Happy Birthday, Mac

In the Hutong
Geeking out and Maccing off
1637 hrs.

I don’t know about you all, but when I was using Windows I seemed to go through a laptop about every 18 months to two years. Somehow, in that period of time, normal wear-and-tear would render the things unstable, slow, and eventually unusable.

My first Windows laptop was an NEC. I bought the thing in November of 1996, and it lasted me until May of 1998. 18 months.

My second Windows laptop was an Acer. That one did pretty good – it lasted me from May of 1988 until July of 2000 before croaking. 26 months.

My third Windows laptop was a second-hand Dell, company issued. That one lasted me from August 2000 to April 2001. 9 months. It was old, anyway.

My fourth Windows laptop was another Dell, also company issued. That lasted from April 2001 until I replaced it 15 months later with my Fujitsu Lifebook D.

The Fujitsu Lifebook D I actually picked up as a second computer so I could have something that was my own. I got it in August 2001. It lasted until February 2003 – 17 months and then completely croaked, leaving me having to borrow a laptop.

The Return of Mac

In April 2003, after an absence of nearly 7 years, I returned to Mac, buying a 17″ PowerBook as soon as Apple in China got its first shipment. In fact, I can confidently say it was the first of its kind outside of Apple in Northern China.

Last year, I bought a new 17″ MacBookPro, expecting the PowerBook to croak.

It’s still going. And I still use it daily alongside the MacBookPro.

Today, it’s been 4 years since I bought the PowerBook, and it’s still running happily. A freaking record.

Oh, and my wife’s iBook has 3-1/2 years on it. That’s a record, too.

Of course, I know that the life of a computer is determined by many things, and so I won’t claim some kind if innate superiority for Macintosh. Your results may vary. Suffice to say that we’ve got 6 Macs in our business and we’ll be buying 2 more in the next year – not as replacements, but as additions.

Four years on a laptop?

Damn.

Hollywood to Boycott China?

One learns, after a few years in the media industry in China, to ignore the chest-thumping threats of media moguls to withhold something from China. This is for good reason: the threats are usually empty.

Such was the case several years ago when Disney CEO Robert Iger told the media in Hong Kong that unless China gave Disney a full-time TV channel, there would be no Disneyland on the mainland in China. The reason you heard no angry (or even stern) response from the Chinese government after Iger’s comment is that Chinese officials were laughing so hard they couldn’t compose a statement. The threat was hollow – having just opened Disneyland in Hong Kong, Disney was in no rush to open a park on the mainland. And, frankly, China’s officials knew that if they really want the people to go to Disneyland, they don’t need a park in Beijing or Shanghai – they just need to grant more permits for folks to visit the conveniently-located Hong Kong park.

Beware of Angry Lawyers. They Bark.

Two days ago, MPAA Chief Dan Glickman (aka, Hollywood’s hired gun in DC) told The Hollywood Reporter that if China didn’t do something about ending piracy, the industry could choose to boycott China. I don’t expect an official response – I think, once again, the government officials with remit over Hollywood’s fortunes in China are probably too paralyzed with paroxysms of mirth to compose a response.

I will, however, respond.

I can only surmise that Mr. Glickman dared to suggest the possibility of Hollywood divesting from China in order to play to his clientele, to prove that, like the recently departed Jack Valenti (rest in peace, Jack) he could play tough with the Chinese. Or, perhaps, he was pissed off at having to sit in economy class on his redeye from DC to the Coast. Or perhaps it was indigestion.

Because as far as anyone on this side of the Pacific was concerned, his offhand remark came off at best as reckless, and at worst profoundly ignorant, particularly in light of his distinguished background.

China Can Live Without Hollywood…

First of all, as Mr. Glickman himself noted, any sort of organized, multilateral action on the part of the major studios would likely be viewed by U.S. regulators as a violation of the Sherman Anti-Trust Act. So coordinated unified action is out.

And any non-coordinated unity of action is highly unlikely. Apart from the fact that Iger, Parsons, Stringer, Redstone, Murdoch, and Zucker don’t like each other any more than Disney, Warner, Zukor, Mayer, Cohn, Fox, and Laemmle did at the height of the studio system, each company knows that the departure of one would be to the advantage of another. If there are only so many slots each year, one guy walking away means more slots for someone else.

Most important, perhaps, is this: if the major US media companies simply packed their bags and left, in all likelihood they would suffer far more for their actions than China. Divestment may scare smaller countries who depend on foreign direct investment, or might concern China if the push to divest was broad-based. But given the microscopic footprint of the film industry’s investment in China (or, indeed, that of the entire entertainment business), divestment wouldn’t even be a rounding error in the overall flow of FDI in a given year.

We also should not forget that China is in the midst of a major policy shift away from encouraging foreign investment because of fears in Beijing that the country has sold its industry to a bunch of big-noses to the growing disadvantage of China’s domestic enterprises. While the rest of us might feel that concern is a tad overblown, it holds a lot of currency in Beijing, and they got the idea from U.S. economists.

So China’s attitude toward Hollywood packing its bags would probably amount to something like “don’t let the doorknob hit you on the ass as you leave.”

…Does Hollywood Want To Live Without China?

After over two decades of trying to figure China out, there are signs that a very small number of companies in Hollywood are beginning to build real businesses here. Of all of the majors, Warner has arguably done the best job of turning China into a business. They’ve built a music label. HBO and Cinemax have a profitable business here, as does CNN. And…here’s the kicker…in a nation of pirates, they actually have a modest but growing business in legitimate home video.

There are other examples. Despite a miserable system, the box office take for Hollywood films in China continues to grow, especially as the cinema experience improves in major cities and same-day releases become the rule rather than the exception.

