Silicon Hutong

China and the World of Business • China Business and the World

Silicon Hutong - China and the World of Business • China Business and the World

The Apple Pay Early Adopter Problem

In the Hutong
Fighting Sleep
24 October 2014

English: People pay tribute outside the Toront...

English: People pay tribute outside the Toronto Apple Store. (Photo credit: Wikipedia)

I am caught in the heart of a swirling vortex of work at the moment and getting ready to fly this weekend, which explains my slow posting of late. More announcements on that soon. In the meantime, I’m going to be firing off a series of short posts on things that I have been itching to share.

Let’s start with Apple Pay.

Arguably the most interesting and revolutionary announcement tha Apple made at its product launch gala this week, Apple Pay promises to finally put the US on the long pathway to doing away with fat wallets, something that has been happening in Hong Kong for nearly two decades and in Australia for almost as long. It is also being touted as the big differentiator for the Apple Watch, and an important one for the iPhone 6.

I have two reservations.

First, I think we all need to take a deep breath and think carefully before entrusting our financial information to any large company. That’s not luddism, that’s wisdom. The recent series of security breaches at major retailers alone should give us pause, and Apple is no exception: a company that has shown itself incapable of protecting Jennifer Lawrence’s photo album has to prove to us that it can be trusted with our wallets.

Second, the high profile of this announcement will surely pique the interest of just about every hacker on the planet, from the kid down my block to certain military units operating from Shanghai suburbs. Even the best systems tend to have hidden vulnerabilities, and those of us who can wait for Apple Pay should do so if only to allow the engineers to discover and addres its most blatant vulnerabilities.

These aren’t deal killers for Apple Pay, but they do suggest that most of us should venture carefully into this new system.

 

Wanda Arrives Arrives in Beverly Hills

“China Developer Buys Robinsons-May Site in Beverly Hills”
Julie Makinen
Los Angeles Times
August 8, 2014

The Times scored a win in picking up this story about how Chinese development giant Wanda is raising its bets on US real estate. Based in Beijing, Makinen can be forgiven, though, for not addressing what the real story is likely to be: the challenges the company is likely to face in gaining approval for its project.

Wanda has yet to reveal plans for the site, but the location has some particular challenges familiar to locals. Traffic is already very heavy going into the area on both Wilshire Boulevard and on Santa Monica Boulevard, which border the site, and during large parts of the day the proximity of Century City makes Santa Monica Boulevard a parking lot for several miles of its length. The development of a high-density complex on the eight-acre site would only exacerbate the problem.

That issue alone is likely to provoke public opposition to a sizable development. The NIMBY factor in the area is high. I know: I grew up three blocks away, and worked at the recently-demolished department store between college and grad school.

If Wanda is wise, it will embark on a campaign to woo local residents, most of whom live in homes with values far in excess of $3 million (and who are accustomed to wielding political clout with the local government,) as well as the Beverly Hills City Council. It will have architects focus on creating a site that integrates elegantly with the Century City, downtown Beverly Hills, with the Hilton, and with the elementary school and neighborhoods to the north.

If the project is clearly woven into the broader fabric of Beverly Hills, seeking to update an enhance rather than just plonking another Chinese multi-use center like it created in Beijing, Wanda will wind up with a flagship property and the respect of the business community in Southern California.

That costs money, of course. But Wanda has plenty of money, and it has every reason to make nice in the US as it diversifies its portfolio beyond China’s increasingly uncertain real estate market.

China’s Hidden Health Crises

Hutong Forward
Contemplating Anacostia
1940 hrs

I have done a lot of work over the past several years with companies in different parts of the healthcare industry, each seeking a way into the China market. Almost every first meeting entails the client bringing up China’s current Five-Year Plan, and trying to figure out how to capture opportunities around the nation’s healthcare priorities as laid out in the plan.

Unfortunately, everyone does that, so the result is that the entire industry is chasing the same set of opportunities. In healthcare, that’s shortsighted. The best opportunities lie outside the stated government priorities, in part because the field is less crowded, and in part because those are usually the problems that the government finds most embarrassing and is anxious to address quietly.

An example is the scourge that diabetes has become in China. Before Johns Hopkins and the China Center for Disease Control and Prevention released their report last week, few had an idea of how large diabetes had become in a relatively short period of time. China now has 114 million diabetics, a third of the world’s total and representing 11.4% of the adult population – a higher rate than the US (11.3%). What is more, Chinese are developing diabetes at a lower body mass index than the US, so the rate of growth of the disease is not likely to abate soon.

