A Wise Word About 210 Million Internet Users

In the Hutong
Downloading music
2126 hrs.

Donald DePalma, author of Business Without Borders: A Strategic Guide to Global Marketing puts CNNIC’s recent report on China’s Internet market into perspective in an article on Chief Marketer.

He introduces a compelling concept he calls the Online GDP, which basically translates to the buying power of the online population.

According to DePalma, China’s 210 million Internet users account for only 1.1% of the world’s online GDP. He doesn’t give us enough information to check his figures, so it is hard to judge the validity of his claim.

Let us assume for a moment, however, that what he says is true. His point is simply this – don’t make a decision about localizing for a market based on the number of people it has, but based on its buying power. All of which is easy to understand and hard to dispute.

Or is it?

I have a couple of problems with using the e-GDP as the sole means to evaluate whether it makes sense to come to China.

The e-GDP figure is static. What we need to understand the value of a given market is both that figure AND its rate of growth. I would bet, given the fact that China’s population is slowly aging and becoming more prosperous as it expands AND that China’s overall GDP continues to grow at double-digit rates, that the growth rate in China’s e-GDP is fairly spectacular compared to other markets. At some point, that 1.1% is going to grow into something much larger.

The e-GDP figure assumes that Chinese users confer the same priority on all goods – or, more correctly, it fails to take into account that some goods and services are better sold online in China.

Similarly, the e-GDP figure does not tell you how badly advertisers on your site want to reach online users in China.

Finally, the e-GDP does not give an idea of what percentage of a country’s overall GDP is represented by Internet users. In other words, if you are already IN China and looking to identify places where a certain group of buyers goes, an overall figure is unhelpful.

I like DePalma’s analysis, but I think he (and we) need to dig deeper. To rush to China purely on the basis of 210 million users is madness. But to stay away on the basis of a snapshot of the market runs the risk of missing very real opportunities.

Olympic Skies

In the Hutong
Playing with my new iPod Touch
1420 hrs.

Over at The New York Times, Jim Yardley, Joseph Kahn, Keith Bradsher, and David Barboza are ten articles into a periodic series entitled “Choking on Growth,” covering how China is responding to its environmental challenges. The most recent is Jim’s piece dealing with the challenges of cleaning up Beijing’s air for the Olympics and beyond. The real challenge, Yardley notes, is the long-term problem.

Read the full series, including:

  • The superb if depressing overview article;

Whither to Stash the Great Haul of China?

Sunflower Tower, Beijing
Grokking wind chill
1320 hrs.

China has financed a huge part of the American consumer’s borrow-and-spend spree of the last two decades, to the point where the doomsayers are suggesting that the U.S. has in effect mortgaged its future – both economic and political – in return for a few shiny trinkets.

At the same time, of course, the Chinese look at the Blackstone fiasco and the sub-prime meltdown and wonder if they are the ones being played for suckers, watching their invested dollars disappear as the dollar plunges and the American financial system looks a lot less stable than it once did.

James Fallows, sophomore China-hand and probably one of the most astute observers of the American political system, has jumped on the issue in his piece in The Atlantic this month, “The $1.4 Trillion Question.” Well worth the read, it provides grist for anyone who wants to understand why (although not “how”) the nature of the Sino-American relationship must change (and soon) and what that is going to mean for American lifestyles and for the men responsible for a the world’s largest hoard of cash.

Here’s what gets me. Warren Buffett’s company Berkshire-Hathaway piles up $1 billion a month in excess cash, and Warren says he has problems figuring out where to effectively invest that. And he’s arguably the smartest guy in the game. The people at China Investment Corporation have a US$1.4 trillion pile of money that is growing at an estimated $1 billion a day.

Fallows makes the point that China’s well educated, brilliant, and determined financial leaders want very much to do a great job with this cash. What is clear to us here in the Hutong is that they are going to be writing an entirely new chapter in the history of investing as they attempt to do so.

Who Got Your Vision?

East Third Ring Road
Dreaming of coffee
0859 hrs.

The one upside to Beijing traffic is that it gives you an opportunity to have some interesting conversations.

This morning’s topic: America and China.

The guy that I was talking to had an interesting theory. He believes that what defines a civilization is the source of its vision.

“In America,” he said, after a long talk about the current presidential race there, “your businessmen have dreams and great vision and operate accordingly. But your leaders are preoccupied with the present, grabbing votes, staying popular.

“In China, it is different,” he went on. “Our government leaders are the ones with the great dreams and vision, and our businessmen are preoccupied with the present, grabbing as much money as they can now, and to hell with the future.”

Like all searing generalizations, this one is suspect. But it deserves some contemplation. What I liked best is what he said next.

“Now, a nation where both the government leaders and the businessmen are people of vision…THAT is a truly great country.”