To give up now – to just walk away – would be to ignore the progress that has taken place, and it would be tantamount to saying “we are NEVER coming back.” Because let’s not have any illusions: memories are long here. Much longer than your typical Hollywood career.

One day, you may realize there is actually a great value for you here.

Dreaming of Chollywood

I suspect that a lot of very senior people in the motion picture business – and in the entertainment industry – are starting to realize that the Chinese government at the moment has little interest in being a part of Hollywood’s world, and that China is just large enough – and developed enough – to say “no” to Hollywood and just not worry about it. The fault for that lies as much with Hollywood as it does with Beijing. It’s time to fess up to that.

Being confrontational, issuing ultimatums, and divesting (or even threatening to do so) are not going to solve the problem. Especially right now, with China prickly and sensitive, having a representative of the industry suggesting the global business equivalent of the nuclear option is just baiting the dragon. Come on, you big beast. Bite me. I dare you.

Trying to change the government’s mind – or forcing it to – won’t work as long as you are an outsider fighting for the interests of outsiders.

The only way things are going to change significantly in China for the global entertainment industry is to start playing an inside game.

First, stop focusing on piracy, and return the focus to access. Get more product into more stores. Where are the HMV and Virgin megastores? Or their Chinese equivalent? If Warners can build a home video business, why are they the only ones?

Next, get the consumer onside. Trust me, there is growing discontent about paying even $0.75 for a pirated DVD and then having it freeze up 5 minutes before the end of the movie. It happens ALL THE TIME here. And it doesn’t matter that the store or the guy on the street corner will give you a refund – the evening is already toast. Consumers are ready to pay for the real thing, and many to DEMAND the real thing. Deliver it at a competitive price, and they’ll buy. But unless the real stuff is ubiquitous, forget it.

Then, start working with your Chinese counterparts. If you think you’re hot about piracy, talk to some of these guys. Your movie gets ripped off in China, you shave a few points off of the global home video numbers. Their movie gets ripped off, and a massive chunk of their theatrical AND their home video is gone.

Start supporting their films. Start distributing them overseas. Build the kind of partnerships with mainland Chinese filmmakers that you’ve built with American, British, Canadian, Australian, German, Russian, and Hong Kong directors, producers, and independents. At the very least let them know that you’re on their side and want to help, then listen to dhem.

Hollywood’s greatest allies in China are consumers and filmmakers. And they are being ignored because it is a lot easier to listen to your lawyers than it is to think creatively about the problem. If the entertainment companies would simply form common cause with their natural local allies, more progress would be made in a year than has been made in the last 20 toward ending piracy.

The Other Side of China

A parting thought.

Even if you resign yourself to the possibility that China will never buy a lot of Hollywood entertainment, it would be foolhardy to remain blind to an important fact: even if you can’t make much money IN China, there are a growing number of ways you can make money WITH China.

The industry simply needs to take China as it is and discover where China fits in the broader scheme of things. Look at what your business needs, look at what China offers, needs and permits – and figure it out. Next week, I’ll look at a set of opportunities for Hollywood in China.

China is like nothing the industry has ever dealt with before. China will change the rules of the game. That’s not going to be pleasant for anyone, but there it is. There is opportunity here, but it’s going to require intelligence, creativity, and flexibility – not Mr. Tough Guy – to capture it.

Winning the Unwinnable

The Village by Bing West, Pocket Books, December 31, 2002, 400 pages

As we sit each day and have pumped to us still more images of Iraq descending into civil conflict, we are tempted to throw up our hands and say that America has no business trying to intercede in – and end – a civil war. We point knowingly to Vietnam, nod our heads sagely, and foreswear any future military venture unwinnable by sheer kinetic brute force.

And then we read a book like The Village, the true story of a team of 15 U.S. Marines who, without any special training or indoctrination, lived for two years in a village of 6,000 peasants in South Vietnam and for all intents and purposes ended the Viet Cong reign of terror in their district.

West (a Marine in Vietnam, later an Assistant Secretary of Defense and most recently a war correspondent in Iraq) could have been reading from the works of Mao when he noted that a revolution has to be fought among the people. Every counter-revolution or counterinsugency, West notes, must be fought the same way. It’s not just about “hearts and minds.” It’s about “I’m going to put my ass on the line alongside you, every day, 24/7, because I understand that you trusting me is more important than any weapon I could bring to bear.”

The book is an incredible read, a page turner, and with the end of every chapter you ask yourself “why didn’t they tell us we could do this? Why, for seven years after the successes in Binh Nghia village, did America choose to pursue the failed strategies of the French and not the strategies we knew would – and could – work?”

You can read this book, understand it, and still argue that America had no business supporting the corrupt, detached regime in Saigon. But you cannot argue that the war was tactically a lost cause because an organized military cannot successfully fight insurrection. Follow that line of inquiry, and I guarantee that you will find reasons for the collapse of South Vietnam that are far more complex – and disturbing – than any of the oversimplified platitudes of either the “Vietnam was a bad war” Left or the “we could have won if if only the politicians had let us” Right.

And what about today?

If, one asks oneself, there were successes like this in Vietnam that have been forgotten both by the public and the military at large, what lessons are we failing to learn on the ground in Iraq (if any) that could change that situation. And what lessons from our past have we forgotten that would provide us insight into the situation we face today?

You might say this is all irrelevant, because Iraq is a lost cause and Afghanistan will surely follow.

But if you have a sense of history and of the direction the world is taking, you cannot help but realize that we will find ourselves facing more Iraqs, more Afghanistans more Vietnams in the future. It is not going to be a matter of “if.” Rather it is a matter of “when” and “whom.”

