Unilever Market Development - China's Emergence & India's Democracy -

wanting

 

NB caution !! ... we only keep these notes on our interweb so we don't lose them ... just a few bits of prosaic prose for a bit of fun

... so remember any resemblance to relevance may be coincidental!   

 

:drink

     China's Emergence

1980 to 2018 Unilever growth in back China ... then authoritarian creep & back sliding in Hong Kong & Ukraine to the days of the Tsars & the Emperors?

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Thucydides TrapThucydides Traps & Zero Sum Games     

In exchange trade and in business, companies were not at war with their customers in a winner takes all Athens v. Sparta blood bath. Rather companies chased cooperative synergies and mutual benefits were available for everyone in diverse competitive market places ... it was not a fearful zero sum game.

Unilever and P&G were cavorting in a strange intimate dance where mutual benefits came from producing better mouse traps for the same cash strapped customers ... exciting positive sum games which escaped the mythical Thucydides Trap ... a trap which existed only in the clouded minds of the gullible who misinterpreted evolutionary economics and the 2+2=5 synergies of specialisation & scale.

We guessed our friend and classical scholar Frank Martin had studied Thucydides as well as Queen Zenobia, and had learned that market development and technology transfer were not adversarial mischiefs demanding compromise but rather synergistic collaborators in economic growth demanding cooperation.

Silk Road TrapThere were mutual benefits for both China and Europe in the old silk road, and any new one for that matter. Free & fair trade always involved synergies ... both gain or why bother? ... folk always seemed to get it wrong ... perhaps Thucydides was easy but Ricardo too difficult? 

The quest, focus and aspiration for Unilever was to deliver 'better mouse traps' for everyone ... but Unilever was trying to get their first so we could pay the bills! 

The surplus, the profit, after we had paid all the bills, was a post hoc outcome of the Pacioli double entry measurement system ... aka the Unilever Accounts Manual ... a surplus to fund investment in innovation.  

'Build a better mousetrap, and the world will beat a path to your door'

We forgot the wag who first coined this aphorism but we never forgot the message.

We recalled our old chairman in Apapa, Derek Holdsworth -

'Sounds marvelous, John, but will it catch mice'?

'and don't forget it's the 2nd mouse that gets the cheese'!

We recalled Richard Rivers an inspired marketing manager friend we worked with in the 1980s -

'No use producing crap, John, the customers don't like it'!

And Mike Cowan who refined the adage -

'Always remember we are in business not the snake oil industry'!

These one liners remained in the front of our minds during every subsequent business extravaganza that we garnished ... and we soon learned that striving for better mousetraps inevitably produced inequality ... it was an evolutionary arms race which always produced diversity as we knew from our guru Darwin's entangled bank ...

Unilever, PZ & P&G, like everybody else, only avoided bankruptcy by themselves producing better better mouse traps  ... such was the basics of innovation and economic growth ... 'one size fits all' monopoly was not the answer monopoly was the problem ... happy customers was the answer.

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Fred ChengChina's Emergence - Market Development

By the 1990s Hindustan Lever was a big successful company in India growing Unilever 'know how' and benefitting at least 1 billion Indian customers ... and many more around the globe. HLL was a shining example of Ken Durham's strategy for Unilever as a multi local multi national. Significantly the growing of 'know how' was a two way flow, businessmen led by giants like Prakrash Tandon and Ashok Ganguly were adding to Unilever's bank of know how overseas. Encouragingly Hindustan Unilever has continued to prosper with a long successful run of satisfied customers.

Meanwhile in the 1980s China was only just beginning a restart ... and China was a very different kettle of fish.

During the 1980s FM and the shakers & movers in the OSC were wrestling with the great China opportunity ... how best to get into the action? 'Aim for the orient my man', was the mantra for the young Turks. We knew Hindustan Lever pretty well but China was a mystery. Over cold 'Stars' in the Apapa Club in the early 1970s MJC used to muse about his childhood in Shanghai and the life of his dad as a Mill Manager in the city ... but a much deeper history was the inspiration for the OSC in the 1980s.

Around 1979/80 the interpretation of the cultural history of China demanded endless reflection over beers in the St Bridget's House Club in Bridewell Place, Blackfriars ... this was fun but in real time and we hadn't a clue ... we guessed this was what business risk was all about ... exciting opportunities & fearful horrors. We were familiar with the history of business in India, we started to learn more about the history of China ...  

It seemed to us that China could not easily change its state-dominated bureaucratic system in deference to the clamour of foreigners. Hundreds of written and unwritten rules of engagement seemed designed to keep foreign merchants at arm’s length. How could China possibly join the WTO?
The basic cultural underpinnings of statehood and the exercise of power in China had remained consistent over the eight centuries that had elapsed since the Mongol conquests of Genghis Khan and his successors led to the founding of the Chinese Yuan dynasty in 1271. The 'Great State' world view that came to be during the Yuan was followed by Ming (1368-1644) and Qing (1644-1912) and persisted to today. The ruler with his bureaucracy was endowed with an authority that was universal. Those within China were to submit and those foreigners must defer. The idea of equality between sovereign trading states — the basic building block of the so-called Westphalian system and the WTO — had a more fragile tenure in China even after Deng's opening up in 1978.

We enjoyed a recap -

The Silk RoadThe Old Silk Road was initiated around 100 BC by the Han Dynasty. China knew all about adaptive markets from yonks ago. Silks & spices flowed along this trade route from Canton to Bagdad to Constantinople and on to Rome, Venice & Genoa ... and inevitably with the camel payloads came ... genes, memes, black rat plagues, parasites, predators, culture, religion, all manner of goods & services ... and technology ... and 'know how'. All this burgeoning 'trucking, bartering & exchanging' was indirectly, and some said miraculously, coordinated by a network of flourishing local markets en route. Multitudes fed off the trade synergies whenever & wherever theft & violence could be mitigated. But don't get it wrong wherever & whenever the were stocks of goodies there were thieves ... defences were needed.

