Interview: August 15, 2004

What got you interested in East Asian (especially Japanese) business opportunities? Putting differently: Why “do Japan” when you have opportunities in China? Are there business opportunities in Japan? What types of opportunities are more favorable in Japan than in China?

Fascination with the how little I knew after 16 years of liberal education. At first. I came to China with the intention of learning the language, the culture, and later became interested in business and government. I was torn back in 1993 to where in East Asia I wanted to start—at the time, China seemed a road less traveled. I spent a total of nearly six years in China, but still felt I wanted to learn more about and experience Japan; there was a higher learning curve for me here. Also, I have always felt that Japan has many inherently unique strengths such as an amazing capacity for organization, nemawashi, and functional aesthetic detail, which in business terms means they will always be strong. That is what firms like Ripplewood and Carlyle are doing here, buying up and restructuring what has always been inherently valuable, often in manufacturing and high tech. In China, everything is being built from the ground up with a mixture of smarts and sweat.

Tell us about Prime Minister Zhu Rongii?

I was chosen along with seven Chinese by the Chinese government to translate for his delegation back in 1999 when he visited Chicago after the failed World Trade Organization (WTO) talks. Zhu made a joke to Chicago Mayor Richard Daley and his cousin William who was then the US Commerce Secretary. Zhu said to stay in Chicago and not go to Washington because when Zhu was Mayor of Shanghai he used to have a full head of hair. After he went to Beijing, he started losing it like cousin William. I almost split a gut. But seriously, a highly capable, honest, and visionary leader. He is a hard act to follow for Hu Jintao, Wen Jiabao and crew.

Imagine that you were asked to select three books on Japan (fictional and non-fiction) that best conveyed the feeling and depth of this country. What would those three books be? Are there any books on Japan that you feel are exceptionally well written and researched—something in the field of business literature or the social sciences that also deserve special mention?

My first book was Conrad Shirokauer’s A Brief History of Chinese and Japanese Civilizations, and that’s what really got me hooked. Since, I have often used it as a general reference because it’s all there (except Korea, one flaw). Nagai Kafu’s Bukuto Kidan, A Strange Tale from East of the River, is a fictional favorite, with its reveries of the Yuki yo-e and the rich and elaborate descriptive detail of a lost world (his work is intense in Japanese). Finally, I guess I’ll go with The Sword and the Chrysanthemum, dated though it is, as it encapsulates a lot of the social tradition that built up the “Japanese Spirit” which, postwar, has been essentially acted against (and take Murakami Haruki’s Underground for a contemporary counterpoint).

For business, nothing leaps to mind but then again I think business is usually better described in timely articles and cases, although Ohmae Kenichi's The Mind of the Strategist is good. For social sciences, Cages of Reason: The Rise of the Rational State in France, Japan, the United States, and Great Britain by Bernard Silberman is an insightful look at how the modern Japanese State evolved and in what traditions written by a man of great learning and compassion.

How about best and worst books on China? What makes a “bad” book on China? Is it for different reasons than for “bad” books on Japan? Our favorite source for very bad books on Japan is the “foreigner in Japan” genre (e.g., Mike Millard’s “Leaving Japan” see review). Is there a similar genre in China studies? 

Again, Shirokauer for history. Lunyu for philosophy, or the Confucian Analects—there is so much in that deceptively simple text that is absolutely fundamental to China, not to mention Japan and Korea. Finally, I am an unabashed fan of James Clavel... Pop fiction, perhaps, but his history and psychological insights are profound. Plus its fun.

What makes a bad book? A lack of understanding, truth, and compassion—same as for all books. I agree that there are many bad “foreigner in Asia” books, most of which (but not all) were written by people who fairly well isolated themselves from the greater culture, whether in a journalist’s newsroom or an English teacher’s classroom. But not all. For China, the main difference is that there is a huge gap between 1945 and the late 1980's as there were essentially no foreign observers on the ground so no direct research. Of course that has changed, but there is simply not as much depth. So, you are getting a lot of sensationalism both for and against China.

What are you reading right now?

I am working on my Japanese, so currently I am reading Murakami Haruki's Kami no Kodomotachi wa Minna Oodoru, or All of God's Children are Dancing. Also, I just finished Japanese in Action: An Unorthodox Approach to the Spoken Language and the People Who Speak It by Jack Seward. It is an absolute classic whether you're a day-one beginner or a 35-year language scholar.

