What's our Game Plan?

When we lived in China, my wife and I were having dinner with a great Chinese friend.  As often happened, conversation turned to the U.S. and its role in the world.  Our Chinese friend grew increasingly upset with what he saw as U.S.-led injustices in the world.  Frustrated with the direction of the conversation (and always careful not to enter too deeply into political discussions in China), my wife finally said, “You’re right.  You know everything about America.  We air our laundry for the world to see.  The problem is, you know nothing about China!”

Pow!  Right in the sore spot. 

Fortunately, the Chinese are gracious people.  We changed the conversation, enjoyed our dinner, and have remained friends to this day.

I occurs to me that we know increasingly little about our own country.  Our Constitutional roots long forgotten, we look to those in Washington to solve every problem.  In the global soccer match with China, we fly from country to country, falling on the tarmac and screaming in an effort to draw a foul that never comes.  To be sure, the world is not fair.  Other countries have not opened their markets to our products to the same degree that we have opened ours.  Yes, the RMB is likely undervalued.  Still, perhaps it’s time that we stop thinking so much about the competition and focus on our own game.

There’s a story to be told in the numbers Wall Street obsesses over – the story of our game strategy.  Before we ship the last engineer to a low-cost country, perhaps we should ask someone to do some analysis.

The End of Cheap China Goods?

I just saw an interesting AP article on rising manufacturing costs in China.  Labor costs have been on the rise in China for years, as has the value of the Yuan.  Certainly, prices are still lower in the Chinese interior, as compared to the seaboard, where most of the development has taken place.  Still, this trend will continue.  In the current economic climate, manufacturing costs in the US are becoming more competitive.  It seems to me that a little balance is not a bad thing; that the current economic situation is forcing us to consume less and maybe save more.  What do you think?

Iraq's State-Owned Enterprise Problem and China's Solution (Again)

When China started to privatize its state-owned enterprises (SOEs), it could have auctioned them off to the highest bidder.  I'm sure large auctions happened in many cases.  In many other cases, the factories were sold (given?) to people with contacts inside the party.  While that may not seem morally correct, the end result really did serve a large number of people.  In fact, selling (giving?) the factories at low prices indicates an understanding that most SOEs are really worth nothing more than the land they are on, and maybe some equipment value.  As businesses, SOEs are, for the most part, disasters. By getting SOEs into the private sector quickly, many people were put to work in productive and viable businesses.

Iraq has a similar problem.  The government of Iraq owns hundreds of factories, which employ hundreds of thousands of workers, who don't even show up for work.  Essentially, the SOEs have become another means to distribute government rations.  Still, the Iraqi government, with advice from some US advisors, continues to overvalue these terrible companies and desperately offer them to foreign investors.  Better they use China's models -- give them away to businessmen who will rapidly make them productive.  Of course, a few connected people will get wealthy.  Other than making some feel jealous, who cares?  The end result will be thousands of Iraqis returned to work.

Iraq's Power Problem and China's Solution

The biggest complaint among small business owners in Iraq is the lack of electrical power.  Most small manufacturers have their own generators, but the operating costs are so high that it doesn't make sense to use them.  Power is available, but in unscheduled blocks of 1.5 to 2 hours, delivered every 4 to 6 hours.  Imagine that you are attempting to produce plastic parts, and your machines take 90 minutes to warm up.  You aren't going to make many parts with 1.5 hours of power.

Billions of dollars have been spent repairing the electrical grid in Iraq, and much progress has been made.  Still, it will be several more years before all the citizens of Iraq have reliable electrical power.

During the peak of China's growth, China faced a similar shortage of electrical power, and the solution the Chinese government adopted offers a basis for a solution in Iraq:

1.  When I was working in China, my company opened a new manufacturing facility.  The local government was unable to meet all of our power demands.  We simply received a schedule, telling us when we would have full power and when we wouldn't (we didn't have power for 2 days each week).  We were able to schedule our work around power availability.  Though the situation in Iraq is more extreme, the Iraqi government could provide a power schedule to industrial areas.  While in Iraq, I was able to convince the Ministry of Electricity to provide a scheduled block of power to the factories I was working with.  The benefit was enormous, and new factories opened in the area as a result.