There was also competition for the land routes from the cheaper, faster, safer sea routes spurring incentives for smooth efficiency ... but no one 'authority' was in control ... the camel trains were robust and Chinese silk & spices had unmatchable allures in Europe ... the merchants were in business. No doubt these cooperative markets were disrupted by interminable wars and ownership ambitions ... but blockages were by-passed to let the blood flow. Trade along the silk road evolved 'as if' propelled by a will of its own. 

This trade bonanza prospered until the fall of Constantinople in 1453 when the rise of the Ottoman Empire made trade with the west foreboden. An act of stupendous folly which sparked the European Voyages of Discovery, the Scientific & Industrial Revolutions.

Zheng HeThe Ming Dynasty from the 14th to 17th centuries was the greatest period of achievement in China's history. China was the world's most powerful country and there was nothing they needed or wanted from the 'barbaric and uncivilized' outside world. Self sufficiency was the creed with no interest in colonies or mercantilism. Any threats came from the Mongols in the North not from Europe.

But this imperial hegemony was also the beginning of a dark era for international trade. The Confucian System in China sponsored -

moral pride

extended family loyalties 

organised self sufficiency 

A far cry from the Western traditions of interminable religious and political factions. International trade was not needed and parasitic merchants were not into useful production, they were middle men, moving goods around to make money ... in fact they were a drain on the system. The few of them who were enterprising and innovative often found themselves in impossible competition with the revered imperial bureaucracy.

After the 'seven ocean voyages' of exploration & adventure expired in 1433 with the death of Zheng He, the Confucian traditionalists prevailed at court and China closed its doors to the outside world. The ships were scuttled and records were burnt. China withdrew into its shell and stayed there for centuries. China cut itself off.

International trade was never stamped out but without doubt the 1842 Opium Wars and the 1843 colonisation of Hong Kong did nothing to encourage trade and beer drinking with the Brits. 

Not for want of trying, an impoverished agrarian economy in China never successfully industrialised ... why?

The problem was not for want of beer, the locals had been brewing beer from around 9,000 years ago ... made with rice, honey, grape and hawthorn fruits ... similar to the early beers of Mesopotamia and Egypt. Ancient Chinese beer was important as a social lubricant for ancestral worship, funerals and other rituals. But after the Han Dynasty, beer faded from prominence in favor of the renowned 'yellow wine', this elixir remained the bees knees for the next two millennia.

All was not lost because in 1903 the Germans donated a fine modern brew & brewery which we can vouch for ... 'Tsingtao Beer' ... we heartily imbibed this liquor with our noodles in Hong Kong in 1990 and celebrated when 'Tsingtao' found its way into the delicious 'take aways' from the 'Jade Buddha' in Sandiway around 2010 ... cool.

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Cultural Revolution1948 Mao & Revolution   

Mao Zedong & Revolution had its roots in The Treaty of Versailles May 4th 1919 and its peak in the 1948 civil war triumph.

Communism, the Great Leap Forward & the Cultural Revolution cultural revolution proved to be a monumental disasters and led to nothing but grief & horror, famine & disease as inevitable 'Restrictive Practices' & 'Restraints on Trade' killed off all glimmers of progress.

Some said millions died unnecessarily.

 Such fiascos exposed the expanding know how gap ... and no industrial revolution ... meanwhile Hong Kong and Taiwan waxed and prospered.  

Unilever's established business in China, The China Soap Company, Shanghai was confiscated in 1949.     

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Deng Opens Up1978 Deng Opens Up 

Deng Xiaoping & Economic Reform from 1978 opened up the country to trade, Foreign Direct Investment & business entrepreneurs, the way forward was into the thriving, bustling market economics of Hong Kong 'seek truth from facts' ... empirical science.

... but the path was fraught.

Unilever had 'know how' and China had 1.2 billion consumers. No wonder folk were agog in the 1980s, trade opportunities and mutual advantages were immense.

At the time, of course, we didn't know anything about the future?

So how did all this malarkey relate to the Deng strategy of open doors & market economics but also with party control of capitalist markets? How was the Deng strategy of maintaining 'control' over capitalism implemented?

Once the genii was out of the bottle human creative ingenuity guaranteed conflict -

innovation & trade    2+2=5

power & corruption    2-2=0

The Industrial Revolution in UK took 120 years in the USA 80 years ... in China 30 years. Speed, markets, business based on hard work of learning. Catch up imitation was easy compared to successful business innovation in profitable projects? Especially in a totalitarian Communist State?

Initially Chinese industrialisation & urbanisation resulted in a massive production boom and initially in cheap exports to the USA ... with a massive Mercantilist trade imbalance. The associated capital $$$s surpluses flowed back into the USA and spurred real estate prices in America. Sure there was a welcome & dramatic elimination of poverty in China but also an unwelcome & dramatic boom & bust in American real estate ... and a grumbling mass of rust belt rednecks in middle America ... and eventually the global financial crisis in 2008.

In 1980 ... and in 2008 ... Unilever had an opportunity not a problem!

How was it possible for capital imbalances to build up if all the trade was paid for by agreed deals?

The mind blowing quagmire of free & fair trade, comparative advantage, the collapse of the Doha Round and the twin opportunities - 

Free & Fair Trade. American 'know how' or 'intellectual property' was difficult to trade?
Everybody wanted a cure for cancer but nobody knew how to pay for it?

Jobs for the Boys. American 'rednecks' with obsolete skills found it difficult to adapt to the new jobs in innovative in technology in Silicon Valley?
Job vacancies were filled by young immigrants with the latest skills rather than retraining?   

Was there an alternative to the disastrous pouring of capital imbalances into American real estate and the degeneration of productive middle America?

