Business Beyond the Reef

Pooh understands it.

Second best is often the best you can do – and it sure beats finishing further back.  “Second best” is a concept that, simply put, says don’t let your pursuit of perfection defeat the possibility of doing good.  It’s the pursuit of perfection that is defeating the Obama Administration’s trade policy.  I speak, once again, of free trade agreements.

FTAs are on my mind again because the European Union and India are on the verge of signing an agreement that has been in negotiation since 2007.  Trade between the giant of South Asia and the Europeans has reached €53 billion – and negotiators on both sides say the pending FTA could help triple that in the coming five years, bringing jobs to Europe and boosting India’s development.  Achieving agreement, and it isn’t finished yet, has not been easy.  India and the EU have had nine rounds of talks, and both say that they would have preferred a successful Doha Round.  But they have come to realize that a Doha agreement isn’t going to happen any time soon, and that an FTA is the best “second best” option they have if they want to grow their economies.

That’s what the Obama White House and the Democratic Party have not discovered.  I see an approach to trade that is perhaps more typical of a trial lawyer’s viewpoint: you go full tilt toward the perfect outcome, no matter what the cost of doing so.  For Obama and the Democrats, I fear that the “perfect” outcome has more to do with the wishes of certain trade unions or environmental organizations than the world trading system can support.  It’s not that I oppose environmentalism or better working conditions, or that I am a Republican.  I’m not.  It’s just that the world trading system is not the appropriate vehicle to carry all that water.  You solve those issues on their own merits or demerits, not because Washington threatens to raise tariffs on cut flowers.  Obama’s failure to pursue free trade agreements is a classic example of not seizing the opportunity of the “second best”, of continuing to pursue perfection at the cost of the good.  And the good in this case includes jobs for Americans.

“Second Best” is often the best you can achieve and it is no small accomplishment.  We have three good trade agreements waiting for a decision from the White House.  We have no others in the pipeline, despite interest in better trade by most of the world, because Obama and the Democratic Congress have not authorized our negotiators to work on more.  Besides, given that you never know what American politicians will insist on including in a “trade agreement”, I suspect most of the world is reluctant to go through the effort of talking to Washington.

Stick to the subject, and go for the second best if the best is not obtainable.

Pakistani, Indian or Chinese?

I love soccer and can’t wait to spend hours watching TV during the World Cup in South Africa (June 11 – July 11). So I was drawn to an IndiaRealTime post last week about the fierce international competition between soccer ball makers.

The little town of Sialkot, in eastern Pakistan, was the undisputed world champion of the soccer ball production world.  But times have changed and, going into the World Cup, the title of world’s leading soccer ball maker is up for grabs among Pakistan, India and China.  For sheer numbers, China wins – running down the field with millions of mass-produced, machine-stitched soccer balls.  But the companies of Sialkot show disdain for these cheap Chinese balls.  It’s the high quality, hand-stitched balls from India that are worrisome.

The origin of the Indian competition is political, founded back in 1947 when Pakistan and India split.  Some of Sialkot’s soccer ball specialists felt more comfortable on the Indian side of the border and moved their operations to Jalandhar and Meerut, in northern India.  They are still the core of India’s soccer ball industry, but – after all these years – the Indian and Pakistani industries are still aiming kicks at each other.  There are those in Sialkot who claim that the only reason the Meerut ball makers can beat them is on price, and that Meerut’s prices are low only because they use child labor.  The Indian manufacturers, backed by the Indian Sports Goods Export Promotion Council, says the Pakistani charge is offsides, of course.  Unfortunately for the producers in Meerut, the International Labor Rights Forum, an NGO in Washington, sided with the Pakistanis and red-carded the Indians.  Their evidence was enough for the U.S. Department of Labor to put Indian soccer balls on its list of forbidden child labor items.  Pakistani balls are OK, says Labor.

While some of the producers in Sialkot are in stoppage time complaining about the Indians, others are running for what they see as an open goal.  Forward Group, one of the top Pakistani soccer ball makers, says it has cut costs by automating more of its production without sacrificing the hand-stitching that is so important to quality.  Forward has been awarded the contract to produce the mass-market replicas of the official World Cup 2010 soccer ball and expects to sell six million of the round things this year.  That’s a 40% increase in sales.  As a group, Sialkot still does well against the upstart Indians, making some 30 million soccer balls every year – supplying 40% of the world market.

