China: Everything is Hard, Anything is Possible

“In China, everything is hard and anything is possible.” This quote comes from a partner at one of the companies I met with in Shanghai during Spring Break. His words really stuck with me and I saw the truth in this statement through out the entire trip. Shanghai is the largest city in China and one of the largest cities in the world. I learned in one of my real estate classes that China urbanizes a population the size of New York every year. I had to see this with my own eyes. I’m still jet lagged, but I had an amazing experience in China and my only regret is that I didn’t have more time to spend there because I really wanted to see the rural areas of China. I kept a journal throughout the trip and I’m going to use this blog post as a way of summarizing the main themes that I observed on my trip. I also figured out a workaround to China’s Twitter block, so I got to record some thoughts on Twitter as well. Keep in mind that my thoughts and observations can be easily skewed/wrong based on the short time frame of my trip. I would love to hear feedback from people with more experience in China who can supplement and or correct my conclusions.

The Flight to China

I flew in through Chicago and the flight over was about 15 hours. It seemed as if everyone on the plane was opportunists headed to China to pursue business. The guy next to me on the flight is helping to expand operations in China for an electrical parts manufacturer. A few others I spoke with owned textile factories throughout China.

Initial Drive into Shanghai and Real Estate

The outer parts of the city on the drive in from Shanghai Pudong International Airport are a MESS. Serious urban sprawl and construction going on everywhere. I was told that there is no zoning on the outskirts of the city and many parts of the inner city were built with no zoning in mind — this is clear as soon as you enter the city. The quality of buildings here has HUGE variance — you can see a Class A office property right across from a dilapidated small apartment building. Outside the main part of the city, there’s large noticeable vacancies. Rows and rows and rows of empty buildings. You can look straight through the window of one empty building and into the five behind it. I was told that they are going to fill all these buildings up, but my skeptical nature makes it hard for me to fully believe such optimism. Still, the inner parts of the city are very densely populated and the buildings are filled with people. The buildings are all different qualities and sizes. It’s as if they used ten different cookie cutter sheets for each set of buildings. The biggest question on people’s minds has been “Is Chinese Real Estate a bubble?” Having seen Dubai last Spring, I realized quickly that Shanghai is no Dubai. This city has an underlying demand and real fundamentals stemming from the increasing levels of urbanization. The large price run up in Shanghai real estate may correct in the short term, but a bullish long term outlook does not seem irrational.

Lifestyle and Living Costs are Attractive

One of the coolest parts of China is that everything is ridiculously cheap by US standards. You can eat a full meal for $1 USD at a sit down fast-casual style eatery. Cab rides usually cost $1-4 USD anywhere in the city. One of the businessmen I met in Shanghai confirmed that if you make a US or Euro salary in Shanghai, “you can live like a king.” Rents in the nicest parts of the city are no more than New York City rates, and you can enjoy the nicest amenities that the city has to offer at really cheap prices. This lifestyle factor seems to be a huge draw for the expats who make their homes in China.

Intellectual Property Does Not Exist

Intellectual property protection is not really enforced or expected in China. We met with a large medical device manufacturer and pharmaceutical company who made this very clear. Lots of local copycats spring up to replicate existing drugs or medical devices. There is little or no enforcement of IP here in China. The typical model is: replicate a US or European product, get funded by private equity and scale it to IPO or Sale. It’s very hard for foreign companies to come here because it is very difficult to put up barriers to entry based on product. This also makes products super cheap for Chinese consumers. I sent out a tweet which captured my conclusion: “No intellectual property protection here shifts competitive advantages from innovation to selling/distribution and speed of replication.” That’s a much different playing field than in the US.

Driving Insanity

I had heard drivers were crazy in Asia and I expected this, but I was still in for a shock at how hectic the driving in Shanghai was. The drivers will literally hit you. Bikes, mopeds, and cars don’t seem to care about traffic signals that much. They also don’t seem to care about one way streets all the time. I saw a woman get hit by a guy turning the corner on his moped (she was OK, but he didn’t even stop). I saw a young boy duck in front of our bus on his bicycle and barely make it. I stopped keeping track of what I saw. It’s just something to be constantly on the lookout for before you cross the street or even choose to walk outside (the mopeds sometimes fly around on sidewalks or walkways).

The Infrastructure is Superb

The metro system in Shanghai is extremely easy to navigate and very modern. It was easily the nicest metro I have ever used. LCD screens everywhere, easy to follow signs/directions, and everything is in English as well as Mandarin. The most striking thing was that everyone files into orderly lines to board the trains – that would never happen in the US. The Shanghai Pudong International Airport is enormous, very modern, and even has water fountains that let you set the water temperature as well as free WiFi (I wish more US Airports had free WiFi).

