The Coming Global War on Chinese Farmers

Table #113, The Hard Rock Cafe, Tokyo
Nachos on earth, Grilled Salmon to all good men
Embarrassingly light-headed after two Kirin Ichibans
1334 hrs local

Eastern European fruit farmers are the most recently aggrieved parties in China’s rise. Seems Polish farmers have filed a complaint with the EU claiming they are being undercut in the European market for strawberries and other cash crops by Chinese food producers who are getting tax subsidies and benefit from cheap land and labor.

Regardless of the merits of this particular case (which the Wall Street Journal article implies is not supported by the commercial realities), this is simply na early skirmish in a global war on China’s rise as an agricultural exporter – not of rice even cotton, but of cash crops. Many farmers in Eastern Europe and other developing regions retreated to cash crops when they were chased out of commodities by more efficient competition from places like the Ukraine, Argentina, Australia, Canada, and the US. Now China has realized that the landholding structure in China – and the surfeit of farmhands – makes the production and export of cash crops ranging from roses to berries to broccoli the perfect strategy.

High Tech + High Touch = Hasta La Vista Polish Berry Farmers?

China already has more folks on the farm than any of these other countries, and a government determined to keep as many people in the agricultural sector as possible. More people at less cost to take care of crops for whom tender loving care adds value seems to be the best use of this vast labor resource.

Now, let’s add to this mix growing investments by food producers in innovations like climate-controlled hothouses, drip irrigation, and other technical innovations coming from the U.S. and Israel, and China becomes the only agricultural products exporter that can combine the power of BOTH high tech and high touch in agriculture.

At that point, China stops cranking out strawberries that are simply cheaper, it also cranks out better fresh strawberries, regardless of season, that can be grown organically.

Don’t think that’s a big deal? Ask the guys at Unilever, Group Danone, and other major European food processors desperate to find suppliers to help them service the exploding organic food market. Don’t think for a minute they aren’t watching this with extreme interest.

In other words, adding a little tech to cash crop agriculture will turn China from a low-cost producer of cash crops to a high-value producer of said exports in the matter of a very few years.

This does not necessarily mean the end of Polish berry farmers – or of farmers who compete against the Chinese. What it does mean is that, like their comrades in industry, they’re going to have to rethink how they do business, what they grow, and how they market it.

It’s Not Just the Berries, Guys

The EU, for it’s part, is still dangerously in denial about what the future holds. Per John Miller’s excellent Journal article:

“The Eu thinks it has much to gain by striking the right trade balance. ‘Agriculture will be an area of tremendous growth’ says EU trade commissioner Peter Mandelson. China can sell bulk products in the EU, serving EU consumers money, he says, while the EU can cash in on China’s growing middle classes by selling niche products such as wine and cheese.”

I hate to burst Commissioner Mandelson’s bubble, especially since his messages appear so expertly crafted to mollify agitated EU members without pissing off European food companies who increasingly depend on China. Unfortunately, his view of the world is unrealistic, and he is doing his producers of bordeaux, champagne, brie, and Parma ham a serious injustice.

There are Chinese producers in all of these sectors who are making incredibly rapid advances in production quality and marketing prowess. A small number of Chinese wineries have reached quality levels not too different than where Australia was two decades ago, and there are producers of gourmet cheese and other foods that are at least keeping up with the increasingly sophisticated Chinese palates, if not surpassing them.

If Mr. Mandelson really cares about the producers of these products in Europe, he’ll be telling them right bloody now that they need to haul themselves to China to begin building a taste not just for their products, but for their brands as well, and finding ways to beat the Chinese producers to the punch. After all, if the Chinese can produce high quality wines in the hills of Shaanxi and Gansu, one would think there are a few divisions of LVMH who could start doing the same thing under their own labels.

This won’t happen if the Nabobs of Brussels continue to purvey their palliative phrases designed to calm concerned cultivators.

European agriculture has a future if it rises to the Chinese challenge in their boardrooms and fields, not in the courts and legislative floors of the EU.

