How to Trade with China and WIN (and how not to)

Wait- the biggest economy in the world should consult two of the smallest to improve its trade management?

When it comes to China, yes.

A. The Numbers

Let’s start with the numbers:

·      US- 2017 Trade with China (per US Census website): Exports: $130.4 billion; Imports: $505.6 billion. Deficit: $375.2 billion (US trade with China 2017)

·      Australia- 2016-17 Trade with China (A$m billion): Exports: 95.7; Imports 61.5; Surplus 34.2. main export commodities eg., coal

·      (Australia Exports to China growth YOY= 27.8% Imports from China growth YOY=0.0% Australia trade stats 2017)

·      New Zealand- 2016 Trade with China (NZ$ billion): Exports 12.3; Imports 10.5; Surplus 1.8

·      (2017 total trade with China NZ$26.1 billion. Exports of dairy products increased 52% in 2017 NZ trade stats 2017)

So what happened here? Does China need products from Australia and New Zealand more so than those from US? The US is the #1 agricultural importer to China, far more than either AUS or NZ. But you cannot but scratch your head when you see that Australia’s exports to China in 2017 were 73% of those from the US.

BOTTOM LINE: They MADE A DEAL. We didn’t.

B. The Art of  the Deal vs. Transcontinental Chess

President Trump wrote a book entitled, “The Art of the Deal.” And nobody can dispute that he has been successful in business by knowing how to make a deal. But, to me, Australia and New Zealand management of their trade with China looks more like the art of the deal than ours-IF judged only by the result.

So how did they do it? Easier than you might think, and logical too. Both countries have a trade deal with China which lowers tariffs and sets a path for a win-win- New Zealand since 2008, upgraded in 2016, and Australia since 2015.

To my knowledge, the relationship between the US and China has always been adversarial, and no president in the past (until Trump) has had the balls to stand up for US interests OR the smarts to say, hey, China, let’s sit down and explore common interests and come out with win-win (not Trump yet), THEN apply the leverage if China didn’t respond. So China has had an open bar for 20 years, got rich and spoiled on it, and cannot (even more than WILL not) stop the train so easily now without messing with their economy.

In fact, our business relationship with China seems like an amateur game of chess. Latest round: Little Move 1 Trump announces tariffs on China; Little Move 2 China announces tariffs on US; Little Move 3 Little Rocket Man shows up in Beijing. What will be Little Move 4? What it should be is for both countries to sit down, cut the BS and cut a trade deal. There is no doubt that China will not give up its goodies without getting something in return.

C. What Should We Do?

I believe the US has plenty to give in order to get a good deal.

First, US is China’s largest market. No fake news or propaganda can deny that.

Second, there are products that, for better or worse, are not being made in the US anymore and where China has a cost advantage; apparel is one of them, sorry y’all who had dreams of Made in America going back to the good old days. Never.

That does not mean that a viable and vibrant apparel industry cannot exist in the US-it CAN. It just has to be different than it used to be. You are not going to stop mass market clothes made in China and elsewhere from coming; In that area the two countries are codependent. And they are NOT mutually exclusive.

What’s at the core of the stasis in US? Local political interests and ethnocentric rhetoric. Shut them up for the greater good. Change the yahoo attitudes that cling to a Civil War mentality without a shred of business sense. Most important: get some dang HUMILITY.

Lower some duties on those products where we don’t compete anyway. Ask China to lower duties on items they need and that we want to sell more of.

How much difference will this make? IDK. I would love to be part of a government project to initiate and carry out this research. The results might be surprising, but in the least, we would be conducting ourselves like businesspeople rather than bombastic know-it-alls.

(Above is an extract of a lesson taught to my Global Marketing class at FIT)

Dear Macy's-Isn't this a little stupid?

Did you know that Macy's permits ads on its website that can not only provide a platform for competitors, but can clearly promote the same item for less? I didn't know this-because I never shop at macy's online and rarely shop in the store. Below is an example from the Designer Handbags page: I know I don't have the brain trust that Macy's has, but why would you do this? Whatever money Google is paying you to run this page, is it really worth sending customers somewhere else to buy the same item? Why remind YOUR customers that they need not be loyal? Hey Macy's (or anyone else), can you explain how this makes any business sense and how you think it will affect customer loyalty? You make a big deal of the Rewards program for customer loyalty-is this the Reward? Is this how to build (or rebuild) your Brand? OR is this just draining the moat and opening the castle door? If not a good business explanation, the next best thing would be the humility to admit this is stupid-at best.