What about investment in American productive assets and what about American goodies for the Chinese consumers? Were western corporations denied the incomes for further faster investment in innovations?  Were the consumers in China denied the opportunities for exciting imports ... iPads, Magnums and Dove smellies?

Chinese 'managed capitalism' involved basic obstacles for Unilever -

tariff barriers - price controls & import restrictions 

non tariff barriers - equity restrictions & local partnerships

local subsidies & taxes - unfair competition with no level playing field & beggar thy neighbour  

exchange rate manipulation - costly gluts & queues

innovation deterrents - 'theft of intellectual property rights' and 'forced technology transfer' 

Richard Cobden would have been appalled! 

 The state-backed industrial policy began to look like an ominous Mercantilist mix of protectionism and import substitution ... moving the already stalled World Trade Organisation & Doha Round further & further from the goal of 'developing market economies' ...

'Free & Fair trade' delivering maybe $750bn to global wealth but -

increased productivity benefitted everybody either through -

rise in real wages

better terms of trade

reduced international violence

more & better new job opportunities from economic growth  

less protective regulation from less aspiration for naive self sufficiency

... but there were always more votes in interest group protectionism and naive

There remained the unanswered questions which had plagued FM in St Bridget's House in 1979 -

Restraint of Trade?
Who pays for the inevitable 'gluts & queues' from price fixing?

Restrictive Practices?
How to be a champion of globalisation and the inevitable flow of ideas, capital, information, goods and services between China and the rest of the world?

All power corrupts?
How to protect bureaucratic top pecks from inevitable corruption ?

The same stubbornly difficult questions, perhaps strategic deep economic issues for Unilever's business investment in China -

Company Culture & Social Clubs
Was the Unilever business strategy of global 'social' culture, relevant?

For sure Unilever's overt strategy was self sustaining innovation ... business driven, market & consumer R&D, propitious acquisitions, specialised expertise, respected competition & imaginative intellectual property ... 

But there was also a covert strategy to push at open doors and go with the flow of human behaviour ... a social culture, an 'undercover' strategy of transferring marketing & technology know how through the 'Unilever social networks' ... such was particularly difficult to copy & assimilate not on for non English speaking indigenes in one party China? ... unfamiliarity with both language and markets reduced the options for -  

'postings for mangers identified as rising stars to gain experience running companies sometimes facing acute challenges' ... 'these expatriates were not necessarily British or Dutch, but increasingly Indians, Brazilians & Turks' ... could they be Chinese? 

During the setting up of joint ventures -

'it had always been a promised carrot and it was a sought after privilege to be allowed to travel to the UK. Also we needed to convince them that they had linked up with a foreign company of importance with the necessary technology to offer to China.' ...

Creative Diversity & Intellectual Property
Did creative project innovation demand a diversity of experiments and market price guidance?

Was the Unilever sponsored 'innovation funnel' from 'imagination to market' compatible with the 'one party', 'one China', 'united front' and state political control of the diversity of middle class ideas?
Was it physically possible to transfer intellectual property? ... or was intellectual property dispersed in the diverse minds of many cooperating cohorts ... and invariably incomplete?

Could Unilever 'know how' be detailed in 'Blue Book Specifications' which could be handed over, sold, leaked or stolen?

Industrial espionage, or reverse engineering, was, by definition no good for innovations but was it a viable route to technology catch up?

Free & Fair Trade & Foreign Direct Investment
Was FDI a good bet even if 'controlled' by restrictions & restraints?

Was any payment for market access commercially viable in the longer term ... or shorter term?

Did local partners bring welcome diversity and new know how or an opportunity for bureaucrats on the cadge to take a cut?

What was the difference between 'free trade' and 'fair trade'?

Were tariff barriers simply 'price fixing' and distortions which inevitably produced costly gluts & queues?

Was it possible to curtail 'price fixing' by the 1974 Trade Act Section 301, or the 29,000 pages of WTO treaty on 'fair trade'?

Tariff Barriers & Non Tariff Barriers
Did all the malarkey of 'tariff barriers' and 'non tariff barriers' amount to 'price fixing' by another name and still lead to the associated gluts & queues of an unlevel playing field ... subsidies, regulation and unfair local competitors?

.. controls of capital outflows, reserves spent on 'defending' the Renminbi, shared ownership, work permits, quotas, theft of intellectual property, subsidies, non-commercial state investment ...

So there! We remained convinced that all these knotty questions were best viewed through the bottom of a beer glass ... most of the fractious issues of folk were soluble in alcohol ... bottoms up ... and go with the flow!

But we did know a bit about the history of Unilever in China ... and the synergies of specialisation & scale ...    

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Unilever in China  

Unilever had been in similar predicaments many times and knew the ropes. Technology Transfer was not a 'package' to be handed over in 'exchange' for market access ... it was an on going process of organisational learning

The developing Unilever strategy of Market Development was pinpointed by David Fieldhouse  -

'Unilever set up production facilities overseas to manufacture goods for local consumption in the local market. These were market development enterprises and formed the heart of Unilever as a multinational'.

'The profitability of Unilever subsidiaries overseas was determined less by efficiency than by government policy and the way it was implemented by the local bureaucracy'.

And Geoffrey Jones had earlier discussed 'mischievous differences' between India & China -

'India reported financially to Unilever plc, China to Unilever nv but opportunities & difficulties were similar and by 1939 it was generally accepted that these artificial distinctions were mischievous. Direction was to come from those who knew most about the companies and the managers who ran them. Unilever's business outside Europe consisted mainly of soap coordinated by The Overseas Committee . The OSC Directors traveled endlessly to ensure personal contact and reported back, most importantly on men.'

The China Soap CompanyAndrew Knox told the story about 'the old man' getting into China in the 1920s. Competitive battles at home led to keen interest in export markets to expand sales ... Lever & 'Pure Sunlight' luxury tablets or Gossages & 'Housewife's Friend' filled soap or Crosfields & high tech 'Blue Mottled' bars?

