Silicon Hutong

China and the World of Business • China Business and the World

Silicon Hutong - China and the World of Business • China Business and the World

Thierry Henry and the Care and Feeding of Talent

We write about sport but rarely here at the Review, and that’s because it is written about so widely and so well elsewhere. But when something happens in the world of athletic endeavor that seems to call for comment, we will. In this case, it is the seemingly ho-hum news of the departure of Arsenal team captain Thierry Henry for Arsenal’s Champions League bete noir, Barcelona.

While it is by no means easy to be an American living in China and supporting any English football club, satellite television and the Internet do a passable job of keeping me and my fellow soccer fans here in Beijing plugged into the goings on. What I have also discovered is that, if nothing else, distance lends perspective.

So despite the frustration that accompanies my favorite team losing its most valuable player, not only do I understand the reasons for Mr. Henry’s leave-taking, I think it offers an excellent lesson for managing talent, especially for those of us running businesses in the people-rich but talent-poor service industries in the PRC.

Why He Left

Thierry Henry spent 8 years at Arsenal, and they were good ones, too. During his stay the club won the League and Football Association cups multiple times, set a new, seemingly invincible record for consecutive wins, moved into a brand new stadium, and earned the grudging respect of their opponents. Henry himself did brilliantly, and by October 2005 became the top scorer in Arsenal’s long and storied history.

The one accomplishment that remained out of Arsenal’s – and Henry’s – grasp was the European championship. A single point loss in the finals of that competition, combined with the gradual departure of the team’s core players, made it increasingly clear that the Champions Cup victory would be a long time coming.

In other words, Henry had been in one place for eight years – a long time in any profession. He had accomplished much, but he had achieved all he could reasonably hope for in his current situation. And after being tapped as captain of an increasingly inexperienced team, he found himself saddled with the hopes of a squad that was used to winning. No one knew better than Henry that what lay ahead of Arsenal is years of rebuilding, not a redux of its halcyon years of 2000-2004. Leadership is a lonely thing, and there is nothing lonelier than leading a group of much younger people when the odds are against you.

What the new situation at Barcelona offers is a warmer climate, a team made up of peers, and an real shot at the one victory that has eluded him in his career – the Champions League – within the few years he has left on the pitch.

Feeding Stars

Here are the lessons I’m taking away from this situation, lessons I won’t forget because every defeat Arsenal suffers over the next three years will serve as a reminder:

1. Even Stars Get Bored – or Burned Out. In China as in athletics, tenures are short because the pace of life is grueling and because change is constant, and not everybody is Cal Ripken, Jr. The situation you provide to a person today will probably not suit them forever, no matter how many new challenges you throw at them, and sometimes the harder you try to keep them in place, the more frustrated they’ll get.

2. More Responsibility is Not Always the Answer. Many managers tend to forget the simple fact that each person is motivated differently. Some may rise to the challenge of having an challenging new assignment given to at them after five years, others may bristle. When motivating a star, you either need to offer something that touches his or her deepest desires and motivations, or you start working on a transition plan.

3. Offer a Realistic Route to their Goals. Or, help them go somewhere that they can reach them. Do everything practical to build a situation in house where the star will achieve the things that are important to him or her. If it can’t be done, don’t push it. Send them on their way with your blessing.

It’s not the Star, it’s the Galaxy

4. Even a Star Needs Mentors. True achievers have reached that point largely because they have spent their lives learning from different people, and taking the daily counsel of people they admire and respect. When you take that away, leaving them with a significantly reduced group of mentors – even when some of those mentors are peers – they feel like they’ve stopped growing. Real stars know that they bask in the reflected light of others, sharing their energy, measuring themselves against others, and finding their own unique strengths as a result.

In short, stars need understanding, genuine respect, and an ecosystem of like individuals to thrive. Warren Bennis and Patricia Ward Biederman, in their book
Organizing Genius, taught me that extraordinary people are happiest – and accomplish the most – when they are part of great groups.

Bon voyage, Thierry, and bon chance. Thanks for the victories, and enjoy Barca.

Piracy: To Win the Battle, Identify the Enemy

In the Hutong
Using WMD against mosquitos
2058 hrs.

Shaun Rein fired me a link to his recent BusinessWeek op/ed about how it is possible to win the piracy battle. It’s worth a read.

He and I are often in general agreement, and I enjoy reading his stuff. In this article, he’s touching on one of my favorite themes: an economic approach to reducing the size of the piracy problem will beat a moralistic approach any day.

