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CHINA CLOSES THE GAP
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By Henny Sender
FEER, Issue cover-dated November 13, 2003
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If there is one pervasive question Corporate Japan is currently pondering, it
is how soon it will be before China closes the gap with its Japanese rivals.
When China meant just cheap labour, the question seemed less urgent. But that's
not so today. China has capital and can afford to buy the most sophisticated
equipment anywhere in the world. Also, China is no longer just about vast pools
of cheap labour, it is increasingly about the combination of that with skilled
human capital.
"The facilities gap with China is narrowing," says Eiji Hayashida,
a vice-president at JFE Holdings. "But that is not my concern. If they
have new facilities and the soft infrastructure of Japan's engineering talent,
then they can close the gap quickly." That fear translates into a reluctance
to lay off engineers, lest they go to China and take with them the skills that
have given Japanese steel the highest quality in the world, Hayashida adds.
At the same time, government officials worry that in addition to luring Japanese
talent, Chinese companies may be tempted to buy Japanese companies to acquire
technology. Executives at the big electronics conglomerates, now embarked on
a course of perpetual restructuring, say they would be criticized if they were
to sell divisions directly to the Chinese. But if, for example, "we were
to sell to an American investment fund, and that fund in turn sold to a Chinese
strategic buyer, we could hardly be criticized," says a top staffer at
one of Japan's major conglomerates.
The concern with China is a world away from the disdain with which Japanese
companies contemplated their Korean rivals just a few years ago. But with Samsung
Electronics' market capitalization now larger than that of Japan's leading consumer-electronics
companies combined, that complacency has vanished
also read: Japan Inc. A rude awakening
CHINA'S ELITE
CHANGING AT BLINDING SPEED
A Special Report by Nury Vittachi
FEER, Issue cover-dated November 13, 2003
First Of A Three-Part Series
The sleeping dragon is awake, dude. Are you up to date with
what's going down?
Question: In which of the following communities do the majority of city-dwellers
live in centralized, state-owned apartments rather than private property: Singapore,
Hong Kong or mainland China? The answer may surprise. Those icons of capitalism,
Singapore and Hong Kong, are dominated by people living in state housing. And
in some cities in ostensibly communist China, it is estimated that a majority
of residents now live as private citizens in their own homes.
People who follow the REVIEW's China's Elite survey, now in its sixth year,
are kept ahead of the curve. In this year's three-part survey, we see mainland
urban residents becoming increasingly like their counterparts elsewhere. They
have mobile phones and computers, and some of them even have passports. But
there are important differences too, which come through strongly in their attitudes
to issues like internationalism, travel and technology.
Three's A Crowd
Tickets To Ride
Magical Properties
Things Can Only Get Better
THREE'S A CROWD
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Issue cover-dated November 13, 2003
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MEET THE THREE COUSINS
They're worth knowing. In fact, in forward-looking business and political circles,
these guys are probably among the most talked-about people on this planet.
That's because they represent the new China. And the changes that are occurring
in that huge country are causing ripple effects in a wide variety of industries
and other fields of human endeavour throughout the world.
China can no longer be considered a largely rural country, cut off from the
global community. Today, it has a fast-growing economy and an urbanizing population.
Moreover, it is directly linked, through imports and exports, with almost all
the other countries of the world.
Our three cousins live in the same country and earn roughly the same incomes.
But beyond that, they are very different.
Beijing is the home of Tech Man. Computer-mad, he has got himself hooked on
information. He doesn't choose between getting his news through the press and
the Internet--he demands both sources, and scans them on most days. He carries
a mobile phone religiously. He is the most likely of all the cousins to eat
a burger and fries for lunch--and the least likely of them to do any sports
to keep the weight down. He's not embarrassed about dressing well and checking
out the designer clothes shops.
