Chinese business

Time to change the act

Feb 19th 2009 | DONGGUAN From The Economist print edition

Business in China, like business everywhere else, is being walloped by the global crisis. The slowdown is also exposing some deeper flaws

Illustration by Claudio Munoz

A SMALL stretch o !"nd# " t$o%ho&r dri'e rom end to end# re'e"!s m&ch "bo&t the economic tr"ns orm"tion o " '"st co&ntr() This s!ice o so&thern *hin" r&ns rom G&"n+,ho&# the o!d tre"t( port reser'ed or orei+ners be ore M"o e-pe!!ed them# to Shen,hen# the cit( est"b!ished " ter M"o.s de"th "s "n e-periment in pri'"te enterprise) O'er the p"st dec"de it h"s become one o the $or!d.s "stest%$hirrin+ economic en+ines /" +!ob"! h&b in the m"n& "ct&re o c!othin+# shoes "nd e!ectronics/ser'iced b( tens o mi!!ions o mi+r"nt $or0ers) No$ the re+ion is &nder+oin+ "n e1&"!!( rem"r0"b!e contr"ction) 2n the p"st (e"r tho&s"nds o "ctories# perh"ps one%third to one%h"! o the tot"!# h"'e c!osed) 3e!i"b!e st"tistics "re h"rd to come b(# not !e"st bec"&se m"n( "ctories oper"te in " !e+"! nether$or!d# b&t the se'erit( o the s!&mp is p!"in) The !o$ o mi+r"nts h"s +one into re'erse) Some o the ne$!( &nemp!o(ed h"'e st&c0 "ro&nd 4"nd " e$ h"'e st"rted " ne$ ind&str(5 street crime6) The !&c0( ones h"'e o&nd $or0 "t "ctories th"t mo'ed in!"nd# "!tho&+h "t !o$er p"()

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On the ro"d thro&+h Don++&"n# " spr"$!in+ ind&stri"! cit( ro&+h!( h"! $"( bet$een G&"n+,ho& "nd Shen,hen# b&i!din+ " ter b&i!din+/residenti"! "s $e!! "s ind&stri"!/ disp!"(s red b"nners "d'ertisin+ its "'"i!"bi!it() Loc"! "+ents s"( there is no interest rom b&(ers) A !"c0 o dem"nd or $h"te'er " "ctor( mi+ht m"0e is p"rt o the e-p!"n"tion) So is concern "bo&t the 1&"!it( o properties or s"!e5 " !ot o "ctories $ere p&t &p in " h&rr( "nd h"'e been m"int"ined poor!( i "t "!!) And so is the neb&!o&sness o *hinese propert( !"$s) 7&rch"sers c"nnot be s&re th"t $h"t the( b&( the( $i!! tr&!( o$n)