Oh, and by the way – to my friends in the U.S. and Australia – this applies to you guys, too.

And to all a good night.

The Permeable Membrane: Why Beijing Fears the Media

The Silicon Hutong Suite
Meguro-ku, Tokyo
Amazed at how the Christmas Fairy appears to have upchucked on Japan
1132 hrs.

Proving once again the value of a subscription to The Wall Street Journal, Geoff Fowler and Jason Dean have written a superb AWSJ front-pager on why China’s leaders are growing increasingly uncomfortable with the rapidly improving quality of investigative journalism in China. Cut free of the government teat, newspapers are actually having to attract readers by the quality of their copy, and many publications have built powerful reputations and loyal readership by unleashing their smartest journalists to do exposes on nefarious business practices and government corruption. The government was happy to have reporters playing this role – it served to support broader policy objectives, and it kept China’s ace reporters out of more sensitive issues.

It used to be that foreigners were the only reporters who were really good at this sort of thing, leading to the regime of regulations and enforcement that today still dog the heels of accredited international journalists. A small but growing group of locals have gotten good enough at it, though, that they are finding themselves operating under a similarly restrictive regime.

There are two points that this brings up that Geoff and Jason didn’t get a chance to cover, and are worth bringing up. I could go into them more deeply, but in short, the membrane is no more.

There was once an impermeable membrane between the foreign media and local media – what was written in the foreign press reached only foreigners in China and overseas audiences, and what was written in China stayed in China. No more. Foreign news became broadly available in China via the Internet and via local papers repeating stories discovered on the Internet, but also via a small group of internally developed publications that inform the leaders of China’s government organs and SOEs.

International wire services and specialty sites like ChinaTechNews have recently built large local staffs in China who scour the local press for stories of interest, do some checking and analysis, and pass those stories onto global audiences. So what is written by Chinese media not only moves locals, it moves international markets and perception of China.

In short, the lines between foreign and local media, at least in terms of editorial coverage, are disappearing. For that reason, we can expect in the coming months to see growing government discussion about – and regulation of – the way journalists operate in China.

What this means is that the government will find it more and more difficult to play local and foreign media outlets against each other. When the locals and the foreigners make common cause on to limit the severity of the new regulatory regime, that will be a signal that media as an industry in China is turning a very critical corner.

Gone in Five Seconds

On the Airport Expressway
Beijing
Watching the I’ll-be-home-for-Christmas Crowd rush for their planes

Looking at the procession of overpriced very expensive outdoor advertising that lines the Airport Expressway here in Beijing, I cannot help but marvel at how many of the advertisers take a great chance to make a lot of good impressions (hint: poor people don’t fly) by putting horribly designed ads on billboards that are costing them upwards of $600,000 a year.

I mean if you think Chinese TV commercials are bad, as a rule, Chinese outdoor is far, far worse.

Think about this – your average driver or passenger is going to have less than 5 seconds to grasp a meaningful message from a billboard. And yet advertisers waste these impressions with billboards filled with such non-outdoor-friendly things as multiple lines of copy, phone numbers, and complex images. At that point, a billboard stops being interesting – it’s visual static. Background noise. Ignored.

And thus useless.

And thus money wasted (and a good view ruined.)

Now I have a theory – scientifically unproven but based on some experience and anecdote – that more than a few companies who actually buy these billboards wind up indirectly paying some of their own employees an unauthorized bonus. But regardless of the intent behind buying these windstoppers, one would think that you’d want to get a decent result from it, right?

So why do advertisers continue to crank out crappy billboards?

Two reasons, I think.

First, of course, is the general dearth of sophistication and experience among people making creative decisions in advertising. This is a subject so large it could be the subject of a long monograph, not to mention a blog post.

Second, and I think equally important, is that in the advertising world, there is a pecking order among the different media in terms of creative attention accorded to them. Even in China, television gets first claim on creative energies, followed by print, online, direct, point-of-sale, and all the way down to the bottom where you have outdoor and radio.