China’s problem with diabetes: medications and treatment are more expensive than the average patient can afford. The obvious opportunity, then, a less expensive treatment regimen aimed at China’s massive population.

The upshot is this: global healthcare firms are going to find their best success not in chasing the obvious opportunities with remedies created for developed markets, but in addressing the health challenges that remain largely hidden from public view, and doing so with drugs and regimens that fit China’s local conditions.

Yahoo! China According to Susan Decker

An Insider’s Account of the Yahoo!-Alibaba Deal
Sue Decker
HBR Blog Network
August 6, 2014

American businesswoman Susan Decker, president...

Susan Decker at employee all hands meeting in Sunnyvale, California. (Photo credit: Wikipedia)

If you have not yet stumbled across Sue Decker’s article in the Harvard Business Review blogs, please read it. Decker, who left Yahoo! in 2009 after being passed over for the CEO post in lieu of former Autodesk CEO Carol Bartz, delivers her view of the investment that effectively saved Yahoo!, and her role in it.

First person accounts are always suspect: one is never certain about how much of the history so presented is objective and how much is subjective. Thus, it was reassuring that the editors of the Harvard Business Review chose to publish it as an interesting curiosity rather than a definitive account or a case study. Still, the article made me a bit uncomfortable, for a few reasons.

The “Everyone Failed” Gambit

First, the author frames an eloquent but ultimately unconvincing defense of Yahoo!’s failures in China (in essence, everything the company did except the investment in Alibaba) that can be summarized in as “yes, we failed badly, but so did everybody else.”

That’s partly true: the list of US Internet companies that tried to make a go of it in China and failed is long and distinguished. But the ledger is not quite as one-sided as Decker implies that it is. 

Google had a viable business in China before it chose to stare down the Chinese government. Amazon has a business and is still in the game, despite having to go head-to-head with China’s 900 lb. e-commerce gorilla, Alibaba. Evernote and LinkedIn are making headway with tightly defined value propositions that make sense for China and the rapid refresh cycles that local users demand. And let’s not forget little South African NASPERS, a firm largely unknown to Valleywags that somehow managed to run circles around everyone else, making a brilliant early investment in Tencent that may ultimately outshine even Yahoo!’s windfall on Alibaba.

Decker suggests that the relative success of each of Yahoo!’s moves in China can be explained by the degree of control exercised over the China venture by Sunnyvale. The less control Sunnyvale tried to wield, the more successful that venture became. If that explanation seems a bit too neat and simplistic for you, join the club. I’ll come back to it shortly.

The False Management Paradigm

Second, the author skims over the fact that the joint venture with Alibaba failed to produce anything of value aside from Yahoo’s partial ownership of its partner. The joint venture did not save Yahoo!’s China business: the company’s China operating unit, valued in negotiations at $700 million, sank quietly beneath the waves soon after the agreement that handed operational control to Alibaba was signed. If anything, the Alibaba agreement destroyed Yahoo!’s operating business in China, or, perhaps more generously, sacrificed it in the name of a harmonious relationship between the parties.

Given the outcome, one might be inclined to say that the sacrifice was worth it. Perhaps. But neither we nor Decker should harbor any illusions about what this means for Yahoo!: that the company failed as an operating business three times in China, and that despite her assertions to the contrary, the degree of control exercised by Sunnyvale had no influence on the final outcome. Tight control, loose control, or no control, all three models failed. The one management lesson she tries to deliver in the article is a canard.

The Forgotten Brand Problem

Third, there is no mention in the article about what happened to Yahoo! and its family of brands in China. The brands that Yahoo! owned during Decker’s tenure – including the “Yahoo!” brand itself, each represented a repository of goodwill. The Yahoo! brand in particular initially occupied a position of great respect among Chinese netizens, both because of its success and because of Jerry Yang‘s Chinese heritage. In the process of thrice failing to make a go in China, Yahoo! squandered that goodwill, and thus destroyed the value of its brand in the largest online market in the world.

As a senior finance officer, Decker certainly understands the value of goodwill, as does Yahoo!: much of what they paid for their acquisitions was based on the goodwill and the brand value of the firms acquired. Any reckoning of the net value of Yahoo!’s investments in China must therefore take into account not only the sunk costs and the book value of the assets written off, but also the brand value it destroyed in its largest addressable market.

