Sunday, September 30, 2012

The Polemics and Realities of U.S-China Trade


Milton Kotler

President, Kotler Marketing Group

September 2012

During his August 2012 trip to China, Nebraska Governor Dave Heineman reported to the China Daily that “I want the Chinese people to understand the warmth, the hospitality and welcoming atmosphere we have in Nebraska - that we will give your businesses the opportunity to grow and prosper." China is Nebraska's fourth-largest trading partner and among its fastest-growing overseas export markets. He went on to say, “Obviously we have a good relationship with Canada and Mexico - they are our northern and southern partners. But we are looking throughout the world," adding that fast growth may make China the state's No 1 trading partner.

If this should happen, Nebraska will join Oregon, Washington, Alaska and Louisiana where China is already the #1 export partner. If China only reaches 2nd place in Nebraska, then Nebraska will join Alabama, Georgia, Maryland, Minnesota, Pennsylvania, North Carolina and Vermont as states where China is already the #2 export partner. If China reaches third place in Nebraska’s exports, that state will join Arizona, Delaware, Illinois, Maine, Missouri, Nevada, New Hampshire Ohio, South Carolina, South Dakota, Tennessee, Texas and Wisconsin where China already holds third place in 2011 exports.

According to the U.S. China Business Council, 30 U.S. States rank China among its top three export partners for goods and merchandise. The other 20 States are not far behind. Total 2011 U.S exports to China reached $103.9 billion, ranking third after its neighbors Canada and Mexico. By contrast, the U.S. is only China’s 5th largest source of imports. But note: China accounts for nearly 10% of all U.S. export of goods, which totaled $1.4 trillion in 2011. Since, $1 billion of U.S. export results in 7,000 jobs, according to Gary Huffbauer of the Peterson Institute for International Economics, U.S. export to China in 2011 produced roughly 70,000 jobs in the U.S. in that year alone. Not bad for a country starving for job growth!  

Notwithstanding the polemics of politicians who threaten China with punitive monetary and trade actions and a U.S. press that obligingly ignores U.S. export realities, the facts speak for themselves. China has as much on-the-ground trade leverage on the U.S. as the U.S. has on China. U.S. leverage rests on Chinese imports. China’s leverage rests on U.S. exports.

President Obama has called for a 15 percent annual increase in U.S. exports to China. The fact is that China is the only export market for U.S. goods that has consistently exceeded 15 percent since 2000. It has dropped below this mark for the first time in eleven years, but is likely to rebound with China’s new economic stimulus initiative. Governor Romney may declare that he will label China a currency manipulator on his first day in office, should he win election, but this astute businessman knows that if he wins, he will have to sugar coat this electioneering bluster.  

Polemics aside, China is deeply entrenched in the economics and politics of U.S. State and local governments and their business constituents. No U.S. Congress or President can politically subvert the economies of their Congressional districts and business contributors with currency sanctions, excessive punitive trade barriers and the fatal risk of trade war.

While politicians and the press assail China over monetary policy, unfair trade, human rights and a host of alleged Chinese abuses, the Chinese government and its State-owned and private businesses have been steadily building grass-roots trade relations with U.S. State and local governments and their indigenous businesses since 2000 for the export of crops, computers and electronics, chemicals, paper, transportation equipment, waste and scrap and other goods.  

In 2000 export to China was 16.2 billion. By 2011 it reached $103.9 billion, If we add export to Hong Kong, which is largely throughput to China, this figure reaches $140.4 billion, inching closer to Mexico’s $197.5 in U.S. export and more than double U.S. export to Japan. While the EU currently receives twice as much U.S. export as China, its annual import growth rate from the U.S. is less than 1/6th the growth rate of exports to China.  

The basic dynamic of U.S. export growth over the past decade has been State and city business delegations to China and the opening of State trade offices in China. As of 2010, Idaho, California, Ohio, Maryland, Virginia, New York, Illinois, Kansas, Georgia, Louisiana and 20 more U.S. State governments have registered trade offices in China. These offices promote export and manage a continuous stream of trade missions from their State to China and from Chinese provinces and cities to their own States and cities. Many American cities like New York City, Chicago, Philadelphia, Los Angeles, Washington, D.C. and others have their own trade offices in China. Even Columbus, Indiana, a city of only 44,000 people has a registered trade office in Beijing.   

As much as the 2012 Presidential election is ranking job growth as the #1 issue, it is the governors, mayors and their local business cohorts who have carried the load of export driven job creations in their jurisdictions for the past two decades.