For the sake of advancing the argument rather than denigrating Shaun’s excellent piece, I want to call out one issue that his article brings to light.

We Got 99 Problems But The Law Ain’t One

Shaun’s article is broad, covering almost the entire issue of IPR theft in China, including pirated software, counterfeit luxury goods, knockoff pharmaceuticals, tainted food, bootleg DVDs, and fake consumer electronics. It is a perfect example of one of the unspoken reasons we have not managed to solve the IPR issue in China yet: we have collectively failed to recognize that each of the manifestations of IPR theft is a separate, distinct problem with its own causes and solutions causes us to search for simple solutions.

We need to recognize that China does not have one gigantic IPR problem, but several quite large IPR issues that each need to be addressed separately.

For a simple example, let’s compare bootleg DVDs and knockoff pharmaceuticals. Consumers are complicit in the first. They are unwilling victims of the second. What drives these two issues are quite different: in the case of DVDs, it is a combination of price arbitrage (“it’s too expensive to buy the real thing”) and failed distribution (“I want the real thing, but there’s no place I can buy it.”) In the case of knockoff pharmaceuticals, the problem (as I understand it) is a combination of lack of awareness, profiteering medical administrators, and a distribution system that mixes the real with the fake.

The problems are different, the solutions should be as well.

The old saw about how to eat an elephant (“one bite at a time”) applies here. Fix the problem by breaking it up into its component parts. Create solutions for each type of piracy one at a time.

Your Mercedes or My Life

As an aside, we must also recognize that some piracy issues are more serious than others. Motion picture and software piracy are bad things, and we focus on those issues in The Hutong because they’re close to our heart. Pirated copies of Windows VISTA and Terminator 3, on the other hand, are not likely to kill people the way, say counterfeit aircraft parts, pharmaceuticals, or batteries might.

As we disaggregate the piracy problem, we could all start spending a little more time focusing on the parts of the issue that are potentially lethal but not quite as glamorous.

Where The Law Does Matter

As Shaun himself appears to grant in the last paragraphs of his article, engaging on the legal/moral side does have value. There are two important qualifications to that. First, the victories Shaun cites are Chinese companies suing Chinese pirates. These cases, which cannot be framed in “us vs. them” nationalistic terms, are superb examples of why the battle in the courts is best framed with Chinese as the plaintiffs rather than foreign ones.

Second, these victories come not to companies who abstain from full participation in the market, but those who focus first on gaining full and legitimate access to their customers in China. Apart from the fact that this makes great business sense, it recognizes a often overlooked phenomenon: when a foreign company builds access to its customers in China, it automatically enlists a host of de facto allies in its fight to defend its IPR: Chinese companies who serve as partners, suppliers, distributors, retailers, promoters, developers and the like.

Legal and commercial tools to protect IPR march hand in hand. But the commercial means must be applied first, the law second.

Hollywood, take note.

Our Greatest Ally

At the core of Shaun’s argument – and mine – is that we have to look beyond the government for solutions. Even if the government woke up Monday morning and said “okay, let’s fix the IPR thing,” they would not be able to achieve a solution via fiat. They will turn to industry – us – and say “okay, given the limitations on our police resources, how do we create a lasting solution to the issue?”

We’d better have some smart, specific, commercial answers, and we be ready to mobilize our greatest assets in each fight: the ordinary Chinese who are being hurt by each specific form of piracy. Consumers, businesses with their own IPR, filmmakers, and the companies who rely on legitimate foreign IPR or IPR-based products for their livelihood. Only can the battle be won on the streets, and only then will the politically controlled police and court systems recognize the value of consistent, vigorous enforcement.

Restructuring Nokia: Reading Between the Lines

In the Hutong
Battling burnout
2052 hrs.

Nokia made a major announcement today, telling the world that in 27 weeks the company will significantly reorganize itself. Ostensibly, the reorganization is to focus on “future growth opportunities around converging Internet and telephony services.”

If that sounds pretty innocuous, you can be assured that this is intentional. Using buzzwords like “convergence” and “Internet,” and even aping Apple and Motorola by talking about “rich, mobile experiences,” Nokia appears to be taking a logical step in its evolution.

I applaud Nokia’s efforts to change with the times. But as I read between the lines in the reorganization announcement, I’m disappointed to find that this reorganization merely appears to solidify the Finns’ traditional approach to the market, an approach that is, in my opinion, tragically misguided.

