Business Beyond the Reef

It’s useful to keep track of what Hong Kong companies are selling in China, since they are positioned to respond rapidly to demand changes in their huge hinterland market.  A recent survey by the Hong Kong Trade Development Council confirms that China is becoming more of a consumer market.

Only 27% of Hong Kong’s traders actually sold goods in China in 2009.  Most of these sales are fairly small, only 29% of those who sell in China reporting 2009 sales of more than HK$10 million (US$2.86 million).  The small percentage of Hong Kongers actually selling in China makes one wonder if profit margins from helping China export are so much higher than from selling to the Chinese?  Possibly.  Or is pushing product in China simply a tough sell?

Previous HKTDC surveys showed China’s demand to be primarily for raw materials, semi-manufactures, parts and components.  Clearly, Hong Kong was supplying Chinese factories.  But the mix has changed rather suddenly.  Industrial materials have dropped to 45% of Hong Kong’s China sales and light consumer goods are challenging for the lead with 44% of the total.  What’s more, most of the respondents expect that light consumer goods will be the trend for at least the coming three years.

Just another Chinese seaport?

Most of Hong Kong’s trading companies are focused on producing or buying goods in China and then exporting them to overseas markets. Of total goods sold by Hong Kong companies worldwide, an astonishing 83% were sourced in China, only 6% from Hong Kong itself.  The mere 11% made elsewhere raises questions about whether Hong Kong’s former attraction for taking products into China still holds.  Are more Western or Asian companies going to China directly now?  Will they be doing more joint ventures with Taiwan companies (as the Japanese are doing) now that the China-Taiwan FTA is in place?  All this makes me wonder if Hong Kong’s historic entrepôt role is ending and the city is becoming merely another Chinese seaport.

Brian Ng, HKTDC’s Director for China, made some clarifying comments that suggest that consumer and business services are where Hong Kong’s growth in China sales will come.  Ng sees impressive opportunities in China for Hong Kong companies in consumer businesses such as catering, retail and beauty services, as well as for sales of automobiles, appliances and construction materials.  The latter makes me wonder if a Chinese DIY market is developing, as some of my friends in China have suggested.  Ng also emphasizes business support services such as brand management, logistics, design, marketing and financial services.  He cites green technologies as a growth area for Hong Kong in China, mentioning systems development and consulting services in environmental protection and remediation, energy conservation and emissions control.

Might be some lessons there for non-Hong Kongers.

We’ve just had the Farnborough Air Show, so much of the world’s media has been writing about the aviation industry, all the contract announcements, and especially about military aircraft sales (Farnborough’s real specialty).  Much of it is simply hype by the companies.  You don’t really believe that all those contracts were actually done at the show, do you?  Billion dollar aircraft deals aren’t impulse buys.  But the show is still immensely important for getting things started, and meetings and displays at this year’s Farnborough may lead to the contracts announced at Farnborough 2012 (or Paris, Berlin or Singapore).

The Wall Street Journal published an interesting summary last week of the export dependence of U.S. arms and aircraft builders.  Assuming the Obama Administration really can extricate America from Afghanistan, U.S. defense expenditures may drop swiftly in coming years and U.S. suppliers, accordingly, are positioning themselves to expand their share of the worldwide armaments market.  The WSJ quoted the CEO of Lockheed Martin as seeing “significant” potential for export sales in the Middle East and Asia, and noted Boeing’s goal of upping the foreign share of its defense sales from 16% today to 25% in 2015.  This will require some creativity since the generally low-tech opponents that governments are likely to face obviate the need for such items as high-end stealth fighters.  The real action may be in lower-tech equipment and drones.

Some big deals have gone down already this year: United Technologies’ sales of helicopters to Australia ($2.1 billion) and Taiwan ($3.1 billion).  Boeing may get a $5.8 billion sale of cargo aircraft to India, and Canada is spending $377 million on mobile radars, radios and vehicles.  That said, defense budgets are getting leaner in many countries, especially Europe, so expanding overseas sales may be a good trick.  And non-U.S. competition is never to be underestimated.

Austrian Blackhawk (photo: Markus Gattringer)

We long wrestled with the ethical issues of arms sales when I was in the U.S. Commercial Service.  At times, we had instructions not to help sell weapons systems, but we would be told that assisting non-weapons sales to foreign militaries was OK.  It was sometimes hard to tell the difference and we often worked with U.S. companies to compete against foreign suppliers once a foreign government decided it had to get new weapons.  And some supposed “weapons systems” are actually dual-use.  I worked for two years to help United Technologies sell Blackhawk helicopters to the Austrian military.  Yes, a Blackhawk has offensive capabilities, but the real selling point was that the Blackhawks could do heavy lifting in the high Alps during avalanche season.  This was brought home pointedly to the Austrians during a disaster when they had to rely on U.S. Army Blackhawks flying in from bases in Germany to help trapped victims on mountain tops.  So, was selling Blackhawks to the Austrians a weapons sale – or a humanitarian program?  It counted as a foreign military sale in the export statistics.