National politicians can espouse export growth, while decrying China and proposing protectionist barriers to China trade; but State and local governments and their business leaders that praise China and do the leg work of China export promotion, deals and private sector job growth.  

What do we make of these realities in contrast to the polemics? Three things should be noted.

1. There is a disconnect between political rhetoric and political fact. China has been a well established scapegoat in American politics since the Liberation of China in 1949. The Korean War prolonged animosity. The McCarthy red scare   beat the bushes for all commies well beyond McCarthy’s death in 1957. Taiwan’s defense and the Vietnam War sustained the threat of China until Nixon’s visit in 1972, which began to purge this fear. President Carter stabilized relations and mitigated three decades of hostility with the establishment of the U.S. embassy in China in 1979. Reagan warmed feelings toward China as a tactical stress upon the Soviet Union until its collapse in 1989. In quick order, the U.S. reversed its tactical affection with post-Tiananmen economic sanctions and adverse relations. Under great pressure by business to return to the China market, Clinton promoted international trade and investment with China in the ‘90s.

Following the high tech crash of 2000, State governments and cities, along with their business leaders got worried about jobs and paved a trail of export to China. This fact on the ground had to continuously battle Congressional opposition and a hostile press, which always found new ways to curse China with a cudgel of human rights abuse, low wages and the off-shoring jobs, and currency manipulation. Notwithstanding, it has been the persistence of local political and business leadership, who feel the heat of poor economy and jobs pressure, that has brought us to the height of export trade with China that we enjoy today. Really, no thanks to Congressional politics or the press.

2. While the Chinese embassy in Washington jostled diplomatically with Congress and the Executive branch over trade and monetary policy, the commercial office of the embassy and its consulates in Chicago, New York City, San Francisco, Los Angeles and Houston divvied up direct commercial representation to all 50 states. The embassy in Washington handles relations with Delaware, Idaho, Kentucky, Maryland, Montana, Nebraska, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. The consulate in New York City handles Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. The consulate in Houston covers Alabama, Florida, Georgia, Louisiana, Mississippi, Oklahoma and Texas. The Chicago consulate handled Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri and Wisconsin. The consulate in Los Angeles attends to Arizona, Southern California, Hawaii, New Mexico and Pacific Islands. The San Francisco consulate covers Alaska, Northern California, Nevada, Oregon and Washington.

As diplomatic commerce spread its wings, Chinese provinces and cities also established direct trade offices in U.S. cities. Shenyang set up a trade office in Chicago in 2008. Tianjin Economic-Technological Development Area (TEADA) has offices in Chicago and Dallas. Shenzhen has a trade office in Los Angeles. Other large Chinese cities and their local businesses have direct relations with U.S. states and cities not only to promote Chinese export, but also to put their own local Chinese businesses in contact with American producers for import.        

Chinese local trade offices along with the support of American business NGOs, like the U.S. China Business Council, did the heavy lifting of expanding U.S. exports to China from $16.2 billion in 2000 to $103 billion in 2011 – an increase of 542 percent. All of this under the radar screen of political and press polemic.

3. Any talk in the U.S. from politicians, union leaders and other special interest groups about getting tough with China must be taken with a grain of salt. U.S. job growth cannot come from any domestic recovery of its mature economy. It must come from export and this means China, as the world’s largest growing economy, however hobbled from 10% GDP growth to 7.6% growth, and a 2012 reduction in its export growth rate.

No matter which candidate wins the Presidential election, local economic pressure for export to China and its job creation will continue. China’s percentage of total U.S. exports will grow beyond 10 percent as the rate of export growth to the EU and our Canadian and Mexican neighbors declines. U.S. job growth needs export to China. Polemics are a drag on this local reality.

The best thing the U.S. Federal government can do to help State and local government and their indigenous businesses to grow is to get out of their way. The Federal government should curtail CIFIUS and other regulatory barriers to technology export, and increase export bank financing and other trade support services.

Chinese diplomacy will never change U.S. opinion in its favor, but it can change the self interest of local leaders by job facts on the ground. Eventually a more solicitous opinion and relationship at the national level may emerge.