That this issue remains unmentioned in Decker’s article is, to a marketer like me, a final though perhaps unnecessary indictment of Decker’s narrative. In the end, her piece is not the full account of the deal from the inside promised in the title. It is, rather, an effort both to stake a claim of some credit for Yahoo!’s Alibaba windfall and to exonerate Yahoo!’s leadership – including herself – for the company’s poor operating record in China during her tenure.

Decker richly deserves her share of the credit for the deal: in the end, it saved the company. What she cannot claim for herself or her colleagues any credit for operational success in China. Porter Erisman, a former Alibaba Vice President who recently released a documentary about his time working inside the company called Crocodile in the Yangtze offers this thought on how to assess Decker’s legacy and her account of Yahoo!’s success:

How Yahoo! performed as an operator and how they performed as an investor are two different questions. If we evaluate Yahoo! as an operator (both inside China and outside,) I think we can all agree that their performance was poor. If we evaluate Yahoo! as an investor, we should take into account their entire history of investments and not just cherry-pick one investment that paid off. On the whole, Yahoo! did well as an investor over the years (due to Alibaba) despite some obvious failures. But people investing in Yahoo! didn’t do so because they believed it was a private equity fund. Luckily, the Alibaba investment turned out well and made up for Yahoo!’s failures on an operating level.

Erisman makes a superb point: Yahoo! did brilliantly as a private equity fund and poorly as an operating company. Nowhere was either more true than in China, so I suspect that if we – or Marissa Mayer – are ever to understand what makes Yahoo! tick, we will find the answers in a thorough, unbiased, and balanced account of Yahoo!’s China odyssey.

We will have to wait for someone else to write that account. In the meantime, please read Ms. Decker’s article. If nothing else, it is a valuable contribution to the oral history of American business in China.

If you’re in or near Shanghai and interested at all in the issues raised in my post on China’s evolving approach to Internet governance, you definitely want to catch “Who Controls China’s Internet,” a talk being given by Professor Mark Grabowski of New York’s Adelphi University on Monday, August 11 at 7pm at C3 Cafe. Grabowski, who has focused on the Internet and media, is working to help frame a viable scheme of Internet governance that would head off the possibility of fragmentation – a path towards which China’s policymakers appear to be treading. Go if you can. huang pi south road 700, building A, room 105 上海黄浦区黄陂南路700号A105(过 合肥路)
Shanghai (map)

Beijing’s New Internet Buzzphrase

Hutong Forward
Planespotting at Reagan National
1655 hrs 

In a ten minute speech last month in London at the 50th Meeting of ICANN, Lu Wei, the Minister of China’s Cyberspace Affairs Administration, introduced a set of seven principles under which, according to him, the Internet should be governed. While not much attention was paid Mr. Lu or his speech outside of the confines of the attendees, we can assume that it was an official statement of government policy, and therefore worth understanding, analyzing, and discussing.

His principles, as I heard them, are:

  1. The Internet should benefit all mankind and all of the world’s peoples, rather than cause harm;

  2. The Internet should bring peace and security to all countries, instead of becoming a channel for one country to attack another;

  3. The Internet should be more concerned with the interests of developing countries, because they are more in need of the opportunities it brings;

  4. The internet should place emphasis on the protection of citizens’ legitimate rights instead of becoming a hotbed for lawbreaking and criminal activities, let alone becoming a channel for carrying out violent terrorist attacks;

  5. The internet should be civilized and credible, instead of being full of rumors and fraud;

  6. The Internet should spread positive energy, and inherit and carry forward the outstanding culture of human beings;

  7. The Internet should be conducive to the healthy growth of young people, because that concerns the future of mankind.

There is a lot to grist in these, but what jumped out at me was this catchphrase “credible Internet.”

There is a ring to it that suggests that we are going to be hearing this much more in the coming months, but the aim seems clear. While in the past the boundaries of online expression have been defined by prurient content on the one hand and seditious content on the other, there is now a third piece to that troika: rumors.

This is worrisome: “non-credible” content implies a much wider scope for restriction than the modus vivendi we have enjoyed in the past, and opens to official censure a vast swath of online content. You can avoid posting prurient content rather easily by avoiding adult themes and illustrations. You can dodge seditious content by steering clear of domestic political issues. But “non-credible” content is in the eye of the beholder, and can easily extend to commercial content and company web sites as well as posts on Weibo or WeChat.

