Three Reasons Alibaba Wins

Someone asked me the other day why I thought Alibaba was such a huge winner in the China e-Commerce game. I see three reasons.

  1. Trust. For a long time, people in China were wary of e-commerce in China because they were simply afraid of getting ripped off when buying goods sight unseen. We didn’t really face that issue in the US to the same extent, because Sears, Wards, and JC Penney had been selling goods to Americans sight-unseen for over a century. Over that time, we had not only discovered which mail-order brands we could trust to “deliver the goods,” we also compelled the creation of terms, conditions, and practices that formed an (often unspoken) contract between retailer and buyer. When it created Taobao, Alibaba put together a series of terms and conditions that allowed both early adopters and the mass market to trust them enough to send their money into the ether. That trust went deep enough that, with Alipay, Chinese now trust Alibaba with their money.
  2. Experience. Alibaba understood from the outset that it needed to offer a an efficient and enjoyble buying experience, but that it did not need to go crazy. The company understood that it had a low bar. The Chinese retail experience was always miserable, and has improved only a little over the past two decades. Simply by making the experience a bit better than what you get at a typical Chinese retail store, and spending the rest of their effort on reliability and trust, Alibaba won.
  3. Scope. As Jeff Bezos understood, the key to winning in electronic commerce was not to focus on being the best bookstore, or grocery store, or anything store. The key was becoming the go-to place to shop, regardless of what you want to buy. Alibaba used Taobao to build unmatchable scope in a very short period of time. Now the default choices are traditional retail and Taobao, and everyone else has to fight harder for consideration, even as a specialized niche site.

It is difficult to see how anyone might knock that wall down.

Still, Alibaba faces two challenges. First, it has to figure out how it can continue to sustain high growth once it has secured its role of China’s national online department store. That market does not continue growing at double-digits forever, and Alibaba is already hunting for how to grab the next large chunk of users’ wallets – or extend its strengths abroad.

The second challenge is that as e-commerce matures, more companies will figure out how to build their own retail empires, much like Xiaomi – and, to a lesser extent, Apple –  has done. Once Taobao and TMall have accustomed people to buying big brand merchandise online, the value for brands of building their own sites begins to grow. Alibaba will be challenged to address the defection danger in the coming 2-3 years.

For now, though, Alibaba sits pretty, all based on an unimpeded view and unmatched understanding of the Chinese consumer.

When Lux and Tech Collide

However, the cost of providing customers with devices and gadgets to gain access to new tech and maintaining them is not a small expenditure for most luxury fashion businesses. What’s more, when a customer is enthusiastic about testing a hi-tech headset in a store, it does not necessarily guarantee that he or she has the desire to purchase a $1,500 handbag.

Source: Village: How to Combine Tech and Luxury Fashion in China the Smart Way | Jing Daily

I confess that when I began my career thirty-odd years ago, I saw the luxury fashion industry as an easy target for ridicule: alien rituals and strange affectations aside, I found it hard to give credence to a group so focused on the capricious whims of the planet’s most pampered posteriors. That perception was both short-sighted and immature.

The opportunity I had to watch China’s luxury market sprout and blossom has given me a different perspective. Luxury consumers are an informal yet exacting standards body. I have found that the more that we can conduct any consumer-oriented business or marketing activity in accordance with the standards of this rarified niche, the better we can serve all consumers.

That’s why I was fascinated by this London panel talking about the use of technology (specifically augmented reality (AR) and virtual reality (VR)) to sell more luxury fashion.

One truism I’ve never forgotten about luxury customers: they all want the most fulfilling possible experience delivered with the least possible friction. The gratuitous application of kludgy technology (and, let’s face it, while AR and VR are getting better, neither are ready to fulfill their promise) seems to be a guaranteed way to chase luxury buyers out of your store.

Which leads to a second truism: The well-to-do are not early adopters. They’re the demanding knife-edge of the mainstream user, the guardians of the far side of the chasm twixt “niche product” and “widespread adoption” into which so many promising inventions fall.

