An exchange between Churchill & Lady Astor:

She said, “If you were my husband I’d poison your tea.”

He said, “If you were my wife, I’d drink it.”

Grand Theft China?

The U.S. Chamber of Commerce released Tuesday a report about the rise and implications of China’s “indigenous innovation” policies.  This is a think piece by long-time China watcher and journalist James McGregor of APCO Worldwide.  I urge any of you working in China, or thinking about doing business there, to take a look at “China’s Drive For Indigenous Innovation: A Web of Industrial Policies”.  Though the current debate focuses on tech industries, it has far broader implications.

Beijing has realized for several years that its industries soon will not be able to depend on being the world’s low labor cost supplier.  This wasn’t a startling insight, but an inevitable progression as other countries begin their own march to development and seek to attract the industries that gave China its launch as an export powerhouse for cheap goods.  Ergo, China must move into higher value-added industries.  Domestic considerations are at play, too, reflected in recent labor unrest and sudden decisions to increase factory worker pay scales.  China is, whether Beijing wants it or not, becoming more of a consumer market and needs to up its game in the quality of production.  Beijing saw this several years back, culminating in the 2006 issuance of the “National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020)”. Given the catchy title, I’m not surprised I missed it at the time.  The plan has become known by the acronym MLP, less of a mouthful.

The MLP is a blueprint for China’s scientific development – and for applying new technologies to Chinese industry.  All sorts of policies have grown from the plan, such as determined schemes to build a modern Chinese-designed airliner.  But the policy that really caught the business world’s attention was last fall’s announcement of the “indigenous innovation” policy, which seemed a pretty blatant attempt to force non-Chinese firms to hand over their technical know-how and secrets free-of-charge.  Reactions from companies worldwide and the world capitals that support them have been predictably negative.  Indigenous innovation has become the collision point between China’s necessary development of science and technology, and a form of protectionism Beijing deems necessary to foster industrial applications of this technology.  It crosses the line when it becomes an excuse for wholesale theft of other people’s technology.

The MLP is a curious document.  It says the expected things about developing science and talks about new labs, science centers, that sort of thing.  But when it comes to innovation, it becomes protectionist and xenophobic in tone.  “Indigenous innovation” is defined as “enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies.” This doesn’t sound particularly indigenous, but seems an exhortation to copy or somehow obtain non-Chinese technology, but then camouflage it somehow in Chinese decorations.  The MLP gives this advice to Chinese tech developers: “One should be clearly aware that the importation of technologies without emphasizing the assimilation, absorption and re-innovation is bound to weaken the nation’s indigenous research and development capacity.” While embellishment on someone else’s inventions can be productive, and is common around the world, where is the emphasis on developing new and original ideas?  Has the nation that has brought the world so many inventions over the ages lost its nerve, or its belief in its own people and systems to create something new?  One wonders.

The U.S. Chamber report sums this up neatly: the MLP “… is considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before.” The emphasis is mine.

Whale shark waiting for the pot in Bangkok (photo: Rob Stewart)

These benevolent attitudes run head long into the love for shark fin soup brought to our islands by Chinese immigrants, but it is now official in Hawaii: the shark has won and shark fin soup lovers have lost.  As evidence mounted that sharks are being fished to extinction, and videos emerged of still living sharks having their fins cut off, public opinion turned heavily in favor of the shark (despite some hangovers from “Jaws”).  Hawaii has long had a ban on finning in Hawaii waters, but the Hawaii Legislature this year voted to ban all possession of shark fins, including by restaurants.  You won’t find shark fin soup in Hawaii’s restaurants any more.  I believe this is the first such ban anywhere in the world.

I have been waiting for a backlash from Hong Kong, Taiwan or China, but it hasn’t materialized.  Indeed, last week, the South China Morning Post ran an article that mentions Hawaii’s shark fin ban, but said there is growing opposition to the shark fin trade within Hong Kong itself.  Why is Hong Kong important?  The entrepreneurial city buys half of the world’s total trade in shark fins. Most of the rest is purchased by China.  But the tide may be turning in favor of the sharks.

