CBS News had an interesting take on the development of the global green industry. While start-ups have played a crucial role in getting the industry off the ground, CBS believes that the future will be dominated by large, industrial companies which it calls “Green Giants.” Why? Green technology involves revamping the physical infrastructure of the modern world: replacing coal-fired power plants with wind turbines, building homes from new materials, and swapping out engines for electric motors. Established companies simply are in a far better position to muster the capital, technological depth, managerial expertise and factory capacity needed.

So, which large industrial company heads the CBS list of Top Ten Green Giants? Is it General Electric? Siemens? Nope. Surprise—it’s none other than the Communist Party of the People’s Republic of China!

Here’s what CBS News had to say:

What isn’t China doing? The country has kicked off at least 13 electric car trials, issued somewhat strict gas mileage in cars, and set aggressive renewable energy standards. The government will invest an estimated $300 billion in green stimulus over the next decade or so, and assist the effort by direct investments in companies through its estimated $200 billion sovereign wealth fund.

Japanese and Korean companies established worldwide brands with cars and TVs. China will do the same with energy. Other governments — Germany, Spain, the U.S., California — have set up stimulus programs too, but the one-party government and state-owned status of many companies and banks (Coda will make its car on lines in a state-owned factory and funding for its battery venture comes from a state bank) put the PRC in the category of a market participant.

As impressive as that is, that’s not all. China has the most aggressive nuclear power expansion program in the world, and is also building more high speed trains than any other country.

China is projected to build 132 nuclear power plants in the years ahead, and Westinghouse Electric Co., which already has contracts to build several units, says that China wants to have 100 nuclear reactors in operation or under construction by 2020. To put this into perspective, there were only 52 nuclear reactors under construction as of the beginning of 2009 according to the Japan Atomic Industrial Forum Inc. http://www.bloomberg.com/apps/news?pid=20601101&sid=a2lUkzmYNGWI

In order to relieve some of the traffic on the country’s highways and airways, China is spending approximately $100 billion in each of the next three or four years to build out its high speed train network. China already has 10,000 kilometers of rail tracks that are capable of carrying trains traveling at speeds of at least 200 km/hour. Another 17,000 kilometers of high-speed lines are now under construction, and China has plans for a total network of 50,000 kilometers by 2020. By then, China will have more high speed train capability than the rest of the world combined.

A friend of mine who is involved in a number of large green projects explains China’s feverish activity with his “Six Planet” theory. According to him, China’s leaders understand that the country’s continued industrialization and development will require the resources of six planets. Since they all have engineering backgrounds, they realize that there is only one planet. Therefore, they understand that China has to do things differently, and can’t merely follow the same development path as other countries, if it wants to continue to progress.

Makes sense to me. It also explains why so many companies with new and interesting technologies are flocking to China from around the globe. While other countries pay lip service to adopting green technologies, they realize that the country formerly referred to as “Red China” is actually going green.

In order to describe China’s different and lower cost perspective, I tell audiences that when Americans come to China and see a 100 RMB bill, they automatically divide by 8, the approximate exchange rate between the U.S. dollar and the RMB for most of the time that I have been here, and really see the equivalent of $12.50. However, when Chinese see that same 100 RMB bill, they see something more like $100.

The different way in which Americans and Chinese look at the same 100 RMB bill explains so much about China’s cost structures, pricing and markets that I devote a whole chapter to it in my book, Managing the Dragon. This different cost perspective is so ingrained that I still divide RMB prices by 8, even though I’ve been in China for nearly 20 years. While I might think to myself “what’s 12.5 cents anyway” in discussing price with a local vendor, my Chinese colleagues, no matter how wealthy they may be, will negotiate very hard over every yuan.

To illustrate my point, I always carry around two bills: a 100 RMB bill with a picture of Chairman Mao, and a $100 bill with a picture of Benjamin Franklin. Holding them both up for the audience to see, I point out that the two bills are treated exactly the same way in their respective countries.

