Asia Logistics Wrap

The New Silk Road

While writing my previous post on the ADB's CAREC project, I noticed other bloggers commenting on this recent Businessweek article titled, "The New Silk Road." Where ADB is focused on building up the physical infrastructure that links the regions involved in the "Old Silk Road," Businessweek discusses what it sees as the new channels of trade and investment between these same regions.

At HG's World, Tom appropriately delves into the Old Silk Road's history (Tom's links maintained):

"Putting my historian hat back on, I decided to offer some background to how the "Silk Road," a name first coined by German geographer Ferdinand von Richthofen in the 1870's, came to be.

"We know the origin of the founding of the silk road from the writings of Chinese historian,Sima Qian who wrote the Records of the Grand Historian while serving as a scribe for Emperor Wu of Han Dynasty. I had written a post about Qian, The World's Most Dedicated Historian who gave up his testicles in order to continue his life's work.

"But I digress, the hero of this story is a little known officer in the palace guard of the Emperor Wu. The emperor sought an envoy to travel west across Central Asia to make an alliance against the Xiongnu nomadic turkic tribes also know as the "Huns." The envoy, Zhang Qian went on a quest that lasted thirteen years, including being captured twice by the Xiongnu, before returning to make a report to the emperor..."

Based on Tom's comments below, we can see from my ADB post that security and economic cooperation are Silk Road foundations then and now (Tom's links maintained, additional highlights mine):

"Zhang's detailed report stimulated Emperor Wu's interest in the goods that existed on the other side of the known world. Within a few years, other expeditions opened the route and lined it with military posts. The Xiongnu were pushed back, and trade flourished under the umbrella of security and the Silk Road linked the great empires of the 1st century Common Era spreading goods, ideas along with the negatives, like disease's Antonine Plague, that today's medical historians see as possibly contributing to the downfall of the Roman and Han Dynasties."

The Road declined in parallel with the decline of civilizations that sustained its links. In addition, the sea trade channel gradually became less and less risky relative to overland routes, providing a preferrable substitute due to increased security and experience in navigating the seas:

"Over the centuries the route fell out of use as dynasties in the west and east fell. The road began to flourish again under the Tang Dynasty 618–907 and continued for the next several centuries to be the main conduit between East and West, only to again fall out of use with the rise of sail and European naval dominance."

Of course, many of these same dynamics are in force today. Commenting on the same article, Steve DeAngelis at the Enterprise Resilience Management Blog made the following comments, first noting one of its regional partners working on both ends of the Old Silk Road:

"One doesn't have to look too far into the distant pass, the article notes, to discover close ties between Gulf states and Asia. Those ties were weakened with when the West's post-Second World War economies started to thrive. "The oil boom led to closer ties with the U.S. and Europe," the article notes, "and most Arabs forgot about India, China, and the rest of Asia, preferring to invest in the West." It goes on to discuss one of the companies in the region with which Enterra Solution's works closely.

"[Tarek Sultan] is CEO of Agility, a Kuwaiti logistics and warehousing outfit with $6.2 billion in annual revenues. Agility has made a bundle supplying the U.S. military in Iraq. Now it's plowing nearly $2 billion into millions of feet of warehouse space and other trade infrastructure in Asia, building up a network of 70 offices and 20,000 employees in China and India. Agility even deployed a dozen trucks and 100 workers to handle dirty laundry for athletes at this summer's Beijing Olympics. 'Everybody knows about China and the U.S.,' says the 44-year-old Sultan. 'We are making investments in the trade that takes place within Asia.'"

"Agility is one of the leaders in helping make connections both within and between emerging market countries. As the article points out, connections are being made everywhere.

"On the ground in the Gulf, connections with Asia are visible everywhere. Asian laborers are the muscle that builds skyscrapers, airports, and petrochemical plants. Asians also provide much of the brains and managerial talent at businesses ranging from investment banks to retailers, and people whose parents or grandparents originally came from the Indian subcontinent form the backbone of the middle class in Dubai and Abu Dhabi. The souks along the Creek, the salt inlet that was Dubai's original harbor, are dotted with hole-in-the-wall Hindu temples, and it's rare to spot anyone in Arab dress among the crowds piling into abras, the rough wooden water taxis that shuttle across the luminous green water."

