We have been going through some changes at CinemaNow of late, one of which is our CEO is becoming Chairman and moving over to become President of Digital Distribution at Lions Gate. In a recent email exchange between he and I, he made the comment "neither of us can be 100% objective in this matter." It was a simple but powerful statement. I remember when I read Atlas Shrugged I thought at the time and still think today that the first half of that book is the "best book I have ever read" and the second half of the book was the biggest disappointment I have ever read. It was Ayn Rands attempt to document the philosophy of objectivsm and in the all she proves is that the philosophy of objectivity is as utopian as any religion. We are simply not capable of it.

Hush Restaurant
858 S Coast Hwy
Laguna Beach, CA 92651
Phone: (949) 497-3616

Located in beautiful Laguna Beach where the ocean air is refreshingly crisp and the people are enjoyable.  Unfortunately, hush is a fish out of water here.  Being native to LA, coming to hush felt like I was back in Hollywood with the bustling bar scene and tighlty knitted 2 person tables which squeeze out just about every ounce of intimacy left. 

Parking lot pimpin
Pulling into the valet is definitely something of a sight, not surprising given you're in Laguna, but not seen everyday, Bentleys, Ferraris, Benzs, and just about every other luxury/exotic you can think of fill the lot.  I'm in frequent attendance to Hollywood and have not seen a lot like that ever.

Service
We were given a table that actually would've been perfect given we were a 10,000 piece puzzle and we were the last piece to be plopped down.  I can understand from a business perspective, dollar value per square foot, fine, I'm in absolute agreement, but in the middle of our first bottle of wine they actually come over to us and ask us to move over a table becuase the larger group aside wanted more privacy.  That is incredibly ridiculous, especially if I were to calculate money made.  2 people, ordering appetizers, dinner and multiple drinks pound to dollar to time is much more profitable than a large group socializing.  Preposterous! I digress, the want to be LA restaurant is failing at that, as most "nice" restaurants in LA would make a compensative offer for the inconvenience, perhaps a drink, an appetizer, even a new napkin would've won me over.

Food
The menu is fairly expensive, plates averaging around $30 - $40, not a problem, the food must be good.  Don't eat the complimentary bread, it's a waste of calories.  They are very similar to the kaiser rolls you buy from Costco, strike 1!.  She'll have the scallops, filet mignon for me please!  Raaarrrree...  Our food arrives, we're a bit seasoned given our drinks, definitely prepared to delicately devour our meals.  I cut open my steak, drooling as I lift the fork to my mouth, and boom.  For what seemed to be an eternity of waiting to experience heavenly bliss of my juicy rare $40 filet mignon completely utterly was destroyed by a well done carcass sitting in my plate limp with what I thought was a bite of beef jerky in my mouth. Strike 2!  Waiter returns with a new plate, this time rare, good steak, I enjoyed it, not Ruth's Cris, but very good.  The scallops were lovely as well.  Full and sated, a look over the plain dessert menu made me hang the menu off the table, close my eyes and pin the tail on the donkey.  Prick! Choc lava cake it is.  As it comes out, it looks good, but tastes like a brownie.  Scratch that, I wish I had ordered a brownie. Strike 3!  Food is definitely not worth this price.

Drink
Wine selection is insane, a bit overpriced if you know your wines, but a wide variety to choose from.  Drinks are somewhat stiff which very much pleased me.

In the end
Definitely not a place to go if you're a frequent diner in LA, this place will only leave you laughing at how bad they failed at copying a typical LA spot, but in the hopes of rubbing elbows with some of Laguna's money, you'll be sure to find home here.  P.S.  Don't wear a hat here, they made me take it off in the middle of dinner! Aiyaiyai.  I wont go here again, unless I'm bored and looking to waste a few bucks.

Education has become perhaps the greatest area of focus for me over the last few years in terms of my personal research. I think in part because it has become abundantly clear to how far behind the education system is in the adoption of technology and how teaching methodologies have barely changed from the manufacturing models generated over 100 years ago.

But even more than this education has been important in my research as it seems to always come up as the only viable long-term solution to most of the issues we face in a global society. Everything is changing (there is nothing new here, so it could be argued nothing changes) and we need a generation of leadership that understand global economics, global geopolitical issues, global environmental issues and even the changing face of conflict. Tomorrows generals will need to be radically different from today’s just as much as tomorrow business and political leaders will need to be different from todays.

While this post is not the place where I will dig into these issues it a place to begin to see how China is viewing education.

…

Acquisitions such as the ones by Lenovo and TCL are attempts to enrich China’s impoverished repertoire of corporate brands. On a human level, the same impulse for respect and invisible capital motivates a vast demand for overseas education. Although Beijing’s record in improving the availability and quality of the education it provides for its people has been impressive, there is an insatiable thirst for more. And the branding that comes with a degree from a good foreign university, such as Harvard and MIT or Oxford and Cambridge, is valued at least as much by Chinese society as the knowledge that may have been acquired there. It is difficult to comprehend quite the size of potential demand in this area. In the past, for instance, the flow of qualified Chinese applicants to such universities was circumscribed by a lack of financial resources, substandard teaching in some Chinese schools and an imperfect mastery of the English required for the entrance examination. But now that China’s ‘middle class’ has swelled to include roughly 150 million people, and education loads secured against property are available form state banks, the potential increase in applications is enormous. English is becoming less of a barrier now that an estimated 200 million people are studying it across the nation. Teaching standards are shooting up and hundreds of thousands of gifted children, who just a decade ago would have been denied anything but a rudimentary education, are now thriving under competent tuition. What this portends for the world can be seen in the 2004 participation numbers at the annual international Science and Engineering Fair run by Intel the US semiconductor company. In the US, 65,000 students participated in local fairs to select finalists. In China, six million did.