“You can’t get a bill larger than $100 in the United States, or a bill larger than a 100 RMB in China,” I explain to audiences. Continuing to make my point, I tell them, “When I go to the Wegman’s supermarket near my farm in New Jersey and pay with this (holding up the $100 bill), the cashier puts it under a light to see if it’s counterfeit. When I go to Pacific Century Plaza across the street from my apartment in Beijing and pay with this (holding up the 100 RMB bill), the cashier will feel it and look at the serial numbers to see if it’s counterfeit.”

And then for the punch line– I hold both bills up, look at each and note that “Chairman Mao even looks a bit like Ben Franklin!”

I like to think that my speeches are informative and entertaining, but I don’t pretend to be a standup comic. Nonetheless, that last line about the likeness between old Ben and the Chairman, as well as my comment about eating “every part of every animal” during my nine months of travel around China in 1993, are always sure to get a laugh.

Given Ben Franklin’s importance to my speeches, you can imagine how horrified I was to read the headline to the Wall Street Journal story, Money Makeover: $100 Bill Gets Facelift to Fight Fakes, and how relieved I was to read that the picture of Ben remains. The $100 bill’s new look puts the finishing touches on its second major redesign. The bill last got a makeover in March 1996.

Needless to say, there was no one more pleased than me to see that Ben Franklin had survived yet another facelift.

China’s President Hu Jintao met last week with U.S. President Barack Obama in Washington D.C. The occasion was the Nuclear Summit called by President Obama, and a key sidebar discussion was the subject of tougher sanctions on Iran. What was agreed in these discussions?

According to U.S. officials, the meeting of the two presidents resulted in a diplomatic breakthrough with both sides agreeing to jointly push for new nuclear sanctions on Iran. “Injecting momentum into the drive to punish Tehran over its nuclear program, Hu and Obama instructed their delegations at the United Nations to work together on a draft resolution, the officials said, as Obama seeks to enact toughened sanctions within weeks.”

Sounds promising. However, after leaving Washington, President Hu traveled to Brasilia where in meetings of the BRIC and IBSA countries, the leaders and officials from these two major international groups took a contrary view, agreeing that new sanctions would not help resolve the nuclear issue. (BRIC stands for Brazil, Russia, India and China, while IBSA stands for India, Brazil and South Africa.) The April 15 Brasilia meetings saw Indian Prime Minister Manmohan Singh sit down first with Brazilian President Lula da Silva and South African President Jacob Zuma for the India-Brazil-South Africa summit, and then with Lula, and Russian President Dmitri Medvedev and Hu Jintao for the second Brazil-Russia-India-China summit.

As reported in the Indian press, India’s National Security Adviser Shiv Shankar Menon took part in a meeting of BRIC senior security officials alongside Nikolai Patrushev of Russia and Dai Binguuo of China. Giving an account of the intra-BRIC exchanges on Iran, a senior Indian official said, “All of us agreed that we don’t think sanctions will help solve the current problems with Iran.”

What gives? Is President Hu telling two different stories to two different audiences? I don’t think that’s the case. China has said consistently that it does not believe that increased sanctions will work and that it favors further discussion and dialogue with Iran instead. Moreover, Iran is an important supplier of oil to China and many Chinese companies have operations in the country.

Anxious to walk away from the Nuclear Summit with China’s agreement for tougher sanctions against Iran, my guess is that Administration officials mistook President Hu’s desire to show a harmonious relationship with the United States as agreement with the U.S. position on Iran. In other words, they heard what they wanted to hear and didn’t listen hard enough.

This happens all the time in China. Americans tend to have very set views and are in a hurry to reach agreement, while the Chinese are more subtle and tend to play their cards close to their vests. Understanding what is truly being said in a meeting is akin to peeling an onion. That is why being patient and learning to listen are two important keys to doing business in China. Administration officials are likely to learn this lesson in the coming weeks.

The China market for all products is significantly larger than most people realize. That’s because many analysts only consider the high price/high technology segment of the market in China, that part of the market that most resembles those in more developed markets. But, the total market for any product in China is actually much larger when the low price/low technology segment is also taken into account.

