Friday, June 24, 2005

China's Next Long March

Lenovo, Haier, TCL, Pearl River Pianos, State Grid Corp, CNOOC. If these names and initials mean nothing to you, you are not alone. In a couple of years, however, some of them may become household words. They are all names of prominent Chinese corporations set to go global.

About a dozen Chinese companies have already achieved the eminence of a listing on the Fortune Global 500, signifying their growing wealth and status as multinational corporations. What they haven’t achieved yet is to imprint their names on the world’s conscience. At least not yet.

No longer content to remain no-name suppliers of generic products for American and other offshore companies, Chinese companies are setting out on the next Long March, into the capitalist paradise of recognizable brand names. A rising economy must create multinationals. The Japanese have their Sonys, Toyotas and Toshibas. Now it’s China’s turn.

In the vanguard of this global movement is Lenovo, China’s leading maker of personal computers. It burst into the American consciousness late last year when it bought the PC division of IBM for $1.5 billion (half in cash and the rest in stock).

Now having consummated the deal, passed muster with the U.S. authorities that scrutinize sales of American technology assets to foreigners, Lenovo is preparing to seal the deal with American consumers through an extensive marketing and advertising campaign to implant the Lenovo name firmly in this country’s commercial consciousness.

Lenovo has long aspired to be China’s first global brand and has been working steadily and purposefully toward that goal. Two years ago it changed its name in English from Legend to Lenovo (an invented word from Latin novo, meaning new) specifically because the name Legend was too common and already trademarked in the West.

In acquiring the IBM computer division, Lenovo gained the ThinkPad laptop and the ThinkCenter desktop, two of the best-known brands in the computer industry. Lenovo’s strategy is to link its name with the better-known products, until they become synonymous in the customers’ mind.

“There will be no doubt that ThinkPad is made by Lenovo, just like iPod is made by Apple,” says Deepka Advani, Lenovo’s senior vice president and director of marketing. The products will be produced under the IBM logo for five years. As the Lenovo brand becomes better known, the company will eventually drop the IBM logo and sell them as Lenovo brand ThinkPads and ThinkCenters.

Lenovo is also taking the unusual step of moving its corporate headquarters from Beijing to New York – the corporate headquarters, not just some “Lenovo America entity.” Lenovo’s young chief executive Yuanqing Yang plans to move into the company’s new worldwide headquarters in Westchester County.

Can Lenovo pull it off? “Yes,” says Oded Shenkar, professor of international business at Ohio State University and author of “The Chinese Century.” “The way the deal is structured, with IBM retaining a stake and putting its brand name on the line, will help them do that.”

Besides Lenovo, several other Chinese companies are poised to cross that great divide between commercial anonymity and renown. Haier, a 17-year old appliance maker based in the port city of Qingdao began quietly selling in the U.S. market in the mid-1990s. It now accounts for about half of the American market for small refrigerators (such as those used in college dorms).

Taking a page out of Lenovo’s playbook, Haier announced that it is leading a group of investors bidding to acquire the Maytag, the number-three ranked American appliance maker. That would give the Haier group control of such all-American brands as Hoover vacuum cleaners, Amana appliances and Magic Chef ovens.

Haier’s longtime chief executive, Zhang Ruimin, likes to call himself the “Chinese Jack Welch” after the famous American business icon and former head of GE. But he is a Jack Welch who is also a member of the Central Committee of the Chinese Communist Party. (Lenovo’s chairman Liu Chuanzi is also a CCP Central Committee member, I believe).

Another Chinese company with huge brand potential goes by the initials TCL International. TCL is China’s largest maker of television sets. Much like Lenovo and Haier, it wants to piggy-back on a famous global brands. Last year TCL acquired majority control of the French television maker Thomson Electronics.

That gave TCL use of the American RCA brand. TCL thus licensed the image of its famous little dog Nipper cocking his hear to hear sounds emanating from an antique phonograph. “We want to be the next Sony; we want to be the next Samsung,” says TCL’s Chief Financial Officer Vincent Tan.

A Chinese company that is also gradually making a name for itself in the U.S. is Pearl River Pianos, which owns the world’s largest piano factory in the southern city of Guangzhou. Competing directly with such established brands as Steinway and Yamaha, Pearl River had garnered about 10% of the American market in 2002 and was on its way to reaching its goal of 25% share of the market for grand and upright pianos by 2005.

Some other Chinese corporations are rapidly acquiring the attributes of global multinational giants, even if they may never become household words since they are either resource companies or parts makers.

