Sunday, May 31, 2009

Posts of the Week: 5/25 - 5/31

I went jet-skiing on a stand up 701cc two-stroke jet ski today. That ranks as one of the most fun things I've ever done. Back to studying for the bar tomorrow!

China Plans Environmental Rules for Companies Investing Overseas at China Journal
Is this going to be enforced? China's standards are pretty high, and they're not well enforced in China.

Time to stop talking of renminbi as reserve currency at dragonbeat
A sober and informed voice on what it actually means to be a reserve currency.

From DLA... at asia tax blog
A couple of links to DLA's detailed reports on the new China M&A tax rules.

Built to Fail – Case Studies on Chinese SME Companies Damaged By Greed, Deception and Crooked Investment Banking
at China Private Equity
Case studies from Peter Fuhrman's experience in the "opportunity" that OTCBB listings and reverse mergers can bring to the SME Chinese clients of overly opportunistic VC and PE funds, and investment banks.

Chinese Sausages at Silk Road International
When and where the numbers get a massage in China.

Thursday, May 28, 2009

A G-2 Mirage? If You're Thirsty, You Should Double Check for Water

In The G-2 Mirage (subscription only, support your local library), Elizabeth Economy and Adam Segal argue that the US should avoid engaging China bilaterally, and focus on a multilateral approach to China. As a mirage is a real optical phenomenon, I assume that the authors are instead alluding to a Looney Tunes-like, heat stroke inspired hallucination of an oasis in a dangerous desert. Though the authors make several erudite observations about conflicting foreign policy goals between the US and China, their ultimate recommendation for a "sit down with Japan, the EU, and other key allies to begin coordinating their policies toward China" is dangerous. Coordination between the "West" + Japan without China at the table has a high probability of alienating and antagonizing Beijing, and without an effective EU leadership it is very difficult to coordinate anything.

A brief summary of shared US-Sino foreign policy goals according to the authors:
  • "Kickstarting economic growth and maintaining an open global economy." Ending this crisis.
  • "Maintaining peace and stability in East Asia." Not just Korea, but Myanmar, India, Pakistan, and Afghanistan. China shares borders with many of the most dangerous places in the world.
  • "Halting climate change." Agriculture has the chance of being significantly impacted by climate change (p19) if the availability of water resources declines.
And a summary of foreign policy problems:
  • "Opposing perspectives on sovereignty and humanitarian intervention." China takes a more hands-off approach, while the US prefers to sponsor UN Sec. Council resolutions and other methods of intervention. Angola, Democractic Republic of Congo, Iran, Myanmar/Burma, Sudan, and Zimbabwe are specifically mentioned as countries where China has taken the side of the oppressive and abusive regimes.
  • "China's authoritarian but decentralized political and economic system." 天高皇帝远。China's ability to implement laws on product safety and environmental safety is frustrated by both the disconnect between Beijing edict and local government implementation, and a lack of transparency and accountability across bureaucratic spectrum.
  • "Cooperation on climate change may prove even more challenging." The authors are concerned about the lack of transparency in emissions reporting, and the US true willingness to share clean technologies with China.
  • A disconcerting military relationship. China's secrecy is intentional to shield its true (and most likely weak) capabilities, and the capabilities China does reveal suggest that they are focusing on weapon systems that can attack US aircraft carrier groups.
  • A "contentious" economic relationship. "Washington insists on currency reform, more open markets, and the protection of intellectual property rights. Beijing, by contrast, generally wants to be left alone to conduct its business as it sees fit."
I think these are all valid points. It is truly amazing that the US and China are so close. But just because we have so many points of contention with China does mean that we should risk damaging our relationship by going behind their back and forming a monolithic and coordinated policy to deal with China. China, Japan, the US, and the EU member countries have all historically been and/or all have great potential to become rivals. When blocks of potential rivals too conspicuously team up against another, it conveniently sets the stage for conflict (okay, maybe the link is a little dramatic...).

The approach needs to be multilateral with the major stakeholders at the table. I'm thinking the US, Japan, the EU, maybe the UK, Russia and China are the ones that need to meet and work towards that future that Hayek wrote tends toward human and societal development. This group includes all of the permanent members of the UN Security Council, plus a couple of the WWII losers that have rebounded so well.