It was a no brainer; India and China were the big markets ... but for exports or local manufacture?

The Lever Overseas Committee was formed in 1926, bringing together the several Directors of Overseas Companies (DOCs) and their specific country responsibilities, a system which remained after the 1929 merger as the Unilever OSC 'Contact Directors'. Managers were left alone with their huge responsibilities, given guidance not instructions, and encouraged not to mither HO. The slogan was 'don't keep a dog and bark yourself' ... but, fear not, the OSC would respond immediately with requests for help ... you were never alone in the sticks. 

Some time after 1913 independent competitors Crosfields, Brunner Mond & Price's Candle Company founded The China Soap & Candle Company, Shanghai; it was cheaper to manufacture in Shanghai than ship from Liverpool.

In 1919 Lever purchased Gossages & Crosfields from Brunner Mond and resolved the competitive altercation. A new factory was built and new Lever company was formed in Shanghai; The China Soap Company, established in 1923 ... and confiscated in 1949.

When we joined the OSC in 1971, Eric Laycock was on seat as Secretary. Eric had worked in Shanghai and was there when the revolutionaries pushed Unilever out by 'simply' taxing income at 100% plus ... easy. Eric retired in 1976 still urging Unilever to keep an eye open for a sensible way to get back into China.

Unilever started to make it back into China during the 1980s after the Deng Reforms ... and we're still drinking to celebrate such mutual perspicacity ... but once bitten twice shy?

FM recalled that in the early 1980s the OSC was obsessed with seminars and meetings on China. We never claimed FM was also full of the wisdom from our discussions in the bar at St Bridget's House in 1979!

FM later recalled this period as -

'the beginning of a long learning curve that was to lead up to my most fascinating and rewarding years in Unilever. Interest in China was rising for Frazer Sedcole and the OSC, but there was an enormous communication and conceptual gap that existed between western business people and the Chinese at any level'.

In the 1980s all the young wags overseas were well aware of the success that Bill Vale had had in drinking his way into the Taiwan partnership with Formosa United Industrial Corporation ... but no one admitted that beer was the lubricant for a business strategy based learning how to please local consumers.

On the ground the challenge was how best to get back into the old Unilever Shanghai Soap Company, then owned by The Shanghai Daily Chemical Industrial Corporation ... and in a run down condition but with a 3rd of the local soap market? Cautiously in 1985 a 50/50 Shanghai/Lever joint venture was agreed ... initially one Lux Toilet soap production line on one floor of an existing building with 30% of the output to be exported.

Sales exceeded capacity after 6 months. In the 80s Shanghai Ponds and Shanghai Van den Bergh joint ventures followed.

It was a long hard slog for Unilever but right on ... by the time we retired in 1994 China was looking good ... but things could get better ...  ?

However the explosive growth of the post Deng Chinese wealth creating economy inexorably led to dramtic upheavals -

in China massive middle class bulges blossomed as millions were boosted from poverty to plenty

in America mass production workers in obsolete industries were redundant

Mercantilist price fixing and associated $ imbalances were syphoned into unproductive real estate bubble

in Central Banks massive fiat money printing supercharged existing asset prices in the abscence of profitable innovation projects

Global bubbles burst in 2008. Both 'expected' and 'surprising' ... 'Tulip Mania' but 'this time was different' ... back to square one and rhyming history ... Corn Laws, Doha Rounds and the flawed WTO?

Innovation FunnelMarket Development & Technology Transfer?   

Here's the thought ... sustainability of Unilever's business overseas was largely based on recruitment of competent local managers into long term membership of the networking social club. A club which was sensitive to the business strategy and the Fieldhouse conclusion ... most happenings engineered by Government Officials involved not 'market development' but 'market distortions' for personal enrichment.

Unilever's business strategy was Market Development but what was China's economic strategy? Technology Transfer and Catch Up? Were these strategies incompatible or were they the same thing?

We were sure that the sun rising in the East did not mean it was setting in the West ... synergies were at work.

Market Development was clear -

the innovation funnel and customer focused sustainability required -

cooperation (honesty & torts) synergies from team work

deals (hard work & trade) straight from the 2nd Law of Thermodynamics

investment (thrift & technology) financial clout

innovative products from M&A or R&D could only be 'tailored' to customers through deep understanding of local markets which required a local teamwork from a presence immersed in local cultural excitements & fears

Ken Durham told us Unilever was a Multi Local Multi National based on exciting investments in The China Soap Company in 1923 but fearful experience of the confiscation of the company in 1948 ... and losses loom large ... PZ an d P&G had a different history? 

trust in local partners with access to tax, FX surpluses, Belt & Road opportunities

access to WTO and Doha Round failure from ????

intimate embers burst into flames empirical science, easy technology, scarce FDI,

Unilever's financial clout and M&A nous ... 'know how' was not wanted? American $$$s were spilling out of the coffers imbalances would build the Belt & Road

Technology Transfer was opaque -

plausible deliberate rational purposeful intentional plans were not what they seemed to be. How could Marxist ideas be compatible with Market Development?

compromise rather than cooperation was the route to an independent self sufficient China rather than a business partner & trading specialisations.

manufacture of Lux Toilet Soap was easy but the success of Lux was not a 'package of specifications' which could be handed over ...

'know how' was all about organisational learning

why should China be interested in buying a 'package' which didn't exist and couldn't be 'nationalised' nor 'handed over' to local partners?

catch up - urbanisation - young demographics - control of investment = copy
but WTO membership and self sustaining economic growth demanded product innovation ... Darwinian copy/vary/natural selection .... innovative products were difficult for state/party control of debt funded investment, in unproductive assets? 

Shanghai R&DWith these ideas in mind, special localized strategies like hiring of local employees, setting up an R&D unit, and planning for stock market listing were initiated to strengthen the company's position in China.