We failed to learn the lessons of Vietnam the first time, and it has landed us in Iraq today. In The Village,Bing West reminds us that perhaps it’s time we realized that our defeats have far more to teach us about ourselves and our future than our victories.

Gates Blows Out Windows for Kids

In the Hutong
Growing sores on my tuchas
2114 hrs.

Apparently deciding that getting $3 per computer in schools was better than nothing, Bill Gates announced in Beijing last week that Microsoft would sell a version of Windows called Microsoft Student Innovation Suite at said price to government customers buying Windows-based PCs to primary and secondary school students.

The timing was more interesting than people think, and had nothing to do with his trip out this way.

See, at the same time Gates was announcing his 99% discount on Windows for schools, Canonical software was launching and offering for free the newest version of the company’s extremely-user-friendly version of Linux, Ubuntu 7.04 (Feisty Fawn to its friends.)

Now, I’ve extolled the virtues of Ubuntu 6 as a better alternative to Windows XP. By all accounts (I haven’t been able to get my hands on a copy yet), Ubuntu 7 is a leap forward in ease of use, to the point where many people – myself included – would never think of going back to Windows.

Whether the guys in Redmond admit it or not, in countries around the world where large chunks of the population live on $1 a day or less, Ubuntu is in a great position to squeeze Windows out of some pretty lucrative markets. Bill’s $3 gambit is not about stopping piracy. If it were, he’d make the deal more broadly available. Bill’s $3 gambit is about stopping Ubuntu.

Which of course, is free (as in “free beer,” and “free disks mailed to your home or office“), and comes with all kinds of excellent software. I can say now with conviction that if I were ever to be forced to give up Mac OSX, Ubuntu can do anything I need to get done.

Let the battle begin.

Graduate Level Blogger: Stephen DeAngelis

Enterprise Resilience Management Blog, Stephen F. DeAngelis, Principal, Enterra Solutions

Stephen DeAngelis is an extraordinarily bright guy, working as he does with some very interesting clients to help figure out how to use well thought-out, well-packaged economic development as the principal weapon in the war on terrorism. Stephen is dedicated to making the world (and, more important, our policymakers) understand that the only way to end the river of homicide bombers is to give them all a better future to live for.

His blog posts read like lectures – not in the sense of them being esoteric and pedantic, but in terms of being so filled with insight that you want kill all the lights in the room, close the blinds, and turn off your iTunes just so DeAngelis’ words go straight into your cortex. DeAngelis one more proof of the value of reading some of the better blogs out there.

Stephen has inspired me to create a list of what I will call “Graduate Level Bloggers,” people who write blogs that are themselves like master classes. Read them and forget about having to go back and get your degree from Hopkins. You’ll get more staying in your current job and reading these guys – and what they read.

Ind-ja!

Stephen has written an excellent post comparing and contrasting articles from recent editions of The Economist (subscription required) and BusinessWeek on the challenges India faces competing with it’s trans-Himalayan neighbor and rival.

Despite a lot of sunshine that pundits have been pumping out about the sub-continent lately, the ugly truth is that India’s leaders are having a hard time mustering the political cojones required to make the unpopular trade-offs that will buy India her future. Now, to an extent, I can’t criticize, especially when America’s leaders – in both the White House and on Capitol Hill, similarly lack the testicular fortitude to risk their own political careers in the name of vision.

America, however, does not face the same kind of challenges that India does.

We should all be rooting for India. If she succeeds in addressing the challenges that face her, it would give deep credibility to the argument that democracy can bring underdeveloped countries – and their peoples – out of destitution and into global-level prosperity.

If she fails, however, or becomes a laggard in a dynamic region, she will only give more credibility to those who say that only authoritarian regimes can assemble the necessary preconditions of national wealth.

Ask Mary Ma: Are Chinese Companies Ready to Go Abroad?

In the Hutong
Catching up on reading
0200 hrs.

Gordon Orr and Jane Xing of McKinsey cornered Mary Ma for an interview and asked the normally publicity-shy CFO about her thinking on whether Chinese companies are ready to go abroad.

Her answer was interesting:

“Chinese companies are better prepared to invest abroad than many people believe.”

She then goes on to point out that, after all, Chinese companies are used to competition at home, making them very competitive when they decide to go international.

Mary Doesn’t Know

I have a great deal of respect for Mary Ma, and I continue to believe that when the Lenovo management team all sit down together, she’s the smartest person in the room. I also credit her with much of the success the company has had in its integration after the merger with IBM’s PC unit.

However, I think that oversimplifies things a bit. As Lenovo discovered before it bought IBM, all the competition at home was not translating into great success overseas. Its tentative moves to go to battle even in small markets like Italy and Germany as well as some Asian territories left it with little to show. Apparently, there is more to success overseas than being a strong competitor at home.

Bigger is Better?

She then goes on to say that the most important thing for a Chinese company to have before going overseas is scale at home:

“The most important thing for a Chinese company is to grow big enough and strong enough in its home market—in China. Probably the biggest reason for the failure of international growth is that companies lack a certain critical mass at home. Without that, they will lack the level of strategic thinking needed to manage an international organization, and they will lack managers with the necessary breadth and depth of experience.

And this is purely about size; a smaller company’s management wouldn’t have the capability even to think about operating at a global scale, nor the capacity to absorb hundreds more people and managers. The depth of Lenovo’s management meant that we could sustain our success in China and still have managers available to go anywhere we needed them, as long as there wasn’t a language barrier.”


Then in the next paragraph, she talks about companies in the solar panel business, who on the other hand must go overseas first because China is not ready for what they produce.

In short, Ms. Ma, as exceedingly intelligent as she is, is teaching the wrong lessons about Chinese companies that need to go international.

Anyone? Anyone?

So what is the answer?

