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.