Is China Facing a Growth and Debt Crisis?

"Will China Shake the World Again?” is a recent article written by Robert Preston. Preston is the Business Editor for the BBC. The piece discusses China’s ability to sustain its growth, manage its heavy debt positions and avoid a disaster equal to or greater than the 2007-2008 financial crisis

Preston believes China has an "unbalanced economy whose recent sources of growth are not sustainable.”

In 2007-2008 “…the Chinese government unleashed a stimulus programme of mammoth scale: £400bn…growth accelerated... But the sources of growth…have a limited life.” “…China's growth rate…really looking at 4%."

 “But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts…have increased since 2008 from 125% of GDP to 200%.”

“…investing at that pace…it is a…certainty that much of it will never generate an economic return…debtors unable to meet their obligations…large losses for creditors; the question is not whether this will happen but when, and on what scale.”

Based on my experience working with operating companies in Shanghai and Guangdong, I have to agree. My expectation for China’s future is negative, as their potential for serious growth and continued competitiveness will prove to be very difficult.

Having inspected a number of Chinese owned manufacturing companies in mainland China, it becomes apparent manufacturing knowledge, processes, and systems are woefully behind the times. Contemporary manufacturing in China corresponds to the USA’s 1970 manufacturing capabilities.

Therefore, cost increases from higher wages and inefficient operations are to be expected. Also, unfavorable changes in currency valuation will be a factor. This will result in lower growth, employment and capital availability. This will make it far more difficult to service its debts and fund necessary initiatives.

Judging from my visits, the young and educated Chinese appear much more independent, aggressive and spontaneous. It may make its citizens more difficult to control. Social unrest could be a major issue affecting China's economic development as well.

Click on this link to read Mr. Preston’s article.

Here are some other posts on China:

Is China’s decline permanent?

China to surpass USA as World Leader in manufacturing?

Can Manufacturing Return to the USA?

Steve Jobs compared to Peter Drucker

Steve Jobs built Apple Computer into one of the most successful and valuable companies in history. He had a distinctive management style.

How would his management compare to the advice Peter Drucker would give a CEO?

Steve Jobs’ practice of management:

Heavy stress on innovation. He did not have all the innovative thoughts that proved successful but he quickly recognized a potentially successful idea or product. Since he was not risk averse, he forcefully pushed for its development.

Focused on and generated well above average profits.

Strictly limited priorities to three.

Had excellent judgment on who were the A level employees. Successfully hired and retained them. Categorized employees performing below the A level as “Bozos” – a Bozos’ employment was terminated or he made the person’s life so difficult that they left the company.

Submerged himself in all levels of the company via random walk and meetings. Aggressively practiced hand-on management of even the most minor factors. Was incredibly exacting.

Practiced full and open cross-functional communication. Hated PowerPoint presentations and written documents – preferred face-to-face, verbal discussions. His meetings included all organization levels –whoever was knowledgeable was included.

Treated all people harshly. He was difficult to work with – emotional, explosive. Angry. Accusatory. Brutally candid. Demanding in the extreme. But he created an exciting and successful culture that motivated and retained the A level employees.

Steve Jobs and Peter Drucker were in agreement with:

Innovation was one of Mr. Drucker’s key factors for success. He advised that successful organizations abandon outdated strategies, products, and processes and have a bias for innovation. Absent innovation organizations become complacent, insular and corrupt.

“Above all management is responsible for producing results. Profit is a requirement for a company…profitability is not the purpose but rather the test of their validity.” “The ultimate test of a manager, and the only one that counts, is …accomplishment…it isn’t only accomplishing things…it’s accomplishing the right things (i.e., generating profit).”

He was concerned with retaining and motivating “knowledge workers” – his words for A level employees.

He advocated for “ruthlessly” terminating employees who failed to perform at the A level.

Elimination of excessive bureaucracy and management layers. Apple had a layered organization but Mr. Jobs' management practice created a somewhat unique organization with integrated, seemingly un-layered functions.

Communication. Communicate a clear strategy throughout the organization. Successful companies have a bias for frequent, repeated and in-depth communication.

Write down your priorities – no more than two. “Companies must avoid the temptation to dabble in many things.” Mr. Jobs had three.