Other than the piles of half-finished books on my coffee table, I finished The Temple  by Stephen Spender a few days ago; it's a great novelist's look at the last days of hedonistic sun and sex culture in Weimar Germany with the malignant rise of Nazism in the forested background. After the booming 90s, it seems poignant in these “times of wa” and New World Order.

What books on Japan and China need to be written? Will you be writing it?

On Japan, I would like to see something about now by a strong academic with an intimate knowledge of the business/political/cultural world here, as Japan is changing for the better, slowly but surely, especially due to the rise of China/Korea and the dying off of the old guard—any suggestions? On China, less rose colored glasses and more analysis at the future of the country, and its real, tangible problems of the widening rich/poor gap and all of the sociopolitical implications. Not sure if I want to write it. My current project is a collection of short stories in which I hope to sing a song about this wonderful, challenging, and crucial part of the world.

Missouri is pretty exotic to us. Why is the state of Missouri interested in China and Japan? What are the main things Missouri is interested in importing? What are the main things Missouri is interested in exporting? What is Missouri interested in developing…Catfish? Just kidding.

I once helped a catfish farmer sell semen and embryos to a Chinese aquaculturist from Louisiana and am currently trying to flog paddlefish roe here in Japan. Beyond this, St. Louis is a center for Fortune 500 firms like Anheuser-Busch and Monsanto, and Missouri is full of dynamic small and medium enterprises (SMEs). While we are not working much with importers as it is not perceived to be in the interest of the taxpayers, we are working with many exporters. In Japan, the classics revolve around soy and, until the bovine spongiform encephalopathy (BSE) ban, beef. The new school is biotechnology which Missouri is a powerhouse in, especially in agrobio, licensing opportunities, and equipment. The total trade is around $300 million per year. In China, it is much smaller but growing, especially in advanced manufacturing to jumpstart their developing industries such as autos and tool and dye. In the “World’s workshop,” there is a large interest in direct investment across many manufacturing-intensive industries, but Jefferson City, MO, is a bit wary of this one for political reasons. Ever heard of Dick Gephardt?

What is the current state of play for government subsidies for agribusiness in Japan and the U.S.? With Japan and U.S. having vastly different farming structures, we would imagine government subsidies to be different. Can you give us an overview?

The only transnational arbiter of agro subsidies is the WTO and this has been a thorny problem with pushing forward the agenda throughout the organization's history. This is because all politics are local, and this fact keeps the status quo—classic political action problem. America and Japan are both rich countries, and food as a percentage of consumer spending continues to fall. Farmers by definition live in rural areas, and both the US and Japan are zoned to have more voting power, so the politicians have to keep them happy. So goes the conventional wisdom.

In the US, in addition to direct subsidies for things like sugar in Hawaii, there is a vast network of invisible subsidies, most of which comes from our largest government agency, the USDA. These include trade finance support, cooperator organizations such as the US Grains Council and many others, my previous employer the Foreign Agriculture Service who deals with the WTO and in bilateral negotiations along with providing free consulting and business support. In Japan, subsidies are focused largely on rice and are a mixture of things like direct payments to farmers to not grow rice and quotas on imports with heavy tariff penalties for exceeding them. So, I usually go for soba.

What sort of friction and resistance and problems do American agribusiness face in Japan and China? Are the trade frictions different?

Yes. In Japan, the biggest problem now is the BSE ban imposed in December of last year which has caused billions in losses and wreaked havoc on world prices. Longer term issues have been around genetically modified organisms (GMOs) which the US (and Missouri) are very strong in. But I see these as fundamental food safety issues more than political issues.

In China, the issues date back to Mao Zedong’s “Self-Sustenance in Agriculture” policy which saw food imports as a national security problem The biggest volume imports in China from the US are in wheat, soy, and wood (i.e. commodities,) and the Chinese government periodically decides to buy $5 billion in Canadian or Russian instead of the good old American stuff. Tacitly, this happens because the State Department banned some sensitive technology issue or due to some other tit for tat game. On the value-added side, the US is now selling way over $1 billion per year and growing. Tariffs have been steadily falling so this side is fairly smooth. In the long term for China, there remains the larger problem of what to do with around 700 million farmers as the have/have not divide widens. This provides a major disincentive to Reaganesque farm liberalization, but there will be pressure to do so.

Here’s the million-dollar-question: Are agribusiness subsidies fair for the U.S. or Japan? Are they ever necessary?

