Fonterra echoes...

Hello again,

Just a quick update on the Fonterra story: it's doing it's rounds in the industry and more and more people are becoming aware of the issue. Latest publication is in the "Dairy Bible", Barry Wilson's Dairy Industry Newsletter!

Keep spreading the word...

Is Fonterra rigging the international dairy market prices: a David and Goliath story

Today I am bringing you something a bit more "biblical" in terms of international trade: a sort of David vs. Goliath.

Meet Goliath: Fonterra is New Zealand's largest dairy cooperative and is known to control directly (but mostly indirectly) more than half of the international dairy trade. It is the powerhouse in the industry, it has always tried to influence the trade in order to increase demand during New Zealand dairy season and stifle demand during the off season. However, these actions have reached their highest level of sophistication recently, through the creation of a “transparent” tender platform called www.globaldairytrade.com in order to try to build an image of fairness in business. For the untrained eye, this looks totally "Kosher". In fact, it is a clever way to manipulate the market.

Meet David: a dairy consultant who had the guts to write an open letter to EU Trade Commissioner Karel de Gucht today. The letter's content has been published on moproweb.de this morning and I have attempted to translate the main part that shows several strategies Fonterra is using to achieve their monopolistic goal. Here are the points that our "David" submits to the EU Commission.

1) globalDairyTrade does not deal with butter and Milk Protein Concentrate 85%.

The reasons are:

    1.1) Fonterra has a special distribution channel agreement in several markets for its butter and does not want to disturb this business by indicating lower prices on its tender platform.

    1.2) Milk Protein Concentrate 85% protein (MPC 85) is one of the few dairy products that Fonterra can export to Europe with only 3.4% import duties (and to several other important markets in the world). This allows Fonterra to influence the price in these markets indirectly (the full explanation is not given in the article but basically by combining the MPC 85 with lactose or milk permeate you can decrease the protein level of MPC85 and use it instead of Skimmed Milk, which will obviously have an influence on the prices of Skimmed Milk, a major part of the international dairy trade).

2) globalDairyTrade does not show the volume of traded products by category, but rather only an aggregate volume awarded.

The reason for this is that Fonterra wants to decrease the price of WMP (whole milk powder) during the European milk season so buyers get their product from New Zealand. The way it works is that they offer bigger volumes of WMP on the tender, so high supply, lower demand, bid prices will be low. When the season comes up in New Zealand, they offer smaller volumes of WMP during the tender session, triggering the inverse mechanism during the period that Europe has less milk (which means that Fonterra is maximizing it profits all year long while the opposite is happening for Europe). Moreover, Fonterra knows very well that some big buyers (the "Big Boys") need to buy New Zealand origin as it is written on their retail packaging, writes the consultant (which means that the volumes offered being small, those who need to buy, will have to offer exorbitant prices).

3) Applications to become a member on globalDairyTrade are routinely rejected based on "bogus" (pardon my colloquialism) reasons.

When they register to the platform, the aspiring participants need to indicate the destinations to where they will export the products purchased. If the destination could "disturb" one of Fonterra’s Big Boys, Fonterra will reject the application under the pretence that it does not accept brokers however, even if you are a distributor, the reason provided will be the same. Funny enough though, Europe's three largest brokers are active members of the platform, since Fonterra wouldn't want them to complain to the EU commission.

4) Fonterra sells to its Big Boys outside the tender, of course, at much lower prices than those on the platform. Recently, it asked some of them to buy at least a small volume on the tender platform to minimise the risk of complaints.

A recent inquiry by moproweb.de shows that "David's" points are valid and can be substantiated. A trader reported that after a successful bid he was actually denied the Veterinary Certificate allowing him to Export the product to Russia or the EU. He also expressed the suspicion that Fonterra sells at very high prices to some of its subsidiaries and then asks them to kick-back some of the profits. Another major reproach against the trade platform is that the bidders never know at what price level they were eliminated from the bid.

In the midst of bank scandals, government corruption and social upheaval across the world, should this story really surprise us? Why should this story be so much more compelling than a plethora of others, lining up for our attention in the daily newspapers, the weekly journals or the monthly reviews? Well, that's because in this story one man dared to raise his voice against the behemoth, dared to throw the stone directly at Goliath, a stone that broke the mirror window to let us see the truth behind it, not just the reflection of our own moral turpitude in the face of lies and deception. This is a modern day David and Goliath story and that's why we should all pay attention, get inspired, and throw a few stones of our own!