Steve also notes the challenge faced by establishing links and connectivity, crucial to the ADB strategies for CAREC that I noted previously:

"One of the challenges of doing business in emerging market countries is that the business environment in many of them is radically different than business environments found in most developed countries. As the article states, "For Asian and Middle Eastern investors, negotiating the written and unwritten rules of each others' business environments isn't easy." That is one of the reasons that we stress internationally-accepted standards and best practices as part of Development-in-a-Box. For their part, emerging market entrepreneurs are finding Arab investors and investment groups frustrating because they only want to invest in large projects. As Asian countries become more wealthy, Middle Eastern countries are trying to attract investment money back into the region -- especially the less well-off Middle Eastern countries.

"While oil-exporting nations want to lock up markets for their crude, Egypt and other Arab states are pushing Asian countries for investment that creates jobs. China's exports to Egypt have more than quadrupled since 2003, to $4.7 billion in 2007—roughly 18 times the value of Egyptian exports to China. The Egyptians want China to compensate by manufacturing in Egypt. 'We are trying to make Egypt a hub for China to export from,' says Ahmed El Sewedy, chief executive of Cairo-based El Sewedy Cables and head of the Egyptian-China Chamber of Commerce."

Steve finishes off with the following comments:

"The new silk road is likely to operate as long as the old one did. It's a virtual road that connects that connects wealth, resources, and opportunities. Companies that want to get in front of the money are going to have to travel that road and the sooner they get on it the better."

The New Silk Road and the Old Silk Road will eventually become integrated into a multi-modal, multi-channel "Grand Silk Road" that enhances the trade and economies of nations currently enjoying the benefits of modernized trade and those nations that wish to return to at least some of their past glory in and around Central Asia. Stable security networks and common rule-sets must provide the background for investment, which includes both the physical architecture of roads, rail, and air ports and also the multiple other architectures that form the foundation for modern, high-performance supply chains.

What's the new baseline of consumer demand?

The answer to this question will eventually be sorted out over the next few months. The overextension of credit the past few years has artificially inflated consumer demand and already many companies--such as DHL, Nortel and Circuit City--are making cuts in order to adjust down to a new baseline in this demand. David Roche explained the current phenomenon well and rather simply in the op-ed 'The Coming Crunch' in yesterday's Wall Street Journal Asia:

"The credit bubble was the financial circuitry of excess consumption in many rich economies. Excess consumption was the appetite on which the factory economies of Asia fed. Like Cleopatra's beauty "they made most want where most they satisfied." In turn, other emerging markets that produced food and energy benefited from the insatiable appetite created by the economic boom of the factory economies. Thus emerging-market demand for commodities and energy was derived from growth in demand from rich economies.

"But now excess credit is being removed. While this is happening, demand in rich economies will fall and savings rates will rise. So developing-world factory economies will see export demand cave in and this will cut their own demand for inputs. It has already fed through into lower commodity and oil prices."

The question this time around is whether Americans and other Westerners will increase their savings rates over the long-term, effectively dampening a recovery based on a strong return of consumer spending.

President-elect Obama's Economic Advisory Panel

I mentioned in my post on the US Presidential Election my disappointment in the direction of the State of Michigan, and in the comments I elaborated further on the poor leadership of Governor Granholm. Under her direction, Michigan has gone from #24 to #29 in terms of business tax climate amongst all states. Bill Testa, of the Federal Reserve Bank of Chicago, discusses Michigan on his blog in an April post. Below are two graphs showing unemployment rate as compared with the US rate and migration statistics.