Emphasis on Execution

From talking to many local and foreign businessmen, the general conclusion seems to be that business in China is all about execution and that ideas take a back seat. Multiple people told me that the Chinese school systems are much more rigid and systematic than US schools, which makes it harder to develop outside of the box thinking. This can be a huge advantage for anyone coming to China from America with a strong sense of entrepreneurship. It seems like you can really stand out. I can’t help but feel that this advantage is temporary. As Chinese entrepreneurs become more global, there will be a greater balance between ideas and execution. Ideas in the US are a dime a dozen.

Chinese are Buying Foreign Assets to Expand out of China

This has not historically been the case, but this is now a growing trend. Chinese companies are doing this to buy know-how and to set themselves up for global expansion beyond the Chinese market. A recent example of this is the November 2009 closing of Beijing West Industries Co. Ltd.’s acquisition of Delphi Corp.’s global brake and suspension business. The Chinese are buying up real estate, technology, and businesses from the US in a cash scarce environment. Such moves show the foresight and shrewdness of Chinese businessmen who are taking advantage of the global downturn and setting themselves up for the future.

The Government Controls Everything
Everything in China has an “aura” of government to it. This was not as weird for me to get used to after visiting Dubai last year where the situation is very similar. A critical aspect of life in China is the strong role of government in every aspect of life. Pretty simple, but worth mentioning. Being able to work with the government is critical to success for many businesses in China.

The Chinese Consumer

I had the opportunity to sit down with a retail and dining operator. He gave me an excellent overview of the Chinese consumer. Popular leisure activities in China include board games, karaoke bars, shopping, and playing dice games. The Western conception of night life is completely foreign to them. I noticed this when I went out at night — I saw people playing dice games in night clubs. Also, Chinese consumers love expensive and premium brands. In fact, they respond strongly to pricing levels as a signal for quality. One of the hard things for me to get used to was that Chinese consumers LOVE choices. When you go into a supermarket, it feels like there are 100 brands to choose from for every product type. When we went to Pizza Hut we got about 4 menus to choose from (Pizza Hut is a premium restaurant in China). It sometimes felt overwhelming to have so many choices — I like simple menus and quick comparison shopping. Also, in a lot of ways, I felt constant parallels between the consumer online market in the United States and physical shopping market in China. Barriers to entry are very low, replication/copy-cats exist everywhere, switching costs are very low, brand loyalty is low, options are abundant, and costs of doing business are very low. It felt like everywhere I turned there was a shopping mall. I’ve never seen so many shopping centers so close together.

Commodities and Real Estate All Over

This is probably true of any emerging market, but it really struck me that so many of the people I met were involved in or somehow linked to either commodities or real estate. No real insight here, just an observation.

University Meeting

We got to meet with business students and a professor from Shanghai Jiao Tong University (SJTU), which is considered the MIT of China. The University has recently been in the news as the home of the Google hackers. I had a wonderful time meeting the students and I enjoyed hearing their views on the US as well as China. The NY Times has an excellent article on SJTU, which has, in recent years, consistently beat out schools like MIT and Stanford in international science competition.

Being White Stands Out

Being white in China stands out. I definitely felt like an outsider the whole time, but I was treated extremely well all around the city. One time, I went to a restaurant with a few Asian girls from my trip. Whenever they tried to order or get the attention of the waitress she would ignore them. Whenever I needed help the waitress would run over instantly. I found people staring at me in a lot of places — I didn’t mind it, but it was very noticeable. I also noticed that when I bargained in the street markets, I consistently had to pay a higher price than the Chinese people on my trip — they told me that white people are expected to pay more.

Language is NOT a Barrier

I thought that my lack of Mandarin would make it very difficult to enjoy China. Most people that I tried speaking with in restaurants, stores, or other places throughout Shanghai spoke very little or no English. This was only a superficial barrier. I still found ways to communicate. And the expats that I met throughout the week all confirmed that it took them all roughly 1-2 years in China to pick up enough Mandarin to get by. One expat that I met with hired a private tutor (very cheap to do) and developed high level speaking skills within 6 months.

Concluding Thoughts

I had an amazing time in China. In my mind, China rising to the top is not a matter of IF, but a matter of WHEN. I am extremely fascinated and excited by the opportunities in China. Everything is new and constantly changing. There are definitely barriers to doing business in China, but that’s a good thing because it helps you build a competitive advantage. I truly believe that doing business in or with China will be like having a website – ubiquitous. I can’t wait to return to China, and hopefully for a longer visit next time.

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