Upgrading Apple for 5G

Jonny Evans, the resident Appleholic at Computerworld, made a case today that Apple would be the primary driver for 5G in North America, despite the fact that a) Apple doesn’t have a 5G device yet, b) several very large competitors do, and c) networks are already rolling out.

Granted, his argument makes a kind of intuitive sense. Apple’s US market leadership in handsets suggests that Most of Us will adopt 5G when it shows up in the handset of our choice and that few of us are likely to jump the iOS ship for Android just for a yearlong speed-bump.

What is more, I think the issue of Apple being a year late to the party is not as serious as sources like Bloomberg suggest. The 5G party is just getting started, and while they were late on 3G and 4G in China, it slowed but did not stop their rise to the top of that massive and fickle market.

That said, where Ian King is correct and Evans is wrong is in the implicit misconception that 5G is all – or even mostly – about handsets. 5G will offer quantifiable improvements in services to mobile devices, but that is an evolutionary change. The 5G revolution will be that devices with wireless services embedded into them will become more important to our lives and our economy than mobile devices.

Let’s put this into context:

  • Cellular phones (1G and 2G) made mobile communications available to a wide population, ending the pre-eminence of land-line phones.
  • The Internet brought online information to personal computers, ending the pre-eminence of workstations and shared computers.
  • The Internet, combined with WiFi, allowed us to easily plug into the Internet with our laptops, ending the pre-eminence of desktops.
  • 3G and later 4G made mobile data available to a wide population, ending the pre-eminence of laptops.
  • 5G will make the internet and connectivity available on a growing number of devices, ending the pre-eminence of mobile phones.

Nobody is talking much about the latter point, but it goes to the heart of Apple’s misunderstood 5G problem. While Apple focuses on handsets, other brands are stealing the mark by focusing on enabling the embedded universe. And that’s the problem for Apple.

Let us be clear: Apple as a company has spent the last two decades making pretty devices for prosperous people, and so has formed everything from its R&D through product design through marketing around extracting a premium for its design and user interface on computing devices.

But the next information revolution will put less of a premium on the way things look and feel and will shift the focus to stuff that just plain works in the background. In short, Apple’s core strengths will serve it far less in the era of 5G than at any time in the past. What it needs now is competencies in system integration, in building strong relationships with partners who will want to share branding, and in creating world-beating core technologies.

Apple does not lack assets. It is learning to work with partners much better than it did in the past with such baby-steps as CarPlay, it knows how to build an ecosystem of devices, and it has the money to build or buy what it needs to make up for its shortfalls.

Apple will succeed in 5G in the short-run because it will ride an initial wave of device replacement with the first 5G iPhones in 2020. But succeeding in 5G for Apple, in the long run, will require a fundamental change in how the company is structured, how it thinks, and how it behaves.

Competitive Disadvantage: Multiculturally Challenged

20180929 CND000 0

The Economist’s Chaguan dove into what was like to be very obviously non-Chineses in China. Full credit to the author and editors, the article is, in my experience, rather gentle. 

Setting aside any comparisons with other countries for a moment, this hints at a possible advantage for non-Chinese firms that are staffed by rather more enlightened managers. Cultural chauvinism is a weakness of many up-and-coming Chinese brands. 

Know your rival: this is one area where a non-Chinese company that has embraced diversity and multiculturalism has an opportunity to use that culture as a competitive advantage. If you can, do it. 

That may sound cynical, but think about it: if you are genuinely multicultural and diverse, your Chinese rival is not, and it is the source of competitive advantage, why not use it? The worst case s scenario: you compel your rival to change its behavior. Best case: they fall on their faces. Either way, you win, and so does the cause of diversity and multiculturalism.

China’s Terms

IMG 0679

Yet China is not a market economy and, on its present course, never will be. Instead, it increasingly controls business as an arm of state power. It sees a vast range of industries as strategic. Its “Made in China 2025” plan, for instance, sets out to use subsidies and protection to create world leaders in ten industries, including aviation, tech and energy, which together cover nearly 40% of its manufacturing.

Although China has become less blatant about industrial espionage, Western companies still complain of state-sponsored raids on their intellectual property. Meanwhile, foreign businesses are profitable but miserable, because commerce always seems to be on China’s terms.