If you can tweak a technology or product to the point wherein you can match the exacting standards of the luxury consumer, the big-time awaits. Smartphones went mainstream when the iPhone passed the lux test; satellite radio went wide after Damlier, Toyota, Nissan and BMW were able to make them accessible to finicky upscale buyers; and electronic cars went mainstream when Tesla introduced its luxury roadster and Toyota made the Prius hip with the well-to-do.

China is no exception to this rule. The Chinese luxury consumer often shares as much of her psychographic profile with her counterparts in Europe and North America as she does with her home-girls in Shanghai or Bengbu. Until you can offer her a great experience with the minimum of friction, forget about being first-to-market: go back to the lab.

Flavor Fail

It's the picture of Italian ice-cream in a sho...
It’s the picture of Italian ice-cream in a shop of Rome, Italy (Photo credit: Wikipedia)

The lobby of my hotel in Beijing had a happy hour ice cream special: a scoop of Movenpick ice cream for RMB 25 ($4). Intrigued, my family ordered a few scoops.

I ordered Cappucino, and watched the server mark from the bin clearly marked as such. It was with great surprise, then that when I put the first dainty taste of ice cream into my mouth I tasted not the expected creamy espresso, but the cloying super-sweetness of butterscotch.

The staff could not figure out the problem, but to someone who has managed companies in China, the issue seems as clear as day: somebody got it mixed up in the kitchen, and figured “hey, what the hell, who is going to notice?”

Ending “Marketing gratia Marketing”

Aggressive marketing campaigns are common, thi...
Aggressive marketing campaigns are common, this one features Coco Lee (Photo credit: Wikipedia)

Source: From Mini Apps to KOLs: 6 Effective Luxury Marketing Campaigns on WeChat | Jing Daily

Jing Daily, the leading publication covering the business of luxury in China, does regular features spotlighting social media campaigns using WeChat to engage luxury buyers.

One recent example:

4. WeChat x Online to Offline (O2O): Chanel

From April 12 to 24, French luxury powerhouse Chanel opened Coco Café, a pop-up café-themed beauty store, in Shanghai. Visitors to the store could order a cup of coffee and some snacks provided by the brand while browsing beauty products and enjoying customized make-up services. Coco Café has been a huge hit, attracting thousands of visits to the site every day. Chinese social media was filled with photos taken by consumers in the store, who seemed undeterred by the long line snaking around the block. VIP customers could avoid the long lines by reserving a spot on Chanel’s official WeChat account ahead of time.

The campaigns are clever, and the coverage is thought-provoking. What is unclear, and what the article never probes, is whether any of these campaigns do anything to increase market share, drive more sales, increase brand awareness, or drive business goals. And that highlights a larger problem.

There is nothing wrong with using technology to deliver clever campaigns in marketing. But when the technology is being used on tactics and campaigns with vague objectives like “increase engagement with the brand,” “deepen affinity,” or “increase visibility,” something is broken. Each of these phrases is euphemistic shorthand for “conduct activity in order to be seen conducting an activity.” In short, marketing for its own sake. Or worse, marketing for the sake of marketers.

The true promise of technology in marketing is the ability to reduce the size of a target market down to the single individual. I call this “sniper marketing,” the ability to market to each targeted individual personally, using the right pitch, the right channel, at the right time, and in the right place, and do so in a way that makes the entire experience fun and meaningful.

What so much of marketing – even good marketing – remains, especially in China, is spray-and-pray: get in front of a whole lot of people in the hopes that, somewhere in that mass, is a subset of people who want to buy your product. All of the people reached who are not in that subset represent money wasted by the company, time wasted by the consumer inconvenienced with superfluous messages, and credibility wasted by marketers for touting campaigns that deliver anemic returns on the time and money invested.

We should applaud the creativity behind the campaigns on Jing Daily. But we should withhold our cheers, recognizing that these efforts were but a temporary stage in our efforts to do much better. Because companies are not going to put up with this type of activity for much longer.

