Dear ATCA Colleagues

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

We are grateful to our distinguished and long standing ATCA contributors:

. Andrew Leung based in London, UK, and frequent visitor to China, for "The China Black Swans"; and
. Prof Jean-Pierre Lehmann based in Ouchy and IMD Lausanne, Switzerland, for "Integrating The Black Swan in Corporate Global Trends Analysis"

in response to the ATCA presentation, "Low Probability High Impact and Black Swan Events -- Considerations for Future Scenarios -- The Opportunity and Risk of Asymmetric Globalisation."

Andrew Leung has over 40 years of experience in a number of senior positions working closely with mainland China, including Hong Kong, with a focus on commerce, industry, finance, banking, transport, social welfare and diplomatic representation. He has addressed numerous local and international business and strategic fora, groups and organisations on China, including making regular television appearances. He has written many key commentaries on China for various organisations including ATCA. His target audience includes finance and investment houses, institutional investors, large businesses, think tanks, senior officials and business schools. Andrew was twice sponsored personally by the US Government on briefing visits to the United States, including a month-long visit to brief Chairmen and CEOs of multi-nationals in regard to China, post-Tiananmen Square. He was also sponsored by the Economist as a speaker at the China conference in Berlin with the German Foreign Affairs Institute. He was invited to brief personally the Duke of York and the Lord Mayor of London prior to their China visits.

Andrew is on the Governing Council of King's College London; the Advisory Board of Nottingham University's China Policy Institute; and the Executive Committee of the 48 Group Club with historical and working links with the Chinese leadership. He has been appointed as a Global Representative for Changsha City, China. He chairs the China Interest Group of the Institute of Directors' City Branch. He is a Visiting Professor of the International MBA Programmes of China's Sun Yat-Sen and Lingnan Universities. He will shortly begin lecturing as a Visiting Professor at NIMBAS University, Utrecht, Holland. Andrew is a Fellow of the Royal Society of Arts (FRSA). He was awarded the Silver Bauhinia Star (SBS) in the 2005 Hong Kong's Honours List. He has qualifications from the University of London, Cambridge University, The Law Society and Harvard Business School. He speaks Cantonese and Mandarin and practices Chinese calligraphy as well as fine art. He writes:

Dear DK and Colleagues

Re: The China Black Swans

As the summer 'silly season' is about to start, world markets are gripped by an underlying fear of a new and increasingly uncertain round of sell-offs in the US and European bond markets as the US Treasury yields breached their technical benchmark of 5.25%. World interest rates are rising. Is the era of cheap capital and stock market bonanza coming to an end? Is investor confidence again beginning to fray in how long the global imbalance will last between too much indebted consumption in the US and too much saving in China? [ATCA: 'China: Watch this Space', March, 2007]. Above all, with rising Western protectionism and a host of geopolitical, social, and environmental challenges, is China, a key driver of the global cheap capital, poised to unwind, if not unravel?

It is no wonder that the world markets are in such a nervous mood. There is a mounting flight from risk to safety. But where is safety in this new Age of Globalisation?

First, although oil prices are showing some signs of restraint, there remains a great deal of concern that in the medium term, higher oil prices are going to be the name of the game as an unprecedented proportion of humankind, including China, India, and other Asian, African, and South American countries, are industrialising and urbanising at the same time.

Second, apart from the relatively 'Known Knowns' of Climate Chaos such as melting glaciers, rising Polar trend temperatures and drying rivers worldwide (When the Rivers Run Dry, Fred Pearce, 2006), there are now alarming reports of Colony Collapse Disorders (CCD) - sudden, massive, and yet scientifically unexplained die-offs of birds, bees and amphibians in the US, Canada, Germany, Poland, Switzerland, and a string of Mediterranean countries [ATCA: June, 2007].

Third, apart from its impact on Climate Chaos, oil has now translated into bolder nationalism of some of the major energy exporting producers such as Russia and Iran. Energy security in terms of supply, transportation, and prices, has become a top national agenda for more and more countries.

Fourth, the global uncertainty is compounded by changing or changed leadership in the West (including the US, UK and France) as well as some fresh blood expected in the line-up of the Chinese Communist Party at its 17th Congress in the autumn.