In more cases than not, it seems that outdoor creative is basically print creative that has been quickly repurposed, rather than something done specifically to take full advantage of the medium.

This needs to change. You can get away with this nonsense elsewhere, or in places where outdoor is cheap, but not here. Outdoor in China is getting expensive, and here as with any other densely populated place it screams to be used well.

Tokyo is on my mind because I’m starting a double-barrel 11 day business trip there tomorrow, but on the balance it is probably the world’s most innovative outdoor market. Walk around Shibuya, Shinjuku, Roppongi, and Akihabara and you’ll see what I mean. From massive television signs to small format street-level stuff, people are thinking creatively about how to make the best use of the attention people can give – and holding onto it. Billboards along the freeways deliver messages simply and quickly. No scads of copy, phone numbers, or complex images. Simple. Clear. Beautiful. Effective.

Come on, advertisers. If you’re going to block my view and grody up the skyline, at least spend some time making your windbreaks-on-a-stick worth looking at.

Because if you don’t, we’ll all be gone in 5 seconds, and your advertising dollars with us.

eBay and the New Refugees

In the Hutong
Listening to the Princeton Hip-Hop Symposium
2013 hrs.

Reading the Wall Street Journal article breaking the story that eBay is passing its China operations to Tom Online in return for a shareholding, I like many others cannot help but be struck by the overt similarities between this and other such deals that have preceded it – especially Yahoo!’s handoff of Yahoo! China to Alibaba.

Indeed, eBay now joins a growing and distinguished list of U.S. Internet businesses that have been driven unceremoniously from China’s shores. Three choice examples:

* AOL: AOLegend? Gone. Cut and ran.

* DoubleClick: Swaggered in on high hopes in 1999. Packed it up and handed their China business to TechSolutions.

* Yahoo!: Spin it how you want, Yahoo! bailed and dumped headaches on Alibaba in a deal that was a sweet one for Alibaba’s shareholders.

Where Did It All Go Wrong?

They left for a simple reason, the same reason eBay is handing over the keys to Tom – China was not core to any of their businesses. They came over here believing that China would be important to them in the long term, and decided they needed to be here big time. In other words, they bought into the great fallacy sold regularly to foreign businesses – get in here now, and get in big, or surrender forever any potential to do business here.

But in reality, their businesses were growing and evolving so quickly in markets that were ready now, today that they could ill afford to distract their time, attention, and capital to a major effort to fight regulators, competition, and the sheer tempo of the market to build a leading position in China (or even the internal capability to get them there.)

If you think about it, this is not a bad template to apply to almost any foreign company operating in China. Simply ask the question “is China genuinely key to the success of this business, or is it merely “important?” If the former, success is about doubling-down, with focus and energy more than capital and head count. If the latter, success is about getting out now and handing the business to someone who will give it their full time and attention.

The China Online Dead Pool

I see two categories of refugees joining this parade of online notables.

The first is those who have yet to show, but are coming. Driven by the hype, by the Olympics, and the narrow window of opportunity for their own businesses, they are on their way.

* MySpace: is China really core to their business? Do they offer something that can’t be readily replicated? I cannot shake the feeling that MySpace is showing up now because Rupert has the online bug and Wendi is bored.

* YouTube: Late. Strong competitors. And frankly, Google has enough to worry about here.

The second is those who are here, but who have challenges elsewhere that place China on the back burner. The first are eBay units:

* PayPal: Will pack up and leave with eBay, taking the hassles of trying to do a banking business in China with them. They have bigger fish to fry than sit around in Beijing waiting for a possible issuance of online payment licenses. And let’s face it – anyone who is handicapping in this race is betting that the first online payment licenses go to organizations closely affiliated with Chinese banks. Not even Tom has that kind of pull.

* Skype: This belongs to Tom already. The Skype business in China is Tom’s business, not eBay’s.

