Pisney Dixar?

Back in the Hutong
Nursing a really gross case of Sinusitis.
1420 hrs.

Amid all of the coverage coming out of the U.S. on Disney’s annexation of animation studio Pixar is speculation about how the musical chairs issue among the executives will play out, what will happen if the next film is a flop, how long before Jobs becomes kommandant of Mouseschwitz, and whether the colors of the Disney logo will change to rainbow.

You know, the usual sorts of things reporters write about when 500 other reporters have covered the story before them, their editors are banging on them to run something, and they need to come up with a different angle just to be different.

It’s a genuine shame our perspective-challenged media hasn’t yet asked the newly combined company “so, guys, what about the quarter of the planet that neither of you has much impact on?”

It’s probably a good thing, too, because some embarrassing answers would come out.

The truth is, none of the executives involved in this merger a) understand China, b) have business that are doing all that well here, and c) appear to even care very much if China exists except when they’re traveling in the region. Recall that:

  • Pixar has no presence in China. None. Zero. Nada. Zip. Of course, to the guys in Emeryville, the phrase “far east” probably makes them think about Stockton, or Merced.
  • Apple (peripherally involved) who just replaced their local leadership AGAIN, has so consistently lost brilliant opportunities in China over the past 15 years that I wonder if ANYONE in business, government, or the media take them at all seriously. Now remember – I say this as a near-fanatic Mac user and evangelist. We have 3 Macs and 2 iPods and swear by The Gospel According to Stephen. But Apple China is a tiny operation, there is no Apple store in China, and no Mac ads anywhere. This is, of course, despite having an OS that handles Chinese characters (and installs in Chinese) brilliantly, a loyal following, and people with the ability to spend. Jobs doesn’t get China. Full stop.
  • Disney? Some good progress recently, but Bob Iger proved himself a pretty broken China hand when, after having just opened Disneyland Hong Kong alongside Chinese Vice-President Zeng Qinghong, he told Keith Bradsher of the New York Times that unless the Chinese government started granting Disney some TV access, there would be no Disneyland Shanghai. Nice job, Bob. I’m sure that scared the hell out of the guys in Beijing. You tough guy, you.


So forgive us, dear American cousins, for not managing much more than a passing glance at this latest megamerger.

An American Investment Banker Bamboozled by China

The Silicon Hutong Suite
Holiday Inn Darling Harbour
Sydney, Australia
2200 hrs

If you haven’t seen enough train wrecks today switch over to the Australian Broadcasting Corporation’s showing of “The Men Who Would Conquer China.” Mark Bakal, New York investment banker who made his name and fortune revitalizing former state-owned assets in former communist countries.

It’s a ton of fun to watch Bakal swoop into China with the tactics and toolkits honed in eastern Europe, where regimes had collapsed leaving enterprises with little alternative but to sell, and try to bully and cajole organizations like the Bank of China into doing business his way.

It’s a blast to watch his designated Hong Kong “partner” (read “compradore”) squire him around to meet and greet with very senior officials, only to have Bakal come across as patronizing and condescending, embarrassing.

It’s a delight to see this guy, who is supposedly a millionaire, fly from New York to Hong Kong squeezed into coach and then refuse to put up $1,000 for his share of the company setup costs.

Not to mention his inability to say “Nanjing Lu.”

He makes SO many mistakes that I can’t keep up. Check it out, though. Ranks up there with Mr. China as a warning to all of those folks who buy the hype and figure they can just parachute into China and make millions.

America’s Weakness: The Coming Power Transfer from East Coast to West

Returning to the Vision that Brought Me Here
0019 hrs.

The Grouch is back from the U.S., and his tales of our mutual homeland leave me worried for the future of the nation. My three week trip to America Norte last September, driven by a desire to allow my mother to get to know her grandson a bit better, left be with an ill-defined foreboding. Initially, I wrote it off as little more than the disgust – nay despair – of a lifetime Republican who has watched The Party of Lincoln sold off in bits to wildcatters, fundamentalists , and robber barons.

