Note: The following is a guest posting by Bradley A. Feuling, CEO, and Yi Kong, Vice President, Supply Chain Operations, Kong and Allan.

Procurement from China is growing. The $1.7 trillion USD or 12.33 trillion RMB produced in 2007 for export provides strong evidence. With increasing manufacturing for foreign and local consumption, new companies are sprouting up. In many regions, we find companies that are untraditional to the historic capabilities of the area. This is just one factor to take into account.

Example: Suzhou
Consider Suzhou in Jiangsu province. Historically, Jiangsu, Zhejiang and Anhui were known for light industry manufacturing such as fabrics and textiles. Automotive manufacturers are now entering what was once silk alley. The difference in local capabilities impacts skill development and material handling processes. Chery automotive in Anhui represents one exception.

Other regions in China
Traditionally, the northeast region focused and still does on heavy industry manufacturing. For automotive, steel, and oil buyers, strong sourcing partners are located here. Currently, the region has experienced slower economic growth, although First Automotive Group provides a developed supplier network.

Shandong province, between Beijing and Jiangsu province, was agriculture based. Many smaller companies have developed in Shangdong, yet the larger supplier bases are linked today to the electronics industry with Haier and Hisense.

Moving south, are Guangdong, Hunan, Yunnan, and Guizhou. Guizhou and Yunnan are known for liquor production, Mao Tai being a famous manufacturer. Guangdong, with its proximity to Hong Kong, became the first area for export-focused manufacturing. Many foundational industries required low-skilled labor such as furniture and textiles.

In Central China, there are Shanxi and Sichuan. Sichuan was a military equipment manufacturing center, also serving the wine and liquor industries. Today, electronics suppliers are developing with the growth of Changhong.

Lastly, we look to Inner Mongolia and in the west, Shaanxi, Gansu and Xinjiang. Inner Mongolia was a livestock -based economy. Today, the province is best known for dairy manufacturing. Western China was and still is the raw material resource base of China: iron ore and crude oil. Currently, the Central Government is influencing the movement of manufacturing to the west. Although investment has been high, a developed society mentality has yet to take hold.

Offsetting risks
The risks are numerous to manufacturing products in an area historically not known for specific production. Knowledge and education of product specifics must be understood therefore training costs will be higher. Material management and handling procedures must be analyzed. For example, automotive logistics capabilities in northwest China will be stronger compared to Shanxi, although suppliers may exist. Also, understandings of western sense of service and practices in dealing with foreign companies will reduce certain risks. Regions along the east of China will offer a greater number of sourcing partners who have experience working with foreign buyers.

Bradley A. Feuling is the CEO of Kong and Allan, LLC, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion. Yi Kong is vice president, Supply Chain Operations.

For a fare twenty time more expensive than the ordinary fee, a five-star hotel on wheels will from September this year offer the most luxurious train in the world for the journey between Beijing and Lhasa, complete with a sightseeing car to take in the view on the 'roof of the world.' A few more affluent visitors might well be useful, because according to an evaluation of comprehensive economic competitiveness among China's 31 provincial-level administrative regions in 2006 (released this week by China's Overall Economic Competitiveness Research Center), Tibet finds itself at the bottom of the list, along with other western provinces like Xinjiang, Yunnan and Gansu. Topping the list is highflier Shanghai (with the bad luck that it might find itself inundated by ocean water by 2050 when global temperatures are expected to rise by 2 degrees), where residents have recently been competing very effectively to induce the local government to delay construction of an electromagnetic train line until next year. FT.com reports on mass protests by residents whose flats are situated near the planned track as becoming an important test of the potential for political activism among the new middle class, especially residents of the wealthier cities who have acquired their own property. For all their efforts, the people of Shanghai may soon be able to indulge in Asia's third Disneyland as the city's mayor this week announced plans to build the theme park right in Pudong - the cradle of China's reform-era industrial leap.