The Name is Fine China, So Why is there no Chinese Brand? By Yuting Zhang

Guest post by a brilliant merchandiser and critical business thinker. Thanks, Yuting

Recently I planned to buy some dinnerware to make a nicer presentation for my dining table. After doing a lot of research from Replacements.com, I noticed that I didn't see any chinese brand. After searching Google and Baidu (Baidu is the most popular search tool in Chinese language), to find out what’s the most world famous Chinese porcelain brand, I found nothing. Of course there are always some domestic brands in China who feel good about themselves and believe they are well-known globally, but actually not.

As a Chinese and a fans of fine china, after this research, I felt very tired and sad.

China is the start and origin of porcelain, and the product is still called “China,” but now we have no signature brands and share at the higher level of the world’s dinnerware market.

What makes me feel worse is that historically, China was the first country to become involved in international trade, and the first international merchandise that exported from China to Europe was porcelain.

Nowadays, when I search some well-known porcelain brands from Amazon, like Spode, Lenox, Portmeirion, the newer products are mostly made in China, even though the brands are located in England, USA etc.. You can see by comments on Amazon that consumers expected that the products which they bought could be made in England for example, but once they received the merchandise and figured out it was made in China, they started to complain. The fine china that was made in China, becomes unwelcome and uncomfortable.

Why? What makes this happen?

Because of the actual quality issue for those made in China? I have randomly compared the Spode(Made in England) and Villeroy&Boch(Made in Germany) coffee cups with the tea cups I bought in China 10years ago: my Chinese tea cups are cheaper in price, but in reality, the porcelain is higher quality--finer, whiter, thinner, and more delicately hand drawn blue patterns.

So why are consumers still complaining?

I think the main reason is because there is no Chinese brand among the higher level market, so it is hard for consumers to pay attention to the quality of Chinese products. Even though the international brand merchandise they bought is made in China, consumers still only recognize the brands, but not the COO. The company can always change its factory; the products may be produced in different locations, but the brand is exclusive.

So brands, not production, are the key to recognition in today’s international markets.

Even thought China has been the original empire of fine porcelain, and its originator, even though she still holds the highest skill and technics, even though China is still producing a massive percentage of the world’s porcelain she depends on others’ brands. so your expertise and the fate of your business is in the hands of another master, not yourself.

Unfortunately the perception of the label Made in China still represents cheap, fake, no taste.

Historically, this shouldn’t be the case. One hundred years ago and earlier, in many ways, China and the Orient were the dream of the western world. From those discontinued china patterns, you can find the clue about people’s thinking about China at that time: the patterns are always elegant, peaceful, with vases, lanterns, and luxurious silk clothing for men and woment. If we want to further research the artisans’ imagination, then we can look at the history of the past 500 years- there were millions of tons of silk, tea, porcelain exported from China to Europe. Those products fulfilled Europeans’ dream: one kind of rich, peaceful, elegant and poetic life. I believe that the Western world started to change their mind about China from 1841 during the Opium war, which was actually a trade war: China was forced to open its doors so that Europe could import more high quality merchandise and make substantial profits without due balance of trade.

There is no doubt that China is capable of producing the best quality of porcelain, as an example of the real quality situation. The problem is that China isn’t good at building its own brands. A famous and long lasting brand not only requires good quality, but also attractive design and proper marketing—How do you attract global customers to buy your merchandise? How do you fulfill customers expectations? How do you give your customers the passion to always come back? Only after successfully doing that, then your brand starts to own its soul, and you have your business moat built. Without your own brand or moat, your destiny is not in your control, and your fate is determined by others.

But-before you can attract customers to buy your brand with your quality and design, you must positively influence their perception of the identity of the brand and gain their trust that it will fulfill its promise.

Given the still present perception of Chinese design and quality, it will be a long and tough journey for China to gain back the share of the world’s trade in fine goods it had as many as 500 years ago.; with the right design marketing and production standards, China should be a leader in fine China and other industries. It has been a long time coming, but it will never be too late.

Scattered Thoughts: Xi, Macy's, Dillard's and Kevin

A lot to focus on now, so let's offer up some of the key stories. Can expand on them later, but I don’t believe in padding words..

1.     China abolishes Term Limits-

So Xi Jinping will stay in power for the foreseeable future.  IF you read and believe the US press, it is a shadowy reminder of Munich in 1933. Not.

Yesterday, The New York Times  editorial was entitled, “Xi Jinping Dreams of World Power for Himself and China.” Questions: a. How do they know what he dreams? b. Isn’t China already a world power?  C. Isn’t it his job to “dream” of how to increase China’s power? This is typical ethnocentric writing, implying that only the US can and should dream of world power. A shame one of the world’s most influential journals can’t be more adult and objective.