Now, if only the World Cup didn’t overlap the Tour de France (July 3 – 25).  What to watch?  Play on!

Former OC1 Champion Karel Tresnak, Jr.

We had two notable outrigger paddling events this past weekend.  First, the one that made it into the newspapers: the world championship for solo one-person canoes (we call them OC1s, as opposed to an OC2 that has two paddlers, and the big OC6 boats with six paddlers).  This is a grueling 32-mile race from Molokai to Oahu, crossing the notorious Kaiwi Channel, often one of the roughest stretches of open ocean in the world.  The very top paddlers can do it in under four hours.  Danny Ching was the overall and men’s winner this year, but it was a squeaker.  After 32 miles of nip-and-tuck racing, Ching’s winning margin was 32 seconds.  That’s close for distance work.  Ching is also the first non-Hawaii paddler to ever win the OC1 crown.  The women’s winner was no surprise.  Lauren Bartlett won her 7th world championship and fourth in a row.  While most of the paddlers were in their 20s and 30s, there were some younger and at least one in his 60s.

Not feeling quite so energetic, my own team staged a “Master Blaster”.  We only do this once a year and you will understand when I explain the rules.  Racing OC6 canoes, your crew gathers one six-pack apiece and musters on the beach.  Each crew member drinks one beer, then you rig the boat (attach the outriggers to the canoe).  You then drink another and launch the canoe.  Clambering aboard, you paddle as fast as you can to the first mark (maybe a quarter mile).  Then you down another brew.  You paddle back to another mark close to the beach, where we drank the fourth can.  You hustle your boat to the beach, where you unrig the canoe and drink the fifth beer and the winning crew is determined.  Most of us, being “master” paddlers, are canny and sly.  We cheat.  You drain much of the beer over the side when the other crews aren’t looking.  Of course, all the crews know this and are doing it, too.  The sixth beer, by the way, is in case you get thirsty during the pot-luck feast that follows on the beach.  Good fun.

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Returning briefly to my usual international trade beat, I’m sure you are seeing all the stories about how the ash cloud from the Iceland volcano is disrupting travel and therefore business.  Airlines are hurting, business meetings are canceled, hotels and restaurants feel it when their customers can’t arrive, and even Formula 1 teams had a tough time getting parts out of Europe for their race in Shanghai this weekend (not to mention getting back afterward).  I was intrigued, though, by a story from the Indian edition of the Wall Street Journal.  India’s exports of jewelry and gems have been disrupted since flights weren’t able to get into Belgian or U.K. airports, the European jewelry centers.  This must be an industry that has pushed just-in-time delivery to an extreme, if they are running out of stock so quickly.  The same article noted that India has plenty of gold in its vaults, so delivery of gold to India from Europe is not so crucial.

• Must read op-ed piece in the Wall Street Journal yesterday entitled “World Tariff Wars”.  They hit the nail on the head.  Our politicians in Washington, many unions and a few terminal industries drive much of America’s trade policy – leading to protectionist policies while crying that other countries are “unfair”.  Grow up, folks.  Brazil and Mexico are giving us what we deserve.
• Commerce has published its annual Top U.S. Export Markets report.  This is a great reference containing 2-page summaries on each of the top 50 markets for U.S. goods, plus similar analyses of the impact of America’s 14 current and pending free trade agreements.  Good stuff.
• An article caught my eye in the South China Morning Post about electronic trade across the Sea of Japan.  Yahoo! Japan and China’s Taobao are negotiating a deal that could potentially boost on-line sales between Japan and China.  Yahoo! Japan, of course, is a joint venture between Yahoo! and Softbank, while Taobao, owned by Alibaba, is China’s top Internet shopping portal.  This follows a similar tie-up between Baidu, China’s leading search engine, and Rakuten, Japan’s top Internet shopping mall.  Not only do these ventures help online sellers with their marketing, but they also ease the problems of physical delivery of the goods.  Perhaps the model can be expanded to other markets.
• Selling things that go boom in the night!  The law firm of Covington & Burling has issued a paper about prospects for U.S. military sales to India.  India’s $30 billion defense budget is a huge increase, reflecting the need to replace outmoded Soviet-era gear.  C&B say that India will spend upwards of $100 billion over the next decade.  A possible purchase of 145 American howitzers has already been announced, and India plans to buy ten cargo transports from Boeing.  Lockheed Martin and Boeing are both competing for an international tender for 126 jet fighters, and further competitions are expected for tanks, more fighters, warships, anything a modern military needs.
• There is a huge competition to build high-speed rail lines in California.  The New York Times had an article this week about Chinese attempts to win the bid.  California plans to spend $43 billion on high-speed rail between San Francisco and Los Angeles, a number that is attracting bidders from China, Japan, Germany, South Korea, Spain, France and Italy.  U.S. suppliers are likely working with all the major bidders, because this project is tied up with stimulus money and associated Buy America rules.  Gonna be interesting.
• Sugar prices in the United States are high and rising, contributing to inflation in the grocery store.  Part of the reason is that America has long had strict quotas on how much sugar can be imported, quotas designed to protect U.S. farmers from low world prices.  That’s no longer the case.  World sugar prices are pretty high, too, right now.  So, the National Foreign Trade Council is pushing the Obama Administration to increase the quotas (allowing more foreign sugar to come in) to help increase supply in the United States.