Peter Drucker differed from Mr. Jobs with:

He “…argued for decentralization – the process of delegating decision making down into an organization, closer to the people who actually do the work…”. Mr. Jobs did not; he made the decisions, even minor ones.

To Mr. Drucker the customer was a factor critical to success. He coined the phrase: “Outside-in perspective”. Definition: customer focus, involvement, input – spend time with customers. Mr. Jobs did not want customer input, he did not seek it.

He advocated for the dignity of the individual and for humanizing the workplace. “Management is about human beings. Create an atmosphere where people are permitted to make mistakes.” He would not have agreed with Mr. Jobs confrontational, bullying style.

 Click on this link for an earlier posting on: Peter Drucker’s Tenets

Sources: The comparison is from Walter Isaacson’s biography of Apple Computer’s Chief Executive Officer titled ‘Steve Jobs’ and from two books on Peter Drucker’s tenets: “The Daily Drucker” and “Inside Drucker’s Brain”

My AMA article: “Hard-Won Lessons from a Turnaround CEO”

The American Management Association published my article “Anticipate, Focus, Execute - Hard-Won Lessons from a Turnaround CEO”.

An excerpt from the article is as follows:

“After 15 years at Emerson Electric Co, I have spent more than 20 years as a turnaround CEO.  During this time, I have discovered that companies get themselves into trouble, not because of technological advances in the marketplace, new competition, or other external factors, but because they have been mismanaged. Here are eight characteristics that separate successful businesses from those that are headed for trouble.”

Click on this link to read the total article.

The Jaguar and Land Rover Turnaround

I was pleased to read the New York Times recent article “Tata Motors Finds Success in Jaguar LandRover”.

The article describes the turnaround of the troubled England based manufacturer of Jaguars and Land Rovers by Tata Motors an automobile manufacturer headquartered in India.

Tata purchased the company from Ford Motor Company in 2008.

The sad aspect of this story is that an Indian automobile manufacturer could fix and turnaround this complex operation but the venerable Ford Motor Company could not.

Surprisingly, this may be an indication of some weakness in Ford's management ability.

Allegedly foreign manufacturing operations in developing countries are not capable of matching the management abilities of USA companies.

Can Ford's failure in this regard, be applied to studying the weakness in the USA's overall manufacturing capability?

The question remains, “Can Manufacturing Return to the USA?”

General Motors versus Toyota – who will win?

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General Motors just reported a 41% reduction in its second quarter Net Income to $1.5 billion with a $1.8 billion decrease in Sales.

The main source of the GM decline was its European operations. Its future results are questionable as USA sales forecast predicts declines. Both of which are understandable in this difficult economic environment.

But, Toyota reported a huge increase for the same time period. Its Net Income was $3.17 billion on robust sales growth – profit was 111% greater than GM’s. Its sales forecast expects substantial increases.

Can GM be successful up against Toyota and other Asian manufacturers?

Toyota’s USA based operations have lower product costs compared to GM because their hourly factory labor wages are lower – further compounded by lower health care and retirement costs. Toyota has a leaner salaried organization and thus lower overhead costs. These significant issues were not dealt with during GM’s bankruptcy.

GM is not the best cost producer in its industry and, as a result, will decline. Its profit margins and free cash flow will be squeezed resulting in less capital available to develop new products and productive manufacturing systems and equipment.

Will this bring GM to its knees again?

Most likely.

Click on the following links to read my earlier posts with greater details of GM’s issues:

General Motors - Industry Leader? 

GM & Chrysler Bankruptcies

UPDATES:  

On August 15^th Forbes published a thorough analysis of General Motor’s declining performance entitled GeneralMotors Is Headed For Bankruptcy – Again -  a worthwhile read.

A September 10^th Reuters’ article, Insight: GM Volt: the ugly math of low sales, high costs,  details General Motors costly failure with the Chevrolet Volt – a loss of $49,000 on each car. Couple this failure with the Chevy Malibu being rated dead last versus five competitive vehicles in Car and Driver magazine’s comparison tests raises two questions: Is GM well managed? Can it succeed?

These product failures signal the absence of coordination and cross-functional communication among GM’s operating functions. In particular, for these two product failures, are product engineering, marketing, manufacturing engineering and cost accounting working in sync?