Oh, for yesterdays problems

The r"pid co!!"pse o economic "cti'it( "ro&nd Don++&"n indic"tes th"t *hin".s pri'"te comp"nies "re bein+ s&b8ected to the s"me b"tterin+ "s their co&nterp"rts in m"n( other co&ntries) 9et it "!so r"ises 1&estions "bo&t the !on+%term s&r'i'"! o m"n( o these comp"nies) The( h"'e been "mon+ the most d(n"mic components o *hin".s "st rise to$"rds prosperit() Their t&rmoi! m"( be tr"nsient) Then "+"in# there "re "!so $orries th"t it is in "ct tied to pro o&nd !"$s in the *hinese econom() Si- months "+o *hinese m"n& "ct&rers $ere bein+ po&nded b( incre"ses in "!! m"nner o costs# rom $"+es "nd the prices o m"teri"!s "nd ener+( to interest r"tes "nd t"-es) :&st "bo&t e'er( t(pe o s0i!!ed !"bo&r $"s in short s&pp!() Ann&"! res&!ts or 200;# d&e to be re!e"sed in the ne-t co&p!e o months# $i!! sho$ th"t these orces did m&ch to ho!d b"c0 *hinese b&siness or " !"r+e p"rt o the (e"r) No$ those m"n& "ct&rers "re t"0in+ " di erent sort o po&ndin+5 " dr"m"tic "!!in+%"$"( o orders) December.s o ici"! ind&stri"!%prod&ction d"t"# or $h"t the( "re $orth# sho$ed " m"r0ed drop in "nn&"! +ro$th< :"n&"r(.s "re de!"(ed 4see "rtic!e6) E-ports# on $hich the i+&res "re more re!i"b!e# $ere 1=)>? !o$er in :"n&"r( th"n " (e"r be ore) 2mports $ere do$n b( @A)1?) The s!o$in+ econom( h"s sent "!! those costs in the other direction) 2t h"s bro&+ht the prices o m"teri"!s "nd ener+( do$n sh"rp!( "nd s!"c0ened the !"bo&r m"r0et) A ter (e"rs o ste"di!( p&shin+ &p interest r"tes "nd incre"sin+ b"n0s. c"pit"! re1&irements# the in"nci"! "&thorities in Bei8in+ be+"n to c&t both in September# "nd !endin+ h"s been 'oc"!!( enco&r"+ed) Fe"r &! o the soci"! conse1&ences o $idespre"d &nemp!o(ment# both !oc"! "nd n"tion"! +o'ernments h"'e b"c0tr"c0ed on po!icies p&t in p!"ce bet$een 200C "nd 200; th"t r"ised pri'"te comp"nies. costs) E-porters. t"- reb"tes h"'e been restored# or e-"mp!e< "nd ne$ !"$s on $"+es# $or0 r&!es "nd bene its th"t "dded costs " (e"r "+o "re t&rnin+ o&t to be more !e-ib!e th"n the( "t irst "ppe"red) Aro&nd Don++&"n# !oc"! o ici"!s no !on+er seem bothered "bo&t p&shin+ the re+ion to$"rds hi+her%'"!&e%"dded prod&cts) M"0ers o !"bo&r%intensi'e +oods# s&ch "s "pp"re! "nd to(s# ind th"t the( "re no !on+er &nder press&re to mo'e "$"() A stri0e th"t the m&nicip"! +o'ernment $o&!d h"'e "!! b&t enco&r"+ed or m&ch o 200;# it $o&!d no$ he!p to sett!e) None o this h"s come "n($here ne"r o settin+ the dec!ine in orders) Dorse# the m"!"ise m"( +o "r deeper th"n the short%term e ects o " s!&mp in dem"nd)

footloose business
M&ch o the rem"r0"b!e s&ccess o *hinese b&siness h"s been b"sed on !o$%m"r+in# !o$% techno!o+( "cti'ities) Bro"d!( spe"0in+# *hin" is " net e-porter o +oods $ith " !o$ techno!o+( content "nd " net importer o more sophistic"ted $"res) 2n richer co&ntries# not s&rprisin+!(# the re'erse is &s&"! 4see ch"rt 16)

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M"n( *hinese b&sinesses h"'e been b&i!t on &sin+ che"p !"bo&r to prod&ce che"p# commoditised +oods s&ch "s c!othes "nd shoes or e-port) Lots o others prod&ce hi+her%+r"de st& # s&ch "s e!ectronics +oods or br"nded sports$e"r or Destern comp"nies) The tro&b!e is th"t other co&ntries c"n "!so do this# sometimes more che"p!()