Readers of Managing the Dragon will recognize this analysis because it is one I use frequently to explain what appear to be anomalies in the China market.

Needless to say, I was delighted to read Bertel Schmitt’s article in The Truth About Cars where he cited my analysis of China’s car industry to explain why analysts keep under estimating the strength of its growth. Here is what he wrote:

A week ago, we swam against the trend of China analysts who predicted a 30-40 percent rise in March new car sales in the Middle Kingdom. By using our patent-pending TTAC forecasting methodology, we projected China’s sales rising between 50 and 60 percent in March. The numbers are in. We were wrong.

The March number is even more surprising as we are comparing to a high base in March 2009, when Chinese sales begun to skyrocket. This augurs for a record year. If the trend continues, China could break the all time sales record of 17.4m units sold in the U.S. in the year 2000.

While many might argue that this suggests a bubble economy, Bertel uses my analysis to explain why this isn’t the case.

Forget any bubble talk. This is not a market where a couple has three cars in the garage. China has just begun to motorize. There are 1.3b to 1.5b people in China. It’s like a dry sponge sucking up water. An estimated 400m to 500m already can afford a car. That number is rising rapidly.

That other part is motorcycles, farm engines, and three-wheelers with a one cylinder engine diesel engine. Once these people have the money, they buy a car.

Amen, Bertel. And many thanks for the reference!

U.S. Treasury Secretary Timothy F. Geithner made a brief stop in Beijing on Thursday, meeting for 45 minutes with China Vice Premier Wang Qishan in a private room at Beijing Capital Airport. Although details of the discussion have not been released, the obvious purpose of the meeting was to discuss face to face whatever agreement the two countries have made regarding the currency issue.

In an effort to repair the relationship between China and the United States, it appears that a deal was made over the past week between the presidents of the two countries. Faced with nearly 10 percent unemployment, the Obama Administration has been under growing pressure from many congressmen to brand China a “currency manipulator” in a report which it was due to deliver on April 15. In exchange for the administration delaying this report, Chinese President Hu Jintao has agreed to give President Obama “face” by attending the nuclear summit he is hosting in Washington this coming week, and by taking steps to revalue the yuan.

All three are relatively minor concessions in my opinion. Labeling China as a currency manipulator would touch off a major trade war, something that nobody wants and that would only harden positions on both sides. As the second leading economic power in the world, China wants to be involved in meetings discussing global events, so attending the nuclear summit is something it should do anyway. And as many China watchers have noted, China was likely to begin allowing its currency to appreciate against the dollar for its own reasons. Once again, no big concession. The consensus opinion is that China will unhinge the peg to the U.S. dollar in the coming days and allow the value of the yuan to appreciate gradually.

Apart from the political hay which President Obama will likely make of any decision by China to allow its currency to appreciate, what will a revalued yuan mean for ordinary Americans?

I have always believed that the currency debate with China has more to with politics than economics, because the connection between changes in currency policy and trade is not clear. As I have noted in previous posts, Japan’s exports to the United States continued to increase in the mid-1980s, even after the country allowed the yen to appreciate significantly against the dollar. Similarly, China’s exports to the United States increased by 40 percent from July, 2005 to July, 2008, a three year period which saw the yuan appreciate by 21 percent.

While a stronger yuan — and a weaker dollar — is widely considered to be a good thing for U.S. manufacturers, it will cause problems for Americans. As pointed out by a CNN.com article over the weekend, a revaluation won’t bring many jobs back to the United States. “Much of the nearly $300 billion in Chinese exports annually are not going to suddenly start being produced at U.S. factories simply because of a rise in the value of the yuan. Labor costs are still going to be lower in China.” To make its point, the article quoted Mark Vitner, a senior economist with Wells Fargo Securities, as saying, “The labor-intensive parts of the manufacturing base that have been lost here are never coming back.”