The authors do argue for a multilateral approach, but the EU's impotent power structure needs to be reformed first. The G-2 solution is so attractive because agreement among fewer parties is typically easier to reach than agreement between more parties. Before we can work with the major stakeholders, the EU needs a strong leadership position. If the EU doesn't have a seat at the table, and France and Germany each do, there will be no end to the nationalistic European whining we'll be forced to endure, and this will weaken any policies the group arrives at.

Though the G-2 might indeed be a mirage, we need to take a multilateral approach from the beginning to avoid alienating China, and work together in digging a well to create an oasis in the desert the world is currently passing through.

Tuesday, May 26, 2009

Baker McKenzie's "China Legal Developments Bulletin"

Baker McKenzie just released a new version of their China Legal Developments Bulletin. It is 27 pages of analysis of new laws, summaries of new laws, and a list of new laws. This is has been a year heavy in tax laws, rules and regulations for China, and this bulletin reflects that with several articles on tax.

My favorite is John Eichelberger and Brendan Kelly's article on "New Challenges to Special Purpose Vehicles for Investing in China." The article is about the SAT's recent push to combat tax avoidance and the abuse of tax treaties through the use of SPVs through SAT Notice 81 on Issues Relevant to the Implementation of Dividend Provisions in Tax Treaties, and through a pair of tax bureau cases. The Chongqing Case and the Xinjiang Case are sober reminders that Beijing is serious about curbing tax treaty abuse, and they are an interesting look into how the local tax bureaus will analyze cases to make a determination of wheteher or not there is abuse going on. Hey, China's gotta pay for their RMB 4 trillion stimulus package somehow . . .

Saturday, May 23, 2009

KPMG on Outsourcing to China

KPMG recently produced a report on the growth of outsourcing to China, including information on the benefits of outsourcing to China and the formation of outsourcing businesses in China, A New Dawn: China's Emerging Role in Global Outsourcing. The focus is on IT outsourcing in software development. The report is solid and neither sugarcoats the advantages of outsourcing nor shies away from the disadvantages to outsourcing to China. There are also a handful of in depth case studies on Chinese outsourcing companies serving the domestic market, other Asian markets, and the Western market.

The two greatest advantages that China has as an outsourcing destination are high number of college graduates with the necessary technical skills, and a relatively low salary for those graduates. China graduates 600,000 college students per year with engineering degrees, compared to 400,000 in India and 70,000 in the US. This provides industry with a "massive pool of engineers at the entry level." China still lacks the necessary amount of senior-level program managers, though. The salaries for entry level engineering graduates is much lower than in India, at $250-$350 per month compared to $750-1000 per month.

The greatest disadvantages to outsourcing to China include limited English language skills compared with India, highly fragmented market, high variation in local strengths and weaknesses, and ye olde IPR protection problems. China does lack the English language skills of India, but China is improving, and China does have the advantage of relatively high numbers of Korean and Japanese speakers. The report notes that though market fragmentation creates huge opportunity for consolidation, it is hard currently hard for foreign companies to make an informed choice for outsourcing service provider. Of the 20 cities identified on page 20 of the report as strategic sourcing locations, there is wide variance in education and infrastructure, which is just not the case in the relatively more "monolithic" levels of education and infrastructure development in India.

This is a really good report, and it's worth the read even if you just stick to the excellent case studies.

Thursday, May 21, 2009

Why Do American Companies Avoid Africa?

Africa has a population of about one billion people, and the land is extremely wealthy in natural resources. The strong European business presence makes sense because of the colonial legacy. Without a modern colonial impact in Africa, the Chinese have been making strides in Africa to secure access to natural resources. As the beneficiaries of early colonialism, Cold War political meddlers, and the richest (and most opportunistic?) country in the world, why are American companies so hesitant to invest in Africa? This is the question that Baird's CMC and the US Chamber of Commerce tries to answer in a recently released study, The Conversation Behind Closed Doors.

It doesn't seem that the question of investment is specifically focused on the extraction of natural resources. Baird's is talking real investment for growth such as the establishment of local factories to produce for the local market.