As I was penning this ATCA submission, a call from CNBC Singapore asked me to give my views on China in the light of all the market volatility at its Worldwide Exchange program on 12 June. I gave the following pointers for the live TV interview:

· China's Producer Price Index (PPI) remains subject to some import price inflation eg steel and minerals, high-end components and local skilled personnel shortage. But any such increases are likely to be moderate, offset by remaining overcapacity, gradual RMB appreciation, and strong market fundamentals as more and more second to third-tier cities and townships are revving up [The Value of China's Emerging Middle Class - the McKinsey Quarterly, 2006].

· Pending more maturity in China's market system, corporate lending and market capitalisation as % of GDP remain extremely low by international standards. So any isolated relaxation (eg in the 'A' Shares market) inevitably attracts unwelcome speculation and volatility. So the Chinese government remains vigilant on the need for policy tightening.

· In addition to pork, even milk prices are rising globally due to drought. How much this may be attributable to Climate Chaos remains to be seen. But water shortage (along with energy efficiency and pollution) remains a top policy agenda.

· Moderate inflation is not all that bad as it may add some dynamism to the economy. But China remains anxious about its impact on the poorer masses pending the building of a more wide-spread social safety net.

· In spite of rising protectionism and continued China-bashing on Capitol Hill, China's economy is set to continue to grow rather impressively as the country is driven by the need to build a stronger economic foundation faster: China will grow old in several decades before she gets rich. She needs to generate some 24 million jobs every year to stay even.

The medium-term outlook is largely shaped by the following:

· The impact of energy constraints and Climate Chaos are spawning a new breed of global investments in clean and renewable energies and related technologies including energy efficiency. This marries political agendas in Western governments with China's own national imperatives.

· This shift in global attitudes towards Climate Chaos is poised to impact on businesses and lifestyles worldwide. For example, it is beginning to revolutionise the concept of the cars for the future and set the direction for the growing car industry in China. It is firing creativity in building more environmentally-friendly neighbourhoods, cities and transport systems. As the world's largest and most dynamic canvas for this creativity, China provides a powerful platform for increasing global business and technological partnerships.

· Notwithstanding continuing challenges to fight IPR violations, China's absorption and adaptation of cutting-edge technologies and management techniques is breathtaking. She has introduced the world's first 3C technological standards (for combined Computers, Communications, and Consumer Electronics). Huawei and Lenovo are redoubling their efforts in building their global brands by marketing their proprietary savvy internationally. 'Just-in-Time' techniques are spawning a new generation of sleek and branded Chinese-style fast food chains nation-wide, likely to give the likes of McDonald's, KFC and Pizza Hut a run for their money in China.

· With openness and liberalisation unimaginable in China's history, her society has changed dramatically. There are some 250,000 locally-born NGOs in a variety of social causes including the environment, working China-style broadly in line with the central government's policies. Counting her unofficial denominations, China is also home to one of the world's largest and fast-rising Christian communities (Jesus in Beijing, David Aikman, 2003).

· Although the Beijing Consensus is not without its value-blind problems, its implied Soft Power appears to be gaining ground internationally. This is translating into a whole new horizon of regional alliances with ASEAN, Central Asia, Africa, and South America. This is happening at the same time as China continues to embrace globalisation.

Nevertheless, we must remain hugely concerned about China's progress in her battle against corruption, inefficient allocation of capital, IPR violations, inadequate social provision for the masses of peasants and migrant workers, and perceived deficit of transparency and freedom of expression.

There may of course be Black Swans or Unknown Unknowns. Indeed, Mother Nature and human nature are full of imponderables. In any case, if all that remain were Known Knowns, life would be less colourful, not least for the world's commentariat!

