Shanghai Scrap

As I mentioned earlier today, I’m attending a conference at the Renaissance Tianjin TEDA Hotel & Convention Centre, roughly 30 miles outside of Tianjin, about 100 miles southeast of Beijing. This is a big facility, and like most big conference facilities, it hosts more than one conference at a time. Such as this one:

Unfortunately, by the time I noticed that the third largest American oil company was hosting a forum – in China – on how to prepare for a flu pandemic, the seminar was already over. A pity. I might have tried to sneak my way into that one. If I have time next week, I may follow-up on this. It’d be interesting to know how many other foreign multi-nationals are making the same preparations.

I’m in Tianjin this week, attending a conference that I’ll be writing about soon. Like most Chinese trade conferences attended by government officials, this one is a very long snooze: speeches and presentations are submitted and vetted in advance, bound in a book, and distributed to conference participants who have very little incentive to attend the actual presentations, but instead spend their time networking outside of the hall. But for experienced conference attendees (say, me), the long snooze poses its own challenges, precisely because attendees with something worthwhile to say will often leave it out of the submitted version of their remarks, and instead insert it into their actual presentations. Thus, unlike most conference attendees, I sit and wait for these moments.

Anyway, perhaps my most treasured moment of this conference was backhanded. Late yesterday afternoon, Professor Lu Zhongwu of China’s Northeastern University stepped up to the podium. As he prepared his Powerpoint, he was introduced by Wei Jiahong, Specialized Vice-chair of the China National Resources Recycling Association. “Professor Lu is an expert in his field,” Wei noted. “And though he is eighty years old, he is still lively and energetic.”

So far as I could tell, Professor Lu took this without a flinch.

It didn’t stop there. After his 30 minute presentation, Lu returned to his seat of honor at the front of the conference hall. As he sat, Wei asked him to stand, and encouraged the audience to wish him “many more years of life.” In response, Lu clasped his hands together and shook them over his head, Olympic champion style.

From a purely selfish point of view, I think the best news to come out of Wu Yi’s visit to Washington was a deal to add 13 more daily flights to China by US carriers by 2012. Currently, there are only 10 routes per day, and so the competition for new ones is always ferocious. For example, last year, the FAA awarded a Beijing-Washington, D.C. route to United Airlines after a bitter contest between carriers that included online petitions with thousands of signatories.

It’s not entirely clear to me how the FAA chooses carriers and routes, but my impression is that the agency evaluates the proposals on the basis of whether they fulfill an actual market or political need. Thus, during the last round, a proposed China route originating from Dallas/Forth Worth didn’t make the cut, but one connecting the two national capitols did.

That’s all fine and good. Markets and politics should play a role in the choice of new routes. But I think that there’s a role for other criteria, as well: namely, past performance and customer service by the bidding airlines.

So I sincerely hope that the FAA does not award Northwest Airlines any of the new China routes until it makes a concerted effort to improve its services on its current China routes (recent reports in the Minneapolis Star Tribune suggest that Northwest would like the new routes very much, indeed). Two areas of needed improvement:

1. Northwest currently operates a Detroit-Shanghai round-trip, and though it has the right to operate it non-stop, the flight stops in Tokyo, where passengers must disembark the plane, go through airport security, and then find the gate for the new plane. This is not a non-stop, and in my opinion, if Northwest wants receive the right to new routes, it should have to operate this one as non-stop.

2. Northwest’s daily flights in and out of Shanghai’s Pudong Airport are flown on aging 747s that look like they could have been used as the set for Airplane (1980). The upholstery is often worn and ragged, headphone jacks barely work, and the flight attendants … well, I’ll leave that for another post. These same planes are used for – in my experience – the Tokyo routes to Minneapolis, Los Angeles, and Detroit (the aforementioned “direct” flight between Shanghai and Detroit). Unlike most other international carriers and routes- including those run by Northwest’s competitors – the 747s do not have seat-back in-flight entertainment for coach passengers. In fact, I’ve found that Chinese airlines operate newer aircraft on their China-US than the ones that Northwest operates!

In other words, Northwest is shamelessly milking these routes for every last penny of trans-Pacific revenue, customer comfort be damned. Profiteering is the right of all American airlines, and lord knows they do it with impunity.