CEO Centric

Getting past the obligatory jargon-laden CEO quote and digging into the Tell You As Little As Possible details, some interesting points pop up. First, the company is moving to a more vertical structure, an approach that should give CEO Olli-Pekka Kallasvuo more direct control over the company. That could be good thing for Nokia, arguably making them more nimble.

They’re also apparently pulling their supply chain, sales channel, and marketing activities into one unit, divorcing them from the product divisions. Whether that’s going to work or not depends on the details – me, I’m a big fan for keeping the marketing close to the product and both of those as close to the ultimate customers as possible. But let’s wait and see.

The Rise of Services and Software

The real wake-up comes when you look at the structure underneath Nokia’s consumer products division, Devices and Services. Devices, okay, that’s handsets. We get it. The real juice of this reorganization is in the introduction of a new Services & Software unit. The wording refers to that unit as “reflecting Nokia’s strategic emphasis on growing its offering of consumer Internet services”.

This is not a small move. Creating an organization inside of Nokia that enjoys a status co-equal to that of the group that actually manufactures the mobile devices means that Nokia sees its future at least as much in the services side of the business as in the devices.

That’s an announcement clearly designed to make investors wiggle. The problem is, the investors are not the only people Nokia needs to please.

Competing with Customers

Nokia believes the Services unit will help it “offer its customers complete solutions” that are “coupled” with their devices. Now, when Nokia refers to its customers, it is primarily referring to mobile network operators. So what it is saying here is that it wants its Services team to come up with end-to-end packaged solutions that it can sell to operators as is. One assumes Nokia will sell the software, or perhaps just partner with the operator.

In short, the justification for the services unit is so that Nokia can sell a single integrated solution to the operators – network gear, software, services, and devices. In other words, Nokia still dreams of owning the whole value chain, and selling it all as a package to operators.

The question – particularly in Asia, and especially here in China – is whether the operators are even interested in that proposition.

If anything, operators in Asia have demonstrated that they are willing to make mistakes – sometimes a series of very expensive mistakes – in their quests to develop bouquets of services that users find exciting, relevant, and worth spending money on. Initially these operators have tried to go it on their own, but most of them have come to the realization that they are better off working with a dependable group of service providers.

In the case of operators like SKT in South Korea and DoCoMo in Japan, the most successful mobile operators have created their own branded platforms that they have used to make their brands mean more than pipe providers. China Mobile and Unicom are studying them – and operators like Orange and Verizon – with great care, and are conducting their own experiments. And they seem to be getting closer to the right mix.

The question is – what does Nokia have to offer to mobile operators that the mobile operators cannot – or do not – want to create or acquire through partnerships with dedicated service providers? And why would they want prepackaged “complete” solutions over bouquets they assembled for markets and customers they understand far better?

Nobody Loves a Value-Chain Hog

As Nokia publicly preens itself for being different than what it derisively calls “point solution vendors,” it risks alienating the entire mobile industry. It makes operators uneasy about letting them too close, service and software providers leery of working with them, and it hands their competitors all of the ammunition they need to sow fear, uncertainty, and doubt about Nokia’s ulterior motives with everyone else.

Nokia may not care. Their scope of their vision is now clear. They are not satisfied with being the market leader. They want more. They want to own the ecosystem – or as much of it as they can get – and either lock out other players or force them to play on Nokia’s rules.

In other words, Nokia wants to be Apple. Nokia hardware, Nokia software, Nokia back-end, Nokia services, all on Nokia’s terms.

There are only a couple of problems with that. First, Nokia is not Apple. Despite pretensions to the contrary, it lack’s Apple’s cachet, design leadership, superior user experience, and history of delivering and selling a closed system.

Second, despite some resemblances, the mobile business is neither the computer industry nor the consumer electronics business. Apple has created an entire closed value chain because it has never had to work through a major intermediary. Nokia cannot realize its vision of service leadership without running afoul of its major customers – the operators.

Get Back To Where You Once Belonged

Nokia’s market share leadership in mobile devices has served to obscure some fundamental problems in the business. The integration of Siemens on the networks is still unfinished, and the hollow-eyed looks among the lunch crowd at Pacific Century Plaza in Beijing underscore that layoffs are ongoing. In the mobile business, the design effort is still two years behind Motorola and a year behind Samsung. Nokia runs third in mobile entertainment behind Sony Ericsson and Motorola, and its leadership in entry level phones will be challenged by a resurgent Motorola and a Samsung that is now determined to take its fair share of that market. And, of course, Nokia is still recovering from its failures in mobile games and its perennial weakness in the US market.

