GSK “Led” Scandal Fallout Smacks Entire Industry Across the Face

Wednesday, November 13, 2013 6:00
Posted in category Going to Market, The Big Picture
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There is NOTHING, and I repeat, NOTHING like having an executive open up at a conference about a crisis their industry is following. Particularly when they are attempting to make their company look better than the “others”, try to justify why it was “industry practice”, and then lament that all the back doors to “diffusion of scientific knowledge” are all closed.

It was a classic moment, backed by slides no less. One of which I wanted to share with you as it shows the level of pain that he (and his colleagues) at one of the firms is now facing. A pain that is being felt across the industry, and one that is yet to be fully known as many (if not all) of the pharmaceutical’s operating in China are being asked to drop their prices.

The “real” reason why GSK (and many) others are now being investigated for fraudulent business practices in China.

I won’t bore you by going through the entire list one by one, I’d like to point out a few that match well.

Reduced sales/ ROI on investment – GSK announced a couple of weeks back their sales “slipped” 61%, and for a firm that has invested billions into R&D centers in China (in hopes of further access to the market), their ROI timelines are going to get VERY ugly should they find themselves unable to recover from this scandal.

Loss of reputation and talent loss – this is something I remember hearing about during the SIEMENS medical equipment scandal. The risk of being associated with SIEMENS led to a 40% drop in sales (that took 2-3 years to recover) and hiring talent because very tough. Which, on the bright side, were both windfalls for their primary competitor GE. They had a banner year.

compliance/ regulatory/ monitoring/ transparency – these have been increasing for years, and I would argue that whistle blower aside, each was already in place already. they only needed the spark to catalyze a reason to bring all forces to bear, turn the industry upside down (for a few months), and make the point known to stop screwing patients (as hard as they were)

Loss of confidence in China/ reduction in expansion rates/ new sources of rev – when presented, the speaker actually said that firms were threatening to leave China due to the pressure to reduce prices and play a clean game. Something I found laughable. But, one thing that we agreed on was not funny, was that these firms were all going to see reduced market, and would find it hard to expand under current conditions. One thought they were giving, which I don’t place much into, was the idea they could buy into clean brands.

So, for those of you out there who are playing the “China game”, I’d highly recommend that you look at the list above and think twice about your short term vs.  long term.  There is every reason to believe that China’s nets are closing in on a number of industries, and while the international media has been distracted by CCTV’s full court press on Starbucks,  the foreign infant powder brands begun drinking their cups of tea.

So….Do as the Chinese do or do as the Chinese will do in 10 years?

Lung Cancer Rates in Beijing up 50%. Breathing Blamed

Tuesday, November 12, 2013 21:06
Posted in category The Big Picture, Uncategorized
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This morning’s article from the Telegraph (Lung cancer rates in Beijing are up by 50 PER CENT (but officials claim it’s due to smoking NOT the smog), leads with some very sobering bullet points about the crisis that is air quality in China.

  • Lung cancer rates in China’s capital have doubled in a decade
  • Officials blame smoking, saying air pollution is only a factor
  • While 320million Chinese smoke, the rate has fallen steadily since 1996
  • Meanwhile air pollution has soared 30 per cent in 2013 alone
  • Last week an eight-year-old girl was diagnosed with lung cancer which doctors blamed on poor air quality

Note that while this is a Beijing focused article, this is actually a China issue, and what I continue to find sobering is the level of denial around the issue, its causes, and what it will take to fix.

Although… I would agree that the increased rates are due to smoking. The air is THAT BAD that simply breathing is smoking.  the only problem is that there is no patch, no gum, and no quitting cold turkey available to the millions of residents that live in North China.

Picture from: NASA Satellite Image Shows Beijing Drowning in a Lake of Smog

Tesla Sells First Car in China. Preparing it’s First “Ship”ment

Monday, November 11, 2013 1:54
Posted in category Going to Market
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There are few things that investors like seeing more than an announcement that a firm plans to enter China. Especially when there are customers willing to spend 410,000USD to be the first owner!

So, big news is that Tesla has just opened their first store in China, have sold their first car, and on their recent analyst call the indications are that this is just the start.  As reported in the article 3 Crucial Elon Musk Comments From the Call

On the earnings call Musk said deliveries in China would start in the first quarter of fiscal 2014. The company has already passed all of the homologation requirements in China and launched a soft opening with its Beijing store. Musk went on to say that Tesla expects to put its first cars on a boat to China as soon as January.