To the south, in Shanghai, we find the habitat of Casual Man. He is by far the
most mellow and laid back of the cousins. He is the least likely to be seen
barking into a mobile phone or going out to cultural events, preferring to relax
at home. But this man is no bumpkin. He is more cosmopolitan than the other
cousins, and at times can be seen reading international newspapers. And he may
well be looking at the business pages, since he has a fondness for playing the
stockmarket.
Guangzhou, in the far south of the country, is where we meet Active Man. He
is not much of a computer buff, nor does he have an Internet addiction to feed.
Out of all the cousins, he is most likely to get involved in active pursuits
such as sports and going to concerts or shows. He reads the newspapers but skips
the stocks pages. He doesn't read international newspapers or magazines, but
gets a taste of the outside world because he has more access to international
TV channels.
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SURVEY DETAILS
RESPONDENTS: 1,091
CITIES: Beijing, Shanghai, Guangzhou
DATES: August-September
CONDUCTED BY: Synovate LtdCHINA'S ELITE
Top of the page
TICKETS TO RIDE
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Issue cover-dated November 13, 2003
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GOODBYE, FLYING PIGEON.
An increasing number of middle- and upper-class Chinese are setting their black
bicycles aside and buying cars. And that's just one aspect of a string of trends
that are transforming urban society. A day in the life of a member of this group
goes something like this:
Early morning: Time to go to work. There's a choice of travel methods--on foot,
bicycle, bus, taxi or car pool. While car owners are still a minority, people
we interviewed were of the group of people who had cars or were likely to know
people with cars. German models proved most popular, with Volkswagen well ahead
of the pack.
Mid-morning: Work has started at the office. Our friend, Tech Man in Beijing,
is surfing the Internet. He is glad he works for an international firm, where
all the computers are Net-linked. Three out of four individuals from Beijing
consider themselves experienced surfers. In Shanghai, the number is two out
of three, while in Guangzhou, just over half are Web-literate.
Lunchtime: Over noodles, they chat about hot topics, such as the Severe Acute
Respiratory Syndrome outbreak that caused panic in China earlier this year.
Our interviewers asked people whether Sars had caused them to "realize
that there's more to life than making money." The response, shown in the
graph on this page about value systems, was overwhelmingly positive. Thanks
to Sars, China is a less commercial, more spiritual place.
Afternoon: Staff are packing sample cases for a sales trip overseas. A few years
ago, this would have been unimaginable. But now, a full 30% of interviewees
have passports, with Casual Man in Shanghai being more of a traveller than his
cousins. While only 11% of people earning up to 3,000 renminbi ($362.50) had
passports, the proportion jumps to 41% of people earning 5,000 renminbi or more.
Clearly, a wave of outbound tourists will gradually get used to leaving China.
Evening comes and the sales force heads to the airport. Active Man, the gentleman
from Guangzhou, reveals he has the most decadent tastes in travel, having booked
himself a seat in first class. A remarkable 17% of Guangzhou respondents like
to travel first class even on holiday flights. Active Man may be the least likely
among the three cousins to own his own car, but when he does hit the road, he
does it in style.
Top of the page
MAGICAL PROPERTIES
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Issue cover-dated November 13, 2003
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PEOPLE WITH out-of-date views of "Red China" (and that means large
chunks of the world's population) would be amazed to learn that buying and selling
real estate is a popular activity in major cities of this ostensibly socialist
country. And it is not just a matter of converting old work units into private
apartments. Major urban centres in China have gone further, and are generating
a sub-species of businesspeople associated with the limits of advanced capitalism:
property speculators.
Tech Man, who lives in Beijing, loves all modern trends, and is very ra-ra-ra
on "flipping" properties for money. An astonishing 70% of Beijingers
interviewed said property speculation was easy money. Casual Man, from Shanghai,
was almost as enthusiastic.
But it is telling that Active Man, from Guangzhou, who has the most experience
in buying and selling property--since he interacts with his property-mad Hong
Kong neighbours--is also the most sceptical about it. More than 60% of Guangzhou
respondents did not think speculating in real estate was a simple way to get
rich. They've seen too many people get their fingers burned.
