IBM Thinks China and Developed Countries are Equally Connected

In the Hutong
1132 hours

In a story dispatched out of Berlin, Reuters is reporting on a joint IBM-Economist Intelligence Unit report that suggests India and China are closing the digital gap. The report cites the fact that Shanghai and Bangalore have similar connectivity to developed nations as proof of the fact.

Peter Korsten, the European Director of IBM’s Institute for Business Value, even told Reuters “This is the first time we see a level playing field between developed and developing nations in terms of connectivity.”

A level playing field in terms of connectivity.

Right.

It is not an uncommon error for foreigners to reach broad conclusions about China’s development based on what they see in Beijing, Shanghai, Guangzhou, Shenzhen, or even Chengdu. What is uncommon is to see this mistake made by researchers who should know better.

To say that China has a level playing field of connectivity with the U.S., Europe, or Japan is such a gigantic exaggeration it suggests that IBM is thoroughly deluded. At worst, the report is a farce. At best, the top-line conclusions IBM and the EIU are reaching are not supported by the data.

The facts should speak for themselves:

  • Less than 9% of China’s citizens have regular access to the Internet.
  • There is one computer in China for every 20 people.
  • There is one home computer in China for every 50 people.
  • Less than 1% of China’s population can reach the Internet via a mobile phone.

Mr. Korsten suggesting that digital gap is narrowing in China – to the point of parity with developed nations, no less – is irresponsible because it suggests that the problem of digital exclusion is going away.

  • It makes China appear to be a bigger technology market than it really is;
  • It exaggerates China’s level of development and the extent to which China is a competitive threat to knowledge and creativity based industries in developed countries; and
  • It suggests to China’s leaders that critical investments necessary to provide connectivity outside of the tier-one cities is not a high priority.

I would wager the average truck stop in the United States has more connectivity than your average Chinese village.

The IBM Institute for Business Value is an in-house think tank supporting IBM’s consulting business. This, in other words, is where the folks who design and sell IBM systems to major companies get their world view and their perceptions of the market.

Can you think of anyone who would want to do business with a company so out of touch that it would draw parallels between connectivity in China and in the U.S. in the face of readily accessible data to the contrary?

IBM is looking incredibly out of touch. This calls at the very least for a public clarification.

Google and the Rule of Law

In the Hutong
1647 hrs

Next to a superbly written Clive Thompson piece about Google in China, The New York Times has inserted one of it’s reader forums (“See? See? We can be interactive, too! Aren’t we SO Web 2.0!”):

“Should Google allow China to censor it’s search results?” (Italics mine)

Excuse me?

How about “Should Hai’er allow the U.S. government to regulate working conditions in it’s U.S. factories?”

Or maybe “Should Toyota allow the U.S. government to tax the company on its U.S. earnings?”

Or how about “Should Chinese businessmen be prosecuted in U.S. courts for crimes committed in the United States?”

Come on, people!

As onerous as a law may be, it is the law of the land, and it is applied to foreigners and locals equally. If a foreign company or its shareholders have a problem with that, they can either comply and work to change it over time, or they can choose to do business elsewhere.

How patronising of The New York Times, the supposed bastion of all that is good about the American media, to suggest that a company may choose to ignore local laws at whim. How can the venerable Gray Lady, a staunch proponent of the primacy of rule of law, in good conscience suggest that a major American company scoff whatever laws it doesn’t like and at he same time expect that company to avoid the consequences? China’s leaders must adhere to the rule of law, but Google shouldn’t?

I don’t think the folks at Google are at all pleased with having to comply with this law, any more (and probably less) than Toyota’s CFO is about having a large chunk of its U.S. profits sucked into Uncle Sam’s hungry maw. Frankly, I’m far more ready to believe that Google’s presence and actions in China will make a positive difference for the Chinese people, than I am likely to say the same about McDonald’s or Coca-Cola.

Go ahead and second-guess a company’s decision to do business overseas, particularly in markets where you are uncomfortable with the social costs of doing business. In fact, buy a share (or lots) in that company and make yourself heard as a shareholder.

But do not question the obligation of a company to behave according to the law once its operations begin. Because when you start giving corporations the right to choose those laws with which they will or will not comply, you are setting the world on a slippery slope to a day when the corporation is answerable to no one.

Of Berries Black, Berries Red, and the Little Pen that Could

Third Ring Road
Beijing
1320 hrs.

Over the past weekend there was a slew of media coverage about how RIM’s Blackberry is squaring-off against locally developed Redberry in China. Pundits are taking sides, handicapping either RIM (proven business model, software, and service) or Redberry (home-grown, cheaper). Blackberry cheerleaders are drooling over the thought of making their favorite device-cum-addiction the modern, technological equivalent of opium for China’s millions of urban yuppies, professionals, and tai-tais.

This is yet another example of how the media are getting China wrong. In the end, the Berry Wars are going to be a tiny blip on the radar in China, and inevitably a big disappointment to RIM, Redberry, and the two carriers.