…

The benefit to Dulwich from accepting several clever Chinese students each is year is that their performance bolsters the school’s reputation. Parents who send their children to fee-paying schools in the UK make their choices increasingly on the basis of their rank in ‘league tables’ of exam result achievers. Good students, therefore, boost a school’s exam result average, while brilliant pupils – such as those who win scholarships to top US or UK universities – give their headmasters something to boast about when prospective parents come to look around on open day. The elitism, in other words, has become self-perpetuating. The best schools lure the best potential students, who then improve their school’s performance and so on. This dynamic, though pervasive, is far from universally popular. In the UK, just as in China, some teachers and parents bemoan an intensifying culture of competition that can place unbearable strain on pupils while depriving them of time to play sport and indulge in the cherished aimlessness of childhood. But no matter what misgivings parents may have, the root cause of the trend is clear; just as today’s world is global to an extent unprecedented in history, the world of tomorrow will be more so. The current generation of Dulwich College students, if they choose when they are adults to work in an international business, will have to compete for their jobs with many more candidates than do their predecessors today. Faced with this hyper-competitive vista, the reaction of many may be to opt out of the globalized market place and take up locally focused jobs that may pay less but offer a more sane existence.

But Able is in no doubt about where he is heading. The world is becoming more global and education has to follow. This conviction drives his school’s overseas expansion. By most reckonings, Dulwhich is already the world’s most internationalized secondary school, with a campus in Phuket, Thailand as well as Shanghai and Beijing. There are now plans for six more franchised international schools in China and negotiations are well advanced to set up three joint ventures as well. A search for an opening in India is also drawing to a close and Able is sure that Dulwhich will have a school there in the not-too-distant future. There could also be one in the Gulf, he adds. The income form the franchise fees and a per-pupil fee in all of its overseas branches will return to Dulwhich in London, where it will fund bursaries for clever boys from the UK and elsewhere in the world. The final aim, Able explains, is to expand the Dulwich financial endowment to a size at which the school becomes ‘needs blind at the point of entry’. In other words, so wealthy that it can offer scholarships to anyone, regardless of their circumstances, whose presence will enhance the school’s brand. The hope is, Able says, that in a few decades’ time Dulwich will be to secondary schools what Harvard is now to universities.

The environmental debate has always been something that has interested me. I think because it’s a reflection of polarization of American politics in general. It has been my perception that long ago the facts became irrelevant to many in the debate and became purely a emotional debate.

As I stated in one of my previous blog entries, I lost respect for the “green movement” and Green Peace specifically when a teacher made us as kids almost weekly watch two green propaganda movies one of which involved having us at 7 or 8 watch sealers club to death (very graphically) baby white coated seals. It turns out that Green Peace staged the entire escapade and had paid for people to do this to create an outcry (that was never how the seals were killed in reality).

My years spent in Texas included listening to my friends say “its arrogant to think that we damage this planet that has been around for so many years.” And finally to some extent Al Gore didn’t do the rational world a favor with his early books that basically predicted the world would be over by now, and clearly the environmental cause was hijacked by politicians with political agenda’s in site and by Hollywood with a desire to sell movies rather than rational discussion on the topics.

However, thankfully rational people like the editors in the Economist magazine and editors in the Asian Wall Street Journal have in recent years taken a far more objective approach to the matter. In addition my friend and partner in my education project has educated me being able to look past the noise to the real issues inside global warming.

Clearly it is beyond debate (sadly the Heritage Foundation have missed the boat on this one) that there are very serious environmental issues facing THIS generation and future generations. Ironically while the left have been the ones who have championed that cause and while big business have often been culprits it is general popular opinion in the WEST that holds the keys to finding solutions. Only in finding this common ground can market forces aid in the development and accountability of such solutions.

My concern as the following section from China Shakes the World shows is that developing nations, who have a general popular level the concern of “feeding and employing our developing nation” way ahead of the popular concern of “comfort and protection of our environment” in the West could well be the tipping point of environmental disaster on a scale never seen before.

…

The Anyuan coal mine is known throughout China because it was one the places in which Mao Zedong cut his revolutionary teeth. When he worked there in the 1920s fomenting disaffection among workers towards their German bosses, the mine was one the main sources of fuel for the Yangtze River Basin and an early industrial base in the poor interior province of Jiangzi. By the time I got there, though, most of the coal reserves, along with the ideological poignancy of the revolution, had been exhausted. The place had a desiccated feel ot it, as if it had been plundered and left with little but memories. A cavernous museum to Mao and the glory of the revolution stood on top of a hill, but the city of Pingxiang, which stretched out beneath it, was anything but resplendent. Its streets were dirty, thronging with unemployed miners and full of brothels masquerading as hairdressing salons. But that was not the worst of it. Large urban precincts had begun to sink into the disused pits and mineshafts that had provided the town with its livelihood for a century. In some areas, the thin slivers of land that had concealed gaping subterranean holes had suddenly given way, causing the buildings they had supported to tumble into them. In other areas, schools, hospitals and houses were slowly and unevenly subsiding into the earth like ships listing at anchor.