The reason why Tech Man and Casual Man associate property with speedy wealth
may be because they are looking in from the outside. They can see the apartments
springing up but can't actually afford to buy them. Only 20% of Beijingers and
18% of Shanghainese said they themselves could purchase a city-centre flat.
On the other hand, they are not too miserable about having been priced out of
the market. One in two respondents from those two cities say that the property
bubble in China is about to burst, and both sets of residents feel their own
cities' markets are overheated.
In contrast, respondents in Guangzhou are evenly divided, with about a third
able to buy, a third not being able to afford it, and a third somewhere in the
middle. Active Man does not expect a property crash in China, but sees the market
as staying flat.
In Beijing and Guangzhou, there is another problem to worry about: Corruption
scandals are affecting the market. Shanghai respondents don't share that concern.
But all three cousins agree that the infrastructure in their own cities has
improved a great deal in recent years. There may be a lot of problems under
the surface, but the physical landscape is definitely getting better.
THINGS CAN ONLY GET BETTER
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Issue cover-dated November 13, 2003
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DESPITE THE HUGE development challenge ahead of China, the middle- and upper-class
residents of its major cities are confident about their future. In Beijing,
Tech Man was positively ecstatic about the country's prospects, with 97% of
respondents describing them as "excellent" and virtually no one voting
against. (The numbers don't add up to 100% in some charts because a small number
of people do not vote one way or the other.) People in the other two cities
were barely less enthusiastic.
Even on a more personal note, the same message was repeated. Residents of all
three cities said that they as individuals were very likely to have a bright
future, with Beijingers again being the most positive of the three. And this
may not be a nonrepresentative opinion. Respondents felt they were not just
speaking for themselves, but believed that the general mood of the people in
the cities in which they lived was very optimistic.
Only when we got down to specifics was there evidence of a crack in the rose-tinted
vision of solidarity. Will the economy do better in the next 12 months than
it did in the previous 12? Yes, said the majority of respondents. But those
from Guangzhou were significantly less united on this issue. Some 27% said economic
activity would stay flat, while 5% said it would decline.
JAPAN INC.
A Rude Awakening
After almost a decade of stagnation despite massive fiscal and monetary stimuli,
Japan has seemed a lost cause. But there are clear signs of vigour as its top
companies consolidate to compete better
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By Henny Sender/TOKYO
FEER Issue cover-dated November 13, 2003
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JAPAN INC. FIGHTS BACK
• After years of inertia, Japanese companies have woken to the competitive
threat they face from neighbours
• They are consolidating operations, cutting debt and workforces
• Exports are up, costs have fallen and profits are on the rise
WHEN EXECUTIVES at Kawasaki Steel Corp. and NKK Corp. began talks about a prospective
merger three years ago, they agreed early on to throw away their old names to
symbolize just how dramatic a break from the past they contemplated.
Steel makers have always been at the heart of what was once regarded as Japan
Inc. and the Japanese economic miracle. But the newly combined enterprise, now
known as JFE Holdings, is no longer yesterday's story. The company has torn
up much more than the names that were so evocative of past Japanese industrial
might. It has closed blast furnaces, taken out capacity and reduced headcount.
Post-merger, it is the largest Japanese steel-maker and the fourth largest in
the world.
In reshaping itself, JFE has become emblematic of the awakening of much of corporate
Japan after more than a decade of drift. Today, Japanese firms are flexing still
awesome technological and marketing muscle and are finally getting serious about
restructuring.
True, there have been signs of recovery in the past. But those signs were largely
due to massive fiscal and monetary stimuli and proved fleeting. This time, the
revival is driven primarily by the private sector and is thus likely to prove
more lasting. "We have the freedom to rationalize," declares Eiji
Hayashida, a vice-president and head of finance at JFE.
At least part of the catalyst for the reawakening is the message of opportunity
and threat from Japan's neighbours in Asia. Orders from China are a big part
of the resurgence in demand for the materials, capital equipment and consumer
electronics that Japan still produces better than anyone else does. "China
and Asia represent a huge tailwind for us," adds Hayashida. "Every
day our production is up." At the same time, competition from South Korean
companies is contributing to a new sense of urgency.
