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QUEST MEANS BUSINESS
BRIC Countries Meet in Beijing; Interview with Burberry CEO
Aired April 12, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Growing in power and ambition, the BRIC countries meet in Beijing, in China, to set the way forward ahead.
Tonight, the chairman of China's national tourism tells us the quest for growth leads to a quest for talent.
And Burberry's chief executive on why China is her number one priority.
I'm Richard Quest, tonight, live from Beijing where, I mean business.
Tonight the program comes live from Beijing where we are standing on what is rapidly becoming the epicenter of global economic growth. The power shift to China is well and truly underway. This is the motor which is powering world trade. The superlatives keep going and you'll hear plenty more of them as this program continues tonight. Because tomorrow, the leaders of the BRIC nations, Brazil, Russia, India, and China, and now add and S for South Africa, will be arriving for their own summit which takes place in the China.
The summit of the so-called BRICS, and that of those nations, begins on Wednesday. The Indian president arrived a short time ago. Brazil's president is already here. She spent Tuesday in lucrative talks with President Hu Jintao. Chinese airlines has just placed an order for 35 Brazilian Embraer jets. The order is worth more than $1 billion.
And the developing world is just as keen to do business here. The Greek investment minister is keen to get Beijing to buy Greek bonds. He told a Chinese newspaper a stable Euro Zone is good for China.
These numbers demonstrate why the might of China simply cannot be ignored. They are this week's GDP forecasts for 2011. The WEO from the World Economic Forum, from the IMF; China's economy way out in front, expanding 9.6 percent. The biggest economy in the world, the U.S. 2.8 percent.
Our Business Editor Eunice Yoon is with me now.
Eunice, you know these statistics backwards, 9, 10 percent versus 2, 3 percent, elsewhere. But the BRIC countries, do they realize that they are the future in terms of economic growth? And how are they handling that?
EUNICE YOON, CNN ASIA BUSINESS EDITOR: Well, they certainly hope that they are going to be the future. I'm just going to be heading off to Hinang (ph), in a matter of hours and for the most part I'm going to be reporting on the summit, which is meant to really give the developing nations a platform to have greater say in world affairs. As you mentioned, the BRIC nations are industrializing very, very fast. And they want the economic clout and the political clout as well that goes with that.
QUEST: Right, but they are a disparate group of countries. They want China, to some extent, leading the way-or whether they want to or not, they've got China. And China itself, has just given us its own plan for the future.
YOON: It has. China has given the new plan, which is a five-year plan. And the point of this plan is to really improve the quality of life in China. As you can probably see out there, the pollution has actually gotten really bad. And so what the Chinese government is trying to-what the government is trying to do is really to improve the lives and the welfare of more of its people.
YOON (voice over): In villages across China people want to be heard. Like the country's fast economic growth many feel they are being left behind, especially in the rural areas. To make sure Beijing hears their voice loud and clear they are calling on officials like Bai Yitong.
China's biggest challenges are agriculture, farmers and solving rural issues, Bai tells us, because China's rural population is the largest these issues are the biggest headaches for the Chinese government right now.
At this year's National People's Congress, premier Wen Jiabao conceded China's economic might hasn't done enough to address the rich/poor divide.
"We still have a serious problem in that our development is not yet well balanced, coordinated, or sustainable," he said.
YOON (on camera): Beijing intends to bridge the wealth gap, as part of its new five-year economic plan. The goal is to shift from growth at all costs, to sustainable growth that improves the living standards for more of China's 1.3 billion people.
(Voice over): The priorities are to rein in rising prices, raise workers' wages, and invest in better social safety nets. Ultimately the moves should boost consumer spending, helping to rebalance the economy away from its heavy dependence on debt driven investments and exports. Yet the policy agenda looks nearly identical to the last five-year plan, outlined in 2006.
(On camera): The government has made little progress on these economic reforms. Part of the problem is that the priorities conflict with each other.
(Voice over): Raising worker's incomes, for example, runs against the government pledge to fight inflation, higher labor costs could also hurt the country's exporters. And engine of growth the government continues to prioritize despite promises to boost domestic demand.
Policy maker have also done little to ease controls on the currency. The growth target is now set at 7 percent a year. Down from 7.5 percent in the previous blue print.
CHAX WONG, PROFESSOR, CHINESE UNIV. Of HONG KONG: The previous five- year plan is all about gaining weight. This five -year plans is probably much more about gaining muscle.
YOON: But given the slow pace of change not everyone is convinced the leadership here will sacrifice the double digit growth that has created jobs for so many and kept them in power for decades.
YOON: So, ultimately, the point of this plan really is to boost consumers' confidence and get them spending in the stores out there.
QUEST: OK. We're going to talk about spending in the stores a little bit later in this program, on the luxury goods. But, Eunice, a lot of our program tonight is about Beijing. How realistic is the lifestyle of what is seen in Beijing, the capital, maybe for Shanghai it is similar, but for the rest of the country?