Apologies to Ernest Hemingway for the headline.

Fraudulent plastic?

USA Today had an article last week about the rampant spread of credit and debit card usage in Asia.  Card transactions in Asia, collectively, reached $1.8 trillion in 2009 – an increase of 158% in five years.  The point of the article was that credit and debit cards are likely to break down Asia’s historically high savings rates, boosting the market for consumer goods of almost all types.  And this will be accelerated by the new swipe cards and by the ability to do transactions on your cell phone.

Measured in cards carried per capita, the Japanese have already surpassed the Americans, carrying 2.5 cards each.  South Korea has caught up to the United States, each with two cards in their wallets.   But that doesn’t mean that Asian spending on cards has climbed anywhere near U.S. levels.  Debt per card in the United States is $1317.  The Chinese are the most profligate in Asia, with debt per card reaching $194.49, less than 15% of the American debt level.  So the flood gates of consumer debt have not exactly opened in Asia.

Hong Kongers and Singaporeans, who you might expect to be in the forefront of adopting credit cards, still only carry 1.33 and 1.15 cards each.  And, in the Philippines and giant India, cards are still rare, the average citizen carrying only .06 and .02 cards.

While USA Today focused on the consumer sales impact of credit and debit cards, they neglected a huge downside that has direct implications for exporters to Asian markets.  The Commercial Service office of the American Embassy in Singapore has issued a warning to U.S. exporters about fraudulent credit card orders from Asian “customers”. The Embassy warns that American companies are receiving orders from buyers “purportedly” in Singapore who pay by credit card and request delivery to a Singapore freight forwarder.  The “buyer” normally places an order, by phone or email, for between $5,000 and $30,000, but wants to split the “purchase” among several credit cards or has to make numerous attempts (with different cards) to get approval for the transaction.  Having worked through those delays, the “buyer” then asks for expedited air freight to deliver the goods.  The seller falls for this, the goods are dispatched to Singapore, the freight forwarders efficiently send them on to addresses in other countries – all before the seller discovers that the card numbers are all fraudulent.

The U.S. Commercial Service, America’s FBI and the Singapore Police Force are working together to stop the perpetrators, but – even if they are successful – you can expect the scam to move to other transhipment airports and continue.  The key warning sign is the use of multiple cards, usually from a first-time customer, and the eventual request for expedited air shipment.  Use all the security services provided by the credit card companies and use your common sense.

One key to business is understanding where your customers are and where they are likely to be.  That’s where the Boston Consulting Group’s annual Global Wealth Survey can be useful – if you are selling to the very well-to-do.  (Collier’s international retail survey is another avenue to these customers, as I reported last week.)

Where are the customers' yachts?

The world’s wealthy took a hit in 2008, started a recovery in 2009, but BCG sees 2010 as the year their comeback really hits its stride.  The report is targeted at wealth managers and measures assets under management in most of the world, but there are some data points that might interest the rest of us.  As a group, the rich folk have more money to spend than before, their assets rising 11.5% last year – nearly to pre-recession levels.  North America has long been a great market for selling to the rich and still is, registering the highest absolute increase in wealth last year: some $4.6 trillion in loose change.  But it was Asia (not including the still suffering Japanese market) that took the growth crown, boosting their wealth by $3.1 trillion, or 22%, in 2009.

2009 closed with 11.2 million “millionaire households” around the globe.  The United States had 4.7 million such households in 2009, leading the millionaires of Japan, China, the United Kingdom and Germany.  Still, the places to sell to the millionaires may be Singapore, Hong Kong, Switzerland and the Middle East which have the highest density of millionaires in their populations.  (That seems to be reflected in Collier’s retail survey, too.) It makes sense to sell in the great crossroads of the world, which Singapore and Hong Kong have been among for years, recently joined by some Middle Eastern cities.  Switzerland, of course, offers decent taxes and the aura of Swiss banking.

Female millionaires are still lagging, women controlling about 27% of the global millionaires’ wealth.  The United States is somewhat more enlightened.  Women control about a third of America’s millionaire wealth.

