Great Wall of Numbers Business Opportunities & Challenges in China By Tim Swanson 1 © Copyright 2013 by Tim Swanson Book cover design credits: Riko Lee and Evelyn Wan This manuscript is released under the Creative Commons - Attribution 3.0 license: to copy, transmit, share, adapt, remix, make commercial use of and freely distribute this work. 2 Table of Contents Foreword Introduction Acknowledgments Chapter 1 – Potential market size Chapter 2 - Selling books and content Chapter 3 – Food and beverage Chapter 4 – Hospitality services Chapter 5 - Financial services Chapter 6 – Games, health and robotic related services for the elderly Chapter 7 – Exporting manufactured goods Chapter 8 – Sports Chapter 9 – The education market Chapter 10 – Legal services Chapter 11 – Luxury goods, amenities and art Chapter 12 – Social Media and marketing your brand Chapter 13 – IT and software services Chapter 14 – Pop Culture Chapter 15 – Human resource and infrastructure challenges Chapter 16 – Localizing and understanding your customer Chapter 17 – Architects, aviation and debt structuring Chapter 18 – Retirees, Insurance and NGOs Chapter 19 – Health care Chapter 20 – VPN and infrastructure services Chapter 21 - Synthesis and implementation About the author Endnotes 3 Foreword “Grey,” Goethe tells us, “is all theory, and green the golden tree of life.” To really understand something, we need more than generalizations and a priori arguments. We need “color.” Unfortunately, most of what is written about China these days falls into the “grey theory” category. Countless pages have been devoted to the China “model,” China’s “rise,” or even its “coming collapse.” But little of this gives us any real feeling of what it’s like to live and work there. Often we can’t see the trees for the forest. This book is different. It looks not at the “big picture” but at the myriad fascinating details that make it up. We learn not that China will be “number one” but rather that Shanghai is home to the world’s largest skateboard park. Not that China has “a billion consumers” but rather that Chinese college kids love NBA apparel. Not that China is a “locomotive for the world economy” but rather that convenience stores in Bengbu, Anhui Province carry US-made razor blades. There are less prosaic observations as well. The Chinese are big Angry Birds fans, for example. China now accounts for 25% of worldwide downloads. Recently Rovio, the maker of this popular app, even went so far as to turn Shanghai’s skyscrapers green to help launch a native version of its product. These are exactly the kinds of details that matter if you are trying to formulate a business plan for the China market. And their relevance goes well beyond the particular industries cited. For the US exporter, for example, the important point isn’t that there’s a market for NBA apparel and razor blades. The takeaway is that in China—a country awash in knockoffs—a “made in USA” label signifies a high quality product. Indeed this book is full of interesting business ideas. It looks at opportunities in everything from college textbooks to assisted living facilities, from fast food to Android apps. China, it turns out, is not so much the land of a billion consumers as it is the land of unexplored niche markets. The growth of the Chinese economy in general—and that of its middle class in particular—has created many surprising new worlds for entrepreneurs to conquer. Naturally, there are risks to consider as well. Local partners or employees may expropriate your intellectual property and set up competing businesses. The regulatory environment can be full of nasty surprises, particularly for those lacking the right local connections. Profits may be difficult to repatriate. Again, readers will find a wide range of examples that help to turn China’s “unknown unknowns” into “known unknowns” if not “known knowns.” As you begin to appreciate all this local color, some fascinating big picture issues come into focus as well. Consider the potential of 3D printing, for example. This new technology makes it possible to produce plastic products directly from a computer file, using special printer heads that deposit multiple layers of plastic to produce a finished product. These machines are now available for as little as $2,199. 