The arrival of the full Disney cast in Pudong forms a poignant juxtaposition with Nanjie village in Henan, China's so-called utopian communist village (where workers supposedly go to the factories as equals every morning to the tune of "The East is Red"), and Dazhai village in Shanxi, home of the famous 'Dazhai spirit' of self-reliance and selfless devotion, later renounced during the Cultural Revolution and now a renowned patriotic tourist destination with its own brand name and newly-built Buddhist Temple. No such luch for Nanjie, though. Global Voices Online translates a review by Chinese blogger Xiong Peiyun, declaring the 'Nanjie myth' to the 'broken' and the model village utterly bankrupt. When village director Wang Jinzhing died in 2003, according to Xiong, a full 20 million Yuan was found tucked away in his office.

The obvious gap in access to wealth and instances of corruption have made inequality a serious topic in China. While not supposed to make important decisions, China's National People's Congress (currently in the midst of its annual session) can illustrate the government's two main policy concerns for 2008 which, according to FT.com, consists of taming inflation (which hit a 12-year high of 8.7% in February) and improving the workings of the central government to better facilitate protecting the environment (see Washington Post's article on supposedly green solar energy firms leaving waste behind in China, where the push to get into the solar energy market is having unexpected consequences) and reducing inequality. Thus in order to bypass provincial leaders able to flout the will of the center, plans are afoot to establish a number of 'super-ministries' with increased powers, despite the fierce rivalries anticipated in the streamlining process.

In addressing inequality in China there is clearly (as the President of China Merchant Bank told the People's Daily last week there to be for rural financing in China) "large room for improvement". A World Bank report released this year entitled Migrant Opportunity and the Educational Attainment of Youth in Rural China illustrated the entrenched challenges affecting the social mobility of migrant laborers, an important cog in China's economic transition.

While the opportunity to migrate has raised living standards in many rural areas of China, access to migrant employment appears to create a disincentive for continued increases in educational attainment levels among rural youth... For most individuals in rural areas, the decision not to attend high school is irreversible. When large numbers of families opt out of educational investments in favor of the relatively attractive migrant wage available to middle school graduates, the effectively resign themselves to the long-term prospect of earning considerably less than urban youth, nearly all of whom graduate from high school and who are enrolling in college in greater numbers. The decision not to enroll in further schooling increases the likely gap in the lifetime earning ability of a rural child relative to an urban child, and may therefore contribute to increases in inequality, at least for one generation, within urban areas after migration occurs.

For the 324 Chinese companies listed on China's two stock exchanges who have filed their annual reports for 2007, however, profits have nearly doubled compared with that of 2006. And as an indication of future prospects for Chinese industrial growth and profit, a survey of 2,000 U.S. consumers conducted in 2007 by market research firm GfK Roper found that Chinese products are regarded as being inferior only to American goods, and in terms of prestige products from China are held in higher regard than those of Canada, South Korea and any other developing country.

As yesteryear's model villages Nanjie and Dazhai make way for the dream world of Disneyland in Pudong, its obvious that many in China will happily go relish the arrival of Mickey and Goofy - and many others will never make it there.

Yet with people like Liu Xiufang around, an 80-year-old woman from a village in Fujian province who (the Shanghai Daily recounts) lives on 10 Yuan a day and has donated more than four million yuan to charity and public welfare over the past 20 years, it is interesting to think whether China's growing affluent class can learn something from her, as she probably did from Dazhai.

 

       

The start of the year of the rat was a rather miserable experience for some in China this year, especially for a few of the 210 million migrant workers who were deprived of their only holiday when the transportation system clogged up under heavy snowfall (I watched it all from sunny South Africa).

The real culprit for it all was hot air.  Like the U.S.-based Pew Center explained to China Dialogue this week (after first pointing out that science cannot in fact determine whether any single weather event is directly connected to global warming), when warmer conditions evaporate water from the ocean, moist air is formed and when this meets cold air over land the moisture freezes and falls. Asked why this process happened to such an extreme degree in China this year, Pew Center explained (after first pointing out that they are in fact not a meteorological society) that

the unusual severe snow storm in China certainly fits a broader trend of increasing severe weather events that is well documented and it could well be a consequence of global warming...The most important lesson China can take from this event is that climate change has real and potentially severe costs.

China's energy security, moreover, is intimately linked to climate security. China still relies on coal for about 80% of its electricity generation, and as most of the coal is mined in the northern and western provinces and then transported to China's booming coastal provinces, the recent storms have illustrated how easy road and rail networks can be disrupted.