Our mate FC established the new laboratory at The China Academy of Science, Institute of Organic Chemistry, Shanghai in 19?? and recruited excellent local scientists who knew the science and the customers ... and became a source future Unilever business leaders?

Centre stage at the time was AG, an old colleage of ours from Four Acres and HLL ... where else?

The Unilever website told the ongoing story after our retirement -

Unilever were back in China and in 1998 the first Board Meeting outside of London/Rotterdam was held in Shanghai. In Feb 2000, Unilever set up a R&D center in Shanghai. It was Unilever's 6th global research centre (Port Sunlight, Colworth, Vlaardingen, Trumbull, Anderri, Shanghai). (R&D locations = Bangalore, India - Colworth, UK - Port Sunlight, UK - Shanghai, China - Trumbull, North America - Vlaardingen, The Netherlands). This centre acted as a bridge to get closer to local markets (local traditions, local ingredients, local products tailored to cater for local consumers).
Unilever China responded to the complex needs of the country's consumers by developing a portfolio of brands, both local and global, and incorporated traditional Chinese sciences with technological enhancements. The company aimed to identify itself as the brand that was quality conscious and consistently endeavored to meet local needs and tastes. Global brands (Dove, Lux, Ponds, Lipton) promised international expertise in their formulation and development but had local professionals to manage them to ease communication between the company and its customers. Similarly, local brands such as Hazeline and Lao Cai soy sauce benefited from Unilever's extensive knowledge and resources, without losing their local character. Thus, Unilever China endeavored to balance global and local needs by developing solutions that satisfied the demands of its target consumer segment.
Unilever signed a strategic partnership with Alibaba in 2015, including using data from its online marketing unit and its cloud business, to improve its digital advertising strategy and expand its distribution channels for rural consumers.
Chinese ecommerce firm JD.com has agreed a deal with Unilever to move products like Lipton’s tea and Lux soap between warehouses across China as the consumer goods firm looks to expand sales in more remote parts of the country. The deal is the latest move by an ecommerce company to muscle into the territory of logistics companies by leveraging the expertise and supply chains they have built up for their own retail business to offer those services to others.
The Chinese market was not one single market but several where deep studies and analysis reveal different spending habits of different consumers. New products were constantly developed to meet changing tastes, lifestyles and expectations.

Furthermore Unilever's approach seemed to be very different to the bureaucratic direction of our arch competitors -

P&G ... it seemed to us that P&G didn't buy beer they relied on instructions that flowed from central Cincinnati to their subsidiaries? P&G China was established in 1988. 20 brands Rejoice, Pantene, Head & Shoulders, Vidal Sassoon, Olay, SK-II, Safeguard, Ariel, Tide, Febreze, Gillette, Venus, Braun, Oral-B, Crest, Pampers, Whisper, Tampax, Meta, and Vicks. HQ in Guangzhou, Guangdong one innovation center in Beijing, nine manufacturing plants ... 7,000 people.

PZ ... our mate Alan Robinson was there ... and left empty handed?
In 2002 PZ entered China with the purchase of an ancient moribund soap company based in Qingdao ... Tsingtao ... anticipating a mad thirst for successful Western products and were ago for Good Manufacturing Practice.

Qingdao, an old naval dockyard & Yellow Sea port and ship building & commercial centre which was famed as the host for Tsingtao beer! (Qingdao 7 mn population cf Shanghai 25 mn, Shenzhen 13 mn)

Anglo-German Brewery Co Ltd, an English-German joint stock company based in Hong Kong, founded in 1903 and owned it until 1916 when it was liquidated by the Japanese. After the war the brewery was surrendered to the Chinese and confiscated/nationalised in 1949 as a state owned enterprise. After Deng opened up it was then privatised. Anheuser-Busch (American) were involved but sold its shareholding in 2009 & Asahi (Japanese) sold its shareholding in 2019. A familiar pattern?

The CCP were in charge of 'quality control' and everything was perfect ... thus Good Manufacturing Practice was a challenge and marketing was waste ... everybody needed soap for public health reasons. Western know how was anathema. The problems of historical poverty, famine and disease were not because of Mao's Marxist red book policies but rather bad karma and a Western legacy of conspiracy and imperialism. Happenings in Tiananmen Square, Hong Kong and Taiwan were just a small insignificant minority of trouble makers.

But for others, the party line didn't stick, maybe the silent majority aspired to Lux toilet soap made in Hong Kong which contained sweet aromas which made you smell like a beautiful film star and cost the earth. Happenings didn't cut the mustard and bribery & corruption went in tandem with tyranny & oppression.

Placing competent Greek businessmen to manage the company was not on and PZ sold out in 2005.

Raspberry Pi stopped manufacture in China in 20??

Perhaps Chinamen can do 'innovation'? ... yes maybe, but innovation was not in the user manual!

We remember an old boss of mine, senior but clueless,

'they only want to get their hands on our specification, keep it under lock & key'.

Underneath the soap pan in Apapa we learned that even if China received a paper specification on the exact science, the manufacture at the purities, precision, reproducibility, the quality & service, would be really tough. It’s not that simple and they didn’t have the supply chain to support it.

In 1993 Mrs Chan offered us a rebuttal to our equity investment in South Korea,

'now we have the specification we don't need Unilever anymore'!

Then the numbers changed ... progress & infrastructure must be balanced. Problems of complexity, change, conflict & scarcity must be solved as a whole shebang & caboodle.

1978 Deng opened up but 1989 collapse of the Berlin Wall didn't kill off Marx & Communism. China joining the WTO in 2001 did not result in acceptance of the 'Western Rules'. Price fixing was a catastrophe, free trade and detente were an naive optimistic pipedream. The Chinese world view and 'values' were implacably different.

Indigenisation could not change an alien value system. As with 'the Russian World', 'the Chinese World' had no liberal democratic institutions, no free speech, free association, free choice just a host of political regulations; restraints on trade' and 'restrictive practices'!