• Yesterday’s post about the Chinese yuan – or renminbi (RMB) – was timely.  About an hour after the post, Chinese vice foreign minister Cui Tiankai was quoted as saying: “The RMB is China’s currency, so I don’t think it is an issue that should be discussed internationally“.  Just a tad defensive, isn’t it?  Do you suppose this means that China will refrain from discussing other countries’ currencies?
• While I was prowling around the Collier’s International website earlier this week for my post on the world’s top retail corridors, I noticed some other potentially useful stuff for companies looking to set up offices in other markets.  Take at look at their summary chart of worldwide leasing guidelines.  And you don’t want to try to park in London.  Don’t even think about it.
• China plans to make another offer next month in its negotiation to join the WTO’s government procurement code.  This code is vital to China because it would ease China’s access to the procurement markets of the world’s major nations.  At the same time, China must open up its own procurement market.  China tried this once before in 2007, but didn’t make a good enough offer to open its own market – and were turned down by governments that had already liberalized their markets.  Let’s hope Beijing is more forthcoming this time.
• Hawaii’s new Republican Congressman Charles Djou is getting into the trade game.  Djou has drafted a non-binding resolution that would ask the Obama Administration to negotiate a free trade agreement with the Philippines.  Hawaii has long had close ties with the Philippines and has a politically active Filipino community.  This puts Hawaii’s Democratic senators and one Congresswoman in a tough spot: support the Filipino community or continue to roll over for the Administration’s anti-FTA stance.
• Fedex, in a bit of good news, argues that we have been underestimating the recovery of world trade from the recession.  The company is seeing customers (and shipments) with stronger than expected exports.
• If you have any interest in Mongolia, take a look at my friend Jargalsaikhan Dambadarjaa’s blog post about unregulated “ninja” mining in Mongolia.

Top 10 lists are always fun – and can occasionally be useful.  It’s more than just ten, but if your business deals at all with high-end retailers, make sure to take a look at Collier’s International rankings for the world’s top retail shopping strips (Global Retail Highlights Spring 2010).    So, who are the Top 10 in high-end retailing?

1. Paris – Champs Élysées
2. New York – Fifth Avenue
3. Hong Kong – Russell Street, Causeway Bay
4. London – Bond Street
5. Milan – Via Monte Napoleone
6. Sydney – Pitt Street Mall
7. Zurich – Bahnhofstrasse
8. London – Oxford Street
9. Rome – city center
10. New York – Madison Avenue

Avenue des Champs-Élysées, still #1 (photo: Benh Lieu Song)

You’re going to have to look further down the list to find surprises.  Honolulu’s Kalakaua Avenue came in shockingly well, to me anyway, at 31st on Collier’s worldwide rankings – and #5 for North America.  I suspect Kalakaua may have already moved to #30 worldwide, because it was Athen’s Ermou that was just ahead – and Greece just doesn’t seem like a growing market right now.

Another surprise is the lack of Asian shopping corridors in the Top 10.  Sure, we have Hong Kong’s Causeway Bay as #3 and Sydney’s Pitt Street Mall at #6, but where are Tokyo, Shanghai, Beijing or Singapore’s Orchard Road?  Actually, Tokyo’s Ginza came close at #11.  Brisbane’s Queen Street Mall was #24, and Orchard Road finally made it into 27th place.  Shanghai’s Nanjing Road West was 41st and Beijing’s Mall at CWTC was 49th.

I have to caution that the Collier’s rankings are done by rent per square foot for prime retail space, not by any sort of retail sales figure.  One assumes the two are related, that a landlord can’t keep the rent high if their tenants’ sales are plummeting.  But rent numbers will be somewhat sticky since they represent past rent negotiations and retail conditions, not necessarily what’s happening now.

That also means that some of the cities that place further down the Collier’s list may be relative bargains if their retail sales are picking up while rent costs stay low relative to the Top 10.

Where are rents accelerating (perhaps indicating a retail boom – or bubble)?  Collier’s says that rents on London’s Bond Street skyrocketed nearly 52% in the past year.  At the other end of the scale, rents on Sheik Zayed Road in Dubai plummeted nearly 69%.  Bargain hunting, anybody?

Better than it might be, worse than it could be.

Yesterday I posted about a recent U.S. Chamber of Commerce study about the economic impact on the U.S. economy of free trade agreements.  The Chamber has been busy and has also published a new study of the impact of exports overall on America’s well being.  This study, The State of World Trade, looks at far more than FTAs, addressing protectionist tendencies around the world, opportunities in global trade, and success and failure in implementing trade agreements and obligations.

It isn’t surprising, during an economic downturn, to see many countries pushing protectionist policies.  We seem to hear about one restriction or another virtually every day (I have reported here about China’s many restrictions and everybody talks about the value of the yuan, but China is far from alone in such policies).  The remarkable thing, however, is that the world’s trade policy gurus have thus far avoided the slippery slope of protectionism that made the Great Depression so much worse than it had to be.  The WTO’s warnings appear to have had the desired effect of heading off the worst of it.