— The Economist

Coming back to the Hutong

I had the good fortune about seven years ago to have coffee with Jim McGregor, who has spent even more time than I have living and working in China. Over a Starbucks in the then-expat-heavy Beijing suburb of Shunyi we were comparing sources of insight about policy and business, he said something arresting.

“You know the reason I like your blog,” he asked. “You never write something just because you feel like you need to write. You only post when you have something to say.”

That made me feel better about not being as prolific as other bloggers, and it has, over the past four years, given me much comfort as I have left this forum to stand as aught more than an archive of thinking about a time in China that is now long past. There were more people than every commenting about China, many (most) of them smarter than I, and I felt that I had nothing to add to the conversation that was worth reading. In a perverse way, I felt like I was keeping a promise to the readers of this blog: I would write only what was worth reading.

That was then.

We stand now having crossed a threshold into a new era for China and for the world, and amid all of the changes I find myself with something to offer the wider conversation. 

And so I am back. I’m going to clean up a bit around here: update the design, and start offering short chunks of insight from myself and others. The meatier stuff will come later. But let’s talk: we’ve got much to discuss. 

Beating the Olympic Ambush

I am starting to get requests from clients to sit down and talk about communications and marketing strategies around the upcoming Olympiads in Tokyo and Beijing, and one, in particular, has asked me a question I get about such events with increasing regularity: how do you deal with ambush marketers?

(In the trade, “ambush marketing” is defined as “the practice by which a rival company attempts to associate its products with an event that already has official sponsors.”)

I tell them that the best way to respond to an ambush just like an infantry platoon leader would. You expect them, plan for them, and prepare for them in advance so that, by design, your efforts will make theirs ineffective or worse. Sponsors most often lose out to an ambushing rival because of a fundamental flaw in the structure of the sponsorship, not because of poor creative.

Sponsor to Patron

One of the reasons that ambush marketing is such a great strategy is that too many sponsors of the Olympics make their sponsorship all about buying the right to market, to wear the regalia of sponsorship and to have the right to advertise before and during the events. In those cases, the only real difference between a sponsor and a rival company are the right to sport the Olympic logo and access to advertising time and space. Both of these can be useful,

But the most memorable Olympic sponsorships get as far away from hawking products, services, and brands as possible. Instead, they focus on the games themselves, and in particular what the sponsors are doing for athletes, for teams, for specific sports, and for the Olympic movement writ large. A program built around enabling the event, and then surrounded by thoughtful communications that are relevant, appropriate, and not too in-the-face is what will win.

When the public sees that a sponsor views the value of sponsorship as the opportunity to serve as patrons to champions if the door is not closed to rivals altogether, those rivals face a price of entry that is so exorbitant as to be impractical, and they desist.

We see that happen most often in the case of individual sports: The Southland Corporation (7-Eleven Stores) locked down Olympic bicycling for years; Omega owns timekeeping, shutting out Swiss rival Rolex.; and upstart Mikasa has overtaken Speedo in the competitive swimwear wars.

The time is coming for Olympic sponsors to work with the IOC to shift to a patronage model rather than the world’s most expensive cash-for-placement deal. In the meantime, sponsors need to rethink their own efforts. $100 million is a lot of money to pour down a drain.

Recession How?

During a long February in the United States I was asked by several very well-educated people when I think China will have a recession. It’s nice to be asked, but my opinion on this means a lot less than that of someone like Arthur Kroeber, Nick Lardy, or William Overholt. I’m a businessman, dammit, not an economist.

With that disclaimer in place here’s my take.

The question is less important than its underlying assumption. There is an expectation that China is headed for a point where the economy will need at least a pause to catch its breath. There is a recession coming, and it will come because recessions happen, and China’s economy will be no different. That expectation, that perception, may be enough to ensure that it will come sooner rather than later. and that businesses should do all they can to prepare.

The important questions, then, would focus less on when than on how to prepare for and address the inevitable.

  • What are the kinds of geopolitical, domestic, and economic shocks that could trigger a recession in China?
  • What would the effects of such a recession be on the world’s economies?
  • What would be the impact on businesses that depend on China as a market?
  • How do we mitigate those effects? (I started answering this last question in an article I wrote for the Fletcher Forum.)
  • How do we position ourselves to profit from the recovery?

Food for thought. Have a great day.

Will a Hundred Teslas Bloom?