According to the article, there is growing recognition in Hong Kong that many shark populations, not just those on endangered species lists, are over-fished and sliding towards oblivion.  Indeed, there is even a Facebook group, launched by Hong Kongers, called the “Cut gift money for shark fin banquets” campaign.  That’s a reference to the Chinese practice of presenting money to new brides in red envelopes, and the 8,000 strong group is advocating that the amount in those envelopes should be cut by 30% if the wedding banquet includes shark fin.  The documentary film Sharkwater is apparently a blockbuster hit in Hong Kong and is building opposition to the shark trade.

A friend, who is an ardent devotee of shark fin soup, argues that if we ban finning and trade in shark fins, then we should also ban fishing of blue fin tuna.  I think he is right.  I trained as a fisheries economist and, if humans want to taste such species again someday, they need a rest now.  Hawaiians have a word for this.  Whenever a particular area seemed fished out, the chiefs would declare that area to be kapu until the fish became more abundant.  We recognize kapu in English today as taboo (from the Tahitian form of the word).  Perhaps we need to declare shark and blue fin and whale kapu for a while.  In trade terms, I believe that means embargo.

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.

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.

Are the Brits on their way to Hawaii?

Most of Hawaii’s visitor industry is fixated on an established customer base in North America and Asia, or relaxing in the prospect of increased travelers to come from South Korea and China.  So it was with some excitement that I read Tuesday that Thomson Airways is thinking about direct flights between Honolulu and the United Kingdom beginning in 2012.  British Air used to have Honolulu – Heathrow flights, but dropped out of the market years ago as traffic lagged.  Thomson’s plans are not a done deal, but they do reflect strong British tourist interest in Hawaii.  Thomson recently surveyed their U.K. passengers about possible new long-haul destinations and Honolulu was favored by three-quarters of them, a strong vote for the new route.

Honolulu-bound flights would likely originate at Gatwick, Manchester, Glasgow or Bristol, and Thomson would use new Boeing 787s.  Other long-haul destinations considered in the Thomson survey are Borneo, Madagascar, Namibia, Cambodia, Ecuador, Vietnam and Argentina.

Thomson’s interest, of course, comes at a difficult time for the visitor industry.  Using January to May data for 2010, Hawaii welcomed 14,733 visitors from the UK, a drop of 7.6% from the same period last year.  European visitors as a whole dropped by 4%, though neither decrease is surprising given what has been happening in European economies.

Nor are the decreases surprising in light of the relative lack of Hawaii promotion in European markets. The Hawaii Tourism Authority, which is supposed to be developing markets for new visitors, steadfastly ignores Europe (and much of the rest of the world).  It is hard to know exactly what HTA plans because they have now closed their board meetings, where the marketing budget decisions are paid, to public view.  Occasionally news seeps out and it is clear that HTA only spends $100,000 a year in Europe, all of it devoted to the UK and Germany.  That is out of an international marketing budget of over $67 million, the majority of it spent in Japan.

Hawaii’s visitor industry claims that it wants long-staying visitors who spend a lot over the course of their stay, which sounds like a prescription for attracting Europeans.  What HTA does, however, is devote its resources to short-staying Asians or lower-spending Canadians.  Go figure.

Thomson Airways provides us with a bit of hope, but we have to keep things in perspective.  About three years ago, Virgin Atlantic said much the same thing, but they have been silent ever since.

SME Export (photo: Abhijit Tembhekar)

Yesterday, I posted about a new report from the U.S. International Trade Commission about the problems faced by small U.S. exporters.  My post was broad-brush, the best you can do when summarizing a substance-filled 314-page study.  Today, we’ll get into some of the solutions that SMEs have come up with themselves.

