an article on all this from Forbes:

http://www.forbes.com/2009/05/04/china-manufacturing-orders-markets-economy-stimulus.html

The news does seem to be improving on both sides of the globe. Equity markets are way up, of course, over the last several weeks. I believe if we can get past the swine flu scare and into summer, things will continue to look better. US consumerism may not rebound to where it was (which is a good thing as the savings rate may stabilize in positive territory), but the economy will adjust over a longer period.

Warren Buffett Makes Big Investment in China's BYD

Warren Buffett's Berkshire Hathaway purchased a 10% stake in China's BYD Group recently. BYD makes rechargeable batteries, mobile handsets, and automotive parts among other things. Their strength seems to be taking manufacturing costs with high capital requirements and changing them to take advantage of China's low labor cost model.

This does seem to be a major statement of confidence in China from Buffett. BYD seems to be a Chinese company that is doing all the right things. At OPSA we need to find similar, although smaller, companies to continue partnering with. Here's a link to an article on the investment:

http://www.gurufocus.com/news.php?id=53933

Let the Sun Shine Down

It's springtime here in the Midwest and that means we get to see the sun. OPSA is also incorporating the sun in our strategic planning. We already do a good amount of business related to solar energy and are planning to do more. This works well with what appears to be the Chinese government's focus on the solar energy industry.

Today it was announced that Canadian Solar (NASDAQ: CSIQ), which has all its operations in China, is receiving $2.2 billion in financing from three Chinese banks. The government seems to be supporting both domestic solar energy utilization and export of solar energy devices.

Solar energy is one of the industries to watch in the future. Not only will OPSA be watching, but we intend to participate.

Another Take on Quality in China

There is an interesting blog posting from Kimberley Palmer at US News and World Report from yesterday. She interviewed an author that recently wrote a book about quality in China. Paul Midler is the author. In the interview on the posting he goes back-and-forth about quality in China. On one hand he says he's nervous to buy and use some products from China. On the other hand he makes a case that China is the place to be.

This is yet another opinion that points to the need for all the ingredients of successful sourcing I've talked about before - with planning, communication and having "feet on the ground" being the most important.

Here's the link to the blog post.

http://www.usnews.com/blogs/alpha-consumer/2009/4/23/explaining-chinas-quality-control-problems.html

The Rescue Mission

It seems we are receiving a higher quantity of "rescue mission" inquiries lately. A rescue mission is OPSA-speak for a potential customer that has tried to do their own sourcing in China and has experienced problems - usually in terms of quality or communication issues. At that point they reach out for help. If the product or component being sourced is custom (rather than a commodity) and has reasonable complexity we will usually try to help. It's a different model than our core business, but we've made it work several times.

Helping involves contacting the customer's factories to diagnose and "fix" the problems and root causes. Usually the factories turn out to be completely inappropriate for the product and/or customer. If that's the case, usually the next step is a fairly complex negotiation to unwind the customer's work with that factory. Getting tooling out and closing PO's can be very tricky.

Sometimes the factories currently being utilized by the customer can continue to be utilized. Then we try to go in and address the specific issues. Most often communication is the problem.

The key learning from all this is to avoid requiring a rescue mission in the first place. Do your due diligence and planning upfront or hire professions on the ground in China (like OPSA) to help. If you are having problems, address them right away. Letting things linger or hoping they will improve has not been shown to be a good strategy.

A Take on the Recession's Impact in China

There is a new article out by Einar Tangen this week. I've quoted Mr. Tangen several times in the blog. He is a former Milwaukee resident now living in Beijing. In this week's article he describes how the recession is hitting smaller firms in China harder than large firms. He claims this is the opposite of the situation in the US.

I will accept Mr. Tangen's argument about the recession's impact in China. However, I don't know why he feels smaller firms in the US are doing better than larger firms. He explains why he thinks this is the case, but offers no evidence. I don't see much distinction in impact between large and small companies here in the US.

Either way, the article is interesting as all of Mr. Tangen's are. Here's the link:

http://www.biztimes.com/news/2009/4/17/recession-has-different-impact-in-china

6.1% Growth for China in Q1

The Chinese economy grew slightly faster than expected in Q1. Economists expected 6% growth and got 6.1%. This seems to be more positive news pointing toward a bottom for the economy.