Saturday, June 23, 2012

The Mittelstand is Vulnerable: Chinese Acquisitions in Germany


The Mittelstand is Vulnerable: Chinese Acquisitions in Germany 

Milton Kotler
President, Kotler Marketing Group
June 2012

            Mittelstand companies are the backbone of the German economy. The German Savings Banks Association (DSGV) publishes an annual analysis of over 100,000 Mittlestand companies amongst its member banks' customers. There are many more unassociated SMEs. In all, Mittelstand companies employ 70 percent of German workers and contribute roughly half of the country's GDP. The very premise of their success over the past three decades is now the source of their vulnerability. China is buying many of these companies to fill the technological gaps of their state-owned and private industrial giants. In the long run, this trend may cause greater damage to the German economy than the current euro crisis.

            Mittelstand companies are primarily privately owned businesses with fewer than 500 employees and annual sales of less than 50 million euros; yet they collectively generate 2.4 trillion euros. They are export- oriented B2B machine and engineering niche companies which invest heavily in innovative research to attain and preserve their dominant global market share. They have a long-term focus and rest their productivity and innovation on a long-term, apprentice-based skilled workforce. They have been called “Hidden Champions” in management literature. But this apparently indomitable fortress is being stormed today for the very reasons they succeeded.

            In the late 1970s large U.S and European OEM manufacturers began to shift from vertical to horizontal organization. Instead of internalizing supply of parts, components, systems and equipment, big business lowered its end product cost by outsourcing supply. Horizontal organization devoted itself to the four new fundamentals of modern large business organization: 1) managing an external supply chain; 2) maintaining final assembly for brand control; 3) expanding marketing for a global revenue scale; and 4) managing finances for mergers to grow their companies.

            Specialized Mittelstand SMEs became the technical nutrients that flowed through the supply chain catheters of large OEM companies. The greater the OEMs grew on a global scale, the more volume and innovative adaptation they needed from their parts, components, systems and equipment suppliers to compete in the global marketplace. German Mittelstand companies being the most highly engineered and well managed suppliers in the world grew as well. The paradigm of German prosperity was not challenged until China arrived on the global threshold.

            China consolidated its multitudinous state-owned companies in the first decade of the millennium to gain scale for efficiency, improved management and technical training, as well a rationalization of state investments and subsidies. This coincided with a policy of joint ventures with foreign partners in selected industries to give Chinese industry “big brothers” for added quality, in order to compete on price with foreign makers in the domestic market. Added quality at lost cost production gave China a competitive foothold for machine export to emerging developing markets. The next step was added value for export to developing and developed markets. By 2004 Chinese policy was positioning its industries to compete directly with multinational OEMs. To accomplish this, Chinese machine manufacturers needed to fill niche technology gaps in their product line. Mittelstand companies were just the thing they needed – specialists in parts, components, systems and equipment to improve China’s final industrial product. The financial crisis of 2008 and global economic downturn distressed the balance sheets of Mittelstand companies, and Chinese cash was ready to move in and acquire a set of highly-leveraged Mittelstand companies.

            The very strategy of specialization that built the Mittelstand sector has become its undoing. China has no interest in purchasing horizontal multinational OEMs that have no internal supply nourishment. Her vertical business organizations have to fortify their own internal supply chain. The Mittelstand is just what the doctor ordered to build Chinese industrial brands.

            Since 2009, in the aftermath of the fiscal crisis, Chinese companies have acquired ownership many Mittelstand companies. While acquisitions are matters of public record, only the larger acquisitions have been reported in the press. China has invested in considerably more funds in for minority positions in other Mittelstand companies. These are hard to track because the companies are often family-owned.

            The Wall Street Journal ((5.12.11) reported that “the value of Chinese acquisitions, mostly of small, low-profile companies rose to $98 billion last year (2010) from $3.8 billion in 2006, according to merger research firm Dealogic. The total is already $83.4 million this year, with nearly all the deals involving engineering firms.”

            According to statistics from Germany Trade and Invest, the German Federal Republic’s economic development agency, China has overtaken the U.S. as the number one foreign investor in Germany, registering 158 industrial projects in Germany in 2011, compared to 110 by U.S. companies.

            Here is a partial list of acquisitions in the past two decades, most notably since 2009. I limit myself to only three industrial sectors and remind the readers that a lot of Chinese investment in private German SMEs is not publicly documented; and that my list is only a tip of the iceberg. 

A. Auto parts

            1. SaarGummi International GmbH provides body sealing systems and moldings. The company offers automotive profiles for body, door systems, and convertible systems; molded parts for chassis, motors, power trains, and exhaust systems; and glass encapsulation. It also provides moldings for mechanical engineering, railways, footwear, and tube industries; and sealing systems for windows, facades, flat roofs, and pond films. The company was founded in 1947 and is based in Büschfeld, Germany. As of June 6, 2011, following insolvency, SaarGummi International GmbH was acquired by Chongqing Light Industry & Textile Holdings (Group) Co., Ltd for 360 million Euros and currently operates as its subsidiary.