First off, the Small and Medium-Sized Enterprises (SMEs) interviewed by the ITC staff were overwhelmingly in favor of negotiating new and more trade agreements, whether completion of the Doha Round or, more likely, new free trade agreements (FTAs).  They see competing countries negotiating FTAs all over the world and they have experienced the stiffened competition that results – in the form of higher relative customs duties – for the countries that don’t play the FTA game.  For now, the United States is the primary trading nation that is ignoring or hindering FTAs, to the detriment of our own exporters, their workers and our general economic well-being.  SME exporters told the ITC that the “playing field” is fast tilting against them.  So when will the White House and the Democratic “leadership” in the Congress get off their okoles (that’s Hawaiian for posterior portion of one’s anatomy) and get back into the negotiation game?

Why do SME exporters want new FTAs?  Obviously, equal tariff treatment with competitors who enjoy FTAs is a big attraction.  NAFTA is the prime example of an FTA that has helped America’s SME exporters, while the lack of implementation of the FTAs with South Korea and Colombia has boosted competition with countries that do have FTAs with them.  Non-tariff market access has improved under the U.S. – Dominican Republic – Central America FTA – and SMEs want more of this in other markets.  Our FTAs with Singapore, Australia and Chile have demonstrably improved market access, SMEs say, for products such as cellphones, auto parts, computers, medical equipment and many others.  FTAs can also facilitate trade by making the trading and shipping process easier, a key benefit seen by SMEs from the NAFTA agreement.  Agreements to improve intellectual property protection are also important.  SMEs told the ITC that they are more likely to do business with the European Union, Japan or Singapore than with China because of IPR concerns in the the latter.

The ITC study then looks at exporting in seven sectors that feature competitive SME exporters: apples, wine, chemicals and nanotechnology, textiles and apparel, medical devices, computer services, and professional services.  They all face limited access to capital and daunting regulation, both foreign and domestic.  Apples and wine must cope with phytosanitary restrictions and high tariffs, and must overcome small production capacity.  Computer services, nanotech and chemicals each must confront export control issues.  Everybody runs into cultural and language barriers (services more than most), labeling or advertising restrictions, foreign support for their own industries and much more.

What do the SMEs in these industries do about all this?  Industry associations have been established for wine, apples, nanotechnology and professional services to join forces in overseas marketing, trade show participation and for promoting changes in trade policies that limit those industries.  Agricultural exporters have increased their use of the Department of Agriculture’s Market Acccess Program, while the others are turning more often to the Commerce Department’s U.S. Commercial Service for information about foreign markets, help in selling and lobbying for contracts.  Venture capital firms are helping medical device companies with finance and in finding overseas customers.

The devil is in the details, so I will periodically post about some of those over the next few weeks.  The broad brush is going back to my workshop.

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When I ran the commercial unit for the American Institute in Taiwan, we faced a hopefully unique problem in promoting U.S. apple exports.  The State of Oregon had hired our exhibition facility in Taipei to promote the state’s products – including apples.  Only the expected crates of Oregon apples never showed up, the freight forwarder having dispatched them to Thailand, not Taiwan.  I sent my staff out to markets all over Taipei to buy up as many Washington State apples as they could find.  We spent hours peeling the Washington labels off those apples and put them into the Oregon exhibits.  Nobody spotted the substitution and the show went on.

U.S. International Trade Commission

Wow!  I’m impressed.  Government studies often help me to take a nap, but here is one that has some eye-popping stuff in it.  The U.S. International Trade Commission has released the second in its series of studies about exporting by U.S. Small and Medium-sized Enterprises (SMEs).  I know, that sounds like a snoozer, but bear with me.  The first ITC report, released in January and reported upon here, was a scene-setter that examined the scope and role of SME exporting in the context of overall U.S. exports.  The major conclusion was that most SMEs sell to only one foreign customer in one foreign market, usually Canada, so there is beaucoup room for improvement.