Sure, none of these problems is insurmountable. But they are considerable, and collectively they argue for the company to focus on its fundamental business rather than undertake a major reorganization and shift focus to services and software.

Can Nokia do it all at once?

As I close this piece, Nokia’s NYSE shares are up less than one half of one percent. That’s far from a resounding endorsement, and Motorola is up by the same amount. It’s clear the Street is as skeptical as the Hutong.

Manoj Menon Gets It

In the Hutong
High on Benadryl
1026 hrs.

Manoj Menan, a partner at Frost & Sullivan, was just on CNBC from the floor at CommunicAsia 2007, and while I missed half of his interview because of a con call, I think I heard the money quote.

“Our ability as an industry to visualize [advanced mobile services] exceeds our ability to execute. Asia’s carriers need to embrace the open innovation model, rather than take a walled-garden approach.”

Well said.

As we’ve said here before, the biggest barrier between China’s mobile phone users and really useful mobile data services is NOT technology: it is, rather, operators’ insistence on owning any piece of the mobile value chain that might make a little money.

I see signs of hope, especially in entertainment. With music, the carriers looked into the nasty maw of copyright issues and recoiled in horror, delighted to allow partners to deal with the beast of selection, rights clearances, and the like and happy to partner in the revenue stream without having to own the deal.

Let’s hope, for the sake of operators, their shareholders, and users, that this continues.

China is Going Grey

Maya Alexandri has written a superb review of a recent government study on China’s grey economy. The study claims that urban residents in China generate and earn an estimated RMB 4.4 trillion in grey income. Putting that number into perspective, that’s about the size of the current defense budget of the United States.

Let’s analyze those numbers for a moment. Figuring that China has approximately 300 million urban residents, that’s RMB 14,667 in underground spending/earnings PER urban resident each year. While US$ 1920 per year may not sound like a lot, it represents a figure that is 25% larger than what the National Bureau of Statistics reported for per-capita urban income in 2006.

This means that urban income is at least understated by 25% in government statistics, and if the NBS is not taking into account the grey economy (which it doesn’t look like they have,) urban incomes in China could well be underestimated by 50% or more.

In a day when there is a significant battle among economists as to exactly how much purchasing power China’s urban residents have, this discrepancy could be pivotal in the debate.

Why China Might be Playing the Blame Game

China Law Blog referred me over to a superb post by Will at ImageThief that explains that China’s entire PR strategy around the recent food and drug export tainting scandals has been abysmal – or worse.

Will points out that AQSIQ and other government organs blaming Panamanian traders, the USDA, foreign reporters, former drug chief Zheng Xiaoyu, and each other – basically doing everything but take responsibility.

To outside eyes, that’s bad, if not pathetic. Here is the government of one of the most powerful nations on earth abjectly refusing to take responsibility for something that, conceivably, it could have had a hand in preventing.

Whenever I see inexplicable situations in China, rather than lash out or go postal, I stop imbibing caffeine and sit back for a moment to reflect on some of the reasons this could be happening.

I think the spate of denials and blamestorming that is going on are probably driven by some deeper issues.

  • First, it is entirely possible that Zheng Xiaoyou’s recent death sentence for his dereliction of duty is having the perverse effect of scaring the living hell out of everybody in the food and drug inspection business, and thus causing them to play the blame game out of sheer fear for their own lives, facing the possibility that they may be next, rather than having them come clean with any issues they are already finding.
  • Second, there is the very real possibility that out in the provinces there is some horribly deep rot in the inspection system. As good as things might be on top, it is entirely possible to imagine that a number of individual government inspectors have been turned, that the concerned bureaus know or suspect that, and they’re worried it will wind up on their plates.
  • Third, let’s remember for a moment the enforcement challenges China faces on everything from traffic laws to intellectual property protection. It is quite easy to see how local political pressure to go easy on hometown enterprises could make real enforcement impossible, even for the most intrepid and honest inspector. Even in this case, the blame for failing to enforce would land on the enforcer.

Independently, any one of these would be sufficient to explain the knee-jerk posterior-covering going on. If the problem is a combination of these factors, serious action is required.

What has to happen to stop all of this is an enlightened approach at the highest levels of the Chinese government. Somebody very senior has to say “I’m not out for somebody’s head – I’m out to solve this problem. People will be evaluated in this process by the vigor with which they help us find and implement workable solutions.”

That’s a de facto amnesty, but the serious pain this situation is set to cause to some critical export sectors in China justifies it.