Where this will get interesting for me is that in terms of position, Tesla has an opportunity to be THE luxury car in China to have, and that could mean great things for a firm that is already maxing out its capacity.

A few things that I look forward to seeing from Tesla are:

1) BMW has just launched its i3 and i8 in China, which could prove to be an interesting match against Tesla.  Both are luxury, but BMW has two advantages that I see: (1) they are a known brand and (2) while both are “limited” range vehicles, part of the BMW service will be to provide a “traditional” car to iSeries owners should they wish to go on a long drive.

2) Part of what is driving Tesla’s market in the US, and what will help increase sales going forward, is the charging infrastructure that they are building across the US.  IF Tesla were to strike a deal here with sale PetroChina  to roll out a series of charging stations, that could potentially make the China story very interesting

3) Given Tesla’s limited capacity to produce, yet their reasonable price points, I will be very interested to see how they balance out supply and demand.   Their GM is the former GM of Bentley, so they have the sales guy, but I wonder if their pricing will be forced up as cars … or if they will develop a quota system so that deliveries to each country are “fair”.

Either way, I look forward to seeing what their impact will be in China, and what that will translate into in terms of their annual (stock) performance.  There are few firms that are “clean” enough to be able to observe a true China effect these days…

Intent and Growth Reductions Won’t Solve Smog.

Thursday, November 7, 2013 16:05

With Northern provinces already beginning to feel the bite of winter, the next few months are going to prove interesting for China as the air grows thick with pollution. There have already been reports that the air is growing thicker, with Harbin  being the worst to date, but as I have been discussing over the last few years, things are only set to get worse for the time being despite a number of announcements from the new administration

Announcements that include continuing the movement of boilers to gas, move industry out of cities, and force  ask the large power producers to invest in cleaning equipment.  All of which will sound familiar as Beijing has been retrofitting boilers for 10 years, heavy industry has been moving (at a snail’s pace) out of the city, and the economy is transforming, but given the severity of the issue and the fact that the “government” is having to shut down schools to protect children, there is a different feel to the announcements.

The intent is certainly there, or at least there at a higher level, to do something. The only question is what can “they” do besides take cars off the road and shut down factories?

For many, this would be an opportunity to raise their hand and offer up “renewable energies” as a replacement to coal, but for me it has to go farther.  That, what needs to be done is to move away from the emotionally charged “better” energy, consumers, and government policies and get into the nitty gritty of where the system is failing. Which requires a very different approach.

Why I say this is simple.  China is NEVER getting away from coal. Growth rates may come down, but even at best estimates, coal is expected to move from 70% to 65% of China’s total energy package in 2030.  An energy package that will be 400% LARGER than today.   Which is a “reduction” only in name as emissions from coal based energy production will continue to climb…. (Note: that this is also true for many of China’s raw material inputs into the core of its economy)

Which is where this gets far more complicated because in reality the smog that China is seeing is actually a byproduct of urbanization. The very thing that they feel will provide long term stability for the country, its economy, and its people.  A process  that will (intentionally) move an estimated 20 million rural residents into the city every year for the next 20 years.  300 million people, who are largely off the grid today, will move from being largely off the grid into the urban lifestyle. A lifestyle that is 4-5 times more economically productive, but 8-10 times more energy intensive.

This is a system  whose byproducts, are not going to be materially impacted by “more” solar panels, caps on coal fired production in a few areas, or fracking at this point.  Yes, doubling solar from less than 1% to 1.5% by 2030 is noble, and a great way to keep an industry afloat, and yes, cutting coal from 71% to 65% is an “achievement”, but at the end of day China will need to radically change the calculus for energy demand.

Right now, China is in a state of transition, and with transition is going to come pain.  Pain that is only going to get worse if the way that we look at these problems doesn’t change.

Beijing, at present, is trying to remove the “causes” of the air pollution by  focusing on tailpipes and smokestacks, the mediums by which emissions are created and delivered to the air, which will only deliver negligible gains as economic growth will outpace their capacity to insert plugs. The pollution that we are seeing is a BYPRODUCT that needs to be addressed at the source, system, and behavioral level, and to avoid taking DRASTIC actions, investments need to be focused at the  source, systems, and behavioral levels.