Competitive advantages of commodities trading houses outside Canada

I know I have been absent for quite a while, but it was due to family priorities. I am coming back with a short but acute issue: can Canadian trading houses be competitive on the international scene?

The question might seem silly at first glance, but consider the following: European trading houses can have their operational credit at Euribor + 75 points, while in Canada we can be happy to get prime + 1%. When trading in commodities this can be the difference between profit or loss.

Moreover, the credit insurance rates are approximately, on average, four times less than what EDC (or any other credit insurance company) is offering in Canada.

We do have some advantages: a strong supply management and other protectionist legislation, which always creates niches for those who know how to exploit such regulations.

What would happen if we were living in a truly globalized trading environment?

This is the stuff of nightmares... I guess.

Results...

One of my readers made a very sweet comment on the collection article and then asked a very pertinent question: "did you collect?" Well, you're right, what good would all this talk be indeed if the results were not there? So, I would like to proudly announce that the issue has been resolved in a somewhat creative manner and that all the amounts have been recuperated! Victory through intelligence, perseverance and... appropriate tactics. I know that I promised to write the second part on the tactics and I have not yet had the time, however, I am committed to doing so. Thank you all for reading on!

Short guide to approaching an international trade issue

I thought some of you might be interested in (what has proven to be) a rather efficient approach to dealing with an international trade issue. This is a basic skeleton for a strategic approach to the issue, not purporting to be an exhaustive treatment.

Defining Intelligence Needs

Before formulating a strategy, intelligence must be gathered. Before gathering intelligence, the intelligence needs have to be well defined. Here are some examples of intelligence needs categories and scopes leading to proper definition of such needs:

Corporate structure
- Levels
- Leadership
- Functions

Financial
- Available credit
- Bank procedures
- Equity

Management
- Is client an intermediary at the mercy of his end-clients
- How does he handle quality claims issues
- Does he have enough and adequate resources for the business it’s doing

Leaders’ psychology
- Habits
- Hobbies
- Ideology
- Family
- Pets

Environment
- what is going on in the market in that region at that point in time

Gathering Intelligence

1. Secondary Research

a. Remote
- Web search starting with the company website, search words being the name not only of the company but of its shareholders and leaders
- Information especially about SMEs from underdeveloped countries is very hard to find on the net
b. Local
- ON the ground you might get tips on websites that don’t show up in the first pages of the google search
- Locally you might have access

2. Primary Research
a. Remote
- phone interviews with partners and sympathetic parties with direct knowledge of infringing party
b. Local
- Visit offices and production
- Interview staff
- Interview leader
- Take pictures of people, offices and merchandise
- Interview local partners
- Try to get on the Network in order to view valuable information

Establishing Risks beside the issue at hand

1. Financial
- Too tight on the finances, if one of his clients doesn’t pay, his suppliers are in trouble
- Bad investments draining cash flow
- Equity depleted, danger of bankruptcy

2. Operational
- Not enough or appropriate resources to handle transactions properly – leads to errors
- Does not insure his clients so if they don’t pay it will break him
- Frequent quality claims for the purpose of delay or non-payment

3. Market
- If market is going down, there is a risk that the customer will find reason to annul the contract
- Customer’s customers are annulling contracts and he is forced to cancel with you
- Difficult local import or banking bureaucracy

Gaining leverage in order to avoid risks

- If you represent 30% or more of his supply, you might have leverage with cutting off supply
- If you know that your shipment is going to a particular important client of your customer, threaten to hold off
- If you can, purchase merchandise from the infringing party and offset the invoices
- Have SGS inspection before sending off merchandise in order to avoid quality claims

Usually the issue will be one of delayed or refusal of payment for any reason outlined above in the risk section. Many responses are available, including legal action, however all the risks need to be taken into consideration because one action from you can trigger a response from the infringing party corresponding to one of the risks identified that could in turn trigger some of the other risks and ultimately lead to a failed enterprise. In fact, one has to identify a dominant strategy in the situation, a strategy that no matter what the response, it will lead to a satisfactory result for you.

Soon we will look at the tactics involved in the execution of a dominant strategy, because even though the perfect strategy might be outlined, execution can make it or break it.

