Tour Brings China Capitalism Into Perspective

by Jeff Hankins  on Monday, Oct. 11, 2010 12:00 am  

Long known as an isolated nation, China is beginning to embrace the Western world with Arkansas companies ready and happy to help.

Editor's Note: Arkansas Business Publisher Jeff Hankins recently spent 10 days in China with the University of Arkansas Sam M. Walton College of Business' Arkansas Executive Forum. This is his account of the trip, including exclusive interviews with leaders of Arkansas companies operating in China.

This multimedia package is also available at ArkansasBusiness.com/China.

And watch Today's THV at 6:30 p.m. Monday for a special Arkansas Business segment on the China trip.

Evidence of how China has evolved came at a fast pace as the Maglev high-speed train reached 258 miles per hour and took us 30 miles from the airport to the outskirts of Shanghai in just seven minutes.

Watching my wife detained for a couple of minutes by Chinese immigration officials had heightened and reinforced the anxiety that grew leading to the 14-hour flight from Chicago, over the North Pole and into a Communist country. By dusk, however, we were strolling along the Huangpu River, relaxing and marveling at a spectacularly lit skyline that showcased capitalism and a new economy that had been difficult to put into perspective from halfway around the world.

The 10-day journey with members of the Arkansas Executive Forum through Shanghai, Xi'an and Beijing was history and tradition mixed with an eye-popping view of what happens when a strong-armed government loosens its grip and creates a market-driven economy. As millions of rural Chinese families move into these cities as part of the world's largest urbanization movement, thousands of apartment skyscrapers are being constructed, and both domestic and foreign companies — particularly U.S. brands — are capitalizing on the opportunities.

Tyson Foods Inc., Wal-Mart Stores Inc., Acxiom Corp. and a luxury car dealership conglomerate run by Little Rock native Mark McLarty are among the Arkansas-related business interests with footprints in the Chinese market.

(Video: Click here to watch Jeff Hankins' video report on Arkansas businesses operating in China.)

American restaurant chains, particularly KFC and McDonald's, have perhaps the strongest presence, and brands such as Apple, Coca-Cola and Gucci are serving China's appetite for Western culture. It quickly became clear why. As if the sheer volume of people wasn't stunning enough — one can't overstate the masses and crowdedness everywhere you turn — their attire in the cities was surprisingly American. None of those Chinese outfits or people with the cone hats pulling buggies like we used to see in movies. Casual dress was everywhere as people used all sorts of transportation, from old, rusty bicycles and scooters to taxis, buses and luxury cars.

The streets were lined with young people, who also filled the designer fashion stores and paid top dollar for Coach handbags. The center of Xi'an, whose 9 million residents include 450,000 college students, was particularly crowded with shoppers one night. Most of them are products of China's one-child policy, and they receive money from newly wealthy parents and grandparents.

(Slideshow: Click here for a photo tour of China's cities, including Shanghai and Beijing.)

We're told the Chinese 20-somethings in the cities are living and spending for today because most know they won't be able to afford to buy apartments or real estate. One of our tour guides participated in the government's effort to transfer property to private ownership and paid $40 per SF for a small apartment. She says she could sell it for $400 per SF today, which helps explain some of the wealth creation under way.

Tracking the Wealth
The wealth in these Chinese urban centers is nearly impossible to understand or explain, despite our group's best efforts to ask questions and put the pieces together. With per capita income of just $10,000 a year, how do these people afford to drive BMWs or buy multimillion-dollar high-rise apartments? Much like the United States, China already has a super-wealthy class of people that might represent only 1 percent of the population. But in Shanghai alone, with its population of about 18 million, that sliver represents 190,000 people — the entire population of Little Rock.

Even more stunning is that the Chinese market-driven economy runs on cold, hard cash. McLarty, a Little Rock Central High School graduate whose 15 luxury auto dealerships generated $1.4 billion in revenue during the past year, says 90 percent of the sales are cash deals. These are BMW models that range from $100,000 to $150,000 — twice as expensive as U.S. models mostly because of tariffs and consumption taxes, but also because of high demand and limited supply.

(Slideshow: Click to take a photo tour of Mark McLarty's Shanghai BMW dealership. And click here to read more about McLarty's China business.)

Of course the unspoken explanation for the incongruous wealth centers on corruption and insider deals with the government, but China is hardly unique in the world in that respect. And every time we were lulled into fascination with the economic explosion, evidence of substantial poverty appeared, particularly the farther from the cities we traveled.

It was impossible to completely forget that we were in a Communist country that doesn't afford the same freedoms as the United States. China's efforts to shield its citizens from anti-Communist communications remain clear through filtered government newspapers, lack of access to major U.S. television news networks and the inability to access websites such as Facebook, Twitter and YouTube.

But at the same time, I didn't see people who appeared to be suppressed, oppressed or threatened. China will struggle to build a middle class and lift its people out of poverty, but the bona fide efforts to improve quality of life were evident. The Chinese government finally recognized it couldn't be a world power within the confines of the Great Wall using a massive army. The country needed to generate economic strength and clout, and that meant creating wealth and seeing how capitalism could work to its benefit to increase global strength.

(Video: Click to watch Jeff Hankins talk about his China trip on "Arkansas Week.")

$3.6 Trillion in Infrastructure
China couldn't begin to compete globally in a market economy until it made considerable investment in infrastructure. A story in the China Daily during our stay said the country might need to invest $3.6 trillion by 2020 to build infrastructure to support the massive urbanization effort.