Best wishes


Andrew K P Leung, SBS, FRSA
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Jean-Pierre Lehmann is Professor of International Political Economy at IMD International -- Institute for Management Development -- in Lausanne, Switzerland, since January 1997. His main areas of expertise are the socio-economic and business dynamics of East Asia, the impact of globalisation on developing countries and the government -- business interface, especially in respect to the global trade and investment policy process. In 1994 he launched the Evian Group, which consists of high ranking officials, business executives, independent experts and opinion leaders from Europe, Asia and the Americas. The Evian Group's focus is on the international economic order in the global era, specifically the reciprocal impact and influence of international business and the WTO agenda. Jean-Pierre Lehmann acts in various leading capacities in several public policy institutes and organisations. He obtained his undergraduate degree from Georgetown University, Washington DC, and his doctorate from St Antony's College, Oxford University. He is the author of several books and numerous articles and papers primarily dealing with modern East Asian history and East Asia and the international political economy.

Prior to joining IMD, Jean-Pierre Lehmann has had both an academic and a business career which over the years has encompassed activities in virtually all East Asian and Western European countries, as well as North America. He was (from 1992) the founding director of the European Institute of Japanese Studies (EIJS) at the Stockholm School of Economics and Professor of East Asian Political Economy and Business. From 1986 to 1992 he established and directed the East Asian operations of InterMatrix, a London based business strategy research and consulting organisation. During that time he was operating primarily from Tokyo, with offices in Seoul, Taipei, Bangkok and Jakarta and was concurrently Affiliated Professor of International Business at the London Business School. Other previous positions include: Associate Professor of International Business at INSEAD (European Institute of Business Administration) in Fontainebleau, France; Visiting Professor at the Bologna Center (Italy) of the Johns Hopkins University School of Advanced International Studies; twice in the 70s Visiting Professor and Japan Foundation Fellow at the University of Tohoku, Sendai (Japan); and Founding Director of the Center for Japanese Studies at the University of Stirling (Scotland), where he also taught East Asian history in the University's History Department. From 1981 to 1986 he directed the EC-ASEAN 'Transfer of Technology and Socio-Economic Development Programmes' held in Singapore, Bangkok, Jakarta, Kuala-Lumpur and Manila. He writes:

Dear DK and Colleagues

Re: Integrating The Black Swan in Corporate Global Trends Analysis

"International finance is now so interdependent and tied to trade and industry, that political and military power can in reality do nothing."

Who said that? Bill Gates? Warren Buffett? Thomas Friedman? Keep guessing. Actually it was Sir Norman Angell. Who? Norman Angell was a highly travelled, experienced, widely known and respected writer, journalist and lecturer in the early 20th century. That sentence is taken from a best-seller he wrote in 1910, entitled The Great Illusion, which was translated into twenty-five languages and sold over two million copies. And that sentence well reflects how the world seemed to the European middle and chattering classes in the early 20th century. My grand-parents left their Paris apartment quite blithely with their children, my father and aunt, in early August 1914 to spend a two-week summer holiday in Montreux, Switzerland. It ended up being a stay of over four years and not much of a holiday.

The great expectations of what was widely expected to be the booming global business bonanza of the early 20th century was shattered when on 28 June 1914 the heir to the Austro-Hungarian imperial throne, Archduke Franz Ferdinand, and his wife Sophie were shot to death by the Serb nationalist Gavrilo Princip in Sarajevo. Two decades after publishing The Great Illusion, Norman Angell wrote: "Political nationalism has become the most important thing in the world, more important than civilization, humanity, decency, kindness, pity; more important than life itself." He was unfortunately right this time. The trend of globalism that seemed so powerful in the late 19th and early 20th centuries as the world became highly interconnected through trade and investments, enabled by new communications and transport technologies such as the railway and the telegraph, collapsed for most of the remainder of the century into rival virulent nationalisms and ideologies in what the historian Eric Hobsbawm has labelled "the age of extremes" ; it has only re-emerged in the last fifteen years.

