Alibaba: Building a Fire with Yahoo! Money?

In the Hutong
Watching the American Choppers Behind the Scenes Special
2127 hrs.

Jack Ma told the Search Engine Strategies Conference in Nanjing last week that he has basically redefined the phrase “burn rate.” Less than a year after Yahoo! handed over it’s China operations and a $1 billion check to Alibaba in return for 40% of the company’s stock, and he’s already spent $750 million of that.

Let’s call it 9 months since the deal was announced. That’s $250 million a quarter. $2.7 million a day, 7 days a week, for nine months. At this rate, the entire billion will be gone by the end of the summer.

Hey, Pizza and Jolt Cola are Expensive in China

Now granted, he says that it’s been spent on research and development and “other projects.” But without casting any aspersions or making any accusations, nearly any CPA or tax lawyer you talk to will tell you that both of those categories can (in practice) be interpreted very broadly. And the company is looking at further investments.

The first question that leaps to the top of anyone’s mind is okay, where did the money go? I’m not sure the general public will ever get to know, that it is really any of our business, or that it really matters anyway. It is entirely likely that everything is above board, as we have been given no reason (except for a monstrous sucking sound) to think anything is amiss. Yahoo! and its shareholders are certainly satisfied that their money has been well spent. Because if they weren’t, they would be calling for a SWAT team of forensic accountants to drop in with their arsenal of tools and start following money trails. Frankly, as a minority shareholder, I’m not even sure what rights Yahoo! has to even do this much.

But again, this is a diversion (albeit a titillating one for corporate scandal fetishists) from the real question.

That’s Funny. The Site Still LOOKS The Same…

Where’s the return on investment? Where are the tangible results of the spending? Because remember, $750 million was more money than it took Google to get where it is today. It would have bought MySpace nearly three times. And it would have bought outright a dozen promising, profitable companies in the online or mobile content space in China.

Was the money spent on research, development, and “projects” that will eventually wind up adding value to the company, to the Yahoo! brand, and providing a more valuable service for customers? Is the money going to show up in the form of unique services, powerful new features, and cool tools that are going to thrust the company out ahead of Baidu, Google, and everyone else?

Ask Not For Whom The Clock Ticks…

For the sake Jack Ma and his reputation, I sincerely hope so. For $750 million dollars, Mr. Ma is now under a lot of pressure to come up with a game-changer, a business that is going to disrupt the rest of the search sector and become the equivalent of a Google or a Microsoft in the PRC. Time and money are running out, and the industry is moving ahead. Mr. Ma has proven himself an astute dealmaker. What remains to be proven is his ability to actually run a business.

The stakes are no less high for Yahoo!, for whom the count is now stands at 02 in China. Having failed with their first stealth entry strategy, they paid a small fortune to buy search technology firm 3721 and place it’s founder in charge of Yahoo! China. When that gambit came apart less than 18 months after the ink had dried, Yahoo! spent a year looking for another solution, and found Alibaba. What is at stake now is whether Yahoo! will have a business in China at all.

Yahoo! has some exceptionally smart people on the payroll. If it fails in China after three costly, high-profile attempts while its rivals continue to bootstrap their businesses into moneymakers, those smart people are going to have a lot to answer for when they face their shareholders.

Borigami becomes eXboX

Jingshun Road, Nasty Traffic Because They’ve Closed the Airport Expressway for a VIP Visitor
0900 hrs.

As suggested recently in these pages, Microsoft would we well advised to give up reinventing the iPod wheel with it’s Origami product and instead putting its efforts toward morphing the platform into a portable XboX.

Well, according to Good Morning Silicon Valley today, that’s apparently what Microsoft is doing. The Softies have shifted some strategic resources into the effort – all the top people from their gaming side – and are working with the boys from Transmeta on architecture. GMSV says this is clearly a high priority project in the organization.

Now all they have to do is come up with something that kicks the PlayStation Portable. As the Sony tightens up its software to shut out hacks and tweaks that are the delight of so many key users, MS has an opening to exploit. Now the only questions are “when?” “what?” and “will the darn thing be any good on the first go around?”

All of this underscores our thinking on Origami – it is not a product, but a platform around which to create products that focus on niche markets. To see Origami – and ultraportables – as anything else will be to watch them all join the Newton, the Betamax, and other products at the bottom of The Chasm between early adopters and the mass maket.