The era of Communism in China, as in the former Soviet Union, has not been kind to the environment. A combination of neglect, overpopulation, careless industrialization and the inability of a planned economy – in which prices are fixed by state fiat – to put an accurate value on nature’s gifts has contributed to an environment crisis that is unparalleled in its severity. Everywhere there are signs of distress. The deserts of the north are marching towards the towns and cities on their fringe. Waterways that just ten years ago were gushing torrents have slowed to a trickle or disappeared altogether. Food is often contaminated with illegal and alarming levels of animal hormones and agricultural chemicals. Strange new diseases such as Sars and bird flu appear with regularity. Air pollution is so bad that some 380,000 people may be dying prematurely each year by 2010 because of respiratory ailments. Several animal and bird species face extinction or loss of habitat as wetlands and forest vanish. Several towns and cities like Pingxiang are sinking into underground holes that have been burrowed by miners or emptied of the underground water they used to hold.

These problems, or their antecedents, have been around for decades. It is not revelation to assert that the edifice of Chinese statehood rests on frail ecological foundations. But what is new – and world-shaking – is the projection of this environmental exhaustion into the international arena. Extraordinary though it now seems, the famine that followed Mao’s “Great Leap Forward” in the early 1960s took place for the most part without the outside world’s knowledge. More than 30 million people died of starvation while ‘China watchers’ debated whether hunger was, in fact, wide-spread at all. Not, though, the appetites unleashed by the rise of the world’s most populous nation are felt even in the most remote corners of the earth. The forests of Indonesia and Papua New Guinea, the fish of the Pacific Ocean, the iron ore extracted from mines in Australia and Brazil, the soybeans grown in Latin America and the United States, the freshwater that flows into the Mekong River, the oil underground in the Middle East, the gas from Russian Siberia, cashmere from goats on the Mongolian steppe and hundreds of other resources and commodities from places all over the globe are being subject to voracious demand from a burgeoning China.

It may seem obvious that the rise of a great nation will result in great appetites and that those appetites would, in their turn, drive up the international prices of commodities in demand. But history also provides alternative precedents. The prices of grain and meat actually fell during the emergence of the United States in the last three decades of the nineteenth century because the commissioning of more and more virgin territory for agriculture raised the supply of food. China, however, is not blessed with excess farmland. Not only do domestic producers find it difficult to keep up with the surge in domestic demand, but the ongoing degradation of the environment and the exploitation of natural resources also means that the ability of producers to respond to demand signals is actually regressing with time.

Indeed, China’s endowments are deeply lopsided. The extreme frailty of its physical environment contrasts with the prodigious strength of its human capital. The disequilibrium that results from this mismatch explains, in a nutshell, both the intensity and polarity of the influence china exerts on the world. At one extreme, the world have never had to deal with such a large, cheap and versatile workforce joining the globalised economy in such a short period of time. At the other, never before has so large a country emerged so quickly from so eviscerated a natural base. These starkly different characteristics explain why China can drive down the average level of working wages and the prices of manufactured productions worldwide, while propelling the prices of most sources of energy and commodities through the roof. The cleavage between these areas of influence falls neatly between the things China makes and the things it needs.

At the top of the list of needs is oil. The US during the twentieth century was able to fuel its development with oil drawn from deposits in Alaska, the Gulf Coast states, Oklahoma, offshore Louisiana, California and Illinois. But China’s geology is less fecund. It made a few large discoveries in the 1960s and 1970s, but in the last two decades its production had fallen far behind domestic demand. Twenty years ago, it was the largest oil exporter in east Asia. Now its is the second-largest oil importer in the world. In 2004, it accounted for 31 percent of the global growth in oil demand, suggesting that the rise in the price of oil to above $60 per barrel in mid 2005 was to a significant degree due to the influence of Chinese demand. China’s appetite is growing at a pace that makes a mockery even of expert predictions; in 2005 it was consuming almost as much oil as the US Energy Information Administration though it would need a full five years later. And, as always, from a per capita perspective, the potential was mind-boggling. In 2001, Americans were suing more than eleven times more oil per person than Chinese. Indeed, if Chinese were ever to consume at the American levels of 2001, they would need to guzzle three times the world’s total consumption.

…

Conservation in any part of the world happens best within stakeholder communities where citizens have the responsibility and the right to hold local officials accountable to their promises. But in China, notwithstanding the growing role of some embryonic non-government organizations, these conditions do not exist. Problems therefore deteriorate until they are so grave that they can no longer be hidden from central authorities. But by the time central authorities are called in, it is often too late for conservational solutions and Beijing resorts to sweeping, revolutionary policies. In the case of the Huai, this amounted to the over-ambitious and ultimately unsuccessful decree to halt all industrial waste pollution by closing down thousands of local factories. In the case of the Yellow River, it was to commission the largest civil engineering project since the Great Wall: a $60 billion project to transport a river-load of water from the Yantze and its tributaries to the Yellow River Basin and to parched northern cities such as Beijing and Tianjin. The project, which was already underway in 2005, envisages digging three canals of over 1,000 kilometers in length and pumping the water northward. But even before the scheme had started operating, environmentalists were questioning the efficacy of the Herculean efforts required. For one thing, some of the water to be pumped was expected to come from heavily polluted sources, including the Huai.