Blackberry and Redberry both rely on input systems based on small versions of the standard typewriter/computer keyboard. This system is generally referred to by the industry as the “QWERTY” system (for those of you who don’t get why, check the upper left-hand corner of your keyboard. We’ll wait.) This is an obvious problem in a region (the PRC, Taiwan, Hong Kong, Macau, Japan, and Korea) where the alphabets exceed the size of the keyboard by a factor of about 100.

Decades of work have gone into developing software kludges that will make up for the inadequacies of the computer keyboard in East Asian countries. They are much better than they used to be, but they are still designed for keyboards that you can get both hands onto. Adapting those kludges to the far different environment of thumb-based computing is going to be difficult, and it’s not clear whether the result is going to be entirely satisfactory. Typing in romanized Chinese, then selecting a character by scrolling up and down with an arrow key means a lot of keystrokes. Carpal Tunnel, anyone?

This issue will bedevil the two Berrys, and will thus create pressure against uptake. Don’t believe me? Ask the folks at Palm and other companies who have sold QWERTY devices in China.

Then go and ask companies like Motorola, Nokia, and Dupod what kind of smartphone/PDA devices sell, and despite their sworn enmity I guarantee they will agree that the answer is “pen-based character input.”

That’s right. A competitive war to develop the best Chinese language handwriting-recognition system has resulted in a host of devices whose functionality for Chinese far outstrips that of any thumb-keyboard. The approach meshes brilliantly with the Chinese culture and education system, which emphasize penmanship to the point of calligraphy, and where merely writing characters is considered a demonstration of one’s culture.

Makes a miniature typewriter seem crude, doesn’t it?

This approach has appealed to the pride Chinese feel in their culture, and has had the extra side benefit of making the devices smaller – a great virtue among phone buyers. (Chinese people laugh at my Treo because the thing is just so huge.)

If all of that sounds like a lot of rationalizing, take a look at the market. The PDA/smartphone market in China is estimated to be between 9 and 10 million devices, the vast majority of which are pen-based. QWERTY makes up a tiny, tiny portion of the market (mostly native or daily English speakers and foreign devils like me.) Motorola – a company that ONLY sells handwriting-based PDAs in China, holds half of the PDA/smartphone market. And they have no plans to sell their much-anticipated “Q” QWERTY phone in Greater China, choosing instead to introduce MING, a handwriting-based PDA phone developed exclusively for this region.

None of this is to say that there will be no market for Redberry and Blackberry in China. There are enough people here – and a diverse enough customer base – that there is a market for nearly everything. Whether that market will be large enough to justify the development effort and marketing dollars, or whether frustration with using a western input system for eastern characters will drive even more users to handwriting-based PDAs and smartphones remains to be seen.

NYT Joins Silicon Hutong in Blasting Lenovo Decision to Drop the Golden Initials

In the Hutong
1631 hrs

The New York Times has finally picked up the story about how remarkably short-sighted Lenovo is being in discarding the use of the IBM brand so early in the game. As noted on Silicon Hutong almost exactly eight months ago, Lenovo has screwed itself out of 4 years’ use of a $53 billion asset.

This move would not be as serious if Lenovo had already spent the time, effort, and marketing $$ to let their customer base (enterprise, not consumers) get to know who – or what – Lenovo is. Instead, they’re dumping the IBM name FIRST, then starting an ad campaign to explain. It’s clear from the NYT article that most of their customers have no idea who Lenovo is or why the computer maker should be trusted with the future of their businesses.

Think Dell, HP, Toshiba, and Apple are happy about this? Bet on it.

Deepak Advani, Lenovo’s chief marketing officer, is taking the public heat for the decision, and he’s doing a good job at articulating the company’s position, as unconvincing as it is. Somehow, I don’t think Deepak is making these calls. As such, the question that troubles me is “where are these decisions being made?” I’d bet good money the answer is “Beijing” and not South Carolina.

Dreams Built on Sand: Investing in Chinese Real Estate from a Distance

Catching up on Podcast Backlog
In the Hutong
0916 hours

I just received an interesting e-mail from my brother Jeremy, who is a professional property manager in Los Angeles. He was forwarding me a newsletter from a Beverly Hills-based entity that is touting international investors on the “exciting, unaddressed opportunities” in real estate in China. They’re holding an investor forum, meeting with local developers, and they’ve apparently made several trips here.

Caveat: technology and media are my core areas, so I would not profess to be an expert (or even a specialist) in real estate in China. But I am a property owner in China, spend a lot of time researching the market, and speak and work with professional investors frequently. And, like my brother, I learned the fundamentals of real estate from my parents (who were – and my mom still is – successful real estate investors) at the dinner table and from nights and weekends helping tenants or cleaning up after them.

The fundamentals of China’s market would appear to make real estate investment a no-brainer.

  • The amount of real estate available is limited, both absolutely and by government regulation;
  • There are a lot of Chinese who need places to live, work and shop;
  • There is a population shift underway, with tens of millions of people moving into the cities;
  • Chinese lifestyles are improving, compelling locals to look to upgrade their current digs;Business investment is growing, driving a jump in demand for A & B class office buildings nationwide; and
  • There is a jump in demand for retail space driven by increasingly prosperous consumers.
All of this is true. Spot on. And all of that is exciting to investors who look worriedly at the softening U.S. market.