The Michigan rate has steadily worsened as compared with the US rate since 2001. The below graph shows net migration has accelerated since 2001:

Now, obviously there is a significant impact from the poor performance of US auto manufacturers. But the Michigan leadership has done little to help attack the root of the problem. Regardless, at a time when many in the US point to Michigan as a case study in how NOT to manage a state economy, I was shocked to learn that President-elect Obama has asked Governor Granholm to join his economic advisory panel. I know she is a fellow Harvard Law graduate, but what advice and/or solutions can she bring the President when she has failed in her own state? Personally, if he had to choose a Democratic governor, I would have suggested Phil Bredesen of Tennessee:

"To recruit new industry and jobs, Bredesen led reform of Tennessee's workers' compensation system and invested in retraining programs to help laid-off employees develop new skills. Since he took office, 2,889 companies – including Nissan and International Paper- have expanded in or moved to Tennessee, bringing more than 104,000 jobs and $12.8 billion in new business investment to the state."

The irony of Granholm's selection is nicely put by Nolan Finley in his Detroit News blog post, "Obama borrows Granholm's excuse book:"

"A top Obama advisor warned today that the change Americans thought they were voting for Tuesday may not come for a long time because, in his words, President George W. Bush is leaving behind such a mess.

"Granholm must be his ghost writer. She spent her entire first term blaming her predecessor, former Gov. John Engler, for her inability to come up with any answers to Michigan's economic free-fall.

"When state residents wearied of that excuse, she switched in her second term to blaming Bush for her paralysis in the face of disaster. There's much Obama can learn from Granholm about dodging responsibility for not delivering on campaign promises to make things better.

"Perhaps she can convince him to lead off his innaugural address with her now famous vow, "in five years, you'll be blown away.""

I hope President-elect Obama reconsiders this selection. Michigan has a role to play in global economic trade and development as a hub for R&D in advanced automotive technology and home to some of America's finest universities, but the state cannot be complacent and cling to past notions of superiority.

Financial Crisis Ripples Into Backwater North Korea

The North Korean Economy Watch blog points to an article in the Wall Street Journal touching on the impact of the financial crisis on North Korea. As I mentioned recently, countries like North Korea are likely to feel the effects of the crisis via their strongest links with the globalized world--in this case, those links are strongest with China:

"North Korea does little trade with the rest of the world -- about $2 billion annually -- and now it's being hurt by lower prices paid by its biggest trading partner, China, according to report from a South Korean institute that specializes in North Korea research.

"In recent weeks, the Chinese companies that buy North Korean ores and minerals like zinc, which are some of its biggest exports, have slashed the prices they're willing to pay. That's forced some North Korean mining firms to halt production and even produced a drop in the smuggling of ore and scrap, trade that's illegal in the North but is believed to play an important role in supporting the impoverished country."

North Korea, its people and its companies can be thought of as one, large state-owned enterprise (SOE). Thus if its financial architecture as an SOE is tied so tightly to China's economy, it is obviously going to severely strain its ability to finance its immense overhead--the millions of North Koreans that labor in or rely on its system:

"The price pressure exerted by Chinese traders on North Korean companies is in line with the broader drop in commodity prices in recent months. But it has imposed new burdens on North Korea in what is shaping up to be a terrible year there.

"The country is experiencing its worst food shortages since the famine of the late 1990s, international aid agencies say. Civil unrest has grown as people lash out over reduced food rations and government crackdowns on market activities, according to Good Friends, a Buddhist-affiliated relief organization that regularly issues reports of news and gossip from North Korea...

"...Official North Korean media have published reports saying the global financial crisis will ruin the U.S. and other industrial powers. But in the report, the Institute for Far Eastern Studies said "North Korean people are becoming very anxious over the possibility of the international economic crisis having a long-term impact.""

North Korea's archaic methods in managing its economy ensure that the growth and development of its supply chain architectures remains stifled and fragile.

My Evolution from Economic Nationalist to Economic Liberal

I am someone who believes in the overall benefits of free trade as part of the globalization process. This belief has evolved over time as my experiences expanded beyond my hometown environment. Basically, I grew up mostly subscribing, albeit unconsciously, to an 'Economic Nationalist' view of the world which is formally described as follows (via Wikipedia):

Economic nationalism is a term used to describe policies which are guided by the idea of protecting domestic consumption, labor and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labour, goods and capital. It is in opposition to globalization in many cases, or at least it questions the benefits of unrestricted free trade. Economic nationalism may include such doctrines as protectionism and import substitution.