But The Return of the Grouch has confirmed for me that my concerns were more general in nature. This goes deeper than Bush and his cronies and the war in Iraq – it goes to the hubris, the introversion, the moral collapse, the loss of purpose. If I were called upon to describe America today, it would be a nation that from all accounts feels like it has lost its way.

And yet, I remain decidedly optimistic.

Because what I think we might be seeing is the end of an era in America, not the end of America.

Let me explain.

Vision Quest

I spent the summer of 1985 in a fourth-floor one-bedroom apartment in an old building at Haste and Telegraph in Berkeley. I was there to take the cram session in Mandarin at Cal (two semesters of Chinese in ten weeks flat), and if that’s all I had taken away from that summer, that would have been enough.

The rigors of the course, long, solitary hours, the immersion in Chinese culture, and a view that took in a vista that included San Francisco, the Golden Gate Bridge, the Bay, and Mount Tamalpais from the huge windows behind my Kaypro 4 computer made a combination as remarkable as that of any drug. The whole summer was a bit of a vision quest, three remarkable months that set me on my life’s course and that left me completely changed.

On a late but sunny summer afternoon made cool by the breezes through The Gate across the bay I was struck by a vision of an America remade, a nation wrested out of its slumber by the economic onslaught of Dai Nippon and invigorated by Four Little Tigers and a Waking Dragon. And the clearer I saw this vision, the more I realized that the power structures guiding America, those that C. Wright Mills, F. Scott Fitzgerald, and Tom Wolfe described so eloquently, would never, NEVER get it.

I realized at the age of 21 that the foundation upon which American society, power, enterprise, culture, and martial thinking had been built for over two centuries was based fundamentally on the assumption of a world where the decision makers clustered around the North Atlantic ocean.

This is not simply a matter of geography – this, as anyone who has spent any time on both coasts of the United States will agree, is a matter of two radically different cultures.

And the cultural crucible that has produced ten generations of American leaders is no longer relevant to the nation. It has been so for a while, but Japan’s rise from ash-bucket to economic ass-kicker was the first sign that something was wrong.

I have to give it to the Eastern Establishment – they pretended to get it. They wrote and read books. They joined The Asia Society. They made trips to a place they still called “the Orient.” And they mouthed the same platitudes about the rise of the Pacific.

But they never realized that the emergence of Japan, then China, then India, meant that the Rules of the Game they and their families had played since the Mayflower were wrong. Even when their good buddies in Europe flipped them the bird over Iraq, they didn’t get it. Over the last quarter century, everything they knew about America and themselves went from right to wrong. All of the reasons that the people who have led America for 250 years have been allowed to run the show no longer make any difference.

(This is what Tom Barnett calls a “rule-set reset.” Big time.)

The conclusion I reached in this moment of clarity two decades ago was that IF America was going to play any kind of role at all in the New, New World Order, at some point the Eastern Establishment would lose it, and a Western Dynasty would have to rise to displace it.

America could no longer be run from the towers of New York, led from the marble halls of Washington, and taught by the ivy-covered brick of Boston. No way.

San Diego – LA – San Francisco – Portland – Seattle would replace Boston – New York – Philadelphia – Washington as the new axis. I-5 trumps I-95.

Pac-10, not Ivy League.

All those guys back East would slowly fade away. In their place would rise Out West.

Yeah yeah, I KNOW you’ve heard this all before. Lots of people have.

But were they really listening? Were they – are they – tuned into just what this is going to mean?

So I think back to my vision that day in Berkeley, and I think that maybe, just maybe, we’re seeing the ending of the old before the new emerges. This is NOT the decline of the American Empire – it is the fall of The Atlantic Empire. This could mean the end of America as a world power, not so much militarily but socially, economically, culturally. I’m not talking about the end of American socio-econo-cultural hegemony – that’s dead anyway, regardless of what Tom Friedman has to say about McDonalds.

If those of us who GET the new Imperium Pacifica step up and start talking about this, we have a chance to ensure that America as a distinctive, prosperous nation has a chance in the near future. Otherwise, it will go the way of the establishment that has led it.