The editorial ends with a criticism (of course) of President Trump:

In this regard, the White House’s response to Mr. Xi’s power grab was not encouraging. “That’s a decision that would be up to China,” the White House press secretary, Sarah Huckabee Sanders, said on Monday.

How refreshing and damn right. Who else would it be up to? The New York Times?

I would argue that this is not new for China. The cultural dynamic of the Mandate of Heaven is thousands of years old and reflects the Chinese mentality about government-as long as it is seen as benevolent and protecting the people, it can stay until it doesn't.

Second, China faces some financial and political challenges, so if I am the leadership I would feel that disruption at this time is not viable. There is precedent for this right here in US with Roosevelt. So we needn't act shocked.

This need not be a reflection of agreement or disagreement with Xi Jinping's policies or thought (another subject). Just the political reality in China. Yo..they would be a little stupid not to do what is right for them. And they are not stupid.

2.    Dillard’s and Macy’s-Dreaming of a White Christmas Past?

Wow. Is that all it takes to make the investment community happily spend their money?

Macy’s, on the heels of a positive 4^th quarter report (which happens when your sales unexpectedly go up), has increased 14.8% since yesterday (27 February). So, knowing that, I have one question-Why?

All the questions about fundamentals that drove the stock to below $20 last year have been answered? The viability of the department store format has been resurrected as the retail of the future? Macy’s will not have to resort to price upon price marketing to keep volume up? Category killers like Inditex and Uniqlo have disappeared?

Macy’s Backstage format has been mentioned as further salvation, thrusting them into the mass market retail mix. I have been to these stores and I would call them WTW (Worse than Walmart). At least Walmart does testing on every garment in its store. Macy’s does NOT.

And TJX has nothing to fear.

So please tell me why should I buy the stock now?

Similar questions occur with Dillard’s. The stock jumped 10% yesterday based on the Q4 result. Nice. But wait, take a look at this-

The blue bar is revenue and the orange line is net margin. What do I not understand here about why you would bid up this stock 10% in one day?

I worked at Dillard’s and I will say that it has something that Macy’s (and the rest of the department store world, even the higher priced ones) do not have: a true belief in and standard of customer service. So Dillard’s can stand out and forge its own path. That being said, it cannot stubbornly bring in expensive (albeit good quality) merchandise of questionable aesthetic and hope to compete. Customers just don’t care that much anymore. So let’s keep the service and give the merchandising a wash and rinse.

Sorry, dear folks, I am shorting Macy’s and Dillard’s.

3.     Under Armour and Kevin Plank and Under Armour-

I wrote about this before, you can read the article. (Adidas, Nike and Under Armour-The War for Your Workout http://www.isourcerer.com/2018/01/adidas-nike-and-under-armour-war-for.html)

In which article I expressed my opinion about the opportunities for the UA brand to correct itself and its’ stock price.

Seems founder and CEO Kevin Plank is being thrown under the bus for all the troubles that have befallen the company. This may or may not be true, but I have a hard time believing the same guy who built an iconic brand in the company of giants has lost his mind completely.

I just don’t know here, but I would like to.  In the meanwhile, what would I do with the stock? Wait. Currently it sits about 50% higher than its low in November 2017. That may or may not be sustainable given all the bad gossip. So here I wouldn’t short it, but wait for something substantial before making a decision. Like change of management? I believe in this brand, but bigger brands have been tanked due to mismanagement.

What’s the Problem with Walmart?

At this writing , Walmart’s stock price is down more than 12% in 2 days. This is roughly an $40 BILLION loss of Market Capitalization. Sounds like a lot? It is. Target’s ENTIRE market cap is about $40B. Macy’s market cap is $7.81Billion. Adidas entire market cap $45Billion. So Walmart, in the last two days only, lost 5 Macy’s, or a Target, or an Adidas.

What is the reason for such a steep decline in stock price after a less than desirable earnings report and a less than crushed ecommerce growth? Really- we have seen MUCH worse reports than this in the past year- See Sears, Under Armour, L Brands, Bed Bath & Beyond, etc. So why freak out over this one (make no mistake-this qualifies as a freakout)?

Here’s why the precipitous decline in stock prifce-and nobody is telling you, but it IS why- such a dramatic response to a not so dramatic report: Everyone was counting on Walmart to be the antidote to, and the competition for, a rising and seemingly unstoppable Amazon. So the expectations that rode up the stock price from $80 in October 2017 to $109 at the end of January 2018 were-false? Too optimistic? Not borne out by facts? Poorly thought out? All of the Above?