How Unileverisation? The Wacky Wokes were anti Unilever and didn't like it either, they preferred to be cooped up in their own bunker and let the deplorables go to oblivion. What a dogs breakfast. 

NB Hong Kong, Japan, South Korea, Taiwan ... liberal democratic values?

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unilever_shenzhenShenzhen - Fishing Village to Miracle in 30 years   

Capitalism worked Hong Kong and was bettered in Shenzhen! Poverty was eliminated! Instructions for Wealth Creation? A model for India and Russia imitate? Production problem solved and echoes of Marx!

But how can you keep the lid on crowd trouble as Europe & USA matured?  

The social behaviour of folk everywhere has necessarily evolved to be diverse as they try for longevity through the discovery & accumulation of the synergies of specialisation & scale.  

The process was familiar - bills had to be paid, bills for investment & innovation in better mouse traps for everyone had to be paid from profits, GDP per head growth, profits growth, urban growth, jobs growth, education growth, skills growth, aptitude opportunity growth ... but inevitably growth in congestion, pollution, inequality ...

Deng opened up trade & Foreign Direct Investment for entrepreneurs, the way forward was thru the thriving, bustling market economics of Hong Kong ... 'seek truth from facts' ... empirical science & private enterprise. The economic miracle of Shenzen & Shanghai 'catch up' ...

In 2021 China joins the World Trade Organisation ... game over?

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State Stricks Back2012 Xi Strikes Back

The miracle was followed by Xi and his thoughts which reimposed dictatorship by cults, cliques, cronies & party ... 'innovation by instructions' & 'picking winners' ... similar to the Putin reversion to 'control' over Gorbachev, glasnost & perestroika?

Deng showed the way to economic growth but Xi and the CCP had to strike back to retain 'control' ... bureaucracy had to survive ...

The imposition, tax & regulation were familiar as bureaucracy grew ... and with it the inevitable problems of dictatorship -

bribery & corruption

crowd trouble

stifled productive investment & innovation

There was a familiar road to the 'Common Prosperity' mandates of the CCP ... the legislation of wealth ...

Were real wages and profits alternatives ... for compromise?

Were economic growth and inequality alternatives ... for compromise?

Or was there just one whole shebang & caboodle of synergies of specialisation & scale ... widening circles of moral sentiment ... for cooperation?

Crowd Trouble - Tiananmen 1989 & Hong Kong 2019 & when Taiwan ?  

Natural diversity was China's historical strength but the conundrum was how a central authoritarian regime kept the lid on students & workers ... who instinctively always worked hard for longevity & fun ... if not revolution then constant drive to emulate Hong Kong & Taiwan ... not with guns but with enterprise? ... Tiananmen scares and HK riots and Taiwan ambitions? 

Just 10 years after those musings over beer, the Tiananmen massacre dashed some of the hope that Shenzhen could easily mimic the synergies of specialisation & scale of vibrant Hong Kong. Then crowd trouble emerged in 2019 as 'one country two systems' proved to be easy during catch up but more difficult during innovative hegemony.

Tiananmen & Bureaucratic Authority clashed in 1989, as the students and workers on the left reacted as hope, stability, efficiency & trust went out of the window with the bath water ... immune systems were needed as the inevitable 'fearsome foursome' of evolution  appeared -

inequality from Darwinian diversity & differential survival

inflation from arrogant tax, spend & print

corruption from parasites & predators

pollution from 2nd law of thermodynamics

Immune systems evolve as economies move from analogy to ontology -

copy - access & participation in the 3% compound growth of the Empirical Science database of 'know how' - required because intellectual property is diverse, dispersed, tacit & incomplete and impossible to steal

vary - diversity of trial & error in the innovation funnel - required because of ignorance

select - natural selection of real prices which clear markets - required to avoid the costs & inefficiencies of gluts & queues by fixing prices 

The immune systems of Evolutionary Economics and the synergies of specialisation & scale were missing and misunderstood  -

Free & Fair Trade - fixed prices result in imbalances - 'gluts & queues' - 'restraints of trade' - 'restrictive practices'  

Comparative Advantage - self sufficiency results in waste & low growth - 'sprinkling the desert with a teaspoon' - 'Jack of all trades master of none'

Everybody, even in Liberal Democracies, seemed to be 'compelled to control the future' rather than experiment and 'seek truth from facts' ... 

Belts Roads & GunsBribery & Corruption - One country, Two systems?

2001 WTO membership legitimised cheating and unassailable 'muckraker's hyperbole' 'politically incorrect'.

unfair trade practice exported jobs with the horror of unemployment (rather than the maths of comparative advantage)    

accumulated debt & money printing fed real estate bubbles (rather than balanced balanced sheets)   

There were interlinked questions -

Liberal Democracy ?

private investment & innovation ?

Incompatible Strategies -

central bank accumulation of $s, export subsidies 

tariff & non tariff barriers, local partners & equity investment,

labour, environment, product standards & liability

intellectual property abuse    

human rights abuse

Around 2013 China used some new words to describe how markets, trade & finance could underpin & grow the 'One Belt & One Road Initiative' into a new silk road with 100s of interlinked thriving markets across Asia to Europe? - 

'China will continue to greatly ease market access, create a more attractive investment environment, strengthen the protection of intellectual property rights, voluntarily expand imports, and create a more relaxed and orderly environment for domestic and foreign entrepreneurs to invest in and start businesses'.

FM & MJC would have loved it ... more synergies of specialisation & scale ... more please!

But how could two systems deliver if there there remained nagging questions of obvious creeping Mercantilism ... and continuous Western Innovation ? 1.4bn intelligent humans under the control of one party, controlled by one man, cannot be the best way?

Human Rights? Central Party Control?

Price Fixing? Subsidies? Non Tariff Barriers? State Infrastructure? State Procurement?