China Wants to Build an Airliner…Again…

Expanding on my Airliners.net forum Post
In the Hutong
2006 Hours

As if it were engraved on two stone tablets, the Telegraph is reporting that:
China is launching a direct challenge to Boeing and Airbus for dominance of the global aircraft industry, aiming to build its first mid-size passenger jet within a decade.
Reality Check time.

China will eventually build such an airliner. The only questions are: when will they build one, at what point would such a venture be locally if not globally competitive (based on price and operating costs), and at what point China can catch and surpass Airbus and Boeing.

Eight-and-a-half Reasons Why The Odds Are Against This

Any of the above is, of course, a matter of opinion or informed speculation. I’ll resist the temptation to venture an opinion, but will instead throw a few facts out for everyone to consider:

1. No Experience: China has yet to design, build, and put into revenue service a transport aircraft that it has designed, developed, and manufactured on its own. The Y-7, a locally assembled Antonov An-24 derivative, is being phased out of passenger service, and in Beijing is usually only seen in freight-only configurations. The Y-8, another Russian turboprop, is suitable for little more than hauling cargo. Frankly, I go out of my way to avoid being stuck on a Y-7 – they’re apparently little more than flying cement mixers.

They still can’t build their own jets. They certainly couldn’t build a good MD-80 by themselves. They needed a very high percentage of expensive, imported talent to help build it up to Douglas’ quality specs. At peak, Douglas had 150 expatriates living in Shanghai working on the MD-80, and an untold additional number making regular trips from Long Beach.

2. Bad precedent: A range of government-sponsored ventures have been announced with great fanfare in the past, and all of them have passed into history before going into full production. The abortive Y-10 (a 707 knockoff) got the furthest, and the AVIC I and AVIC II Trunkliners never made it off the drawing boards. In all cases, the ultimate reason for discontinuing these ventures have been that despite whatever prestige benefits these ventures might bring, the price tag was too high for the central government to carry in light of its revenue challenges and the multitudinous demands placed on the national budget.

3. A Toothless Sponsor: The current initiative was announced by COSTIND. Even if this were a politically powerful organization, this project would require the go-ahead of at least one ministry and of the State Council. COSTIND will have much to prove to the higher-ups, most of whom are looking for more cost-effective ways to build national prestige while at the same time solving some very real and much more serious challenges – severe environmental degradation, bankrupt banks, a looming health-care crisis, and an educational system that lags even India’s.

But COSTIND is a bunch of leftovers, a dog’s breakfast of functions that mix the military and civilian. While COSTIND stands for Committee for Science, Technology, and Industry for National Defense, its real power originally lay in its position under the Central Military Commission. No more. In the government reorganization of 1998, all military related research and development projects were vested in the PLA’s General Armaments Department. COSTIND was left as a civilian agency with military pedigree overseeing the 10 SOEs manufacturing armaments. While this may suit it to try to convert fighter-plane production to building airliners, it doesn’t give it much knowledge of the business of designing, building, selling, and servicing airliners in revenue service.

And while we’re on THAT topic, let’s look at China’s fighter plane business. Apart from the fact that China’s SOLE recorded arieI victory in 30 years was Wang Wei’s suicide lunge at a lumbering whale of a US Navy surveillance plane, building advanced fighter aircraft remains a challenge. This is why the first two Su-30s built in China had to be completely rebuilt, and why locally made fighter planes make up a shrinking percentage of China’s true first-line fighter capability.

4. By 2020? Forget it. Note that not even COSTIND thinks this will land on the national agenda before 2010, and even then only to begin research and development, which we can expect to take at least a few years. This was a little factoid the Telegraph missed, even though it was covered nicely by China Daily.