In my experience there is an absence of open and candid communication through all levels of distressed, troubled companies. Cross-functional communication is always missing. Consequently mistakes mount, problems fester.

Cross-functional communication requires that the CEO uses it and demonstrates that it is an integral part of the company’s culture. Absent that it is difficult for functional officers and mangers to use it – the negative politics of some human beings results in certain people being unwilling to participate in this style of management. Need a fully competent and self-confident CEO - highly knowledgable of what goes on in the bowels of a manufacturing company.

If its faults are not corrected, the prediction that GM will reenter bankruptcy may come true.

October 31 and November 5. Toyota’s net income tripled and market share increased while General Motor’s net income declined12%.
 

Is China’s decline permanent?

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News reports are replete with China’s struggles and decline. China’s past success is frequently labeled a “Bubble” with the question – Is it bursting?

Yes, China is in decline. But not just due to negative Global economic struggles. China has entrenched problems that are contributing to its decline. Are these problems intractable?

Following are significant but an incomplete list of its problems:

● Manufacturing processes and systems are at the same capability level as were in-place in the USA in the 1970s. Relatively inefficient production operations coupled with the sizable increase in hourly factory labor wages are reducing profit margins and free cash flow. A large percentage of Chinese company owners and managers do not have knowledge of the more productive methods of operating.

● The absence of trucking and freight forwarding capabilities to support expansion into lower labor cost Western China. In addition, it is difficult and costly to get quality managers to move to these remote areas.

● China needs to maintain its historic growth rates to ensure that capital is available to clean up its environmental problems. In addition, high employment levels must be available to mitigate the current increases in social protests and riots.

There are several other negatives for China. Click on these links to see further details:

Where is China Heading?

China’s Achilles’ heel– Obstacles to Low Cost

Will China duplicate Japan’s decline from its 1980s success level?

Not exactly the same as Japan since China’s leaders have a history of responding and changing its formulas. But some of its entrenched problems will not be easily solved and China’s pendulum will swing to the negative side of the ledger.

UPDATES: 

August 23rd New York Times article, Manufacturing in China Slows, reporting on a worsening economy.

Business Week’s November 15 article, “Xi takesChina's helm with many tough challenges”, further documents the serious problems facing China’s new leader. 

Miyamoto Musashi, “The Book of Five Rings”

There are several revered authorities whose management principles result in businesses becoming and continuing to be successful. Two of the most famous: Peter Drucker and the legendary Sun Tzu.

Peter Drucker is the eminent author of 39 management books and is considered the “father of modern management”. Sun Tzu is the author of “The Art of War”. He was China’s first professional General. Prior to Sun Tzu's leadership, armies in China were largely disorganized, impotent, failures.

Surprisingly Peter Drucker’s and Sun Tzu’s advice is quite similar. Both list almost identical characteristics needed for effective leadership. Each focus on developing and executing strategic and operating plans. They also stress the importance of innovation to achieve success, or in Sun Tzu’s words, “do the unexpected”.

Another source frequently referenced when effective management and leadership is discussed is the famed Miyamoto Musashi, the author of “The Book of Five Rings”. This work is described as a classic guide to strategy. He was one of the most accomplished Japanese Samurai warriors of the 17th century.

While Miyamoto Musashi’s book is a worthy and interesting read, it is not truly a guide for effective management and strategy development. It is a manual more specifically focused on the Samurai, especially offering proven tactics for prevailing in battle. Topics include insight on combat expertise needed to excel, such as swordsmanship, weapons, technique, intimidation, etc. There is even teachings on Machiavellian concepts designed to distract and demoralize an opponent.

The value of his book is the healthy guidance it gives for leadership. There are very interesting portions of the book, which include a sound philosophy of life helpful for anyone seeking a successful leadership role. Here are a few quotations to be remembered:

“A truly confident person never loses self-control in whatever situation he is forced into.”

"One’s state of mind must be like a shiny blue sky without clouds – free from doubt and confusion."

“If a person is determined to accomplish something without fear of the outcome, nothing is impossible.”

Miyamoto Musashi, “The Book of Five Rings”.

Click on the following links for the earlier Peter Drucker and Sun Tzu posts:

Peter Drucker

Sun Tzu