On the World Bank’s list of the twenty most polluted cities in the world, sixteen are in China. Acid rain falls over 30 percent of its territory. Although some large showcase cities such as Shanghai and Beijing are being cleaned up, rural areas are becoming a dumping ground for toxic waste. Chinese environmentalists tend to see the problem as at least partly imported. The factories that multinational companies have set up have turned China into the workshop of the world but have also made it the ‘rubbish tip of the world’, one senior official once told me. But this view is at variance with how much of Europe, America and the rest of Asia regards the international impact of China’s environmental failure.

I have recently finished reading Rod Oram’s book Reinventing Paradise which has the tag line “How New Zealand is starting to earn a bigger, sustainable living in the world economy.” While James Kynge does not research the impact on a remote country like New Zealand he does research its effect on Europe and the US.

…

The following conversation when James was on a train in Europe was quite insightful.

I went by train from Prato to Chiasso, a town just over the Italian border in Switzerland. By Chance I found myself sitting next to two Chinese, one older, thick-set man in casual clothing and his young, keen colleague in a suit. The older man was the boss of a textile company based in Zhejiang and his associate was the company’s representative in France, where they had recently acquired a linen manufacturer, Terre De Lin. The young man had taken it upon himself to be his boss’s eyes, ears and cultural compass among the alien corn, offering up an effusion of unsolicited observations in a cloying voice. So when the boss asked him why he had been unable to arrange any business meetings for the next day, the young man went into a discourse on the laziness of Italians. They never wanted to meet because they took so much time off. ‘Their lives are just too comfortable,’ said the young man screwing up his mouth as if the thought tasted bitter. The boss nodded silently as he stared out at the Tuscan countryside.

Both men seemed interested by this theme. A while later the boss remarked that they had been traveling for an hour and a half and had hardly seen a single factory. ‘Foreigners like looking at scenery,’ the young man offered. The boss paused for thought, and then asked: ‘Scenery or production. Which is more important?’

My mobile rang and I answered it.

‘You see, some foreigners can be quite low-quality too,’ the young man said to his boss. ‘And look at his phone. So old. Yours is so much better than his.’

It was true. My phone, with its scuffed corners and dull gray display, was certainly inferior to the boss’s all-beeping, all-flashing, full-color model. Nevertheless, I found myself unable to resist letting them know I could understand what had just been said. ‘Is that so?’ I asked in Chinese.

Disappointingly, the young man did not skip a beat. ‘Yes. I was just telling my boss that your phone does not match up to his. How much did you pay for it?’ he asked.

As the journey went on, we struck up a lively conversation. The boss’s curiosity ranged over many subjects, some familiar, some surprising. Why were foreigners lazy? What was Europe going to do when it did not have much industry left? Could you really run an economy on services alone? Did European cows really consume $2 a day in farm subsidies? Was there any reasons for the European Union to exist? Hadn’t it come into being because a few French and German politicians had wanted to play political games?

In among the questions, there were statements. China, the boss said, would be finished if it took its eye off economic construction and started to play politics again. Playing politics was the worst thing that could happen to a country. During the Cultural Revolution, playing politics had cost the formal education of millions of people, and the boss had been one of them. Making money was the only objective truth, he said. But foreigners already had enough money, so now they were playing games with politics.

(Chinese view all non-Chinese as foreigners even when they themselves are living in a foreign country). I asked the boss how he found doing business in an alien culture such as Europe. ‘It is better than before. Five years ago, hardly anyone in the textile industry would meet us. Some would not even take our calls,’ he said. ‘Now, wherever we go, we meet the CEOs. You know what the difference is? Money. It is the only thing that foreigners respect.’

…

At lunch, the conversation was somewhat somber. The business of gold was in trouble. Northern Italy was home to over 10,000 jewelry manufacturers, most of them small-scale artisan outfits that, taken together, make up the largest gold jewelry industry in the world. But competition from China and Turkey was threatening to wipe them out. You could see the changes already in Italy’s demand for refined gold; in the last four years it had slumped from over 600 tons annually to around 350 tons. Camponovo saw little prospect for an improvement. Every year, he said, Chinese entrepreneurs and designers decended on the big jewelry fairs in northern Italian towns such as Vicenza to buy speciems to take home and reproduce at less than one-tenth of the Italian price.

What really exercised him during our lunch and later during discussions in his office was how ignorant the Italian and Swiss governments seemed to be of the nature of Chinese competition. From his perspective, the threat came less from China’s rise than from the failure of European governments to understand it and formulate policies to deal with it. For instance, he said, corporation tax rates in his canton of Switzerland were effectively over 50 per cent of profits. But in spite of this heavy burden, the canton announced larger budget deficits year after year. The reason for these deficits was not any significant increase in spending on essential infrastructure; Chaisso is one of the wealthiest places in Europe and the roads, railways, schools and hospitals are already excellent. The main cause of the deepening deficit was state payments to individuals for medical treatment. Of some 300,000 people living in the canton, around 90,000 qualified through various loopholes for help in paying their health costs. ‘We are killing ourselves with comfort,’ he said.