5. We’re No Innovators: Local state-owned enterprises have proven that while they may be able to make a jump into a high-technology industry by developing and producing a product, they have not had equal success at turning such ventures into real businesses. China is making money in cars because of foreign help. The nation developed a local microprocessor, but it’s 4-5 generations behind the industry and they’ve yet to sell it. No other country in the world is taking up TD-SCDMA, China’s locally developed 3G standard, and the local carriers will roll it out because they’re being forced to do so. Even the local computer components and ODM business relies on American/European technology and management from Taiwan and Hong Kong.

6. Prestige and “Face” are not enough. As the cancellation of the Trunkliner, debate over the cost of prestige projects like the new national opera house, the CCTV tower, and dozens of others, the prestige argument has pull only if a decent economic case can be made, or if a project has presidential/State Council patronage.

Sure, designing and building a prototype would be a matter of national prestige. But if the plane flopped in the market and wound up being a hangar queen, the prestige would evaporate, and the cooler heads in Zhongnanhai understand that.

7. Cheap is not enough. Jets aren’t underwear, in that the cost of the item is not limited to the purchase price. If the quality stinks, the total cost of ownership rises through higher maintenance, higher fuel costs, and the attendant probability that lower-quality aircraft will turn into very expensive smoking craters.

8. China needs bigger planes, China’s biggest problem in the long term will be crowded airspace. If you want to see the future of Chinese aviation, look at Japan – almost all domestic routes will be using large jets to handle a growing percentage of the nation’s immense population taking to the air. Personally, I’d bet my first flight on an A380 will be Beijing to Guangzhou.

8-1/2. China has ZERO competence in critical subsystems. Huge chunks of these aircraft involve the kinds of technologies that are simply beyond the ken of Chinese industries right now. China can’t make turbine or turbofan engines, composite materials for hulls, complex avionics suites, or a host of other subsystems. Nor do they demonstrate much competency in other areas – including automobiles, in integrating them.

What’s Really Going On

Don’t get me wrong: if Airbus, Boeing, or both fall asleep at the wheel and stop innovating, they’re in big trouble. Long term, the only hope Boeing and Airbus have is to move the needle faster than the Chinese can catch up.

But somehow I don’t think they’ll drop the ball. The two of them are goading each other heavily in an intensely competitive market, and they have Embraer and Bombardier nipping at their heels.

Here’s what I think is happening.

COSTIND’s bureaucrats may be a lot of things, but they’re not stupid, and even if they were, the senior policy-makers in government are not. After canceling half a dozen major airliner projects in the last 20 years, they’ve gotten very good at it, which means they have a clear understanding of the technical, management, and commercial obstacles to creating a viable airliner.

This is the first and most public volley in an effort to get Boeing and Airbus to decide to produce A320s or 737s in China so as to prevent China from becoming a competitor. China will ratchet up the heat between the two with a promise for a gigantic airplane order, and the two companies will fall all over themselves for a chance at that order – even down to promising technology transfer of their family jewels.

And nothing would be worse. Because all Boeing and Airbus have is their technologies, and China never has been shy about appropriating those. I can think of little that would frighten me more as a shareholder or executive in either Airbus or Boeing than the prospect of going into business with COSTIND and its stable of defense factories. Come to think of it, given China’s propensity to take advanced technologies and go looking for a way to put them into military applications, I can think of nothing that scares me more period.

Airbus and Boeing have the fundamental strength to hold out against any ridiculous demands China makes, because China does eventually have to come to them for the aircraft that will keep the Chinese economy running.

I only hope they know that.

Sending a Boy to do a Man’s Job

I have no idea of the personal qualifications of Mr. Ambrose Evans-Pritchard, the gentleman who filed the Telegraph story. But I can say his credulity on both China and aviation suggests that his editors have little business assigning him to cover either.

— He quotes only a single “senior Chinese aviation official.”

— He questions not a single statement.

— He says that “the aircraft project makes commercial sense” but he doesn’t examine the commercial issues. He doesn’t ask whether or not such an aircraft can be competitive to sell or operate. He doesn’t mention that at a $3 billion price tag, they’ll need to sell 200 of them just to break even. He doesn’t ask if the airlines want this aircraft. In other words, he demonstrates not one whit of understanding of the economics of aviation.