Here's a link to an article on MarketWatch about the Q1 results. It reports economists as positive but cautious after the report. Interesting stuff. Will Q2 be the beginning of faster growth? We don't see it yet from our partners in China.

http://www.marketwatch.com/news/story/chinas-economy-downshifts-61-growth/story.aspx?guid={2D6F69D9-07E9-490B-B3C5-69C9C45FC5C0}&dist=msr_4

Growth Spreading West in China

There is a great article in yesterday's NY Times about the spread of manufacturing and wealth westward in China from the traditional bases of Shenzhen, Guangzhou, and Shanghai. Maybe I think it's so great because it agrees with many things I've been suggesting we need to address quickly within OPSA. We are moving in the right directions, just not as quickly as I'd like.

I do believe that the best companies create an environment where spirited disagreement is accepted and encouraged as long as it is focused on how to move forward. That's good news for OPSA.

I've read much about the Chengdu area. The article also covers it. The earthquake rebuilding will make this a key area in China soon. It may be a little too hot right now, but areas around it or between Chengdu and Hong Kong may be an expansion opportunity for us. Here's the article. Enjoy!

http://www.nytimes.com/2009/04/14/business/global/14insideasia.html

China Begins Using RMB to Settle Trade Accounts

This may be the start of something big. The Chinese government has allowed five major trade cities to begin using the RMB (Yuan) as trade currency with selected countries. This is a major development because, until now, all trade was settled in US Dollars. This move is intended to make the RMB an international currency to compete with the dollar.

Shanghai and four cities in the Pearl River Delta - Guangzhou, Shenzhen, Dongguan and Zhuhai have been designated as the RMB trade zones.

This could be nothing, or it could be the start of a decline in the prestige and value of the US dollar. I can't claim to understand all the implications or how this will impact our customers and business directly, but I do intend to study and learn about the situation. Here's a link to an article on this by China Daily:

http://www.chinadaily.com.cn/china/2009-04/09/content_7660017.htm

Terms Tightening in China

We are hearing from several Chinese manufacturers that they are reducing their credit terms. These factories previously had offered US customers they have had for several years terms of 100% at time of shipment or even net 30. They are now moving back to 50% at time of order and balance at time of shipment.

We are hearing that factories just don't have access to the credit needed to offer terms. This will not help them keep their long-term customers, and if this action becomes widespread will further weaken China's economy. It will be interesting to see what develops during 2Q.

Looking For Another Family Trip Opportunity

It seems lately that the family keeps bringing up our March 2006 trip to China. Our oldest asks most often when we can go back. She also talks about doing some sort of exchange program in China during high school or college.

The younger two often bring up memories from our trip to Hong Kong and Beijing. They remember Ocean Park, lunch with the OPSHK staff, Hong Kong Disney, The Great Wall, and all the other sights in Beijing. It was our favorite family vacation so far.

I'm hoping this fall or near Christmas might be another opportunity for a trip. Much depends on business conditions and airfares. We'll see.

Conflicting Information

The Chinese government is reporting high unemployment, especially among migrant workers. Among the estimated 130 million workers that headed to cities after Chinese New Year this February, the government estimates 20 million returned home after not being able to find employment.

There are also all kinds of news stories about Chinese factory closings. However, nearly all of our OPSA factory partners report good business. They also appear busy, although not as busy as last year, when our employees are in their factories. Pricing has declined a bit, but not to the extent we would expect given the soft demand and steep falls in raw material prices.

It's a bit strange. With the recent bounce-back in the US stock market, I wonder if things are either not as bad as reported/feared, or if things are moving up from bottom. It will be an interesting Spring.

China Asserts Itself Before G20 Meeting

There is a very interesting article at Barron's online today about China asserting its new global leadership position in the lead-up to the G20 meeting in London next week.

China has recently criticized US financial policies and those of other Western nations. It has not only criticized, but has offered concrete proposals for reform of global financial mechanisms.

The main suggestion is to end the US dollar's reign as the world's reserve currency. The article mentions how much this position has benefited the USA and goes on to say the G20 meeting may be the end of this run.

Very interesting stuff. See the link to the article below:

http://online.barrons.com/article/SB123812879219054939.html

Exchange Rate Stable

As you can see in the chart, the RMB to USD exchange rate is essentially flat since about July 2008. There has been almost no attention paid to the exchange rate since this time when the economy really started to be in a recognized decline.

