Big Oil Can Say “No” To China

Yesterday, Shell and Unocal announced that they were pulling out of a project to explore and develop a natural gas project in the Xihu trough in China “for commercial reasons.” In isolation this is not a small matter. However, coming as it does one month after a consortium led by Shell pulled out of China’s critical West to East pipeline project, the announcement suggests that the rules of the game are beginning to change in China.

No More Business As Usual

Far too many companies come to China convinced that they must be here – and be seen to be a player in China – at any cost. Implicit in this approach is the deep faith that somehow at some time in the future the investment required to be a player will pay off (what author Joe Studwell calls The China Dream), and that failure to be a player in China will relegate one’s company to a second- or third-tier status globally in one’s industry (what should thus be termed “The China Nightmare.”)

The corporate casualties – in destroyed careers, wasted money, and deeply damaged companies – that came from this misguided thinking is such a matter of public record as to stretch credulity and to call into question the competence of the legion of otherwise very smart executives who have ignored it. And yet, in so many industries – autos, real estate, steel, beer, telecommunications, and an untold host of others – continue to behave as if business logic is suspended at the border and that in China it is sufficient “just to be here.”

So you will forgive me for hoping that the Shell and Unocal announcements are the beginning of a trend.

Something tells me that they do. The statement that they are bailing on the deal for “commercial reasons,” despite the considerable investments that both Shell and Unocal have made in reaching this point, are a clear signal to the folks on the other side of the table that the deal had better make sense, and that the days of paying just to be here are over.

Uh-oh. Now What?

Before we all get comfortable with the “self-high-fives,” there is a serious downside to consider here for China. Sinopec and CNOOC (Sea-nook), the two Chinese partners in the project who were (by third-party accounts) making the commercial terms for Xihu so unpalatable, are now left having to go it alone. Likewise Sinopec is left holding the bag for the West-to-East natural gas pipeline project.

This comes at a very bad time for China, and for the world. China’s growth is starting to draw in energy resources from around the globe at a rate that is exacerbating both perceived shortages and the increasing expense of bringing those resources to market. Given that China is still fairly early in its curve of energy usage per-capita, that demand will continue to grow. The country is trying to wean itself off of its huge dependence on coal (the country burns nearly a ton of coal per person per year) and imports of petroleum, and natural gas would help meet the growing demand coming from industry and housing.

In short, anything that slows China’s move toward dependence on cleaner fuels will simply increase the damage to its environment, and anything that raises China’s dependence on energy imports will drive inflation in China, will hurt the country’s competitiveness globally, and threatens an oil shock that will slow growth in many of China’s key markets.

Bleeding the Foreigners Doesn’t Look So Clever Anymore, Does It?

This is by no means a condemnation of Shell and Unocal – they did what they had to do, and they should be applauded for making smart decisions. Rather, this should be a warning to China – unless the government and industry in China suppress the desire to sop every possible penny from the foreigners, they will lose critical opportunities for genuine partnerships that will not only speed development, but will also avoid some unpleasant issues along the way.

China Radio International Gets Greedy: Branson Says “Sod Off”

Zach Coleman over at the Hong Kong Standard has brought to light the disgraceful denouement of the partnership between Virgin Radio Asia and China’s #2 radio broadcaster and global propaganda outlet China Radio International. He was good enough to quote me on record, but unfortunately I could not say all that needs to be said about this. So I will here.

I say disgraceful because it was yet another case of a foreign company coming into China, resuscitating a lousy property in an overlooked industry, turning it into a paying proposition, and just when they start to make money, wham! The locals change the terms of business so it’s impossible to turn a profit.

As I have long been saying to the three people who would listen (including my wife and 2-year old when strapped into a moving vehicle with me and no place to go), radio in China is an insanely undervalued medium. But in order for it to gain value, you need great (not just good, but great) programming, production values, and professional and engaging on-air talent. With all due respect to CRI, those are three things the state broadcaster has consistently proven it was unable to bring to the table.

