China Biz Slog: Shenzhen and Hong Kong
January 2010

To say that Shenzhen bustles is like saying the Hoover Dam holds water.

We swept north and east a few months ago and now we’re bracketing China on the south to Shenzhen and Hong Kong (and back to Vietnam). (See the previous blog here)

Shenzhen was our first outpost going back a few years in the “Wild West” as Jerry calls it. When I first heard that description I figured it as a warning and that it was dangerous to walk about and packing heat was a good idea. But about the only thing wild west to an American is the fixed-fleeting hooves of a bronze sculpture on the lawn of the Overseas China Town (OCT) area in one of the tonier areas of SZ. 

SZ Horses

Seriously, though, how dangerous can it be when much of it is like Everytown USA? Breakfast?

 Breakfast

The expansion of this Special Economic Zone (SEZ) in the past 30 years is a continuous deliberate move. Low value manufacturing in China is being replaced by smart, sophisticated and highly-engineered products. We need to recognize and deal with it, quit the whining and face the challenge that China’s move up the value chain is top-down decision. New technologies and emerging industries are the focus point.

Perhaps invoking “The Jetsons” makes a more apt metaphor for the urban dynamic.

SZ Civic Center

Iconic US companies, like Cisco, are looking carefully at the home-made brands of ZTE and Huawei as they take bigger footprints on the technology development map. China, flush with foreign reserves and with a strengthening RMB, emerged from the economic crisis barely skipping a beat.

China’s growth in the fourth quarter of 2009 was an astonishing 10.7% (International Herald Tribune 1/22/10). During the worst part of the economic turmoil, GDP growth dropped to 6.2%. The stimulus package that was enacted focused on transportation and infrastructure. While US politicians and interest groups gathered, gabbed and sometimes gambled, China put the shovel in the ground.

One (of many, admittedly) US brand that boldly broke ground here is Sheraton. Here, the Shenzhen Sheraton rises above the neatly laid-out and manicured streets around the new downtown area (it is awesome, although it looks a little like Darth Vader’s bachelor pad).

Sheraton Shenzhen

Aside from the building and construction industry, other sectors are thriving. The solar market is booming and investment in clean energy and water improvement are distinct programs under the ongoing planning of the central committee. For example, China has committed $125B to water quality projects and projects that will generate 10% of all energy from renewables by 2020.

Shenzhen cellular phone manufacturers cranked out an estimated 200 million handsets in 2009.

Wrapped around these developments are evolutions in business practices, law, labor, banking, taxes and the usual elements of a sophisticated economy. We examine a few of these aspects as they relate to our modest efforts to take a small bite out of the big dumpling.

LAW

We met Allen (Yi Yuan) Wang from Guangdong Hanyu Law Firm in Shenzhen on our first full day in China. Allen is a licensed attorney with the Guangdong Hanyu Law Firm in Shenzhen. Gathering at the offices of Kaizen Certified Public Accountants, Ltd, which is run by Mr. Benjamin Yen, we discussed a range of business and legal issues. Kaizen is one of numerous private firms that choreograph the complex ballet between Hong Kong, China and foreign firms investing in China.

Over loose-leaf jasmine tea we discussed some of the recent changes in the market and regulations. Many of these directly affect our efforts here as we grapple with challenges of operating under the sometimes arcane strictures mandated by the Chinese authorities.

In 2008 significant changes were made to the Chinese labor laws aimed primarily at protecting workers from exploitative practices that were (are) rampant during the expansion of the economy. Allen spends a significant amount of his time in the area of labor law, gaining some two to three new cases each week. Many of the cases are defending firms from lawsuits filed on behalf of, or by, employees.

Since the system of laws began merely 30 years ago, Chinese legal practices have rapidly advanced and, as Allen states, both domestic and international firms operating in China have had to grapple with this ongoing (r)evolution.

Allen works with customs and trade issues with particular expertise in supporting trade between China and the US, South Korea and Germany. Allen passed the Chinese bar in 2000, after spending five years working in the Haikou Free Trade Zone, where his family still lives. He graduated from law school in 1995 and has two children, an anomalous situation in one-child China.