Erratum

A small correction for those die-hard Bruce Lee fans: he was not born in Hong Kong but rather in San Francisco. However, he did grow up from his infancy in Hong Kong.

Birth place of Bruce Lee

For those of you who are fans of Chinese Kung-Fu cinema, I must let you know that I have made it (safely but painfully) to Hong Kong, the birthplace of the one and only, Bruce Lee. I believe Bruce Lee really represents the resilience of this people, who have not only survived, but thrived over centuries of colonization and oppression, in a little enclave, surrounded by super-powers. I would think Singapore is similar (and according to their history, it certainly seems so). Singapore has become the thriving, modern city that it is today in the past 40 years, right after its emancipation in 1965 (it had already its own government in 1959 but had a short affair with Malaysia). Of course, the same party, the PAP (People's Action Party) founded by Lee Kuan Yew has been in power ever since, but in this case the authoritative regime has proven itself to be beneficial to this mixed bowl of cultures and religions. I will be staying in Little India and the Muslim quarters, so it should not be too unfamiliar from my days in Africa.

Adventures in dairy trading...

So, speaking about financing international trade... it also comes a time when, after financing something and going overboard with confidence, we have to also make sure that the financing comes back. I am talking about clients paying late (or defaulting completely), of course, something that is extremely complex in international transactions that are not expensive enough to start legal proceedings in a foreign jurisdiction (cost-benefit analysis with the cost of legal counsel, trips and time value of money). The key phrase is "carrot and stick" - always make sure you have something to either attract with or hit with. But, most importantly, make sure that you always do business with partners with whom you want to build a relationship. In that case, getting over such issues becomes something positive, a hurdle that has to be overcome together, and once overcome, it will make the relationship stronger, it will make you understand each other's ways better and work better together.

Of course, the ideal would be not to get there, and the key word for this is business intelligence - the far reaching effects of good business intelligence in international trade and the role of technology in this. I am presently on my way to Singapore in order to collect, and I will try to use this experience in order to outline a bit the points mentioned here above. I hope y'all have some fun, 'cause I sure as hell am not!

Wishful thinking...

So I promised a new piece, but in the mean time life had caught up with me and my noble desires did not materialize; for that I apologize. However, I never default on my word...

Operating an international trading house in Canada, especially in Quebec, is not an easy thing to do. SMEs that provide export and import services to local manufacturers and distributors are very important agents of development, fighting Quebec's dependence on exports to the US, especially in times of crisis, like we have seen recently, and providing competitive sources of supply for local manufacturers and distributors. First of all, export service companies or trading houses, have been agents of economic development since the beginning of modern economy: the first chartered company ever to issue shares traded on a stock market was the Vereenigde Oost-Indische Compagnie (VOC) (literally "United East Indian Company") in 1606. This was a major trading company for Asian spice and its stock was traded on the Amsterdam Stock Exchange. It had the approval of the King and a monopoly to carry out its activities. This has allowed it to become one of the (at that time) world's richest companies and to spread the Dutch influence to the farthest reaches of the world. This legacy remains in the policies of the European governments toward international trading companies and the type of terms banks give to these companies, however we are quite far from that legacy, here in Canada, despite the fact that we are a nation built on trade!

I am not a banker, so I do not claim to have a perfect vocabulary with regards to the banks services and procedures. This however, is the case for most SME's, so at least I will try to paint the picture from their point of view. From what I understand, banks in Canada have two main types of financing models: asset based or equity based financing. This means that a service SME can't really use the first one (because it has not assets) and the second one is really dependent on its receivables. If things are properly done, the accounts receivable are already secured by credit insurance or by the way that ownership to the merchandise or service is passed (documents only sent if the payment is received, otherwise there is a retrade). So even if the receivables themselves are secured, and the accumulated equity of the company (we must specify "accumulated" because otherwise a banker will say that the equity is the receivables minus the payables). In fact it is receivable minus payables, but add the retained earnings and capital, then you have the real equity on the basis of which the bank finances. So, when you look at this equity, the banks in Canada only finance one-to-one or maximum two-to-one (1$ of loan for 1$ of equity). However, the European banks finance three or four-to-one, because they know that those receivables are already secured (see previous post for explanation), thus giving their European customers much greater power of trade. Moreover, us, Canadians, we are on the safe side, always. This the credit insurance we have from EDC is more conservative and solid, but also costs a lot more money, no mater who you are. In Europe, Coface routinely insures the customers of equivalent companies for a fraction of the cost.