But not all is perfect.  The stimulus packages of some nations have resurrected “buy national” policies, including the infamous “Buy America” rules and China’s attempt to impose “indigenous innovation.”  Many countries are ignoring inconvenient obligations under their international agreements (for example, Washington’s refusal to admit Mexican trucks as required under NAFTA).

The Chamber is concerned, rightly in my opinion, that the United States is losing jobs and opportunities while our competitors negotiate free trade agreements and we sit still.  The Chamber estimates that the FTAs with South Korea, Panama and Colombia would create $40 billion in export sales and in excess of 380,000 U.S. jobs – if only we would grasp the prize.  The likely benefits dwindle with every day we refuse to compete with our major trading partners in these markets.  The European Union and Canada have FTAs or are negotiating them with all three, and China can’t be far behind.

The Deep Sea Quest for Amelia Earhart

The search for Amelia Earhart’s airplane is the ultimate in Business Beyond the Reef – and my friend Dave Jourdan is doing exactly that.  Dave heads up a deepsea exploration company called Nauticos that operates out of Cape Porpoise, Maine.  These are the guys who found the lost Israeli submarine Dakar and salvaged her in 10,000 feet of water.  They also discovered 2,000 year-old Mediterranean shipwrecks at the same extreme depths.  Dave and his Nauticos team found the wreckage of one of the Japanese aircraft carriers that went down in the Battle of Midway, and they worked with the National Geographic Society to photograph the wreckage of the I-52, a Japanese submarine sunk in the mid-Atlantic while carrying a cargo of gold on a secret World War II mission.

Dave, Nauticos and our friend Elgen Long have put years of research and ocean exploration into their search for Amelia Earhart’s long-lost aircraft, hoping to find the site where Amelia and Fred Noonan went down in the vast Pacific, and to solve the mysteries and rumors of their fates.  Nauticos has based its searches on Elgen’s exhaustive research, written up in Elgen’s 1999 book, Amelia Earhart: The Mystery Solved.  But research only gets you so far.

Dave and his Nauticos team now have to find the wreckage in thousands of feet of water in a huge ocean.  Elgen’s work narrowed their search to waters near remote Howland Island, but still leaves an area the size of Rhode Island to sift through.  A search for such a small target in deep water tasks modern ocean technologies to the fullest and demands extreme ingenuity, pushing technology beyond its designed limits.  Deep-towed sonar mapping is the primary tool.  Nauticos has produced undersea charts of this part of the Pacific that surpass any previous surveys, yielding one-meter accuracy and the discovery of underwater features – such as volcanoes – never known before.  It has also led them to several targets that match the shape and size of Amelia’s Lockheed Electra.  Read about the search in Dave Jourdan’s new book, The Deep Sea Quest for Amelia Earhart, being published in the next few days.

This is an adventure, but it is also a business.  Ocean exploration is expensive.  Dave estimates that the search for Amelia costs about a dollar a second, and requires millions of dollars worth of equipment, not to mention the costs of keeping vessels and crews at sea for weeks or months in a remote location.  There’s romance, sure, and the chance to solve mysteries, but there is also calculated risk.  Finding, perhaps even salvaging Amelia Earhart’s aircraft, could lead to immense commercial possibilities.  Imagine the excitement, the films, the books, the exhibitions.  Every airshow and aviation museum in the world would want to show her Electra.  And I can’t even imagine the return from Amelia-based fashions.  The return may be incredible – or it may be nothing.  This is truly Business Beyond the Reef.

Don’t go to China for business.  I have been preaching that mantra to neophyte exporters for years – not that they listen.  And there is a growing chorus that adds fuel to my view.  U.S. Secretary of Commerce Gary Locke is in China right now trying to convince Beijing to put a stop to its protectionism.  As the South China Morning Post‘s Tom Holland points out, the British tried the same thing in 1793 and received a lecture from the emperor: “We possess all things … and have no use for your country’s manufactures.” Locke is likely to hear a variation on the theme.

For decades, surveys of foreign business in China have highlighted how tough it is to do business.  Western companies rush to China whenever they see the prospect of something opening up and, almost invariably, their hopes are dashed as China swings the doors closed again.  The largest, smartest companies in the world have gone to China – and many have had their heads handed to them.  I won’t deny that some companies have done very well in China, but – in almost all cases – it is only after many years of determined effort.  Yet another article in this vein appeared yesterday in the New York Times.