In addition, there is the big question:

* Google: They’re investing huge, and piling up warm bodies firewood before a blizzard. But many people in this town – including a few in the Hutong – are not convinced this is going to translate into success. Make no mistake – the jury is out, and Baidu is keeping the pressure on.

At some point, Google’s investment in China is going to have to start showing meaningful results. eBay’s move may hasten the day when a) Wall Street analysts start asking some very pointed questions about the China operations, and b) vocal activists in Google’s core markets find one or more choice opportunities to resume their vilification of Google as an abettor of repression.

When that day comes, The Boys In The 767 may decide that China is more trouble than it is worth, and work out a deal with the Baidu guys.

The countdown will begin when we hear of the next high-level departure from Google China.

Prepare for the Tsunami

The online businesses will not be alone in this mass retrograde movement.

In the last five years, a lot of companies across a wide swath of industries have come to China, many of them propelled by little more than a nagging feeling that “China is going to be huge” and “we have to be there.”

Most of them will stick it out through the Olympics. But mark my words – 2009 is the morning after, and between now and then a lot of CEOs are going to start rethinking whether the hassle of China is really worth it to them.

When is Innovation Indigenous

In the Hutong
Charging my iPods
1755 hrs.

Yesterday, I had the privilege of being a fly on the wall at a small lunch attended by representatives of some large US companies and a respected university professor who advises the government on issues pertaining to the information technology industries.

As is inevitable at such meetings these days, the question of China’s “independent innovation” came up in several contexts. Searching for a lever to try to draw the government into interpreting independent innovation in a manner that allows for some level of foreign participation, one of the corporate reps asked the distinguished professor how he felt the government might view the innovation that would take place in an R&D facility owned by a Chinese company but taking place in, say, Silicon Valley.

The discussion got really interesting, and it basically condenses down to one point:

The Chinese government is not interested in legislating on the basis of establishing a principle, taking into account hypothetical problems that might arise in the future (an approach that stands opposed to the Talmudic traditions at least, and probably those of Justinian, English Common Law, and the Napoleonic code). Indeed, the nation’s bureaucrats and policy makers are far more interested in using the law as a tool to serve near-term policy goals, rather than use law to build a system that will withstand the test of history. (Hence the old saw “rule by law, rather than rule of law.”)

When it DOES get to the point where Chinese companies are setting up R&D centers in other countries at a rate approaching that at which multinationals are establishing them in China now, THEN the Chinese government will deal with the question of whether that is independent innovation or not. They’ll just change the law.

(Or perhaps, as some policy makers appear to believe, by the time we get to that point, the whole issue of “independent innovation” will be a distant memory. I wouldn’t bet against that.)

This is another one of those critical differences in viewpoint between the two cultures. In the west, policy and government action occur with the framework of law. In China, the law occurs within the framework of policy and government action.

Is the law important in China? Absolutely, and getting more so over time.

But pay attention to policy. Those will tell you how the laws will be interpreted and acted upon.

Accept No Nonsense

In the Hutong
Watching the kid watch Mulan
1049 hrs

Granite Studio writes brilliantly about James Fallows’ post on public rudeness in China.

All of which is fine and good. But no amount of cultural or historic justification is going to make any of that behavior more palatable – or even right.

I’ve been studying China for 23 years, I’ve lived here for 11, and our family is as much Chinese as anything else. Despite that – or, perhaps, because of that – I don’t buy the argument of cultural and moral relativists that demand we stomach public anti-social behavior because failure to do so is akin to insensitivity or, worse, cultural imperialism.

China is integrating into the rest of the world at all levels. The ugly truth is that either this process will make the rest of us adopt Chinese practices, or it will moderate Chinese personal behavior because the rest of the world will insist on it as the price of interaction.

The choice of which direction this will take is really up to us.

So I will continue to inform – or remind – queue-jumpers and their ilk in appropriately polite, firm, or colorful Mandarin when I think they’re doing something wrong. I don’t think I’m doing any damage to Chinese culture or imposing my inappropriate Judeo/Christian/Egalitarian values on Chinese. I think I’m doing Chinese and the rest of the world a favor.

