China's Inflation Higher Than Expected

I’ve been watching inflation in China recently, which you can read about here and here. A recent Reuters report has announced inflation in China is even higher that expected, reaching an 11 year high. At 8.7%, inflation is approaching a full percentage point higher than predicted, and nearing the double digits expected later this year.

China’s Bureau of statistics confirmed what was already suspected - higher food prices caused by the severe winter storm coupled with rising energy prices are the driving factors of current inflationary pressures. The Bureau of Statistics went on to explain that with food and energy taken out, core inflation was a more acceptable 1% in February.

However, given the unique circumstances in China (i.e. a massive population, extreme energy shortages and reduced crop yield), trying to paint the economic picture in China without food and energy is unrealistic. It’s also not likely to be short lived since resources in China are stretched so thin.

The question becomes, with the economies of the US and China so inextricably linked, how will inflation in China affect the US?

More Microsoft Woes

I recently commented on the troubles at Microsoft in a post titled, "Microsoft's Purchase of Yahoo - An Effort to Remain Relevant". Recent news seems to have confirmed my suspicions about Microsoft's motivation for its move to acquire Yahoo. I just ran across an article in the New York Times titled "They Criticized Vista. And They Should Know." The article details a pending class action lawsuit Microsoft must answer to for the failure that was the Windows Vista release.

I'm not a fan of Microsoft products, but I think everyone must acknowledge the fact that Microsoft has a near monopoly on PC operating systems. This lack of competition has created an environment at Microsoft that lacked concern for continued improvement or attention to its customers. What we're seeing now is the consequences of that corporate culture.

I think my original analysis was correct, and this NY Times article confirms it. Microsoft is in reaction mode, trying to make up for a lack of management and direction.

The Decline of the US Dollar: What Does It Mean?

As the US Dollar continues to plummet to new lows on Forex markets, many business owners and managers are wondering what it means to them. The answer is fairly simple, but it really depends on your perspective and the type of business you are in.

First off, I need to explain that the US Dollar is not really losing its value. The value of the US Dollar (domestically) is actually a function of inflation. The US Federal Reserve has been very proactive about controlling the liquidity of currency in the market to insure inflation does not rise. In fact, the US Dollar is really only losing its value compared to other currencies. Or in other words, other currencies have more buying power than the Dollar.

Domestic Purchasing Power

So, what does that mean to the US? Domestically, nothing has changed. In fact, if the value of the Dollar on the Forex market was not on the news, US consumers would be completely unaware. Domestic products remain the same price, however products imported from countries whose currency is stronger than the Dollar are becoming more expensive (requiring more US Dollars to purchase). This makes the consumption of US made goods more economical here in the US.

US Exports

For businesses that export US goods overseas, the weak Dollar is good news. Strong foreign currencies can purchase more US made goods, making US imports more economical than (foreign) domestically produced goods. Therefore, the weak Dollar will actually increase US exports, stimulating US production.

US Imports

However, US businesses that rely on foreign imports are negatively affected by the weaker US Dollar. In order to purchase goods made in countries with stronger currencies, more US Dollars are required than before. This makes imported goods more expensive than US made goods, and therefore less economical to US consumers.

Travel

While a weak US Dollar is relatively meaningless to US consumers domestically, it really affects US citizens traveling abroad. Strong currencies in foreign countries means more US Dollars are required to purchase goods, making travel abroad expensive. The reverse is true for foreign tourists wishing to visit the US, making our country an inexpensive vacation destination.

Weak Dollar = Good News?

US citizens tend to make a strong US Dollar a point of pride. Reactions to the declining value of the US Dollar on the Forex market have ranged from humility to outrage with our elected officials. However, a weakening Dollar is actually a benefit to the US right now. With an economy on the brink of recession, a weak Dollar will increase US exports and tourism in the US by foreign tourists. Increased US production linked to the decline in the value of the Dollar abroad will translate into more jobs in the US.

"Made in China": Keys to Successful Sourcing

I had lunch today with Michael Bloom, founder of Off Shore Solutions and a board member of the Master's of International Management program I just graduated from. During lunch I had the opportunity to discuss with him an article in the Oregonian titled "Made Safely in China". The article was about recent recalls of Chinese manufactured goods, and the author of the article interviewed Mr. Bloom as he's an expert in the field.

US firms sourcing goods in China often make the mistake of assuming that the rules of business in China are the same, or at least similar to those in the US. US firms spend enormous sums of money on contracts that spell out every detail of a business relationship - or even a single business transaction. However, while contracts provide a good way to develop a framework of expectations for each side of a business deal in China, they are fairly useless for any other purpose.

As I've mentioned in previous blog entries, China is an extremely "relationship-based" culture. Often times, when the relationship-based business culture of China meets the legal-based business culture of the west, there are problems. When western businesses fail to develop meaningful relationships with their Chinese suppliers, opting for legal contracts in their place, they really lose a vital component of the business relationship - guanxi.

Without that guanxi aspect of the business relationship, Chinese suppliers can be tempted to cut corners in the production process as evidenced in recent scandals involving lead in Mattel's toys and melamine in pet food. Further, if the business relationship is not mutually beneficial, the Chinese may outright refuse to honor it. Mr. Bloom related to me a case where a Chinese manufacturer discovered it was not making money on the production of goods. When this revelation was made, the supplier simply shut down production, crippling a major multi-national corporation in the process.

What US businesses often don't understand is that the contracts they rely on really don't mean anything in China. Once the Chinese business partner decides to violate the contract, the US counterpart really has no recourse. The Chinese legal system is in its infancy. Further, Chinese courts tend to side with Chinese regardless of the details of the case.

One notable exception of this would be instances where the bad actions of the Chinese side make global headlines and/or a substantial loss of life ensues. However, the consequences in circumstances like this usually involve the execution of responsible parties. While this discourages Chinese from repeating the actions involved, it hardly compensates the US firms harmed by those actions.

Successful business transactions in China depends on 2 main factors: guanxi and responsibility. US firms need to learn to develop personal relationships with their Chinese counterparts. A single person or group of people must be the "face" of the US firm and represent it in China build guanxi there. Second, with an absence of consumer protection agencies US firms rely on in the US to insure quality control, firms sourcing in China need to learn to take responsibility for their own supply chain. If your firm is importing pet food for example, you should at the minimum have personnel in the manufacturing facilities in China doing routine quality control inspections.

Finally, if a dispute does come up in the process of doing business in China, don't count on legal recourse because there likely will not be one. Negotiating is really the only viable option for US firms, and guanxi is the best card that can be played when negotiating with the Chinese.