I often speak with companies that have come up with a product, and are trying to figure out where to manufacture it.  These are usually small Hawaii firms and it generally doesn’t make much sense to manufacture something on a small island in the Pacific if your likely customers are thousands of miles away.  Most of these companies look to China and make a bee-line for Shenzhen.  That’s a well trodden path and I know several companies that have done very well getting their stuff made in China.  I’m reminded of my friend whose company has their Hawaii tourist-oriented products made in China: stuff like artificial leis, perfume, stuffed animals.  There is another who is getting telecom equipment manufactured by Chinese suppliers.  And still another that gets plastic cake pans made there.

But China may no longer be the place to go.  (Or India, for that matter.  Mainland U.S. firms tend to think of India more than Hawaii companies do.)  Strategy+Business has issued an article by Kevin Stringer (registration required, but it’s free) that casts considerable doubt on whether we should look to India or China for future offshore manufacturing, making a cogent argument for sources such as Taiwan, Singapore or Estonia.  Stringer’s argument, briefly, is that China and India both suffer from high labor training costs and lower labor productivity than smaller, more developed countries.  Let’s take a look at what he has to say, first at labor costs.

Labor cost savings in China and India are transitory.  Yeah, they may look cheap now, but pay rises in recent years are up to 20% a year for some specialties, so you can’t count on cheap labor for the long term.  But the real cost of labor is in the need for training your work force.  India is famous as a site for international call centers, yet these centers see up to 80% labor turnover every year.  That’s a lot of training to do just to keep at your current performance level.  The bigger cost, however, comes in trying to find sufficiently educated personnel for the more high tech needs of manufacturing and product research and development.  Stringer uses the Philippines as an example.  He points out that China has a population 16 times that of the Philippines, but only has three times as many well-trained, English-speaking engineers.

Are their grads good enough?

Education systems in Chindia simply aren’t keeping up with demand.  India generates huge numbers of graduates, but that doesn’t mean they are ready to work productively.  Stringer cites Indian studies that reveal that perhaps 5% of India’s work force has basic vocational skills.  Three-quarters of German workers boast those skills, 68% in the United States, and a whopping 96% in South Korea.  Better plan to invest in training.  Another study points out that only 10% of engineers in China and 25% in India possess sufficient skills to work for multilateral corporations, while Hungary and Poland both top 50%.  India’s 61% literacy rate doesn’t begin to compare with Singapore’s 92.5%, 96.1% in Taiwan or Estonia’s magnificent 99.8% literacy.

Now that we know training is going to be needed, let’s take a look at labor productivity.  We all hear about the long hours worked in China and India, and unconsciously assume that the extra time makes up for lower productivity.  It doesn’t.  Stringer cites an OECD study that measured GDP/hour as a proxy for productivity, based on U.S. productivity being 100.  India came out at only 7, China slightly better at 8.  Pretty pathetic.  Estonia scored just shy of 41 compared to the United States, and Slovakia racked up over 53.

Stringer provides considerably more evidence.  But the bottom line is to do your homework and don’t blindly leap to do business somewhere just because everybody else is going there.  Dare to be different.