So, just this once, couldn’t the FAA exercise its right to take into consideration ever aspect of an airline’s service record when awarding new business? Theoretically, at least, the agency should be choosing the routes on the basis of what passengers need – comfort, quality, safety, and convenience – and not on the basis of what the airlines need. Naive, I know, but as a Northwest frequent flier, I can hope.

In late April, Xinhua ran a brief item on new drug and psychological testing requirements for People’s Liberation Army officer candidates. At the time, I was most surprised by the open acknowledgment that drug use is a growing problem among young Chinese. That, and the obvious use of a modified MMPI (“700 to 800 questions in a one hour written exam”) in the PLA. What I would pay to see a copy of that!

Anyway, this morning SCMP ran a sort-of follow-up story that pointed out an entirely different aspect of the Xinhua release that I’d overlooked:

Mainland military colleges have relaxed bans on tattoos and height requirements for recruits from ethnic minorities, a move one military analyst has described as an extension of preferential policies for minority groups.

The story goes on to describe how, though tatoos are prohibited for candidates from the Han majority (92% of China’s population), they are allowed on minority candidates so long as they “do not detract from the military’s overall image.” Meanwhile, minority candidates are allowed to be two centimeters shorter than Han candidates.

Though little remarked outside of China, China’s ethnic minorities often face significant discrimination, particularly in the country’s largest municipalities. This continues despite the fact that Beijing has long favored preferential policies for these groups (presumably, to placate them in hope of preventing ethnically-based insurrections), including exemptions from the “one-child” policy, the grant of autonomous governing units, and greater degrees of religious freedom. Still, it is no small development when China’s most Chinese, most Communist, and most conservative institution – the People’s Liberation Army – decides to start exercising preferential policies on behalf of ethnic minority groups. As an American, I am reminded of the US military’s de-segregation and integration of black American during and following World War II, and the important role it played in spurring the Civil Rights movement. China doesn’t need – and won’t have – a race-based civil rights movement along the lines of what happened in the United States. That said, I think it’s a socially significant moment when the Chinese military announces that it will allow – on paper, at least – a certain degree of diversity in its officer ranks.

One final note on this. SCMP also reports that online discussions (on sina.com) of this issue trend strongly against the preferential policies, with many posters arguing that “the policies amounted to discrimation against Han people.” For Americans, this argument should sound familiar: it is the same one employed by white Americans to oppose affirmative action policies.

The quality control crisis in Chinese manufacturing may be on the verge of getting some high-level attention, if recent news coverage is any indication. In a stunning acknowledgement, China’s General Administration of Quality Supervision, Inspection and Quarantine [AQSIQ] yesterday released figures showing that 23% of non-export toys manufactured in six major provinces, do not meet national safety standards. Subscriber only South China Morning Post has the full story, with stats, but a softer version can be found on Xinhua. I have been unable to find the raw stats on the AQSIQ site.

The SCMP story describes stuffed toys filled with “unsterilised industrial materials – mainly cotton leftover from rug making.” These stuffed items, the story makes clear, were destined for China’s domestic market. As I read this, however, I could not help but reflect upon a conversation that I had at the gym last week with a sourcing agent for an American sporting goods company. The primary product of this company requires foam stuffing, and typically that stuffing is made up of shredded foam from automobile seats and old furniture. The sporting goods company, I was told, has a strict standard for the quantity of metals that can detected in the foam – not just fragments, but also traces of lead and other materials that have seeped into the foam itself – and as of a few weeks ago, those standards were no longer being met.

The sourcing agent blamed the falling dollar for forcing manufacturers in China to seek cheaper means of ensuring a “China price.” But now that we know the situation is affecting production on the domestic market, I think we have to look deeper.

Though unremarked in the Xinhua or SCMP stories, the stuffing used in Chinese toys purchased on informal scrap markets that are sprouting up all over China (initially sourced by scrap buyers from factories that prefer not to pay for disposal). This is not a new phenomenon when it comes to metals and paper, but it is relatively new as applied to textiles and foam. As that market grows, participants will be inclined to find markets for material that would otherwise be burned or landfilled – such as the material described in the SCMP story. This is a well-remarked phenomenon in the scrap metal and paper trade, and there’s no reason it won’t repeat in foam and textiles.