The new report looks at specific issues faced by SMEs and compares U.S. programs and conditions with those our European Union competitors use to help their small companies.  There is so much meat in the report that the executive summary takes up a full eight pages.  I’ll attempt to hit the major points here, but I suspect I will draw on the ITC report for several more posts in coming weeks.

The ITC begins by disposing of a semi-myth, that SMEs are far more prominent in the European Union’s exports than in those of the United States.  That’s true, as far as it goes.  Using 2005 data, the latest comparable, SMEs sold 31% of the EU’s manufactured exports but only 13% of America’s foreign sales.  They say not to make too big an issue of this, however, because the U.S. market is so large and well integrated that America has tended to grow more big companies than has the EU, thus it is no surprise that big companies dominate our exports.  I agree with the impact of a large integrated economy, but I know from personal experience that the Eurocrats have being doing everything possible to grow Europe’s SMEs into something larger.  Both in meetings in Brussels and at a conference about SMEs in Copenhagen, Eurocrats made it clear to me that, in their opinion, being small is a disease and that Brussels has the doctors to cure it.

I was surprised to see the ITC’s conclusion that U.S. financing for SME exports is no worse than in Europe, given the moaning I hear from small U.S. companies.  In fact, U.S. pre-export and short-term credit appears superior to what the Europeans are doing for their firms.  European exporters, however, may have better access to help in foreign markets – and far better support for participation in international trade shows.  (I have seen EU exporters laugh out loud when they hear how little official assistance is available to Americans at trade shows.)  The ITC also notes that European countries attact foreign investors with a view to building new export industries, something the U.S. Government cannot do because investment promotion is largely the preserve of individual states and cities.

There is a major difference in the structure of U.S. and European SME exports.  In Europe most SMEs do their own exporting, while American SMEs tend to sell their product to middlemen who then do the exporting.  I interpret this as part of our firms’ absorption in the huge North American market, though I suspect it also reveals a lack of willingness to take on the perceived risks of exporting.  If you can sell most or all of your product in a market you thoroughly understand, then you are less likely to take on markets you don’t know.  That’s understandable, if perhaps short-sighted.

The ITC then looks at barriers to exporting.  Most SMEs, anywhere, have difficulties with obtaining good and sufficient financing.  Their size makes them appear higher risk to the  banks, and a focus on foreign markets makes them seem even riskier to the green eye-shade people.

The U.S. Government sets up its own barriers to SME exporting.  Export controls are front and center due to their complexity and immense paperwork.  Visa issues are equally important, hindering efforts to bring potential buyers to the United States for contract talks or for training, and for stopping immigration of specialized foreign workers that a company might need.  SMEs also complained to the ITC about poor coordination among government agencies and unnecessary tariffs on inputs they need for production.  I wrote about the latter last week before beginning to read the new ITC report.

Transport costs are a big issue, especially the relative lack of availability of containers on the West Coast.  Foreign regulations are a huge hindrance for a small company that lacks the staff to fully understand and ensure compliance in multiple markets.  IPR protection is a big concern, especially for those SMEs trying to do business in China.  Ditto delays at foreign ports for perishable products, such as foodstuffs or pharmaceuticals.  Increasingly U.S. SMEs see “unfair” competition from foreign competitors who benefit from free trade agreements their governments have negotiated, while the United States remains inactive in FTA negotiations (is anybody in the Democratic leadership listening?).   Language and cultural issues, and limited knowledge of foreign markets, are yet more consequences of our over-reliance on our huge domestic market.

What do American SMEs do to overcome these reasons not to export, and what does the ITC recommend?  Check in again tomorrow.