Healthcare was one cost. Unions were another; there were ten different unions represented among the staff who worked in Componovo’s gold refinery. The red tape and the welfare payments were suffocating, he said. In every company and profession it was the same story; the socialist welfare state had turned from a boon to a burden. A couple of years ago, he said, there had been a move to increase the twenty-five-hour working week of school-teachers in the canton by one full hour. But many teachers opposed this, so a public, canton-wide referendum had to be held to resolve the issue. Camponovo shook his head at the memory of it.

I thought of the boss and his assistant on the train and wondered what they would make of a conton-wide referendum on a twenty-five-hour week for teachers.

… Switch now to small town USA…

The last person I meet before the speeches started was Eric Anderberg of Dial Machine, a fair-haired man in his thirties with an open face and a quick intellect. He had been to China on a trip led by Manzullo and Dennis Hastert, Speaker of the House of Representatives, and he sat on a committee in Chicago that provided the Federal Reserve Board with feedback on the state of American industry. He saw Rockfords predicament from both a micro and a macro perspective. Dial Machine had had to let go thirty of its seventy staff in the last couple of years and Anderberg seemed deeply affected by the experience.

‘How do you tell people who have worked for you for all of their life, people whose families you know, that they no longer have a job? Everyone knows that a skilled, qualified machinist earning $16 an hor will not find another factory job in Rockford now,’ he said. The place his former workers were most likely to end up was behind the counter at the discount end of East State Street working in Lowes, Home Depot, Target, Sam’s Club, Menswear House or Wal-Mart itself for $7 an hour without a pension. ‘The government says that it is creating jobs for those people leaving the manufacturing sector. But I say what kind of jobs? No wonder real wagers were falling across the economy,’ Anderberg said.

His view of free trade was that it was fine as long as it was fair. But competition with China was structurally and qualitatively unequal. The Chinese fixed the value of their currency against the US dollar, keeping it undervalued so as to give their exports greater competitiveness. They provided little or no welfare for their workers, so their costs were artificially low. There were no independent unions in China, so the safety standards he had seen in Chinese factories would have been illegal in America. The state banking system provided cheap credit to state companies that could default without consequences. The central government gave generous value added tax rebates to exporters that were not available to US companies. Restrictions on emissions in China were lax, so companies had to pay relatively little to keep the environment clean. Chinese companies routinely stole foreign intellectual property, but it was difficult to prosecute them because their courts were either corrupt or under government control. Finally, the state kept the price of various inputs, such as electricity and water, artificially low, thereby subsidizing industry.

As the main course of the dinner arrived, Frink got up to speak. From the start he was at pains to identify himself with his audience rather than with the bureaucrats he worked for.

He explained that his position had been created in response to criticism from small and medium-sized manufacturers towards the policies and efficiencies of the US Department of Commerce. He did not know why the government had not seen fit to appoint a lead advocate for manufacturing before. After all, agriculture has its own full Secretary even though it contributed about 2 per cent to GDP. Manufacturing makes up 15 percent of GDP, and with the multiplying factors added in, its influence spread up to 30 to 40 percent of the economy.

Until that point he had the audience in the palm of his hand. There were deep nods, eruptions of laughter and amused smiles. His ‘champion of the little guy’ build-up had raised hopes for a piece of good news; a promise, a pledge or a projection that everything was going to be OK. But none came. In fact, he seemed to switch sides. It turned out that he thought outsourcing, a prime cause of Rockford’s malaise, was a good thing. ‘Who knows where it will lead. But we can’t be protectionist.’

As people filed out of the hall after the dinner was over, there was disappointed murmurs and complaints. How could the so-called champion of US manufacturing support the wave of outsourcing that had decimated small and medium enterprises nationwide and thrown 3 million onto the job market? Manzullo helped me understand. Missing from the Rockford dinner, were the representatives of the Fortune 500. America’s big multinationals were the ones who benefited from outsourcing, and they were also the ones who controlled US political attitudes towards the manufacturing sector. They financed the campaigns of most of the Congressmen on Capitol Hill. If the multinationals said outsourcing was good for America it was good for America until such time as ordinary voters could convince Congressmen otherwise at the ballot box. ‘We have lost a lot of market share to China, and a lot of guys here have gone out of business because of that,’ Manzullo said. ‘Nevertheless, Boeing has about a $250 million presence in northern Illinois and the largest purchaser of Boeing aircraft is China. You gotta fight this thing and yet you gotta do it correctly because their economy has to be robust enough to buy the stuff that [companies such as Boeing] are manufacturing.’

This dichotomy of influence springs from globalization’s great failing: that although goods, services and capital are mobile across borders, jobs (human capital) are much less so. Even if workers wanted to move their lives and families to different countries to work in unfamiliar conditions, the restrictions on such types of movements are legion.

The result is that the beneficiaries of the cheap, diligent and often and often skilled labor available in China are overwhelmingly the multinationals. And the benefits they have reaped have been handsome. According to a recent study, about 25 percent of the profits that American multinationals make these days derive from their foreign subsidiaries. Or, to put it another way, 25 percent of the market value of these companies – a whopping $2.7 trillion – is built on profits earned by overseas arms.

Even before Adam Smiths The Wealth of Nations it was clear the impact that human capital has had on economics. It is arguable that the political impact of the distribution and management of human capital is source of great social debate.