Industrial Policy? Forced technology transfer or theft of intellectual property?

WTO membership? Tariffs & Trade Wars?

Cyber Security?

Debt Finance?

Innovation by Picking Winners? Nobel Prizes?

No process of copy/vary/select necessary for the innovation funnel ... all three elements of Darwinism didn't feature?

Copy alone and you can never be better, you stagnate.

Vary is necessary for the discovery of new innovations.

Natural selection is essential because picking winners is impossible nobody knows yet the what, where, who and when of the next good idea!

Strong support for state-owned companies & lethal debt was weighing down on the dynamic private sector.

There were many exciting rags-to-riches stories as folk didn’t fear heaven nor earth and by 2017 the private sector was 60 per cent of China’s economic output, 80 per cent of urban employment and private companies accounted for 90 per cent of exports. But some entrepreneurs began to worry that the last four decades of economic reform from 1978 had stalled as bank lending to the state advanced the crowding out of private investment? Weak legal systems and the absence of tort law resulted in regulation of rent seeking corruption becoming indistinguishable from regulation of entrepreneurial risk investment as economic growth stalled debt & defaults exploded ... tax, borrow, spend  ... familiar? Pushing away every-day entrepreneurs in favor of a crony, technocratic communist elites while gorging up on cheap debt as bright people ran away?   

New Silk RoadBelts & Roads Debt Financed Mercantilism?   

Would the 'Belt & Road' initiative be based on self sustaining innovation and market led economic growth 'below the radar' ... or was 'Made in China 2025' a state sponsored, debt funded pipe dream ... unproductive assets? A top down 13th Five Year Plan with Mercantilist objectives which would sooner or later be embroiled in the universal, uncontrollable, foibles of human emotions - excitement & fear - complexity, conflict, change & scarcity ... and boring 'me too' products, corruption ... a funding shortfall ... and bust?

We bet the wheels came off ... the 'project of the century' was hyperbolic hubris. China had promised to spend about $1tn on building infrastructure in developing countries around the world ... bossed by authoritarian leaders of countries with big debts and junk status ... and the fatal flaw, it was all financed by lethal debt through Chinese financial institutions.

A flawed model that appeared to work at home ... building large infrastructure projects with lethal debt ... was applied abroad.

$s which naturally would have flowed to coolies & yanks accumulated in the Chinese central bank and used to fund overseas adventures in Belts & Roads and American real estate ... all funded with lethal debt rather than enterprising equity.

We looked at Venezuela - hubris, ambition and naïveté ... between 2007 and 2013, the China Development Bank lent Venezuela nearly $40bn, cementing a relationship with Hugo Chávez, and erecting 'a Great Wall' against US hegemonism ...

Was it all certain to unravel? We remembered grandiose schemes and The Groundnut Affair. We remembered Unilever's focus on cooperation & innovation and we had a beer and drank to FM's synergies and mantra -

'tell us your rules and we will write the investment proposal ... or not'

'offer your goods & services and we will test them to see if they run on our machines with our products ... or not'

We remembered Unilever's disdain for compromise & direction and had another drink to FM's insistence on local cooperation & synergies -

'external tariffs, non tariff barriers & subsidies of protectionism hurt the Chinese consumers'

'even polarised voting systems led to deadlock, innovation was required and innovation required a Bill of Rights ... a UDHR'

Meanwhile amongst all these shenanigans it became clear that back at the coal face Lux Beauty, Dove Smellies and Magnum Ice Creams were a hit in China!

In 2015 Mr Xi visited the Prime Minister's 'local' for a pint of delicious beer and then promptly invested £265 million through a Chines consortium, China Media Capital, for a 13% stake in Manchester City FC ... wot was that all that about? At the same time old City favourite, Son Jihai was appointed a club ambassador in China ... to help to lever the global Premier League Brand into China ... the Labour Shadow Sports Minister described it as 'a grubby little fix' ... wot had it got to do with him? Perhaps Premier League just like Dove Smellies and Magnum Ice Creams were superb brands!

Debt financing of the Belt & Road Initiative, like all debt financing was lethal to lenders & borrowers alike.

Lotus Tower ColomboIn 2022 The Lotus Tower, Colombo, Sri Lanka showed to the world all the problems of lethal debt, unprofitable projects and white elephants. The FT reported -

China steps back from the Belt and Road - Financial problems are prompting a quiet but fundamental rethink in Beijing as economic risks around the world rise, says a senior government adviser in Beijing, who declined further identification. 'A lot of investment in Belt and Road countries didn’t make commercial sense and was in effect a form of capital flight. 'What’s more, the economic prospects in many BRI countries, led by African ones, has worsened dramatically in recent years. That makes it more imperative for us to think twice before going on another lending spree'. In addition, China’s foreign exchange reserves — which peaked at nearly $4tn in 2014 — have fallen back to just over $3tn in 2022, making the hard currency that Chinese financial institutions use to lend to Belt and Road countries relatively scarce.

Economic growth was about discovering profitable projects (elevating the playing field?) not protectionism and regulating out competition ... but we repeated ourselves.

Perhaps the whole apparatus of state sponsored capitalism & planning simply distorted the markets & delivered gluts & queues and in the end corruption, coups & catastrophe? Were all free & fair market 'corrections' uncompetitive, unsustainable and unfair to someone, sometime, somewhere? 'Free & fair trade' could not be dismissed as 'bullying' ... when the 'managed trade' of the Doha Round, NAFTA, TPP and Euro Reform all proved difficult to sustain ... and even the acclaimed WTO staggered ... weighed down by its 27,000 pages, or was it 29,000 pages, of instantly irrelevant detail ... out of date before the ink had dried.

Why had the Doha Round collapsed? Why did the WTO need reform?