Statistics bear out the story. In the quarter to the end of September, exports
were up 10% over the previous quarter, while in September, they surged 3.4%
month on month. While Europe and the United States saw exports up less than
2% in the past 18 months, in Japan they have risen 13%.
"Exports are only 11% of Japan's GDP," says Masaaki Kanno, a managing
director at JPMorgan Securities in Tokyo. "But they drive Japan's industrial
production and the business cycle." As a result of these orders, business
capital investment, which dropped almost 5% in calendar 2002, is expected to
swell 11.6 % this year and over 10% next year, Kanno says.
That in turn is good for the rest of the region. China may be the mantra of
the day for the rest of Asia, but Japan's $4 trillion economy is still nearly
four times the size of China's and recovery in Japan can swiftly translate into
growth elsewhere in the region. For example, in September, export orders from
Japan to Taiwan were up 37.4%, according to data from Goldman Sachs. Japan already
imports more from China than it does from the U.S.
JFE reflects the circumstances of corporate Japan writ large: decline at home,
hope abroad. Domestic demand for steel is shrinking 2%-4% per year, according
to Hayashida. The number of cars produced domestically is also dropping, from
10.5 million last year to under 10 million in two years, he adds.
Not surprising then that sales at JFE were down 8% in the year to March or that
the company's medium-term business plan is full of references to downsizing
at home. Yet, thanks to a combination of cost cutting, improved productivity
and higher prices from abroad, particularly China, operating profit was up 80%
for the fiscal year ended in March.
JFE's strategic plan calls for over $3 billion in investment over the next three
years at home--not to expand facilities but to modernize its ageing plant. But
because JFE has about ¥2 trillion ($18.4 billion) in debt and a debt-to-equity
ratio of nearly 350%, investment is subject to discipline that was unknown in
the past. "From a financial point of view, we benchmark ourselves against
Posco," says Hayashida, referring to his mighty Korean competitor, the
world's fifth-largest steel-maker. "We have to improve our credit rating
and reduce our debts to make our balance sheet stronger."
At the same time, JFE is investing in China, most recently beginning construction
on a plant in southern China that will provide steel for cars rolling off the
assembly line at Honda's Guangzhou factory and other car plants. China's total
vehicle production is currently less than 4 million a year but is growing rapidly
while Japan's shrinks. In addition, JFE supplies materials to China's hungry
construction and appliance industries.
China's own steel industry is huge--indeed, the capacity it's currently adding
is equivalent to India's entire output. Moreover, Chinese facilities are now
world class. But the gap between the quality of the two countries is still large,
because China lacks the soft infrastructure, the processes and the engineering
skills of its richer neighbour, Hayashida notes. Still, the knowledge that China,
along with Posco, is striving to close that gap has forced JFE to become, finally,
more lean and mean.
"We believe JFE is stronger than the sum of its parts due to rationalization
and amalgamation of overlapping facilities, a focus on new business opportunities
and headcount reductions," note analysts at Morgan Stanley in a recent
report, which names JFE as one of three possible winners from global consolidation.
"The management has shown a commitment to profitability by making pricing
a top priority. It is best positioned to benefit from expected growth in Asia."
JFE is just part of a growing corporate universe that is showing signs of increasing
vigour. Konica-Minolta Holdings, which was born in August from the merger of
two companies which specialize in optical and imaging technologies and cameras,
is another example of a firm where the whole is finally more impressive than
the sum of its parts.
Both companies--much like Eastman Kodak in the U.S.--faced stagnant markets
and an increasingly competitive environment, with balance sheets burdened by
heavy debts when they decided to combine. "We are much stronger together,"
says Fumio Iwai, president and chief executive officer of the combined firm.
"Our technology in both processes and products is very complementary."