Clearly, the move is stupid on several levels:

Stupid Level 1: Dead Goose, No Eggs: As Beijing Variety correspondent and Village Grouch Steven Schwankert noted, CRI essentially killed the goose that laid the golden eggs when all they had to do was sit back and count the money from the deal and spend their time on other things.

Stupid Level 2: Now CRI will have to spend money on its own program to replace it. So instead of taking in cash, they now have a cost center . And it will fail to meet the Virgin standard. And they will lose advertisers.

Stupid Level 3: They messed with the wrong dude, in my opinion. Call it coincidence, call it Karma. the fact is, people who piss off Richard Branson have a funny way of watching their businesses evaporate. Richard Branson is the spear in the side of British Airways. Richard Branson is the arrow in the heart of HMV and Tower Music. Richard Branson is the machine gun pointed at nearly every mobile operator in the world.

Businessmen around the world have learned: join this man, do not try to beat him. Mess with him, on the other hand, and prepare for Disruptive Innovation delivered with the force of vengeful fury. Full-body check on the business model.

Would You Buy a Used Stock from This Man?

Craig Karmin’s Wall Street Journal piece about Barclays PLC’s new China exchange traded fund is right on the money, if you will – without question Barclays just made buying a basked of Chinese stocks a lot easier. The question is, why would you want to? And why would you want to use this device?

Okay, first, the ETF is a misnomer – it’s not a fund. It’s an exchange traded security, just like a stock. But instead of the underlying value of that security being a share in a business – the value of which doesn’t change radically on a day to day basis – the underlying value is the value being the underlying value of a company, the basis is a basket of stocks. This by itself is, to someone who has rejected as so much oat bran the Efficient Markets Theories, is pretty scary.

What is worse, the underlying stocks are shares traded in Shanghai and in Hong Kong. To the extent that these are Shanghai shares, one’s queasiness at least extends no further. But shares in Shanghai? Shares that are traded and that are priced on an ongoing basis based on technical criteria or superstition? Shares for whom the opacity of their underlying companies is so great that it is impossible to get a bead on value?

Wiser people than I have unfavorably compared China’s bourses to casinos with 45 million gamblers. Amen. If you want a piece of a Casino, try Harrahs, or MGM Mirage, or even Wynn Resorts. At least you know you’re on the winning side of the gamble.

The Monster Screams for Coder Meat

An article in this weeks BusinessWeek recounts yet another embarrassment in corporate governance, the independent board report on Conrad Black’s reign at Hollinger International apparently was allowed by a weak board to do bad things for too long. Where will the next spate of revelations come from?

I nominate Redmond, WA.

So, on the one hand, we’ve got Microsoft Chairman and Chief Software Architect William H. Gates III telling the world that Apple doesn’t know what it is doing about digital media.

Meanwhile, Microsoft’s third major downgrade of Longhorn (an operating system that was originally supposed to add the kinds of advanced features that users of Mac OSX and indeed desktop distros of Linux) enjoy – in as many months has Mr. Softy’s spin-doctors working overtime explaining to the world that this is no big deal – such a painfully obvious untruth that even mainstream publications like BusinessWeek aren’t buying it. Industry wags are beginning to call the Microsoft’s Great Vaporware “Shorthorn.”

In what can only be called an incredibly lame apology, Greg Sullivan, a lead product manager in the Window’s client division at MS, told the Economist it was because its programmers were busy patching up Windows XP, thus producing the now globally famous Service Pack 2, which has turned out to be as much disease as cure.

BusinessWeek correctly points out that there is something seriously wrong at Microsoft R&D. Certainly, this would seem to be the case. But the entire fiasco begs three much larger, far more troubling questions about Microsoft.

