Third Ring Road from the Silicon Hutong Desk, China World Tower 2

Not a bad day, really. One day, China World Tower 3 – 78 stories – will sit on the site of the building in the foreground, and in the background next to the grey tower on the right behind the freeway and on that big plot of open land will be CCTV’s new Miracle of Architecture. Nice view, while I had it. Now, of course, the Silicon Hutong Suite is right where all great tech businesses get started…in the Garage.

More Capital: Just What China’s Securities Markets Don’t Need

The Garage in the Hutong

China’s insurance companies, loaded with capital that needs to be invested someplace that offers either some security, relatively decent returns, or both, have now been authorized by the government to start pouring their capital into China’s A-share market.

Certainly, adding institutional investors into a market of largely unsophisticated punters could bring some much-needed stability into the markets, and would also create a class of investor theoretically able to compel better governance and transparence among listed PRC firms.

Apart from the macro-economic benefits, however, one has to wonder whether Chinese insurers as businesses are likely to benefit from the new regulation. Remember, these firms make the investments in order to secure their premiums and make a healthy profit from their investment. The abnormally high P/E valuations of Chinese issues, combined with a low level of transparency and governance, tends to argue that – in the short term at least – putting a significant portion of their capital into the A-share market will put that capital at risk. And putting too little capital in would fail to stabilize the market sufficiently to raise A-shares to investment grade.

Additionally, the government looks likely to retain controlling ownership of nearly all of the issues in the near- to medium-term, thus reducing whatever leverage the insurers would have over the companies and their governance. The government could essentially vote its shares and overrule the insurers.

What makes much more sense is to take steps to compel local securities markets to be more competitive, and give them the wherewithal to do so. Increasing the percentage of state-owned enterprises traded on the bourses, raising the limits for equity investment by insurers, and implementing (and enforcing) the highest international standards of governance (to be phased-in over a 3 year period) would do much to address the fundamental issues in the market. In the meantime, pouring institutional capital into an overpriced market with shareholders restricted to trading 30% the outstanding shares of 1,500 questionably-governed companies on a bourse that behaves more like The Las Vegas Strip than Wall Street is simply throwing good capital after bad.

Television Powershift from Hollywood to Redmond? Somebody, Please Wake Up Bill Before He Hurts Himself

Back in the Hutong
As a (what I thought) carefully controlled reaction to the megalomaniacal nonsense Bill Gates gave The Hollywood Reporter about the future of TV, I penned this little sucker for ChinaTechNews to underscore that Bill’s vision, even if workable in the U.S.A. (and I have doubts about that), is a long way from prime time in the World’s Largest Television Market.

Andrew Orlowski of The Register wrote a flat-out brilliant piece that takes gates gently but firmly to task for his delusions, and I quote:

“But Gates’ belief in interactivity is almost religious. An intelligent man with a zero boredom threshold, it’s no wonder he finds traditional broadcasting tedious and dull. As Gates tells the Hollywood Reporter, he hates linear assumptions.

Gates’ presumption that only stupid people can enjoy non-interactive TV is widely shared amongst technology evangelists, but it isn’t widely shared amongst the population at large, who simply clamor for better programs. The enthusiasm of the audeince during Jon Stewart’s Crossfire appearance, where he berated the format for its idiotic theatre, shows that people want better programming, not to click more.

But in addition to thinking mass audiences are axiomatically stupid – if you got a dollar for every time a technology enthusiast berated someone “not getting it!”, there wouldn’t be a pensions crisis – Bill also makes a another mistake. He thinks broadcasters are stupid, too.”

Assuming stupidity on the part of a potential adversary is dangerous. And after reading both articles it was pretty clear that Gates has sunk enough fingers in enough pies to be clearly looking to dis-intermediate everyone in the industry between the content creator and the content user. Which is fine – if you can find a better highway (a two-way highway, no less) between the two sides. But it looks increasingly like Microsoft is simply interested in building any highway, as long as the tolls go to Redmond.

This is not the old days, Bill. We’re not going to sit back and let you steamroller us into sending larger and larger chunks of our disposable income in your direction.

Are we?

Businessweek Prognosticates, Dvorak Preens

The Silicon Hutong Suite, Intercontinental Hotel, Singapore

John C. Dvorak writes a brilliant column skewering the recent Tech Future cover story in Business Week. You should read it yourself so I won’t spoil it, but one point he makes sticks out in the otherwise very good article for a bit of correction:

“[Business Week’s editors] seem absolutely stunned that, for example, companies like Dell don’t have much market share in China itself. This is somehow a shock, part of a global change that needs a special report. The fact is, buying a Dell, or any American-branded computer for that matter, in China would be like a Virginia pig farmer buying bacon from Argentina.”

