I Go East – My China expedition finally begins.

Henry Blodget – Slate

Posted Monday, March 14, 2005 Copyright Slate
The last time I went east, in 1989, when I was 23, it was summer, so the entire flight to Asia seemed to take place on the same interminable afternoon. Now, in the late winter of 2005, the Northern Hemisphere is tilted away from the sun, so the daylight outside the windows faded, brightened, and then faded again in the 18 hours before we landed in Hong Kong. I’ve always regarded jet lag as a sort of pansy affliction, but in this case it rendered me nocturnal in Hong Kong. I lay awake all night, and the hours that I wandered around Hong Kong asleep on my feet were dreamy and sentimental.
After landing, for example, there was the magical whoosh into town on the airport train, each seat equipped with a personal television. There was consternation at the desk of the gleaming Shangri-La in Central, where I discovered that the reason I’d gotten such a sweet deal on a five-star hotel was that I was actually staying at the Shangri-La in Kowloon. There was the blurry taxi ride through the tunnel, and the currency conversion gaffes upon arrival: After tipping the doorman HK $5, I chastised myself for spending like an investment banker—and then realized that my generosity actually amounted to 70 cents (at which point I handed the startled man another HK $10). Then, upstairs, when a bellhop charged into my room with a ceramic tea pot and two rock-hard nectarines, I decided that an HK $20 tip was too generous for petrified fruit I hadn’t ordered, and stiffed him. There were tapas and flamenco music in the hotel bar, Juventus beating Real Madrid, and seven languages on my hotel-room TV. It didn’t feel like East Asia. It felt like nowhere.
The stunning Hong Kong waterfront. But where are the junks?
Hong Kong is just like the pictures, except with rice-pot humidity and without the junks. In the postcards, the skyscrapers that sprout like asparagus stalks out of Victoria Bay are usually juxtaposed with junks. My first day, I crossed Victoria Bay twice on the Star Ferry, but I never saw any junks. In fact, as the accompanying picture illustrates, I didn’t see much of anything.
Mystery dumplings
A Slate reader named Ross O’Brien had been kind enough to invite me to lunch at Wang Fu, a dumpling shop on Wellington Street, a quarter-mile up “The Escalator” from the Star Ferry dock. O’Brien has lived in Hong Kong for seven years, where he runs a research and consulting firm called Intercedent Asia. O’Brien was the one who flamed me for cackling about the nutty food at business banquets in Mr. China, so I suspected that lunch might be a ploy to subject me to some of the same.
Wedged into a tiny table near the Wang Fu kitchen, the goateed O’Brien began jabbering with the waitress in Mandarin, an extended discussion that seemed to confirm my fears.
“Horse balls,” I imagined he was saying. “Bring us the biggest horse balls you’ve got.”
“Sorry, no horse balls today,” I imagined the waitress replying, “We just have bull’s balls.”
“Fine, bull’s balls. Bring us a double order.”
And then there they were, steaming, in front of us. While O’Brien described the intricacies of patent law, regional integration, and the slow march toward the irrelevance of Hong Kong, I wolfed down the tasty dumplings, glad I had no idea what they were.
Hong Kong growth market: electric pets
O’Brien hasn’t struck it rich here, but he’s doing fine, and he and his partners are besieged with—and bewildered by—laowai (literally, “old foreigners,” with a hint of “buffoon”) who imagine that China is still a green field of opportunity. He shuttles among Hong Kong, Shanghai, Beijing, Singapore, Bangladesh, and India the way East Coast bankers shuttle between New York and Boston, teaching executives how to navigate Asian technology and telecom markets. He believes that doing business in China is more a necessity than an opportunity and that companies that don’t won’t be able to compete globally. He regards much of the whining about the reverse engineering and copying of American technology products—telecom switches, for example—as, just that, whining, and observes that American companies often do the same thing.
After lunch, on Hollywood Road, O’Brien swerved momentarily into a coffee shop that looked suspiciously like Starbucks, then, abandoning it for a less-crowded one, explained that the shop’s chain, Pacific Coffee Company, had been designed with the express aim of being acquired by Starbucks when Starbucks went east—right down to the “Tall” and “Grande” cup sizes. Unfortunately, Starbucks decided to go it alone. So now the companies are duking it out, block by block, with Pacific Coffee, so far, hanging tough.
More waterfront
Later, nipping under awnings to avoid the afternoon rain, I took a taxi to the glass towers of Pacific Place to meet with some major China investors (details to come in a later dispatch). Then, with the light fading, I struggled zombielike into the Foreign Correspondents’ Club to have a beer with a real foreign correspondent. I expected that the FCC might look like those British Empire-era saloons in Out of Africa, an ancient colonial building with leather, dark wood, and antelope heads on the walls. I wasn’t far off, but it was more like Empire meets Marriott. As I downed a Foster’s, my host tutored me on the state of media in China today. Specifically, I learned about “playing edgeball,” the delicate dance China editors must do with Party censors, who won’t state with clarity what is and isn’t OK to say, leaving editors to forever test the “edge” and, in so doing, bet their careers.