4 This process will enable many manufacturers to by-pass the supply chain altogether, going directly from idea to inventory in a single step. It’s easy to see the advantages for foreign firms seeking to market specialized products in China. The manufacturing could be done anywhere and the production runs kept arbitrarily small. The implications for the US-China trade balance are even more important. Once this technology is in widespread use, it seems likely that important parts of the Chinese manufacturing machine—e.g. manufacturing toys for export—may either be shut down entirely or have to be converted to serve local markets. Learning about opportunities in particular sectors leads naturally to an understanding of much larger issues that “big picture” analysts easily miss. Unlike the common practice of looking at China from “a thousand feet up,” a ground-level perspective provides insights into both the idiosyncratic features of specific industries and the overall macroeconomic situation. Thus, this book will be useful not only to those looking for Chinese markets for particular products and services but also to anyone with a general interest in learning more about the country. Whether you are looking for new worlds to conquer or just curious about the China story, this book will help you move beyond the “grey” plane of theory and abstractions into the verdant realm of economic reality. Mark DeWeaver is the founder of Quantrarian Capital Management and author of Animal Spirits with Chinese Characteristics 5 Introduction It has become increasingly difficult to separate hyperbole and exaggeration from the story of China’s development over the past three decades. This book was written in part to highlight both the opportunities and challenges facing entrepreneurs, companies and businesspeople wanting to do work in China. I try to be as evenhanded and balanced as I can – this book vilifies neither bulls nor bears. Rather it serves as a guide to those willing to take risks. In short, this book is a testament to human ingenuity and entrepreneurship. For those looking for a particular bias one way or the other, I point to Voltaire’s germane quote, “Le mieux est l’ennemi du bien” or in English, the best is the enemy of the good. There is no shortage of excuses to invest or not invest in any domicile – irrespective of the political climate, level of debt, who won the World Series or astrological sign – yet it is counterproductive to be a fair weather entrepreneur. Or rather, it is incredibly easy to complain and do nothing. Consuming doom, reckoning and gloom, preparing for prophetical collapses that are always around the corner – fear sells and will always be a popular past-times for those wanting a complete reboot, revolution or some Pyrrhic nirvana. Yet as I try to illustrate in the following pages, you do not have to be born into a family of entrepreneurs to have the desire to start a company and manage it profitably. You just have to be open to new ways of doing business, even if the conditions are not ideal, perfect or “the best.” And despite the eye-catching apocaholic analysis from those who have been predicting doomsday and eventual collapse – the Chinese, as I explain throughout, are by and large a hard working lot that have endured nearly every conceivable adjective. They are constantly looking to improve their living standards, aspiring to the quality of life in the West by learning to uncover the secrets to American and Western innovative prowess. In short, they are looking to provide a better future for their progeny. Thus opportunities abound for the entrepreneurial spirited. The book includes dozens of stories, anecdotes and interviews about experiences, opportunities and challenges on the mainland. I should point out that because of the dynamic nature of all the industries I delve into, the data and statistics cited will become quickly outdated. This is not a bad trend itself but rather goes to show you the relative vibrancy and opportunities of the creative destruction process which take place in any open marketplace – even a relatively encumbered one on the mainland. Throughout the book I mention friends, colleagues, experts, professors, businesspersons, former students and acquaintances. This is not an explicit endorsement of their opinions or services but rather serves as an on-the-ground reference point. Nor by providing me with quotes do they endorse this book or my opinions. Furthermore, in the interest of financial disclosure, I do not currently have any equity positions in the firms or companies discussed throughout. In addition, as Sagan, Russell and Oppenheimer are all believed to have said, “keep an open mind 6 – but not so open that your brain falls out.” Or as Dean Stamatis recently reminded me: “figures do not lie, but liars do figure.” In fact, one alternative working title I had considered was “seek truth from facts” (实事求是) a historical expression that dates back to the original Book of Han some two millennia ago. Thus even though I cite hundreds of references, be skeptical of any claims, especially when risk and uncertainty is involved. In short, be sure to do your own due diligence. And as a close friend once told me when I first moved to the East, for those unfamiliar with Asia and specifically China, it is better to know something than know nothing. That is what this reference guide is for, look a little before you leap into the unknown.