Ministry of Railways spokesman Wang Yongping also had some hot air to deal with recently. Involved in a controversial exchange with the Guangzhou CPPCC deputy secretary on February 20th, Mr Wang has had his head called for and the Ministry of Railways exhorted to adopt an attitude of submission, earnestly studying the problems exposed by the recent disaster, as one columnist put it. As David Bandurski outlined at the China Media Project, exchanges like these have formed part of the Chinese media anticipating a green light on 'reflection,' or fansi 反思 (emanating from favourable whispers of Wen Jia Bao's report for the upcoming session of the National People's Congress), and hence their providing bolder coverage of the storms and what they reveal about government and society in China.

Thus for example the Economic Observer this week highlighted the plight of Chenzhou in Hunan, which was isolated for ten days during the Spring Festival after three successive snowstorms and freezing rain decimated its power grid, shut down public transportation and limited water supplies. And it was bad, as local resident Li Ronghua explained,

There are floods and droughts here every year, so we are used to natural disasters. But this time many of us panicked. The city was so close to coldness and death.

Relief work in Chenzhou has just begun, the city's secretary general said - 70% of the city still has no power - and would last until May. Chinese banks have kindly lent more than RMB102 billion to help rebuild areas damaged by the storms, aimed at restoring farms, transportation, power and other infrastructure. China's 'big four' top state-owned banks accounted for RMB59 billion of the disaster loans, and no doubt China Minsheng Banking Corp, China's first private bank that saw its net profits jump 68% in 2007, would also have been asked for a contribution.

Shanghai has luckily shown the way forward in dealing with global warming. While an explosion at a sewage plant in eastern Beijing this week caused the death of four people and poisoned 20 on-site workers, advertisements on Shanghai's new subway stations now have themes related to global warming, and the city's Waste Management Department recently announced they have found new ways of classifying waste, utilizing a four-category classification pattern referring to four different bins for glass, harmful waste, recycled waste and other waste. Clearly, what Beijing's new subway lines need are the right kind of message.     

China's future path is a stark choice between four options, or trajectories as they call them, as laid out by The Foundation for Law, Justice and Society (FLJS) at the University of Oxford in a report (link from Asiabizblog.com) considering whether China's transition is 'stalled'. These four, under the strangely familiar banner of One Country, Four Perspectives, are so descriptive they require little further explanation:

• Liberal evolution
  
• Authoritarian resilience
  
• Imminent collapse, and
  
• Authoritarian stagnation
  

The report bulges with talk of calculating ruling elites, a political monopoly overriding the culmination of full market reform and ominous indications of the development of a predatory state and systemic risks. Ultimately, what's going on in China right now is called (deceptively harmonious-sounding)

...Partial Reform Equilibrium.

And basically, the choice from here onwards ranges between

• Evolving, like China's two-tiered household registration system which is set to be reformed to allow freer migration between cities and the countryside;
  
• Persisting, like the stinky smell from 10 branches of the Liaohe River, for which reason 200 small paper-making plants will be shut down in Liaoning this year; 
• Collapsing, like the roof of a slag pit in Liaoning; or
  
• Stagnating, like China's manufacturing competitiveness in some industries, at least according to more than half of the 66 foreign-invested firms surveyed by the Shanghai Chamber of Commerce.

Let's not throw out China's new lively intellectual class, however, whose influence (writes Mark Leonard in the March edition of Prospect magazine) is actualy amplified by China's repressive political system that can use intellectual debate as a surrogate for politics. In the long term China's one-party state may well collapse, yet although China is not as yet a fully open intellectual society,

it is so big, so pragmatic and so desperate to succeed that its leaders are constantly experimenting with new ways of doing things. They used special economic zones to test out a market philosophy. Now they are testing a thousand other ideas - from deliberative democracy to regional alliances. From this laboratory of social experiments, a new world-view is emerging that may in time crystallise into a recognisable Chinese model...

(For another encouraging political outlook for China in 2008, see Economic Observer's views on why this year will be a key point in Chinese history).

All of this cuts no ice for FLJS at Oxford University though. Which of the four 'trajectories' does their report consider, on balance, the more likely outcome in China? You guessed it:

Option number four!, with a gradual dissipation of vigour and momentum projected to set in. Ouch!