YOON: It is not reflective of the rest of the country. Over here you could see a lot of growth, the cars are-the traffic is really bad. There are so many people who are buying cars who are in the shopping malls, who are in the Ikeas, trying to outfit their new homes. But that is not the case in the outside-in the outskirts of China.
QUEST: Is there resentment in the rest of the country, for the standard of living and the standard of live that is enjoyed here in the capital?
YOON: Well, I wouldn't say there is so much of a resentment; it is kind of back an fourth. It is definitely a large group of people, farmers, especially, people who are workers, who aren't getting the wages that they feel that they deserve and they envy, and do get resentful of the situation happening here.
QUEST: It is 2:00 a.m. here in Beijing. What time is your flight?
YOON: My flight is-well, I'm leaving from here, 8:00 o'clock in the morning, so.
QUEST: Thank you very much. Doing good duty, Eunice Yoon, our Asia business editor, joining me here.
Now, the markets have been busy and they need-we need to catch up with them. What has been happening, of course, in Japan, has taken its toll with the Fukushima plant now being upgraded in its severity to level 7.
Asian markets were down sharply. That is somewhat reflected now in the New York market. Alison Kosik is at the New York Stock Exchange.
Alison, I can tell you, 2:00 o'clock here in the morning, in Beijing. Easy to work out the time difference to you; 12 hours difference, you are 2:00 in the afternoon.
ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: Exactly, exactly. And you mentioned Japan, Richard. Japan is a big worry for investors today. One of the reasons we have been seeing a sell off here on the markets. As you said, the accident level at the Fukushima Daiichi nuclear plant was raised. It is of course raising concerns about what that means for the Japanese economy and beyond, worldwide, especially supply chain issues.
Also, investors are less than impressed with the first major earnings report of the season. We heard from aluminum giant ALCOA posting a profit, issuing a strong out look for the rest of the year. But admits it failed estimates and that is really what the market is focused on. This earnings season investors really want to see companies showing profit growth as a result of selling more stuff as opposed to profits from cost cutting or other reasons. It is the reason why we are seeing the Dow right now down 91, though it is off its lows of the session, Richard.
QUEST: Alison Kosik at the New York Stock Exchange. Off the lows of the session but still reflecting events taking place on this side of the world.
Now, it was a similar day in Europe. If we take a look at the Euro bourses and how they closed. The Continent's big three all ended just about 1.5 percent to the loss. Worries about the nuclear power in Japan helped filled, and obviously natural resources stocks down. Metals company, Kazakhmys, lost almost 5 percent on the FTSE. The CAC 40, Total lost around 2.5 percent as the price of Brent also fell sharply.
When we return in just a moment, we turn our attention to tourism and travel, a vast industry, destination China. Only two weeks into the job and the new chief executive of Cathay Pacific talks about his China expansions. And we'll also hear from the head of China's national tourism administration. He gives us a view of why the quest for growth is a quest for talent as the Chinese go on the move. In a moment, QUEST MEANS BUSINESS, live from Beijing. Good evening.
QUEST: Good evening from Beijing, middle of the night on Tuesday night, Wednesday morning, but we are here taking the economic temperature and looking at some of the big industries that are clearly destined for growth. And one particular, of course, is travel and tourism.
China represents the opportunity of decades for the airlines. That is according to John Slosar, who is the new chief executive of Hong Kong based Cathay Pacific. One of Cathay's largest shareholders, nearly 30 percent, is indeed Air China. And Cathay sees its future very much expanding its business both domestically in China, in the long-distance future, and, of course, connecting Mainland China with the rest of the world. Cathay also has many routes into Japan and is feeling the effects of the crisis, the nuclear crisis, the earthquake and the tsunami.
And that is where I started my discussion with John Slosar, by asking him about the business of Japan and how it is affected Cathay.
JOHN SLOSAR, CEO, CATHAY PACIFIC AIRWAYS: Overall, you know, the revenue side of the business, so far this year, obviously has been pretty good. Obviously, Japan, itself has suffered greatly because of the earthquake and tsunami. And the business there is well down and I think will be down for a time. But I'm very confident Japan is going to rebuild. I believe that the cargo business as a result of supply chain restocking is going to get going pretty quickly. And it is such a popular destination around Asia, that the passengers are going to get going back as soon as they feel it is OK.
QUEST: Let's talk about Air China. Air China has a sizeable stake in you. You have a sizable stake in them. So what is strategy?
SLOSAR: In a nutshell, Richard, is this: I mean we see that-and I personally see that, you know, the development of international travel, to and from, especially out of China, is really going to be the great travel story of this decade. You know, when we look back in 2021, the volume of travel coming out of China is going to be the thing that really made a difference. And so, the strategy between us and Air China is to jointly work together to take best advantage of that. To make it so convenient and so compelling, in terms of service and product, that we just capture as much of that traffic as we can.