It is time we evolve past this interim phase in marketing technology set about using the tools we have been given to downscale marketing so that we can conduct a million individually-targeted campaigns for the same money (or less) than it would cost us to conduct a mass campaign aimed at a million people. The result will be orders of magnitude greater effectiveness, measured in the only currency that matters: additional sales and deeper customer loyalty.

Anything less, and we are betraying the trust given us, and marketing will follow farriers and feather merchants into premature obsolescence.

 

Concept of the Week: Bio-luddite

Bio-luddite (n.) a person opposed to the introduction of new biological technologies, usually without regard to the scientific evidence regarding their safety.

Bio-luddism is nothing particularly new, but it is becoming more important as the rate of spread of biological innovations increases, as the rate of innovation increases, and as this becomes a matter of concern not just for a small number of markets, but for the globe.

China, which was one of the major beneficiaries of the Green Revolution, understands the value of genetic modification. What it has yet to do with any kind of credibility, though, is make a public case for the safety of genetically modified organisms separate from hand-wringing about the abuses of a small number of very large ag-tech companies. If the failure continues, bio-luddism in policy-making circles may eventually serve to slow or throttle competitiveness China’s biotech industry.

The Greenpeace China Coal Fail

Coming out of a long winter and into the pre-summer months (I daren’t call it “Spring,”), the season offers constant reminders to those of us living on the North China Plain* that China is far from solving its most serious air pollution problems. There are those, however, who live far outside of the Ring Roads who believe that things are a lot better and continue to improve.

Last year, ThinkProgress published an article under the breathless title “It Only Took Four Months for China to Achieve a Jaw-dropping Reduction in Carbon Emissions.” The article detailed a recent study by Greenpeace which noted that China reduced its coal use by 8% in the first four months of 2015 over 2014, resulting in a 5% drop in CO2 emissions. A Greenpeace analyst suggested that this shows that industrial output and thermal generation are decreasing, while use of renewables like hydro, wind, and solar are growing.

There are prima facie reasons to question Greenpeace’s excitement.

  1. Any reduction in coal use comes off of a very high base. China burned over 4.2 billion metric tons of coal last year, enough for two tons of coal for every living man, woman, and child in China, PLUS enough for three tons each for every man, woman, and child in the United States. While any reduction in the overall number is a good thing, China has a very long way to go.

  2. Greenpeace is using government data to support its narrative. Leave aside any general reservations about the Chinese government as a source of data: in this case alone, the government has an abiding interest in telling its people a positive story, and thus in massaging or falsifying the data. Greenpeace’s defense of the government statistics – that that the government gains nothing by revealing a drop in industrial output – is at worst inadequate and at best debatable, especially as the other side of those figures is the shift to the service sector. Further, I’d argue that the government is actually under quite heavy pressure to be seen to be doing something about pollution, and that it has much to gain by gaming the figures on coal use. When the source of your data has both motive and opportunity to play fast and loose with the truth, it behooves one to seek less intrinsically biased sources. †

  3. Similarly, there is no transparency as to methodology in collecting and analyzing these statistics, so we have no way of knowing if this came from a change in the way use is measured. Changing the way the game is scored is not an uncommon hammer in the Chinese statistics toolkit.

  4. There is no way to confirm or gainsay these statistics because there is no credible, disinterested third party with access to the information on which these statistics are based, or that can provide data from other sources against which to balance the conclusions.

  5. Even if we take these statistics as correct, there is little clarity as to what forces are driving the decline in coal use, so we are uncertain what caused them, and whether that cause is a one-off occurrence, a short-term phenomenon, or the harbinger of a genuine trend. If we do not look at wide range of factors, we cannot tell whether this was caused by uncommonly warm weather, a fall in the price of other energy sources, or a temporary decline in the economy caused by the shift from a manufacturing-based economy to a services-based one.

If this is not sufficiently convincing that China’s coal use statistics may be unreliable, at about the same time the Greenpeace report, New York Times correspondent Chris Buckley published a damning report of revised Chinese government figures that raised estimates of Chinese coal use every year since 2000 by as much as 17%. The culprit: “gaps in data collection, especially from small companies and factories.”