The usual suspects - 

Price Fixing - subsidies, tariffs & FX manipulation

Regulations - non tariff barriers (NTB) - regulation, party control of companies, nationalisation, no term limits, censorship, state-led infrastructure spending, debt financing of Belt & Road

Intellectual Property theft -

Forced Technology transfer

Environmental and Health 'n' Safety costs - 

Five distortions made a mockery of 'free trade' ... 

 Was the concept of free trade, pioneered by Adam Smith & David Ricardo, the foundation of economic analysis? Was applicable to today’s conditions?
Two issues -

'trading countries' did not refrain from mercantilism nor protectionism

'trading countries' did not have automatic adjustment mechanisms that prevented chronic trade imbalances

Free trade did not work when it was not fair and countries adopted non–market economy industrial policies.

Somebody somewhere had to pay for the gluts & queues?

Even unilateral free trade was advantageous as 'dumping' was always unsustainable, bills must be paid. Even with state subsidies, unnecessary costs still had to be be weeded out.

It seemed that the world was protectionist and therefore we had to conform? But this was just not on. Ricardo’s theory of comparative advantage could not be summarily dismissed, with unsustainable arguments -

unfair competition - we cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities ... crime, drugs, suicide & inequalities. But loss of low paid jobs is more than compensated for by gains in well paid jobs. Evolution is creative destruction

fairness - price fixing trade is not free trade and destroys the economy. Theft, piracy, counterfeiting, FX manipulation, forced transfer of technology and low environmental, health & safety and labor regulations. All either illegal or reasonable cost reduction practices ... violations of WTO rules. Mercantilism & protectionism destroys economies not free & fair trade

trade deficit - trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade. All trade is paid for deficits on current account are balanced by surpluses on capital account as FX adjusts. The problem lies investing surpluses in non productive assets (American real estate bubbles?) ... bills have to be paid. One way or another, exports must always equal imports plus net foreign investment 

retaliation - retaliatory protectionist measures are justified against protectionist countries; such retaliation encourages real free trade ... or the downward spiral of trade wars? Tariffs are paid by local consumers. Dumping is paid for by foreign tax payers. Trade is beneficial to all partners; otherwise they would walk away from the deal. Unilateral free trade is beneficial 

national security - protectionism is required for reasons of national security. An excuse. National security is enhanced by trade and economic growth. The best trade policy is not to have one, to leave citizens alone to import or export as they wish and secure the mutual benefits ... synergies. Unfortunately votes can be purchased, not by science but by promising magical alternatives to hard work honesty and thrift.

Made in China 2025 

In 2015 China turned in on itself once again. Another 10 year plan to go wrong?

Integrating China into the WTO and restarting the stalled Doha Round of reciprocal investment failed as forced technology transfer & interventionist mindset became the norm.

China was trying to appropriate technology, distort competition and trade, with state spying & price fixing to 'challenge' the prosperity and security in the west? Instead of liberalised trade and mutual gain there seemed to be a zero-sum competition and ruinous use of commercial policy for foreign policy ends.

Gains from trade described specialised high-tech industries where innovators established dominant positions. But old Mercantilist ideas persisted. Current account deficits were a never a sign of economic weakness as all trade was paid for ... but price fixing always resulted in imbalances (gluts & queues) and capital account surpluses invested in non productive assets caused real estate bubbles!

Mercantilism was never a good idea, in our world if you didn't pay your bills the result was bankruptcy or state bail out and the zombies?

Author Wu Xiaoping -

'the private sector had completed its historic task in helping state-owned companies to develop and that it was time for it to start fading away'.

Xi ThoughtXi Thought

So as doctrinaire 'Xi Thought' entered the textbooks and curricula it was clear to many who had worked under the soap pans in Apapa that -

wealth creation was about private enterprise ... top pecks were in 'office' but not in 'power', the genie was out of the bottle ...

Top pecks were inevitably unseated by ingenious folk who were adept at tying shoe laces together ... there always seemed to be unintended consequences ... coups (elections), catastrophes (environmental, nukes, immigrations) & new technologies ... last time we looked happenings were a tad more complicated than the top pecks thought ... perhaps there were ... at least an eightsome assemblage of difficulties & more? 

The genie was out of the bottle, successful market innovation demanded teamwork & cooperation, not instructions from above ... catch-up was comparatively easy.

Children as young as 10 studied boss honcho Xi's eponymous political philosophy which was labeled by some parents as 'disgusting' and evoked memories of the Mao personality cult, great leap forward & cultural revolution. The thought police were around again. Everybody was scared of Xi and his guns but that did not mean folk obeyed ... thoughts & ideas were beyond reach.
'Power' must be transferred to the lower levels, to invigorate the economy & modernisation, but such transfer to the local levels resulted in extreme difficulties with regulation & control by the CCP. Catch 22?
Deng unleashed centrifugal forces that promoted the interests of the consumer, rather than the interests of the producer and the central CCP.

Innovation?The innovation question lingered on. China was obsessed with 'control' of business which was denigrated as cut throat, hire & fire. The talented got to the top of the CCP and recruited clones ... not mavericks ... to build and protect monolithic bureaucracies. It seemed to us that Google 'evolved' from small beginnings in back street Palo Alto but Alibaba exploded as it 'involved' ... work was frenetic, folk had no time think about hitherto unconnected connections ... and ingenuity ... all bureaucracies, state or private, were about 'control' of the construction of monoliths ... not innovation?  

Then came another 'new' initiative from the CCP -

'Common Prosperity'

... a scheme to crack down on private enterprise ... or was it a scam to ban inequality ... and much needed diversity?

Michael Wood IndiaMichael Wood ChinaRecap ... Hindustan Lever & Market Development ... continuous innovation ... a fascinating comparison?

This comparison between China & India and their histories continued to dominate Unilever investment decisions and the quest for global excellence in global markets ... incomprehensible without reference to the wonderful story telling books by Michael Wood -

 

 

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