What will happen when the global economy starts to improve? A year ago I was guessing the long-term direction was for the RMB to continue to strengthen versus the dollar. Now I suspect this exchange rate is now set for a while and will not change much for the foreseeable future. The weakness of the economy has taken the pressure off and I don't see it returning for quite a while. In fact, I believe the probability of a reversal is higher than the probability of further RMB strengthening. However, I believe the highest likelihood is we see long-term stability.

The Value of the Plant Visit in China

THe China Sourcing Blog (www.chinasourcingblog.org) recently had a good post on why companies should visit the factories they are working with in China before placing the first order. While a good idea in theory, most small and mid-sized companies can't be wandering all over China visiting factories they haven't even ordered from yet.

That's where OPSA comes in. We are our customers' eyes and ears. And better than a one-time visit, we are in the factories often obtaining all the benefits mentioned in the CSB post and more.

What makes us unique among our competitors is that we also encourage our customers to visit us in China and the factories we are working with for them. This provides and even stronger benefit. Now the factory knows that not only is the customer serious enough to work through OPSA, but they also are visiting China themselves. It's a powerful message.

Check out the post at the link below.

http://www.chinasourcingblog.org/2009/03/china-plant-tours-why-you-have.html

China Sourcing - Lessons Learned Survey Data

Here's more information from the Deloitte survey presented at the last MITA meeting. Survey respondents reported six key lessons learned from their Chinese sourcing efforts:

- Make sourcing decisions not just on the basis of cost
- View China sourcing as a tool for ultimately gaining access to the Chinese market
- Be flexible and maintain some diversity of sourcing
- Establish stringent cost, quality and timing metrics prior to implementation of a sourcing decision
- Conduct detailed due diligence during the supplier selection process
- Take steps to watch contracts, delivery, and payments carefully so as to minimize misunderstandings

These are excellent lessons. I'm surprised there is nothing on relationships or contingency planning, although the flexibility lesson likely refers to having multiple options.

What Companies Are Focused on Regarding Overseas Outsourcing

Here is some more from the MITA presentation by Deloitte. From Deloitte's recent survey, the top six things companies are focusing on as they examine current overseas outsourcing or consider new opportunities are:

1. Local market inflationary measures (labor rate, utilities, etc.)
2. Changing customs and duties environment
3. Intellectual property leakage
4. Currency rate fluctuations
5. Oil price volatility (as an indicator of transportation costs)
6. Potential legislative impacts (including potential carbon regulations and other potential trade barriers)

When evaluating an overseas outsourcing strategy these are excellent things to consider. I would add contingency planning - what will you do if your supply line is disrupted? Also add inventory and cash flow impact of the longer supply line.

Make sure to touch all these bases as you consider your current and future position relative to overseas outsourcing.

What Does America Make

There is a really good article by AP this month that has been in several papers and on many web sites. It goes into some detail on how the US still produces $2.50 worth of products for every $1 China produces.

The article describes what we will people as well, that the US has moved up the "food chain" and now makes much more complex items. What people see in retail stores are what is made in China. US companies make computer parts, airplanes, software, and other complex items.

Manufacturing all over the world is taking a hit right now. History shows the US will likely emerge stronger than other countries as we are the innovators. I firmly believe this to be the case.

You can find the article at the following site:

http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20090216&ID=9613102&Symbol=US:AAPL

US Wins WTO Dispute with China Over IP Protection

In January the USA won what appears to be an important WTO ruling on intellectual property rights protection in China. This is important to all companies sourcing or selling in China. In both cases it is important that China's IP protection improves.

Since the WTO allows for appeals and the process of complying will be a long one, the impact of this ruling will not be immediate. It is another sign that IP protection in China is moving the right direction. This is good for US companies, but also good for the continued growth of the Chinese economy.

Here is a link to the Office of the US Trade Representative where you can find the news release on this development:

http://www.ustr.gov/

26 Million Chinese Migrant Workers Unemployed

The Chinese government now estimates the number of unemployed migrant workers is now greater than the population of Texas. This is a huge issue for the country and the world as it could lead to unrest. Many of the unemployed stayed in their home provinces after Chinese New Year and some are returning now. Others are staying in the cities hoping to find work. USA Today did a great story on this today. Here is the link:

http://www.usatoday.com/news/world/2009-02-16-chinamigrants_N.htm

Cost Savings Expectations

More from the MITA Deloitte presentation mentioned in my last post. The Deloitte study on LCCS (Low-Cost Country Sourcing) found the following levels of expected savings:

6-10% savings - 7% of respondents
11-15% savings - 14% of respondents
16-20% savings - 0% of respondents
21-25% savings - 43% of respondents
25-30% savings - 21% of respondents
>30% savings - 14% of respondents

The actual level of reported savings for these companies was:

6-10% savings - 21% of respondents
11-15% savings - 14% of respondents
16-20% savings - 29% of respondents
21-25% savings - 21% of respondents
25-30% savings - 7% of respondents
>30% savings - 7% of respondents

So, what can we learn from this? First, the median actual savings fell somewhere in the 16-20% savings category. The median expected savings was 21-25%. Expected was higher than actual. No news there as returns on most investments are lower than expected. Is the savings enough to justify the efforts? At 20% I would say, yes. Below that it's more questionable.

It is safe to assume the top performing companies using LCCS were above the median. I guest the moral is to make sure you are top performing with regards to sourcing as you need to be in most key parts of your business to succeed.

This survey was taken in the last several weeks, so the savings likely represents experience from 2008. I'll post more interesting information from it in future posts.

Attributes of Sourcing "Top Performers"

I attended an excellent meeting of the Madison International Trade Association (MITA) yesterday. The first speaker was from Deloitte and he described research his firm is finishing on Low-Cost Country Sourcing (LCCS) Strategies. Here was the findings on what attributes made companies top performers in sourcing.

- Dedicated LCCS team
- Established own International Purchasing Office (IPO)
- High percentage of local resources engaged
- Supplier selection process includes strong local market insight
- Have supplier development function to drive continous improvement

Deloitte works with large companies that have the resources to maintain dedicated LCCS teams and IPO's. Most small and mid-size enterprises (SME's) do not. OPSA is the solution for SME's as we provide the top four items above for our customers. We need to start a formal supplier development program and intend to do that soon.

Some Good News on China's Economy

Some good news from Hong Kong as we come out of the New Year holiday time. We need more good news.

HK stock index jumps 3.6 pct on China prospects

The Associated Press


HONG KONG: Hong Kong's stock index jumped more than 3 percent Friday amid optimism about China's economic prospects.

The blue-chip Hang Seng Index advanced 476.14 points, or 3.6 percent, to 13,655.04, in line with gains in mainland markets.

Better-than-expected manufacturing and bank lending reports this week have boosted confidence in the success of Beijing's efforts to safeguard the economy through stimulus spending and monetary easing.

"People are hoping more will be done by the major governments and central banks," said Dariusz Kowalczyk, chief investment strategist for SJS Markets. "Investors are looking for any optimistic event to hang onto right now."

Chinese stocks were especially strong.

Chinese top lender Industrial & Commercial Bank of China Ltd, or ICBC, surged 4.6 percent to 3.65 Hong Kong dollars. Air China soared 8.3 percent to HK$42.36.

Lenovo Group rebounded almost 11 percent to HK$1.62 a day after the Chinese computer maker announced a quarterly loss and management shake-up.

____

China Announces Huge Increase in Rural Unemployment

The Chinese government announced this week that over 25 million rural residents, most of them migrant workers who travel to industrial cities for work, are unemployed. This is a huge increase in unemployment for a group that has enjoyed increases in their standard of living as China's export economy has boomed.

The government announced it is considering even more intense stimulus efforts to address the situation.

I'm not sure what impact this has on our business yet, but I sure am keeping my eye on developments. Here's a story from AFP on this situation.

http://www.google.com/hostednews/afp/article/ALeqM5jVtf5IJZ-RKUQWenCnyw3dRG97DA

World Economic Forum Also Fears for Free Trade

In a Reuters article this morning Jonathan Lynn writes about policymakers' concerns at the World Economic Forum in Switzerland. The article lays out more information and detail to follow-up on my post from yesterday. Here's the article:

Policymakers Sound Slarm Over Protectionism

DAVOS, Switzerland (Reuters) – Policymakers sounded the alarm about the growing threat of protectionism on Thursday as new data showed a sharp fall in air freight traffic that signaled a broader slowdown in world trade.

India's trade minister, Kamal Nath, warned at the World Economic Forum that the global economic crisis could fuel protectionism to safeguard national industries and jobs.

He told Reuters that India saw growing signs of protectionism and would respond with its own measures if its exporters were threatened.

"We do fear this because one must recognize that at the heart of globalization lies global competitiveness, and if governments are going to protect their non-competitive production facilities it's not going to be fair trade," he said.