Zhang Ruimin, Haier’s boss, seems to get it a bit better. In an interview with BusinessWeek’s Tiff Roberts back in 2004, he got closer to the answer when he talked about product design.

“When we enter into overseas markets, if we don’t use local resources, we cannot design and produce the products that satisfy the needs the local consumers’ needs. In the past we tried to design our products in Qingdao and sell them to the U.S. These products looked like American products, but once they were released on the market we discovered that there were minor details that didn’t meet the needs of American consumers.”

Let’s take Mr. Zhang’s point one step further. The most important thing for a Chinese company expanding overseas is to have a deep understanding of the local market all the way to the top of the company, combined with local resources and talent.

Ya can talk, ya can talk, ya can bicker ya can talk, ya can bicker, bicker bicker ya can talk all ya want but is different than it was.

No it ain’t, no it ain’t, but ya gotta know the territory.

Meridith Willson, The Music Man

So the question overseas-minded Chinese companies should be asking is “where do we find the insight and understanding to make us successful in a given market.”

Unfortunately, not enough are asking the right questions. And if they listen to Mary Ma’s advice, they still won’t be asking.

Too soon to Dell

In the Hutong
Watching
Silverado
2300 hrs.

Back at the beginning of February I wrote that the troubles that have led Dell to boot Kevin Rollins and to create what the company is calling “Dell 2.0” all began when the company’s business model hit a high water mark in China in 2004. (“Dell Freezes Over“).

The first commenter to respond was a gentleman identified as “RichardatDell,” who is either a Dell PR person or somebody at Dell’s PR agency. Richard, for obvious reasons, took strong exception to my points.

Rather than respond to him in a comment, I promised I would respond in a new post. and now, a little over 10 weeks later, here is my much belated reply.

Allow me to retort

First, he said:

“Dell’s competitors are not free to act only in the customers’ interest because they must factor in value for their resellers and distributors. That means the customer is third in line. Not so at Dell.”

Right. And Dell must factor in cost for their sales organization and for customer support – which, if you believe consumer polls, have not done much for customer satisfaction. But we’ll address that later.

Dell’s point about factoring in profit for the channel is correct – assuming you believe, of course, that Lenovo, one of Dell’s largest competitors in China, does not act in the customers interest in their company-owned stores around China. Frankly, I think a lot of Lenovo customers would disagree.

It also assumes that the channel adds no value, or adds negligible value to the process. If you assume that all of your customers know enough about computers to purchase them mail order, that’s true. In reality, there are a lot of individuals out there who don’t know all that much about computers and need considerably more hand-holding and service.

Indeed, consumer trends in China underscore that they want that support – not just with computers, but with mobile handsets, appliances, big-screen TVs, and the like. They want these complicated items delivered, unpacked, set up, turned on, and adjusted for them.

“Dell, its direct model and the competitive advantages that made us number one and a global competitor rest in more than simply efficient ordering and product production processes. The direct model is not about processes. It’s about relationships.

I think the direct model is in part about relationships: between Dell and its employees, suppliers, and yes, its customers. I would argue that these are things that are the hallmark of any successful business in any competitive industry. I know it has been in every business I’ve been involved in my entire career.

But this is not, by any means, all of the story. I’ve got Michael Dell’s book Direct from Dell here next to me, and he says so himself.

What has made Dell unique among its competitors, however – it’s differentiation – is the other parts of the model: tight vertical integration, to the extent of bringing suppliers inside the business; turning the competition’s greatest strength into a weakness (which is what they’re trying to do to all of those big bad companies who sell through retailers); and exploiting the Internet, and dragging every efficiency out of the production process.

Whatever Dell’s “customer relationships” are like in the U.S., they aren’t much in China. I was a Dell owner for 4 years from 1999 to 2003. I can tell you that after the post-delivery call, I never heard from Dell again. Apocryphal? Yes.

Anyway, you tell me. What do you think brought Dell this far? It’s relationships, or direct sales backed up by efficient production?

Yeah. Me, too.

Beware of Anything 2.0

Dell 2.0 is about reinvigorating and extending the competitive and non-replicable direct 1:1 relationship with our customers to provide the best customer experience, build a strong global services business and ensure our products deliver the best long-term customer value.”

While I’m willing to give Dell some time to show me what Dell 2.0 is about, and whether Mike and his new executives can deliver on the promise. This is a high bar. How are they going to build a better services business than IBM or HP in modest period of time? How are they going to offer a better customer experience than Apple or Lenovo?

Even if they try, it’s going to be expensive. Especially when part of your solution is to open costly “experience stores” that won’t sell anything.

And, with respect, “reinvigorating and extending” the customer relationship makes it pretty clear that Dell knows they need to be doing a lot better in this department. Giving them the benefit of the doubt, that suggests that whatever Mr. Dell wrote in his book about relationships was either forgotten or took a second priority to the rest of the model. A less charitable soul might suggest that it was never part of the deal in the first place, and that any talk about “relationships” is so much window-dressing.

Xeroxing Dell

In addition, while we are investing in our business for the long term, competitors have announced they will continue to eliminate costs to maintain their ability to compete with Dell; other competitors are not making much or any profit because they need to sell products at a loss. Perhaps they have a ways to go before we can suggest Dell is easily replicated?

Specifics, please. What competitors are selling products at a loss? If a company sells products at a loss, it will lose money. Continue to do that, and you’re out of business.

If, on the other hand, a profitable competitor sells computers at a minimal profit, no profit, or a small loss, it is because they choose to add value elsewhere, like in servers, integration, software, services, or accessories.

Then, of course, there are companies like HP, who are learning to make and sell inexpensive computers that, sumbitch, are even more energy efficient.

