Joint (ad)venture

12 September 2004




Before I start this Limeblast, I'd like to let you all know that I surfed the Internet and went shopping on-line for a pair of classic Timberland boat shoes. Buying a pair of these shoes in the US costs US$90 per pair, whereas buying an identical pair of shoes in Italy costs e121 or US$149. In other words, in Europe, you pay 65% more for the same pair of shoes. Further words are superfluous and the point made in the July Limeblast has been proven I think. I'd like to make a clear unequivocal statement: I have nothing against the People's Republic of China, nor do I hold grudges against the Chinese people. On the contrary, I admire them for their strong will and organisational as well as productive capacity to emerge in a large number of fields. I have visited the PRC many times and I have found only kindness and hospitality and people who were working very hard. On the other hand, I think it is legitimate to dedicate several Limeblasts to what is perceived in our industry and other industries as a genuine problem. I don't consider China as the culprits in the threat against our industry. Without entering a political discussion, economically, China is not 'the enemy', but it is only doing what it sees and considers best in its own interest. The western industries are also doing what they consider most convenient and the best for themselves. The results are only different. In this process, the Chinese are the clever party by attracting industries to set up plants and operations, whereas the western industrialists are extremely short-sighted, to put it mildly. In the west, we are now worried but already the damage has been done and there is no return. We should have started worrying ten years ago but then, in our ignorance, everything smelled like roses. The world was different, there was less terrorism, no 9/11 and a far better economy! It is not only our fault, because western governments are even more short-sighted than the industry. Let's be clear about one thing: the leather industry does not shift east to produce for local consumption and expand its markets. It shifts east to produce more cheaply for the European and American markets, contrary to, for instance, the automobile industry who set up huge factories in the PRC with the main purpose of selling locally. You don't (yet) drive a Chinese made Audi in Germany but you do wear brand-name shoes made in China. We live in a consumer society where almost everything is available to everyone. To make this happen, we must mass produce at affordable prices. The western world is capable of mass production but, due to lots of factors, it is no longer capable of producing at affordable prices. Rules and regulations almost turn western tanneries into sterile operating theatres, where you can eat off the floor and where it is practically impossible to incur an accident. This is, of course, fantastic from the point of view of the working environment, but it adds tremendously to the operating costs. Effluent plants almost discharge drinking water and again that is great as it saves our environment but the same conditions are not applicable to tanneries elsewhere and, hence, we bear the costs of an environmental friendly industry, whereas our colleagues/competitors in the emerging markets don't have too many worries in this field. Western Europe has social laws that make life enjoyable with guaranteed minimum wages, pension funds, social benefits and health care, which again have a negative impact on our production costs. When we add it all up, a huge piece of the pie that forms the cost of producing consumer goods in the western world is made up of allied costs that have nothing to do with the end product or its quality but, nevertheless, have a huge impact on the price. None or few of these accompanying costs are born by producers in emerging markets. On top, westerners are taxed for development programmes from which the emerging markets benefit. You can't even talk any more about unfair competition because we are simply being had over a barrel, with our pants down! Unless and until the emerging markets reach the western environmental and social levels, they will be able to compete us out of the market. Once they reach our costing levels they won't have that price edge any more, but then it is too late as, at that point, we will have dismantled our production of leather and leathergoods, cars, airplanes and computers and we might become eligible for development aid from the east, who will run the show! Pakistan, India and Bangladesh, all producers of relatively cheap leather and leather products, have started to feel the competition from China. The search for producing cheaper is a natural process and we can neither stop nor delay it. And if we can't do it 'here', than we are forced to do it 'there'. Particularly when our governments are unwilling to move and impose conditions that bring back a minimum of equality, we will do it 'there' and lose jobs 'here'. On the private industrial level, we can only delay our demise by forming joint-ventures and shift part of our production to the emerging markets, notably the People's Republic of China, and try to keep a finger on the pulse. Few, however, succeed in participating in a joint-venture unscathed because in reality and unfortunately 'joint'-ventures become daring 'ad'ventures. Not all of them or, perhaps, only a few of them, have a happy ending. Obviously we cannot demand or command on someone else's home turf, and that has to be kept in mind all of the time before one even starts! Most of all, we are not Chinese and our understanding of the Chinese ways is close to zero, whereas the Chinese have a very clear picture of us westerners, whom they read as an open book. Joint-ventures start off in harmony and with good will on all sides to make things work. The Chinese jv laws give great incentives in the form of tax rebates or exemptions for the first five years, which make a joint-venture together with a whole score of other privileges more than attractive. But the problems are hidden in the local system, which few know anything about, and almost all acquire the necessary knowledge after it is too late. Partnerships with foreign companies are mainly sought for rural areas where conditions are seemingly the best, namely low construction and labour costs. Many cathedrals have been virtually constructed in the desert. The Chinese have no quarrel with the westerner being the majority partner, on the contrary. The less they have to invest, which is almost always in the form of land and construction, neither of which are easily to evaluate, the happier they are. This gives the fake impression that the western investor has control of the operation, an illusion, because nothing is less true. Once a joint-venture runs properly, inevitably the local partner, more often than not a political figure and party official, will forward his demands: a larger share of the profit! You own 60% of the operation, they want 60% as their share of the profit. You don't agree? There are several options to exercise pressure, including strikes for better working conditions, better wages, tax control, whatever. You can go nowhere to complain because there is no civil legal system. What many perceive as the winning option today, will turn out to be the worst nightmare tomorrow. Sam Setter [email protected]



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