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

Quotable Friday: Sir Martin Sorrell

“I remain an unabashed bull on China,” said Sorrell. “There are worries about the slowing of growth but that was inevitable. It was natural it was going to slow. We are concerned about the stock market bubble and the fall in the stock markets has implications. Having said that, we still believe in the longer term in the economy. We think it is a short term phenomenon.”

Source: WPP’s Sir Martin Sorrell bullish about China prospects despite sales slowdown | Media | The Guardian

 

The Limits of Coercion

Persuasion trumps coercion. Even in China. The government has a monopoly on force, but it does not retain that monopoly by employing it without consideration of public opinion.

The days of high-handed government action are over, and this makes the government’s task more complex – and delicate – than ever. Power my grow from the barrel of a gun, but the nation’s leadership cannot ignore that it remains rooted in the people.

Concept of the Week: Urbanizing In Place

Urbanizing in placeconcept – the idea that China’s urbanization is not being driven entirely by migration from the countryside to the cities, but that large areas that Beijing’s statisticians might once have considered “rural” are now considered “urban.”

In-place urbanization could occur in one of three scenarios.

The physical area of a municipality has been expanded to include what was once surrounding countryside.

In the second scenario, a village that was once considered part of the countryside has now grown into a town that a demographer or statistician would now classify as urban.

In the third scenario, a group of villages in a given area are considered to be conglomerated as a single administrative entity and reclassified as a single town.

In these cases, China’s urbanization is taking place without migration, and presents a different set of policy, marketing, and personal challenges and opportunities than classical migration-based urbanization.

The Third Way on Xi

English: "Long live the great Communist P...

English: “Long live the great Communist Party of China” in Xinhuamen, Beijing ‪中文(简体)‬: 新华门左标语“伟大的中国共产党万岁” (Photo credit: Wikipedia)

“Is the Chinese dragon losing its puff?”
Peter Harcher
The Canberra Times
March 16, 2015

Professor David Shambaugh’s recent essay in the Wall Street Journal suggesting that China’s political system is about to hit some very rough times (“The Coming Chinese Crackup“) has provoked intense debate. Peter Harcher’s article written in response offers a neat summary of what makes Shamgaugh’s conclusions so debatable.

I nevertheless absolutely reject his conclusion which I find astonishingly ill-informed. The pervasive sense of dramatic change is, I have found, combined in almost all Chinese minds with satisfaction and confidence that the change is urgently needed–indeed long overdue—and in the right direction.

It also demonstrates that the American academy has powerful competition as a source of cogent analysis on Chinese politics.

Any serious discussion of China’s future must include non-Academics like economist Arthur Kroeber and Australians like Geremie Barmé of the Australian National University and David Kelly of China Policy in Beijing.

Barmé, for his part, writes off Shambaugh’s collapsism as the view of an American deeply anxious about America. Kroeber, an American himself, argues that the Party remains as strong and adaptable as it was in 2008, when Shambaugh wrote his excellent China’s Communist Party: Atrophy and Adaptation.

My problem with both sides is the determinism implicit in the arguments. The Party’s collapse might not be imminent, but neither is its adaptability without real limits, imposed upon it by important groups and individuals within its own ranks. I find it hard to believe that Barmé and Kroeber would argue that point.

We thus must agree that there may be circumstances under which the Party might prove insufficiently adaptable to avert an existential crisis. And before you protest, let us agree that there may be circumstances under which any polity, however strong and adaptable, might face the same limits. In that case, the answer is neither “the Party will collapse” nor “the Party is too adaptable to collapse.” It is, rather “under what circumstances would the Party face the danger of collapse?”

Like most of us, neither I nor my clients can afford to treat China like its future is a game of roulette: bet on Red, the Party stays in power. Bet on black, and it collapses. Creating strategy in business means contending with all possibilities, balancing them, and coming up with a pathway that appropriately addresses them.