One of the newest additions to the Fortune Global 500 was State Grid Corp of China the country’s largest builder of electric power plants. For the moment it probably has its hands full trying keep up with the demand for electric power in China. But one day it may be a global force to reckon with the Bechtels and Hyundais and other globe-spanning construction corporations.And, of course, China National Offshore Oil Corporation just announced it had upped its bid to acquire the Unocol Corporation.

To succeed in the U.S. the Chinese companies have to overcome some perception problems. The Chinese companies are making their move precisely at a time when American anxieties over China’s enormous trade surplus are rising sharply. Newspapers are filled with stories of allegedly unfair trade practices ranging from theft of intellectual property to accusations that Beijing manipulates its currency to make Chinese products cheaper.

China is not the first Asian country to face these problems. But the Chinese have another prejudice that never concerned the other Asian exporters. The brands come from a country that is still nominally communist and one that is seen by some as a rising military threat to the United States.

When Lenovo secured the necessary clearance from the U.S. Committee on Foreign Investments to purchase IBM, the popular CNN commentator Lou Dobbs accused the government of allowing “25 years of research to be passed to the Chinese communists.” The report was accompanied with file footage of parading People’s Liberation Army troops and tanks.

Indeed, many of China’s new global players are still state-owned, although they function like privately owned companies and are listed on the world’s stock exchanges. Lenovo was spawned by The Chinese Academy of Sciences in 1984 at the beginning of China’s market transformation and opening to the world and for most of its life CAS still held a majority interest.

Some say that the Chinese companies may fail when they leave the protective cocoon of their home market. But Haier, TCL and Lenovo honed their management and business skills before launching global subsidiaries. The influx of foreign competition in China, especially in the three years since China joined the World Trade Organization, has provided the locals with tough, world-class competition.

Lenovo was almost knocked out by American and European computer firms, when tariffs on imported computers were lowered substantially in the early 1990s. It still faces intense competition at home from Dell, competition that has kept its profit margins slim and its stock values languishing. Yet it withstood the foreign onslaught to emerge as the largest seller of personal computers in China and now the third-largest in the world. Given its record can Fortune Global 500 fame be far behind?

Todd Crowell is the editor of The Legend behind Lenovo


Lenovo. Head office: Beijing (soon New York). Founded: 1984, in a two-room bungalow in Beijing by 11 scientists from the Chinese Academy of Science, a government agency, for the purpose of commercializing research. Now the leading PC maker in China and the third largest-PC maker in the world. State ownership: With the IBM deal, the academy’s stake is just under 30%.

TCL. Head office: Hong Kong. Founded: 1981, to make cassette tapes. Now the world’s largest maker of television sets. Acquisitions: German electronic-appliance maker Schneider; joint venture with France’s Thomson Electronics. State ownership: The Huizhou Municipality owns 25%, the rest public.

Haier. Head office Qingdao. Founded: 1987. China’s leading maker of white goods, such as washing machines and mini refrigerators. In the U.S. market since 1994. Opened a factory in Camden, S.C. to make full-sized refrigerators for the U.S. market. State ownership: None, a “collective,” 100% of profits retained by the company.

Pearl River Piano. Head office: Guangzhou. Founded: 1956, well before market reforms were introduced but has prospered in recent years selling pianos to rising Chinese middle class. Owns the world’s largest piano factory, turning out 250 models a day. Has joint venture with Japanese piano maker Yamaha. State ownership: 100% Guangzhou Municipality.

Friday, June 17, 2005

Just a Typical Hong Kong Boy

He’s a remnant of British colonialism with a knighthood to boot. Yet Donald Tsang, Hong Kong’s new chief executive, somehow earned the trust of both Beijing and the people of Hong Kong. How he managed to pull this off is one of the more fascinating stories of post-handover Hong Kong.

Tsang clinched the top job this week after he received 710 nominating votes from the 800-member selection committee, packed with pro-Beijing business leaders, that chooses Hong Kong’s chief. Since a minimum of 100 nominating votes is required to advance to the election, Tsang essentially was unopposed and declared the winner.

At the time of the handover in 1997, Anson Chan, then the number-two officer in the administration was unquestionably the most popular official in Hong Kong. If Hong Kong’s first Chinese chief executive had been decided by a popular vote, she would have won hands down.