            2. Sellnor design studios which produces auto interior finishes was acquired out of bankruptcy by Ningbo Huaxiang Electronics for 30 million euros. It holds a 20 percent global market share.

            3. German auto supplier Preh is a Bavarian car parts supplier of control units and sensor systems, with $503 million in annual sales and more than 2,500 employees. Joyson Investment Holding, a privately owned automotive electronics supplier based in Ningbo, Zhejiang province, became its majority partner through acquiring a 74.9 percent stake. The agreement creates a global firm worth an estimated €500m ($721.8 million). The majority buyout follows a joint venture in which Joyson and Preh entered the Chinese market in August 2010. The move is designed to re-enforce both companies’ market potential in Europe, North America and Asia.

            4. KSM Castings Group, which includes six light-metal automotive die-casting and permanent mold foundries in Germany, the Czech Republic, and China, has been sold to China's CITIC Dicastal Manufacturing Co. Ltd. for $430 million. KSM is a supplier to automotive OEMs and Tier 1 suppliers that include Volkswagen Group, Daimler, Benteler, Bosch, ZF, and TRW. Dicastal supplies aluminum automotive wheels produced at six casting and forging operations in China.

            It should be noted that KSM, itself, was a management buyout by the British investment group Cognetas, of the onetime ThyssenKrupp Fahrzeugguss operations from ThyssenKrupp AG in 2005. Management buyout Mittelstand companies are the best targets for acquisition because they no longer have the family stubbornness to resist sale or the available credit to survive alone in the growing auto market of China, which is expected to produce 1/3 of global autos by 2020.

            5. Automotive News reported in March, 2012 that Hebei Lingyun Industrial Group of China agreed to buy German automotive lock and latch maker Kiekert AG. Lingyun plans to purchase Kiekert shares from a group of investors including BlueBay Asset Management, Silver Point Capital and Morgan Stanley, which took over after a debt-to-equity swap in 2006 which restructured the firm.

            No purchase price has been disclosed. Kiekert, which makes lock and latch systems for cars, has more than 500 million Euros in sales and 4,000 employees, according to the statement. The company sold more than 41 million locking systems in 2011, which was a record volume for the company.

B. Machine Tooling

             Mittelstand machine tooling companies were the first acquisition targets, dating back to 1999, long before the China trumped the West as a major modern industrial economy. China needed precision machine tooling technology to build its own indigenous machinery and equipment industry.

            1. At the end of 1999 the Burkhardt and Weber (Holding) GmbH, Karlsruhe, Germany (BWH) and the Shenyang Machine Tool Co. Ltd (SMTCL) equally founded a joint venture, the BW Machine Tool Co. Ltd, (BWSMT). In 2001 the BW group became insolvent and SMTCL took over 100% of the shares and has successfully developed it further.

            2. Dalian Machine Tool Group made inroads into Germany through its purchase of F.Zimmermann, Denkendorf, Germany machine tool group. In the end of 2004 the Dalian Machine Tool Group became the majority share holder. Chinese investment financially strengthened the German company through new product development and entry into new markets. The management remained in German hands and the company has grown substantially since Chinese majority ownership. The acquired technology strengthened the Dalian Tool Group in the Chinese domestic market and helped Dalian Tool Group grow its exports.

            3. In the beginning of the year 2004 talks were arranged between the SCHIESS AG, Aschersleben and the Shenyang Machine Tool Co. Ltd, (SMTCL) with the purpose of minority participation by SMTCL. The talks broke off due to the insolvency of SCHIESS. Later SMTCL took over the newly founded SCHIESS GmbH as majority share holder. The company is very successful and has expanded step by step under continued German management.

            4. In spring of 2005 the Hangzhou Machine Tool Co. Ltd. (HMTC) made a substantial investment to acquire majority control in the aba z&b Schleifmaschinen GmbH, Reutlingen, Germany. Management continued independently under the lead of the German general manager. Since then in every aspect the company has made positive improvements.

C. Construction machinery

            1. Sany Heavy Industry Co and Citic PE Advisors paid 360 million euros ($475 million) in 2012 for concrete-pump maker Putzmeister Holding GmbH to strengthen its own technology to compete more effectively in the China domestic market technology, as well as establish its foothold in Europe and other developed markets through the both the Putzmeister and Sany brands. Sany built a Greenfield manufacturing plant in Germany last year. 