And unless you want a world of people who act the same way, I’d suggest you do the same.

Airlines, Portectionism, and the Shafted U.S. and Chinese Flying Public

In the Hutong
Contemplating my car’s dead battery
1103 hrs.
It’s winter again, which means it must be that time of year when the U.S. airline industry dives into yet another round of a game played on Capitol Hill called “We Should Get The New Air Route To China – And Not The Other Guys – Because…”

It is a battle that pits America’s giant, unwieldy, one-size-fits-all carriers against each other in a PR battle that enriches lobbyists and agencies and will result in the end in a handful of weekly flights between a U.S. city and either Beijing or Shanghai.

I won’t argue that ether Northwest, United, Continental, or American could make very profitable use of the routes. And if you’re an employee, shareholder, or frequent flyer of one of these airlines, the idea that one of them may get a new China route is probably appealing.

But to a lot of us, it means nothing more than just another bad choice when we have to figure out how to get to the U.S.

The fact is, given the choice, a lot of us would prefer to fly Singapore Airlines, Cathay Pacific, All Nippon, Virgin, or any of a range of “third country” airlines from Beijing to the U.S. This kind of thing happens elsewhere in Asia: to give just two examples, third country airlines like Singapore fly direct to the U.S. from Japan and Korea.

The reason it can’t happen in China is simple protectionism – both China and the US are working to protect their flag carriers.

Argue if you will about the imperfection of market mechanisms, particularly in a developing economy. Regardless, plitics should not stand in the way of a superior product or service experience and consumers who are willing to pay for it. That’s a simple principle that should apply regardless of whether the product in question is a technical innovation or merely better service.

Apart from the Chinese, Who Still Thinks Retail is About Storefronts?

In the Hutong
Nursing a sense of shock and wonder
1844 hrs.

Wall Street Journal columnist Jason Fry wrote a superior article (subscription may be required) in yesterday’s paper about how slowly, subtly, but very clearly online shopping outlets have changed the way he, his family and his peers shop for almost anything.

Books? Amazon.

Music? iTunes or Amazon.

Baseball cards? eBay.

Groceries? FreshDirect.

Reviewing this, he begins to understand why he gets stressed about actually going out to a store and buying something.

“So what do I still buy in the real world? The occasional comic book. (I could do that online.) Some
weekend mornings I take my four-year-old son to Target. (They have a Web site.) Oh, and I buy
soda and yogurt in our company cafeteria. (I could stock up on those via FreshDirect and bring them
from home, but I’m too sleepy in the morning to tackle planning that involves refrigeration.) Odds
and ends at the hardware store. I run unexpected errands, of course. We go to restaurants. Oh, and
haircuts are still real-world expenditures.”

He notes that this didn’t happen overnight, but that the experience of going online just got to the point where it was far superior to what he was getting in meat-space. He then ponders what will happen in a world with fewer retail storefronts? Maybe stores become relegated to serving the digitally-excluded. I can hear the schoolyard taunts now “you’re so poor your mama shops at stores!”

His conclusion – the only way for traditional retailers to prosper in this new age is going to be by offering a superior experience. Nordstrom. The Apple Store.

So by this point, you’re probably saying “well, yeah. Duh.”

So then, while catching up on my back issues of BusinessWeek (delivered, incidentally, electronically to my computer each weak via Zinio), I read an article about Amazon by Robert Hof that says in the second paragraph “Many people continue to wonder if the world’s largest retailer will ever fulfill its original promise to revolutionize retailing.”

A quick question Mr. Hof: who are these people you are talking to, and what holes do they live in? Sure, here in China maybe you could justify that attitude. On the other hand, please give Mr. Bezos a ring and ask him if he’s selling stuff in China. Not only does he have a subsidiary here on the ground, Joyo.com, he also sells containers full of product here each year. I know – every day I go by the management office for my residence compound and I see the stacks of Amazon books fresh from distribution centers around the world. And we’re a tiny little village of maybe 1,000 families.