Responsa: China Unicom and GPRS

Workers’ Stadium North Road
Hiding from the icy winds
0947 hrs.

Since NetNanny has seen fit to once again mark all TypePad blogs off limits, I am compelled to respond to comments with posts (and to once again wonder about hosting alternatives.

CU doth know GPRS…

Kevin Prest responds to my comment that “Unicom knows not GPRS” with the following:

You say “CU knoweth not GPRS”, but that’s simply not true. GPRS is available on China Unicom’s GSM network in all major cities (a quick Google search brings up this article, saying that GPRS was available in 259 cities as of December and further expansion was planned: http://www1.cei.gov.cn/ce/doc/cenlx/200712190613.htm ), and the company also offers EDGE services in many areas.

Kevin is right in that China Unicom has now upgraded to GPRS in 259 cities. I stand corrected, and happy to be so. Thanks, Kevin.

…but it hath serious experience issues

But all of this makes me wonder why my BlackBerry 8700 with an overseas SIM card can only find a GSM signal when it roams onto China Unicom’s network here in Beijing and not a GPRS signal. I’ve had to force-select China Mobile on the device or lose all data services the second it gloms onto a China Unicom signal.

My wife’s brand-spanking new RAZR2 V8 GPRS device – she’s a CU subscriber – is not getting onto a GPRS network at all anywhere in Beijing.

So CU may indeed know GPRS. But you wouldn’t know it from OUR day-to-day user experiences in China’s capital city. Whether they’ve got the hardware or not is irrelevant if the network can’t offer a consistent user experience on two GPRS devices from two major manufacturers.

Subsidize the Handsets

Kevin makes another interesting point:

Unicom are also a lot keener on the Western/Japanese style “subsidise the handsets to lock users in to long contracts” business model than China Mobile, so Apple’s revenue-sharing model isn’t as large a step for them.

I am far from being a China Mobile fanboy, but on this point I respectfully take issue. Both carriers are fairly far along with early experiments in subsidizing handsets in return for subscriber lock in, in particular for entry-level users. China Mobile, for example, has been offering the Motorola C139 or the Nokia 1100 as part of a basic entry package since 2005.

None of this, of course, addresses the larger question of whether Chinese people would be ready to put up with lock-in just to get a cheaper mobile phone. For the end of the market that would be buying an iPhone, that has yet to be proved. It is also interesting to note that the US is starting to sneak away from user lock-in.

I see China – and the U.S. – moving toward a hybrid system where you have the choice of Cheap Phone + Lock-in + higher rates or Expensive Phone + cheap rates. Once you’ve given consumers choice among devices – and in China we can choose among over 800, including hacked iPhones – it’s hard to take it away.

Especially when by taking it away you are also squeezing local manufacturers out of the home market.

Anyway, check out Kevin’s website, especially if you are into manga or anime. Very cool.

Cars? Check. Booth? Check. Hotties? Check! PR and Marketing? Uh-oh…

In the Hutong
Teaching my son about books
1949 hrs.

Reporting from the Detroit International Auto Show, the L.A. Times’ Ken Bensinger gives us a glimpse at the impact Chinese automakers are making at Motown’s home-town trade show.

He quotes a batch of American and Japanese executives who are admittedly concerned about China’s ability to crank out a modestly-priced automobile, and even grants that quality and safety might be at or approaching U.S. standards. Unfortunately, Chinese automakers are still struggling with marketing:

Changfeng Chairman Li Jianxin, who doesn’t speak English, insisted on reading a speech in phonetically rendered English — a painful experience for reporters covering the event. An accompanying news release bore last-minute redactions made with black marker — apparently in an effort to conceal the fact that one Changfeng model relies heavily on Mitsubishi Motors technology. But journalists could easily read the text beneath the black ink. Oops.

He continues:

But perhaps the most entertaining offerings were three electric vehicles made by the Li Shi Guang Ming Automobile Design Co. They looked like oversize bath toys, painted bright yellow and bearing nameplates such as “The Book of Songs,” “A Piece of Cloud” and the amphibious “Detroit Fish.” Two of the models could go on sale in China this year, the company says. Depending on the type of battery, the cost is $5,200 to $9,200.

The money quote came from the man who has just contracted to import 600,000 Chinese vehicles and sell them in the U.S.

“Chinese manufacturers are good at production,” Chamco’s [William] Pollack said. “But their expertise is clearly not in marketing.”

When, oh when, will large Chinese enterprises learn to value marketing?

Making Old Jets Green Again

Lobby of the China World Hotel, Beijing
Surrounded by the Chindians
1439 hrs.

It’s getting to the point where you can’t go a day without hearing another recycling story. This pictorial essay on CNET today walks us through the recycling of airliners that have exceeded their economical service life.

(The whole concept of “economical service life” is, of course, highly relative. I think Aloha Airlines is flying 737-200s that are nearly 40 years old, while much younger aircraft have already gone through the shredder.)