            Putzmeister is a top-tier Mittelstand company and key example of the Germany’s “Hidden Champion” strategy of economic growth. Its acquisition by Sany manifests China’s transformation into a high tech economy and the vulnerability of Mittelstand strategy. According to Hermann Simon, author of Hidden Champions, “Putzmeister’s owner Karl Schlecht, age 79, sold the company that he founded through a deal, hammered out in secret, (which) has triggered a ‘state of shock’ at Putzmeister headquarters in Aichtal near Stuttgart”. According to a member of the company's works council, "Not even the supervisory board was informed." Upon public announcement, 700 Putzmeister employees gathered in front of the factory gates to protest the sale to Chinese Sany. Matters began to calm down when Sany made it clear that it would retain German management and indeed invest in the growth of the Putzmeister brand. Sany has its own Greenfield manufacturing facility in Germany and the merger of these companies has to be worked out by Sany.

            Hermann Simon reported his direct 2012 communication with Karl Schlect about the sale. Schlecht said, as reported by Simon, “In the late 1990s Putzmeister and Schwing (#2 in concrete pumps) held two-thirds of China’s concrete pump market. China was by far the largest consumer of concrete in the world. But by 2004 the combined market share of the two German companies dropped to less than 5 percent, while China accounts for 60 percent of worldwide concrete consumption today. There is no way that a company which loses in the world’s most important battlefield can win the global competition.”

            In Simon’s view, Chinese companies are the most dangerous competitors to Germany, because they are by far the most effective in the core sectors of German industry, such as machinery, engineering and technology.

            2. Less than three months after the Sany transaction, China’s XCMG Group, a maker of construction machinery, agreed to buy Putzmeister’s main domestic competitor, Schwing.

C. Energy

            1. LDK Solar (LDK), China’s second largest solar panel maker, agreed to buy Germany’s Sunways, one of the domestic panel makers struggling to cope with competition from Asia.

            2. The Chinese energy group Hanergy Holding Group Ltd agreed in 2012 to acquire all of the shares that Q-Cells SE, a German maker of solar panels, and its subsidiary Solibro, a maker of thin-film solar panels. Nedim Cen, CEO of Q-Cells, said Solibro's can take full advantage of its thin-film technology and existing production capacity. The purchase comes as the latest evidence of Chinese energy companies' interest in the European market during the current debt crisis. China is the world's largest maker of solar panels, mainly producing what are known as polysilicon panels. Manufacturers that want to make thin-film panels are faced with technical obstacles. Hanergy Group is solving this problem.


            Adaptive strategies can become maladaptive as external circumstances change. This has happened over eons in human genetics and over a few generations in Mittelstand business strategy.

             Over 3 million of years, humans ate as much sucrose-rich plant life as they could during growing seasons, in order to store fat for hard winters of poor food supply. Fat was adapted for living in hard times of food shortage and human being craved sugar. For the past hundred years food preservation technologies and regional trade between seasonal zones have made food available year long. Yet the genetic longing for sugar persists and is glutinously available in all year long fresh fruit, prepared foods and candies. The result today is a maladaptive epidemic of obesity. What was once a selective trait has now become a curse.

            As the Western industrial and service OEMs grew globally over the past several decades and changed from vertical organizations to horizontal organization with outsourced supply chains, German Mittelstand specialized manufacturers needed greater capacity to supply them with specialized parts, components, systems and equipment. These companies, like Putzmeister, borrowed heavily to build new production capacity.

             The global economic meltdown, beginning in the 2009 aftermath of the fiscal crisis and continuing to this day, has reduced demand and placed extraordinary debt pressure on Mittelstand companies. By 2010, revenues were cut by half in many cases. Companies could have weathered this storm, were it only a cycle. But another external element came into play that permanently damaged the Mittelstand strategy.

             The largest buyer of Mittelstand products was China. Domestic Chinese equipment was not competitive. Mittelstand companies first exported and then brought their product to China to lower production cost. They tried to survive in China through solo or joint ventures with Chinese companies. That was like a robin building its nest in a warren of rabbits. First, Chinese partners and other companies simply copied their products and improved the quality of their own product line. Mittelstand companies lost China share, which was the greatest part of global demand. Next, Chinese partners rescued Mittelstand failing finances by becoming majority shareholders and outright owners of Mittelstand subsidiaries; and shortly afterward owners of the parent companies.