The amount of commercial construction already completed in the last 15 years and still in progress throughout China is stunning. Imagine 200 skyscrapers the size of Arkansas' tallest, the 40-story Metropolitan Tower, under construction at once between Little Rock and Cabot. We saw essentially that in one stretch of highway between the airport and Xi'an, and similar levels of construction activity are happening throughout China's major cities. The country's impact on commodities prices became clear instantly.

One of our guides described three decades of developments in China that have had a major impact on their quality of life. Bicycles, sewing machines and watches were the big three items locals bought starting in the late 1970s, then washing machines and refrigerators in the '80s. In the '90s, city residents acquired air conditioners, cell phones and home audio and video equipment. The past decade started with the purchase of laptops, cars and apartments, and today more Chinese consumers are spending on vacations and education.

(Slideshow: Click for a photo tour of the new Shanghai Wal-Mart Supercenter.

China and the U.S.
Ignoring or dismissing China over objections to its government, lack of freedom and other politically charged issues seems like antiquated thinking. It's a rapidly evolving society that will continue to grow as a major force in the world economy and present opportunity to U.S. companies.

However, U.S. companies also need to prepare to compete with a country — and government — that is still getting its first taste of capitalism and is hungry for much more.

Shanghai: The Modern City
With so much new development in a concentrated area, the most modern and stunning city we visited was Shanghai, especially its Pudong district.

Just as the 2008 Summer Olympics served as Beijing's reintroduction to the world, Shanghai pulled out all the stops for World Expo 2010. The expo is attracting an amazing 400,000 visitors a day during its six-month run, but the crowd we saw was decidedly Chinese, and the event doesn't command a world television audience so it can't have the same impact as the Olympic Games.

The expo opened in May and had attracted 59 million visitors by the end of September. Chinese residents clamored to tour the individual pavilions built by countries from around the world, most of which showcased their cultures through photos, art, entertainment and food. People lined up for a couple of hours to enter the pavilions of larger countries. The U.S. pavilion was dreadful — a commercialized mess of three movies that touted the sponsors but delivered little flavor of America. Wal-Mart was the only Arkansas-based company with a display, and it emphasized its green initiatives.

(Slideshow: Click for a photo tour of Chinese culture, including the Terracotta Army and the Great Wall of China.)

Shanghai is the second-largest city in China and has the same latitude as Houston. The city is exceptionally clean, and the streets and sidewalks are well manicured with gardens and parks scattered throughout to provide limited green space. At the Yuyuan Garden, we were struck by the juxtaposition of historic architecture, an old slum-like apartment with clothes hanging on a line and a soaring office building with reflective glass.

Government-owned apartments lured residents to the Pudong area and then were sold to them for just $3,000. Many of those apartments were then sold to investors to be torn down to make way for commercial development, thus creating nice financial returns for those residents.

Luxury carries a hefty price, with the government charging an 80 percent tax on vehicles, not including the $6,000 license to own an auto. Shanghai's officially reported $8,340 median income is the best in China, but some say it's vastly understated because of the cash economy.

A 3,000-SF apartment in one of the new luxury high-rises fetches more than $6 million in a market economy that began in 1992, but the more typical 500-SF apartment is far less and typically houses three people. Foundation work is under way for a 135-story office building called Shanghai Tower, which will become the second-largest structure in the world.

Locals are just now beginning to accept supermarkets such as Wal-Mart as an option to open markets. They escape the pushiness, merchandise returns are allowed and the air-conditioned buildings are comfortable.

(Slideshow: Click for a photo tour of business in China, including shots inside Tyson Foods' and Acxiom Corp.'s Shanghai operations and scenes from the 2010 World Expo.)

Xi'an: The Historic City
With a mere 8.6 million people, Xi'an was the smallest city we visited. With a 3,000-year history, it is the gateway to western China, and agriculture is a major business sector. Xi'an is famous for dumplings — we tried 12 varieties at one locale — and is the home of noodles.

Our primary destination was Emperor Qin Shi Huang's Terracotta Army Museum to see what's been described as the most significant archeological excavation of the 20th century. Seeing more than 1,000 soldiers and pieces of another 2,000 that were created around 221 B.C. was stunning. Hangar-like buildings cover three pits of artifacts, which were discovered by peasant farmers in 1974.

Beijing: The Power City
Beijing has about the same population as Shanghai but is much larger geographically, and it indeed seemed less concentrated and even less modern.

It was harder to focus on business in Beijing because symbols of communist power (think Tiananmen Square) and emperor rule (think the Forbidden City) stood out. The biggest examples of modernism were the 2008 Summer Olympics facilities, including the famed "Bird's Nest" coliseum, and the world's second-largest terminal at Beijing International Airport.

Between dirt-cheap auto licenses that cost $20 and wide streets, Beijing's traffic was considerably more congested. About 4.5 million cars are owned in that city alone.

The 4,500-mile Great Wall of China is one of those spectacular sights that photos and video can't adequately illustrate, especially when imagining how much labor it took to get materials up the mountains. By contrast, the 98-story China Tower just opened to give Beijing its tallest skyscraper.

Tiananmen Square covers 110 acres, and 500,000 soldiers can stand there at once. From there, the Forbidden City is full of historic architecture alongside capitalistic concession stands, many run by women in areas where women were once forbidden. A "four-star" rated toilet facility, with notorious "squatter" toilets that are flush to the ground, had no toilet paper or soap.

More

Acxiom in China helps companies reach new customers via text message

Tyson Foods: Meeting new protein demands in the Far East

Wal-Mart: Everyday Low Prices on jellyfish in air conditioned stores results in a growth market

Mark McLarty: Driving $1.4 billion in luxury auto sales

 

 

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