Michael Olivero
The official blog of Michael Olivero, Software Architect & Humble Entrepreneur

Is China a twisted form of capitalism? -- the world will take notice with Apple at the frontline

Wednesday, 15 February 2012 22:26 by Michael Olivero

Since the reforms some years ago, the general rule of thumb prevailed to all citizens was "don't intervene in our leadership and we will not intervene in your business endeavors".  This started what many consider the biggest boon of domestic growth and prosperity in modern history and fueled into overdrive with president Clinton's signing of the China Trade bill back in 2000.  The trade bill opened mammoth Chinese markets to US business and would be the prequel for China to join the World Trade Organization.  Over a year later, on Dec 2001, China became part of the WTO.

My college professor in database systems, Dr. Wei Sun, even took a sabbatical and left to China foreseeing the vast opportunities -- he never returned and even eventually relinquished his tenured position.

So this is allegedly positive for all, after all free markets cultivates innovation and survival of the fittest making better products accessible at an ever more affordable price.

So what's wrong?  Fast forward to today, we have had enough time to realized China true ambitions in becoming an influential world power  In the last decade, we've seen China launch humans into orbit, built their first aircraft carrier, & even recently launching their own global positioning satellite system similar to US' GPS and Russian's GLONASS.

From an outside perspective, this is all good and compares similarly to the benefits of local capitalism -- except at a world level.  So what's wrong then?  In a nutshell, by observation, China's goals seems to be:

  1. Securing and maintaining party rule (at all cost)
  2. Maximizing opportunities and employment for all citizens abiding by the ruling party (e.g. government is on your side if you abide) 
  3. The dishonest control of their currency rather than letting it float freely in the markets
  4. The squelching of anything deemed a threat to either
  5. Long term becoming a world power with influence both politically, militarily, & monetarily.
And Apple is a victim of these goals and their recent spat with iPad trademark infringement as concluded later on in the post.  Lets first discuss each of these points with some additional detail.
 
Securing and maintaining party rule at all costs.
It's clear China is extremely concerned about freedom of speech and expression.  They incarcerate those who rally against the government.  They force companies to censor sensitive topics such as Tianenmen square revolt.  At one point this even clashed with Google's principle of don't be evil and consequently having to filter search results became more and more contrary to Google's principals of free and accessible information.  The Google vs. China escalated to the point where Google redirected services from mainland china to Hong Kong servers (which are not restricted politically) however this didn't fare well with China and ultimately Google decided it was best to pull out of China all together.  China currently disallows twitter, youtube, Facebook, & a whole slew of services which may help or empower unionization and eventual opposition to current government rule.  The issues is so tightly controlled whereby China had sophisticated internet routers custom configured so they could control internet traffic -- effectively blocking any web site or service, country wide, with a flip of a switch.  A prominent voice by the name of Liu Xiaobo (1) was almost the equivalent to the Chinese as Marin Luther King was to african americans. China incarcerated him on frivolous charges.  The world, long aware of China's human right violations, took notice and even award Liu the Nobel Peace Prize.  It was a defining moment in history when he was not able to receive personally the peace prize award; intentionally putting China on the spot internationally.  His wife was also house arrested and was able to tweet for some time until she was also cut off from communication.  I haven't followed up since then to see there status, but incidentally, internal China news media didn't mention the awarding and simply became another topic of suppression.  China arrogantly decided to start their own peace price initiative months later and awarded Vladimir Putin the first Chinese peace price -- perhaps as an indication of how irrelevant these awards mean(2) or simply to obfuscate the the headlines a bit.
 
Maximizing opportunities and employment for all citizens abiding by the ruling party
Again, the government favors and even protects, as promised, those who express allegiance.  As a consequence the ability to "making a living" has little boundaries and the government typically turns a blind eye to such violations such as copyright & trademark laws -- particularly intellectual property, music, software, and most forms of digital content.  Software piracy at 82% (3) is just a subtle example. There are businesses literally officially open and selling copied movies, music, etc. in major shopping areas.  This "do what you please and we won't bother you" mantra reached a whole new level when duplicate non-official Apple stores started popping up in many parts of china.  These stores were a complete rip with Apple logo, employees dressed in the typical blue jerseys, identical floor layout and even identical product branding and marketing throughout (4).  Go ahead and take a look yourself briefly before you continue reading:
 
 
Clearly the enforcement of trademarks and copyright are very lax if non-existent otherwise entrepreneurs would not take the capital risk in setting these stores up as they did.  Put simply, China doesn't care and will even promote and help business sell and make a living.  Promotion?  Well, take this for example.  Go on eBay and search for some items -- say an iPhone bumper case.  Among all the listings, you'll see what looks like legitimate Apple bumper cases among them -- complete with the metallic buttons and all.  Originally you could find both the white and black versions -- the ones Apple themselves sell at the Apple store, however as of late you can find all color variations except those two solid black and solid white ones.  In either case, the same manufacturer who makes the bumper for Apple is directly or indirectly dumping inventory on eBay and making a killing.  What I find striking here is how cheap the shipment direct from china is -- just 99 cents.   You might think the price of the bumper subsidizes the shipment but I'm not sure how much room there is for subsidizing when the price of the item is also 99 cents.  So, yes, you can buy a full iPhone bumper case for a mere $2 rather than the $30 at the Apple store.  When the package arrived, it was indeed shipped via air mail directly from China.  I really don't understand how any company can cost effectively make and ship a bumper case from half way around the world for $2.  In my humble opinion we have government subsidizing somewhere in between -- all in the spirit to maximize opportunity and employment for Chinese citizens.
 