When you add to the previous point the historical perspective that Canadian exporters are lazy because they have as their neighbor the biggest consumer in the world and therefore they don't have to force themselves to export to more challenging (but possibly rewarding) destinations, you have a recipe for international trade paraplegia. The lonely crusaders in this are the Canadian trading houses, especially the smaller ones. Of course, we are big grain and lumber exporters, and the Canadian Wheat Board could be considered as a very important and successful trader, but they, just like the United East Indian Company, have a monopoly. This is a privilege reserved to the rich and the shameless, but the Quebec economy runs on SMEs so we have to find more human-sized solutions for them. This is where the trade houses could help local manufacturers take their products farther into the world, help them get into deeper trading territory,because they would have the knowledge, the finance and the logistics to do so. This is indeed some wishful thinking...

Upcoming subjects

Just to give a heads-up, following my comments about the financial aspects of living and doing business in Montreal (and Quebec in general), triggered by the city hall leaders' debate, I will write a short piece on the financing of international trade, a subject that is very dear to politicians, but who don't have a clue on what it really takes. I will contend that two things are really important: the financing of international trade and the ability of SMEs (especially in the food sector, where we have an abundance of such companies outside Montreal) to export somewhere other than the US through trade intermediaries.

Leaders' debate on Montreal's economic future - follow up

I had some very interesting comments from people reading the blog and I wanted to quickly address them. These comments were mostly regarding the urban sprawl and the migration of families towards the suburbs, taking with them obs, investment funds and creating a whole lot of traffic. None of the candidates except Mr. Bergeron had a realistic view of the problem and Mr. Bergeron had a plan that involved the increase of the transport budget by 6.3% per year for 4 years to achieve in the fifth year a mere 10% reduction in traffic. Other measures he would take would result in the loss of "only" 100,000 people in the next ten years to the suburbs. The realistic view I think is the very long term one, and we cannot approach this from the political "I need a second mandate so I will make all the unrealistic promises necessary for that to happen" point. However, it seems ingrained in our political fabric to do so... I personally left the downtown for the same reasons as everybody else: it's crowded, it's loud, it's expensive, and if I want to get some culture (e.g. theater, movies, shows, etc.), I am 30 minutes away. Moreover, if I want to have a family, I want my kids to be able to play outside safely. The only way to reverse this trend is to take the example of Outremont and create villages within the city, encourage the creation of small "downtowns". Another trend that the candidates are not taking into consideration is the virtual office, where people can work from their homes, which means that a physical location does not become such an important issue.

In conclusion, I am not even sure that the migratory trend and the traffic can even be resolved, but there would certainly be improvements if the "village within the city" concept would be considered, if the fiscal and financial aspects of living in Montreal (and Quebec in general) would be scrutinized and if the telecommute trend would also be taken into consideration.

Leaders' debate on the economic future of Montreal before the Board of Trade of Metropolitan Montreal

The three "community leaders" running for the mayor of Montreal position in the 1st of November 2009 municipal elections in Montreal crossed their wits today, October 27, 2009 in a debate that was causing embarrassment due to the lack of discipline, charisma and substance.

The incumbent mayor, Mr. Tremblay, has obviously the most charismatic presence, and he is the one that can sell even the most benign ideas with success. Unfortunately, his ideas are benign, and even though not ridiculous or antiquated as those of Mrs. Harel, they are not looking toward the future but rather towards the next mandate. He is right to want to solidify the administrative base acquired by the city after long and tedious struggle with decentralization, but what will truly bring Montreal into the 21st century and make it a real contestant in the fight against Toronto (any Montrealer will tell you that Toronto is our benchmark)?

Mrs. Harel seemed completely out of place, not only due to her excessive mannerisms and her lack of respect for the process but mostly because of her antiquated ideas of wanting to grow the administrative apparatus in order to shorten the lead time on projects and her insistence that Montreal be in the race for the next World Expo because they bring prestige, like the Olympics... quick reality check: the World Expo and the Olympics are not the same. The World Expo is for an emerging metropolis, hungry for the attention (any kind, really), not for a world renowned city like Montreal.