While this reads nicely and provokes a chuckle, the analogy is not apt. It’s more like Argentine pig farmers buying Virginia bacon. Computers made by local PC companies, whether mom-and-pop do-it-yourself shops or even Lenovo, continue to lag their international competitors in features and quality. That difference alone is may not have been enough in the past – locals wanted a cheap computer, period.

But as Chinese begin to bring more knowledge to the purchase of a computer, many are opting to spend more for quality and features as a fight against early obsolescence. When you make a few hundred dollars a month, and you can spend a few hundred dollars more to make your computer usable for another year or 18 months, you are getting a good deal, and a growing number of Chinese understand that. In addition, the WTO and local production are helping companies like HP become more competitive in the local market by leveraging their global size to deliver economies of scale.

The evidence? Look at Lenovo’s financial results, and while they don’t break out numbers, look at the reporting of HP and IBM. Lenovo is losing ground in its own market, and HP and IBM are building steam. Dell’s recent abandonment of the consumer desktop in China has more to do with the company’s own execution than a general trend.

The locals’ home court advantage is slipping. Both Dvorak and BusinessWeek missed that.

How Green is my China

The Silicon Hutong Suite, Intercontinental Hotel, Singapore

Dan Reed wrote a very good piece in USA Today on the 8th about FedEx’s focus on China. I enjoyed the article (both generally and as a PR guy – their agency must be very happy with it) very much, but Dan was clearly reporting from Memphis. Several key points that could have balanced the piece a bit and made it more credible:

• There was substantial mention of UPS as a competitor, but apart from the matter of international flights, the real competitor that both UPS and FedEx face on the ground is DHL. The European-owned company has been open and in business in China for 18 years and has a far deeper penetration in the ground than FedEx. They leverage cargo space on other airlines, allowing them to focus their China efforts on building their local network, where they far outclass FedEx.

• There was no mention of the fact that FedEx was actually relatively late to China, leaving them few choices for joint-venture partners, which continues to beleaguer the company.

• Dan all but ignored the serious challenges FedEx and its competitors have in a growing battle with ChinaPost, and ongoing problems with customs clearance, security, and speed of delivery. Why is it that the U.S. Mail and Deutche Post get their packages from Amazon to me quicker than FedEx as measured from time-of-dispatch to arrival at destination?

• FedEx Kinkos is my office-away-from-office in the U.S., but I won’t touch them in China. Their few outlets are poorly located and dying of neglect, and the service is abysmal.

FedEx has opportunities in China, to be sure, and the company desperately needs its full scope of services. But they will not make a success of it here until they make substantial investments beyond airplanes and routes and significantly improve their offering on the ground in China.

The Coming China AgTech Boom

The Silicon Hutong Suite, Intercontinental Hotel, Singapore

Whenever someone gets enough of an adult beverage into my system and starts talking about the fundamental challenges China faces, he discussion eventually turns to the plight of China’s peasantry. All of the development in industry and services will be for naught unless some way can be found to bring prosperity to the 900-million or so peasant farmers that make up China’s rural population.

That millions – perhaps hundreds of millions – of those farmers will migrate to China’s cities is considered a given among “informed observers” of Chinese population trends – people like the Asian Development Bank, the World Bank, and similar government-organized super-national organizations (GOSNOs for short). The question that nobody can seem to agree on is how many of those farmers will be surplus to needs in Chinese agriculture (and thus will need to be absorbed in the urban workforce), and how quickly they will make that shift from rural subsistence farmer to urban migrant worker.

This question is no trifling matter. Setting aside completely the peasantry, there is a huge mass of urban industrial workers in state-owned enterprises that need to be shifted out of the inefficient state sector and into more efficient, globally competitive companies. Once they’ve made that shift, an entire system to provide for their social welfare has to be created, because the government and the SOE’s have been carrying that up until now. Nobody expects this change to be fast – it will take years.

NOW, add onto this the challenge of absorbing a rural population in cities already crowded with unemployed or underemployed workers.

It’s daunting. The clear answer is to drive rural prosperity. Quickly. Keep em down on the farm.

My soapbox, now as before, has always been to create an agricultural economy that is high value-added, labor-intensive, and resource (i.e, land, water, capital) efficient. Provide those high-value crops to the increasingly prosperous urban population in China, and leverage government investments in infrastructure and the growing foreign role in transportation and logistics to create a global export market for those crops.

Now it looks like China is starting to figure it out. In a recent article in the Far Eastern Economic Review, Andrew Browne and Lai Yang have demonstrated that despite policymakers preferences for agricultural self-sufficiency, local workarounds on land use and China’s entry into the WTO is allowing local farmers to tap the demand for cash crops, and move up into the nations’ middle class. They give stunning numbers. China now produces half of the world’s vegetables and melons. China produces four times as many apples as the U.S., and the quality is improving rapidly.