Late in March I had an engrossing conversation in Shanghai with a veteran Chinese auto marketer. The subject was the future direction of the industry. The executive told me that the most fascinating development for her was how the cascade of innovations falling into the automotive sector after decades of incremental evolution was drawing so many technology companies into the automotive business. She felt that these new, disruptive players would alter the industry, and that we would watch an inrush of new brands that would swamp the old.

I was a bit less sanguine. I grew up in a factory, and I learned a lot from that process. One lesson I will never forget is that many industries and processes that look simple from the outside are far more complex. The auto business is one of them. I give Elon Must credit for assembling a team at Tesla that has enabled the business to come farther and faster than any American automotive startup in the past seven decades. While it would be comforting to dump the company’s current problems on its founder or management, in truth the problems are built into the company’s ambitions. The challenges facing any new entrant hoping to build a car company tower like a ten-thousand foot, orc-infested mountain that starts out as a treacherous hike that get steeper and more hazardous as you reach each new level on your way to the top.

Designing a car from scratch is logistically easy but technically complex. The sheet metal and glass are the easy part: the modern automobile is a complex system of systems that demands that all of those systems not only work together, but are fine tuned so that each performs separately and together at the optimal levels.

As difficult as it is to develop a design, going from blueprint to first prototype is a complex process of engineering that takes even major automakers up to two years. Creating parts, components, and a drive train out of nothing is hard enough: getting all of that untested steel, fiberglass, and silicon to work together demands specialized skills and a lot of patience.

Now it starts to get fun: going into production, even low-level, bespoke production, requires the addition of entire new areas of expertise and a whole new level of complexity. This step also requires immense investments in process design, talent, property, plant, equipment, logistics, and tooling that dwarf even the steep costs of branding, marketing, advertising, and selling the first batch. This was the point Tesla reached before it introduced the model X. It is brutally difficult to get right, which is why only a handful of companies outside of the majors have managed it since World War II.

Going from low-rate production to large scale production – ten thousand vehicles or more per month – adds yet another level of complexity. Processes need to change and improve. Efficiency becomes a watchword, all while ensuring that costs do not spin out of control. Factories already opened must be expanded, new production teams forged, and quality and cost control become an order of magnitude more challenging. The complexities of this step are the reason why most of the new car markers that have popped up outside of the majors in the US, Europe, Japan, and China – think DeLorean, Saleen, Zimmer – have chosen to focus on vehicles with a more modest rate of production and a higher price.

Managing to get through the four steps above, especially when your company has never done it before, is brutally difficult. Doing it all and sustaining positive cash flow, maintaining five-star NHTSA safety ratings, and consistently delivering quality that will earn customer loyalty, avoid endless recalls and keep the company out of court is nearly (albeit not quite) impossible.

Now imagine doing all of the above while integrating a constant flood of technological advances, and you need an organization with the engineering and management capabilities – not to mention the financial resources – of NASA during the Apollo program. In short, it’s a moon shot.

Considering those challenges, it is difficult to conceive of the world’s leading automakers, including China’s state-owned and -subsidized behemoths, crumbling in the face of a squadron of scrappy upstarts. This is not to say that disruptive brands are not in our future, only that new industry players – especially what are referred to as “OEMs” – are less likely to come from outside of the auto business than they are from the ranks of local automakers who are evolving beyond building other people’s cars into building brands and integrating innovative systems.

Despite the recent missteps, I retain a great deal of faith in Tesla. But I suspect that if Elon Musk and his team manage to overcome the obstacles they still face, they will not be the harbingers of a new breed of brands that will take over the industry, but the exception that will prove the rule. I told my host in Shanghai as much, and went one further: there may be a day in our future when Mr. Musk has cause to regret that he attempted his great automotive crusade alone, without the abilities of a larger, more experienced partner.

Concept of the Week: Sniper Marketing

Sniper marketing, noun. An approach to marketing that seeks to raise targeting to its highest possible level, enabling a company to engage directly with the purchase decision-maker only when it has a high certainty of inciting a transaction. This approach ensures that the customer gets the right message/offer at precisely the right time and place (and only at that customer/time/place,) ensuring that no “shots” are wasted in the process and that the irritation factor of marketing is all but eliminated.