Through interviews with top management in "30 leading U.S. multinational corporations," Baird's identified the top 5 factors that influence the decision to invest in Africa:
  1. Rule of Law - In corporate, civil, and criminal fields.
  2. Attractive Market - Not only currently, but promise of future development.
  3. Risk Adjusted ROI - Risks are pretty high in Africa.
  4. Supportive Business Framework - With logistics as a key elements.
  5. Welcoming Environment - Including the health and education level of the local workforce, as well as supportive policies for FDI.
Of these, they identify the three biggest hangups for American management in investing in Africa.:
  1. Difficult Business Case - The risks simply outweigh the rewards of the African markets.
  2. Corruption and Uncertainty - "Do you see that bridge over there?"
  3. Opportunity Cost - Africa is not selling itself, and no other US companies are competing aggressively, so there is no sense of an opportunity being lost.
The study is very interesting, but I have my own theories about why American companies are not investing in Africa. But first, not content with my own thoughts, I posed the following question in my gChat status:
Why don't American companies invest in Africa? Thoughts?
I received three responses:
  1. "cause africans will steal our crap if we bring it over there" - The report brought this up too. I agree that African IPR is weak to nonexistent, but is the education of their workforce and sophistication of their manufacturing base even close to high enough to steal IP at a relatively Chinese level? I doubt it, but it is still a strong concern.
  2. "isn't africa notorious for being especially unstable?" - The report brought this up, and again, I agree. But that hasn't stopped the US from investing in Latin America. "Latin America?" you say. Yes, Latin America. Argentina's only had free elections since 1983, Chile since the end of Pinochet's reign in 1990, Nicaragua since 1990. Meanwhile, Mobutu Sese Soku ruled that poster child of African violence, Zaire, for 32 years, al-Gaddafi has ruled Libya since 1969, and Tanzania has been relatively stable since 1964. Am I cherry-picking? Sure, but political stability is only a piece of the puzzle when money is involved.
  3. "because africa sucks" - I agree, but see final sentence above. Additionally, I can see Lagos, Mombasa/Nairobi, and Dar Es Salaam becoming the Pearl River Deltas of Africa at some point.
That third comment also led into a discussion about what I think makes US companies hesitant to invest in Africa. The optics are totally off. First, Africa does suck and I think that there is the perception that Africa is Europe's problem because it was largely a European colony that turned into a dangerous place. Second, America benefitted greatly from European colonialism, and I think there is a guilt involved in hiring Africans at low wages to do raw material extraction and to work in factories. These are two things that we need to just get over. Africa needs investment, and if American companies can figure out how to invest in Africa, then the situation in Africa will imporve, plus I think there is an absolute killing to be made (at least at some point).

This is a high hurdle to cross, and as one of the interviewees in Baird's intriguing report, which you should certainly review, makes clear:
"We are a stock market-listed company, so the first thing is return on investment. Can we make money?"
As opposed to companies that are beholden to shareholders, the Chinese have a competitive edge in Africa that US companies do not. Chinese companies can invest with an eye to the future, whereas US companies must keep their shareholders happy in the present. Hopefully this report will open US eyes further to the possibilities in Africa.

Monday, May 18, 2009

Posts of the Week: 5/11 - 5/17

Das Birds and Das Capital at Whatever Gets You Through Your Day
I can one hundred percent say that this was the best thing I saw on the internet last week.

From China Law Update: China Combats Tax Treaty Abuse at AsiaTax Blog

When Not To File A Trademark (yes, you heard me) at China Hearsay

The Party is Over for China’s Logistics Firms at All Roads Lead to China

Sunday, May 10, 2009

Posts of the Week: 5/4 - 5/10

China’s State-Owned Banks’ Missed Opportunity Opens the Way for Some Global Banks to Prosper at China Private Equity
Beijing decreed, "Lend." But just who is getting credit and what does it all mean? More at WSJ.

China And The Foreign Corrupt Practices Act (FCPA). Sometimes You Just Have To Step Away.... at China Law Blog
Fun time with every foreign minister's favorite American law!

Taxation on Corporate Restructuring at China Law Update
A look at soon to be finalized rules for the tax treatment of certain reorgs under the Enterprise Income Tax law. Asiatax blog has also been full of links to corporate literature on these rules.