In part six of “China Shakes the World” James Kynge takes a sample look (a) the trafficking of human capital and (b) its impact on local and global economics.

…

Yiwu and markets like it are just specks on the map of China. But they represent the sources of a global economic phenomenon. Nobody could look at the prices there, and the range of goods on sale, and fail to wonder what would happen to manufacturers in the rest of the world when the full force of China’s industrial revolution hit their factories and shopping mores. Or, maybe, this was merely alarmism. Perhaps Europe and the United States would weather the oncoming Chinese typhoon with no more discomfort than they had betrayed when the Japanese economic miracle went global in the 1970s and 1980s. I decided to take my own soundings on the contours of things to come by visiting to one of the oldest manufacturing towns in Europe, a place called Prato in Italy not far form the historical city of Florence.

Prato had every appearance of a typical Tuscan market town. In the stillness of early evening, shadows swept across the russet roofs of the old town and onto the rough-hewn stones of the central piazza. Church bells chimed with a measured, funeral rhythm, drawing a stream of mourners for Pope John Paul II, who had died a day earlier in Rome, towards the Cathedral Santo Stefano.

Everything, in fact, was how it should have been in a well-to-do, self-respecting town in northern Italy. Except for one feature. Walking in the opposite direction to the Catholic faithful – towards the western suburbs – were people marked apart by the bearing and appearance. They strode purposefully through the crowds singly or in two, keeping their gaze downcast in the manner of locals who have no need to navigate through familiar surroundings. It was clear they were not tourists; they had no cameras or bags and they wore simple clothes. There were, it turned out, members of a large immigrant population of Chinese. Since they started to arrive in Prato some fifteen years earlier, they had transformed the destiny of one of Italy’s oldest industrial towns and changed the lives of its indigenous population.

…

Many of these people had arrive here illegally. I asked one of the men by the wall to tell me what his journey was like. He demurred. Members of the snake body are sworn to secrecy by the snakeheads who arrange their trips. I had to persuade him by agreeing to use a false name and to camouflage other aspects of his journey. After a series of meetings and interviews, for which I paid him some money, the story of how Huang came to be in Prato slowly emerged.

In the mid 1990s, Japanese demand for soft-shell turtles was surging and farmers in Fuqing county, in the southeastern province of Jujian, were well placed to benefit from the new fashion. Huang’s father duly invested, and everything was going fine until late 1997 when the Asian financial crisis struck. Turtles are a luxury, the type of thing businessmen eat when they are trying to impress someone. So the price plummeted as the whole of southeast Asia tightened its belt and Japanese demand eased. Huang’s father’s business began to unravel. By late 1999, he was bankrupt and his creditors in the underground banks that service a thriving grey economy in southern China were getting restless. These banks, though illegal, were actuall run by the local government and so when Huang’s father could not pay up, the officials threw him into him into the basement of a local government building that doubled as a jail.

There he had to stay until someone could pay his debts. There was no change of legal redress because his loans had been illegal in the first place so Huang began to consider his last option. Going abroad would mean having to leave behind a wife and a ten-year-old son. But there were plenty of precedents in Fuqing that suggested the perilous journey to a foreign shore would pay off handsomely. You could tell at a glance which households had a son or daughter earning good money in Europe of America; their houses were the tallest in the neighborhood and the construction of extra stories sped up or slowed down in tandem with the ebb and flow or remittances from overseas. So Huang went again to the money lender to whom his father was in hock and agreed a further loan on the understanding that if his trip overseas failed to yield the necessary funds, the lender would seize all the property of Huang’s extended family. Then, after some discussions between the money lender and a local snakehead, it was agreed that Huang would leave a few months later for England.

As he told me these things, we sat in the corner of a café looking out onto the tiled roofs of old Prato. Lie in Fuqing with its unofficial prisons and soft-shell farms seemed so far away as to be barely imaginable. But every time Huang mentioned the moneylenders, his face tightened. ‘They are not like the sate banks. They know everything about you. You can never escape from them,’ he said. ‘They know how many beers you have in your fridge and how many of those bottles are just half full.’

In June 2000, he had been ready to leave. But news of tragedy spread through the community. Fifty-eight Chinese had been found suffocated to death in the back of a tomato van as it tried to cross into the UK through Dover. The Dutch driver had closed the air vents to prevent the noise of the human cargo from escaping.

…

Huang’s sea crossing was uneventful and at last his ship docked. In the back of the van that drove them to Milan, he had been too tired for emotion and still too scared to relax. Form there he had spent the next four years in Bologna, Rome and, recently, Prato always doing menial jobs such as sweeping, stacking, washing and lifting. When the authorities in Fuqing saw he had begun settling his father’s debts in regular installments, they let his father out of the makeshift prison. His father an he then set about paying off the debt to the father’s elder brother. By the time I met Huang in April 2005, he was almost debt-free but he could not go back home. His son was 15 years old and his school fees were too expensive. He had not seen him since he left China and when he spoke of him, his voice cracked. ‘Everything is for my son,’ he said.