Gr"nted# *hin" h"s p!ent( o import"nt comp"nies $hich do not need to $orr( "bo&t their b&siness dis"ppe"rin+ to other emer+in+ economies) More th"n A0 o the 100 irms "nointed b( the Boston *ons&!tin+ Gro&p in :"n&"r( bec"&se the( "re Econtendin+ or +!ob"! !e"dershipF "re *hinese) No other co&ntr( c"n bo"st so m"n() Go$e'er# "!most "!! o these "re o$ned "t !e"st in p"rt b( the +o'ernment "nd bene it rom protecti'e b"rriers in their home m"r0et) *hin" Mobi!e# or e-"mp!e# is the $or!d.s !"r+est mobi!e oper"tor# b&t its competition is !imited# b( ministeri"! decree# to 8&st " e$ other domestic ri'"!s) The s"me +oes or stee!# "!&mini&m# ener+(# in"nce "nd " host o other "re"s th"t the +o'ernment deems Estr"te+icF) A more d&r"b!e mode! or !ess pri'i!e+ed comp"nies $o&!d in'o!'e more hi+her%m"r+in "cti'ities# b"sed on inno'"tion "nd hi+her 1&"!it(# $ith their home%+ro$n br"nds to the ore) So "r# ho$e'er# *hinese comp"nies h"'e been p!"+&ed b( "n "ct&"! or percei'ed !"c0 o 1&"!it() On!( " e$ h"'e b&i!t respected br"nds) The &nder!(in+ c"&ses o this "re " $e"0 s(stem o propert( ri+hts 4inc!&din+ inte!!ect&"!%propert( ri+hts6 "nd " in"nci"! s(stem s0e$ed in "'o&r o bi+# st"te%contro!!ed comp"nies) The( $i!! not be e"s( to i-) The do$nt&rn h"s sho$n m&ch o *hinese b&siness to be rem"r0"b!( oot!oose) 2t is "s i the comp"nies th"t died simp!( e'"por"ted $itho&t !e"'in+ " te"r or " tr"ce) There is more to this th"n the er"dic"tion o e-cess c"p"cit( or the shi t o prod&ction in!"nd) B&(ers in Gon+ Hon+ $ho " (e"r "+o dro'e o'er the border to b&( c!othin+ in so&thern *hin" no$ t"0e !i+hts to Dh"0" in B"n+!"desh) Ni0e $i!! prod&ce more tr"iners 4sne"0ers6 in Iietn"m this (e"r th"n in *hin"# its !e"din+ so&rce or 1> (e"rs) 2n 19;; " sm"!!# secreti'e# T"i$"nese p!"stics m"n& "ct&rer n"med Gon G"i opened " "ctor( in Shen,hen th"t h"s since +ro$n to the si,e o " cit(# $ith more th"n " 1&"rter o " mi!!ion emp!o(ees) Litt!e o $h"t its *hinese s&bsidi"r(# Fo-conn# prod&ces is direct!( disc!osed b( the comp"n( b&t it is bro"d!( be!ie'ed to inc!&de i7ods# Nintendo "nd Microso t +"mes conso!es "nd !"ptops# either in $ho!e or p"rt# or most !e"din+ br"nds) Bec"&se o the sheer n&mber o peop!e it emp!o(s# Gon G"i.s e'er( mo'e +ener"tes h&+e interest in !oc"! ne$sp"pers# "!tho&+h the irm itse! s"(s !itt!e) 2n 200=# pres&m"b!( or m&ch the s"me re"son th"t it mo'ed to *hin" 20 (e"rs "+o# it opened " "ci!it( in Iietn"m $hich is s"id to be &nder+oin+ " !"r+e e-p"nsion) L"st s&mmer the T"i$"nese press $"s "b&,, "bo&t prod&ction mo'in+ b"c0 home) No$ reports rom T"i$"n s"( th"t the Shen,hen $or0 orce $i!! be c&t rom 2C0#000 to 100#000 "nd th"t there $i!! be more 8obs in!"nd) Dh"te'er the i+&re t&rns o&t to be# Gon G"i is " nimb!e tr"nsn"tion"! comp"n(# "b!e to mo'e prod&ction "ro&nd "s circ&mst"nces ch"n+e) And it is not "!one) Admitted!(# there "re sti!! +ood re"sons to rem"in in *hin") Iietn"m# 2ndonesi" "nd other co&ntries h"'e on!( " inite "bi!it( to e-p"nd 1&ic0!( $itho&t o'er!o"din+ their in r"str&ct&re or sp"r0in+ $"+e in !"tion) *hin" sti!! h"s !ots o che"p !"bo&r) 7erh"ps most import"nt# it h"s " '"st domestic m"r0et# m&ch o $hich is protected rom orei+n