What was it that shattered the rosy horizon that people were so complacently gazing at a century ago? Nassim Taleb and the latest ATCA analysis would tell you that it was the sudden arrival of The Black Swan on that fatal day in Sarajevo, as it has occasionally and unexpectedly appeared throughout history, but especially so in the 20th and early 21st centuries. What is The Black Swan? First, Taleb informs us of the interesting fact that before the discovery of Australia, it was an article of faith that all swans were by definition white as there were no other kinds of swans in the northern hemisphere. When James Cook (1728-1799) and his crew "discovered" Australia, they also were the first Europeans ever to come across black swans; initially they could not believe they were swans, since swans were by definition white . Taleb has extended the concept and experience of The Black Swan to describe a phenomenon that has three attributes: 1) it must be an outlier, off the radar screen, outside the realm of normal expectations; 2) it must make a huge impact; 3) it must be seen to be logical and explainable after the fact, ie with 20-20 hindsight vision!

28 June 1914 clearly fits all attributes, indeed the third has allowed for the publication of thousands and thousands of books and theses on the general theme of the "origins of the first world war". 11 September 2001 is a more contemporary example. However, The Black Swan by no means inevitably heralds disaster. The collapse of the Berlin Wall was a black swan, as indeed was the decision by the Chinese Communist leadership under Deng Xiaoping in the late 1970s to, as the Chinese doyen of reform, ZHENG Bijian, put it, "embrace globalisation." There was certainly nothing in the preceding three decades under the leadership of Mao Zedong that would have given even the slightest inkling that China was to undergo such a dramatic and profound revolution. Today China, having come from nowhere on the global business radar screen, is the world's third biggest commercial power (after Germany and the US and ahead of Japan); with accumulated forex reserves of over USD 1.3 trillion dollars and constantly increasing by USD 1 million a minute(!), as Gerard Lyons, chief economist at Standard Chartered, recently opined: "as globalisation takes hold, the three most common words we may read may no longer be 'Made in China' but 'Owned by China'."

While all this is pretty mega stuff, let us bring the theme a bit more down to earth and consider the plight of Arla Foods when it encountered The Black Swan in 2006! Arla Foods is a Scandinavian dairy company with head-quarters in Viby, Denmark. In so far as its foreign operations were concerned, Arla had put most of its strategic eggs in the Middle East basket. It was doing extremely well. Indeed in many Arab countries, the word "Arla" was the generic term for margarine and butter: "I'm going to the shop to buy some Arla." And then, in September 2005 a totally unknown provincial Danish newspaper, Jyllands-Posten, published what were seen by Muslims as blasphemous cartoons of the prophet Mohamed [Debated extensively on ATCA]. And within a few short months, as the news spread, "Muslim Fury over Danish Cartoons Spurs Riots across the Globe", as a typical newspaper headline put it. The riots included the burning of the Danish flag in many capitals across the Middle East, Central and Southeast Asia, and Africa, the destruction by fire of the Danish embassies in Damascus and Beirut, and numerous deaths. A call for the boycott of Danish goods was made and heeded all over the Arab world, as Arla products were rapidly removed from shop shelves. Carrefour in Egypt, among other places, had prominent signs in both English and Arabic "reassuring" its customers that it did not stock Danish goods: "Dear clients, We express solidarity with the Islamic and Egyptian communities. Carrefour don't (sic!) carry Danish products".

The overall result for the year was a loss of earnings of over DKK 400 million (Euro 55 million) for the company, translating into a loss of DKK 40,000 (Euro 5,500) for each of Arla's 10,000 Danish and Swedish cooperative members. Compared to the American, French, British and Japanese flag-burnings, the number of times the Danish flag must have been burned prior to the cartoon riots could probably be counted on the fingers of one hand and almost surely not all five of them! The burning of the American flag would hardly constitute a duckling, let alone The Black Swan; the burning of the Danish flag is something else!

So what are the lessons to be learned for corporate executives from the Arla encounter with The Black Swan and from The Black Swan syndrome more generally?

First, one should note that clearly there was no way that Arla could have predicted, let alone prevent, what happened. But just as clearly for Arla as for everyone else, the first and important lesson to be drawn, if it was ever needed, is that we live in a highly, highly, highly volatile world, all the more so due to the hallucinating speed with which information (or, indeed, disinformation) travels, even to its remotest corners. For Arla, a dwarf in comparison to the giants Nestlé, Unilever and Danone, it did make sense to focus its strategy on one region rather than try to compete all over the world. And indeed all was not lost, as this year the boycott has been gradually lifting in most countries across the region and Arla has recently made an entry into the Algerian market. But, at the same time, it is now diversifying geographically, having also in the course of this year established a joint-venture in Russia, built a plant in China, and most recently launched a new subsidiary in Vietnam, hence spreading geopolitical risk.