            Unforeseen by Western machine and equipment companies at the dawn of their export to China, China had accumulated the means to do this and the will to do it. As economic dusk settled upon the Mittelstand companies, China’s state-owned and private large scale vertical industrial organizations had sufficient capital, state policy support and a vast market for which to acquire a leap in quality. It went on a technology asset buying spree and gobbled up Putzmeister, along with others. Companies, like Sany, are now able to produce and market domestically and internationally machinery and equipment that are competitive in certain sectors with Mittelstand quality at a much lower price.

            The next phase will be further acquisitions as the Chinese add technology value to their product line for both the domestic and foreign export markets. Chinese industrial policy aims for global expansion in developed and developing markets. For these goals the Mittelstand companies have served transitional strategic brand value and management skill until Chinese OEMs have time to incorporate their technology and establish sufficient Chinese management and innovative engineering talent to establish their independent brand trust to domestic and global customers.

            After that, it is anyone’s guess. My only forecast is that once Chinese industrial brands are accepted by global customers, these state-owned organizations will flatten their management and spin off specialized, internal products to Chinese SMEs. In decades to come, China may have its own Mittelstand.

Wednesday, May 30, 2012

China Needs a New Urban Policy

China will build 6,000 new towns over the next two decades. This will be the most rapid urbanization in history. If China does it wrong, it will be the biggest urbanization disaster in history. If China does it right, it will set a new standard for urban planning and development for future cities around the globe: Urban Planning with Chinese Characteristics!

If urban planning and development just continue the practice of the past two decades, there will be unsustainable urban disaster driven by errors in government planning procedures, design, development practice, infrastructure construction, architecture, materials, urban management, social community design, economic concentration, and environmental degradation

Let’s take a few examples of these errors

· Planning: Master planning comes before clear economic, social and environmental strategy.

· Design: Design is driven by rigid technical standards and does not facilitate sustainable economic, social community and environmental strategy.

· Development : Developers do not follow Master plans.

· Infrastructure Construction: Infrastructure construction starts before strategic marketing and economic planning, constraining the shape of viable new urban and suburban places.

· Architecture: Celebrity driven, rather than integrated into the new community strategy.

· Materials: Poor materials undermine durability and degrade the environment.

· Urban management: Fragmented administration; government technical mandates without community involvement.

· Livability: Homogenous “Life style” planning, instead of diversified neighborhood communities and spaces.

· Market value: No strategic marketing plan for sustainable industry and commercial attraction and investment.

· Civic Life: Insufficient amenities and public centers for neighborhood identity and robust community life.

· Branding: New towns and renovated urban centers need distinctive Place brand identity that will be managed for decades to come.

What Can Go Right?

There are some well-planned new industrial cities like Tianjin Binhai city and a number of successful revitalized urban areas, like Xi[Maxwell M1] Tian Di in Shanghai and elsewhere in Chengdu, Guangzhou and other cities. But more often the Master Plans are congested and boring homogenous cookie-cutter formats. Even where Master Plans are good, actual development often corrupts their integrity because of inadequate development control. Sustainable community development requires single owner control of the land parcel with enforceable code specifications for sub-developers. There has to be more policy flexibility in the planning process and control in the development process to get away from the sterile standardization of most new towns. Good planning has to follow sound principles of Place Planning and Development.

What is Place Planning and Development?

The word “Urban” does not tell us what a City is. Real cities and towns are heterogeneous places where people of all classes live, work, learn, play, visit and socially interact with each other both within and between diverse neighborhoods, as well as interact with adjacent and nearby cities, towns and communities. It is this neighborhood diversity and interaction that gives vitality to urban life.

If there are no diverse neighborhoods with new cities and, towns and communities, then the city is a homogeneous settlement of aggregated persons, families, businesses and public areas that have no “living”vitality for their people, businesses and industries. Everything has a boring“sameness”. There is no threshold for human differences that can build interesting personal and family acquaintance, bonds for affection and trust, economic vitality and social harmony. Such physical settlements, however pretty they may look for the moment, will degrade and perish.

Kotler Marketing has four books on Place Marketing and has practiced its principles of strategy, development, design, marketing and management to attract people, investment, businesses and tourists to place destinations. We apply these same principles to urban planning and development in order to create Urban Places of vibrant community life and economic growth.