Watch this space, as I suspect we are going to learn more about where the authorities are going to be drawing the line. In the meantime, any company or individual producing a content-laden Chinese site or posts on Weibo or WeChat should err on the side of caution. Chinese law is unkind to those whom the authorities accuse of spreading rumors, and demonstrable veracity may not be enough to keep you out of the wrong kind of spotlight.

“The mechanical value of the automobile is falling, but the electric value of the car is rising.”

– Amit Gattani, Micron Technologies

Let’s take Amit’s point one step further: the trajectory of automotive development is such that the car is evolving into an oversized piece of consumer electronics. If there is a single factor that inveighs in favor of China eventually becoming the automaker to the world, this is it.

Edelman, Rui Chenggang, and China PR

Hutong Forward
In the Shadow of the Pentagon
1710 hrs

As more details about ties between the China operations of Edelman Public Relations and erstwhile China Central Television (CCTV) anchor Rui Chenggang are released, a wave of schadenfreude has risen amongst both Edelman’s rivals and the detractors of public relations. As happened when Edelman was caught in a similar ethical imbroglio when it hired ostensibly independent bloggers to post on behalf of Wal-Mart, PR‘s detractors believe that ethical lapses suffuse China’s public relations industry, while practitioners who don’t work for Edelman see this as a large, hubris-laden market monster getting its due.

Both are wrong.

Ethical lapses are common in PR in China, but “common” is a far cry from endemic. There are PR firms, executives, and teams in China who insist on the highest possible ethical standards. Rather than going broke, they discover that while some clients will shun them for these reasons, a growing number of clients, particularly MNCs, are insisting on high ethical standards and are willing to sacrifice short-term results for a clean reputation. Clean business is good: not only do these PR firms keep very busy, they have to turn opportunities away.

But while these firms are the future of the business, they are still the exception that proves the rule, and no agency executive or corporate PR manager should guffaw too loudly at Edelman’s expense. For far too long as an industry and a craft we have turned a blind eye to practices considered unethical, immoral, or even illegal in more developed markets, failing to see that China was developing and that a reckoning was coming.

Two issues prevent widespread improvement in PR industry ethics in China. First is a persistent exclusivist belief that because this is China, things are done the Chinese way, and always will be. Operating ethically is seen as naive at best, and culturally imperialist at worst (“how dare you impose your values on us!”)

The second issue is fear. PR executives and their agencies believe that if they don’t take advantage of every opportunity, however morally ambiguous, they will lose revenue and clients to competitors who lack – or opportunistically ignore – their moral compasses. The pressure is greatest among the larger agencies where the focus is exclusively financial performance. The accountants calling the shots in New York and London are not measuring ethical compliance: they measure revenues and profits. Faced with the choice of losing a sizable client or cutting some ethical corners, there is no contest.

But the persistent idea that China is an island untouched by ethical standards for the conduct of public relations is now demonstrably so much cow manure. Those who cling to such exceptionalism – and you know who you are – are dinosaurs whose time in this business is limited, regardless of the success they appear to enjoy today.

What happened to Edelman could have happened to any of dozens of local and international PR firms. Rui had made himself a target, and Edelman is the largest PR firm in the world. But the rest of us have now been given a shot across our bows. Either we bite the bullet now, change course and adopt ethical tactics and practices, or we leave our firms, our people, and our livelihoods at the mercy of government caprice. If we don’t, this will happen again, and when it does we will all find that it will not be a single firm in the spotlight – it will be every PR practitioner in China.

China Goes West: The Coming Rise of Chinese Brands

China Goes West: Everything You Need To Know About Chinese Companies Going Global
Joel Backaler
Palgrave-Macmillan
May 2014

If there is one question that vexes many observers in China, it is this: how can Chinese companies begin to build – or become – global brands? Thirty-six years after the beginning of reforming and opening, only a handful of Chinese companies – Lenovo, Huawei, Haier, Tsingtao – have made the leap to global leadership in their sectors. This invites a rude comparison: 36 years after it was flattened by the US Army Air Corps, Japan had already produced dozens of leading consumer brands – Sony, Panasonic, Toyota, Honda, Canon, Nikon – that were disrupting industries around the world. Why has China not produced a similar – or even larger – crop of world leaders in the same time frame?

In an intriguing new book, China Goes West: Everything You Need To Know About Chinese Companies Going Global, author Joel Backaler offers us a glimpse into why there are so few Chinese global brands. And some of the reasons will surprise you. I won’t spoil it for you, but the reasons go way beyond marketing competency.