…

I was not surprised to find Chinese in Prato. In fact, they were part of the reason I had come. It struck me that their presence offered a potentially telling insight into the competitiveness of European manufacturing in general. Prato had been the center of the European manufacturing in general. Prato had been the center of the European textiles for more than 700 years and its brand was enriched by a history that no advertising could buy. Centuries of Florentine courtiers, including Machiavelli – the most sharply dressed of them all – had swathed themselves in its cloth. Prato also had designers that were second to none in the industry, and a gtlamorous list of clients: Armani, Prada, Ferre, Gucci, Max Mara, Patrizia, Pepe, Banana Republic, Valentino and Versace had all done their shopping here. Now, with the presence of the Chinese, it had another enviable advantage – access to probably the cheapest and more determined labor force in the world. Men, suchas those outside the Xiaolin supermarket, for example, were willing to work nearly double the hours of their Italian counterparts for about half the compensation. A Chinese cloth and garment cutter, for instance, would expect to take home about 1,000 euros for a month of six day weeks at fifteen hours a day, without any pension or welfare payments.

So, my thesis, was this: if, blessed by this confluence of good fortune and hard-earned expertise, Prato could not compete with textile towns in China, then what hope, ultimately, was there for the rest of the European industry which employed around 2.7 million people in twenty-five countries and had a turnover of 225 billion euro a year. And, by extension, what would be the outlook for the rest of European manufacturing?

Prato’s early experiences, I learned, had been positive. The first illegal immigrants began to arrive in the mid to late 1980s and, according to an artist who was among the first to arrive, children on the streets would look at them as if they were extraterrestrials. The numbers then were relatively small and they were absorbed naturally by the town’s textile factories. But by the early 1990s, they had become a potent economic force of some 10,000 cheap and often skilled workers. The combination of Italian flair and Chinese labor fostered a mini-boom and the number of textile companies rose to around 6,000 in the mid 1990s from some 4,000 at that start of the decade. But the local Italian bosses had no way of knowing at the outset quite what they had let themselves in for. If would not have seemed worthy of note to them then that most of the people they employed to sweep the floors, cut the cloth and sew on the labels came from Wenzhou, probably the most entrepreneurial place in all China.

This is what happened in Prato. After a few years working on the factory floor, one after another of the Wenzhou workers decided to set up businesses on their own. The numbers of Chinese-run firms registered at the House of Commerce in Prato rose from 212 in 1992 to 1,753 in 2003.

For a while, everyone seemed to benefit from Prato’s growing associations with China. The cheap thread and cloth that was coming out of Wenzhou, Natong, Hangzhou, Suzhou and other textile towns was available not only to start-ups like Great Fashion but also to the long-established companies of the Pratese. As costs went down, business flourished and it seemed as if this mid-sized town in Tuscany had found an elusive formula, a way of harnessing the energy of a rising China to serve its ends. The local government embraced its unexpected good fortune. It set up an immigrant service center to help those who arrived – illegally or otherwise – with their first few steps in Italy. It recognized the Wenzhou chamber of commerce in Prato as a local organization and cemented a sister-city pact with Wenzhou in China. As a demonstration of sincerity, Prato even funed the restoration of a Ming dynasty temple in Wenzhou by craftsmen sent over from Italy.

But the bonhomie was not sustainable. The illegal immigrants-turned-entrepreneurs began to put their former Italian bosses out of business. Of the 6,000 or so textile companies that existed in 2000, less than 3,000 remained in mid 2005. Several Italian companies with more than a hundred years of history are hanging on by a thread. The main reason for this is that whereas in the past only one part of the process of making a garment was outsourced to China, now almost every step in the production process is being moved offshore. As spinning, weaving, cutting and sewing moves to Wenzhou, the Chinese factory bosses in Prato are better suited to transition than their Italian counterparts.

Prato’s predicament is common throughout the European textile trade and in all of Italy’s artisan industries. In Biella, a wool town near Piedmont, Chinese competition is forcing closures of factories that have lined the river there since the thirteenth century. Other companies, such as the cashmere garment firm Fratelli Piacenza, have moved production to lower-cost countries.

…

In one sense, there is a historical symmetry to the rise of Shengzhou and the concurrent decline of Como; it is as if the moth of the bombyx has decided after a 1,500-year sojourn in Europe finally to fly back home. But for Moritz Mantero, whose company makes silk ties sold by brands such as Ralph Lauren and Brooks Brothers, such observations are abhorrent. He has been to Shengzhou and found the smokestakes, concret-block buildings and pollution of the place ‘horrible.’ At home, he has watched as some 20,000 silk industry jobs have disappeared since 2001 and dozens of long-established firms gone under.

It is my opinion that the three greatest forces facing business are (a) the decomposition of the services industry with out sourcing; (b) the revolution of supply chain management and (c) the commoditization of manufacturing. This section focuses on the evidence of the later through application of labor and automation.

The following is part 5 in the series of extracts from China Shakes the World.

Whatever the interplay of right and wrong, the commercial result of piracy is always the same: rapid value destruction across a wide range of manufactured products. This is true not only for established goods, but also for new technologies; and evidence of an unremitting downward pull can be found both in individual examples and in aggregate prices of manufactured items since 1998. Regardless of the breakneck growth in the wider economy or the prevailing inflation as measured by broad indices such as the Consumer Price Index, the average prices of manufactured products have fallen each year. In some cases, the declines have been significant. A 29-inch flat-panel television that cost 6,000 renminbi in 1998 was going for just under rmb 2,000 in late 2004. Color-screen cell phones were a new, trendy product in 2001 and were priced accordingly at around rmb 6,500; by late 2004 they too were trading at under rmb 2,000. Domestic brands of DVD players, all configured to play counterfeit DVDs, hit the market in 1998 at rmb 3,000 but cost around rmb 500 by late 2004. Set-top boxes, which allow viewers to access satellite television, started selling for around rmb 2,300 in 2000 but were going for around rmb 700 in late 2004. Each of these products represented a new foreign technology which, once introduced to China, suffered a swift destruction of value that was due in part to piracy.