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prod&cers) B&t "s the r"i!t( o the so&thern *hinese m"n& "ct&rers demonstr"tes# these 'irt&es h"'e their !imits) Gi+her m"r+ins "re o ten !in0ed to hi+her 1&"!it() 2n " recent s&r'e( o =00 intern"tion"! b&siness pro ession"!s b( 2nterbr"nd# " cons&!t"nc(# ;0? o respondents cited !o$ 1&"!it( "s "n import"nt b"rrier to the s"!e o *hinese prod&cts "bro"d) T$o%thirds s"id Eche"pF $"s the chie "ttrib&te o *hinese +oods) On!( 12? be!ie'ed 1&"!it( $"s impro'in+) :&d+ed b( the str&++!es *hinese comp"nies h"'e h"d oper"tin+ "bro"d# s&ch impressions "re $e!! o&nded) Dith r"re e-ceptions# not"b!( Leno'o# $hich p&rch"sed 2BM.s !"ptop b&siness# "nd G"ier# the m"0er o che"p# sm"!! re ri+er"tors th"t &rnish the rooms o n&mber!ess st&dents# *hinese n"mes h"'e "i!ed to m"0e m&ch o " dent) Dhere the( h"'e thri'ed is either in cost%conscio&s emer+in+ m"r0ets or in cost%sensiti'e "re"s o de'e!oped m"r0ets de ined b( c!e"r speci ic"tions "nd minim"! inno'"tion) The +re"test e-"mp!es o this h"'e been JTE "nd G&"$ei# m"0ers o te!ecoms e1&ipment) The poor e-tern"! rep&t"tion o *hin".s prod&cts h&rts not on!( *hinese comp"nies b&t "!so Destern irms 0no$n to be se!!in+ *hinese%m"de +oods) L"st (e"r# in response to " series o sc"nd"!s# b&(ers. comp!"ints "nd !"$s&its o'er *hinese to(s# Americ" p"ssed !"$s re1&irin+ e!"bor"te certi ic"tion) This is cost!( or +ood m"n& "ct&rers# b&t Americ"n to( distrib&tors o&nd themse!'es inc"p"b!e o 8&d+in+ the s" et( o prod&cts the( imported rom *hin") O&t o simi!"r concerns# 2ndi" h"s imposed restrictions on *hinese% m"de to( tr"ins "nd c"rs# do!!s "nd p&,,!es) Dh(# then# h"'e *hinese m"n& "ct&rers not done more to impro'e the 1&"!it( o their +oodsK The beni+n e-p!"n"tion is th"t *hin" is &nder+oin+ the s"me prob!ems "s :"p"n once did# b&t in " !iti+io&s# cons&mer%centred "+e in $hich e'er( !"$ is m"+ni ied) There is somethin+ to this# b&t :"p"n.s n"tion"! obsession $ith 1&"!it( $"s "pp"rent e"r!( in its post%$"r ind&stri"!is"tion# $hen it "dopted the te"chin+s o D) Ed$"rds Demin+# "n Americ"n 1&"!it(%contro! +&r&) *omp"nies s&ch "s Gond" cr&shed the British motorc(c!e ind&str( b( o erin+ hi+her 1&"!it( "s $e!! "s !o$er prices< Son( "nd 7"n"sonic did the s"me to Americ"n m"0ers o r"dios "nd te!e'ision sets) A!most "!! the s&ccess &! comp"nies be+"n b( prod&cin+ "t !e"st some components or others 4Son( sti!! does6 b&t $ere e1&"!!( determined to c"r'e o&t n"mes or themse!'es b( m"0in+ distincti'e prod&cts) To s"( these comp"nies h"d !on+%term 'isions is "n &nderst"tement) Honos&0e M"ts&shit"# the o&nder o 7"n"sonic# dr" ted " 1#000%(e"r corpor"te p!"n) There is no e1&i'"!ent in *hin" (et) Go$e'er# m"n( *hinese comp"nies "re "$"re o the per'"si'e criticisms o their 1&"!it() Some bi+ irms h"'e be+&n emp!o(in+ Desterners $ith !on+ e-perience in the best Americ"n "nd E&rope"n "ci!ities) The *hinese "&thorities "re "!so "$"0e to !"c0 o 1&"!it(# bec"&se o its de"d!( e ects in the 4he"'i!( protected6 domestic m"r0et# $here it h"s been "!! too e"s( to s&cceed b( bein+ shodd() L"st (e"r# " ter poisoned d"ir( prod&cts 0i!!ed si- chi!dren# the ch"ir$om"n o S"n!&# the most not"b!e prod&cer# $"s sentenced to !i e in prison) T$o s&pp!iers $ere condemned to de"th) To be s&re# !ots o hi+h%1&"!it( thin+s "re m"de in *hin"# rom sportin+ +oods "nd M7A p!"(ers to !&-&r( c!othin+) *hin" h"s become the $or!d.s !"r+est e-porter o in orm"tion "nd comm&nic"tions techno!o+() Loc"! m"r0ets "nd tr"de "irs "re "$"sh in "spirin+ br"nds) 2n tr"nsport "!one# there "re " do,en si,e"b!e c"rm"0ers# A00 t(rem"0ers# 1#000 bic(c!e%m"0ers "nd se'er"! tho&s"nd scooter%m"0ers# "!! hopin+ to m"0e "n impression) More th"n A#>00 $"tchm"0ers !ist their ser'ices on A!ib"b"# " so&rcin+ $ebsite# "s do ;#000 r",or%m"0ers) And m(ri"d comp"nies ch&rn o&t the "0e Gi!!ettes "nd 3o!e-es so!d on street corners)