Second, it is clear that future markets, profits, and resources lie in the developing countries, for demographic and economic reasons, hence there can be no alternative to doing business there; but the risks must also be recognised and one of them may be over-reliance on a particular area. As one prominent example, many Western companies, especially in garments, are highly dependent for production and sourcing in certain regions, especially in the south of China. Were The Black Swan to pay a visit to the Guangdong province, this could have a sudden devastating effect on the company, the retailers and of course the consumers. The Black Swan could come in various possible guises: a pandemic strikes the region (SARS, avian flu, HIV/Aids or indeed some at the moment unknown contagious disease); massive socio-political unrest, including strikes and violence; a boycott or sudden protectionist moves in the importing country, most likely the US .

Third, the important lesson is that in assessing future prospects, which are the key inputs for strategy, all the cleverly crafted graphs drawn up by banks and consulting companies purporting to show sizes of GDP, global shares of GDP, proportion of the middle class, etc, etc, over several decades must be treated with the barrel-full of salt they deserve. I am not aware of a single forecast that was made in 1960 - or indeed in 1970 or 1980! - that proved to be even remotely accurate in 2000. To cite a recent example: in the course of the mid-1980s, as the booming Japanese economy seemed to be operating on anabolic steroids, predictions were confidently made that the Japanese GDP would take over the American GDP in 2004 and that American corporations, especially in high-technology, would lie prostrate at the feet of their Japanese corporate victorious conquerors . However The Black Swan swam into Tokyo bay in the early 1990s in three guises: the arrival of the world wide web and mass internet for which the Japanese industrial structure, especially in electronics and communications, was totally ill prepared and ill equipped; the Chinese market revolution; the bursting of the bubble. For the ensuing fifteen years, Japan was the OECD's most anaemic economy, and Japanese GDP remains at some 60% of US GDP, roughly where it was in the mid-80s.

These forecasts, which are major polluters of business strategic thinking, are more often than not simply extrapolations of current realities. A major debilitating consequence is that they induce people into linear thinking. As has been said, linear thinking cannot possibly envisage a caterpillar turning into a butterfly, but of course this is precisely what happens. To try to understand the world we live in, and the world in which we may be heading, especially as complex as things are at present, as opposed to extrapolative linear thinking, one key requirement is holistic lateral thinking [as presented by ATCA]. In assessing key forces in any country or region, especially in the developing world, it is critical to integrate demographics, environmental issues, energy consumption, infrastructure, politics, social movements, ideologies, not just the average GDP per capita (which can be very misleading), but income distribution, the provision of public goods, such as health and education, the position of women, the existence of minorities, patterns of emigration and immigration, the proportion of R&D in public expenditure, the ranking of the country on different indices, including those for corruption and for doing business, etc, and to link them together.

In assessing trends, developments and prospects, there is also far too often a tendency among business executives to confuse wishful thinking with hardnosed and detached analysis. This in turn is often due to superficial knowledge and lack of modesty. A good example is in respect to China. When asking executives to gauge political risk in China, a frequently heard mantra is that "the Chinese above all want stability". "The" Chinese? All 1.3 billion Chinese? Maybe they do, but how on earth can the foreign executive know what "the" Chinese think when the Chinese authorities themselves have only the foggiest notion of what their hundreds of millions of compatriots think. China is not an open society where attitude polls can be freely and regularly taken, let alone where people are encouraged to express their views and sentiments. When pushed on how the foreign executive has reached this startling conclusion, it often comes out that that is what he was told by his Chinese circle of acquaintances - perhaps at the 19th hole after a round of golf (!); the latter are certain to be well-heeled urban executives working in China's advanced industrial sectors or for foreign companies. For sure, the Chinese executive of Citigroup wants political stability, as things are fantastic so far as he or she is personally concerned and prospects could not be brighter. But he or she represents an infinitesimal proportion of "the" Chinese.