Oh, and that snarky crack about competitors eliminating costs? We’re hearing in the Hutong about a plan to reduce up to 13% of Dell’s China staff, apparently because revenue per employee has dropped to its lowest level since 2000.

Grow to Dell

With respect to China…The region’s growth was led by 33 percent unit growth in China, where Dell was the fastest growing among the top five vendors in the region, growing at three times the growth rate of the industry.

Two questions on that. First, 33% growth on what kind of base? What was the current market share? And how have things been in Q4?

Second, where is the growth coming from? Is it in laptops (a market that is growing) or desktops (a market that is shrinking?) Is it with large corporate customers, who service themselves or are getting service someplace else, or from small businesses and consumers?

All of this is germane, because what it will tell you is to what extent this is sustainable growth, versus growth that is gained in the near term at the expense of the long term.

Dell’s Biggest Problem

I see Dells finding there way into corporations. What I don’t see or hear buzz about is Dell winning the hearts and minds of the people that are using them at work. Everyone I know who uses a Dell, laptop, docked laptop, or desktop – cordially hates the damned thing. Again, it’s apocryphal. But the plural of “anecdote” is “data.”

I don’t hear people talking about the Inspirion XPS laptops. I DO hear them talking about ThinkPads, HP Pavilions, and MacBooks.

My data may well be wrong. I’d be happy to have it proved wrong. But I suspect Dell is buying all of that growth at the expense of long-term customer satisfaction and relationships.

Now, maybe Dell 2.0 is set to change all of this. But Dell has to start by admitting that there is a problem here, not by either spinning or ignoring all of the people who aren’t happy.

Worldwide announced today are not encouraging. In the most recent quarter Dell sales dropped 14% in its core U.S. market and 6.9% worldwide. HP, meanwhile, is up 28% worldwide and 26% in the US. Lenovo is up 17.4% worldwide, Acer up 41.4%, and old Toshiba up 13%.

So, roll on Dell 2.0. Let’s see what you’ve got.

The Pipe Dream of Open Skies

In the Hutong
Welcome to the suck
2210 hrs.

Secretary of Transportation Mary Peters was in town last week talking to Chinese officials about the possibility of setting up an open skies agreement between the U.S. and China. I think it’s a great idea, and I’m personally looking forward to direct flights between Beijing and Honolulu. Nonetheless, for several reasons I don’t hold out much hope for an agreement in the near term, despite the SecTrans’ optimistic tone.

The good news is that cabotage – or the ability of a U.S. airline to carry passengers between points within China, or of a Chinese airline to carry passengers between U.S. cities – appears to be off the table. Cabotage creates serious domestic political opposition, and would do so on both sides of the Pacific. Leaving cabotage out of the discussions apparently helped US conclude their open skies agreement with Europe last month. Secretary Peters, apparently flush from that success, is now tackling a much tougher nut in China.

The SecTrans is Smart, but…

From what I hear from some of the reporters who had contact with Secretary Peters during her jaunt through China last week, she is one very bright lady. Indeed, in the words of one journalist, she stands out among the Bush appointees as a singularly intelligent, well informed, down-to-earth, competent administrator.

The one challenge she faces, however, is that she is, by both training and disposition, a highway engineer. This means that not only is she an outsider to the politics and peculiarities of the aviation industry, she is also more accustomed to dealing with government issues in a domestic (rather than international) context. Her experience dealing with the Chinese is, therefore, also somewhat limited.

So when she predicts that the US will see an open skies agreement with China within the year, and a framework for discussion within a month, she can, therefore, be forgiven for her optimistic assessment.

Because anyone with experience negotiating international agreements with the Chinese government knows that reaching any bilateral accord, much less something with significant potential impact on China’s economy, is not a quick process. Things just don’t move that quickly here, and they are less likely to in this case.

Anyone familiar with the grunt work involved in reaching a bilateral open-skies agreement also understands that this will be a very long process. One friend of mine, working for a major wire service, noted that when he spoke to a senior U.S. airline executive recently about the possibility of open skies with China, he noted that he did not expect significant progress for at least a decade.

There are lots of reasons why this is the case. Two of them immediately come to mind.

What is Hong Kong?

One of the biggest questions in the discussions is the status of Hong Kong and Macao in the agreements. If you exclude Cathay Pacific and Dragonair from the discussions, open skies looks like a great deal for U.S. carriers, but not necessarily such a hot deal for domestic Chinese airlines. Short of a significant upgrade of the reputation and service offered by Chinese airlines on their North American routes, chances are the U.S. carriers would dominate the routes, at least taking the more profitable business and leaving the Chinese airlines to scoop up the leftovers.

On the other hand, if China managed to convince the U.S. to include Hong Kong and Macao, the tables would turn. All of a sudden, you could fly Beijing to Los Angeles, San Francisco, New York, Chicago, and DC on Cathay Pacific. That would allow CX to take the cream, with the American carriers fighting the mainland Chinese carriers for everything else.

While the Chinese may not want it (ownership structures notwithstanding, there’s no love lost twixt the mainland carrier and it’s Hong Kong cousins), would be a great tool to use to slow down negotiations and exact concessions from the US. Regardless of how the Chinese feel about it, the U.S. airlines certainly don’t want to face CX on what are rapidly becoming the most profitable routes in the business.

Are the Chinese ready for open skies?

Here is the real kicker. You have to assume that at some point there will be an open skies agreement between the US and China. You also have to assume that the US wants this, because they are driving the process at the moment. This means that the Chinese control the timing of the process.

So the real question is “when will it make sense for the Chinese to go for open skies?”

The short answer to that is “not right now.”