— He mentions China’s ARJ21 regional jet. What he doesn’t mention is that both Chinese airlines and airlines around the world have thumbed their nose at the project, with a grand total of 35 local orders on the books – a flop in the making. He even notes that plane’s plans aren’t even finished, but misses the standing commitment to fly the thing by summer. Nor does he mention that even this relatively simple little jet needed GE to build the engines, Antonov to design and build the wings, Rockwell-Collins to make the avionics, and other international firms to make the landing gear, hydraulics, fuel system, electrical system, fire suppression system, environmental controls, flight controls, lighting controls, tires, and brakes. Basically, China is making an aluminum tube and some seats, and everything else is coming from elsewhere, and they STILL can’t sell it.

— Finally, he mentions that Beijing got Airbus to “commit” to plans for a Chinese assembly plant that could entail a major transfer of technology. WRONG. Airbus agreed to study the concept only. No commitment was made.

— He also notes that Airbus’ “commitment” was a quid-pro-quo for an order of 150 A320s. Of course, he doesn’t mention that a month earlier Boeing took a similar-sized order for 737s without any such commitment.

But that’s what passes for journalism when covering business in China. Some people will question anything that comes from a British or American bureaucrat, but if a Chinese says it, it must be believed.

How Do You Translate “Phyrric Victory” Into French and Chinese

In the Hutong
1021 Hours

So the owners of New Silk Street have been told by a Chinese court that they shouldn’t allow the sale of cheap knockoffs of Chanel, Prada, Burberry, Gucci, etc. A VICTORY for the forces of all that is good.

The courts award damages of $13,000. Oooh. Now there’s a deterrent.

All of these major international brands actually GET someone in law enforcement in China to gather evidence. They hire lawyers. They go to court. They spend legal fees, valuable management time, and use their ultimate weapon – the courts – to get the most notorious purveyors of knockoffs in the city to cease, desist, and pay damages.

And they get $13,000.

As Philip Lin at Pacific Epoch points out, the fake goods are still available, but they’re just stuck in the back room.

Philip asks, not facetiously, I think, whether this case and Starbucks’ victory in Shanghai marks the beginning of a new era in IPR protection in China.

I’d say no. Until there is a demonstrable, long-term trend of these verdicts with pirates and counterfeiters having to shut their doors, their goods burned, their bosses packed off to prisons, and any officials that covered for them reprimanded or sacked, this is ought more than window dressing for China at the WTO.

But a much less noticed case holds the promise of greater things.

China Telecom’s broadband portal ChinaVnet has been sued for by a local film company, Ci Wen Films, for copyright infringement for running Tsui Hark’s film Seven Swords on the Internet without permission. Frankly, this is the case to watch. Intellectual property protection will become a national priority in China when local companies begin losing their shirts to counterfeiters and pirates.

If You’re Going To Go East, Young Man, Don’t Wait for Someone to Buy Your Ticket

Hutong Bound
2011 hrs.

It seems like every week or so I get an e-mail from a young person who is interested in finding work in China, and sends me a resume asking for my help. Nearly all of them are well-mannered, articulate, and well-informed about the region. I’m always happy to help.

But what I have discovered is that a large percentage of the class of 2005/2006 are not willing to actually come out here to seek their fortune. They would rather wait for the offer. I once thought that way, and it was the biggest mistake of my career. I’ve discovered since that the right thing to do would have been to get my ass on a plane and come out here – it would have saved me at least two years of scraping by, living in the guest room of a friend’s house, and working in jobs with limited prospects.

I want to help others avoid that, so this is the advice I gave today to one recent correspondent:

Not sure if I ever told you this, but between 1993 and 1995 I spent nearly two years trying to find a job in China from my home in California. I sent out 500 resumes, shook the guanxi tree, even published a quarterly China business newsletter. When I finally got a bite (from a newsletter subscriber), it was enough to get me over to China, but not the ideal job. Once here, however, I’ve never been unemployed for more than 60 days.