We can be neither Cassandra nor Polyanna. We should not overestimate the considerable challenges Xi Jinping faces as he guides the nation through roiling and uncharted waters, but none of us can afford to underestimate them.

Concept of the Week: The China Entrepreneur Reality Distortion Field

China Entrepreneur Reality Distortion Fieldnoun – the special power granted to successful Chinese entrepreneurs that allows them to take advantage of selective disclosure, a lack of third-party oversight, a global fascination with the rise of China, and a modest cult of personality to establish an exaggerated perception of their company’s value. See LeTV, Xiaomi, etc.

China Marketing: Silos and Timid Marketers

For a variety of reasons, cross-platform alignment occurs too infrequently. First, marketers have become disorientated, even intimated, by the emergence of quantitative technologies that promise algorithmic salvation. Second, advertising agencies have yet to identify models of collaboration that pair conceptual distillers – that is, “storytellers” — with systemic thinkers, the latter capable of devising innovative transactions. Finally, many organizations have siloed operational structures. This is particularly true in China where sales departments wield control over marketing. To boot, online and offline units function independently.

via Digital Commerce in China: Cheap Tricks or Deep Love? | Tom Doctoroff | LinkedIn.

Concept of the Week: WaterTech

WaterTechnoun – the discipline combining elements of of biology, agronomy, engineering, environmental science, and electronics to find ways to make more efficient and effective use of limited water resources.

In an upcoming post in The Golden West Review, I suggest that the California drought is really a great big hint from the universe at one of the greatest business opportunities facing both China and the United States. The companies and countries that are able to develop the products, technologies, skills, techniques and services that significantly reduce per-capita water usage will be the winners in the 21st century.

As the steam slowly leaks from the microelectronics and telecommunications revolutions that created Silicon Valley, we need to start looking for the next revolution. WaterTech will no doubt be a major part of that, and Sand Hill Road would be stupid to leave the opportunities to foundations and foreign firms.

Friday Irrevrence: Labels are Important

IMG_0060

My wife’s aunt brought this bottle of wine to a recent family dinner at the Liu Family Restaurant next to the National Art Museum of China (Meishuguan) in Beijing.

Nobody is happier than I to see Chinese vineyards jumping into the wine business. But someone should alert this particular winery that selling a wine without a year on the bottle makes it very hard for all but the utter tyro to trust what is in the bottle.

Shameless Plug Dept.: New Fast-Food Paper

Hutong West
Contemplating lunch
1253 hrs.

My most recent paper, this one on addressing the challenges facing fast food franchisors in China, “Jumping China’s Great Food Wall (pdf),” is now up on the Allison+Partners website.

Failing that, you can find the paper on Academia.edu here.

This is more of a practical paper than my last one, giving a quick overview of the uneven success enjoyed by fast food companies in China, and offering a series of prescriptions designed to avoid some of the more serious rocks and shoals, and mitigate the effects of many others.

Nokia Problem #342: We Ignored Journalists

In the Hutong
Watching the tourists shuffle through the Forbidden City
1055 hrs. 

Working on a long paper about China and the demise of Nokia, I came across this interesting little anecdote from a journalist friend from 2011.

“So if you want to leak something, especially since you’re such a big fan of NOK, you can let the world know that a certain journalist found out today that despite having submitted questions for an interview in late July, was informed today, 17 days after the initial deadline, and 10 days after an extended deadline, that the interview would not be available.”

Nokia did not melt down because of the way it handled its media relations. Nonetheless, I contend that the problems that led to the end of Nokia were visible in a hundred facets of the organization long before the high flying handset maker found itself a rump division of a rudderless software company.

Get off the plane

English: Business class at grand opening of Be...

English: Business class at grand opening of Beijing–Shanghai (Jinghu) High-Speed Railway. (Photo credit: Wikipedia)

In the Hutong
Watching the pigeon hutches
1011 hrs.

Speaking to a group of students touring China from the UK, I asked how they traveled from Shanghai to Beijing. Their response, of course, was that they flew.