In exchange for little gain, the article listed the following risks of a higher yuan:

• Higher Prices for Chinese Goods. Chinese products will become more expensive for U.S. consumers.
• Higher Interest Costs. China has been keeping the yuan cheap by buying massive amounts of U.S. dollars and Treasury securities. If the yuan is allowed to float freely, China won’t need to buy as much. And that could mean higher interest rates on U.S. Treasury notes, and higher borrowing costs for many U.S. homeowners and businesses.
• Higher Commodity Prices. A slide in the value of the dollar, which in turn could raise the price of imports from elsewhere in the globe for products such as oil.

I was taught in my economics courses at Yale that a country is best served by a strong currency. In pressing so hard to lower the relative value of the dollar, the Obama Administration should be careful what it asks for.

At the end of our interview last week, Sam Gustin, the writer for AOL’s Daily Finance, asked me to give his readers five keys to success in China. It’s always difficult to take the matter of doing business in this very big and very complicated country and reduce it to a few simple statements, but here is what I told him:

1. Develop a strong local management team, and then truly empower them to make decisions.

2. Work very hard to develop “mutual trust” with your employees and counterparts in China. Once a level of mutual trust is achieved, things get a whole lot easier in the country.

3. Learn to listen very carefully — things are not always as they first appear. Most problems in China are the result of miscommunication.

4. Be patient, and practice what I call the “cold shower” approach to decision-making. Just when you think you know enough to make a decision, take a cold shower and think again before acting.

5. Resolve to settle any disputes that may arise through friendly negotiation. Going to court, trying to create pressure by making a dispute public and resorting to other such tactics seldom work. The Chinese value stability and harmony, and do not like confrontation and conflict.

In many ways, doing business in China is getting more difficult, not easier. Yes, demand for virtually all products continues to expand at rates of growth that are beyond imagination in most other countries of the world, and China’s infrastructure improves on a daily basis. However, local competitors are becoming stronger and are now getting access to very cheap capital in China’s “A” share market, and at least according to the latest AmCham survey, many U.S. companies believe that China is less hospitable than it once was.

At times like this, I believe that it’s even more important for every company to go back to basics. Hopefully, the five keys above will assist in that process.

Google’s withdrawal from China and the relationship between the United States and China is on everyone’s mind these days. Sam Gustin, a senior writer for Daily Finance, AOL’s money and finance site, called last weekend and asked a series of questions about both issues. Sam wrote up our conversation in an article that appeared in Thursday’s edition of the on-line publication.

Whatever one thinks of the Google issue, it seems to have marked a high point in tensions between the United States and China. Both sides have played a role in escalating the debate in recent months. China’s rapid recovery from the global economic crisis, and its emergence as the world’s newest “superpower,” have given it a significant confidence boost, and some would argue that the country is now overplaying its hand, flexing its muscles so to speak. At the same time, and as I discussed with Sam, the United States needs to change its mindset with respect to China. China is not the same country it was before the crisis, an event which accelerated its emergence on the world stage.

Just when the situation seemed darkest, though, there is now some hope that the relationship is thawing. The Chinese government announced on Thursday that President Hu Jintao will attend a nuclear security summit meeting in Washington later this month, hosted by President Barack Obama. As reported in The New York Times, the two leaders spoke for about an hour by telephone on Thursday night, with both expressing an interest in healthier ties between the two countries.

President Hu’s visit may also signal reduced rhetoric on the currency issue. My friend Andy Rothman, the China Macro Strategist for CLSA Asia-Pacific Markets who is usually right about such matters, believes that Hu’s visit “almost guarantees that the White House has decided not to conclude on April 15 that China has manipulated its currency with nefarious intent.” Andy believes it would be a political insult for the United States to do so just days after President Hu leaves Washington. In Andy’s view, this will pave the way for China to resume a gradual appreciation of the yuan against the dollar this summer.

The relationship between the United States and China has tended to ebb and flow over the years. Let’s hope that we have now seen the worst in this cycle, and that the two countries begin working together to address the difficult issues which face the world today.