In fact, a small circle of mostly pro-Beijing business figures decided the issue in favor of shipping magnate Tung Chee-hwa. He kept Anson Chan in office since any immediate change would have undermined both local and international confidence in the new Hong Kong administration.

Patten picked Anson to be the first Chinese chief secretary shortly after he became governor in 1992 and embarked on program of expanding the number of directly elected seats in the Legislative Council. It was an action that earned Beijing’s deep animosity, since it had assumed that the matter was settled. Anson was pegged as Patten’s chief lieutenant, or, as Beijing saw it, his chief running dog.

Anson seemed to revel in Patten’s favor. Donald Tsang, whom Patten named to the key post of financial secretary in 1995, was more circumspect. Even when accepting British honors and accolades, he always seemed to be slightly embarrassed about it. Anson, when made an honorary dame (similar to a knight) professed to be “overjoyed.”

Chris Yeung, political editor of the South China Morning Post wrote this after Anson retired in 2001 and was succeeded by Tsang: “Despite bearing the same political baggage of Mrs. Chan, inherited from their close links with Chris Patten, Mr. Tsang has been more successful in diluting this pro-British image since the handover.”

Several times while she was chief secretary and later after she retired, Anson spoke out publicly against certain actions by Beijing or its sympathizers in Hong Kong. One such occasion was in 1999 when some pro-Beijing figures attacked the government radio station RTHK for being too critical of the central government. Tung remained silent.

Such actions won her plaudits in the West as “the conscience of Hong Kong,” a title first bestowed on her in an admiring cover story in Newsweek shortly before the handover. Thereafter she would be constantly described in the foreign press as Hong Kong’s conscience, which must have grated on the leaders in Beijing.

By contrast, Tsang kept his differences behind closed doors while cultivating the public image of being a “typical Hong Kong boy,” born and educated in Hong Kong, who worked his way to the top of the civil service on sheer merit and competence. It had the added advantage of being largely true.

Tsang cemented his rise when in August 1998, in the depth of the Asian Financial Crisis, he abruptly sacrificed free-market principles to spend billions of public money to defend the Hong Kong dollar from currency speculators. In a matter of weeks he would spend the equivalent of nearly (US) $25 billion buying shares on the Hong Kong stock market.

The action turned out to be a smashing success as it scared off the speculators, saved the dollar and later earned the public a handsome profit when the government sold off the shares. It is a sign of Tung’s political ineptitude that he didn’t seize credit for what was one of the few successes of his administration.

Tsang comes into office, then, with considerable advantages. He has much more public support that Tung ever had. (The latest polls give him 78% approval rating.) He is demonstrably more decisive and competent than his predecessor, and he probably has better relations with the democratic camp in the legislature as well as with the international community.

In the seven years since the handover, Hong Kong has suffered from a major dysfunction. As Chief Executive Tung Chee-hwa had Beijing’s trust and confidence but not that of Hong Kong’s people. Anson Chan was trusted by the people but thoroughly distrusted by Beijing. Tsang by all accounts seems to be trusted by both. That should auger well for Hong Kong.

Todd Crowell wrote Farewell, My Colony, Last Years of British Hong Kong. This post appeared in Asia Times Online

Saturday, June 11, 2005

Can This Alliance Be Saved?

South Korea is moving perceptibly into China’s orbit. The question is whether this trend is reversible. Don’t expect the brief summit meeting yesterday between South Korea’s President Roh Moon-hyun and U.S. President George W. Bush to change much, no matter what kind of public face they put on things.

This development may come as a shock to many Americans who think that the alliance was cemented in blood because of the common defense against the North Korean invasion in 1950. Remnants of the 1950s system remain in place. Some 32,000 American troops are still stationed in the South under terms of the 1953 Mutual Defense Treaty.

But the political tectonic plates in Northeast Asia are clearly shifting, perhaps for the first time since the beginning of the Cold War. The rift that is opening and rapidly widening runs through the Sea of Japan with China and the two Koreas on one side of the divide; Japan, the U.S. and possibly Taiwan on the other.

The six-party talks aimed at disarming North Korea of nuclear weapons seem to be accelerating this trend, and by clinging to them, the Bush administration may be pushing this development along. Seoul’s position in the talks is much closer to Beijing’s than it is to Washington’s. Neither China nor South Korea wants to push Pyongyang too hard.

Seoul considers the government of North Korea to be a legitimate, possibly even a trustworthy, partner for normal inter-state interactions in the political, economic and other fields. Washington can’t decide whether the regime in Pyongyang is even worthy of parlay on any level.