How To Build Christmas Trees in Shenzen
Some of China’s best investors teach me a lesson.
By Henry Blodget
Posted Tuesday, March 15, 2005, at 10:07 AM PT
Not a serious China investor…
In Hong Kong, between dumplings at Wang Fu and beer at the Foreign Correspondents’ Club, I stopped by 2 Pacific Place to learn how professional investors invest in China.
I met with some of the best. Beyond its reputation as a symbol of connection capitalism, the Carlyle Group is also an investment firm, and a big one at that. It manages $19 billion of assets and employs 300 people in 14 countries. The firm’s strategy is to “leverage local insights,” and it accomplishes this not only by having a local presence—Asia investments are managed out of offices in Bangalore, Seoul, Shanghai, Singapore, Tokyo, Hong Kong, Mumbai, Sydney, and Beijing—but by hiring natives.
Both Carlyle managing directors I met, Wayne Wen-Sui Tsou of the Asia venture fund and Xiang-Dong (X.D.) Yang of the Asia buyout fund, are from China. Both have MBAs from Harvard, and Tsou also has an M.S. in electrical engineering and a J.D. Both have more than a decade of professional investment and Wall Street experience. Both control hundreds of millions of dollars and have armies of analysts scouring China for opportunities. Both, needless to say, are fabulously well-connected.
Serious China investors inside
It is pleasant to think—as the financial press forever suggests—that with a little gumption and homework, we will unearth opportunities that Tsou, Yang, and their brethren miss. In some cases, we can (we win at roulette occasionally, too). And in some cases even TCG, et al., makes awful mistakes. But before we bet the farm on a China stock—a topic this series will return to—we should recognize that we are at as much of a disadvantage in this endeavor as we would be batting against Randy Johnson.
According to Yang, China’s entry into the WTO opened the door for buyout funds, which take control of companies, then fix, grow, and/or sell them. Many China buyout opportunities result from the Chinese government looking to unload state-owned enterprises, and the deals are so complex that only a handful of firms can do them. Here, TCG and other foreign funds are benefiting from a temporary bit of good fortune. A recent swoon of China’s domestic stock market has shrunk capital that would otherwise be available to local buyout groups. So the Carlyle Group has cash to spend now that Chinese firms don’t. TCG fears native competition: In every Chinese city, Yang says, there is someone with more connections, cheaper capital, and better information. One of Tsou’s investments, a lithium-ion battery company, suddenly faces competition from a factory built with a fortune made in the Chinese real-estate market. Foreign China investors are also stiffer competition, Yang says. Americans, Europeans, and others aren’t making the really dumb mistakes they made in the early 1990s.
The Carlyle Group’s buyout investments include a department store chain—which is thriving as the wealth of some Chinese consumers skyrockets—a consumer finance company, and the largest manufacturer of artificial Christmas trees.
Making an artificial tree these days means more than pouring green plastic into a mold. Boto, the tree-maker that Carlyle bought most of for $136 million, employs 8,000 workers at a 3-million-square-foot factory in Shenzhen, including 50 in research and development. The company makes 400 different types of trees, including green, gold, silver, flocked, frosted, pre-lighted, and fiber-optic, and it ships more than 6 million a year. Some of Boto’s trees spray snow, some have real pine cones, some play music, some rotate, and some count down to New Year’s and then launch into “Auld Lang Syne” (according to the Wall Street Journal, the latter model took five months to design and sold a disappointing 500,000 units). Consumers hate putting trees together, so some of Boto’s open like umbrellas. Boto is developing a tree that assembles itself at the touch of a button, and someday, perhaps, the company will tackle the real advantage of the competition: smell.
Why does Boto need the Carlyle Group’s money? In part because the plastic Christmas-tree industry is under attack from the biological Christmas-tree industry. A month ago, the National Christmas Tree Association jubilantly reported that the sale of “Real Christmas Trees” (their caps) in the United States increased to 27 million in 2004, while consumption of artificial trees declined. “Consumers are obviously demanding more of the traditional, farm-grown, natural trees instead of the fake ones from China,” the chairman of NCTA’s Market Expansion Task Force declared. The association hammers on the risks of “possible metal toxins like lead” and notes that artificial trees clog landfills “forever.” (NCTA leaves it to others to point out that biological trees are used once, shed needles, die for the cause, and occasionally burst into flames.) If not for the fact that American companies make “fake trees,” too, the NCTA would no doubt also play the job card: the Real Christmas Tree business employs 100,000 people on 22,000 farms—another instance of “China” threatening an American industry.
The Carlyle Group is a member of an American industry, too, of course, and the several hundred American pension funds, endowments, and others it invests for are doing fine. The firm doesn’t release statistics by fund, but, as a whole, it returned $5.3 billion to investors last year—including, perhaps, investors who manage the 401(k)s of some in the Real Christmas Tree industry.


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