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Th"t 'er( !itt!e o this e ort h"s been con'erted into stron+ br"nds is somethin+ o " p&,,!e) Forei+n comp"nies "cco&nt or most hi+h%tech e-ports 4see ch"rt 26) The simp!est e-p!"n"tion is th"t "non(mit( s&its m"n( *hinese comp"nies) 2n Don++&"n# 9&e 9&en# " s&bsidi"r( o 7o& *hen# " T"i$"nese comp"n( $ith " simi!"r mode! to Gon G"i.s# prod&ces sports shoes or !e"din+ Destern n"mes) Sm"!!er irms m"0e e'er(thin+ rom tennis r"c1&ets to E&rope"n !&-&r( +oods) Bec"&se $ide p&b!icit( o the common ori+in $o&!d do those br"nds !itt!e +ood# the Desterners &s&"!!( insist on contr"cts $ith c!"&ses b!oc0in+ disc!os&re) Anon(mit( "!so sp"res *hinese comp"nies rom o ici"! "nd press scr&tin( o !"bo&r conditions# $hich c"n be "b(sm"!) B&t there "re !imits to this str"te+(# in "s m&ch "s m"r+ins on &ndi erenti"ted prod&ction h"'e pro'ed !o$) 3et"inin+ c&stomers me"ns ho!din+ o competition rom "n( co&ntr( $ith !ots o che"p !"bo&r# "nd# "s so&thern *hin" is indin+ o&t# b&sinesses o this sort "re '&!ner"b!e to bein+ $iped o&t in " s!&mp) 2n T"i$"n m"n( o the comp"nies th"t once $ere !e"ders in "non(mo&s prod&ction h"'e s!o$!( de'e!oped hi+h%1&"!it( prod&cts &nder their o$n n"mes# not"b!( Acer# As&s "nd GT*) The most +!"rin+ impediment to cre"tin+ the s"me 0ind o oper"tion in *hin" is the co&ntr(.s $e"0 inte!!ect&"!%propert( protection) Dh( in'est in desi+n or inno'"tion $hen the res&!ts c"n be 0noc0ed o b( competitorsK A$"re o this b"rrier# the +o'ernment h"s

p"ssed ne$ !"$s "nd h"s been 'oc"! in s&pportin+ +re"ter protection# b&t sett!ements rem"in tri'i"! "nd en orcement p"tch() Most *hinese p"tents +r"nted to domestic "pp!ic"nts "re sti!! o " t(pe 0no$n "s E&ti!it( mode!F p"tents# m"in!( "$"rded or increment"! impro'ements# r"ther th"n or inno'"tion or ne$ desi+ns 4see ch"rt A6) The $e"0ness o inte!!ect&"!%propert( ri+hts c"n be seen "s p"rt o " deeper prob!em5 the $e"0ness o pri'"te propert( ri+hts in +ener"!) Be ore *hin".s reopenin+ in the !"te 19=0s# s"(s " recent st&d( on *hinese inno'"tion b( the OE*D# this iss&e did not "rise5 inno'"tion "nd techno!o+ic"! de'e!opment $ere "ssi+ned to +o'ernment instit&tes< "ctories recei'ed $or0 orders) E'en tod"( on!( the r"rest comp"n( c"n c!"im &n ettered independence) Accordin+ to 9"shen+ G&"n+# "n economist "t the M"ss"ch&setts 2nstit&te o Techno!o+(# e-p!icit!( st"te%contro!!ed irms m"0e &p h"! the econom() Th"t prob"b!(