But to approach China as if it were a “normal” real estate market would be foolish. There are some critical differences between investing in Chinese property of any kind that U.S. investors need to take into account before being swept up in the China real estate bubble.

  1. The lending market for second-hand properties is so small as to almost be non-existent. Banks simply aren’t set up to lend on real estate except when it’s being developed, or when the developer is selling newly built offices, stores, and homes to buyers. This means that if you have cash you can make some good buys on pre-owned properties, but it also means that if you ever want to sell, you’re going to be looking at a limited market. Read “depressed value.” That’s fine if you’re relying solely on rental income to get your return, but if you care about capital appreciation at all, you’re going to be challenged a bit.
  2. Multiple listing services don’t exist – and thus there are no statistics on comparable sales. The only thing you will ever know on any property is the asking price. This means that you are never sure what your property is worth. Nice, huh?
  3. In China, you don’t own property. You own usage rights for a fixed term. That also changes the dynamics of resale price, and of property value.
  4. Chinese real estate law is still evolving. Unlike in the U.S., where you have a solid body of law on which to base your investments, in China the actual rights that you own are subject to change as real estate law evolves. And if you want to evict a tenant? Landlord-tenant law is extremely nebulous here. Zoning is starting to happen, but you shouldn’t be surprised to see new apartment blocks going up next door to factories – or vice-versa. Right next door to our upscale residential neighborhood out in the suburbs, they’re building a giant international exhibition center. So much for our quiet neighborhood.
  5. There is no way to check the credit of a tenant, and your options for compelling payment of rents are few.
  6. Good management is hard to find. By good, I mean professional, consistent, service-oriented, un-corrupt, and businesslike, managers (or management companies) who will keep tenants happy and make sure you still make money. That’s tough anywhere, but it’s even harder in China, where tenants and residents think the management company is ripping them off no matter how well the place is run. Frankly, I think it’s a bad idea to own a piece of income property that you are too far away from to actually oversee yourself, but if you can put an honest manager in place, you can get away with it. Marriott made a recent move into the property manage.
  7. Inventory is pouring into the market. Beijing, to give a single example, has been described as “a construction site with a parking lot” and it’s little different in any of China’s tier one or tier two cities. Some of the largest advertisers in China are real estate developers, and with good reason – they need to pull them in quick. The construction shows little sign of abating, and, given the way they do things here, probably won’t until the market collapses under the sheer overhang of inventory.
  8. This is still a market where strange things happen, even to very large, savvy investors:
  • A residential development not far from where I live lies 2/3 empty after nearly a decade in part because the government officials who granted land use rights to the developer had not actually cleared those rights, and the peasants who formerly worked the land are fighting.
  • Another development lies abandoned next to a major freeway offramp because the developers simply skipped town with the investors’ money.
  • And let’s not forget the case wherein McDonalds signed a 20-year lease on their massive flagship restaurant, only to find that another government agency had granted the rights for land use to a well-connected Hong Kong developer. The restaurant was gone a mere 5 years after it was built.

None of this is to suggest that you should NOT invest in real estate in China. I have no doubt there are opportunities for the adventurous, speculative investor here. But before you invest, whether it’s in a piece of property or a China real estate fund, do your homework first. Talking to a bunch of developers during a trip here, or reading the fund prospects doesn’t count. Ask hard questions, and ask a lot of people. Then make your own call.

As for me, I own Chinese real estate because I bought when the cost of renting my house over the last six years would have nearly paid for it, interest and all. Would I buy today? I’m not sure.

Alibaba: No Bonfire Here. Move Along, Move Along.

Somewhere in the Central Business District
Beijing
1609 hrs.

Following our recent post about Alibaba spending $750 million of the $1 billion Yahoo! patrimony inside of 9 months, I was treated to a clarification of Jack Ma’s statements at the recent Search Engine Strategies Conference in Nanjing by a vice-president of Alibaba:

• The $750 million in question was NOT used in operations.

• The $750 was paid out directly to Alibaba investors within weeks of the deal closing last summer.

• The said payouts were included in filings with the SEC made by Yahoo! on 16 August, which can be found here.

• Ergo sum, there is no bonfire of cash at Alibaba, but I think it is safe to say that here are some investors who are satisfied with their return on investment in Alibaba. Great going, guys!

Alibaba told me that the whole deal was modeled on the setup at Yahoo! in Japan, where the local team controls and operates the business because the local team knows best. That’s certainly fair. You can’t run a China operation from 6,000 miles away.

Alibaba also mentioned that they’re going to beat eBay, Google, AND Amazon in China. So I think we can look forward to some more interesting news coming out of Hangzhou in the future.

I expressed my appreciation to the gentleman from Alibaba, because in the Silicon Hutong we gratefully receive any feedback, especially from the companies themselves.

I’m still not convinced this was a good move for Yahoo! and its business in China, but I am now thoroughly convinced that it was a superb move for Alibaba.