Which is why I say that it is ultiamtely not about intent.  It is not about words, hope, or announcements.  It is about action.   Material action, that reduces the demand side of China’s energy equation

When PMI hits 233. Even Professors Engage!

Wednesday, November 6, 2013 21:04
Posted in category The Big Picture
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You know that things are getting interesting when a professor sends an email to the administration urging them to take measures to protect students, and the administration replies with

The air quality today is really bad —- this is very unfortunate and everyone does not want this.

The school is contacting the local Environment Protection Bureau, and to talk to experts how to deal with this kind situation. After we get their advice, the school will take related action.

Keeping in mind this is a school with air filtration units in every room.

Did I mention that this is only going to get worse?

China is Top Spot for (Single) Expats

Thursday, October 31, 2013 7:12
Posted in category The Big Picture

The latest HSBC Expat Explorer rankings are out, and you’ll never guess who took first place.  That’s right…. CHINA!!

China’s #1

China’s #1

China’s #1

Which, given all the issues that North China has had with smog, concerns over food safety, and a tightening of visas, may have come as a surprise for some, but that jives with the fact that china is the world’s primary growth engine (at present), the number of people who have moved here in the last few years has been visibly picking up, and despite (or perhaps in spite) of the pollution, people are quite happy about their lives here.

Particularly as China has jobs… which most of South Europe and many parts of the U.S. are not able to offer right now.

Looking at the data, what is interesting to me is that while China is #1 overall it is #16 for raising a family. Something that actually comes as no surprise to me at all given the vast majority of expats I speak with who are actively looking for an exit have a family, but now there is some scientific evidence to support show the level of concerns that families have

  • Quality of child care (17th) – You get what you pay for (see next question)
  • Cost of Childcare (3rd) – a reason many say it is hard to leave
  • Quality of education (7th) – makes sense as few being surveyed would have kids in public school
  • Cost of education (5th) – a sign that the cost of expat education is ridiculous globally
  • Access to Better Education (24th) -  makes sense given there are few options, that are all expensive, and all have a wait list
  • Health and well being of children (20th) – Shanghai expats clearly helped out here
  • Better quality of life (24th) – THE reason to move?
  • Children are more rounded/ confident (8th) – Exposure to a diversity of cultures, new food, and their own drivers will do that.
  • Children are more outgoing (15th) – Huh?
  • Children are learning new language (5th) – Chinese is the language of future!
  • Children have a wider circle/ diversity of friends (8th) – Guanxi…

All of which lead me to believe that while parents are concerned about health and about them having a better life (than back home I presume), it all seems worth it given the “experience” that the family is having.  The break winner is making a load of cash and padding the CV, trailing spouse is supported by cheap labor, the kids are attending schools that were on average better than their school back home, and there are three weeks to travel around Asia as a family.

China’s #1!

China’s #1!

China’s #1!

For me, there is little question that this survey accurately reflects sentiment on the ground.

Yes the smog in Beijing (north China) is horrendous and kids cannot go outside to play, but fortunately for them (if they are there) their tuition ensures their schools can afford “pollution domes“.

If things get bad enough,  moving to Shanghai is an option.

Still in China.  Still #1

I Don’t Give a PISA How Well Shanghai Students Test.

Wednesday, October 30, 2013 6:54

Tom Friedman has done it again. He has visited China. He has written an article (The Shanghai Secret). He has stirred the hornets nest.

An article he wrote after he visited “some of the highest- and lowest-performing schools in China to try to uncover The Secret — how is it that Shanghai’s public secondary schools topped the world charts in the 2009 PISA (Program for International Student Assessment) exams that measure the ability of 15-year-olds in 65 countries to apply what they’ve learned in math, science and reading”.

An article whose core boils out to two paragraphs

When you sit in on a class here and meet with the principal and teachers, what you find is a relentless focus on all the basics that we know make for high-performing schools but that are difficult to pull off consistently across an entire school system. These are: a deep commitment to teacher training, peer-to-peer learning and constant professional development, a deep involvement of parents in their children’s learning, an insistence by the school’s leadership on the highest standards and a culture that prizes education and respects teachers.