Backaler, who has spent the better part of a decade studying Chinese business and is the author of a highly respected blog on the subject, was given unprecedented access to the companies and their executives, and tapped the knowledge of some of the wisest observers of Chinese companies.

Through the stories of these firms, Backaler explains what drives Chinese enterprises to even consider going global in the first place. He describes the painful path that China’s pioneering Champions followed to get there. And he leaves you wondering why, despite the potential rewards, an more than a handful of Chinese companies would bother.

But Backaler pulls no punches – he clearly believes that we are on the cusp of a major change, one that will see a rash of Chinese companies go global, and in the process disrupt global markets much the same way the Japanese did in the 1980s. You may not agree – but Backaler’s makes a persuasive case, and he makes some pointed suggestions on what the rest of us should do in response.

China Goes West is not a marketing book, but it is a book all of us must read for a simple reason: it describes how China will build global companies, and it gives us the strategic insight we are all going to need to either help them – or to help their competitors stop them.

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Bet the Farm, Or Settle for Table Scraps?

In China, Go for Broke or Accept that Less Is More
Franc Kaiser

Harvard Business Review
April 4, 2014

Nanjing Road pedestrian mall, perhaps the busi...

Nanjing Road pedestrian mall. (Photo credit: Wikipedia)

In this intriguing essay, Shanghai-based consultant Kaiser suggests that for foreign companies, the glory days are over, and the only two strategies left are to either fight for one of the top two positions in your industry (against what might be brutal competition) or accept that your market in China will be modest, picking up what others cannot.

I really enjoyed the essay, because I like contrarian thinking on business in China. But I have a couple of problems right out of the gate.

First, I find it hard to accept that all companies in all industries face such a stark, binary choice. Airlines and banks do not face the same challenges or opportunities as McDonald’s or Intel.

Second, Kaiser’s choices seem better suited to Fortune 500 multinationals with a single line of business. Many large companies will do very well being modest players in multiple markets or product lines without ever being a market leader or settling for modest returns, and many small- and medium-sized businesses will gorge themselves on a modest market position.

Third, the market is immense, and opens the door for a wide range of niche and multi-niche strategies that would be incredibly lucrative, especially for small- and medium-sized businesses from outside of China.

Finally, and perhaps most important, Kaiser implies that there is but a single motive that brings companies to China: profits from China operations. For many companies this is true, but for others, being in China offers other rewards. Companies in the mobile industry benefit from participating in the largest, most lucrative market in the world; other firms are in China so they can better defend against Chinese rivals elsewhere; still others could care less about profits, as China drives volume that supports lower unit costs in more lucrative markets.

One reason there are few good “China strategy” books out there is that there is no good, blanket approach for China that spans across a wide range of companies and industries over a modest span of time. Corporate strategy is bespoke, like the course for a ship. When we write books, we can talk about avoiding storms, rocks, and shoals, and we can talk about the processes that lead to great strategy or effective implementation. Everything else is situational.

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China and “Datathermal Energy”

Hutong West
Letting the Sunshine In
0909 hrs.

Much of my March was spent working with clients who are thinking through some of the issues facing the growing data center market in China. For the uninitiated, a “data center” is a place that houses anywhere from one to tens of thousands of servers. This blog sits in a data center, your bank information sits in a data center, there are a lot of them, and these places are growing.

Little wonder. One delightful quote from Smithsonian.com suggests why.

“From the year 2003 and working backwards to the beginning of human history, we generated five exabytes–that’s 5,000,000,000 GB – of information.

By last year, we were cranking out that much data every two days.

By next year, we’ll be doing it every 10 minutes.”

That quote was from two years ago. Draw the curve in your mind, and you can figure that, conservatively, today we could be generating five exabytes of data every five minutes. Not all of that is going to sit in phones, laptops, external hard drives, thumb drives, or those little SD cards that we stick in our digital cameras. Much of it has to sit in data centers.

The Great Heat Sink

Which is fine, until you consider that data centers suck energy the way blue whales suck krill: in massive quantities, and with large amounts of undesirable waste at the end of the process. In the case of data centers, that waste comes in the form of heat, which then demands more energy to power cooling, which in turn generates heat. The bigger data centers get, the more heat we are talking about. And data centers are getting quite large indeed, measured in millions of square feet of servers stacked like so much electronic cord wood.