QUEST: And yet you've got other-you've got other carriers in China, that are also international. You've got Singapore Airlines, Thailand (ph), everybody wants a slice of that cake.
SLOSAR: We already have the partnership with Air China in place. And we have Dragon Air, which is part of the Cathay group, and came to us 110 percent subsidiary, as part of the Air China deal. Between Air China and Dragon Air, we have an unparalleled network within China that is going to allow us to do better than other airlines will at getting people to, through, and around China. And in terms of international network, I think Air China is certainly the best of the Chinese airlines internationally at the moment, in terms of size and scope. And we at Cathay Pacific are pretty good at that, too. So we think together we're really an unbeatable combination.
QUEST: Why not just go the whole hog, and merge with them? Be done with it?
SLOSAR: At the moment both the controlling shareholders of the airlines are saying no. And the point I would make is I don't think we need to do that to get all the benefits of working together. We can get almost all the benefits with some good cooperation. And we cooperate in terms of frequent flyer programs. We towed (ph) share on some routes. We can offer joint products in places. And we get almost all of that without having to go through the whole difficult process of trying to merge organizations. Which, you know, I mean, look at the history of airline mergers. It's littered with a lot of attempts to do that that haven't worked very well. So, I the focus should be on the action that gets you value rather than the, you know, the headline stuff.
QUEST: You sit down in a palatial place like this, on your first day, and you are no longer the chief operating officer, you are the chief executive. What do you want to do during your tenure?
SLOSAR: For the last three years I've been the COO, I've been heavily involved in a lot of great projects that we were trying to take on to build Cathay and to do the things that we think we'll need to do to be successful. This is product stuff, and lounges and service, and all of that. But it is a little bit different when you walk in and realize the buck stops with you. You know, you are still involved in things, but ultimately you are the final decision maker and people look to you, you know, for the confidence and leadership to make the company successful.
QUEST: When all is said and done, what is your vision? Where do you want to take Cathay?
SLOSAR: In terms of the legacies I'd like to leave, I'm going to focus on four really important areas. One of which is just building the Cathay brand, in the biggest sense. Everything that people touch, see, experience, that is Cathay Pacific, it is just different and better than they are going to get on other airlines, number one.
Number two, building the Hong Kong hub. This is our home. You know, the more convenient it is for people to come through here, but better it is for us, so that is important.
Number three, China, which we have already talked about; we think it is the opportunity of this decade and we are ideally placed to take advantage of it. And last, and certainly not least, I mean, building the Cathay team.
QUEST: It is a fascinating industry, isn't it?
SLOSAR: It is fascinating. No two days are the same. And some of them are completely terrifying.
QUEST: That is the new chief executive of Cathay Pacific, John Slosar, who admits he would like to fly domestically with China, within China, but that is just not on the cards just yet.
Chinese holiday makers, though, traveling far and wide, inbound and outbound, most certainly is on the cards. And they are taking to the skies in droves. China will overtake Japan as the second largest travel market and tourism market by the end of next year, according to the Boston Consulting Group.
Tourism revenue stands to increase by 14 percent each year. And by the end of the decade, here is a statistic for you. The Chinese tourists will be taking the same number of outbound trips as Americans. It may be in the mid-20 millions at the moment. But when you put it into context of 1.3 billion potential tourists, you start to see why that the man in charge of harnessing that amount of power, the head of China's national tourism administration, Minister Shao Qiwei, has really got quite a lot on his plate, as we discussed when we sat down to discuss where he wants to take China tourism.
QUEST: Minister, when we talk about the Chinese tourism industry the numbers coming in and the numbers going out, they are staggering?
SHAO QIWEI, CHAIRMAN, CHINESE NATIONAL TOURISM ADMIN. (through translator): Actually, some of the figures are within my expectations and some others are out of my expectations. For example, the number of tourists going abroad, this is out of my expectations. But the rapid growth for domestic tourism is, for sure, within my expectation.
QUEST: Ah, to manage that level of growth will surely be a challenge?
QIWEI (through translator): Yes, but against the grand backdrop of the fast growth of the Chinese economy, and the continued growth of the income of Chinese nationals, as well as the appreciating Chinese R&D, all of this can be possible.
QUEST: How will you manage the expectations of those coming in and those going out?
QIWEI (through translator): It is very important for us to be well ready for this. In terms of hardware, we have all of the combination (ph) facilities ready. In terms of software, we have to have enough sources of talent. You know what is the great headache for me? The shortage of talent. We predict that by the year 2015 there will be more than 1,000 five-star rated hotels in China. We are facing a great shortage of high- ranking management.
QUEST: In the latest five-year plan that has just been announced, tourism will play a major part in increasing domestic demand in this country. So that puts you, very much, at the heart of one of the most important industries in China.