Everybody is talking about spats between the United States and China, but I am more worried about India’s reaction to China’s growth.  I have posted before about trade fights between the two, but things seem to be taking on more of an edge.

Several years ago India stepped up construction of new power plants, recognizing the needs of a growing economy and trying to alleviate tenuous electricity supplies.  The plan was to increase electricity production 60% between 2007 and 2012.  India did not have the domestic capacity to build all those power plants and, not liking the higher prices of other builders, they awarded many of the new contracts to Chinese firms.  As a result, China is building about 25% of India’s new power capacity.  Thousands of skilled Chinese workers and engineers have fanned out across the subcontinent and Indian imports of Chinese power generation equipment has surged.  So New Delhi is having second thoughts.

The Wall Street Journal reports that India’s Central Electricity Authority has decreed that Indian equipment will be purchased for all future power plants built by government-controlled utilities.  New Delhi is said to be considering new taxes on imports from China and has warned power companies to stock up on spare parts for their Chinese-origin equipment.  And India has tightened visa requirements for foreign workers, forcing some 3,000 workers back to China last fall.  That wasn’t enough, so in December 2009 it was decided that no more than 1% of the workers on a power project can be foreign nationals (or forty people, whichever is less).  Predictably, all these restrictions have drastically slowed progress on the new power plants and has caused consternation in Beijing.  The Indian government says it is only trying to give India’s power generation equipment manufacturers time to build up their own production capacity.  Hmmm … could this be protectionism?

China has given India something else to think about with its expansion into ports in South Asia, says the New York Times.  Not since the fleets of Zheng He has the Indian ocean seen so much Chinese maritime activity.  This time China is building ports, not just visiting them and trading.  New ports are  being built by Chinese companies at Hambantota in Sri Lanka, Chittagong in Bangladesh, Kyaukpyu in Myanmar and Gwadar in Pakistan.  China says the new ports are part of a strategy to pursue new business in a growing region, but India sees it as a potential threat to India’s security and economy, giving China bases to cover India’s shipping routes.  It’s an expensive strategy for China.  Hambantota alone is said to cost $1 billion.  Interestingly, Sri Lanka approached India first about taking on the project, but New Delhi turned them down.

Both China and India say their intentions are peaceful, but they keep getting in each others’ way as they grow.  China has downplayed conflict with India, but India has been more aggressive in taking trade actions against China and its own neighbors, driving the latter towards closer ties with China.  There is a price for ticking off one’s neighbors.

Coming between India and China?

The United States may be an unlikely beneficiary.  Sikorsky Aircraft may win up to $12 billion in Indian defense procurements in the next eight years.  They already have enough business to warrant investment in a plant in India to build Black Hawk helicopters on the spot.  The Indian military has ordered 16 Black Hawks and another twenty will be leased to the Indian coast guard.

Testing Eggplant (USDA photo)

Frankenfoods are back, and in a surprising place: India, one of the countries that has benefited the most from genetically-modified crops.  The Green Revolution, the forerunner of today’s genetic modification science, saved India from mass starvation fifty years back, but last week Jairam Ramesh, India’s Minister of Environment and Forestry, resurrected the Frankenfood arguments of a decade ago.  Mr. Ramesh has stopped commercial cultivation of a GMO eggplant that has been tested for ten years and approved by a commission of Indian scientists.

Mr. Ramesh says he wants to “build a broader consensus” so that India “can harness the full potential of GMO technology“.  India is already the world’s second largest producer of eggplant and could produce even more if farmers weren’t losing 40% of their crop to pests the new strain is designed to control.

It is hard to know what is actually happening.  Bucking the advice of his own scientists, there seems little evidence that Mr. Ramesh has scientific backing for his position.  I have seen politicians give in to populism and use “safety” as an argument to limit participation by foreign companies.  I think both are in play now in India.  You see, the new strain of eggplant was developed by Monsanto with its Indian partner, Mahyco.  Monsanto is the world’s top producer of GMO seeds and, as such, it automatically attracts suspicion.  It doesn’t help that Monsanto is a big American company.  Monsanto and the Indian scientists say that the new GMO eggplant is safe, and that increased production will lower prices on Indian markets where eggplant is often a food for the poor.

