The Tycoon Report

Rule Number One of Investing in China

Is China the world’s next great super power? Can China’s “socialist market economy” sustain the pressure of a market-driven global economy? Will China be able to build global brands even though their primary competitive edge has been low cost labor and production? How do the people of China feel about all of the hype?

How does this affect me? Will it all last? These questions and many more, are what drove me to begin writing this weekly business journal for the readers of Fallen Angel Stocks while I visit China for the very first time. What I've learned so far is that the view of China from the inside is very much like China from the outside - almost a tale of two countries.

The people of China have a stunning work ethic, while the system of China is stunningly inefficient.

The Chinese Work Ethic

The very first thing I noticed when I first arrived here was the Chinese work ethic.

For example, my first night here I was woken up by the sound of banging pipes outside my bedroom window. It turns out the University where I am studying, Peking University (China’s first University), is in the process of constructing an underground tunnel from one end of the campus to the other.

I've been shocked to see that the construction never stops - it happens 24 hours a day, 7 days a week.

Another example came up when I was having my daily meeting with my language partner. My language partner is a graduate student here in China who sits with me for two hours each day to help me perfect my Chinese.

One Saturday I told her I’d much rather be in bed sleeping than outside studying Chinese. She then replied, “If you're not studying, don't you have to go to work on Saturdays and Sundays?”

I almost fell out of my chair. I told her, of course, I didn’t go to work on Saturdays and Sundays. This in turn almost made her fall out of her chair. Weekends aren’t really weekends here - they are just another couple of work days.

Chinese Inefficiency

Jack Welch, the former CEO of General Electric, once said to me that China was lacking experienced managers.

He was on the money. Especially coming from a place like New York City where everything is the model of hyper-efficiency.

For instance, I went to the student cafeteria the other day to buy some lunch. They have several women standing near the trash cans to help students clear their trays so they don’t throw the bowls in the trash can.

Another one of the lovely inefficient processes I've seen here occurs in the shopping malls. Every floor in the shopping mall has a couple of booths set up where you pay for your items. These “Pay booths” are not store specific; they are “floor” specific.

So if you go to the Nike store to buy some shoes, you have to get a ticket first, then walk with that ticket to that floor’s pay booth.

You then pay for your item and finally come back to the Nike store to pick it up. I found this to be incredibly annoying and it certainly stopped me from making many impulsive purchasing decisions. That extra 30 feet without having my item in my hand really made a big difference to me.

One would think that these inefficiencies occur only on the lowest level of the business totem poll, but I've come to find that it is like that everywhere.

A close friend of mine recently opened a plastics factory just outside of Shanghai. For him to find a competent general manager was like trying to sell bubble gum in the lock-jaw unit at Bellevue – let’s just say that it wasn't easy.

And the more I see it on the lower end of the business spectrum, the more it occurs to me that if people can't manage even the smallest businesses, then what must be happeing in the larger companies?

This isn't to say Chinese companies are doomed to fail, but it definitely shows there is a lot of room for improvement.

And as Dylan once taught me, when there is a "lot of room for improvement," there is usually a lot of risk.

Until next week,