Despite all this, I see a stream of small companies, often neophytes in international business, insisting that they must go after the Chinese market.  These are often companies that have never tried Hong Kong or Singapore, or other Asian markets where they might have a chance of understanding what is happening and have a rule of law that is comprehensible.  I ask such companies why they are headed into China, and their thought process has rarely gone beyond “Oh, because the market is so huge!”  They don’t take it kindly when I ask questions about getting paid, protecting intellectual property, or if they have the capacity to handle a huge order from China.  They just don’t want to hear it.  I have likely lost more potential consulting contracts over this issue than all others combined.  My accountant would love it if I could just bring myself to gush over China and simply disappear when my erstwhile clients lose their proverbial shirts.

Go to Hong Kong, skip China. (Image: Pwojdacz)

I spent Friday at an excellent conference in Honolulu about using Hong Kong as a gateway to doing business in China.  The program featured a stellar cast of experts on Hong Kong and southern China.  All were upbeat about Hong Kong and its prospects, most made the obligatory obeisance to the hugeness of China, but there was an undertone that the reason to go into China via Hong Kong, using Hong Kong reps, is that China is just too darn tough to do it on your own.

The side conversations, as often happens, were the most revealing.  Even using a Hong Kong connection is no guarantee.  Several Hong Kong consumer goods companies have returned home with their tails between their legs when they have tried to place products on mainland store shelves.  It’s not just the exorbitant, unpublished fees for stocking on desirable shelves, but the grease necessary to move product in and the seemingly endless array of new requirements with which foreigners (even Hong Kongers) are surprised.  And it is not just foreigners.  I heard about Chinese manufacturers who have decided to go exporting because they find it easier to get into a foreign market than to sell their goods in the province next door.  The word is that corruption remains rampant and woe betide any incoming company that competes with a locally-owned manufacturer.

One owner of a company that has been in China for many years told me that his company had to get approvals from more than a dozen different ministries, each of which claims superiority over all the others, and must file monthly reports with each of those ministries.  The paperwork alone is staggering and the prospects for corruption in such a “system” are mind boggling.

So, for small companies especially, just don’t go there.  There are plenty of easier, lucrative markets.  Use those markets to get some cash flow started.  Go to China when you are so rich you no longer care.

I love trade shows.  From the truly huge trade fairs to the small local variety.  There are the truly exciting shows (like the air shows with their flying exhibitions), the potentially exciting (IGEDO-DESSOUS, the lingerie and swimwear show), the politically incorrect (such as the Shot Show), even the boring shows (DRUPA, which shows endless printing presses).  There’s the sometimes esoteric (like the Frankfurt Book Show).  I’ve heard rumors of a porn industry trade fair somewhere.

Which way to the divorce show?

But there is a new kind of trade fair in town – if your town happens to be Milan, one of Europe’s trade show capitals.  The show is called “Ex Punto e a capo”, which translates to Ex Full Stop. It’s a consumer trade show for the divorce industry!  Timed to coincide with Prime Minister Silvio Berlusconi’s alimony agreement with his soon-to-be ex-wife ($380,000 – per month), and staged in his hometown, Ex Punto e a capo attracted mostly Italian exhibitors, including lawyers, counselors, dating services, party planners, private detectives, even seduction coaches (I didn’t realize that was a business).  The show, held in the basement of a downtown hotel (it’s not ready for the big time at the Milan fairgrounds), attracted more than a thousand paying visitors over its two-day run.  Organizer Franco Zanetti said “There was never a stand without someone asking questions“.  The man has had experience with consumer-oriented shows, by the way, helping to organize Italy’s first sex industry trade show (how did I miss that one?).

Divorce in Italy generally takes about three years, so there is a lot of scope to sell divorce-related services.  There was a divorce planning company (called Ciao, Amore – or Goodbye, Love) that offers everything from legal services to finding babysitters.  There was a stand signing up divorcees to run in Milan’s just for singles marathon.  There were companies that do paternity tests and even one that offered celebratory parties complete with a voodoo doll and pins.

To my surprise, Milan’s show is not the first divorce trade fair.  The New York Times reports a divorce show two years ago in Vienna and another last year in Paris.  When will Las Vegas stage a divorce show, perhaps conveniently located near one of the city’s ubiquitous wedding chapels?  Maybe the show could offer on-the-spot divorces!  With free tattoos.

And there is definitely international potential for divorce shows.  Slovenia’s Tourist Board put together a stand for the Milan show that advertised “regenerative weekends” at Slovenian resorts.  Said a Slovenian spokeswoman: “We used to focus on couples and families,” but divorcees are “a very interesting market”.  Can you imagine the Mexican resorts that would take space at a Vegas divorce fair?