At present, Sniper marketing is less a reality than an ideal, but should be the implicit goal of all marketing efforts. Two factors that are slowing the adoption of this approach are reasonable concerns for individual privacy – concerns that are only becoming more pronounced in the wake of recent revelations from Facebook and others – and the inertia of a marketing industry still trying to escape from its legacy mass-media thinking.

There are organizations who claim to conduct sniper marketing, but at the moment much of this is hype. Here we will begin the effort to define some minimum standards based on the definition above.

Sniper marketing should be targeted at those who otherwise might not have made a purchase or transaction. The effort is a waste if the customer either has a prior intention to purchase or no desire to buy at the time of receipt.

Furthermore, Sniper marketing cannot be “creepy.” It must be perceived as helpful, culturally appropriate, deeply relevant, and – this is essential – utterly trustworthy. That implies that sniper marketing cannot be a mechanical process: it must take place in an atmosphere of transparency and trust.

Finally, sniper marketing must be measured according to the “one shot, one kill” principle. Practically, that translates into conversion rates well in excess of 90%: at least nine out of ten individuals receiving the marketing communication make the purchase based on the communication. Equally important, it means that there is real ROI to the effort: at bare minimum, the marginal sales increase must deliver sufficient profit to pay for the cost of the campaign plus the opportunity cost of the money spent.

The Thin Crust

Walking the elevated byways of the financial district in Pudong, I sit down for a moment to people-watch. The proposals I need to write will keep. Shanghai and I are having a moment.

The passers-by are nearly all young (under 35,) well turned-out but not flashy, and are strolling rather than rushing or shuffling. I catch the snippets of conversation, some in the Shanghai dialect, most in Mandarin. Accents confirm that, whatever similarities in dress, this is not a homogenous group. The daily dwellers of Liujiazui’s office blocks are a high-elevation geographic cross-section of the nation.

I think about this. Whatever else they may be, the people who walk these sidewalks in the sky each day are at the top of a very large heap. Anyone living or working in this particular part of this particular city is not a native. They are here by dint of careful design, having worked hard since kindergarten and/or pulled the strings of guanxi to the breaking point.

The good news for them is that once they arrive the battle to stay is far less brutal than the battle they waged to get here. They know that China has deep deposits of people but very narrow veins of talent. Employers have to fight hard to keep people with education, skills, and dedication than those people are having to fight to keep themselves employed. Even today, forty-odd years after Reforming and Opening began, the biggest constraint on growth for companies who depend on knowledge and skills is not a lack of demand, but a lack of labor. Shanghai’s white- and pink-collar classes know this, and that knowledge tends to breed among the well-placed a sense of complacency, even entitlement.

That observation might elicit a shrug and a smile from China’s leaders. After all, as long as this elite is gainfully employed and vested in the system, Beijing’s apparatchiki can set aside fears that this group will become a nexus of dissent. The middle-class may be anathema to Marx, but if it is not a cap on the seething masses to Beijing’s ostensibly Marxist leaders, it is a powerful force of implicit support for the party and national political stability.

Concerns that China will find itself captured in the “middle-income trap” are rooted in many factors: the environmental costs of the past seven decades of development; the vast misallocation of capital; industrial overcapacity and imbalances rooted in Maoist development and institutionalized under two generations of technocrats; and chronic bureaucratic malfeasance. Yet to this list we must add one more: the nation’s growing inability to staff its own ambitions, plagued on the one hand by a shortage of talented people, and on the other by a pool of talent satisfied with a little piece of the action.

Companies have many reasons for choosing where to invest. Three of those factors lead the pack: proximity to markets, proximity to resources, and proximity to talent. The Party’s determined crafting of a regulatory environment for global business that charitable souls might term “capricious” and the rise of local competition casts doubt on China’s standing as a market. With a few exceptions, China is hardly a global nexus of raw inputs. The best remaining reason to come to China would be in search of talent.

Some industries will find it. But the quality and quantity of that talent is going to be a key factor in whether China sustains its rise as a commercial power into the second half of the century, or whether, instead, companies begin looking for places to invest where the talent is motivated and where their educations are not constrained by the twin evils of enforced political orthodoxy and a slavish devotion to Neo-Confucian pedagogy.