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Oh, Sunday was fun!  We had an outrigger paddling regatta at Waikiki, right in front of the Outrigger, the Moana and the Royal Hawaiian.  What a setting!  And the waves were great, though boats were swamped or flipped in most every race.  My first race was the men’s 60s.  We powered our way out through the surf, taking big hits from the waves but surviving.  We made perhaps our best turn of the season at the quarter-mile mark, then accelerated back to the finish line at the beach, riding the surf much of the way.  There is an art to riding waves and breaking surf.  The acceleration is exhilarating and a good crew can stay on a wave for a long ride.  We were good Sunday and finished a strong second.

My second race, the mixed 55s, was even more exciting.  We never even made it to the turn.  I was stroking (that’s the first seat, the paddler who sets the pace), and we got hit three times in succession by big waves.  We kept going and were moving fairly well, though the boat was full of water.  Then I saw the monster.  Had to be twice the size of the others.  I shouted to apply all the power we had, but it was no good.  I was knocked into the lap of the second paddler (a rather petite woman) and then, in an instant, our canoe was upside down.  Our race was over and our focus turned instantly to making sure everybody was safe and unhurt.  Jetskis got us safely back to the beach and towed the boat in.  Our coach, standing on the beach, told me he saw that fourth wave and knew we didn’t have a chance.  Exciting!

Kaneohe Golf Club

For years I watched the Hawaiian Open on TV.  The golf held little interest – I was mesmerized by the scenery.  Eventually, I moved to Hawaii and, for several years, lived on a ridge that overlooked the course.  If there was a segment of Hawaii’s tourism industry that I would have thought was booming, it would likely be golf.  Wrong.

The Honolulu Star-Advertiser ran a piece last week about how Hawaii has fallen behind in the world tourism sweepstakes to attract golfing visitors.  And, even as a non-golfer, I found some of the reasons fascinating.

Most golf visitors to Hawaii are from the U.S. mainland or from Canada.  Visitors play close to one-quarter of the rounds on Hawaii courses, though that goes over 50% at the famous high-end courses.  But where are the golf visitors from outside North America?  Mark Rolfing of the Golf Channel, and soon to host a new worldwide golf show on NBC, says Hawaii’s courses are too tough, too costly and take too long to play.  I’m not sure about the too costly part; according to the U.S. Commercial Service, average club memberships around Shanghai are $78,000.  I don’t think we’ve got anything that steep in Hawaii.  It’s true, the famous courses can have high greens fees, but my father-in-law was quite happy playing the many public courses, particularly Ala Wai and Hawaii Kai.

Rolfing’s point about too tough puts Hawaii’s courses in a similar league to Scotland’s.  He points out that Europe’s relative newcomers to golf (e.g., Swiss or Germans) take their golf vacations in Portugal, Spain and Turkey where the courses are easier and not too expensive.  It may be many years, if ever, before they decide to tackle St. Andrews or Royal Dornoch.  He thinks China’s legions of new golfers just aren’t ready to take on Waialae or Kapalua – and he may well be right.  Of course, Rolfing and many others note that U.S. visa requirements are also likely keeping Asian golfers away.  Talk about a tough lie.

Another factor is that, over the years, golf course ownership in Hawaii has become separated from hotel/resort ownership.  This means that, although concierges will happily tell you about golfing opportunities, their main task is to keep you doing things in their resort – not on somebody else’s golf course.  And the recession has taken its toll on sponsorship for Hawaii golf tournaments, resulting in less worldwide coverage, fewer shots of superstars playing Hawaii courses, and fewer people like me watching the magnificent scenery.  Finally, the experts say that it sure does help if a destination is the home of some of golf’s superstars.  Hawaii made a run at this with Michelle Wie and Tad Fujikawa, but both have faltered of late.

I’m no expert on golf, but it seems that some good, old-fashioned marketing is needed.  A good step would be for Hawaii, whether the Hawaii Tourism Authority or individual golf courses and tour companies, to participate in the Commercial Service’s Sino-U.S. Golf Tourism Expo this September in Shanghai, Chengdu and Beijing.  But focus on bringing those new Chinese golfers to the smaller public courses.  Don’t start them out with the tough ones, even if they are famous.