One must not go to the other extreme to claim that societies such as China are "inscrutable" and that you can never understand. There are various levels of understanding, which of course fall short of perfect understanding, but are definite improvements on the shallow, wild and quite pretentious generalisations that are based on a very high-flying bird's eye-view that focuses exclusively on GDP growth and related figures. To gain better understanding that can induce lateral and holistic thinking, there is today on most regions of the world an increasingly sophisticated body of literature, including some quite impressive tomes that complement the bird's eye-view with the worm's eye-view .

This in turn leads to another requirement and that is that in the hope of understanding the forces and trends of the global environment and of individual countries and regions of the world, especially the volatile ones, there is no substitute for reading books! Yes, good old fashioned books. Reliance on bank or consulting company reports, instant internet data and the occasional article in Fortune Magazine is not only insufficient, but in all likelihood misleading. These are often the same people who produce these great extrapolations!

Reading books, being intellectually curious and modest, developing lateral and holistic thinking, speaking to and learning from a wider circle of persons from diverse professions and positions, are not going to result in the ability to predict the future nor in the ability to spot The Black Swan before it has arrived. But the corporation that does all these things will be much better equipped in several important ways:

1. It will be far more intelligent and literate on the multiple complexities of the planet and its different regions, cultures, countries, etc. Its executives will be personally enriched and far more effective in navigating the choppy waters of business in the developing world and integrating into their societies.

2. Though the corporation will not be able (except by sheer luck) to spot The Black Swan before it arrives, it knows that it may very well be lurking there. By taking a less simplistic and linear view of the world, by recognising the existence of The Black Swan, the company will be in a much better position to deal with the unpredictable when it arrives. It will be "Black Swan conditioned", it will be more flexible, nimble, and able to put into effect contingency plans rapidly.

3. The sophisticated Black Swan conscious company will be on the alert that The Black Swan can be both an extreme threat, but also a massive opportunity. Hence, it will be mentally and strategically in a better condition to address the threat and jump at the opportunity.

4. All this will obviously impact on the company's performance and profits, by being readier to avert losses in the case of threats and to boost sales and revenue in the case of opportunities suddenly and unexpectedly opening up.

5. Ideally, The Black Swan consciousness also will serve as a means better to deal with ethical dilemmas. Carrefour's public boycott of Danish products was, I think most will agree, at the very least ethically questionable. It is the kind of action that gives capitalism a bad name and thereby contributes to undermining the sustainability of the global market economy. In all likelihood, however, it occurred more as a result of panic-induced knee-jerk reaction than from a well thought-out contingency plan!

Even though it is impossible for a company to predict where, when and how The Black Swan will arrive, it is a very useful exercise to imagine various possibilities. Not only can this foster "out-of-the-box" thinking, but indeed it will soon show that in this complex global era in which we live, there is no box, though there may be plenty of boxes! Just as one must exercise if one wants to compete successfully in an athletic activity, so must one exercise by stretching the brain, the imagination, and one's powers of analysis, if one wants to compete successfully in the highly challenging, but extremely exciting, global market place of the 21st century!

Kind regards


Jean-Pierre Lehmann

[ENDS]

Prof Jean-Pierre Lehmann's ATCA submission will feature in a publication for IMD later in the year and should not be copied or circulated beyond ATCA members.

We look forward to your further thoughts, observations and views. Thank you.

Best wishes


For and on behalf of DK Matai
Chairman, Asymmetric Threats Contingency Alliance (ATCA)
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ATCA: The Asymmetric Threats Contingency Alliance is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies -- bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of ATCA is by invitation only and has over 5,000 distinguished members from over 100 countries: including several from the House of Lords, House of Commons, EU Parliament, US Congress & Senate, G10's Senior Government officials and over 1,500 CEOs from financial institutions, scientific corporates and voluntary organisations as well as over 750 Professors from academic centres of excellence worldwide.

The views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. Please do not forward or use the material circulated without permission and full attribution.
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Intelligence Unit | The Philanthropia, ATCA, mi2g.net

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