India’s Centre for Science and the Environment, an NGO in New Delhi, has rallied to Mr. Ramesh, announcing that this is “a question of public health, which can’t be compromised at any cost.“  Nice sentiment, but pity the Centre staff never took Econ 101.  Amazing how many people don’t realize that perfect public health (or security, or anything) requires infinite cost.  Even the BBC falls for such arguments; their radio report of the eggplant controversy included only one interview – with a British anti-GMO organization.  Talk about one-sided.  Now Greenpeace has jumped on board, calling for India to ban 41 other GMO crops.  Mr. Ramesh has expressed fears about “Monsanto controlling our food chain“.  I wonder if he would have said this if an Indian firm had developed the new seeds independently.  Doubt it.

There is another side of the story – and probably several sides I’m not aware of.   The Indian scientists who approved the GMO eggplant, the Genetically Engineered Approvals Committee, issued their approval last fall, an event that launched a coalition of consumers, farmers, state governments, medical groups, Hindu nationalists and Communist parties to stop the nefarious plant.  They say that India’s biosafety regulations are insufficient and that studies about the new eggplant’s long-term effects had been ignored.   That could be; I’m not in a position to know.  The Economist reports that Monsanto organized a farmers’ demonstration against banning the GMO eggplant – only they weren’t farmers.  They were landless workers who had been bussed in for the day, likely without a clue as to what they were protesting.  Foolish.

So where does that leave us?  Ten years of scientific research and testing down the tubes.  Opposition that may or may not have a scientific basis.  Foreign companies more reluctant than ever to invest in India.  Consumers suspicious of all new developments.  All due to a question that can never be answered.  Mr. Ramesh has set a standard that requires that developers of a new variety be able to prove absolutely that there is no potential for damage to human health or the environment.  Much as we might like to have such assurance, this is impossible to guarantee, because perfect (you fill in the blank) requires infinite cost.

Doing Good - and Well - in India

Like you, I am skeptical of many claims by multinational companies that they do wonderful things for poor people or the planet.  So much of what I see in the media, particularly image ads on television, is so clearly self-serving that I discount it immediately.  But we should give credit where it is due.  And it is due in numerous cases.

The U.S. India Business Council published a booklet last fall, which I just got around to reading, about development programs instituted by American companies in rural India.  The report, Unlocking India’s Rural Sector, is striking, both for the progress made by these companies and because this is in the country that has never forgiven Union Carbide for the Bhopal disaster.  Case studies are presented showing the business and development activities of companies such as Coca Cola, Walmart, Cargill, John Deere, Mars, Monsanto and Pepsi – many of these firms we like to complain about.  Read about Walmart’s training center for farmers and entrepreneurs that prepares them to supply Walmart and other retailers in India with high quality produce.  Cargill has come up with specially fortified brands of edible oils that deliver vitamins to more than 25 million people through the company’s “Nourishing India” program.

Coca Cola and PepsiCo both depend on good supplies of clean water for their business, and the are applying their water resource knowledge to help solve drinking water problems in rural villages.  Mars is working with Pepsi to help women’s groups in Tamil Nadu get into the business of harvesting seaweeds for industrial use.  Monsanto is running a childcare program that has reduced child labor in cotton seed production fields from 20% to less than 1%.  Paramount Farms has introduced their California pistachios to Indian farmers together with an innovative food safety and health program.  These just scratch the surface.  These U.S. companies and others are helping bring prosperity to India’s farmers.  The report hasn’t received wide distribution, so I don’t think this is just more industrial propaganda.  They are doing well by doing good.

He may have your next big idea. Photo: Sujit kumar

You’ve got a small export business, or maybe you’re an importer, and you are looking for a new product idea.  You don’t have your own R&D division, so where do you look for ideas?  A possibility might be India’s Honey Bee Network.

Never heard of Honey Bee?  Neither had I until I saw a report in Asia Times last week.  Honey Bee is a foundation that ferrets out inventions and innovations from India’s farm villages, helps the inventors develop them, and then tries to interest companies or investors.  Over 21 years, Honey Bee has compiled a database of 140,000 innovations, many of which are “green”.  Take the Mitti Cool refrigerator, which is nothing like any fridge you have ever seen.  It is made from terracotta clay, not aluminum or steel.  It uses no electricity, requires no maintenance and is selling for only $53 at the factory in Gujarat.  The earthenware cooler keeps food cool for days.  The same inventor, a potter, has an even bigger seller: a non-stick frying pan made from clay that sells for $1.  Honey Bee says it is safer than Teflon.  Biodegradable, too, I’d bet.  The potter has his own website now.