There are no reliable statistics on the size of China’s domestic recycling industry, its output, or even its organization. But as I’ve noted over the last four years in writings for Scrap and Recycling International, bringing “order” to that marketplace has been a top priority for market participants and, increasingly, the national government. Since 2000, most of the order has been imposed on China’s thriving scrap import markets. Later this year, the Chinese government is going to release several laws related to its domestic recycling industry, and presumably some kind of regulation and quality control will be imposed on new materials being cycled into manufacturing without any pre-processing.

Now, to be honest, I am as skeptical as anyone about the ability of China’s government to impose order on a market that likely has millions of participants, and where the lowest market entry barrier is owning a scale. But we’ll see. Tomorrow I fly up to Tianjin for three days of presentations on this very topic.

Just what national interest of the United States is served by trying to keep pirated versions of an American television series about Texas highschool football off the streets of China? Not to mention, one that comes with Chinese subtitles?

Hollywood’s usual argument, the bogus one, is that Chinese piracy costs the studios hundreds of millions of dollars. I’ve never seen an analysis of just how those figures are tabulated, but I’ve long suspected that they involve lots of hand waving and time spent browsing the pirate shops of Beijing and Shanghai. Whatever the source, I challenge Hollywood to find one – just one – Chinese consumer willing to pay American retail for the 8 DVD box of ‘Friday Night Lights.’ In my usual pirate shop, it cost RMB 60, or roughly US$7.89. That may be cheap by US standards, but in China, where per capita income only recently exceeded US$1000, that’s outrageously expensive – especially for an exotic foreign entertainment that will be barely comprehensible on a cultural level.

Of course, I don’t expect Hollywood to buy my argument that movie piracy is actually creating future market share that the studios can harvest when Chinese incomes finally rise enough to afford US mass market entertainment (mid-century, maybe) at US prices. But on the other hand, I have to wonder: what would the studios really prefer the Chinese watch for free in the comfort of their own homes? Chinese network television? Really?

It’s come to my attention that emails sent from the contact form on this site are not reaching me. The problem appears to be associated with the hosting company and, unfortunately, the hosting company is in the US, and enjoying a long Memorial Day weekend. I’ve pulled the contact form for now, but hopefully it’ll be back up soon.

***Update: I think that the problem is resolved, but I’m not 100% convinced. So, if you send something through the contact link and don’t receive a reply, the issue remains technical (and not bad manners). I hope to have this resolved soon.***

Keith Bradsher’s fine article about the ongoing run-up in the Chinese stock markets was illuminating on several levels. At the very least, even if you’re not interested in financial news, it’s worth checking out for the vertigo-inducing graph tracking individual brokerage account growth on the Mainland.

I can’t even begin to guess when this thing will crash. But crash it will. Last week, while in Beijing, a friend told me that, when she last visited the tailor, he had a computer monitor with real-time stock charts propped on his work table. If that isn’t a sign that this thing is due for a crash, she told me, then there is no sign. I agree, mostly, but for a better example: this evening I was in a friend’s restaurant, and she told me that – when her RMB 1800/month (US$235) waitresses start investing – that’s when she’s going to sell. Sounds about right to me.

Wonderful parody post over at Sinocidal on how to write a China feature – specifically targeted at established journalists on their first trip to China.

It’s an easy target, obviously. But it does hint at the more important point: namely, why do major media insist on the expense and trouble of sending correspondents to China … who have no experience here? It’s one thing to take a great writer and see how he/she perceives China. But it’s another altogether to take a middling writer who maybe gets the assignment on the basis of seniority, and send him/her. More on this in an upcoming post.

Unlike Paulson, Bush brought up the currency issue. In a meeting with reporters after Wu Yi visited the White House, he fingered the yuan as a primary reason for the US$223 billion trade deficit. There’s some truth to that, of course. But only some. If the yuan rises enough, many of China’s low-cost manufacturing jobs will just migrate to lower-cost Asian countries such as Vietnam. In fact, it’s already happening in the apparel industry, and I’m fairly certain that it will soon happen in steel and non-ferrous metals. In the long run, I think the US is going to start thinking about its trade deficit with China as a trade deficit with Asia, as a whole. Those jobs simply are not going to move to North America.