The time has come to stop looking at China’s talent shortage as a quaint inconvenience for global businesses and start seeing it for what it is: a silent but potent barbiturate for China’s economy.
China needs more talent to keep fueling the engine, and it needs to unleash the power and toughness of its privileged class. The nation needs to figure out how to address those issues, and it needs to begin now.

Thoughts on Rusting Bulldozers

On the train from Shanghai to Guangzhou, just pulling into Zhejiang, we passed countless bulldozers, skip-loaders, graders, road surfacing machines, and dump trucks. All were idle, all have seen better days, and all were parked in lots beneath railway viaducts overgrown with weeds. All of this begged a question that bothered me more as we shot into the mountains south of Hangzhou: where does construction equipment go when it dies in China? Decades worth of construction equipment has been built, used up, handed down, beaten up, and run till it quit. Now the ungainly vehicles are starting to fill vacant lots. There are only two possibilities left for these legions of armor. Either they’ll rust and rot in place, or they’ll be refurbished or even re-manufactured.

I have held out hope for the construction equipment refurb business becoming a thing in China, but of late I have started to place bets on the scrapyards.

Several years ago I had a debate with Jack Perkowski when we discussed the prospects for Caterpillar, Komatsu, and similar companies in China in the face of growing local competition. Out of that discussion came some interesting revelations, the most important of which was the issue of how construction firms handle their fleets of bulldozers, graders, dump trucks, backhoes, cranes, rollers, and shovels.

Construction companies in most of the developed world, in the face of grueling competition and exacting tax codes, are compelled to amortize the costs of their trucks, cranes, and dozers over the lifetime of several projects, if not decades. They pay more to buy machines that will last longer, knowing that with a little care and feeding, these iron beasts will eventually pay for themselves, and possibly continue to drive revenues long after their costs have been fully amortized.

Chinese construction companies work with different tax codes and equipment manufactured under rather less stringent quality standards. Operating in a market where cost-plus pricing was established as the norm by state-owned giants, Chinese builders typically included the cost of construction equipment into the cost of the project. In other words, that the trucks and tractors are not going to be much good for more than the life of a single job, there is little value in trying to keep the beasts working after project completion, and a secondary market for the used/abused vehicles out in the provinces all combine to make “use-it-up then throw-it-out” the best way to handle heavy equipment inventory. Total cost of ownership wasn’t a thing: purchase price was of the essence. Better to buy a bunch of cheap vehicles from, say, Xugong rather than buy something from Cat that would last a long time but that would require trained mechanics to keep running and pricey real estate to park between jobs.

Worse, as China’s construction boom winds down just as competition among construction equipment manufacturers hits a fever pitch, the value of the old gear drops to near-junk levels. It is cheaper and safer to buy the new than to fix the old. Hence the growing clusters of tracked and wheeled iron rusting on roadsides.

The question is whether these dynamics will ever change enough to enable China to move beyond using bulldozers like Kleenex, with the resulting benefits to the environment and economic efficiency. Will tax codes change to incentivize more efficient practices? Will maintenance and overhaul become a thing? Is China destined to build the world’s largest bulldozer graveyard? Or will a new trade bloom in exporting cheap used construction equipment, allowing China to turn Somalia and Zimbabwe into parking lots for China’s construction cast-offs?

Kaifu Lee and the Wisdom of Knaves

Kai-fu Lee

“Kai-fu Lee: Why American Companies Struggle in China,” Pandaily.com, January 30, 2018

Catching up on my reading during a hotel-bound weekend in Shanghai, I had a chance to read Pandaily’s transcript of Kaifu Lee’s speech at the World Economic Forum in Davos. His topic was an old one: why American companies encounter so many problems in China.

Ambitiously, he reduces this complex issue to four reasons that American companies struggle in China. Each of his reasons provides sufficient grist to make a blog post, but rather than engage in pilpulery, allow me to offer a few of my own in response.

(Disclaimer: I have met Kaifu Lee, have worked with him on a project, and have the greatest respect both for the work he has done, his intellect, and his abilities as a business leader.)

Limited applicability: For all of their axiomatic pith, Lee’s lessons apply not to all US businesses operating in China, nor even to all US technology firms, but only to a very narrow swathe of companies – US-based Internet giants. He may mean that, but to a casual reader the qualification is unclear. This matters: none of the reasons he gave, for example, explain why Nokia, Motorola, Ericsson, Toshiba, IBM, Mitsubishi, and Lucent are no longer top consumer brand names in tech in China, nor do they explain why BestBuy, Krispy Kreme, or FedEx fell short of their ambitions here.