QIWEI (through translator): We need to work as an organizer, a facilitator and a manager. We boast a very big market of 3.5 billion people. So it is our job to make sure that this is going on very well.
QUEST: But if we look around the world, the world is littered with the mistakes of tourism that has grown too fast. How will you avoid those problems?
QIWEI (through translator): I think three major jobs have to be done. Firstly to have well-established tourism law; the Chinese legislators are at present formulating the tourism law. And there are local tourism administrations, institutions, and government agencies that make sure the laws are implemented and enforced.
So three jobs have to be done: Firstly, legislation; second good management and governance, and thirdly, education. When we talk about education we mean we have to make sure that everyone knows to protect the environment, and cultural heritage through green tourism.
QUEST: As you travel this country and you go overseas, how do you explain this love of travel, this demand of travel that you see?
QIWEI (through translator): When we talk about China tourism, usually the Great Wall, the Forbidden City and the terra cotta warriors are the mostly mentioned tourist attractions. But in modern days, besides all these cultural and historical heritages, tourists are also encouraged to take cruises along the Yangzi River. For example, recently, a 12,000 ton cruise ship just made a maiden trip. Probably you have already known that the Shanghai Disneyland is already under construction. All of this is what we would like to develop.
QUEST: So the next time I come to Beijing, Minister, you and I will go climbing at one of your mountains? Would you enjoy that?
QUEST: Thank you very much.
QIWEI (through translator): Thank you.
QUEST: The tourism minister, who runs up and down mountains, for fun. And he's promised to show me exactly how he-apparently he can get up to 4,000 meters without needing supplemental oxygen. I got 16 floors up to the studio here, and I almost had to have a lie down and a rest.
Not every visitor to these shores is here on holiday.
(BEGIN VIDEO CLIP)
MICHAEL WU, CHAIRMAN & MD, HONG KONG MAXIM'S GROUP: China is such a big market in itself, that probably for the 20, 30 years, that would be our only focus. And there is really-
QUEST: All roads lead to the Mainland. "The Boss" is next.
QUEST: Anyone making their first visit to Beijing, such as myself, for instance, can't fail to be impressed by the magnificent skyline, the buildings. Whether it is the Dragon, or the CCTV (ph) Tower, the originality of the Bird's Nest, Beijing is one of those world-class cities that is now leading the way in architecture. And those are some of the sights of the buildings that we have been seeing here.
At nighttime, of course, it is a little bit different. And of course, the pollution, it is just coming up to 20 past 2:00 at night, a haze, which is part pollution, part nighttime, and as you can see, just the background of the skyscrapers, over there.
We're live in China, where companies from all over the world beat a path because this seems to be where the action is. Hong Kong's Maxim Group, is no different. The chief executive of Maxim's you will know as Michael Wu, who we have been following for several months as part of our series. Now, Michael, has as one of his main ambitions to increase the company's business in Mainland China. We are in Beijing and so is Michael Wu, for this week's edition of "The Boss".
UNIDENTIFIED MALE: Previously on "The Boss", attracting and maintaining customer loyalty. Michael Wu looked for new ways to keep his customers coming back again and again.
MICHAEL WU, CHAIRMAN & MD, HONG KONG MAXIM'S GROUP: We see these mainly as a transaction, a number, but we'd like to do much more than that. We'd like to put a face to these numbers.
UNIDENTIFIED MALE: Michael Wu has left Hong Kong and is now firmly in Mainland China. He is in Shenzhen, in the Guangdong Province, to be precise, a booming Chinese city just across the boarder. Home to 14 million people Shenzhen has grown into one of China's wealthiest metropolises. Not surprisingly, Michael wants a bite out of this market.
WU: The people are getting wealthier. They are earning much more and they are demanding a better quality and higher quality food offering, whether it is bakery, or whether it is restaurant dining experience.
UNIDENTIFIED MALE: Maxim's Group tried and failed to break the Chinese market in the early 1990s. This time around Michael believes, under his leadership, they can do it. He has reason to be optimistic. Over the past year Michael has made this his priority.
WU: China is such a big market in itself that probably for the next 20, 30 years that would be our only focus. And there is really no reason for us to go elsewhere now.
UNIDENTIFIED MALE: In the boardroom he looked for strategic ways to tackle this major market.
WU (translation on screen): I want to explain this. Why do we need this? Because in three or four years, we need to be here. This is our goal.
UNIDENTIFIED MALE: Outside of it he laid out his expansion plans to his staff.
WU (translation on screen): Although we'll face some challenges, in the short term, we are confident of our business strategy in China. We feel that all our brands will become successful in China.
UNIDENTIFIED MALE: Today, with the launch of his Simply Life restaurant in Mainland China, his strategy is paying off.
WU (translation on screen): How is the new store going?
UNIDENTIFIED MALE: We're are all feeling good. We had good feedback yesterday.