Apart from the obvious question of service quality, China’s airlines aren’t ready. Marketing is weak, the brands need pumping – even the liveries on the sides of the aircraft look like throwbacks to the 1970s. Domestic demand is rising quickly, and the companies are having to deploy most of the aircraft, pilots, and financial resources they can muster simply to handle local growth.

Keeping up with a sudden inrush of airlines who are much larger and more experienced airlines would swamp the locals, who would be unable even to match the growth in routes. If it happened today, would Air China, China Eastern, and China Southern be able to start direct service to another half-dozen US cities without stripping their networks of assets? Already China needs to find 11,000 new pilots and 2,500 new aircraft in the next 20 years just to keep up with organic growth. Competing under open skies would only add to this burden.

Give them an inch…

There are other reasons for the Chinese to want to go slow on open skies with the US.

For one, the Europeans would show up the next day demanding open skies for their airlines, too. They’d be followed by the Japanese, the Singaporeans, and nearly every country in the world. In other words, even if you don’t think United, American, Delta, Continental, Northwest, USAir, and Hawaiian could collectively deliver a mortal wound to the international services of China’s airlines, you have to assume that adding the rest of the world to that burden isn’t going to help. At the very least, international growth opportunities for China’s airlines would be stunted, and this at a time when those services are desperately needed to help make ends meet.

Bottom line, as hopeful as Secretary Peters might be, if I were her I wouldn’t count on making open skies happen with China before her boss leaves office in January 2009.

Shuttleworth Joins Anti-DRM Chorus

Africa’s first astronaut and open source supporter Mark Shuttleworth, the man with the money behind Ubuntu Linux, has added his voice to the growing choir of senior executives calling for the end of digital rights management.

It is a good piece and worth the read, even if there is not much new.

Diagnosis Correct. Cure?

Mark Shuttleworth is a can-do, solutions oriented kind of guy. I greatly admire what he is doing (making Linux, formerly The OS Only A Geek Could Truly Love, into The OS that You Can Love if You Hate Windows But Can’t Stomach OS X). Truth is, I’ve got Ubuntu running alongside OS X on my Macintosh for no better reason than to support what Shuttleworth is doing.

What I would have expected from someone with his entrepreneurial drive and technical acumen is something more than “DRM sucks – deal with it, entertainment business.” I would have hoped he’d at least start to focus on possible ways for artists – and maybe a few entertainment companies – to continue making a living in a world where they’re being asked up their last stitch of property protection.

No Pay, No Play

Nobody really likes DRM. Nothing pisses me off more, for example, than the fact that all of the DVDs I purchased in Australia are unreadable on my region 1 encoded computers. Note, if you will, that I (or someone) paid full retail price for every DVD I own. I’m fine with not buying pirated DVDs here in China, and I’m even okay with avoiding DVD shops here because you really never know what’s legit and what isn’t. But I’m pissed off that if I go to an HMV in Hong Kong or Singapore or Japan and buy legit DVDs there, I can’t play them.

But I understand why those things are there. And I also understand that if you walk up to an artist or an entertainment executive and say “look, you need to throw all of your work out into the public domain, like shareware, and put everyone on the honor system to pay for it,” they’re going to throw you a right hook, and rightfully so.

Stop the Posturing

When people get scared – or feel threatened – the automatic reaction is to put the wagons into a circle, or create what the voortrekkers of Shuttleworth’s native South Africa once called a laager. The entertainment business is scared. The wagons are in a circle, the lawyers at the ready.

What needs to happen is for somebody with vision and intelligence to step forward and start talking about transition, a way to put the entertainment industry on a path to wean them from DRM, but at the same time to come up with other stuff that lots of people will pay for around the music, television, film, and other works that are no longer protected.

There’s going to be no silver bullet. It’s going to be a lot of different business models in the end, but you aren’t going to get from here to there by waving a scary future in the face of everyone in the entertainment industry around the world.

Great post, Mark. Nice Op-Ed, Steve Jobs. Get DOWN on your bad selves.

Now, enough with the posturing – and that goes double for the suits at the RIAA and the MPAA. It’s time to start building bridges to the future.

Let’s get on it.

China’s Video Sharing Gold-Rush is Over

Sophie Taylor over at Reuters has written an excellent article noting that the rats investors are leaving the sinking video sharing sites around China.

Apparently, after YouTube scored a sweet $1.65 billion from Google’s cash hoard last year, a whole lot of people in China decided to start their own video sharing sites – before, of course, they thought through a small detail called a way to make money off of all those videos.

Video sharing looks like a typical Chinese “one guy got rich doing this so we can, too” pile-on. According to the article, there are over 400 video sharing sites in China that shared US$ 64 million in revenues last year. Now, it can be cheap to run a business in China, but average revenue of $161,000 per site?

So the implosion is coming, and investors are heading for the door.

What’s Next?

Now that Reuters has been good enough to point out one place online where there is too much investment, the obvious next question is “where else is this happening online in China?”

Games?

Social networking?

More Handset Manufacturers: Good-oh!

The National Development and Reform Commission, China’s super-ministry with the remit over driving the nation’s economy forward, has just issued final approval for four new Chinese consumer electronics companies to begin making handsets, adding to the 80-odd manufacturers already in the market.

You could argue that the last thing China needs is another four mobile handset manufacturers. And you’d probably be right. People far wiser than I have been saying for a long time that there is a major shakeout coming in this market, and that in the end the 80 odd device makers will probably be whittled down to a round dozen or so.

Voting for the Market

I see something very positive in the NDRC’s move. The senior economists and policy makers at the NDRC are not stupid – they know that China’s mobile handset market – no matter how big it is – cannot hope to support nearly a hundred companies in the business. Frankly, I doubt the entire world, with a billion handsets made each year, could support a hundred handset makers.