Washington’s priorities vacillate between nuclear disarmament or regime change. No such ambiguity affects South Korea. The government is firmly against forcible regime change or any warlike action, such as a quarantine or blockade. At times it has taken on the color of being North Korea’s protector.

All sides claim to be against North Korea acquiring nuclear weapons, but in truth both China and South Korea are relatively unconcerned about the prospect. South Koreans, or at least their leaders, can’t bring themselves to believe that their brother Koreans would drop an atomic bomb on them. The Chinese don’t believe the North Koreans would be stupid enough to drop a bomb on them.

The Chinese were probably behind Seoul’s decision earlier this year to scrap a joint South Korean-American contingency plan (Op-Plan 5029) to move troops across the DMZ in the event Kim Jong Il’s regime falls. The last thing Beijing would want is to see American troops moving towards Pyongyang. (Remember what happened the last time.)

Historically, the Korean Kingdom fitted comfortably in China’s orbit. It was a model tributary state for 500 years, stretching from the late Ming to the end of the Qing Dynasty (1911). The Koreans paid their annual tribute even more regularly than the other tributary states, such as Vietnam, Myanmar and Thailand.

This contrasts strongly with the Japanese occupation (1910-1945). Rather than the more benevolent, Confucian “big brother, little brother” relationship, Japan adopted a harsh, nineteenth-century type of Western-style colonialism that sought to crush the Korean identity, so that even today the occupation roils relations between the two countries.

South Koreans continue to pick at that scab. It lies beneath the complaints that Seoul voices about how Japanese portray the occupation in school history texts. Even now there is a political witch hunt underway in South Korea outing of prominent figures who collaborated with the Japanese when they were young, often in small ways, such as serving in the police.

U.S.- South Korean relations are also strained by the fact that the political elite in both countries dislikes and distrusts each other. By 2007 South Korea will have been ruled for ten years by left-of center presidents, first Kim Dae Jung and his successor Roh Moon-hyun. The cornerstone of their foreign/domestic policy is rapprochement with North Korea.

Things got off on a wrong foot when Kim Dae Jung flew to Washington in March 2001 at the very start of the Bush administration. Landing in Washington Kim was happy to hear former Secretary of State Colin Powell say, “we plan to engage North Korea.” The next day Bush effectively retracted this position at a joint press conference, with Kim standing at his side.

China wants to see North Korea gradually reform its economy following its own example (see post below), leading to its eventual re-unification as a neutral state. What it fears is a sudden collapse and North Korea’s incorporation into a South Korean state that is still an ally of the U.S. At the moment things are moving Beijing’s way.

Monday, June 06, 2005

North Korea on the Rebound

In Pyongyang, Sinuiju, Rajin and other cities across North Korea the lights still grow dark at night, but in other ways some life and color and maybe just a little taste of prosperity seem to be creeping into the daily life of this country’s nearly 23 million people.

Reports seeping out of the North, such as this recent unsigned article from the Christian Science Monitor, speak of the beginnings of consumerism in the capital and some other cities. There seem to be more shops actually stocked with things to buy. People on the street appear to be better dressed. Private cars are appearing on the roads.

Trucks constantly rumble across the narrow bridge spanning the Yalu River, linking the North Korean city of Sinuiju with its bustling sister city of Dandong in China. The trucks moving into North Korea are said to be filled with electronics goods, refrigerators and household appliances bound for Pyongyang.

In 2002 North Korea’s unchallenged leader Kim Jong Il declared, “money should be capable of measuring the worth of all commodities.” The statement didn’t have quite the ring of Deng Xiaoping’s famous phrase, “to get rich is glorious,” but presumably it had a similar effect of giving the leader’s imprimatur to making money.

The figures seem to bear out a modest revival of the North Korean economy, which was knocked for a loop a decade ago when Pyongyang’s main patron, the Soviet Union, collapsed and took with it the subsidies that had underwritten the economy. But last year China’s investments jumped from about a million dollars in 2003 to $200 million.

This development has implications for American policy makers, who, for the past decade, have quietly hoped that if they out-waited Kim Jong Il, his regime would collapse and the issue of his nuclear weapons would disappear with it. Yet, far from being on the verge of collapse, North Korea seems stronger than it has been in years.

North Korea has the feel of China in the early 1980s, when the economic liberalization and market reforms initiated by Deng Xiaoping were beginning to take hold, when people discarded their drab Mao jackets and began wearing brighter clothes, when commercial advertisements instead of political slogans appeared on the billboards.