The deeper question, it seems to me, is whether the US has $223 in domestically produced goods – or even US$123 billion in domestically produced goods – that the Chinese want, and can afford to buy. Boeing aircraft and medical devices are two of the highest value products exported to China, but they are hardly mass market products appropriate to an economy where the annual per capita income barely exceeds US$1000. For once, an American politician decided to offer an idea on this sticky front. According to SCMP’s ever-admirable Richard Cheung:

Mr Bush singled out US beef as an area in which he wanted more. “One area where I am disappointed is beef,” he said. “They need to eat more US beef. It’s good for them and they will like it.”

Problem is, they probably won’t like it. The Chinese eat beef, but not much of it, and certainly not in the large portions that most Americans eat it.

This isn’t conjecture; it’s hard facts. KFC operates more than 1700 stores in China; McDonald’s has 700. Profit margins in Chinese KFC’s are around 24%; in Chinese McDonald’s, they’re in the single digits. There might be structural and operational issues at play here, but the more important reason is one that Bush or his staff would learn talking to any Chinese teenager: the Chinese don’t like beef hamburgers, in particular, and large servings of beef, in general. McDonald’s, like Bush, hasn’t managed to learn this, despite a long-term presence in China. Last year, in fact, they launched a marketing campaign to promote beef offerings, presumably in the wake of KFC’s domination of the fast food chicken market, but with little impact. Like the US economy in general, it hasn’t managed to distinguish between what it wants the Chinese to buy, and what the Chinese want and can afford to buy. A related question: even if the US finds products that the Chinese want and can afford to buy, will they buy them in enough volume to make a difference to the trade deficit? Currently, the Chinese want and can afford US soybeans, but overall Chinese purchases of US soybeans barely account for US$10 billion in trade.

I’m not surprised, but the most detailed coverage of Vice-Premier Wu Yi’s trade mission seems to have been in the Asian press, and to a lesser extent in the US financial press. Not surprised, but disappointed. Wu Yi, like most Chinese high government officials, reclusive and difficult to cover beyond her official statements. Thus, it would have nice, if not interesting, if a media outlet with a Washington bureau had been willing to devote some time to covering her.

Anyway, as Jim Fallows points out in his blog, the US and Chinese press had very different perceptions of this summit. To an extent, this is a function of the fact that every foreign trip by a Chinese leader is, by necessity, a massive, historic success worthy of writing in stone. But, more subtly, I think it is also a function of the fact that the US reporters have the opportunity to interface with Paulson and his staff away from the microphone. Whatever the case, I think the most interesting facet of these meetings is what was not said. The South China Morning Post describes this non-news this way:

Mr Paulson made no mention of progress on achieving a stronger exchange rate for the yuan, the main bone of contention among US lawmakers, but he emphasised that the “real test of flexibility on the yuan is whether it moves on a daily basis and over time”.

Why did Paulson avoid discussing the issue that has been the focus of US-China trade disputes for the better part of two years? Mostly, I think, it’s because the 10% drop in the value of the dollar against the yuan over the last year is starting to have a tangible effect on Chinese manufacturers. Just yesterday, I spoke to a sourcing agent working with a US sports equipment manufacturer who baldly stated that the exchange rate is directly impacting the quality of goods he sources, with manufacturers using shortcuts to make up for the lost value of goods. I couldn’t help but think of the recent cases of anti-freeze being used in Chinese medicines shipped to Panama, or the cheap filler used in pet food shipped to the United States. Quite likely, we’ll see more of this kind of thing as the exchange rate declines, and quite likely we’ll see more calls for restricting Chinese imports into the US.

One thing I don’t think we’ll see is a growth in the number of low-skilled US manufacturing jobs. Instead, those Chinese jobs, which were once Korean jobs, which were once Japanese jobs, which were once American jobs, will continue migrating south, probably ending up in Vietnam (where I’ll be in a couple of weeks). Still, Paulson has to be thrilled at anything which reduces the US trade deficit with China … even if it eventually, quietly, means an increasing deficit somewhere else.

First post should be on Monday …