Greenpeace did not have to rely on government data. Researchers who dug deeper into the economy to come up with estimates, like Akaya Jones at the United States Energy Information Administration in Washington, came up with estimates that were apparently much more reliable than the government’s original figures, and far more so than Greenpeace’s.

We often criticize the Chinese government for getting statistics wrong. Playing fast and loose with critical measurements is wrong, but we expect no less from a political system for whom the truth is whatever serves the nation’s rulers. Greenpeace, however, does not get a pas.

Perhaps the organization just wanted to turn out a report on China, was pressed for time, and threw this together. I can only hope this is the case, because there is another, less flattering explanation: that Greenpeace did this in order to curry favor with the Chinese government, to show that it could go along to get along. If this is the case, it would not only be inexcusable, it would also represent a betrayal of the organizations mission, a betrayal of its stakeholders, and an abdication from its role as an environmental watchdog.


 

*- Or even those of us who USED to live there, return frequently, and have family there.

† Greenpeace itself has no lack of detractors who question the organization’s data on other issues. Whether those criticisms are valid or not is moot: by using a questionable source of data in a high-profile research paper without even flagging the potential problems, Greenpeace opens its methodologies and conclusions on a range of issues to re-examination.

 

The Other Wanda Question

Apropos of my post last week about Wanda, a quick thought.

One of the issues that remains a matter of our ongoing fascination with Wanda revolves around a series of important questions that remain largely unspoken: Do Wang’s purchases in the US constitute a simple diversification of his investments? Are they part of a strategy to globalize his businesses?

Or are we witnessing something quite different, Wang’s slow divestment out of China and the flight of his capital to safer havens abroad? And if not a flight out of China, is he at least shifting his money out of real estate?

The company bears close scrutiny if for no other reason than they are a harbinger of what is likely to be a larger trend, and understanding the forces that drive this trend are going to be essential in helping business address Wanda as a strategic challenge, and policymakers address it from a regulatory standpoint.

 

Cadillac takes on Tesla

Source: Cadillac has a secret weapon in its quest to beat Tesla at self-driving – The Verge

All very interesting, but it serves as a reminder that GM is still playing catch-up with Tesla in the space.

I’d still by a Tesla before a Cadillac, and I reckon I’m not alone in either the US or China. What about you?

Apocryphal, to be sure, but it suggests that the venerable marque has a brand problem that innovation alone will not solve. I suspect that winning in China will be critical for the future of the Cadillac brand, determining whether it keeps up with Lexus, or whether it struggles to keep pace with Lincoln.

Huawei’s PR Struggles

And so within the space of half an hour the Financial Review was shown the new and old face of corporate China.There’s paranoid Huawei that will not answer questions and refuses to explain itself in any detail to its stake holders around the world. Then there’s the likes of Green Valley, which represent a new, more open face to corporate China.

Source: Huawei’s epic PR fail | afr.com

This is an oldy but a goody, and I do not mean to pick on poor old Huawei: the organization is led by people for whom transparency and engagement are just not a part of the plan. This is not an especially Chinese failing: I have watched American, European, and Japanese companies build public relations organizations that were little more than beautiful stone walls.

I agree with reporter Angus Grigg completely: let us hope we see more openness from Chinese companies, rather than less.

What concerns me, though, is that for every wise, open, and transparent company that I encounter, I still come across a dozen more who believe that that the “new” face of corporate China is not private, independent, or entrepreneurial, but government-owned, government-subsidized, and expert at blowing smoke up the hindquarters of foreign journalists.

And of course, that’s not new: that’s a giant leap backwards in China’s evolution into a nimble, innovative, and commercial economy.

Which is why I talk so  much about public relations in China here. The degree to which a nation, and organization, or a company is prepared to institutionalize an ongoing, open, and wide-ranging conversation with its stakeholders has great predictive value about its success, and the degree to which we should feel comfortable dealing with it.