I understand the rationale for flying inside of China. Under the best circumstances it is fast, and other forms of travel are harder to arrange from overseas.

That said, my recommendation to anyone organizing a trip to China for a group of executives, students, or scholars is to do yourself and them a favor: on the leg between Shanghai and Beijing, put them on a high-speed train, in either First or Business Class.

(Be aware that for reasons that escape everyone but the Ministry of Railways, Business Class is the better, more comfortable, and more expensive of the two.)

Even if flights are on time, the elapsed time from downtown Shanghai to Downtown Beijing (or the reverse) is not that much greater, especially if you purchase your train tickets in advance. And if there are flight delays (and there are frequent delays, because of weather, VIP flights, or because the Air Force feels like it), the trip can actually be faster. But that’s not the best reason to take the train.

The best reason to take the train is that the people you are squiring across China will actually get to see out their windows something more than modern cities and clouds. They will see farms, villages, half-completed roads, factories, and the insides of a half-dozen cities of a million souls or more that they had never heard of.

Send them home with visions of modern cities in their heads, and they will get the wrong idea about China, making the same mistake made by instant China experts like Thomas Friedman and Niall Ferguson. Expose them to a bigger slice of China, and they will understand that a large part of the nation is still 40, 70, of 100 years behind Shanghai. Then they will start to understand the forces that drive this Asian Leviathan. And is that not the point of bringing a group to China in the first place?

Case Study: Why You Should Seek Multiple Opinions on China

“Three Things TLD Registries Must Know About China’s Domain Name Regulation”
Chang Jian-Chuan
CircleID
June 18, 2015

I get to talk to groups of businesspeople and business students on a regular basis, and one of the maxims I include in just about every speech or presentation is this:

Don’t get your China advice, whether generally or on a specific issue, from any single individual. China is too large and complex for you to trust the future of your enterprise in this market to the viewpoint of one source, however knowledgeable he/she/they may seem.

The news this week offers a superb example of why this is the case. The Ministry of Industry and Information Technology (MIIT) has had one if its periodic regulatory spasms regarding the Internet. One of the specific areas covered by the current policy outburst is the arcane but important area of top-level domains (TLDs).

The Internet Corporation for Assigned Names and Numbers (ICANN, the international body that, among other things, operates the system that makes it possible for you to type “amazon.com” into your browser and get to a bookstore instead of an error page) has recently presided over an explosion of top-level domains (TLDs), those bits of an site name to the right of the dot, like “.com,” “.net,” and “.org.” Where there was once only a handful (in addition to nation-specific top-level domains,) there are now literally hundreds, if not thousands of these, and we’re all having to adjust to a world that includes “.law,” “.ninja,” “.guru,” and “.me,” and .”porn,” among hundreds of others.

China’s adjustment is coming in the form of a new regulation (“Interpretation (Reading) on Carrying Out the Domain Name Registration Services Market Special Action Policy”, promulgated by the MIIT on May 12) restricting how registries (the companies that own the top level domains and collect fees for domain names that use them) can sell domains to customers in China. This is causing a bit of a panic.

Chang Jian-Chuan, a Ph.D. and a research fellow who covers the field for a local registry, offers this piece in a leading industry publication as something of a palliative, and I agree that panic is unhelpful, but he loses me when he writes:

Nowadays a revision of the regulation is under way to reflect the latest expansion of registry operators. However, except for the new requirement that any foreign registry has to establish a legal entity in China, all the other requirements for the license have maintained unchanged. Therefore, it is fairly safe to conclude that there is no “tightened control” or “new move” against New gTLD registries and registrars.

What we have here is a disagreement (to put it mildly) over terms. While a superficial reading of the regulations may suggest no significant change, if you understand both the challenges faced by the companies affected and the knock-on effects of the law, it is clear that the change doe represent a new move that tightens control of the industry and endangers the business of many foreign registries currently selling into China.