"If there are protectionist measures India will be compelled to also take commensurate measures against those countries which will be good for no one."

Nath cited Dutch authorities' seizure last week of a Brazil-bound shipment of a generic high blood pressure drug made in India. He said India had taken up the issue with the Dutch authorities and the European Union, and hoped to resolve it.

India itself has raised tariffs on steel to protect local producers, a measure trade experts say was aimed at China, which India does not regard as a market economy.

The deepening economic crisis, and the failure to complete the World Trade Organization's long-running Doha round on freeing up global commerce, have raised fears that countries will block their partners' exports to protect jobs at home.

Such protectionism, if it led to tit-for-tat retaliation, would intensify the crisis, as happened in the 1930s during the Great Depression.

SLUMP IN AIR CARGO

In more bad news for the global economy, the International Air Transport Association said international air freight traffic fell 22.6 percent in December compared to a year earlier.

IATA called it an "unprecedented and shocking" drop and said: "There is no clearer description of the slowdown in world trade."

On Wednesday the U.S. House of Representatives approved a controversial "Buy America" provision requiring public works projects funded by an $825 billion stimulus package to use only U.S.-made iron and steel.

European steelmakers have already challenged the move.

The U.S. Chamber of Commerce, which opposed the provision, believes it will be of only limited impact.

"An expansion of the current "Buy American" rules would be a dumb idea, it would be a bad idea because the natural reaction would be for our trade partners to react in kind," Thomas Donohue, president and chief executive of the federation of 3 million U.S. businesses, told Reuters.

"The more difficult it gets the more we have to keep saying 'no isolationism, no protectionism'. We need to keep markets open, we need to keep our ability to sell stuff working and to do that we have to keep our own markets open," Donohue said.

Egyptian Trade Minister Rachid Mohamed Rachid expressed concern on Wednesday at the way countries were rolling out stimulus and bailout packages to defend local industries and called for a more coordinated approach.

Nath said it was important for trading powers to continue efforts to complete the Doha round, launched in late 2001.

"I think that at this point the multilateral trading system more than ever before needs strengthening," he said.

(Reporting by Jonathan Lynn; Editing by Timothy Heritage)

Free Trade Under Fire

Is free trade in danger? It appears to be. The political landscape has changed in the US and the new administration is talking tough about China and its currency policies. Although it appears they are already backing off some now that they are actually in office, there were promises made during the election that will need to be addressed.

The Doha round collapsed and there are few signs there is a positive next step for the WTO. Will governments respond to the current economic problems by erecting the trade barriers that certainly contributed to the great depression? I hope we are all smarter than that.

The collapse of the government in Iceland is an interesting situation. As citizens of other countries protest their economic plight and blame their governments, will these governments respond by attacking the tenets of free trade? Lets hope not.

I don't have the answers, but I do firmly believe that free trade is a great benefit overall. I firmly believe the opposite of free trade causes great problems.

Recently the Obama administration has been talking about transforming the economy to compete in new areas and ways. Focusing on innovation and new industries is the way the US can continue to be successful. Focusing on what others do better or less expensively will only distract us from what we excel at. Dominating green energy and pollution control, like we did the introduction of the computer and the internet, are just two examples of what can help bring the next great period of prosperity for our country.

At OPSA we are involved in green energy projects and look forward to doing more.

gōng xǐ fā cái!

Wishing you prosperity and good fortune! This is a traditional Chinese New Year's wish offered to you on this Lunar New Years Day. May you and your family have a wonderful Year of the Ox.

The ox symbolizes strength, calm, hard work, resolve and tenacity. All of these attributes will be helpful to people all over the world in the coming year.

Happy New Year!

4Q Growth in China Down to 6.8%

The Chinese government reported this week that growth in the fourth quarter was 6.8%. Growth in the third quarter was 9%. Growth for all of 2008 was also 9%, which is a seven year low.

The widely regarded figure of 8% growth needed to employ all the workers entering the workforce each year is also the target GDP growth for 2009. However, several economists are predicting closer to 6% for '09.

It will be very interesting to see what the news is in early February as workers begin returning to factories after the New Year holiday. Will there be more reports of high numbers of closed factories? Will there be any social unrest issues? I don't think so, but we are clearly still in the transition phase of this slowdown where weaker factories close.

Lunar New Year and Relationships

The Lunar New Year factory shutdowns are in full swing. Many factories are shut down this week and next. It will take into mid-February for many of them to be back at full speed.