The Principles of Place Planning and Development

Place Planning requires a clear understanding of the purpose of a city. Economic and social strategies for urban places must precede Master Planning, design and infrastructure construction. Urban Places must have an intrinsic economic value and add collateral value to the surrounding metropolitan region and its industry clusters.

Place Planning harmoniously integrates the economy and community of urban places. Efficient planning of CBDs as a center of government, cultural institutions, service industries and high-end real estate and amenities must complement the diffusion of commerce, creative industry, affordable housing, learning and social life in the neighborhoods. Citizen participation at the neighborhood level must balance central power at the CBD level.

The CBD must interact with neighborhoods and neighborhoods with each other. Urban Place Planning, development and management has to be as social as it is physical. It has to be as humane as it is efficient. Architecture and landscape design must enable the distinctive and authentic identity to the City. These principles attract talent, investment, business and visitors to the city and its communities.

What is a City?

Historically there were clusters of independent towns. The most powerful town, or municipality, aggrandized, or more politely stated, annexed surrounding towns. The agglomeration became the “City.”

To this day, cities are composed of “Downtown CBDs” (the annexing town) and“neighborhoods” (the annexed towns). Downtown is the seat of political power, big business and finance, and high-end commerce and real estate. Neighborhoods are communities of people with the social residue of their former autonomy. They are a social fabric of families, homes, stores, small businesses, schools, temples and churches, fire stations, libraries, restaurants and theatres and unique historic sites. In some cases they become industrials ones.

People do not live in a city. Rich people live and work downtown. Ordinary people live in neighborhoods and either work in their neighborhoods or work or visit the CBD and industrial zones.

What Happened to the City?

The economic and financial growth of downtown expanded its original boundary by demolishing or gentrifying adjacent neighborhoods to make more room for CBD hotels, office towers, high-end housing and service businesses.

Municipal government moved industrial production to outlying old neighborhoods or to [Maxwell M2] Greenfield suburban districts. Developers built residential suburbs for middle-income housing, high-end condo and villa enclaves and even enclave zones for industrial migrant housing. Auto highways and mass transit connected the City center to neighborhoods and new suburban sprawl developments and towns. All roads led to “Downtown.”

Near-in neighborhoods decayed until they were cheap enough to be gentrified into high income lifestyle districts. The social community of old neighborhoods was replaced by the anomic lifestyle of young professional newcomers, living in uniform designed condo or rental flats.

Some old neighborhoods are historically preserved by the government because of special features, while other neighborhoods fight for their own preservation. Ad hoc neighborhood groups defend these neighborhoods. The cityscape may look like a pretty picture, but it is a power struggle and disaster for community.

Where Did This Happen?

It happened in the U.S. and it is happening in China and rest of the developed and developing world.

What is the Result?

The rich get richer and fill the ever expanding City Center. Middle class families move to homogeneous suburban developments, separated from old neighborhood networks and left with a minimal social fabric of community. Workers are shunted to residential towers adjacent to industrial zones, without nearby amenities. Poor people fall through the cracks! Most of the 78,000 reported protests in China are precisely about neighborhood displacement.

The municipal drive for globalized centers and suburban surroundings has produced a double standard of architectural fashion and lifestyle downtown and boredom in the surrounding settlements where people are new to each other and have few ties to bind them.

Downtown is held together by wealth. Decaying neighborhoods and new makeshift districts have little intrinsic commerce and public life to hold them together. The disconnection of economy and society is burdensome to people and dangerous for the State. As downtown wealth accretes, surrounding society becomes enraged. Official culture alone cannot bind this separation. We need to restore a community fabric and measure of public autonomy to city neighborhoods and new towns so they can be connected harmoniously to the Center City. Harmonious society is the goal of place planning and development.

What Role Do Planners Play?

City planners are the front men for downtown developers, financiers and politicians. They focus on “downtown” enhancement and suburban residential and industrial resettlement. However talented and well-intentioned, they work under the constant pressures of land sales for municipal revenue. They seek new models for their tasks from cities around the world, in order to copy what looks decent, rather than invent what will actually work.

Planners are driven by central political policy, municipal finance and centralized infrastructure and economy; rather than principles and strategies of economic development and community life. They are separated from economic planners, as well as from neighborhood people. They are technically- rather than economically- or socially-oriented.

What Role Should Planners Play?

The true mission of planners should be to plan new cities and redevelop old cities in a manner that harmonizes economic development with the neighborhood community. They have to be social and economic planners, as well as physical planners.