[..] attributes this to the fact that, while in America a majority of a teacher’s time in school is spent teaching, in China’s best schools, a big chunk is spent learning from peers and personal development. As a result, he said, in places like Shanghai, “the system is good at attracting average people and getting enormous productivity out of them,” while also, “getting the best teachers in front of the most difficult classrooms.”

Now, I am not going to hold myself up as an expert on China’s Education system (or any education system for that matter), but after teaching MBAs for 5 years, developing local staff (experienced and raw), speaking with academic conferences, and just generally reading articles like this, this is an article that is particularly relevant to what I have seen and been discussing over the last few years.

What (I think) needs to be understood is that Friedman is writing for a largely American audience who has heard about Tiger moms, is seeing their children get slaughtered in American classrooms, and is generally looking for the “secret” to how they can “compete” with the “Chinese” student. Which is relevant (to me) as those who are lining to this article as if it were the gospel do not understand the wider context of how and why “Chinese” students are performing so well.

With that said,Friedman has a few things right:
1) Shanghai public school students are testing at the top of the PISA exams, particularly those in the core of Shanghai where the districts are well funded, where parents are on a higher order of economy, and where the schools infrastructure is now seeing the returns on investment that have been made.
2) The Chinese education system is built around a relentless testing system that kids begin preparing for at 3 years old for, that is reinforced by daily drills, and involves the student’s family.
3) Teachers are a key reason why this system is “working”
4) Teachers in China have been given support that their American counterparts don’t

For me to what I believe is article ultimate failure is that it is (1) written with the underling belief that the ability of students to ace the PISA is a sign of success. As if acing the PISA is the actual goal of education, and (2) holds the teacher up on a pedestal when in reality they are nothing more than a blunt force object that is used to cram as much information as possible into their students minds, threaten them when necessary, and demand recommend they attend cram schools in-between semester so that the teachers can receive a kickback the student can get that extra edge.

Ultimately the open secret that no one discussed in front of Friedman, yet is something nearly every academic I speak with in this country understands (as do those at the top of the country), is that the education system as they have developed it is producing students who are winning a game that they should no longer be playing. With results that no longer help them.

Just as it has not helped the neighboring countries (Japan, Korea, Singapore, etc) who have all fallen into this exact same trap and have been scrambling to remove themselves from. Something that several of my recent projects have been focused on (in Asia)

from my experience, this is a system does do an amazing job at educating the masses, as the PISA test highlights, but it has not done its job to incubate that talent. That is the next step, and if there is something that readers should take away from Friedman’s article, and this blog post, it is that for China to move forward, it will have to be done without the current stock of teachers.

Teachers who have been, to date, excellent at stuffing facts in, but who are unable to draw anything out.

which is Shanghai (China’s) real secret. That, for all the success in skilling up the talent pool over the last 20 years, these teachers are not going to be able to get their students to do anything than test.

China’s Global Foodprint. Anyone Else See a Problem?

Sunday, October 27, 2013 5:09
Posted in category The Big Picture

While recently reviewing some notes on China’s growing foodprint, I came across a presentation written by Daron Hoffman (formerly of Rabobank) that contained a chart that I think highlights the size of China’s effect on the world food market.

It is a graphic that I think deserves serious thought as:
(1) Ghis represents China today, at about 50% urbanization
(2) While China’s per capita footprint for everything (carbon, water, etc) is nearly 1/5 of the world average, but if you were to look at the urban centers you would find many surpass the footprints of their Western peers
(3) China’s goal is to urbanize another 300m people by 2030.

ergo.. this as the next 300m are urbanized, this will grow into a larger issue should nothing about the system that delivers food change.

One of the big area where the system can change, is in the efficiency of the food delivery system. China is, or at least was, a country where all the cities could feed themselves. However, as China’s urban centers grew, and as these local systems grew, inefficiency began to skyrocket as the investments in critical processes were not made.

The result is that China now wastes between 40-60% of its food between the farm and the fork. which is a needless source of pressure for the economy in the form of food inflation, but longer term, this is also a water problem. A water problem in that half the water used in the ag economy is lost, and a water problem because the other half of the water is left heavily contaminated by pesticides, herbicides, fungicides, and fertilizers.

Beijing. We have a growing problem.