Konica, for example, is stronger in plastic-based lens technology while Minolta's
strongpoint is glass-based lenses.
"They had always played second fiddle to Fuji or Canon," says Simon
Davis, who manages Japan funds for Putnam Investments in Boston. "Now they
are serious." Serious especially about cutting costs and combining resources
to boost spending on research and development, Iwai adds. "We need to seek
higher technology," he says.
The mood has also changed at other traditional giants, such as Matsushita Electric
Industrial, albeit without the fanfare or drama involved in mergers or importing
foreign management. Matsushita, which flourished in the immediate post-war years,
once represented Japanese resilience. But then, for many years it seemed instead
to symbolize the inability to keep up with changing times, and was hobbled by
overstaffing, overcapacity and dowdy products.
Today, though, Matsushita is far leaner after a voluntary layoff programme that
reduced headcount by 10,000. And it has regained momentum by once more making
things people want. Alongside the bicycle lights (designed by Konosuke Matsushita
himself) at the company museum in its Osaka headquarters are next-generation
products for which demand is soaring, including digital televisions and DVD
recorders, made under its Panasonic label.
Matsushita was one of the earliest and most successful companies to operate
in China. Today, its orders, both domestically and from abroad, are booming.
But gone is the complacent mindset that looked only on Japanese rivals as relevant.
"In the past, we used to benchmark ourselves only against Sony," says
Matsushita Executive Vice-President Yukio Shohtoku. "Now we benchmark ourselves
against Samsung Electronics as well."
Even Japan's long-ailing banks are finally showing signs that the worst may
actually be over. At Bank of Tokyo-Mitsubishi, nonperforming loans have dropped
from 9% of the total to 4%, after massive write-downs. Loans that had already
been consigned to the dustbin are suddenly starting to pay interest again, executives
say. Moreover, the biggest banks have formed units that help troubled borrowers
restructure. For example, Ichida, which was once a successful if modest kimono-maker
during the bubble years expanded into everything from Western-style apparel
to real estate. Debt soared and cash flows disappeared. But now, with help from
Phoenix Capital, a private-equity fund associated with Tokyo-Mitsubishi, the
company has returned to its core business. After 11 straight years of losses,
it is once again operating profitably and its share price has doubled from its
lows.
Moreover, today, the possibility that entrenched managements can actually lose
control of companies if they fail to revitalize them is finally becoming real.
So far, most of the so-called vultures looking for takeover opportunities in
Japan have been foreign, and hence anathema to many local firms. But now, for
the first time, there is a growing pool of domestic risk capital looking for
companies to acquire and turn around.
At the same time, a greater number of shares are available as cross-holdings
are unwound and the keiretsu system, or conglomerates built around banks or
financial institutions, dissolves. Institutional investors are also under pressure
to become more involved in the governance of the companies in which they hold
shares.
To be sure, it would be a mistake to overstate the strength of the recovery
at this point. Problem loans may be dwindling but none of the banks see demand
for new loans yet and bank credit is still shrinking, albeit at a slower rate.
Many corporate executives say they can live with a yen-dollar rate of 100 but
wonder if their customers can do so. They also worry about the government's
repeated history of doing the wrong thing, whether it was raising the consumption
tax and spooking Japanese households or prematurely abandoning the zero-interest-rate
policy, actions that snuffed out previous signs of revitalization. Moreover,
the signs of recovery are largely confined to the area around Tokyo; the gap
between the health of the capital and the hinterland continues to grow.
Still, the mood in Japan is a far cry from that of a year ago, when some analysts
warned that only a war (preferably someone else's) could rescue Japan from its
downward spiral. In early October, during a week in which bank shares rallied
strongly, there were even rumors that UFJ, one of the largest Japanese banks,
would buy Shinsei, the bank rescued by a group of mainly foreign investors led
by Ripplewood Holdings. The rumour was noteworthy not because it was true (Shinsei
executives swiftly denied it) but because it had been years since shares of
a Japanese bank could even remotely be considered a takeover target.
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