With the very difficult economic environment there is no better time to build relationships with your Chinese suppliers than right now. Contact them to see how their business is and how you can work together during this difficult time. Also discuss pricing as it relates to the fall in raw material prices. Maybe you can forgo decreases now in order to escape increases later when inflation hits again. Maybe you negotiated in early 2008 to avoid large increases and your factory partners are now gaining back some of that margin. The point is, use this time to assess and build your partnership. The strongest bonds are built during difficult times.

The Lunar New Year's Day is Monday, January 26th. The new year will be the year of the Ox.

US Trade Deficit with China Shrinks 17.5% in November

The US trade deficit with China plummeted 17.5% last November to its lowest level since June. It is likely December will show another decline according to economists.

The global economy is obviously under great strain. As I've mentioned before, all the stress may turn out to be a good thing in the future. The US government will be forced to deal with its structural deficit in entitlement programs and defense spending. The companies that emerge in China and the USA will be stronger as a result of their survival. American consumerism and debt spending will be moderated.

None of this makes the real-life struggles of losing a job or a home any easier in the short-term. I encourage the folks in these situations to search for opportunities in the adversity. Perseverance and determination are classic American traits. New careers can be exciting and rewarding.

As I've mentioned before, what is required is perspective and communication. At OPSA we are excited about the opportunity to help more companies reduce costs. We are also excited about the expansion plans we are putting in place for 2009. I continue to expect the global economy will improve significantly in 2009.

Einar Tangen - Bailout Blurs the Line Between Capitalism and Socialism

I've discussed articles by Mr. Tangen before. He is insightful and interesting. On the 9th he did an interesting analysis on how the US government is buying equity interest in banks and car companies while the Chinese government continues to privatize its state-owned enterprises. I agree with his article and its conclusions. Here is one interesting quote:

"For both the United States and China, the sharp ideological differences between democratic capitalism and communist socialism, which defined the post war world, has become a muddle of mixed measures dictated by economic desires and circumstances."

He is absolutely right. The private enterprise system made the USA a world power. Now we are moving much more towards a socialist system where the government employs many of its citizens. Is this the right direction for the USA?

You can read the article from biztimes.com below. Have a great week.


Bailouts blur the line between capitalism and socialism

By Einar Tangen, for SBT

Published January 9, 2009
Dispatch from China

Deng Xiaoping, the pragmatic visionary who followed Mao, used the phrase, “One Country, Two Systems,” to describe socialist China’s decision to use capitalistic economics.

Since that point, 30 years ago, the difference between the political ideologies and economic policies pursued in the East and the West have become less distinct.

Today, as China deregulates its banks and spins off its state-owned enterprises (SOEs), the United States is nationalizing its banks and bailing out private enterprises.

Some in the United States (mostly, it seems, those who were part of the sequence of events that created the problem) argue that drastic times require drastic measures.

Is it strange that we are being asked to trust the same individuals who created the problem to solve it? Should we be concerned that these pied pipers have voiced no coherent solution other than throwing money at the problem?

There are many such questions, but at the end of the day, we are faced with the fact that we have engaged in actions that contradict the foundations of our ideological principles.

In China, the culture of consumerism and the pursuit of capitalism have severely challenged its socialist ideology.

In response, the Chinese government has been searching for an ideological balance point that can rationalize its contradictory practices and ideologies.

For both the United States and China, the sharp ideological differences between democratic capitalism and communist socialism, which defined the post war world, has become a muddle of mixed measures dictated by economic desires and circumstances.

Instead of clearly drawn differences, we have become more like two countries with one system.

The effect of this ideological morass has yet to be fully digested by either side, but it is something to keep in the back of one’s mind as you go about your business in either country.

When the times are muddled, it is even more important to be clear about business. As recent events have shown (Bernie Madoff), due diligence is not just something you do in a foreign country.

When something is too good to be true, it generally is. When you don’t understand something, don’t get involved, and when it concerns money, it’s not about trust, just verification.

So, when you are looking at a deal at home or abroad, here are some rules to live by:

* If the cost of due diligence is too high, do not do the deal.
* If there is not enough time to do due diligence, do not do the deal.
* There are no substitutes for doing your own due diligence.
* The need to do due diligence is ongoing.


The first three points have been made before. The last one is an overlooked point which is an essential issue, especially during economic downturns.

Due diligence before the deal is essential, and for the same reasons, you have to periodically update your knowledge throughout a business relationship.