The primary reason for this is that most hiring decisions for China and Asia positions – even for multinational companies (PR, advertising, and others) – are made on the ground here in the region. If anything, this is more the case now than it was a decade ago, as most firms have so expanded their operations in the region that the Asia HR function is managed separately.

Because there are a decent number of applicants in the region, companies will only pay your airfare and expenses to come out for interviews under exceptional circumstances. Doing so is an expensive, high-risk proposition, and most companies choose not to take it. What this tends to mean is that if a company has to decide between two candidates, one in the US and one close by, the one already in the region gets picked, even if the one here is slightly less qualified.

On the other hand, executives and HR directors give high regard to someone who has come to Asia under his own steam. They tend to think that it demonstrates a commitment to the region and a high degree of personal initiative. The importance of initiative should be pretty self-evident. The importance of commitment cannot be understated. I can’t tell you the number of young people who get hired, come out to Asia, spend 24 years here, then decide “you know, I want to go back to the US and go to graduate school,” or “Asia is just not for me,” or “I’m afraid of being pigeon-holed as a China or Asia person, and the effect that might have on my career.” While understandable (except for the pigeon-hole case), such issues are frustrating for companies who invest heavily into the training and development of a young executive, only to see that individual pack it in and head back to the U.S. at just about the time they are starting to deliver a return on this investment. Commitment, therefore, is increasingly critical.

Trust me, I understand how difficult it can be to leave behind a secure home and 3 squares a day to do something like this. But even if you just manage to line up a couple of weeks of meetings and interviews, the price of a round-trip ticket on Air China or Northwest and a few nights hotel is well-invested. One young lady I now was finishing up at the University of Washington two years ago, and had been working as a waitress and a trainer at a national casual dining chain. She got a couple of weeks off of her job during the vacation, about a month before which she sent out a bunch of resumes, following up to line up meetings. By the time she got here, she had a full card of interviews. We didn’t quite hire her on the spot, but close. She came back, did an internship for 3 months, and we hired her. She was promoted within 18 months, and now heads the research department at B-M China.

Again, my goal is not to lecture, but to help set your expectations and to provide you with how I think you might best go about landing a job here. You may well be successful getting hired from where you sit, but I can say that the percentage of young, non-Chinese entry-level managers who get hired from the U.S. is small compared to those who are hired from here.

I’m not sure how he’ll take that, but I’m hopeful. Because I get a call or email every ten days or so from a friend or acquaintance who is looking to hire people like this.

Silicon Hutong 2.0

Freezing The Tuchas Off
1945 hrs

Coming into the new year, I thought this would be a good way to express why you haven’t seen or heard anything on this forum for the past couple of months.

A Blog is a business venture. If you do it with no clear idea what you are offering and what you personally want to take away from it (even if that idea is subconscious), you will fail. After a pretty good start I was flailing a bit, and I realized I needed to find a voice and a focus that would allow me to meaningfully join the chorus of blogs all singing about different aspects of China.

So over the past two months I have meditated intensely on this subject, and was on the verge of a conclusion, but I needed an outside opinion.

So I hunkered down at TGIFridays across from St. Regis with Will at ImageThief and, over salads and burgers and accompanied by our long-suffering spouses, we talked about what he thought Silicon Hutong should be and what I wanted it to be. As usual, his clarity of thinking was invaluable. Will is a former colleague, a fellow diver, and someone I knew would mince no words in his feedback. He did not disappoint.

Silicon Hutong is not going to try to cover life in China better than ImageThief and ESWN, is not going to cover politics better than SimonWorld or The Peking Duck, power politics (and a lot of other stuff) better than Musings Under the Tenement Palm , or media better than Danwei and the hundreds of blogs that focus on those issues in China.

Instead, Silicon Hutong will focus on what I do best – that special breed of business iconoclasm that is focused on destroying misconceptions about China and business. Topically I’ll naturally gravitate to the industries that interest me – I.T., media, mobile telecoms, entertainment, consumer electronics, aviation, and agriculture – but will occasionally wander if it makes sense.

Your feedback – positive and otherwise – is always welcome.