I think it is a question of economic efficiency vs. fairness. If there is a good balance of the distribution of benefits, such as what we do or what JETRO does [eds.—Japan External Trade Organization], and keeps many businesses with many employees happy and offers new product choices to consumers, then yes. Also, in developing countries if trade barriers protect a large population, then yes again. If, however, it keeps prices high for consumers (Japanese rice is ten times more expensive than world averages), or subsidizes a small group of producers such as US corn growers who already have many advantages like technology and abundant land, then no.

The Liberal Democratic Party (LDP) purported power base aside, is farming really necessary to Japan?

If it makes economic sense, i.e. if consumers will chose it, yes. I like Hokkaido watermelons sometimes because they are good, and will pay a premium for them.

You worked as a consultant as one your many hats: What do Japanese businesses want to know?  What do Chinese businesses want to know?  What do they want to know in common? What's different?

Actually I still do. Missouri has been my biggest client for the past 2 years along with the 80+ firms I advise on their behalf. But I’m always looking for new and exciting clients for my own business.

I think in Japan there are two kinds of firms: those responsive to globalization and those with their heads buried. The second kind is not interested in advice. The first kind, however, is looking at how to be best in class on a global stage across whatever issue is relevant.

In China, as I said before things are being built from scratch, even in the larger state-owned enterprises (SOEs). When I was at McKinsey, about 60% of the clients were Chinese and now it is up to 80%+, and they were trying to build competitive organizations based on whatever had brought them success to that point. The issues tended to be extremely broad, like—help with our 5 year strategy across multiple products, rationalize our organization and management roles, and work out our sales force and manufacturing lines. In other words, the whole kit and caboodle.

I think then that what you see in common between Japan and China is that strong firms want to know what global best practices are and how to compete. The difference is in implementation: in Japan, even with the recommendations change comes slowly and very gradually, whereas in China Blitzkrieg action tends to follows top management’s approval.

What is your take on the People's Republic of China (PRC)? Clientelism or capitalism? As of September 2004, will it be a hard or soft landing? And when?

Medium, and within 3 years. China has developed good depth in global business, so barring a catastrophe like war with Taiwan I think China will continue to benefit from globalization. The worst of this decade’s storm has been skillfully weathered. China resisted the intense pressure to make the RMB convertible on the capital account in the late 1990`s, and the Asian flu seemed only to prove the generally unsuspected wisdom of that less-than laissez-faire policy. Then, the more recent malaise in the West has driven more and more investment into China putting the PRC at the top of the world’s FDI destinations. Finally, because of convertibility laws there is no chance for Chinese corporate and personal savers (among the world’s highest) to make a “flight to quality” outside China should confidence erode. China is, thus, a Hotel California of global capital flows.

Now, with a US $400 plus billion cushion in foreign exchange reserves, the challenge is to clean up the balance sheets. I recently attended the APEC Conference on Structural Reform, and heard Mr. Wang Kejin from the China Banking Regulatory Commission say that, of the Big 4 SOE banks, the Bank of China and the China Construction Bank have been chosen as pilots for debt restructuring, and that bad loans are within `globally accepted norms` of around 10% (not sure whose norms, but an improvement on the 30%+ of the recent past...) However, getting these write-offs for only two banks cost taxpayers an unbelievable $45 billion capital injection. The real challenge is whether these new measures will solve the core problem of soft loans to the politically connected—personally, I think that will take a long time to truly improve (look at Japan...) There will be more GITIC-type failures [eds.—Guangdong International Investment and Trust Company, the political and business darling that shook the Chinese business community by declaring bankruptcy with losses of approximately US $ 2bn in FY99], but not at the Big 4 level.

Lastly, inflation is on the radar screen again and the Government and the People’s Bank of China have been public about it. In the early 90`s, Zhu Rongji slammed on the brakes to kill 24% inflation, but China was far more centralized then. Now, it will be more difficult to control the expanded banks and the new banks if interest rates are to rise and investment is to be reigned in, so this will have to eventually signal the end of the investment binge. I think it does present an opportunity, though, to try to stop the further development of some of the overcapacity that has come with over 40% of investment into plant and fixed assets.

In our last trip to China, Shanghai struck us as the Ferengi capital of the universe—to borrow a Star Trek metaphor.  Adam Smith would also have been proud—"truck and barter" was everywhere.  Is there such thing as Chinese capitalism?  In your view, what is it?