The last thing you can afford to do is be caught flatfooted because a previously reliable supplier/partner/client has run into problems or is about to shift direction.

In Shenzhen, China, more than 10,000 businesses went bankrupt in the first seven months of the year. Most were original equipment manufacturers (OEM’s) for foreign companies that found cheaper sources elsewhere.

Interestingly, those companies which had developed their own brands and distribution have so far, for the most part, been able to hang on. In other parts of China, suppliers who were warehousing products for foreign companies, as part of a just-in-time inventory system, suddenly disappeared, along with all the goods, which had already been paid for. You need to stay in touch with your suppliers, partners and customers at as many levels as you can and make sure the message you are receiving is consistent. You need to get independent reports about their financial and management health. You need to be proactive about quality issues and audits. You need to study your suppliers, as well as your customers’ pricing and costs.

For instance, sharp drops in the cost of materials, shipping and energy over the last six months mean that old price quotes are probably too high and can be negotiated down or obtained from other suppliers.

Just as important, you need to look at your relationships and attempt to strengthen them by creating win-win situations that allow you all to go forward. That is the stuff guanxi (friendship) is made of.

Good luck to all in this new year.

Top of Page Top of page

Einar Tangen
About Einar Tangen

Einar Tangen is a former Milwaukee business executive who now lives in Beijing, China, where he advises the Heilongjiang Province on its technology valuations and acquisitions. Tangen previously served as the chairman of Wisconsin’s International Trade Council and is a former advisor to KOTRA (the Korean Government’s Direct Foreign Investment Recruitment Agency). Readers who would like to submit questions to Tangen about doing business in China can send an e-mail to steve.jagler@biztimes.com.

Purchasing Managers Index Shows Decline in Chinese Manufacturing

December's Purchasing Managers Index (PMI) in China rose slightly from November's all time low to 41.2. However, a level below 50 indicates shrinkage of the manufacturing sector. This is the third month in a row of contraction.

Monthly export figures are expected to show December was another bad month after the first decline in seven years was recorded in November.

It is being reported that thousands of factories have closed. It will be interesting to see if there are reports of many factories not opening after Chinese New Year.

None of this is a surprise. What it means is November was not the bottom for the Chinese manufacturing sector. We believe things will recover sooner than the media and government seem to be indicating, but we are still in a difficult time. It is a vital time for communication with all partners in the supply chain. Don't let the distance and differences in culture cause you to spend less time talking with you partners in China.

NY Times Claims Trouble Ahead for US - China Relations

A very interesting NY Times article from December 28 talks about new "cracks" in relations between the US and China. The author points to the global economic situation and the incoming Obama administration as main causes of the new "cracks".

The article goes on the say that US lawmakers, businesses, and unions are preparing new tactics to try and push the Obama administration into forcing China to raise the value of the RMB versus the USD.

If communication continues I see no reason for the stress of the current economic situation to harm US - Chinese relations. In fact, hard times often cause closer relationships among partners. Also, I believe the team President-Elect Obama is putting together is too smart to try and force a partner like China to change fiscal policy. I believe the new administration will work even more closely than the Bush administration has to build bridges with China. Secretary Paulson has done a good job with China and there is a solid foundation to build upon.

Here is the link to the article:

http://www.nytimes.com/2008/12/29/business/economy/29paulson.html?partner=permalink&exprod=permalink

We are now three weeks away from the Chinese lunar new year. Factories are beginning their shutdowns next week already.

Happy New Year 2009

Happy New Year 2009! OPSA is coming off it's best year ever in 2008 and looking to take advantage of several opportunities before us in 2009. We are planning a classic "expansion during a recession". Our business is perfectly positioned to take advantage of the current business climate and we're planning to do just that. More on that in many future posts.

I started the year in a similar fashion to last year. I did another polar bear plunge, this time a larger one in Jacksonport, WI. A friend and I jumped into Lake Michigan (all the way under the water is the only way it counts) at noon on January 1 along with about 750 others in one of the largest polar bear plunges in the country.

It was very windy and cold. Floating ice was a significant hazard. The organizers announced the conditions were the worst in the event's 23 year history.

My friend Dave and I couldn't get anyone to come along and take pictures. Everyone in our families' said it was too cold to stand on a frozen beach. So I don't have any pictures of me in the water. You'll have to trust me.

Taking a plunge in a frigid lake is a symbolic kick-off to a big year. Stay tuned!