Wanda and Hollywood: Three Questions

The craft of filmmaking is a perilous one, a balancing act between the art of cinematic storytelling and capricious public taste. Overt inclusion of foreign propaganda would likely be a destabilizing ingredient in any film, just enough to turn a potential blockbuster into an expensive turkey, undermining a studio’s reputation in the process.

But facing a U.S. administration that is hostile to China (at least on the surface), Hollywood’s new Mandarins, in particular the squires of Wanda’s interests in The Business, must be prepared for three questions that are likely to arise in the coming months from either the public, a Republican-dominated Congress, or the new Administration.

First is a matter of US law. In what is known as the Paramount Decree, in 1948 the U.S. Supreme Court ruled on an anti-trust case against Paramount Pictures, a ruling that compelled the separation of motion picture production and exhibition companies. On its face, Wanda owning both production assets like Legendary and exhibition companies like AMC appears to be a potential violation of US Law, and Wanda will be required to explain why it is not.

The second question touches on the issue of whether films made by a studio owned by a Chinese company will produce propaganda. To this point, we have focused on Wanda CEO Wang Jialin’s promise not to turn the studio into a propaganda machine. For what it is worth, I believe that is Wang’s intention. But let us not forget that the Party still holds considerable sway over Wanda’s fortunes and its core assets in China. Wang’s best intentions aside, Wanda must prepare to answer this question: what will Wang Jialin do when or if Xi Jinping comes calling with an unrefusible offer? Can Wanda afford to decline the call of Beijing if that call should come?

And finally, a third question. We have, in the last forty years, taught China how to create everything from machine tools to smartphones, and Chinese companies now lead the world in the creation of those products. Motion pictures and microchips are not analogous, but what has ensured Hollywood’s continued global leadership in filmed entertainment has been an accumulated century of technical and process know-how that results in marketable films if not global entertainment phenomena. Hollywood as a whole must be prepared to answer: at what point will Hollywood have sold its Mojo to Beijing? And to what degree does the presence of Chinese conglomerates in Hollywood speed that process?

At the very least, these companies must have answers at the ready. Ignoring or dismissing them will only serve to convince potential opponents that there is more to Wanda’s motives than a good business deal.

 

Acronym of the Week: “HIPRA”

HIPRA, acronymHuge International Public Relations Agency, a term that refers to a public relations firm with over 1,000 employees or fee billings in excess of US$250 million.

These massive public relations corporations usually combine a broad global footprint with a headcount large enough to be able to service extremely labor-intensive PR work. These are firms like Edelman, Blue Focus, Burson-Marsteller, Ogilvy, Weber-Shandwick, and the like.

With Blue Focus, China has an entry in this list, and it is worth watching as BF looks set to grapple with Edelman for the title of the biggest, particularly as market trends are pointing away from the scale-based business model upon which both have built their businesses.

 

Yahoo and China, Part MCLXIV

Yahoo! office in Burbank, CA
Yahoo! office in Burbank, CA (Photo credit: Wikipedia)

In 2007, Yahoo agreed to pay millions of dollars to set up a foundation to aid Chinese political dissidents, after the company was accused of turning over information to the Chinese government. A lawsuit filed on Tuesday claims most of the money is gone, and little went to help imprisoned activists.

Source: Yahoo Accused Of Mismanaging Millions That Were Meant For Humanitarian Aid – BuzzFeed News

Yahoo! made billions on its Alibaba investment, and for many years could credit the Alibaba shares in its vaults for much of its market cap. For that reason, a lot of us would mark Yahoo’s efforts in China as a success.

It is probably too early to make that call. The full story of the company’s China experience has yet to be told, and now that Yahoo no longer exists as an independent entity, it will either be told now or buried for a long time.

But some things won’t die, and if this most recent lawsuit actually makes it to a courtroom, we may get to see the details of how successive generations of leaders at Yahoo used China to burn cash, divert the attention of company leadership, and destroy shareholder value.