They have to preserve historic urban neighborhoods for current residents and newcomers in order to retain and augment the cultural identity of their city and maintain the balance between its CBD and local neighborhoods. They have to involve residents in the planning process.

Planners have to help the Government and the Party to find a new model of harmonious urban planning that combines economy and society, and execute that model with variety, adaptability and consistency.

What Role Do Designers Play?

Designers are hampered by preemptive infrastructure construction. They design around bureaucratic initiatives and roadblocks, rather than help bureaus design for viable economic and social strategy. As a competition-based professional they are driven by creative aesthetics and ecological innovations, rather the human livability and taste.

Urban designers focus on downtown commerce, finance, residential luxury and public institutions. They do not pay adequate attention to the sociability and aesthetics of neighborhood design. They are more interested in green technology than community livability.

China is a world leader in solar technology, which it can harness for sustainable cities. But, we must beware of “ecomania” and balance new energy technologies with social principles of human community.

What Role Should Designers Play?

Design should serve people through humane design. Aesthetic novelty and new technology are no surrogate for community. Master Planning has to integrate downtown attraction with neighborhood attraction. Neighborhood community design has to be a key element in Master Planning. Neighborhood design has to invite small business, light industry, crafts and services to neighborhood, so some residents can work in their neighborhoods. Neighborhoods have to be designed for safety, friendship, walking, shopping, fitness, learning, entertainment and community social life.

What Role Do Urban Agencies Play?

City management is driven by tax revenue for operations and economic development for jobs. It posits that economic development is the primary driver of social benefit through jobs and wage growth for the people.

Public managers primarily focus on providing services to CBD and industrial development. The provision of health and social services in the neighborhoods is a secondary interest. There are few incentives for robust neighborhood business and community life.

City managers engineer civic engagement, but do not confer legally empowered community involvement. Their heart is in the right place, but they do not share their authority. This is community engineering, not community life.

What Role Should Urban Agencies Play?

Urban managers are qualified professionals and are trying to do a good job; but they work within the economic priorities of municipal finance. Neighborhood residents do not trust the allegiance of these managers to community interest.

Urban service management requires a broader government mandate and training to involve residents in health and social service program decisions. To do their job well, urban managers have to gain the trust of people. They have to share decision making with neighborhood residents and businesses.

The Central Government acknowledges this need for citizen involvement. China’s 2007 Urban and Rural Planning Law calls for more participation at the local level and that comments by local people should be noted in the final plans. It also calls for more consideration of environmental and cultural conservation as part of the planning process and encourages an integrated approach from urban to rural.

There is a good opportunity to put this mandate to work. In 2012 the Central government is phasing out the Neighborhood Committee level of government. This creates a vacuum of connecting people to government. This vacuum can be filled by voluntary Advisory Neighborhood Councils. Voluntary Neighborhood Advisory Councils operate in the U.S., Europe and elsewhere in the world. These councils have legal standing in the municipality for advisory recommendations on service management and zoning. They have small budgets and their members serve on an unpaid, volunteer basis. Neighborhood councils balance community interest and downtown power.

I organized the first legally mandated neighborhood councils in the U.S. almost forty years ago, so I speak from experience about their usefulness for dispute settlement and civic harmony. My book, Neighborhood Government, Lexington Books, 1969, is still in print.

How Should Government Mandate Place Planning?

I wish I knew the answer! I know the questions, but I do not know the answers. It is for municipal leaders, planning professionals and neighborhood leaders to solve this problem of reconciling the power of CBDs for economic and job growth with the community interests of territorial neighborhoods.

I want to sum up three essentials of Place Planning that have to be faced: (1) strategy must come before planning and design; (2) CBD power must be harmonized with neighborhood community; and (3) neighborhoods require a legal framework for popular participation in local matters.

China’s Unique Urban Opportunity

The disconnection of economy and community is a crisis for all cities around the world, in both developed and developing countries. It is caused by the consolidation and globalization of industry, finance and trade.

It is an explosive crisis because the inequalities of downtown wealth and neighborhood decay. Dispirited neighborhood people are living without a social and commercial fabric of community. They express their rage in all forms of social distemper. Cities are time bombs that must be defused before they explode.

The whole urban world needs a new model of Place Planning and Development, and China is the only place where there is sufficient central authority, financial strength and the ideological, social commitment to devise this model. This cannot be done in the fragmented and competing authorities of Western democracies.

If China can plan, design and manage and the balanced city of downtown power and neighborhood community, she will achieve the harmony she seeks and provide a felicitous road to urbanization for the rest of the world.