Some data centers have started addressing heat as a resource, rather than a waste-product: IBM’s Swiss data center heats a pool; Telehouse in the UK is heating homes in London’s Docklands district; and Notre Dame’s Center for Reserch Computing is heating the flowers of a local municipal greenhouse with the heat from a rack of high-performance computing nodes.

Not everyplace where there are data centers needs heat, though. Some places simply need energy. As any engineer will tell you, where there is heat, there is potential energy. The key will be to capture enough heat so that it can be efficiently turned into energy, for example through steam turbines. Energy generated like this – through the waste heat of data centers, we will call “data-thermal energy.”

Data-Thermal China

China is a natural place for the development of data-thermal energy. The country is early enough in the cycle of development for data centers to start designing its largest server farms to capture and channel heat efficiently. And scale will not be an issue in China. Leaving out government-run data centers entirely, some commercial data centers, like one 6.3 million square-foot beast under construction in Langfang just outside of Beijing, will have more floor space than the Pentagon.

The ability to capture and use waste heat efficiently also opens the prospect of cutting down on air-conditioning costs. If the heat can simply be blown – or sucked – away from the servers and into a central collection point for energy generation, the need to actually cool the air should abate a bit.

There is considerable engineering work to be done, but this is a worthy (if not essential) direction of thinking for the people designing and growing China’s server farms. It will demand imagination and discipline: the old way of doing things – stack ‘em high, chill ‘em down, and blow the hot air out the window – is cheap and pervasive. As the costs of energy grow and sustainability becomes more important, however, Big Data will need to start seeing itself as a utility, not just a customer.

Setting the Stage for Chinese Innovation

Near People’s Square, Shanghai
Skyline in Silhouette 
0700 hrs. 

Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.

One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.

But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.

From Buy to Make

Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.

The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.

China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.

Fast Followers

By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”

By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.

Innovation, however, remained a challenge. While a handful of local tech companies –  notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.

Enter the Innovation Platforms

And there it remains today.

This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.

Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:

Significant – The core innovation is a genuine advance that is both useful and relevant;

Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;

Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;

Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.

Supported - Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.

Early Innovation Platforms

Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.

But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:

The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;

The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;

Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.

Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.

Platforms for the Future

In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.

But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.

For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.

But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.

The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?

I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.

The Innovation Trail: Hisilicon

Hutong West
Blue Moon and Justified
1942 hrs

When challenged to come up with examples of innovative Chinese companies – or those that might start innovating soon – many of us are hard-pressed to come up with names beyond the obvious Tencent, Huawei, and Lenovo. To help remedy this, and to make a balanced case for China as an innovator, I am going to start highlighting select Chinese companies that I believe are moving in that direction.

One company to keep on the radar is Hisilicon. Formerly Huawei’s application-specific chip (ASIC) division, Hisilicon has developed a system-on-a-chip (SOC) product line designed for mobile devices. The recent announcement that Huawei will be using Hisilicon chips in its upcoming flagship Ascend P7 mobile phone offers no surprise – on the surface. In fact, a skeptic might suggest that Hisense winning a spot on a a Huawei device is so much internal self-dealing.

The skeptic would be only half right. Huawei’s mobile device team are a loyal bunch, but the company’s leaders are no idiots. To risk the company’s tenuous reputation among consumers in an insanely competitive market merely to engage in some gratuitous dogfooding is uncharacteristic of the firm. Something else is going on, and it is likely that Hisilicon is sneaking up on the better-known MicroTek in its ability to provide the processing power for complex smartphones. If that is the case, Hisilicon is about to pop onto the radars of both Qualcomm and Intel as well.

Before we add Hisilicon to the ranks of mobile chip powerhouses, however, we need to add an important caveat. It makes good sense for Huawei to buy from Hisilicon if it can, but it probably does not make as much sense for other manufacturers. Putting a chip into a phone design involves more than just buying processors off the shelf and sticking them on a printed circuit board. Smartphone testing and development demands close cooperation between component providers, essentially letting everyone in the process into a lot of proprietary secrets.

If I were a smartphone manufacturer, I would look at Hisense SOCs in the same way that I would look at Samsung memory: whatever the virtues of the silicon, I am giving my competitor a close-up look at my mojo. In a world where Samsung and Huawei are pulling out all stops to lead the smartphone business, that’s writing an invitation to my own funeral.

So that is why I am watching Hisilicon. The technical capabilities are growing to the point where the company is likely to become a nexus of innovation, but the commercial challenges it faces are interesting indeed.