UNIDENTIFIED MALE: To get here, and stay here, Michael has been studying the region and his new customer. He has learned he doesn't have to modify this restaurant to suit local tastes. Instead he's counting on Shenzhen residents to recognize the Hong Kong brand. So far, that strategy seems to be working.
WU (translation on screen): Do they know that Simply Life is originally from Hong Kong?
UNIDENTIFIED MALE: Some of them know. Some of them told me that they've been to our shop at IFC.
WU (translation on screen): IFC.
UNIDENTIFIED MALE: We are actually a bit surprised that they knew us and have even been to our Hong Kong branch.
UNIDENTIFIED MALE: The opportunity to do business in Shenzhen may be great, but working here has its downside.
WU: As a foreigner, coming to China, we pay the price of learning the steps. It takes us much longer to open a store than it would be if we were a local company.
UNIDENTIFIED MALE: Logistics and competition aside, Michael has other pressing concerns, like food safety. Mainland China has faced a series of scandals over tainted milk, fish, even rice. And Michael wants to make sure his ingredients maintain their high quality
HU: We believe that with our strictest and stringent food safety procedures, that this is the most important element and guarantee we can give our customers.
WU: From the location to the competition right down to the ingredients, Michael has thought about every aspect of this expansion. Today, he's got his foot in the door in Shenzhen. The rest of China one step at a time.
HU: China is such a big market, that we know that we cannot conquer this huge country all at once. So we have to take this in phases.
WU: Next week on The Boss...
UNIDENTIFIED MALE: Would you either like the sushi or do you like the -- the hot potatoes?
WU: He's finally made it to mainland China, but can he win the locals over with sushi?
And in London, Sarah Curran tells us how she selects the best people for her business.
(END VIDEO TAPE)
QUEST: A special edition of Michael Wu with The Boss here in China.
QUEST MEANS BUSINESS live in Beijing back after the break.
QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.
This is CNN. And on this network, the news always comes first.
And Max Foster is at CNN London to bring us up to date -- good evening, Max.
MAX FOSTER, CNN ANCHOR: Richard, British and French are urging NATO to get more aggressive in Libya. They say the alliance must work harder to destroy leader Moammar Gadhafi's ground forces. And the weapons that they're using to attack the opposition and civilians, the British foreign minister says a huge amount has been achieved, but there is clearly more to be done.
Egypt's military says ousted President Hosni Mubarak has been hospitalized. A military source says Mubarak's condition isn't critical. Mubarak has a history of recent health problems, including back trouble and an operation to remove his gallbladder last year.
Prosecutors summoned the former leader two days ago to face questions about corruption allegations.
Under U.N. protection, Ivory Coast's detained former president, Laurent Gbagbo, has been moved out of the main city of Abidjan. Alassane Ouattara's government has said Gbagbo will be put on trial for crimes allegedly committed whilst he clung to power. And a Gbagbo spokesman confirms to CNN that the former Ivorian interior minister, Desire Tagro, is dead. Tagro was arrested with Gbagbo on Monday and acted as Gbagbo' chief of staff since November. The circumstances of Tagro's death are unclear.
Japanese officials want to know what their nation's produce is safe to eat -- want -- Japanese officials want you to know that their nation's produce is safe to eat. Japan's chief cabinet secretary underscored that message by munching on tomatoes and strawberries today at an exhibit of produce. Farmers near the crippled Fukushima nuclear plant have been especially hard hit by the crisis -- Richard.
QUEST: Max, we thank you for that.
Japan's prime minister -- let us continue with that story.
Japan's prime minister has vowed to do all he can to bring this nuclear crisis to an end at all costs. Japan has declared Fukushima Daiichi nuclear power plant to now be a Level 7 event on Monday. It put it on the same scale as the 1986 Chernobyl accident. But Japanese officials say radiation leakage has been just one tenth of that which was seen at Chernobyl.
Tokyo Electric Power, which runs the plant, again apologized for the terrible anxieties caused.
As our correspondent in Tokyo, Kyung Lah explains, for nearby families we have been evacuated from their homes, it really is a case apologies aren't enough.
KYUNG LAH, CNN CORRESPONDENT (voice-over): The crisis at the Fukushima nuclear plant, now among the worst in the history. The government raising the crisis from a 5 level, on par with the Three Mile Island accident, to a 7, a major accident declaration, the same as the Chernobyl nuclear disaster.
"The change in the level reminds us this accident is very big," says the government's point man in the crisis. "I apologize to the residents of the area, the people of Japan and the international community."
But activists aren't accepting the apology.
THOMAS BREUER, GREENPEACE GERMANY: For me, it looks like they are putting the agenda for nuclear energy ahead of the people.
