Happy Veterans Day (I’m one)!!!

Happy Birthday, to me!

I was remarking to a friend just the other day that Western investors tend to underestimate the manufacturing skill and management sophistication of mainland Chinese firms.  An early example was an electricity-generating utility that Lehman IPOed in the early 1990s.

The Lehman story was that this company distinguished itself from its peers by using virtually exclusively US- or European-made generating equipment.  Investors, with a little help from Lehman, were quick to conclude that this distinguishing characteristic was the product of sound management judgment.  As buyers of the stock ultimately worked out (or at least, should have worked out), the reality was far different.

Chinese electricity demand was growing exceptionally quickly at that time–to the degree, in fact, that demand for new generating equipment outstripped the ability of the domestic industry to supply it.  Similar-quality equipment was available from foreign vendors, but cost about 25% more.  So there was a big political fight among electric utilities to avoid having to buy equipment from GE or ABB, and thereby raise the price they would have to charge for electricity to make a profit.  The government ultimately decided that one utility would be selected to “take one for the team,” as it were, and buy the majority of the foreign-made equipment China required.  That utility, the one Lehman IPOed, would be the highest-cost (read: worst) company in the industry.

In this case, China knew that Westerners were prone to mistakenly equate low per capita GDP with lack of intelligence and used that prejudice against them.  And as a general principle of commerce, if people are willing to pay a high price for inferior goods, there’s no reason to offer them the crown jewels.

As I turns out, soon after this conversation I ran across a press release from Manpower, Inc., the employee recruitment and training company.  Manpower China did a recent survey in which it contacted 1041 job hunters and HR representatives from 1143 organizations to ask them about what they were looking for in an employer and in a job.

The results:

1.  61% of management-level respondents would prefer to work for a local company that for one of the “golden brands” of foreign multinationals.  Their reasons:

–pay and benefits at Chinese companies have risen close the level of multinationals

–they perceive that multinationals have  “glass ceilings,” above which local managers are very unlikely to penetrate

–they have begun to believe that local companies have better expansion opportunities in China than multinationals.  (I think there are two aspects to this belief:  that local brands are beginning to gain greater awareness in China, and that Beijing will restrict the domestic expansion of foreign-owned brands.)

2.  60% of the HR departments of foreign companies are already seeing this more intense competition for management talent from local competitions.  So far, almost no one is doing anything about it, however.

3.  Cultural issues continue to make it difficult for local companies to hire and retain foreign high-level managers (No surprise here.  This has been an issue throughout the twenty-five years I’ve been watching China).

It’s no secret that every country in the world creates a “home field advantage” for  domestically owned firms.  The Diageo bid for Shui Jing Fang will probably give us more insight into what the rules of the game in China are.  But the Manpower survey suggests (and I think it’s true, too) that the outside world is continuing to commit the fallacy of equating accumulated wealth with brains, by underestimating the value of Chinese brands and the skill of the managers who are building them.