Mr. Bergeron, despite the fact that he was as dry as a stone, had more common sense than the others, with a real vision for a cleaner, more environmentally friendly Montreal, attracting families back to the city from the suburbs. However, his realism was damaging the quality of the presentation, and the fact that it would take a 6.3% increase per year in the transport budget over four years in order to reduce Montreal traffic by a mere 10% in the fifth year, or that in ten years his program would be able to decrease the Montreal population by only 100,000 rather than one million had difficulty contending with the political discourse of mayor Tremblay.

Despite the fact that keeping families in Montreal, increasing the work opportunities for local talent and improving transport and governance were the main themes, the solutions proposed (some that even went beyond the mayoral responsibilities and into provincial and federal domain) never took into consideration the real issues that make Montreal Eastern Canada's "ugly little duckling": fiscal and political. How can a family pay the premium for city real estate, cramped up and children-unfriendly, take the increase in energy costs and transport costs on top of general inflation with all the Federal, Provincial and ultimately Municipal taxes imposed on them? If I want to put some money aside for my retirement, I need some to be left over and, moreover, the average salary in Montreal for a specific job is on the lower side when compared to other international-level cities. As for companies, how can they establish their headquarters in Montreal when they cannot offer competitive wages because themselves are taxed at high levels (even though not ridiculous) and access to financing is difficult and tedious? This issue is linked to the political issue as well, which is not only the over-taxation of the middle-class and of property for sub-par services but also regarding the notorious political instability of Quebec as a Province. I understand that this is not of the mayor's resort, but to ignore these issues would be irresponsible.

All this to say that on Sunday, as the people are going to the urns to vote, it will be, like always, a difficult choice to pick "the least worst candidate" from the pile.

Why can't commodity traders bridge the gap between old school and tech?

Since I've been working in the dairy commodity trade, I can understand why these "road warriors" can't actually bridge the evolutionary gap: because if you were the missing link in the evolutionary process, you would probably get along with your ancestors as well as your progeny.

The trader is like the last existing cowboy, using the six-shooter because it's more reliable than those semi-automatics, kicking-up a dust storm whenever he has a chance and then making up with those involved, paranoid beyond measure concerning the small amount of assets and goodwill he has because that's what's going to save him in the wilderness. Yes, he also uses emails, but he'd rather use the fax, if given the choice. Anyway, a lot of his clients don't even like this whole IT revolution anyway. There is a lack of "humanity" in the screen, that's why they cling to the phone receiver.

These are the SME traders. Of course, there are large companies, like Fontera, in New Zealand, that are making advances in the tech side, but they seem to only stir resentment in the old school of trade, and allegations of conspiracy theories to "control the international markets". Fontera has put in place the first virtual market place for dairy commodities called globalDairyTrade. This is a place where pre-approved buyers can bid on certain quantities over a period of maximum 3 months. Once the tender is closed, the results are made public. Some people in the trade say that these results influence the direction prices are going to take on the world market (Fontera is already controlling 50% of the international dairy trade and has always tried to push the prices in the direction that would be most beneficial for them in the next season). Truth or fiction, no wonder our good ole' boys are afraid of the system...

But if you believe in the laws of the market, what's there to be afraid of? The system cannot really influence the laws of offer and demand, at least not in the long run and not by much. But arbitrage is the trader's bread and butter. They live from the market's imperfections, and any attempt to bring the market closer to it's ideal state of balance would be an attempt on their bread-winning abilities. No wonder the traders dream of the past as "the good old days".

In the same time, technology has allowed the trader to gather more information about the market, faster and in a more reliable way. Everything from emails from their clients and suppliers to the market information and currency forecasts found on the Internet, which has become a precious tool in their business.

So how come the trader is not able to reconcile his need for secrecy and arbitrage with the increased market efficiency brought upon by the advent of more and more advanced information technology? I believe that in fact the gap that they have failed to bridge is the "business intelligence" gap. They are not able to use technology in order to leverage the information generated in the course of their business, combine it with the market information and create profitable trading strategies. Most of the attempts made by trading companies to create software that could capture and treat this information and knowledge have had mitigated success or right out failure, due to the lack of or misuse of the software by the users, the old cowboys, who remain stubbornly opposed to changing their good old ways.

What would be the solution?