LAH: Greenpeace calls the government's elevation of the crisis, quote, "woefully late." Greenpeace tested the soil in a town outside of the mandatory evacuation zone and found dangerous levels of radiation, saying the disaster is much worse than what the government suggests. The anti- nuclear group called for a 7 level rating three weeks ago.
BREUER: It is Japan's Chernobyl. From our -- from our point of view, it's even worse than Chernobyl, because we have three reactors with huge problems with radioactivity and the fourth reactor has lost a lot of the spent fuel. And on top of that, where the accident happened, it's quite a densely populated area.
LAH: For the people who live near the plant, now evacuees, the numbers, whether a 5 or a 7, don't matter. Their towns remain empty. They may never be able to go home again.
The Futaba residents say they're beyond anger or hatred, they've simply lost everything. "We lost something so big, it's unimaginable. We just don't know what to say."
(on camera): Japan's nuclear regulatory agency says there was no deliberate attempt to delay the elevation of this crisis. It just took a month to get reliable data. Japan's prime minister, in a nationally televised news conference, says progress at the nuclear plant is being made step by step, but there's still no room for optimism.
Kyung Lah, CNN, Tokyo.
QUEST: When we come back after the break, we'll be talking the Internet in China. The company is Baidu. Outside of China, you'd call it the Google of China. Inside this country, the prospects are for something much bigger, after the break.
Stay with us.
QUEST: This year has seen a string of Chinese Internet companies making big splashes on markets outside of China, especially on Wall Street. Qihoo, Youku and Dangdang saw their share prices rise very sharply after going public in New York.
Now, the head of the Chinese equivalent of Google is warning against hasty overseas IPOs.
Baidu founder Robin Li says Chinese companies should build up their products and operations and not be fooled by a hot market. Baidu is the leading search engine in China, and that's obviously a very big deal. China has the world's largest number of Internet users -- 150 million as of last November, according to state figures. That is more than the population of the U.S. and UK combined.
Kaiser Kuo is the Baidu's communications -- international communications director and joins me now.
Good evening to you, sir.
KAISER KUO, COMMUNICATIONS DIRECTOR, BAIDU: Thank you, Richard.
QUEST: Thank you for joining us.
We'll get to the IPO question. But it would be remiss of me not to start by asking about these rumors that Baidu and Facebook are coming to some sort of an agreement, a Facebook or a Chinese version of Facebook, to be opened in China.
KUO: Well, you've described it accurately. They are just rumors. And as such, I'm afraid I can't comment on them.
QUEST: Right. And so I have one more dig before we move on.
So in that sense, is there any likelihood in those rumors?
KUO: I wouldn't be able to comment. I'm sorry, I -- I really can't give you any more than that.
QUEST: Well, I could bash away, but we won't get much further so...
KUO: You won't.
QUEST: -- so we'll -- we'll skate to thicker ice.
KUO: Skate on.
QUEST: Let's talk about this warning from Robin Li, that he's saying that IPOs overseas, you should basically get your business in -- in correctly here first.
KUO: Yes, I think that's -- that's advice to be dispensed pragmatically at any turn. I mean I think we shouldn't see an IPO as an end in itself. It's -- it's a step along the way toward the development of a healthy business. And you need to have your fundamentals in order before you do it.
There is a -- a lot of froth right now. There's so much exuberance about Chinese Internet IPOs. And I think that -- that people (INAUDIBLE)...
QUEST: Well, your company is one of those that led the way on that issue...
KUO: Well, that was...
QUEST: -- (INAUDIBLE).
KUO: Well, that was five years ago.
KUO: Yes, absolutely. But we were a profitable company at the time that we listed and right.
QUEST: If we take a look at the market here and people seeing this as being some great o -- opening up of -- of a market, but the fact is, there are still many barriers, not the least of which the great firewall.
KUO: Sure. I think censorship isn't something that we can dismiss. It's certainly a -- fact of life here. Although I wouldn't rank it high among the factors that have really inhibited American, largely Internet companies, from succeeding in China. There have been some that -- that have done well. Amazon has a -- a fairly -- a very successful venture here.
Google itself, I think, we couldn't dismiss it as having failed in China either. And we -- we do sorely miss them as a competitor here in this market.
QUEST: Well, yes, but is it a level playing field, I suppose is what the Googles of this world would say?
The Googles of this world would say you guys, your domestic competition have a leg up, you have a -- a protectionist advantage here.
KUO: I -- I -- I think I would point to the fact that censorship and complying with regulatory issues around, you know, political content, around pornographic content and stuff, it -- it actually is a -- a -- is a very significant cost to us. And it's a cost not only just in the manpower that we have to throw against it the technology and the software, but also, most importantly, perhaps, in the man -- I mean in the -- in the time and attention that our senior -- our very, very senior people, including Robin, have to -- to spend on this issue.
This is something that -- that Google no longer has to deal with...
QUEST: Right. But do...
KUO: -- in this market so...