One Child

This means that he pays higher taxes and probably has to send his children to private school as one of the penalties of ‘exceeding the limit’ is to bar the child entry to public school. But I think that this is not a real burden for him.

Mr. Wang, in his mid-thirties and very youthful, works in Shenzhen during the week and flies back to Haikou (on Hainan Island) each weekend; his lifestyle seems not unlike thousands of professionals in the US who split their time between work and a distant home life.

His firm, Hanyu, with partner firms in Beijing is, as any good forward-looking firm, open for international cooperation.

One of the most critical areas of exchange between the US and China is probably the trade in “people”. That is, groups and delegations traveling between the first (and now nearly-second) largest economies is critical. One example of this exchange is a low-key travel agency in Falls Church that arranges visits for over two hundred delegations per year. At an average of 20 or so per group, this is several thousand business, planning, government and other visitors seeking to understand and, in many cases emulate, the American system.

LABOR

We spoke for a while on Chinese labor practices and costs of employment. The system is, as I said, evolving quickly and from the outside seems convoluted and maybe a little capricious. When picked apart, however, the regulations are not that much different from US practices, that is, a mixture of federal requirements and provincial implementation.

China Rocks

Employers are obligated to contribute a percentage of income to the Social Security system. This contribution includes the following elements:

• Unemployment insurance
• Accident insurance
• Health coverage and
• Retirement

The rate of contribution ranges from 18 to 22% and varies by province; the highest rates are in Shanghai and Beijing, as one might expect. There is a cap on the amount of contribution, which is a multiple of the average salary for the province. In Shenzhen, the cap is three times the average salary (3000RMB/month--which equates to ~$425/ month).

In some cities/localities, there is also a mandatory housing fund allowance which can be upwards of 18% of salary. In Shanghai, the nominal tax burden can be upwards of 44%. Geez, it’s almost like the place is run by a bunch of socialists.

The medical system is funded from the contribution from employers, although any words to describe the system would fall short of describing the complexity of China’s public health system. Again, not so many years ago, very little existed in this sector. Treatment is provided for citizens that contribute and treatment can be refused, so the many millions of marginally or illegally employed Chinese are at-risk. Private health insurance is available and can cost on the order of 500-1000 RMB/month. If one equates the RMB to a dollar on a one-to-one basis (which may happen in our lifetime) this is on the order of the burden for insurance in the US.

Mr. Wang is a product of the advances in China’s economic condition and is certainly in the top tier or upper-middle class demographic, sophisticated and knowledgeable and, at least at first impression, free from obsolete social biases or presumptions--except that there is only opportunity in the future.

Allen Wang, Benjamin Yen (Kaizen), Me

STREET EATS

Readers know that only a few pages of this drivel can go by without a nod to the local cuisine. One may as well plunge right into co-existing with the local fauna by dining local. Five minutes from our offices is a literal hole-in-the-wall kitchen (no inside dining) that makes a memorable Lao Yang Tang (Old Duck Noodle Soup). Under the canopy of a mango tree, in the parking lot of the local printing company (a lady chomping sugar cane nearby) we arranged a few tables and a half-dozen plastic stools. I regarded the perches with some apprehension, as all of them were cracked from years of use. Knowing that I probably exceeded the nominal weight specifications I sat down gingerly. Lunch was served in a simple bowl with chopsticks and a spoon.

Quite nice. The duck didn’t seem that old, tender and with a nice flavor from the fresh cilantro and hot broth. The rice noodles were soft and, for about a buck, I’ve not had a better lunch in a long time. And thankfully the seats held out.

Lao Yang Soup

And if that’s not fancy enough for you, stop off at the Intercontinental where they’ve grounded a replica of a Spanish galleon in the parking lot. Food and beverage served nightly. Aye!