The foreigners are learning. He is correct when he talks about US internet companies that came to the market between 1998 and 2012. But there is a small yet important cohort of companies – LinkedIn and Evernote most notably – who learned the lessons to which Lee refers and are succeeding in China today. American companies can and are learning, and it seems strange that he did not call attention to that fact.

Protectionism may not be the biggest problem, but it is real and getting worse. Protectionism was not what sent eBay, Twitter, Google, and Facebook slinking back to the Valley looking silly: each committed some or all of the mistakes Lee outlines. But protectionism has deprived those companies (except Google) of the opportunity to learn from their mistakes and have another go.

What is more, even a cursory review of the regulatory activity and policy pronouncements around the Internet since 2013 makes evident a calculated effort to create an online playing field tilted in the direction of companies prepared to operate as extensions of the Communist Party of China both in China and abroad. Lee glosses over this, much to his discredit.

Look in the mirror. As much as US companies struggle in China, American companies are doing better in China despite these challenges than Chinese companies are in America, and Chinese internet giants do not have protectionism to claim as an excuse. Kaifu’s examples are but the marginal exceptions that prove the rule: WeChat has failed to displace WhatsApp; Alibaba cannot hope to displace Amazon; and I daresay if Lee’s darling, Didi Chuxing, came to the US today it would fail to displace Uber regardless of the latter’s existential challenges.

Papa needs a brand-new bag. In taking on the question of the issues that have tripped up US companies in China, Kaifu Lee treads down the center of a wide and well-worn path. The points he raises are neither new nor original*, and he falls well short of offering thoughtful solutions.

A more original and worthy effort would be to shift the focus of his considerable intellect to a more pressing and less understood topic: why it is that Chinese companies continue to struggle beyond China’s own borders. This is a far more urgent issue: Chinese companies of all sizes are leaping into the abyss of global expansion, many with scant preparation and armed with little more than a sackful of misconceptions and staff who struggle understand and to make themselves understood in any language but Putonghua. If there was ever a legion of enterprises more desperately in need of the wisdom of someone with Lee’s deserved reputation as a leader and engineer, it is those.

It is a shame that Lee’s sermon on the global pulpit at Davos was wasted on such a hoary theme. How much better it would have been for him – and for China – if he had instead taken a thoughtful look at a fresher, more pressing problem.

Granted, I should probably put myself in Lee’s shoes before offering too much criticism. Sitting in a luxurious hotel nestled high in the Swiss Alps among the assembled elite, schadenfreude likely comes far easier to the mind and mouth than fresh insight.

Or, perhaps it is the altitude.

Or, perhaps, it is much more politically correct in China to laugh at the foreign monkeys than to train one’s own elephants.

 

* To offer but one poor example: the topic he raised has been the primary focus of this blog since its inception fifteen years ago, and readers will note that I have addressed some of these topics to the point where I have desisted for fear of permanent pedantry.

Maybe you are the problem…

“CEO Sir Martin Sorrell said it was “not a pretty year,” but the future for his business looks even bleaker. The… https://t.co/TLqWMe2Fa3

No doubt that this is the case for WPP. Their business model was never that good, and it is particularly unsuited for an era of growing client demands, shrinking budgets, and the automation of communications.

The Danger of Faking Followers

Fake followers are a fundamental part of Chinese social media platforms. Even though many of them do periodically clean out fake followers, the number of fake followers has continued to rise.

Source: China’s “Water Army” Far Outnumbers US-Manufactured Followers | Jing Daily

There is nothing pretty about this story: marketers and opinion leaders are using bots to manipulate the indicators that brands rely upon to judge the effectiveness of their campaigns.

In short, faking the numbers at every turn is endemic to social media marketing in China. Perhaps nobody knows what is real and what is bot-created. Nobody knows what they are paying for and how effective their campaigns are.

Mark my words: the cottage industry that helps brands engage on social media is a house of cards, and the typhoon is coming. Unless brands develop a way to link social media activity directly to the only metric that matters (i.e., sales), there is going to be a bloodbath in the social media business, starting with the agencies and quickly spreading to the “influencers.”