QUEST: Do you see -- I mean the view outside looking in, Western business, particularly Internet businesses, they look at this as if it's some great nirvana where you've just got to come in and pluck the money off the trees.
KUO: Well, I think that they're -- they're completely wrong there. They need to -- to understand that they're faced with some very, very scrappy competitors here, competitors who are...
QUEST: Fair com...
KUO: -- well funded...
QUEST: -- fair compet -- competition?
They would say not fair.
KUO: I would disagree. I think that -- that there are many examples that we can point to where the competition has been -- has been fair, where regulation has played no real significant role in -- in seeing them go down to scrappier Chinese competitors.
QUEST: When we talk about where Baidu will go next, what do you want to do next?
You've got hundreds of millions -- you heard that statistic, more than the population of France and the United Kingdom combined and beyond.
KUO: Sure. And 84 percent of the market right now, 84 percent of shares right now are conducted on Baidu. So we -- we enjoy a very, very strong position in the market.
We see ourselves as growing the ecosystem around us. As a search engine, we occupy a very pivotal role at the center of the Internet ecosystem here in China. And as we invest in other -- other businesses in vertical areas, growing those, we, too, grow. We're -- we're pursuing a strategy that -- that -- that takes advantage of it, that leverages our centrality in the ecosystem.
QUEST: Do you find any of these interesting contradictions that there are in this market?
I -- I'll give you the example of the -- the Facebook or the Twitter that's not available here, but if you use the correct phone and the correct form of communication, you can get round it. The loopholes exist.
KUO: Sure. There are all sorts of ways around the infamous great firewall in China, yes.
KUO: I think...
QUEST: Do you think the firewall will exist for much longer?
Or is there inevitably going to be potholes in that firewall?
KUO: I think that there -- there are holes already. I don't know how -- how much they'll widen. I think that we've seen, in the last three years, of -- I would un -- not hesitate to call it an unprecedented crackdown -- restrictions on Internet content, both within China and allowing the Internet content to come in from outside of China.
But at the same time, in these same -- in this same period -- and this is a -- a survival strategy for China -- you need to be able to hold these contradictory ideas in your head at the same time. It is -- we've also seen the Internet emerge as a de facto public sphere of Chinese life, where there is vibrant discussion within parameters, but nonetheless, very vibrant discussion where, in many ways, the Internet, public opinion, as -- as determined on the Internet, is really leading-- is really sort of determining the political agenda in China.
QUEST: Kaiser, many thanks, indeed, for joining us.
KUO: Thank you, Richard.
QUEST: Now, if there may be some questions on the Internet where there is certainly unbridled competition is when the curt -- in the question of luxury goods. Rarely have so many companies fought for such a market for so many dollars and yen.
In a moment, we'll be back with the Burberry chief executive on why China is now her number one priority.
QUEST: Just as Chinese dot-com companies are keen to go public in the West, so the reverse is certainly true with Western luxury goods companies beating a path to get into China as fast as possible. And it's easy to see why. The latest numbers show that China will spend more on luxury goods than any other country by the year 2020. A recent report by the Hong Kong- based brokerage, CLSA, is predicting this. And the report says China currently accounts for 15 percent of global luxury sales. That will rise sharply.
If you doubt the numbers, just take a drive round some of the shopping malls of Beijing. Every capital city has its fair share of expensive shops. But with China's economy growing so fast, Beijing seems to have more than most.
Take this one shopping mall. Well, obviously, there's Louis Vuitton. And then there's Chanel. Keep going down, and before long, you are at Fendi. Fendi takes you to Dior. Further down in this mall, Gucci, Hermes, Bulgari and Cartier, with Prada at the end. And this is just one shopping mall.
Elsewhere in Beijing, there's plenty more.
(BEGIN VIDEO TAPE)
QUEST (voice-over): The Versace store at Village North, another of Beijing's ritzy malls. The capacity for this city to sustain so many premium brands and grow at the same time is quite extraordinary. More shops are coming along all the time. For example, Montclair (ph) or AlexanderMcQueen opening soon.
For the companies involved, many are now discovering they have to have a strategy for the Chinese market.
(END VIDEO TAPE)
QUEST: On Wednesday night here in Beijing, there will be a major reopening of Burberry's flagship store. It's part of a reaffirmation of the British clothing company's business here in the Chinese capital.
And when I sat down earlier and met with Angela Ahrendts, the chief executive of Burberry, she made it quite clear that tomorrow night's event is simply one more step to prove the importance of China to her company.
QUEST: The size of the screen and the size of the store here in Beijing, this is no ordinary store for you, is it?
ANGELA AHRENDTS, CEO, BURBERRY: No, this is actually the most innovative Burberry's store in the world today, be it store design, be it technology, be it merchandising, question, all of the content is -- you're seeing is live stream from London. We'll be streaming the event tomorrow evening directly on these screens and in 50 stores around the world.