We will go further into the problem in a minute. But here is the battlefield report for today: Walmart’s moat is breached. Now Amazon, at a Market Cap of $710Billion, is 2.5 Walmarts. What is worse or better depending on who you are is that, in the last two days, Amazon stock price has increased from $1457 to $1490. The drawbridge is down, and the rats are leaving the ship.

I believe some stock analysts are smelling around the problem, and some have come close to the answer. But they didn’t get the real smoking gun-to be revealed below.

What they did get:

1.     Only 23% growth in ecommerce is what freaked out the investment community;

2.     Walmart has leaned on Marc Lore and ecommerce growth to make its argument and defensive plan against Amazon, and showed that face to the public-Walmart as ecommerce destination;

3.     Walmart has given it up for ecommerce growth, and damn the torpedos on margin- Per one analyst’s estimate*:

IF this is even a little bit true, Walmart is losing money on each ecommerce order, VERSUS the margin they might make on instore sales.

4.     Here’s something that didn’t escape the analyst, and that we ALL probably know: It is not pleasant to shop in Walmart: Overcrowded, too big, staff not even a bit helpful (do NOT believe the smiley faces you see on TV ads), very difficult to find what you want ON YOUR OWN. So, as the analyst said,

The nearest Walmart location near my home is a few miles away but I never really enjoyed shopping in any Walmart stores. I find them to be too big and too crowded. However, I do like a good deal. (https://seekingalpha.com/article/4148677-deep-drill-walmarts-problem-e-commerce)   Please go ahead and forward the comments to me of anyone who says they LIKE shopping at Walmart.

I have repeatedly said that the key to the brick and mortar world now is the EXPERIENCE. Here Walmart has repeatedly failed and sacrificed improving that aspect for the holy grail of ecommerce.

So here we are- an unimproved brick and mortar experience, given up for the quest to compete with Amazon online. So fail online and the brick and mortar experience already is-how to say this-subpar; what you got left?

Maybe to say Walmart’s moat is breached is giving too much credit. What would be more appropriate is to say that Walmart attacked Amazon with inadequate thought, preparation, understanding of the big picture and-BANG-12+ % stock decline. All your troops died in the assault.

Here's a graphic of Walmart's latest investment in ecommerce-what does this have to do with the shopping experience (I plead ignorance of deeper strategies which I don't get):

What does any of this have to do with improving the shopping experience at Walmart?

As if that were not enough, here is the poison pill that Walmart took that nobody else will tell you (assuming they even know): Walmart’s headlong rush into ecommerce missed a key aspect which I am sure will come back to bite them in the ass, unless they get out of their bubble and deal with it:

Walmart’s stores, at approximately 250K square feet, must produce enough sales per square foot to justify the ROA metrics. BUT-a +44% in ecommerce sales cannibalizes store sales. It is NOT a get out of jail free card on sales robbed from Amazon or anyone else-the switched sales are coming from Walmart. Walmart customers have found a great way to get the prices Walmart offers without the nasty store experience. So the net gain is-NEGATIVE. All the store workers (those you see with the smiles on TV) must be paid. Oops.

Here's some propaganda from Walmart:

If you think the above is even close to accurate, please contact me. Or stop reading.

Does this mean that Walmart is on the eve of destruction? Only if arrogance and the bubble of denial leads them there (see SEARS).

Let’s see if they can get a grip on reality. If they can, they are still the no.1 contender for the title.

What I have said repeatedly in my articles, and will continue to say: Ask for help. Nobody has all the answers.

So, in summary: Walmart’s stores, at something like 250,000 square feet, are dependent on sales/square foot for their metric of profitability. As it has been since the dawn of time. BUT- an increase in ecommerce of 40+ percent per year comes from where? Amazon? Nope. It is cannibalizing Walmart’s brick and mortar sales-why? Because nobody likes shopping in Walmart, and, if you can get the same price deals and NOT have to go to the shop, yesss. Meanwhile, NOBODY in Walmart has EVER commented on improving the shopping experience from nasty to pleasant, much less delightful. We KNOW brick and mortar growth today depends on delightful.

Can Walmart strengthen its moat and pose a legitimate threat, or at least  competition, to an Amazon that is 2.5 times its size? Takes a dose of HUMILITY and some strategy. Oh, and maybe some investment in resources and people (which, at ground level, has been an enduring issure for Walmart).

So Walmart, the elephant in the room for much of recent retail history, turns into the mouse that roared. Check this forecast out:

We are privileged today to live in a dynamic environment where anything can change. Depends on how you approach your business-and your moat.