From a business standpoint, the regulations throw the business of many registrars into a spin, if for no other reason than they are required to set up and register a local operation in China with $170,000 in registered capital, with local technicians and customer service personnel. Someone familiar with the global registry sector would know that most registries, including some of the larger ones, are not yet operating in China, and for all of those this represents a costly process and significant ongoing expense. For the vast majority of non-Chinese registries the cost will be prohibitive, in effect shutting them out of China.

From a legal standpoint, attorney Allan Marson at Ishimarulaw.com noted in November:

When MIIT promulgates these revisions (and barring any last-minute amendments), they will substantially change the status quo for non-Chinese registries in China. While users in China will continue to be able to access websites outside China (subject to passing through the “Great Fire Wall“), in order to promote and serve Chinese customers, a non-Chinese registry will be required to set up a subsidiary registry or entrust a China-based registry to operate its TLDs in China. Failure to do so will likely result in Chinese registrars refusing to sell domain names under the non-Chinese registries TLDs and preventing resolution of any websites that are already registered under those TLDs.

Contrary to Dr. Chang’s fairly offhanded dismissal, a common sense reading of the regulations from the viewpoint of a foreign registry and from an attorney is that this regulation and its knock-on effects represent a new move and tightened control over the field, one that significantly changes the way most companies in an entire industry must operate in China.

While most of us shy from anything that may seem ad hominem, when seeking advice in China you must consider the provenance and possible motives of any advisor. For example, Dr. Chang is a former official with CNNIC working for a local Chinese registry. This would suggest that, far from being a dispassionate observer, Dr. Chang has some skin in the game. It is worth noting that his company, KNET, stands to gain if the new regulations are enforced to the greatest extent possible. It is also worth noting that his publishing an article in an international industry publication praising an MIIT regulation will not hurt his company’s regulations with its regulatory overlords at MIIT, and that it would have been impolitic – if not commercially suicidal – for Dr. Chang to have written a different opinion.

Let me be clear: the goal of this article is neither to impugn Dr. Chang nor his employer. I am sure Dr. Chang is a wonderful person and an academic of great integrity, and that his company is a fine organization operating in a highly competitive and heavily regulated industry.

The point, rather, is that the advice you receive from anyone about China is often influenced on where the individual comes from, where he or she sits, and the pressures under which he or she operates. The only way to get a true picture of the challenges and opportunities your company faces in China is to reach out to a range of advisors, tapping each for their thoughts, questioning each, and forming a picture based on all of the above.

Brands in China: Cheap or Premium (and Aught Twixt ‘Em)

China’s brandscape is bimodal, polarized between omnipresent discounting versus high prices born of aspiration.  Cheap Xiaomi mobile phones, Yili ice cream and Nestle “three-in-one” instant coffee exist in the same universe as premium Apple, Haagen Dazs and Starbucks.

via Digital Commerce in China: Cheap Tricks or Deep Love? | Tom Doctoroff | LinkedIn.

Once again, the brilliant Tom Doctoroff nails it.

China: State Multinational or Global Superpower?

America fights, in other words, while China does business, and not only in Afghanistan. In Iraq, where U.S. troops brought down a dictator and are still fighting an insurgency, Chinese oil companies have acquired bigger stakes in the oil business than their American counterparts. In Pakistan, where billions in U.S. military aid helps the government keep the Taliban at bay, China has set up a free-trade area and is investing heavily in energy and ports.

via China succeeds by behaving more like a multinational company than a global superpower.
A
nne Applebaum
Slate
September 27, 2010

This was a clever observation when Anne Applebaum first made it five years ago, and there is still some validity to it. Nonetheless, one cannot help but wonder if things will stay this way much longer. China’s military posture overseas continues to rise, and its companies are beginning to discover that the easy fruit has fallen. We may well have witnessed either the high point of China’s overseas expansion, or, more likely, the end of China’s purely commercial overseas expansion strategy.