SZ Boat at the Intercontinental

HONG KONG

“I dreamt of walking out the door at nineteen with a suitcase and only a few pounds in my pocket. Go for eighteen months on the road and eventually land in Hong Kong. Now that would be real adventure! How many times would I have only enough money for radishes--or the local equivalent--if that was the only food? From the UK to Albania, Czech, Laos, Cambodia, skirting Vietnam (for it was not a place for a Western civilian then) to Hong Kong to land and live and love in a foreign place carrying only my home on my back and wide-eyed wonder on my face.”

-MRD, unpublished notes

Heading out of Shenzhen into Hong Kong used to be a perilous journey. Now, a short train ride and you’ve crossed the frontier. Tens of thousands do it everyday, working on one side, sleeping on the other. Just North of the city is the Chinese University of Hong Kong (CUHK). We are stopping by to visit a new colleague, but note that there are many fine reasons to celebrate on campus this year.

Professor Kao of CUHK received the Nobel prize in physics in 2009. Known as the “Father of Fiber Optics” he has worked on this important mode of communications since 1967. Without this discovery and implementation, our broadband society would not be as it is. Fibers carry much of the internet, phone, video and other traffic over land and under ocean. Dr. Kao’s discoveries are legion and long-lasting. CUHK is proud of his achievements and the electrical engineering department is festooned with announcements. Congratulations.

Professor Kao’s Banner

We were stopping by CUHK to visit a new colleague, Dr Wu, whose work closely parallels some of our initiatives in the wireless technology area. Dr Wu has a unique capability that can be used to measure the radiation pattern from transmit devices. By properly shaping the field around antennas in mobile phones, handheld devices, RFID and the like, the efficiencies and effectiveness of these devices can be extended. Dr Wu’s test chamber contains a circular array of cross-polarized receive antennas. The fixture is housed in an anechoic chamber. The device is placed in the center of the array and the 128 elements in the array are combined to develop a 3D representation of the radiation pattern from the device.

Antenna Patterns

The information is critical for designers and this unique capability is extremely fast, with a full pattern measured in the matter of minutes. Older methods used to take hours and were not nearly as accurate and the pictures not nearly as pretty. I’m pretty jaded at this point, but this is cool.

Mike and Dr Wu of CUHK

We head into Hong Kong proper and have some discussions with Lawrence Kwan of the Office of Telecommunications Authority, which is an equivalent of the US’ FCC. Lawrence is an old friend from the Asia-Pacific Economic Cooperation (APEC) meetings and gives us an overview of the regulatory requirements in Hong Kong.

Hong Kong Harbor

Recognizing that Hong Kong is a relatively small market and, that to implement additional requirements would be burdensome, OFTA’s system for compliance is completely voluntary for most devices. That is, while there are requirements, there are no Certification regimens that are mandatory. Labeling is voluntary and compliance is ultimately governed by market surveillance.

Our next stop is the Office of the China Council for the Promotion of International Trade (CCPIT). The CCPIT has a special place in my heart because it was under their auspices that our interest in China got going in 1999. We meet with Mr. Li Zhixhi, whose office overlooks Hong Kong Harbor---an enviable view. The CCPIT has a vast network of support and members in China and, as a quasi-governmental organization, has policy support.

Discussions about trade, regulations and bilateral cooperation are lively and, for me unfortunately in Chinese. However, Jerry and Major are enjoying the conversation and further discussions are in the offing.

Heading back into Kowloon, we stroll down crowded streets. I wonder how many coconuts have crossed through Hong Kong. Maybe these guys know.

Shing Fat Coconut Co

We finish with a dinner at the Yum Kee Restaurant. Famous throughout Hong Kong and an institution that many ducks and chickens fear and loath. Yummy.

We gather with our friends from ATCB, Trivet and Training Research Corporation. Also joining us are sons and daughters. I feel the inexorable pull of time as the new generation steps up and steps out.

Fowl Food

That’s about it. Vietnam is next and our Environmental and Climate Change conference will get a big boost from our next visits.

Stay tuned and, in the meantime, Joy and Peace.

Joy and Peace

Mike Violette
AmericanTCB & Washington Labs