The message that the NDRC is sending in this move is that rather than select champions to support and force the rest out of business, they are letting the market decide who will survive. Will this mean cannibalistic hypercompetition among manufacturers? Absolutely. But the thinking is that the companies that DO survive will be better suited to compete both locally and globally than they would if the winners were selected by the bureaucrats.

The Coming Agony

If anything, this move hastens the day when the big shakeout begins. Now, we’ve already seen some manufacturers depart the market completely. Mitsubishi appears to have packed up and left, Siemens is gone, its successor BenQ is on life support, and others are on the edge.

Here are the challenges that face the market:

1. 3G is coming (yes, really): Not all companies will find it easy to shift from producing GSM-based phones to producing phones based on 3G, especially TD-SCDMA. Some will never make the shift, relegated to fighting for scraps at the bottom of the mobile food chain.

2. Picky consumers. China’s mobile handset buyers – regardless of whether they are first-time buyers purchasing basic handsets, style-conscious fashionistas, or wealthy young executives buying the newest, coolest handheld hypergadget, are expecting more and more from their devices. Delivering handsets with the mix of design, features, and experiences that appeal to consumers is no easy trick, and the chances of getting it wrong are growing. Smaller manufacturers won’t be able to afford mistakes – a couple of mediocre handsets, and they’ll be gone.

3. Market tempo: Tastes change fast out here, and your average handset owner picks up a new phone eveery 15 months or so. You have to move extremely fast to keep up with changing demand. Maintaining a reasonable level of innovation and product development will exact a brutal cost on companies, and many – if not most – of the current crop of manufacturers won’t be able to keep up.

4. Economies of scale: Being able to sell a given design, feature, or handset across a global market will mean lower prices, even at the high end. The bigger manufacturers will deliver better value for the dollar. Period. At the low end, where economies of scale are everything, the kind of scale that Motorola, Nokia, and Samsung can bring to the party is going to be difficult to match. A lot of companies are going to engage in bloody price wars to try to hold onto the low end of the market, while the big boys can turn out cheap phones at a profit all day long.

5. Retail: Up till recently, phones have been sold in a bazaar-like environment in stores large and small around the country. The war for retail space and for the attention of the consumer is getting intense: the major manufacturers are making large investments in improving the retail experience across the board. This is no longer about how much display space you get – rather, it is about who can make buying the handset more enjoyable. Motorola is way out ahead in China with its flagship stores. Nokia is following, and Samsung will probably do so as well. The question is, can new licensee Fujian Furi or any of the other smaller manufacturers manage the same?

The Winners Will Be…

We can be pretty sure of about ten companies that will make it across the divide: Motorola, Nokia, Sony-Ericsson, Samsung, LG, Sanyo, Ningbo Bird, ZTE, and a couple of the larger original device manufacturers (ODM.) Beyond that, it’s going to be anybody’s guess.

A number of fates await the losers, not all of them dismal. Sure, some companies might go out of business. Others will merge with competitors to form larger players, move into specific niches or vertical markets, or move into other parts of the business: parts, accessories, and specialized devices like cellular modems and Wi-Max receivers. Many will wind up as either subsidiaries of or suppliers to the winning companies.

As the mobile handset market grows and evolves around the world, the value chain is becoming larger and more complex, offering more opportunites in these areas. What the NDRC needs to be looking at is ways to ease the transition of the companies to something new once they’ve been squeezed out of the handset business.

Here is the ultimate result, and I’d wager this is what the NDRC is betting on: China will be the global center of the mobile handset industry, not just in manufacture and consumption, but in research, design and development as well. If the cost of that is a little creative destrcution, that’s a price the NDRC is (and should be) willing to play.

SAP: Choosing the Future

In the Hutong
Choking on a Centrum
1923 hrs.

Renee Ferguson over at eWeek wonders whether Shai Agassi’s departure from SAP signals that SAP will “sink back into stodginess.”

I’ve spent a little time working with the folks at SAP on stuff here in Asia (though not anymore), and I think both the markets (SAP dropped 2.4% at one point following the announcement) and eWeek are making a big deal out of nothing.

A Team of Leaders

Sure, Shai Agassi loves to jump in and mix it up a bit in press conferences and the like. Agassi stood alone among SAP’s leadership in his willingness to talk trash about the competition, especially Larry Ellison and the rest of the San Mateo Mafia. That kind of stuff makes for good copy, and tech journalists like Ferguson understandably like good copy.

I think what eWeek is worried about is not SAP’s stodginess: she’s worried about finding somebody colorful to write about.

Frankly, SAP’s management team has plenty of colorful characters. I continue to be a big fan of Henning Kagermann, the current CEO, who comes off as friendly, professorial, and brilliant. His quiet, strong leadership is probably best likened to that of Reuben Mark, the anti-celebrity CEO of Colgate-Palmolive who eschews the limelight in favor of – get this – actually leading the company and driving performance.

People also may not realize that Leo Apotheker is a no-nonsense guy who is every bit as capable as Agassi of colorful talk. That he keeps it restrained is more of a reflection of SAP’s desire to avoid dancing on the heads of competitors. The company was born as an underdog, and triumphalism does not suit them. Watch Leo in an SAP sales conference, however, and you get the feeling that the troops adore him.

What Plays In Peoria

Finally, most of the Valley crowd has yet to figure out that the sort of broadsides that Ellison likes to hurl tend to backfire outside of American – and perhaps European – culture. For all of his Japanophilia, Ellison seems to have trouble with something the SAP team seems to know instinctively: in the enterprise software business, you sell to the world, not just to Americans. The remarks that bring guffaws in New York and San Francisco can elicit little more than shaking heads in large parts of Asia. One man’s F.U.D. is another man’s silly trash-talk. As any company in the enterprise software industry will tell you, Asia is where the growth is, both in licensing and service. Over here, strong, silent, mature confidence wins over more decision makers than dissing – or suing – the competition.