Developing an agent network for dairy products in Africa

Part of my mandate for Lactopur, Inc. a small but well known Canadian dairy trading house, is to develop a network of representative agents in Africa. Finding a dairy rep requires the following:

- a trust worthy person
- good work ethics
- knowledgeable about the industry

It is possible to fulfill two out of three requirement, but it is difficult to fill all three of them.

However, our knowledge of the industry in this region of the world, the Canadian Embassies' trade commissioners and other personal contacts have yielded a few leads that we are pursuing.

In West and Central Africa it is possible to have an agent for a whole region, however, as we are moving towards North Africa, it is more difficult, due to irreconcilable cultural differences. Thus, one agent per country becomes a necessity, which is fine, because the markets are larger and more sophisticated.

On the Eastern coast it is more difficult to sell because they can buy from Europe, Australia and New Zealand for historic and cultural reasons, but the Latin American prodcts are starting to make an inroad in these teritories as well, especially due to the push of traders like Lactopur.

If you need an agent in Africa for the food industry:
- Make sure he/she respects the three requirements mentioned above
- Make sure you work hand in hand with the Embassies
- Understand the requirements for each market - make sure your agent is accepted culturally in these other countries
- Assess the size of the market before assigning it to one agent in order to make sure whether it can be one single territory or whether it has to be part of a composed teritory. If culturally it cannot be part of a composed teritory and it is not big enough, just serve it by yourself, without an agent.
- Make sure you have an inside man/woman, who can decipher the business culture and give you access to the business and political leaders
- Make sure your margins are well padded

communologi

Campus Abroad China - Part I

Hello everyone,

We are presently in Yichang, in the belly of the Chinese Chicken (central China), where the largest hydroelectric dam in the world has just been built. This engineering feat very much symbolizes the whole of China, of enourmous proportions, clockwork precision but tarnished appearance.

From the beginning of the trip so many things have happened, and I will try to give a swift account, which will be very poor however without the pictures that would normally accompany it.

June 17
Despite a botched departure by American Airlines, we made it in perfect working condition to Beijing, after testing the high-tech Japanese bathrooms in Tokyo.
June 18
Arrived in Beijing on the evening of the 18th, and we had steamed bread stuffed with meat as well as rediculously cheap beers (which will be a recurring theme througout the trip) at a local dive. Welcome to China!
June 19
Chinese breakfast is bigger and spicier than the American one!
We litterally climbed the Great Wall of China, as it is steep and rugged on top. Despite the heat, the sweat and the fatigue, CHinese people loevd taking pictures with us (especially Nick, as they thought he was Keanu Reeves).
Back at the guesthouse, I tried to exchange some USD and it took... 40 minutes! I will apply to the Guiness book of records for the longest exchange transaction ever!
Walking around the streets of Bei Jing, a few of us represented Canada in a street ping-pong competition.
After a ridiculous amount of food, we went to the Ho-Hai, a charming stretch around a lake filled with bars and restaurants.
June 20
Visited the state owned Bei Jing Electric Motor Company, our first contact with the Business world. They were very impressed with the amount and the quality of the questinos we asked... we passed the first test of not making a Chinese person loose face!
Then we had a taste of Chinese dissident culture in district 798, where art pieces of all kinds testify to the level of oppression experienced by the people - very underground until recently, but now a booming part of town.
June 21
Another day of cultural (re) education, visiting the fobidden palace, Bei-Hai park and finally ended up on Sanlitun in the embassy district. Half the group wanted western food, the other half wanted Chinese food, and in an effort worthy of the Olympic spirit, we met in the middle and went to an Egyptian restaurant!
At night some of us ate royally in a local dive and had enlightening discussions about evolutionnary psychology and gay monkeys.
June 22
Woke up early and did tai-chi in the park. It's not that easy...
Then we visited the SUmmer Palace, which has beautiful architecture and is even more impressive than the forbidden city. We dicided that we want our houses to have pavillions too and we agreed on the name of at least one of them: the Pavillion of Eternal Lavatory.
In the afternoon we had a great presentation by Julien Mazloum, product development director in a western company building infrared saunas. We learned a lot about the "dos and don'ts" for a western company trying to set up shop in China.
Then we went to celebrate St. Jean Baptiste with the Bei Jing Quebec community.
June 23
Meeting with a Western law firm, Blakes. Presentation by Anie Lagacee gave us yet another perspective on business risk in China.
In the afternoon we had a presentation by Olivier Rochefort from Radisson SAS about the hotel industry in China.
At night a couple of us went to meet Ray Plummer (we met him at the St Jean celebration). He is from New Brunswick and has been in CHina for the opast 13 years working for a construction project management company. An incredible guy with many stories from accross Asia, he introduced us to Bei Jing duck and Chinese white alcohol while providing us with yet another perspective on Chinese business and culture in general.
June 24
Personal project day: visiting the Hu-Tongs, ancient neighborhoods around the forbidden palace. Discovered many things about how the Chinese live and tried to insert ourselves into the beat, quite successfully I might add. Learned a lot about ancient Chinese architecture as well and how it eveloved over the years.
June 25
Flew to Yichang and set up HQs in the China Power Corp guesthouse. Went out and saw people dancing and playing all kinds of sports (including a Chinese version of the hacky-sack).
June 26
Presentation by the China YangZe Power Corp (CYPC) and visit of the Three Gorges Dam. We had access to restricted areas and saw the control room of the dam - very impressive.
This being another state owned corporation, we had some familiarity with the process, however it was a lot more official and structured.
At night we wondered the streets of Yichang and ended up in a local dive drinking 50 cent beers and talking about past international experiences.
June 27
Leaving for Shanghai!