The Airbus Gambit, or the Beginning of the End of Civil Aviation As We Know It

In the Hutong listening to Israeli Hip-Hop and Dao Lang
2047 hrs

Thumbing through the March issue of Esquire magazine, I came across an advertisement for Borders Books and Music. The ad was a listing of collections of great songs of musical legends. Alongside names like Stevie Ray Vaughn, Johnny Cash, Willie Nelson, Bruce Springsteen, and Janis Joplin I noted with distress the title of an album called “The Essential Kenny G.”

As I said earlier this evening to the Imagethief, no matter what you think about those artists, you have to admit to hearing that old Sesame Street jingle “one of these things is not like the other, one of these things just doesn’t belong…”

And so the music lover in me is choked with a single question.

Why?

The Airbus Problem

Which brings me, in a roundabout way, an even bigger stumper:

Airbus.

Airliners.net Photo ID 0916955:
Air China Airbus A320-214
Click photo for large version!

There has been considerable talk in the mainstream press recently suggesting that Airbus is apparently in the final stages of choosing a site in China to build an assembly line for it’s A320 series of single-aisle aircraft. Airbus have apparently also agreed to set up an engineering center and employ 500 engineers in a venture with China Aviation Industry Corporation (AVIC, both AVIC I and AVIC II ) to do work on Airbus’ newest project, the A350 long-haul twinjet. Finally, they’ve agreed to raise their level of component purchases from China to $120 million a year by 2010.

All of which makes me ask: why? What does Airbus hope to gain?

Five Reasons to Take the Plunge

Ken Kedl, the well-spoken China strategy consultant, suggests in a recent podcast that there are five primary motivations for a company to make a major move into China: customer pull, attractive market, competitive threat, operational efficiencies/cost savings, or stakeholder push.

Let’s look at these in the context of Airbus’ effort to move onto the ground in China.

It can’t be customer pull – the airlines appear to be happy buying aircraft manufactured in Europe. It doesn’t cost much to ferry a plane from Europe to China, and each delivery means a bunch of airline guys get a free jaunt to Europe on the company tab. Plus, you have the assurance of all of those well-paid, technically outstanding European engineers building your plane, rather than a guy who a year ago was patching holes in Antonovs in a hangar in Inner Mongolia.

Sure the market is attractive, and huge. But Airbus is already here, and their business has been on a 20-year-long upswing in China. There is no indication in any of the talk leaking out of Toulouse that Airbus will suddenly get a market they’ve never had before as a result of this move.

As to competitive threats, Airbus already has 40% of the 100-passenger-and-above planes operating in China, and the government is ensuring (regardless of how horribly this screws up the operating economics of Chinese airlines) that Airbus and Boeing each get about half of the new large jet orders. So they’re at 40% heading toward 50%, and for political reasons things are not likely to get a whole lot better. What is Airbus’ stated goal in China? You guessed it – a 50% market share. And local rivals? There just aren’t any.

Would it be cheaper or easier for them to build the aircraft in China? Probably not – the cost of shlepping components from Europe, keeping a bunch of expat engineers and managers in fine corporate pasha style, and of setting up an entirely new factory suggests that the challenges will be considerable, and they might not save a cent. As cheap as labor may be in China, you don’t hire unskilled labor to assemble a jet airliner – not if you plan on staying in business. They will pay top dollar for the best labor, they’ll have to invest considerably in training, and they’ll face the same issues that all of us in the skilled labor market have to face – skyrocketing salaries, high expectations, and ridiculous turnover. Even if they wrote off the cost of setting up the factory, there is no guarantee that they will ever get as efficient in China as they are in Toulouse or Hamburg.

European Egos and Chinese Cadres

Which leaves us with two possibilities. Kedl’s “stakeholder push,” and Wolf’s “policymaker pull.”

Usually, when none of the economic reasons that might drive a company to make a big move in China, the leap is usually compelled by somebody back at headquarters who has it in their head that, regardless, the effort makes some sort of “strategic” sense. Maybe it is the shareholders, maybe it is the boss, but somebody very powerful believes that it simply has to be done.