These are iPhone4's incased in original Apple bumper case and eBay 99 cent version.  There is no discernible difference in build, craftsmanship, measurements, etc.
 
 
 
As another quick example, I ordered some new head phones on eBay recently, rather economically at $35 rather than the retail price of $99.  The auction however has a "Make an Offer" option.  So I did, at $30, and promptly received my headphones a few days later.  This time however a note was included to buy them at another web site as ebay has closed their account for unspecified reasons.  I'm presumably assuming the original manufacturer of the headphones is cracking down on illegitimate sales of their headphones.
 
In overall summary, China is allowing these products, manufactured for companies abroad and cranking up the assembly line to build extra for dumping on alternative channels of distribution for themselves.  Here is a photo of the headphones and letter with enough resolution to read the letter if zoomed in.
 
 
There is no stopping blatant copyright and trademark infringement and China doesn't do much about it -- first in the digital world with music, videos, & software and now in the physical world with the dumping of these products on alternative distribution channels.
 
Part two of this post covering the items below will follow shortly:
The dishonest control of their currency rather than letting it float freely in the markets
The quelching of anything deemed a threat to either
Long term becoming a world power with influence both politically, militarily, & monetarily.
 
 
All references as of 2/14/2012
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Gold - To be or not to be?

Friday, 10 February 2012 08:36 by Michael Olivero
Warren Buffet, a few months back, said if a all the gold in the world were to be combined into a large cube, it would measure a paltry 68 feet wide on each side worth $9.6 trillion. With today's valuation he argued you can do much better things with the value rather than own all this gold.  While true, especially long term, there are a few problems with this statement.  The first problem is, no single entity will ever own all the gold of the world -- if so, then it's value will become immeasurable.
 
While true, the only common variable in question is the valuation of currency.  How do you value gold today?  You compare it to the dollar and it would cost you $1750 to buy an ounce of it.  What happens when the dollar appreciates in value?  Gold, relatively stable in quantity, will have to decrease and vice versa increase if the dollar declines in value.
 
So clearly, the value of the dollar is directly inversely proportional to price of gold -- however this is not the only influencing factor.  Using Buffet's analogy on preferring buying a company producing gobs of profit over a century over buy gold which will sit in a vault may sound reasonable.  A better way to compare this is assume the value of currency goes to near zero because of huge debts (ex Greece currency) then what value will a good company, say in Greece today, producing gobs of profits in say greece's old currency, be worth? Little -- no one would want the greek drachma.  Greece had to increase rates to 10, 20, even 30% to sell bonds to investors - the return had to be sufficient to warrant the risk!
 
From my perspective, born as a US citizen, it's unfathomable but if US debts increase (as projected for the next 10 years) it may loose more of its rating and trust around the world and consequently it's value. The only thing allowing it's value to remain, and interest rates to be low, is the perception of the dollar as the universal global currency. Meaning, when the euro's credibility suffers people run to the dollar -  making bond auctions here relatively cheap from the excess demand.  This demand allows the US to keep rates low or even move them lower as dollar investors would buy the bonds anyhow just for the perceived safety.  This in return, allows the US to have a relatively "free ride" in navigating the financial turmoil by simply selling bonds at auctions as needed to meet liquidity needs to prop up the economy in the form of bailouts and the quantitative easing necessary throughout the later part of the last decade. That is the only reason why the US has been able to leverage low interest rates throughout the deepest recession in my lifetime.  
 
As soon as a world currency steps up as an alternative (what many thought the euro to be at one time) then the dollar will drop precipitously to correct for its over leveraged position.  Some of these concerns are clearly present today although stubbornly subdued due to the dollars prominence world wide.  With deficits expected to increase for the next 10 years, the leveraged position slowly erodes with decreasing value and appreciation similar to Greece's fallout -- although much quicker.  These signs are already present in the current price of the gold and should continue for the intermediate future -- how so you may ask?
 
Since world commodities are priced in dollars like oil and gold, these commodities will inevitably adjust inversely to the dollars movement as mentioned earlier.  To stabalize a currency, traditionally countries buy and amass gold (ex Wikipedia the gold standard for the US). Recently there is a huge movement to acquire gold by many countries for its stabilizing effects. Venezuela is shipping its gold from overseas banks; China has increased it's rate of purchasing and Russia has double it's own too.   Overall it's desire has increased as a simple safe haven when instability exists.
 
In conclusion, long long term, say 100 years like Buffet affirms, yes prosperity and opportunity abounds more than owning some gold, short term however it's use as a safe haven is inevitable as are other world commodities. Personally I prefer oil, it's also priced in dollars and is in demand like gold, however unlike gold, it depletes and produces a tangible value in the form of consumption.  A gallon of gas in 10 years, all things remaining equal, will be higher than the gallon is today - for sure.  Factor in depreciated dollar and a barrel of oil may be $200 -- 100% return over a 10 years.  Why else do you think renewable energy has become a trendy topic in the last few years?
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