A couple points in my life reflect this thinking:

1988--Junior High: I remember repeating many of the anti-Japan slogans as a young kid with a father in the automobile parts industry in Michigan. Japanese cars--in fact, all Japanese investment--I remember thinking of as evil.

1991--Early High School: I clearly remember the anti-NAFTA feelings in my hometown and on TV, and the popularity of Ross Perot in my own home. I felt myself being enamored with Ross Perot's theatrics on TV--his simplification of the issues around NAFTA and the deficit via graphics and charts was powerful.

Later, I began to develop a greater openness to other perspectives as I ventured outside my hometown, with the full support and encouragement of my parents:

1992--Junior Year Fall: I traveled by air for the first time to attend the National Young Leaders Conference in Washington, D.C. Simply sharing this experience with so many students from other states was an eye-opener for me, and taught me the value of seeking out such opportunities.

1993--Junior Year Summer: I was able to attend the World Affairs Seminar in Whitewater, Wisconsin. I think this experience was my first, in-depth lesson in appreciating the value of opportunities to learn from people from different countries and cultures. This seminar built on what I had learned through a friendship I made with a Finnish exchange student at my high school.

In 1993, my Finnish friend left some materials at my home for Kalamazoo College, which I had never heard of at that time. In learning more about the school's study abroad tradition, I thought back to my fond memories of the World Affairs Seminar. After visiting the school itself, I was hooked, applied early and once accepted never looked back.

Over 80% of students enrolled at 'K' study abroad, most for at least 6 months. In the least, each student is required to become proficient in a second language. Although I decided to be an Art major as a result of my early hope to enter the comic book industry, I took a practical approach to picking my minor--International Commerce--and language concentration--Japanese. Ironically, everything I heard when I was younger about the Japanese dominance in business led me to think of Japanese as being most practical in countering my Art major. It also ran counter to the prevalent choice on campus of studying European languages. I decided I wanted to have a study abroad experience in an environment that in no way resembled America's cultural or historical origins. Chinese was also available, but at the time the country was even a far greater unknown to me than Japan.

I spent almost a year in Japan, my first time outside the US, never once returning home during that time. While living with a host family, the pressure to assimilate into Japanese culture led me to be highly cynical of US government and culture. I believe this was only natural for me while immersed so deeply in a country for the first time and wanting to feel accepted.

The intense culture shock I experienced upon returning to the US confirmed the impact study abroad had had on my life. Basically, I began to look at opportunities through the prism of my Japan experience during the rest of my college experience, and after graduation. Eventually, I was fortunate to find a job with auto parts manufacturer, Denso Manufacturing, MI (DMMI), in Battle Creek, Michigan. This was the first Denso manufacturing plant in North America and followed Toyota's lead in the early 80's of building manufacturing facilities in the US.

Since I worked there for 4 years, I had a front-seat experience in how foreign direct investment in the US by companies like Denso positively impacts communities, bringing jobs and new tax revenues and triggers a flow of follow-on foreign direct investment from other component manufacturers and peripheral service providers. Being a Japanese company, Denso also forced the plant organization to develop an awareness of the world, particularly Japan, in instituting a hybrid American-Japanese management/performance review structure that breeds a more sophisticated skill-set and higher caliber workforce over time.

The value of the Denso investment to the community could not have been overstated as Kellogg's began downsizing its footprint in Battle Creek in the late 90's and early 00's. As I was working in the non-profit community for two years simultaneous with my Denso position, the drop in grants from the Kellogg Foundation was dramatic, the city scaled down programs due to a smaller expected tax base, and non-profit programs like my own suffered or disappeared. It wasn't long before Denso became the largest employer for the city.

It was this case study-like experience that took into my supply chain education in Michigan State's Broad MBA program, and into Thunderbird's Masters in International Management. By the time I graduated from 3 years of MSU/Thunderbird, my conversion to Economic Liberalism and an advocate for the positive effects of globalization was complete.

Since that time, however, I have thought a great deal about the impacts of these trends on small businesses--including my father's business and the Japanese family business I worked for briefly in Japan prior to joining Manhattan Associates. Specifically, I am thinking what role governments should have in helping small businesses adapt to this environment. I look forward to possibly writing on this subject someday in the future...