And American producers of apples, broccoli, and similar crops are hurting…while producers of maize, wheat, soybeans, sugar, and cotton will likely celebrate. There’s good reason for that: the U.S., with around 5-10% of its population engaged in agriculture, has consolidated farms and it excels at the mass production of grain, beef, and oilseeds. But even with migrant farm labor, American fruit is premium priced in Asia.

In the end, China’s policymakers will undoubtedly see the wisdom of horticulture and comparative advantage over seed security. But that brings up another problem.

The steps being taken by the farmers that Andrew and Lai Yang talk about are basic and their scale is comparatively small. What happens when cash-crop combines like the Longda group mentioned in their article become the official model for Chinese farming? Demand grows for key inputs, and you face shortages in water, land, transportation, refrigeration, etc.

Some of the issues:

  • Water is in critically short supply in China. Even the most optimistic estimates (government statistics) place China’s per capita water reserves at the minimum level required for a healthy economy. Given that reserves are likely much below those numbers, water is clearly a critical limiting factor facing China’s agricultural modernization.
  • Farms are some of the worst creators of water pollution in China. Current farming practices must be changed if this is to stop.
  • While logistics are making progress, the situation in China is still horrible. There is no supply chain less tolerant of mistakes than a cash-crop supply chain, and the country is just not there yet. Coastal provinces are addressing these problems, but until cash crops can be brought from the interior as well, the radical inequalities between the west and the east in China – a festering sore point with the non-coastal populace – will grow, defeating much of the purpose of agricultural modernization.
  • The supply of land available for agriculture shrinking. Cities are growing to accommodate the influx of displaced rural peasants. City dwellers are demanding a growing amount of space per capita. Suburbs are sprouting. Everywhere you turn in China demand for land for non-agricultural use is growing so quickly that the government has to inflict draconian measures to stop it.

In short, the move to cash crops is a great trend. But the leap to making it sustainable is going to require significant changes to the way crops are grown in China, including:

<> Techniques for raising crops with a minimum of water need to be adopted, adapted, and developed further. First, crop selection needs to begin emphasizing varieties that can be grown (or are best grown) in arid conditions. Some fascinating work in this area is being done in India at ICRISAT, but China absolutely must add arid and semi-arid crop research to its significant studies in reforestation. Indeed, a powerful case could be made that the focus of reforestation in China should be on sustainable cash crops for semi-arid environmens. There are significant opportunities here for businesses in consulting, equipment, fertilizers, etc.

<> Second, techniques like aeroponics need to be developed further to allow their commercial utilization before it becomes economically essential to do so. More research, but a clear need for the world’s leading developers of this technology to be here and be involved.

<> Wastewater processing for agricultural will eventually become a necessity. Yes, it’s ugly, and as a longtime China resident I have a hard time dealing with the possibility that my fruit is being watered by something unmentionable, or indeed downright dangerous. But the realities are that China, like India and many other nations in the world, will have to turn to the use of wastewater in crops for part of the agricultural requirements. China could start by endorsing the Hyderabad Declaration on Wastewater Use in Agriculture and turning to reputable international firms to help. The problem here, of course, is that China has just destroyed any near-term opportunities in this area by publicly infuriating a major foreign investor in wastewater treatment and disallowing a 15% annual rate of return on a treatment project. With all respect to the Chinese government, it is unlikely that any facility solely operated by – or controlled by – a local utility will reliably deliver processed wastewater of the kind of quality that agriculture would demand. China needs foreign firms, their technology and their management in this field like nowhere else.

<> Logistics needs to be addressed in two ways. First, clearly there needs to be government-private partnership, including foreign firms, in the creation of an effective system for moving fresh fruits, vegatables, and the like from anywhere in China to anywhere on the planet in time to have them arrive fresh at supermarkets worldwide. That’s a huge task and will require a lifetime of effort to accomplish.

Second, as in interim measure, processing infrastructure needs to be moved close to the point of harvest in order to be able to process the crops sufficiently to withstand (in some usable form) transportation to distant markets.

<> Postharvest physiology is another part of the solution, developing ways in the modification of plant breeds to help the crops maintain quality and prevent spoilage.

A premature focus on a potential solution that ignores the obstacles can create much larger problems than it solves in the context of a place like China. Anticipating the challenges – and addressing them – is a process that not only makes the solution viable, it also determines what areas China needs to focus on in developing technology.

Spending the national treasure on duplicating technologies that already exist is at worst an unconscionable waste, and at best an unsure bet on future returns simply for the sake of keeping the money onshore. Import substitution as a policy, however, has been out of favor for decades, particularly among countries with significant advantages to leverage.

Spending the national treasure, on the other hand, in green-field (no pun intended) areas of research and development that can propel the country beyond its greatest challenge is, on the other hand, a wise choice. And if it means that a few foreign companies need to make a healthy profit to get China there a few years sooner, where is the harm?