Could it be that someone very high up at Airbus is thinking about his legacy, and that becoming the first (okay, well, counting McDonnell Douglas, the second) major aircraft manufacturer to begin assembling airliners in China will secure that legacy? Is it some grand vision, some civil-aviation manifest destiny that drives these Grand Europeans? Or is Jaques Chirac driving this, believing that an Airbus plant in China will somehow steal the thunder of les Américains?

All very possible. The history of business is replete with questionable strategic moves made by testosterone-infused CEOs, and Chirac is delighted with his Airbus, one of few European Champions in French industry.

There is another possibility, however. I like to call it “policymaker pull,” which is shorthand for government officials making significant (and sometimes rash) promises to secure a large or prestigious project.

I’d say it’s entirely possible that someone fairly high in the Chinese government intimated that if Airbus were to begin manufacturing in China, the government could pass a law mandating that airlines give first preference in purchases to locally-assembled aircraft. That would mean more aircraft sales and more market share, especially if Airbus were to get a good 13 year head start on Boeing in that process.

I have no doubt that the four cities currently in contention for Airbus’ favor (Tianjin, Shanghai, Xi’an and Zhuhai) are making all kinds of incredible offers to support and subsidize such a plant, falling over each other for this high-prestige project. Subsidies could do much to offset the initial setup and operating inefficiencies of the plant.

All of which means that regardless of the motives and the economics, Airbus executives will find a way to justify this to shareholders. If, that is, the shareholders don’t dig too deep into the fine print.

Pay No Attention to the Man Behind the Screen

China wants to build a local industry to manufacture airliners, so much so that I would expect to find it in the next five year plan. They have good reasons. They need lots of planes and want to keep as much of that money at home as possible. Airliners are a great export product and will be for a long time. And, of course, the industry creates its own ecosystem manufacturing sub-assemblies, parts, and doing fabrication of products from advanced materials.

The country has tried to go it alone with AVIC I and AVIC II and has failed to create a commercially viable commuter jet, much less a large jetliner. So policymakers will follow a simple formula: invite the foreigners in, learn the business, and little by little take the business away from them.

It has happened in computers – the guts and components (if not the complete units) of desktops, laptops, and servers are predominantly made in China. It is happening now in cars – China is now a net exporter of automobiles. And it will happen with airliners if Airbus and/or Boeing let it happen.

Airbus is not just bringing in an assembly plant. They’re going to train 500 engineers how to design and build modern jetliners at AVIC I and AVIC II, enough to form the core of an entire industry in the future. In short, what Airbus is about to do will likely create a new Chinese competitor in the large airliner business in return for what could wind up being a temporary market advantage.

Airbus will undoubtedly argue that the airliner business is increasingly driven by advances in technology, and as long as Airbus continues to leap ahead technologically, China will never become a true competitor. That may be true, but the boys in Toulouse may do well to read (or re-read) Clayton Christensen’s The Innovator’s Dilemma. At some point, airlines around the world may well realize that they only need so much tech in their aircraft, and if that happens both Boeing and Airbus will be left skimming the ever-shrinking high-end of the market.

The Thin Green Line

About the only force that stands in the way of Airbus making this fairly short-sighted move is Airbus’ own shareholders, more precisely the shareholders of EADS and BAE Systems Plc. At some point, they need to decide whether they are comfortable with the China deal. When they do, I hope they ask the leadership of Airbus some very hard questions to make sure that Airbus isn’t getting ready to hand over the family jewels. And I hope they take the answers with some healthy skepticism and keep digging.

I hope they also ask a question that nobody will be comfortable answering: “if this is such a great deal, why isn’t Boeing going for it? What does Boeing know that we don’t?” Because it would be a real shame if this was all happening because the Chinese were manipulating some deep seated inferiority complex at Airbus about their chief rival.

The Blog of Heavenly Peace

The Glazed Gate, Workers Cultural Palace, The Forbidden City
1007 hrs

For those who continue to pooh-pooh the value of 3G systems as a means of Internet connectivity, may I simply say you’ve been proven wrong.

I’m blogging live from the Forbidden City with my PowerBook and a CDMA card from China Unicom.

Looking around at my surroundings on this beautiful early spring day, I can only say that this is my idea of an office.