This short overview cannot express the breadth of the experience, but it will satissfy at least the curiosity about the chronology of events. for some pictures please go to Patrick's blog at http://patrick.wfp.ca/.

Cheers everyone!

George

News Flash - International Food Prices Increase Affect China

"Le Devoir" had a small but significant article in its April 17th, 2008 issue in the Economy section, about how the increase in food prices worldwide affects China.

At the end of the first trimester, food prices in China increased by 21% from the same period last year, reported the Chinese National Statistics Bureau (NSB).

The (NSB) representative, Li Xiaochao said that "since last year, food has been the main factor of inflation, and it remains this year as well". Between January and March 2008, the CPI has increased by 8% over the same period last year, however if the food items are removed, then the increase is only 1.2%. This problem has been worsened by the increase in demand for biofuels, which leads to a transition from traditional crops like wheat towards corn because of higher sales prices.

This is a serious issue in developing countries like China, where 1/3 to 1/2 of the family revenue goes towards the purchase of food (the proportion is largest in the poor rural regions). The Chinese government is dreading social unrest caused by a food shortage, but until now nothing but the typical party rhetoric calling for increased productivity and production in the agriculture sector seems to have been accomplished.

A hungry China would be a terrible thing, with the potential to ignite a world war. The World Bank and the IMF are well aware and on Sunday they called for an urgent intervention. It remains to be seen what this intervention will be...

Chinese Government Structure

I am quite convinced that most people are wondering: what is the structure of the Chinese government? The "dragon" is large and quite complex, so I tried to simplify it a bit for us, Westerners, and our limited capacity of understanding complex administrative structures.

The first flow chart explains the administrative structure of the Chinese government and the different government departments, institutions and agencies needed in order to run this large "enterprise" called China:


The following chart shows the administrative structure of the regional administrative bodies in China:


I hope this simple map will make it easier to navigate the vastly complex Chinese governmental departments and agencies landscape and reduce the personal "institutional void" for each and one of us.

The next post will bring some clarity to Mao's life and role in China's evolution from Empire to Communist Super Power.

The Three Gorges Dam

When speaking bout the size of China, one cannot ignore the newest engineering feat that's being built right now: The Three Gorges Dam. Here are some figures that provide a vision of the sheer size of this project, courtesy of Wikipedia (with all the caveats that come with it). I would like to encourage people who have better or more precise information to contribute to the posts.

The total electric generating capacity of the dam will reach 22,500 megawatts in 2011, at which point it will be the largest hydro-electric power station in the world by capacity. The dam wall is made of concrete and is about 2,309 metres (7,575 ft) long, and 185 metres (607 ft) high. The wall is 115 metres (377.3 ft) wide on the bottom and 40 metres (131.2 ft) wide on top. The project used 27,200,000 cubic metres (35,600,000 cu yd) of concrete, 463,000 metric tons of steel, enough to build 63 Eiffel Towers, and moved about 10,260,000 cubic metres (13,400,000 cu yd) of earth.