For nearly a decade, the Chinese have counseled North Korea’s leaders to follow their example, gradually opening the economy to market forces. They urged them to copy an early Chinese innovation of establishing experimental special economic zones (SEZ), where foreign investment would be encouraged and capitalist principles applied.

North Korea’s response was to create the Rajin-Sonbong Free-Trade Zone in the far northeast corner of the country. Theoretically, this enclave of capitalism would benefit from its close proximity to China and Russia, which converge at this point. Five years after it was established the zone still lacked such basics as hotels, office buildings, telephones, fax machines an airport and paved roads.

Rajin-Sonbong never made much sense. Its location in the northeast is far from any economic center. Indeed, it is not very far north of Gilju, where reputedly the North Koreans might test an atomic bomb. It’s as if the Chinese had located their first SEZs in the desert, near the Lop Nor nuclear test site, instead of where they did locate them, across from Hong Kong and Taiwan.

As far as I know, the only enterprise in Rajin is a Hong Kong-owned casino hotel. It attracts buses filled with Chinese tourists from the northeast provinces, who probably don’t have enough money or connections to get to Macau. One gets the impression that Kim Il Sung located the zone far away from Pyongyang so not to contaminate the communist cadres with the filthy lucre.

Obviously, the right place to put a special industrial zone is where one is now, in Kaesung, just north of the Demilitarized Zone, which is beginning to bustle with Chinese and South Korean joint ventures. You don’t have to have much imagination to figure that the future economic center of a reunited Korea would be in the corridor stretching from Seoul to Pyongyang.

Of course, any progress could be set back by a repeat of the famine of the early 1990s in which a tenth of the population may have died. International food donations are said to be way down because of worldwide opposition to Pyongyang’s nuclear program. More city workers than usual are being dispatched to the countrywide to work on farms.

But if the North can get through this harvest year it may continue to prosper. When one thinks about it, how could a country surrounded by three “miracle” economies -- China, Japan and South Korea – fail to prosper? They must have had to work very hard at it.

Saturday, June 04, 2005

A Brazen but Foolish Conspirator

Yasith Chhun must have thought that he led a charmed life, protected by powerful political friends in Washington. Chhun is the leader of an outfit called Cambodian Freedom Fighters, based in Long Beach. It is dedicated to overthrowing the Cambodian government of Prime Minister Hun Sen.

Chhun never made much of an effort to conceal his activities. When Joshua Kurlantzick, foreign editor of The New Republic, interviewed him in his accountant’s office for an article in The New York Times a year ago, he recounted that Chhun openly discussed future attacks on the phone in front of him.

This brazen but foolish conspirator certainly had supporters in Republican Party ranks. Before his arrest June 1 on charges of plotting to overthrow the Cambodian government, he had raised money for the National Republican Congressional Committee and attended meetings of the committee’s business advisory panel.

But last week federal authorities came down on Chhun like the proverbial ton of bricks. It charged Chunn with conspiracy to kill in a foreign country, conspiracy to damage or destroy property in a foreign country and engaging in a military expedition against a nation with whom the United States is at peace.

The allegations involve a comic-opera putsch that Chunn orchestrated on Nov. 24, 2000 in an effort to topple the Cambodian government. Cambodian Freedom Fights attacked buildings housing the Ministry of Defense, Council of Ministers and army headquarters with grenades and automatic weapons. At least four attackers were killed.

One of Chunn’s main supporters, Rep. Dana Rohrabacher (R-Calif.), told a California newspaper, “unless these guys have been planning some kind of terrorism, meaning attacks on civilians [the prosecution] is wrong-headed.” However, the Neutrality Act, under which Chuun is charged, makes no such distinctions.

Chuun and his wife Sras Pech are also charged with running a tax fraud scheme, allegedly submitting false income tax claims for Cambodians living in America in order to claim unearned tax refunds. This may put a damper on any prominent politicians coming to Chhun’s defense.

As reported in previous posts, an element in the Republican Party has a virulent animosity against Hun Sen, whom they believe to be a communist dictator and a participant in Cambodia’s 1975-79 genocide. However, this is not the official position of the Bush administration, which recognizes Hun Sen’s government as legitimate.

Many observers believe that the only practical effect of Chunn and his merry band has been to hand Hun Sen a plausible excuse to arrest opponents as being members of the Cambodian Freedom Fighters and occasionally to twit Washington for “harboring terrorists.”