Borigami: What Microsoft Should Have Done

In the Hutong
Started Friday evening before sundown, finished Saturday night after sundown

Several people have asked me recently what my take is on Microsoft’s Origami ultramobile PC platform. Generally speaking, I have to agree with eWeek’s Larry Dingan when he say’s that the Origami’s future is that of a doorstop.

Where I disagree with Larry is that there is something in the form factor that dooms Origami. Frankly, I think it’s the positioning, not the device itself.

What is it — REALLY?

The problem is that Microsoft wants this to be all things to all people, and wants everyone to want one, and wants it to do everything. As a result, it will be nothing to most people, and something only to a very few, and only gadget monsters will have one. It won’t do any one thing very well, and it will wind up an expensive paperweight, just like my HP Journada 720 did.

If you see Origami as a product, I’d say it’s an answer looking for a question. As positioned – an ultramobile PC that replaces no other gadget in your bag, I can’t see the niche it fills.

I think if you see Origami as a proof-of-concept machine, however, it’s an interesting evolution of the tablet PC. I think they’ve evolved the tablet to the point where it can start delivering on the original promise. Strip out all of the hype, and what is Origami? It’s Tablet 2.0.

What Microsoft SHOULD have done – and can STILL do

Microsoft ignored some core tenets of technology product marketing. What they have – in a tablet computer – is a product that made some inroads with visionary users and early adopters, but never made it across what Geofffrey Moore calls “the chasm,” the product purgatory into which have flowed hundreds (or thousands) of really good technology products that never made it into the mass market.

To get this product across the Chasm, Microsoft should identify some really good niches with both consumers and enterprise, and then work with original equipment manufacturers, software makers, and even system integrators to create targeted products.

We’re going vertical, Goose

I’m writing a longer white paper on this with more examples, but some interesting possibilities include:

1. XboX Road Warrior (XPad): Use the same form factor, but make it an XboX machine. This is SUCH a no brainer you have to wonder whether the rain in Washington has actually drained washed the creativity out of Redmond and into the Puget Sound.

2. MapPadd: Ruggedize it, pre-load it with all USGS maps and a GPS reader. Sell it to vertical markets like hikers, linemen, military, etc. Panasonic would be one OEM. Do the same with nautical charts and sell it to mariners.

3. CADPadd: Ruggedize it, load it with AutoCAD, and turn it into a portable blueprint viewer for contractors. Given the monstrous size of AutoCAD files, this is also an obvious application. Blueprint corrections and updates on the spot. Inspector sign-offs on the spot.

4. HotPadd: Every fire truck on the planet should have one loaded with building plans for all building in its district, along with Hazmat, water sources, and other information.

5. CarPadd: Package with automotive diagnostic tools and parts catalogs for mechanics in auto repair shops. Diagnose the problem, order the part, sign the PO, send the order, e-mail estimate to owner and, if necessary, insurance company.

6. CrashPadd: For the insurance industry. Combine with a camera to enable complete claim reports to be completed onsite, allowing rapid processing of claims. This takes what some of the leading auto-insurance companies are doing in the U.S. and simplifies it (and drops the hardware investment) to a point where it could become ubiquitous in the developed world and could actually be adopted in much of Asia.

7. HousePadd: For the home inspection industry. Provides a complete checklist for the given type of dwelling, with relevant codes and diagrams, and software to create the report on the fly using the same kind of intelligent form-filling software that Intuit uses to fill tax forms. This will do much to get the industry off the ground in Asia.

8. OrderPadd: Focused on the sales vertical, especially for reps focused on restocking store shelves. As cool as ERP is and EDI was, a remarkably large percentage of retailers cannot – or do not – invest in electronic supply chain management, where an automatic order is generated when stock of something gets low. This is especially true in Asia, and particularly so in China.

But it won’t end there

Once these products are out in the marketplace, tinkerers, hackers, and all sorts of third-party vendors will come up with cool add-ons more useful, allowing the devices to become as multi-purpose as users want. Microsoft won’t need to sell the basic Internet browsing, multimedia use, or other basic functions – people will FIND them or create them as needed, and an ecosystem of enthusiasts and small businesses to serve them will emerge to help drive both buzz and adoption.