QUEST: But what does it tell us, that your flagship store is now in Beijing?
AHRENDTS: It tells you that this is one of the most progressive and fastest evolving markets in the world today.
QUEST: You see the size and the scale of the market here.
What are you trying to do?
What's -- where are you trying to position yourself in the company here?
AHRENDTS: The brand has been playing in the market for about 20 years. And about six months ago, we acquired 50 stores back. And since that time, in the last six months, we've opened 10 new.
But basically our strategy is to -- to connect with the consumers in this market, the new, young, luxury consumers. They understand the heritage and the history and the authenticity of Burberry's. But there's - - there is a new, young luxury customer emerging. You know, it's funny, we talk about the market as being an old/young market. But Burberry, the brand, is an old/young company today.
QUEST: But how does China fit into your strategy?
AHRENDTS: Our strategy and -- and the Chinese market are almost -- it's almost the perfect storm for us. The up and coming luxury customer here is exactly the customer that we've been targeting all over the world. We launched our menswear business a year ago. This is a male-dominated business. We're an outerwear company. We love cold weather. The weather in this market is absolutely perfect for us.
We launched children's wear two years ago, right?
Brilliant children's wear market in China.
QUEST: A global company like Burberry, how do you have to change that strategy to accommodate the Chinese market?
AHRENDTS: From a brand perspective, no, because they want very pure, solid brands. They want the Britishness, they want the heritage, you know, the authenticity. But more than anything, they -- they want -- they want the security that comes with an innovative, strong, global brand today.
They don't want the knock-off. They don't want a -- a version of -- which they used to do in markets like this. They want the real thing from London.
So adopting, adapting, no. What we have had to do is bring in a brilliant managing director. We've opened an office in Shanghai. It looks like a mini version of the London office. We've got 50, 60 people there now, nearly 750 employees in the market.
So culturally, we have to be incredibly respectful and sensitive.
QUEST: When you look at what's happening here, is it too much, too fast?
Is the growth unreasonable?
AHRENDTS: You know, I think it's a great question. And -- and not being an economist but reading, obviously, a lot of the reports that come out. And when you look at the -- the GDP projections over the course of the next five to seven years, it doesn't appear that way.
And I would tell you -- and -- and you don't just look at this market here in isolation. There are 57 million Chinese consumers that will leave the country and tour abroad. And a fun fact you may not know, but London is their second preferred city that they want to visit once they -- once they exit the country.
So I think from a global brand perspective, you've got to have it right here and then anywhere they go in the world, they'll see the same message. And I think that's what great brands do and that's what consumers expect from great luxury brands.
QUEST: I think I probably know the answer, but I'm going to chance me luck on this, Angela.
Where would do you put China on your country priority list?
AHRENDTS: Number one, without hesitation.
QUEST: Given that GDP per capita is only $4,000, although rising, you're going to continue the level of investment here?
AHRENDTS: I think it's no different than investments you're making in any market. And each one of them are a different part of the trend curve. When the business here started to become profitable, that's when we acquired it, back six months ago. And -- and we've already spent the investment in renovating the stores, hiring world class sales organizations, VIP customer service that speak multiple languages.
So it, again, you're -- you're looking at every investment you make is not just for today. We're doing, you know, what's best for the long-term sustainability of the brand. A hundred and fifty-five years we've been around. So, you know, we're investing in India, investing in Brazil. But this market is at a very different growth curve now.
(END VIDEO TAPE)
QUEST: Angela Ahrendts and, of course, the investments that they're making in the BRIC countries, particularly here in China.
Your thoughts are always most welcome. The e-mail address is quest@CNN.com. And we'll be getting to those, of course, in the days ahead. And the Twitter address, @richardquest, is where you can join the debate on what we've been talking about here in Beijing tonight.
It's the middle of the night on a beautifully, relatively warm spring night in China. The pollution levels, normally so high, somewhat moderate. But when we come back after the break, a Profitable Moment to make you think about what the economic future lies in China.
QUEST: Springtime in Beijing and you'd be silly to come all this way and not at least enjoy some of the cherry blossom that is now dotted around the Chinese capital. If you're on the Great Wall, then it's certainly a magnificent view. It almost looks like it's dotted with snow. But there we are, the cherry blossoms, white and pink, that is in China at the moment.
It is easy to be over-awed by the Chinese economic miracle underway. The numbers are simply staggering. Everybody has a story of how this is the latest gold rush.
But even now, there are some saner voices that are suggesting that perhaps there are difficult days ahead.
No question, China will be the market with most economic activity in the near to middle future. But only a fool would rush in without thinking about a way out if things get sticky in the future.
And that is QUEST MEANS BUSINESS for tonight.
I'm Richard Quest live in Beijing.
Needless to say here, whatever you're up to, I hope it's profitable.
"PIERS MORGAN" after the headlines.