Once we’ve made it through this crisis, though, China needs to dig deep into its inspection systems to find out how to avoid this in the future. 99% safe is not anywhere near enough when lives are at stake.

Paulson’s Airline Deal Kills Open Skies

In the Hutong
Listening to the sound of mosquitos
2131 hrs.

About six weeks ago the U.S. Secretary of Transportation showed up in China suggesting that an open skies agreement between the U.S. and China would happen by year end.

We said then – and say now – that hoping for open skies with China in the foreseeable future is at best an existential exercise, and at worst it is self-delusion.

Wu Yi’s trip to the US to talk to her old pal Hank Paulson, while producing precious little, did manage to land an agreement to significantly increase the number of flights between the U.S. and China over the next year or so.

What nobody has caught yet is that this basically ends the whole open skies idea. It’s dead, folks.

Before you don the sackcloth, though, recognize that what Paulson and Wu agreed upon is actually all we can get rightnow. If we had started on SecTrans Mary Peters’ path, we would have been talking our faces blue trying for a home run when all we needed was a single.

Music Does Matter, Especially When It Is Mobile

In the Hutong
Dreaming of clear sinuses and carbohydrates
1958 hrs.

Lots of big music industry folks down at Music Matters in Hong Kong last week. For those of you not familiar with the confab, it is basically an opportunity for everyone who touches the music business to sit down and talk about the business in Asia.

The attendees included EMI, Mercury Records, Sony BMG, Universal Music, and Warner Music Group, along with a host of other companies in different parts of the industry.

It’s Like a Royal Navy Symposium, circa 1740

Naturally, at the top of everyone’s agenda was piracy, and that got a lot of play. Reading the coverage each music executive sounded like a cross between Babbit and Marvin the Paranoid Android, spinning tales of woe about how they are all getting ripped off by those bad kids ripping their pirated CDs.

Research house Synovate contributed their little bit to the gloom, with survey results from around the region suggesting that one out of five of Asia’s young urban consumers purchased a bootleg CD in the last month, and one in four downloaded an illegal song from the Internet. Synovate’s stuff is interesting, but all it offered was a snapshot rather than some inkling of how some of those numbers might be evolving.

The downer of the session likely came from industry group IFPI, who estimate that piracy costs the music business $400 million annually around the region.

Now, that’s not good, certainly, and we here in the Hutong are scrupulous – nay, anal – about legitimate content. But with clients and family in what has become affectionately known as “the Biz,” I’ll grant we are no test case.

Nonetheless, there is a sunny side to the music business in Asia, and the folks at the record labels appear to have a lot more to be happy about than the movie, television, and shrinkwrapped-software crowds.

The Music Industry Eats Its Wheaties in Asia

Brian Bremmer at BusinessWeek did a nice write-up on the program (“Asia’s digital Music Free-for-All“,) and he points to the PriceWaterhouse Coopers study that estimates Asia’s digital music industry at over $4.2 billion. In other words, if you believe the stats, digital music sales alone, not counting sales of CDs or cassettes, is four times LARGER than the total estimated piracy losses in the region. Think the MPA would kill for those kinds of stats? You bet. And the digital music industry is supposed to rise to over $9.35 billion in Asia.

(Okay, so can we fess up to the idea that digital media is not such a terrible thing after all? That while it eases piracy and cuts down on album sales because people are just buying the tracks they want, that it really is a significant market?)

And you need to look at what is driving the market: mobile phones. PWC says that 85% of that $4.2 billion were songs downloaded directly to music-enabled mobile phones. Half of the people MTV surveyed in Asia said they would listen to music more if they had a mobile music device like a music-enabled handset.

The Future of Music is Mobile

You look at all of these numbers, and you are led to a couple of inescapable conclusions:

1. Piracy sucks and still exists in Asia. (It still exists in America, for that matter, but we digress)

2. The future of music in Asia is mobile, and it’s a robust business already with huge growth prospects. Any artist, label, distributor, or retailer not doing everything they can to make legitimate music more accessible to Asia’s one billion (and growing) mobile device owners is both ignoring their future and giving the business away to pirates.

The challenge is for the industry to work together to make listening to music an increasingly fast, easy, and delightful experience. The model is there and its working. Now the challenge is to broaden the appeal.

It’s absolutely stunning Apple didn’t own this event. My friends at Apple need to get their collective act together. The music lovers in this region are shopping at other vendors and building that habit. Don’t wait for long, guys. The market sure won’t.