There are two kinds of Chinese capitalism with an emergent third way. The truck and barter kind is "I`ll tell your fortune, you cook my jiaozai (pork dumplings)," which is the route that the 700 million and shrinking `agricultural workers` have taken off the farm. The other kind is Sinopec, a dinosaur of the Socialist age, rationalizing their assets under the guidance of global consultancies and i-banks to list the good stuff on the NYSE. The third way is truly entrepreneurial firms, like Haier (whose mini-fridges now contain an estimated 80% market share of US college student 6 packs), UT Starcom the telecom equipment firm, or Wanxiang, the auto parts maker, who have followed innovative strategies to become increasingly global companies. None of these systems, in my view, are essentially “Chinese.”

One of the big themes of the 1980s was the complaint that Japan's markets were not open to the US.  Japanese capitalism was not "true capitalism" because they traded along business alliance/social network lines rather than the purely price or competitiveness.

In the same vein, but not exactly the same, is the change that China has clientelist capitalism as a hangover form the bad old days of communism (Andrew Walder et al).  Both of these models place emphasis on networks (We could go on about reiterated games and the cost of information, but we will refrain so not to bore JRN readers-–eds.) to find business partners. In your view, do either of these models fit China or Japan you see today?

Are we taking as businesspeople, or bureaucrats, or political scientists, or sociologists, or philologists? Let’s start as philologists. In Japan, we have the jinmyaku system, which we can translate as “the circulatory system of people,” which is by definition a closed system. Returning to Star Trek metaphors, I like to call it The Borg. In China, we have the guanxi system, or “relationships.” This one is also focused on who you know, but it is more of an open system, and it is focused on the individual. In the US are the good ole` boys and so on.

In pre-"Lost Generation Japan", there was certainly the model of the kind of nepotistic Japan, Inc. the T.H. Wang rants in The Economic Gang. But I think there is a growing counterforce, as you see in Nissan/Renault, Ripplewood/Shinsei, or the internationalist backgrounds of the people at the Industrial Revitalization Corporation of Japan (IRCJ). Or Sanyo selling its microwave division to Midea in Guangdong. On the political front, you have Governor Tanaka in Nakano or Ishihara here in Tokyo, and the increasing power of Okada and the JDP in turn emboldening Koizumi to push forth the Structural Reform (still in the Borg, mind you...) Then you have new, smaller, entrepreneurial actors like Uniqlo or Yamaya or the many boutique VC/i-banking firms, biotech startups, etc.. In other words, there is new blood on the scene, driven largely by international economic pressure.

In China, as I mentioned there are three economies (I should add with a serious danger of a huge segment the first truck and barter group falling through the non-existent social safety net into rebellion...), but I think that the kind of clientele capitalism that David Wank and others describe is gradually fading out as the SOEs marketize and corporateize their assets and shareholder structure to focus on making a profit and rather than as organs of a socialist paradise. However, it is by and large the winners of the clientelist phase who are now the players in the emergent capitalist phase, the people who can afford to send their kids to the top schools and join the global `haves.` In other words, those who have guanxi or are smart enough to make them...

Do China and Japan need to cooperate to survive?  Or can each country go its own way?  Who is more vulnerable?  Which country needs the other more?

Yes they do need each other, and on multiple levels. On the cultural level, there is the great shared tradition, the cannon of Confucianism, Buddhism. and Kanji. OK, as a Westerner from the suburbs of Chicago, I perceive it first as, “They’re Asians from over There.” Then it evolves to the myriad of differentiation between the two countries and cultures (not to mention Korea). But finally, I think that there is a matter of cultural identity that join the two civilizations (and I do not mean this in the negative Saidian sense) as distinct from other Major Civilizations.

In terms of business, look at what each country is strong in and look at supply chains and corporate finance. You don’t build all your Toyotas in Aichi anymore. And I think you will see a lot more deals being put together that have a China/Hong Kong component when you talk about making Japanese companies competitive and brining Chinese manufacturers up to speed—this means Chinese bankers and Japanese line manufacturers working together more and more closely.  

Next, on the vulnerability side is the question of security. After the bloodbath of modernization leading up to 1945, the US military managed to keep these two very competitive siblings from each others` throats. Now, for the first time since the Nara period you have the leadership of both countries looking at some similar core goals, namely prosperity through business and technology and influence on the world stage. I think that both sides know that if they do not coexist peacefully that all will be lost. So in this sense they need each other as separate but friendly competitors.

What are you working on now?

I am helping the State of Missouri and the biotech community there to expand their ties biotech and life sciences firms and institutions in Japan and Singapore along with consulting to a number of clients on their market entry and business development in Japan and China. Next is writing, working on those short stories I mentioned. Finally I am helping to organize Oriented Tokyo, a good meeting group for entrepreneurial types with an interest in China business. Check out our Happy Hour!