I explored Honey Bee’s website, looking for the database of 140,000 innovations.  Honey Bee says they are active in 75 countries and, sure enough, the first innovation I looked at was from Uganda – making cement from rice husks, sand and a residue from a brewery.  Just add water!  Another innovation was sonic fish traps, developed by a village in Malaysia, that use sound from telephone handsets to attract fish to their nets.  One Indian innovator came up with a way to make matchsticks from agricultural waste, rather than freshly-cut trees.  A farmer developed a plow for small farms that is driven by a motorcycle.

The database is a bit cumbersome to work with and most of the innovations tend to be agricultural, naturally.  It is difficult to browse and could use some volunteer work by an innovative programmer.  But there are gems in there if you can find them.

I’m experimenting with titles for this space.  “Weekend Hits” never excited me – and I’m not sure today’s title does it.  The idea is that each Saturday morning I put up a few items that catch my eye (and might interest you), but haven’t blogged about.  Building on our overall “Business Beyond the Reef” them, how about something like “Breaking Waves”?  “Flotsam & Jetsam”?  Anybody have an idea for a catchy title?

Anyway, here are this weekend’s waves:

• We love pork in Hawaii, grinding on our favorite kalua pig, manapua and pork laulau.  So, a Wall Street Journal article about a battle over pork rinds grabbed my attention.  The U.S. Department of Agriculture (unusually) is making a unilateral change to loosen U.S. import restrictions on pork skins, opening up a market for Brazilian suppliers.  This was done at the request of an Ohio producer of fried pork rinds (I like ‘em spicy) who finds U.S. pork skins in short supply.  They are being opposed by some state agriculture departments and by competing pork rind producers, who argue to keep the imports out for fear of health problems.  We’ve got chicharrones here in Hawaii, too, going back more than 100 years to our first Filipino immigrants.  Yum.
• Spare a thought for poor foreign investors in Cuba.  Cuba lured investors in, but then put a moratorium on sending any of their profits back out.  Here’s an article in the Huffington Post about a European businessman in Havana reduced to trading Cuban food vouchers for convertible currency.
• This may take a few years, but Pakistan agreed this week with Turkey to invest $20 billion in a rail line between Istanbul and Islamabad could be big news for business in the Middle East.  It currently takes at least eleven days to send a container by rail on that route, but the new line promises to cut this to as little as three days, making rail shipments from Europe as as Pakistan feasible.  Now, if the Pakistanis can tie this line into the Indian rail system, we’d really have something going.
• It is encouraging that airlines are now competing for landing rights in Iraq.  The Wall Street Journal reports that Iraqi Airlines now has enough traffic to justify ordering new aircraft from Boeing, despite an influx of foreign carriers into Iraqi airspace.  An Iraqi Airlines spokesman takes an enlightened view: “Anything that connects Iraq to the rest of the world is good for the carrier and the country …”. Iraq’s international airports are seeing scheduled flights by Turkish Airlines, Gulf Air, Middle East Airlines, Bahrain Air and Austrian Airlines.  Austrian was a stalking horse for Lufthansa, which now plans to enter the Iraqi market this summer.
• Just Monday I posted about the “Communist Capitalists” in North Korea.  The Wall Street Journal ran an article yesterday about another money-maker for Pyongyang: monument-builder Mansudae.  Seems they are going after and winning contracts to build huge statues and monuments for cheap – based on all the practice they have had at home.  The WSJ piece details work they are doing in Senegal, and mentions contracts in China and Malaysia.  Libya is getting interested.
• The European Union and India resumed talks this week to negotiate a free trade agreement during 2010.  India did an FTA in 2009 with South Korea.
• That didn’t take long.  The United Steelworkers union and four steelmaking companies in Texas and Illinois have brought the first antidumping case of the year against China.  Chinese companies stand accused of selling oil well drill pipe at unfair prices.  These cases take months to investigate and the mere fact that there is an investigation does not mean that the Obama Administration has taken a stand on the issue – a fine point that will predictably be lost on Beijing.  Anybody can bring a case (given sufficient money for lawyers and a little evidence), but it is the decision that matters.  We aren’t there yet.