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&nderst"tes the tr&e e ect# bec"&se e'en pri'"te irms &nderst"nd th"t their e-istence depends on their re!"tions $ith the st"te) 2n st"te%contro!!ed comp"nies# senior m"n"+ers "re rot"ted "t the behest o +o'ernment) *hin" Mobi!e is s"id to h"'e 100#000 s&pp!iers) One re"son is th"t $ith its m"n"+ement "nd oper"tin+ r"nchise s&b8ect to re1&ent +o'ernment inter'ention 4it $"s reor+"nised !"st s&mmer6# techno!o+ic"! inno'"tion m&st be done o&tside) Le"din+ m"n"+ers h"'e !o$ s"!"ries "nd o ten !et stoc0 options e-pire e'en $hen the( "re in the mone(# $hich s&++ests th"t re$"rds "re not c!ose!( tied to cre"tin+ '"!&e or sh"reho!ders) Medi&m%si,ed comp"nies h"'e their o$n con !icts) F"ctories ine'it"b!( occ&p( !"nd th"t $"s once st"te%he!d) As " conse1&ence# their sh"reho!ders o ten inc!&de !oc"! +o'ernment) O ici"!s h"'e !itt!e interest in ind&stri"! e icienc(5 mer+ers# or inst"nce# "re &n"ttr"cti'e i the( me"n !osses o !oc"! 8obs) 2n'"ri"b!(# i there is " photo+r"ph on " $"!! "t " corpor"te he"d1&"rters# it e"t&res " 'isit b( " senior +o'ernment o ici"!/ sho$in+ $ho m"tters) B!&rred o$nership distorts in"nce# m"n"+ement str&ct&re "nd !on+%term p!"nnin+) To ins&!"te themse!'es rom the 'icissit&des o *hin".s st"te contro!# comp"nies +o thro&+h "!! m"nner o !e+"! contortions $hen the( !ist sh"res) G"ier# or e-"mp!e# is incorpor"ted

in Berm&d") Sec&rities o erin+s m&st be "ppro'ed b( the +o'ernment "nd the b&!0 o !e+"! in"ncin+ comes rom st"te%contro!!ed b"n0s) Dith "!! these po!itic"! ties# !"c0 o inno'"tion is h"rd!( " s&rprise) Theoretic"!!(# the sm"!!er# pri'"te irms "re more !e-ib!e) B&t r"isin+ mone( is h"rd5 !o"ns to s&ch irms "cco&nt or on!( " sm"!! p"rt o the tot"! !endin+ b( those st"te% contro!!ed b"n0s 4see ch"rt @6) The so&rce o sm"!! irms. mone( is one o *hin".s +re"t m(steries# b&t there "re hints) *hin" is i!!ed $ith +re(%m"r0et in"nciers# inc!&din+ p"$n shops# Ecredit%+&"r"nteeF irms# "nd sm"!! ind&stri"! comp"nies th"t !end to other sm"!! ind&stri"! comp"nies) Bec"&se in"nce rom s&ch so&rces is in orm"!# ho$e'er# it is short% term# ch"n+in+ the n"t&re o in'estment) 2t o ten depends on the person"! re!"tionships o the irm.s o$ner< th"t too c"n distort m"n"+eri"! decision%m"0in+) None o these impediments h"s pre'ented *hin" rom +ro$in+) 2ndeed# the e-tr"ordin"r( $"( in $hich mone(# peop!e "nd comp"nies seem to come "nd +o i!!&str"tes the co&ntr(.s "d"pt"bi!it() B&t the( "re impediments "!! the s"me) T$o (e"rs "+o# on one o his re1&ent trips to *hin"# Bi!! G"tes s"id he $"s o ten "s0ed $here the ne-t Bi!! G"tes "nd the ne-t Microso t mi+ht emer+e) To the de!i+ht o his +o'ernment hosts# he predicted Asi"# bec"&se o the ch"n+es he h"d $itnessed# the !e'e!

12.02.2014

o ed&c"tion "nd the imp"ct o techno!o+() 2t is e"s( to im"+ine th"t someone rom *hin" mi+ht o!!o$ in Mr G"tes.s ootsteps) 2n tod"(.s conditions it is# "!"s# h"rd to im"+ine th"t someone rom " *hinese comp"n( mi+ht do so)

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12.02.2014