Here’s my question: what happens if you match up, man-for-man, the leadership teams at Oracle and SAP? Which company – lawsuits and recent forecasts notwithstanding – looks like the better bet in the long term?

SAP should be applauded for being ready to sacrifice such an important executive to something far more important – the long term stability of the company and its products and services, which together form a platform on which many of the worlds biggest (and smallest) businesses depend. Journalists and analysts must remember that in the end, SAP made a choice that put its customers ahead of the stock price.

The Three World Planet of Mobile Handsets

In the Hutong
Avoiding the raging mobs of spring breakers
1747 hrs.

The trendmeisters in residence at PSFK have come to the conclusion that mobile phone usage habits vary significantly across the world’s regions. They’re spot on.

They divide the world into 3 regions, based on the rate at which both the Internet and mobile phones diffused into the population:

Region 1: North America, where people mostly had Internet before mobile phones;

Region 2: Europe, where people got mobile phones and the Internet at the same time; and

Region 3: Asia (East, West, and South), Africa, and South America, where for most of us the mobile phone preceded the Internet – and for many in these regions, still does.

The theory is that the later we got Internet versus our phones, the more reliant we are on phones as our primary device for digital access, and as devices to enhance our lives. It’s an attractive idea, especially in its simplicity. I’d say there are probably other issues involved, but I’m ready to grant their idea for the sake of argument.

The article focuses heavily on North America, but gist of the article is basically that if you are in the mobile handset, software, or services business and you count on there being a single usage model the world over, you’re road kill.

My one quibble with the article is that it doesn’t go far enough.

Suggesting that there are no – or minimal – differences between the way the handset is used in Japan or Korea as opposed to, say, India, or Australia is nuts. Asia, as an old friend of mine used to say, is not a place. Asia is an accidental geographical agglomeration of highly diverse countries and cultures. For that reason, you need to think about designing handsets, services, and software for specific countries.

My pals at Motorola get this. The MOTORAZR that sells in China is different than the MOTORAZR that sells in Korea, which is different than the MOTORAZR that sells in Japan. And the differences go beyond the launch screen, languages, and a few .apis. Apart from the iconic design and trademark colors, each of these are phones designed specifically with the users in that country in mind.

That’s also why they drive their R&D and design deep, deep into the local markets: 16 R&D centers in China alone.

Simply sticking a design center into a trend-setting place like Los Angeles isn’t going to capture a significant chunk of a diverse global market. Nor is creating phones in a small town near the Arctic circle, or a company compound near the DMZ.

In the long term, the global handset will give way to the individual handset. The winners in the mobile telecommunications business are going to be the ones who enable that first.

And by the way – that goes DOUBLE for China.

Say With Me: “I am (I AM) somebody (SOMEBODY)!”

In the Hutong
Enjoying the breezes of spring
(and praying they don’t carry dust, sand, and rocks)
1537 hrs.

Reading more of Diligence China (great stuff, I’m not kidding) and one of Andrew’s old posts about different companies in the economy. I tried to write him a comment, but for some reason the blog smacked me out, so I’m posting it here.

This was in response to his post “New China JVs, Look Local, Act International.”

In the post, Andrew discounts the importance of small business-to-business service companies to the overall Chinese economy:

“On paper, these are Chinese companies. Many of these register locally and show up in government statistics as local businesses. The reality is that they usually behave like mini-MNCs, and often make up part of the multinational service supply chain. These are the lawyers, accountants, programmers, consultants, designers, etc. that have been powering the MNCs drive towards success in the China market.

They are important to the Chinese economy, and will continue to make many valuable contributions to the internationalization of places like Shanghai, Suzhou, Hangzhou, Beijing and Shenzhen. But these are mainly vehicles for individual service providers to register and operate. Like many business startups that center on a few talented individuals, they have difficulty sustaining growth and aren’t particularly scalable. While they are invaluable to the MNC supply chain, they probably won’t be a source of significant innovation or large-scale international brands.”

To which I responded:

Andrew,

Great stuff, as always.

Regarding small business-to-business service firms, I generally agree with the post, but I want to address several of your points.

First, while such firms tend to start small and focused around a talent cluster, with the right care they can actually scale. This is a matter of management, not of nature. I’ve seen this happen with four firms off the top of my head in computer services, advertising, and printing.

Second, they start as a part of the MNC supply chain, but they grow outwards from there to service other entrepreneurial enterprises, government, and, increasingly, Chinese firms. Many of these companies are cultivating the expertise to take Chinese brands overseas in the same way they built competency helping MNCs come to China.

Third, regardless of whether these companies grow beyond a few dozen employees, their economic effect is huge. Apart from paying healthy salaries and transferring some essential skills, these companies are hothouses for the corporate counsel, controllers, CFOs, CMOs, designers, architects, project managers, and salespeople who will drive the success of Chinese enterprises both here and abroad.

Fourth, as to innovation, while these firms will not develop quantum computing, room-temperature fusion, or efficient photovoltaic cells, they are driving innovation in service provision that is putting global players in their businesses on their back foot. That’s possible because of the dynamism of the market. Business services in the US and Europe are horribly ossified. Not so in China – we are redefining these industries as we speak.

To dismiss out of hand the significance of such enterprises merely becuase they will not create large scale international brands misses the point: large scale international brands are by no means the sole – or best – measure of economic success. They are simply the most visible.

The fact is, China has built much success so far without international brands. If it can continue to find ways to make the best use of its resources by either buying brands from other companies or serving as the substance behind other global brands, does that make China’s success any less valid?

Love the blog – you make me think.

David