The reservoir created by the Three Gorges Dam exceeds 660 kilometres (410 mi) in length and 1.12 kilometres (0.70 mi) in width on average, and contains 39,300,000,000 cubic metres (9.43 cu mi) of water, when the water level is at 175 metres (574 ft). The dam will reach its maximum capacity by the end of 2008.

When finished, the project will have cost no more than 180 billion yuan, over 20 billion yuan less than the initial estimated budget (a public engineering project that end up under-budget... that is a great feat in itself!) of 203.9 billion yuan, just under 30 billion USD. This calculation accounts for the effect of inflation, and the lower costs are attributed to a low inflation rate in recent years. It is estimated that the cost of construction will be recovered when the dam generates 1000 TWh of the electricity, which will be sold at the price of 250 billion yuan. This will take 10 more years after the dam starts full operation.

Sources for funding include the Three Gorges Dam Construction Fund, revenue from Gezhouba Dam, policy loans from the China Development Bank, loans from domestic and foreign commercial banks, corporate bonds, and revenue from Three Gorges Dam before and after it is fully operational, with additional charges for electricity contributing to the Three Gorges Construction Fund. The additional charges are as follows: Every province receiving power from the Three Gorges Dam has to pay an additional charge of ¥7.00 per MWh. Provinces that will not receive power from the Three Gorges Dam have to pay an additional charge of ¥4.00 per MWh. Tibet does not have to pay any additional money... I am sure they are thrilled about this.

The Campus Abroad delegation will visit the Three Gorges Dam between June 25 and June 27 of 2008. We will be accompanied by top management, a favor due to the close links between HEC Montreal and the Three Gorges Dam corporation: HEC Montreal provides Management Training to their top management.

Introducing China: It's Big... really Big!

Here are some numbers that will give you an idea of how Big China really is, in every sense of the word (these numbers are taken from Knowledge News, a very interesting publication providing general knowledge to the North Americans who actually care about this kind of stuff):

"Big Geographic Numbers

3.7 million – China's total area, in square miles (9.6 million sq km). Only Russia and Canada are significantly larger. China is about the same size as the United States. Whether it's slightly larger or slightly smaller depends on whether you count certain disputed territories.

14 – Number of countries that border on China. China's longest borders are with Mongolia, Russia, and India. Each is more than 2,000 miles (3,200 km) long.

Big Population Numbers

1.3 billion – China's total population. That's more than four times as many people as live in the United States, and about a fifth of the people on Earth. India is the only other nation with more than a billion people, and it still has 200 million fewer than China.

33 – Number of top-level administrative divisions in China, including 22 provinces, 4 municipalities, 5 autonomous regions (including Tibet), and 2 special administrative regions (Hong Kong and Macau). Each of the eight most populous provinces has at least 64 million people--more than Britain, France, or Italy. If any of those provinces were an independent nation, it would rank among the world's 20 most populous.

10 million – Population of Shanghai, China's largest city. Beijing, the capital, is home to about 7.5 million people, and Hong Kong to another 7 million. Since the 1950s, China has urbanized rapidly, but most of the people--around 60 percent--still live in rural areas.

Big Economic Numbers

7 trillion - China's gross domestic product (GDP), in U.S. dollars, adjusted for purchasing power parity (PPP). That's second only to the United States, whose GDP (PPP) is nearly $14 trillion. Basically, a nation's GDP is the value of all the goods and services it produces in a year. Economists adjust GDP for purchasing power parity to account for the fact that a dollar buys more in some places than it does in others.

Tenfold – Increase in China's GDP since 1978, when the communist regime opened up to foreign investment and began implementing market-based reforms.

53 – Percentage of China's population that lived in poverty in 1981, according to the World Bank. By 2001, the number had fallen to 8 percent. Of course, given China's size, that still amounts to more than 100 million people.

59 billion – Amount China says it will spend on its military in 2008, in U.S. dollars. The Pentagon says China's actual military expenditures will be much higher--perhaps more than twice that much. But that's still far less than the $583 billion the U.S. military has budgeted for 2008." by Steve Sampson

Of course, we will also have to mention the Chinese Wall, the only human built structure visible from space, the Grand Canal as well as the Three Gorges Dam that spans the Yangtze River in Sandouping, Yichang, Hubei. (More information about the dam will be provided in the next blog... )

It is for good reason that China has been labeled "the sleeping Dragon". And guess what: it's not sleeping anymore!