The problem, though, as Yin in the late 1990s was starting to discover, was that piracy had a way of returning to haunt those who had once thrived on it. With the technological barriers to entry non-existent and capital freely available, more and more motorbike manufacturers were springing up, each of them following the trail that Yin had blazed to prominence. By 1998 there were over a thousand motorbike factories in China producing some 15 million units a year – 5 million more than were sold. As unsold bikes filled warehouses, vicious price wars erupted until profit margins were completely obliterated. But the big players, still transfixed by a vast potential market, refused to alter their strategy. Liang Xueben, the genera manager at Jianshe-Yamaha, told me in that year that he was committed to maintaining market share. Only 3 percent of the Chinese owned moterbikes, he said. One day the market would take off and amazing profits would be had. Yamaha could not afford to cede ground to upstart domestic competitors now.

Eight years later, the hoped-for boom in sales had not materialized and the problem of was more acute than ever. Yin was disillusioned. Almost all of the value had been stripped out of the industry and he began telling people – only half in jest – that he would begin selling motorbikes by the kilogram, like pigs. “the ex-factory price of our cheapest model is rmb 25 per kilo. That is a bit more than a kilo of live pig.’ Said one of his deputies, Yang Zhou, during another of my visits to the plant. A more pertinent comparison, however, might be with the cost of the metal and other components that go into building a motorcycle. At a sales price of around rmb 2,500, a motorbike costs only a shade more than its scrap value; the other inputs such as engineering, labor, development costs, brand, distribution and the experience and vision of the company’s executives are rates as valueless. ‘Clearly this is not healthy. It is malignant competition.,’ Yang says.

In a normal market economy companies cannot go on selling at below cost for years. Banks start to worry about their ability to repay the debts and eventually call in their loans. But China is not a normal market economy. If does not have a functioning bankruptcy law, so the liquidation of insolvent companies is difficult. In addition, banks are awash with liquidity; Chinese people save an average of around 40 per cent of their income and the supply of money in the economy is well over double the annual gross domestic product. This means that banks often have more deposits than they can find borrowers to lend to, and therefore are less than vigilant about calling in suspect loans. Aside from this there are other concerns. A senior provincial banker with the Industrial and Commercial Bank of China, the country’s largest bank, told me that precipitating a bankruptcy by recalling loans from an insolvent company was inimical to the interests fo the bank. The knock-on effect would be palpable as that company’s suppliers were also pushed under he said. Unemployment would rise, potentially causing a slump on consumer spending and endangering social stability. ‘It is much better to wait for the next upturn in the market rather than cause a slump across the board,’ the banker said. The ubiquity of this attitude is revealed by an extremely low level of Chinese corporate bankruptcies by international standards.

This peculiarity leads to another, one that is shaped partly by the ever-present lure of selling to the mythical ‘billion’. Under market economy conditions, when a company encounters oversupply of the product it makes, it generally pulls in its horns. But in China this happens only rarely. A more common response is to continue producing at the same rate while looking around for another industry sector to diversify into.

Japanese companies are known for financing their forays into export markets by charging more for their products at home (and protecting against foreign companies) than they do abroad. Chinese corporation are the exact opposite. Many of them, Lifan included, export as a means of staying afloat at home. Yang Zhou, Yin’s deputy, says the profit margins on bikes sold in Africa, Iran and Latin America can be as high as 10 percent in some cases, whereas margins in China are wafer-thin or negative.

My journey from Chongqing ended at a terminus of China’s industrial revolution, a place where hundreds of thousands of products made in factories like Yin’s ended up. The scale of the place is dizzying. Some 34,000 stallholders sit in one vast exhibition hall after another selling around 320,000 different types of products in hangars covering an area of 1,500 hectares (3,700 acres for you Americans). They told me that if you took the price of the cheapest market in Beijing and then halved it, you would be getting close to the cost of buying the same things in Yiwu.

I passed the Hiyat Hotel, the Hiyat, of course, had nothing to do with the Hyatt. The first shop was advertising leather bags made in Italy by the famous brand, Gussi. They cost $11 each but, the shopkeeper said, you could always bargin a bit.

In another corner there were Lacoste rip-offs, again all close to each other. One was called New Crocodile, another Crocodile of the Yangtze, a third Crocokids and, the last, Croc Croc. I walked into one of the shops and asked the assistant whether the real Lacoste branded products were being sold in her shop or in France. ‘The Frence crocodile and the Chinese crocodile are the same brand. They have merged,’ she said. Then she waved dismissively at the rival shops nearby. ‘They are all fakes, those ones, you can easily tell.’

Inside the exhibition hall, it was just as my friends had foretold. The prices were unbelievable. A graphite titanium tennis racquet that appeared to be of medium to good quality was going for roughly what a tube of tennis balls would cost in the U