Bailouts blur the line between capitalism and socialism

Deng Xiaoping, the pragmatic visionary who followed Mao, used the phrase, “One Country, Two Systems,” to describe socialist China’s decision to use capitalistic economics.

Since that point, 30 years ago, the difference between the political ideologies and economic policies pursued in the East and the West have become less distinct.

Today, as China deregulates its banks and spins off its state-owned enterprises (SOEs), the United States is nationalizing its banks and bailing out private enterprises.

Some in the United States (mostly, it seems, those who were part of the sequence of events that created the problem) argue that drastic times require drastic measures.

Is it strange that we are being asked to trust the same individuals who created the problem to solve it? Should we be concerned that these pied pipers have voiced no coherent solution other than throwing money at the problem?

There are many such questions, but at the end of the day, we are faced with the fact that we have engaged in actions that contradict the foundations of our ideological principles.

In China, the culture of consumerism and the pursuit of capitalism have severely challenged its socialist ideology.

In response, the Chinese government has been searching for an ideological balance point that can rationalize its contradictory practices and ideologies.

For both the United States and China, the sharp ideological differences between democratic capitalism and communist socialism, which defined the post war world, has become a muddle of mixed measures dictated by economic desires and circumstances.

Instead of clearly drawn differences, we have become more like two countries with one system.

The effect of this ideological morass has yet to be fully digested by either side, but it is something to keep in the back of one’s mind as you go about your business in either country.

When the times are muddled, it is even more important to be clear about business. As recent events have shown (Bernie Madoff), due diligence is not just something you do in a foreign country.

When something is too good to be true, it generally is. When you don’t understand something, don’t get involved, and when it concerns money, it’s not about trust, just verification.

So, when you are looking at a deal at home or abroad, here are some rules to live by:

  • If the cost of due diligence is too high, do not do the deal.
  • If there is not enough time to do due diligence, do not do the deal.
  • There are no substitutes for doing your own due diligence.
  • The need to do due diligence is ongoing.

The first three points have been made before. The last one is an overlooked point which is an essential issue, especially during economic downturns.

Due diligence before the deal is essential, and for the same reasons, you have to periodically update your knowledge throughout a business relationship.

The last thing you can afford to do is be caught flatfooted because a previously reliable supplier/partner/client has run into problems or is about to shift direction.

In Shenzhen, China, more than 10,000 businesses went bankrupt in the first seven months of the year. Most were original equipment manufacturers (OEM’s) for foreign companies that found cheaper sources elsewhere.

Interestingly, those companies which had developed their own brands and distribution have so far, for the most part, been able to hang on. In other parts of China, suppliers who were warehousing products for foreign companies, as part of a just-in-time inventory system, suddenly disappeared, along with all the goods, which had already been paid for. You need to stay in touch with your suppliers, partners and customers at as many levels as you can and make sure the message you are receiving is consistent. You need to get independent reports about their financial and management health. You need to be proactive about quality issues and audits. You need to study your suppliers, as well as your customers’ pricing and costs.

For instance, sharp drops in the cost of materials, shipping and energy over the last six months mean that old price quotes are probably too high and can be negotiated down or obtained from other suppliers.

Just as important, you need to look at your relationships and attempt to strengthen them by creating win-win situations that allow you all to go forward. That is the stuff guanxi (friendship) is made of.

Good luck to all in this new year. 

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