It’s not too late, Bill. Get on this. Better yet, shoot me an e-mail and I’ll send you the white paper, into which I’ve thrown more niches and I’ve specified potential partners.

Hoping against hope

Frankly, though, this approach will probably bore Bill and his alchemists. Once you’ve dominated the world, anything that reeks of a niche approach is not only boring, it’s probably distasteful. On the other hand, there are plenty of smart system integrators out there. Something like this might take place without Bill’s involvement.

As to a mass market device, if it makes sense and can be done well, watch Cupertino, not Redmond. Once again, Microsoft has demonstrated why continues to suck Apple’s exhaust when it comes to creating truly great mass-market products.

Fear of 3G?

In the Hutong
Watching New Jack City
2318 hrs

I like Fons a lot – he gives a great Euro-in-Shanghai perspective on China to balance my California-boy-in-Beijing POV. China Herald should be on your blogroll or RSS reader – check it out.

However, he says something that perplexes me about 3G:

“Only a pity that when 3G takes off later this year, about 400 million mobile phones have to be replaced.”

The fact is, 3G and “2G” networks will operate side by side, quite likely for a very long time in China. This isn’t like digital TV when you need to dump your old set.

Is this a widespread misconception?

China Mobile Might Want TD-SCDMA – Dead

Back in the Hutong thanks to Thai Air
2015 Hours

China Business News (via the Pacific Epoch folks) is quoting an unnamed source inside China Mobile saying that China Mobile may delay its TD-SCDMA outdoor trials because it hasn’t chosen a test site.

This reeks of passive-aggressive behavior.

China Mobile has been playing the role of the little boy from “The Emperor’s New Clothes” when it comes to TD-SCDMA. Very early on in the TD-SCDMA development process, a China Mobile engineer told a friend of mine “you GIVE me a TD-SCDMA network, and I wouldn’t take it.” The carrier has been increasingly public about its displeasure with having TD-SCDMA foisted upon it, and has made statements to the effect that they’d have to take a huge write-off on their current networks if they had to roll out TD-SCDMA instead of WCDMA.

It’s possible that Mobile is angling for some subsidies on a TD-SCDMA deployment, and if they are I’d say they’ve got a pretty good chance to get them. A recent wire-service article running in the China Daily quotes an ABN-Amro analyst, Helen Zhu, as saying that the government will make “drastic moves to ensure TD-SCDMA’s success.”

But I think this goes deeper. Frankly, China Mobile probably decided a long time ago that it wanted WCDMA, and it has been making plans accordingly ever since. Their case makes real sense:

  • Phones: There are 126 different WCDMA devices available right now around the world, most (if not all) of which could be readily available to local carriers. This includes a dozen models sold under Chinese brands and an untold number of foreign-branded phones that are actually made in China.
  • Infrastructure: Over 80 operators worldwide have built WCDMA networks, meaning that base stations, antennae, etc. are all in mass production and are falling in price. TS-CDMA? ZERO.
  • Global Roaming: Want to use your TD-SCDMA phone outside of China? Forget it. There is not a single TD-SCDMA carrier outside of China, nor is there a single carrier planning to deploy TD-SCDMA anywhere else in the world. Oh, it may happen in some horribly poor African country where genocide is a major government activity, but it won’t happen without heavy Chinese subsidies.
  • Local Roaming: TD-SCDMA signals don’t go very far. Want to use it outside of a downtown area? Good luck. I can hear the customer complaints already. I’m sure the China Mobile boys can as well.
  • Cost: The above-mentioned signal-propagation issue means that if China Mobile DOES deploy a TD-SCDMA network, they’re going to have to deploy more base stations to cover the same area.

So it’s not difficult to see why China Mobile is dragging its feet on deployment.

Nonetheless, I think we’ll see China Mobile get dragged kicking and screaming into the TD-SCDMA swamp. It would be far too huge a loss of face for the government and for the TD-SCDMA Forum (whose horribly Chinglish website makes them look like a government organization) if the country’s biggest carrier doesn’t join the party.

In that case, I expect China Mobile to extend its passive-aggressive behavior into the deployment. It can drag its feet on deployment, do the absolutely minimum necessary, and bide its time until it gets the go-ahead for WCDMA.

And that, folks, would have the effect of consigning TD-SCDMA to an early grave.