Sadly, I’m betting this case will settle. Verizon doesn’t need the headache, and it really wants to get focused on turning its collection of Yahoo and AOL leftovers into something profitable. It is a shame: buried in Yahoo’s vaults lies the raw material of a China business “how-not-to” textbook.

 

Zhang Yimou, Race, and Chinese Film

We finally allowed ourselves to watch Zhang Yimou’s The Great Wall. I have seen worse films in the genre (I’d argue it was probably no worse than Cowboys and Aliens, for example.) The flick gave us an opportunity to resuscitate the debate surrounding Zhang’s choice of Matt Damon to play a lead role.

If Zhang made the controversial selection in order to curry favor with US distributors, what he did was no more or less objectionable than the creative compromises Hollywood makes daily to ensure success in the China market. Chinese auteurs are learning that they must not only contend with government oversight of their productions, but that they must also strike a balance between the aesthetic and the marketable.

Creative compromises are rarely good things, but they are an indelible part of the cinematic landscape until filmmakers no longer need to depend on others for finance, distribution, and marketing.

It is worth remembering that identity-shifting actors have been a feature of Chinese entertainment for many years as well. For centuries, men played the roles of women in Beijing opera. And to give a personal example: my Chinese father-in-law, now 87, spent much of his career as an actor playing foreigners onstage and in film. In fact, one of his career highlights was playing Canadian doctor Norman Bethune in “whiteface.” (There’s a picture around here, somewhere, and I’ll post it if I can find it.) I mention this because it points to a different set of sensitivities in China around matters of race and gender portrayal in entertainment than those to which we subject filmmakers in the US.

Indeed, Damon’s role may hint at a tiny crack of light in the otherwise depressing China media landscape. The very fact that authorities greenlit the movie with a western star playing a role that could have gone to a Chinese face, represents a tiny degree of forward thinking among filmmakers and censors in an industry where the forces of progress are fighting a rearguard action against reactionaries.

The movie itself aside, I would argue that we should see Damon’s inclusion as reflecting both an interesting creative choice on the part of the director, and a recognition on the part of authorities that China cannot build a globally successful film industry without injecting wider relevance into the subject matter.

The real concern, then, is not that we are going to see a decline in the number of leading roles for Asians in global cinema. Global demographics and organic trends in Hollywood suggest the opposite is as likely to be the case. The concern, rather, is that the Chinese are learning the rules of the market quite quickly, and that they will be contending with the Hollywood studios sooner than Hollywood realizes.

 

Did Apple and Uber make the right call on Didi?

Late last year I noted that life after Uber would not necessarily be a picnic for Chinese ride-sharing giant Didi. While an 85% market share looks unassailable, it will need a lot more money to secure its position.

I was prepping a post on why that is the case, but Dr. Richard Windsor at Radio Free Mobile beat me to it. Read the whole post. His bottom line:

Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.

Windsor believes that the only logical response for Didi is a change in strategy, but finds it hard to see how any strategic choices open to Didi justify its $34 billion valuation. Fair enough.

Now, second-order effects time. Uber and Apple are Didi investors. As I mentioned in December:

Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber [or Apple] will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.

If you are an investor in either Uber or Apple, and you count the company’s holdings in Didi as a part of the firm’s underlying value or future earnings, have a look at Windsor’s post. You may want to re-run your numbers.

The rule for disruptive companies in China, regardless of provenance, is this: your future depends on more than just being able to make a handsome profit off of disruption. You have to convince a host of powerful individuals and groups that China is better off with the industry disrupted than with the status quo.

 

Concept of the Week: SinoSkeptic

SinoSkeptic (or Sino-skeptic), noun. A person who harbors honest concerns – based on China’s stated policy goals and behavior – about whether China is willing or able to be a positive participant in a global community of nations, (as framed by the system of international institutions that has evolved in the wake of World War II,) or whether its very participation is by accident or design inimical to the intent of those institutions. Different from a “China-basher” or “Panda-puncher,” a person who paints China as an implacable foe based at least in part on that person’s ulterior motives.