1. What In The Name of All That Is Holy is Bill Gates Thinking? Why is the company focusing so much on trying to create an online music service and leading a PR war on iTunes while its core business (and a much bigger profit machine than music could ever be) is rotting on the vine in the next room? And did we mention that the service, after having all this time to look at iTunes and do it one better, has half the songs, a frustrating purchase/download process, and doesn’t support purchases from other sources? Again hopeful MS customers are left to pray for the future .

2. Why is a company that is hardly resourced constrained claiming resources as its primary constraint? That Microsoft, the richest company in the world (with the possible exception of Warren Buffet’s Berkshire Hathaway, a company that has refused to invest in Microsoft), is unable to deliver its promises – to execute credibly on its most critical product line, would rather send its shareholders a $26 billion care package than invest resources in expanding its OS development team, is unconscionable. I know good programmers don’t grow on trees, but it’s time Microsoft started recognizing that it needs to start narrowing its margins sufficiently to improve its execution. Recognizing, indeed, and publicly acknowledging the fact.

3. Is it not time to admit that rather than try to fix Windows, perhaps Microsoft should toss the old kluge out and start anew? Apple, a much smaller company, did it with OSX and came up with a rock-stable OS with stunning features. Rather than continue to invest more and more in fixing old code they’ve been kludging for a decade and a half, perhaps it’s time for Microsoft to start with a blank sheet of paper. The nauseating fact that Microsoft is now losing much of its critical forward momentum in its flagship software line because it’s plugging holes in old code is an embarrassment.

For years Microsoft has gotten away with this sort of thing because it has been able to meet deadlines. Now that is no longer the case. And it is high time for all of Microsoft’s shareholders to point vigorously to the very top of that enterprise and call to account the Last Sacred Cow:

Bill Gates.

It’s time he, as Chief Software Architect, answered for the horror that he has designed. The Beast has now turned on its maker. Either the maker must slay the beast, or be destroyed himself.

Sony’s Makeover

Sony’s Master of the Playstation is increasingly powerful at the House that Morita Built. He calls the company’s technology as its weakness. The streets of Beijing suggest that relevance will be Sony’s greatest challenge.

Today’s Wall Street Journal includes a great article about Sony’s attempt to save itself from the ignominy of commoditization . By appointing Ken Kutaragi of Playstation fame to head Sony Electronics, which makes up 70% of the Japanese giant’s business, the company’s leadership is making a move that will likely lead to the complete restructuring of the company.

Kutaragi correctly notes that at the core of the problem is the company’s need to regain its technology leadership.

But walking the streets here in Beijing and hearing the feedback from locals, there seems to be no question about Sony’s ownership of the technological high ground. But challengers are beginning to eat into that perception. PlayStations are under assault by Microsoft as the software giant invests more in marketing XBOX than Sony spends in all of its divisions in the PRC. Consumer electronics are being hammered by Samsung and LG who are focused far less on unique technology and far more on delighting customers with a vast variety of tightly targeted products. And in mobile phones, probably the single hottest part of the electronics market, more Sony-Ericsson phones are visible, but it is so far behind Motorola, Nokia, and Samsung that even local Chinese upstarts are beating Sony.

Really, for China the answer lies not in the technology, but in demonstrating that the products Sony brings to the market are far cooler, sexier, and more relevant than what rivals are delivering. Readers of this blog know I find “brand” an overused catchall excuse. Sony’s problem is not their brand – it’s the relevance of the company and its products to the Chinese.

Great technology and a powerful brand are terrific. But consumers can be wowed by both and still take a pass on your products. If Sony does not clearly demonstrate where their products fit in the Chinese home or business, they will find their vision of a digital future eclipsed by those being expounded by both foreign and local industry players.

Nokia’s Advertising

(Dateline: The Garage in Shunyi)
Sorry – am I the only one who finds Nokia’s “be entertained anywhere” advertising campaign with the band of clowns chasing an improbably amused Nokia user to be incredibly irritating?

More proof, if any was needed, that the Boys in the Glass House in Espoo have completely lost touch with their customers and are rapidly being sucked into their own navels.