But North America is just the most advanced example of what is slowly happening around the world. Retail is changing, and it is a direct result of the boom that Amazon spread (if it did not begin it).

My mentor, Bill Schereck, has been preaching the gospel of electronic retail since he was a low-number employee at QVC International. Bill is quick to point out that there are vast categories of product that sell better electronically than in a store:

1. Anything that is intimidating to buy at retail;
2. Anything that is embarrassing to buy at retail; and
3. Anything that has key features that are not obvious (i.e, anything with a microchip in it).

To which I add:

4. Anything that does not require personal selection at the point of sale (packaged goods);
5. Anything that does not need to be tried on first (apparel and shoes); and
6. Anything that appeals to a market that is not geographically concentrated (hobbyists.)

I don’t care where you live. If you make a living selling products that fit into the above six categories, either change your career or buy a computer: change is coming, and only the electronic will survive.

China will be no exception. Among the growing, increasingly busy middle and wealthy classes in the nation’s cities, the shift will take place – it’s only a matter of when, not if.

Thanks to Amazon.

Is the Town Big Enough?

In the Hutong
Working off a sleepless night
1453 hrs

The Grouch just fired me a press release announcing the launch of Marketing Magazine, a Hong Kong publication aimed at, naturally, marketers.

Of course, there’s already a marketing magazine in Hong Kong – Media – and Hong Kong is also the home base of AdAge China. But the new kids from Marketing say that what makes their title different is that their publication is focused on Hong Kong, offering “mainly” Hong Kong voices.

Now, I wish the new guys well – we all know how much Media could use the competition – but I wonder how long the Hong Kong focus can last. As many newcomers find out pretty quickly, Hong Kong may look like a big city, but it’s really a small town. I wonder just how much money they will make selling ads to agencies in Hong Kong trying to outdo each other. I suspect they will go regional quite quickly despite protests to the contrary.

I hope they do, anyway.

Hong Kong doesn’t need another publication to reinforce its misguided self-importance and continuing insularity.

Hong Kong once was important, back when The Rock of Jardines was a remote outpost of capitalist spirit at the feet of a big commie dragon and Jimmy Clavell was writing novels glamorizing the colony even as he exposed its warts.

But the insularity that held Hong Kong together in the tough times during the last half of the 20th century is a malignant anachronism that continues to prevent the full globalization of the city in the most important aspect – the thinking of its people and leaders.

A Hong Kong marketing professional I know who has relocated to Beijing told a friend of mine earlier in November that she felt bad for her hometown. “It’s the only city in China whose prospects are in decline.”

How true.

Take heed, Marketing.

I’m Back, and Thank You

Back in the Hutong
Writing Proposals
2239 hrs.

Yeah, okay, I’ve been away for a month, and I’m not going to get defensive about it, but I will apologize.

I love this blog and I’m very attached to its growing number of readers, but this is actually our busy season, and I’m sure you will understand when I say that there are times where the choice comes down to taking care of the clients and taking care of this blog, the clients must invariably win.

That means I’ll have to take an occasional hiatus, but it also means this blog will remain unencumbered by advertising.

In fact, in appreciation of you all sticking with me through these dry spells, I’ve taken some action.

You may have noticed I’ve booted Google off the site, and I’m seriously considering pulling those annoying little Amazon postage stamps off of the border as well. After all, I talk plenty about what I’m reading and why in the Peking Review, but I do it out of a desire to share discoveries, not to send you traipsing over to Amazon and putting money in my pocket.

By the grace of the Big Guy Upstairs, I can afford to run this blog and buy my books out of pocket, and frankly, I respect my readers too much to subject them to annoying advertising.

I’ve also gone ahead and created new (and somewhat more helpful) categories for my entries. If this screws up any permalinks, let me know – iBlog (the software I use for Silicon Hutong) is kind of funny that way.

So thank you for staying with me, and let the wordflow resume…