2.  The Chinese provide power preferentially to business.  Iraqi government employees provide power preferentially to themselves.  Obviously, there's some room for improvement here.

The Power of Business

As we struggle through the worst environmental disaster in the history of the US, it's easy to think about "corporate greed."  Our recent history tells us that a large group of corporate executives has behaved in ways certainly irresponsible, and likely criminal.  The result has been the massive collapse of our economic system, and now even such far-removed industries as shrimp fishing are being threatened by the result of corporate irresponsibility.

Let's not forget, however, the good that businesses can do.  Of course, they provide money and benefits.  Business can also serve to bridge cultural divides that politicians and diplomats can only dream of.  While in Iraq, I brought together Shia manufacturers and Sunni farmers to collaborate on drip irrigations systems.  So much more is possible.

Iraq's Elections

Iraq's national elections happened with a level of violence that was below most expectations.  This, on the heel of successful governate-level elections in early 2009.  Again, I'm not recommending vacations to Baghdad, but things are improving.  You should definitely keep an eye on Iraq's market.  If a new government is successfully formed, it will be an important milestone.  The overall winner, Ayad Allawi, was very popular among Iraqis that I spoke with (though neither Allawi nor Maliki won enough seats in the Council of Representatives to form a majority).

http://topics.nytimes.com/top/news/international/countriesandterritories/iraq/elections/index.html?scp=1-spot&sq=iraq%20elections&st=cse

Iraq's Investment Law

Iraq's National Investment Commission (NIC) was established in 2006, and began operating in earnest in 2007.  If you need specifics about Iraq's investment laws and general information about doing business in Iraq, check out the NIC website at:

http://www.investpromo.gov.iq/

Iraq's Culture of Business

Continuing on the list of reasons why you should consider doing business in Iraq is: 2) Iraq has a strong culture of business.  Let me clarify.  There are three types of businesses/business owners I ran into when I was in Iraq:

1.  State owned enterprises.  These anachronisms were bad when they were open, and they're worse now.  As a make-work, counter-insurgency project, there may be some value.  As a business, I'm not sure what to make of them.

2.  Opportunistic men calling themselves "sheiks" and offering to do anything for government money.  Hey, why not?  There's lots of money to be had.

3.  Real small business owners who were dedicated, eager to learn and grow, and willing to work hard.

I went to Iraq seeking the 3rd type of business owner, and I'm happy to report that I found many of them.  My work focused on an industrial area north of Baghdad, called Boob Al Sham (or Bab Al Sham).  I won't go into detail, as Mechanical Engineering magazine just published an article I wrote about the area (link to that tomorrow, or as soon as the story is posted).

You have to look for good businessmen, and not fall into the easy trap of working with the person with the best English and most helpful attitude, but if you look, the right type of business partner can be found.

Have you done business in the Middle East?  In Iraq?  How did you find the business culture?  Let me know!

What Does Iraq Need?

Continuing from yesterday's post, my first point was that Iraq needs everything. There are approximately 30 million people in Iraq, with approximately 20% of the population in greater Baghdad. Years of war and embargo (don't forget, starting in 1980 with the Iran-Iraq war) have prevented consumer goods, industrial goods, and building materials from reaching the country. As the political and economic situation in Iraq improves, there will be a rising demand for almost everything.

According to some reports, Iraq will need at least three million new housing units in the coming years. Most construction material is now imported from neighboring countries, and is of poor quality. While the current market is very price sensitive, this too will change as the situation improves. Demand for higher-priced, better-quality product will increase. If your company makes material used in commercial and residential construction, you may want to consider Iraq for future market expansion.

Where Effort is All That's Required

As professionals, we’ve been told that effort is nice, but results are all that matter. Working hard but failing to solve the problem equals job failure. Fortunately, there is one arena where effort really does seem to be all that is required, and that’s personal relations with other cultures. Of course, more knowledge is usually better, and nothing can give you more insight into a culture than learning the language, but for most of our business dealings, trying will go a long ways towards establishing trust. Treat people with respect, don’t promise what you can’t deliver, try to understand the other point of view. Basic decency and a willingness to learn are all that are required.