The U.S. leads in this field because a) there are lots of large surplus airports in relatively remote areas, and b) the country has a highly developed recycling industry, and c) the costs of getting chunks of old planes to said recycling facilities – and getting recycled material to customers – is still low.

Let’s see: South Asia recycles ships. America recycles planes. What about China going into the business of recycling railroad rolling stock?

Anyway, what is interesting is that products made from recycled materials are now no longer just paper and beer cans. There are companies coming up with ways to use recycled wood, rubber, and even carbon fiber composites. The green/sustainability direction the world economy is taking has created new incentives for the recycling business to invest in new technologies.

If recycling is a growing business, one that is ready to pay for innovations, it is clearly another direction in which China could consider investing its “independent innovation” efforts.

Immovable Force Meets Immovable Object

La Capilla de San Pedro de las Migas
(aka Peter’s Tex Mex, Beijing)
Thawing out
1300 hrs.

News now coming in suggests that China Mobile and Apple couldn’t reach an agreement on revenue splits. No surprise there. The odorless-feces-factor in the negotiating venue must have been off the scale.

There are three ways of looking at this:

1. Apple has been offered another thick slice of Humble Pie, and it needs to wake up and realize that it is no longer the only guy on the block.

2. China Mobile will regret this. Deeply.

And my personal favorite:

3. The parties walked away from the table because they don’t really need each other to succeed.

China Mobile will continue to be the largest (and possibly most profitable) mobile operator in China in the coming years, so they’re not worried about kick-starting their business in a hyper-competitive environment.

What is more, the operator has a long line of people coming to their shiny new headquarters on the 2nd Ring Road, hat in hand, with ideas on how their devices and services can bring China Mobile even more revenue without lifting a finger. All of which makes Mr. Jobs’ model of “you-sell-our-phones-we-take-your-cash” seem just a little unappealing.

(Apple will get a different reception in Japan, where DoCoMo, KDDI, and SoftBank – for their own, seemingly perverse reasons (that of course make complete sense in a Japanese cultural context) have managed to create three services with the minimum of compelling differentiation. Of course, the Japanese are no slouches at bargaining, and you can bet that if anything they will restrain the iPhone from it’s maximum level of success in the market by either restraining availability or jacking up the price. But we digress.)

Apple has several options:

1. Cut a deal with Unicom, who are increasingly desperate in their search for a decent partner (the problem with THAT, of course, is that as of this writing Apple is not offering a CDMA-based iPhone, much less a CDMA-based iPhone with a SIM-card slot, and CU knoweth not GPRS.);

2. Wait until 3G rolls out in China and all (both) carriers are looking for ways to recoup their investments in network upgrades;

3. Go with one of the Hong Kong carriers, counting on growing China’s already thriving gray market in unlocked/hacked iPhones.

4. Cave in and do it China Mobile’s way.

My bet is on the waiting game, or a combination of #2 and #3). Apple has enough on its plate worldwide, ramping up production, working the bugs out of the iPhone, and bringing developers into the ecosystem.

In the meantime, Motorola, Nokia, Samsung, dopod, and the local guys creating iPhone look-alikes will be doing all they can to eat into the iPhone’s potential market.

Indeed, we may find that the iPhone will radically increase the number of people in China willing to upgrade to a new and cool smartphone without even being in the market, creating a Halo Effect for the entire industry.

Telegraph: The Video Clampdown

In the Hutong
Seeking a sore throat remedy
2041 hrs.

Richard Spencer, fresh back from holidays, writes in the Telegraph about the new rules requiring websites offering video content to obtain a license.

He quotes me, but quite apart from that, his take is spot on – anyone who expects the government to swoop in and start closing down these sites is probably missing the point. Most of these sites are self-regulating already. Tudou and its kin were screening videos for content prior to posting from the beginning, and self-regulation extends beyond the frontiers: even Yahoo! won’t let me watch a video on their English site from here in the Hutong.

China Securities News are quoted as saying that the government’s main concern is keeping control over professionally produced films.

If you buy that – and I don’t – there is a little problem: at what point can you determine if a film on Tudou or YouTube is professionally produced, or just created by a really talented amateur?

Here’s my take:

China Central Television (CCTV) and the other state broadcasters have looked around the world and are worried. They see other broadcasters losing young viewers to user generated television. The Chinese broadcasters want to avoid that fate. They had no intention of losing their franchises to Sumner Redstone and Rupert Murdoch, and they’re certainly not going to roll over and let programming created by a bunch of amateurs with camcorders and mobile phones take their business away.

So they turn to regulators for help.

The policy makers, however, are not of a single mind – an issue in a system of government that depends increasingly on consensus create and enforce the law. To be sure, the broadcasters do not lack for support, but there is a growing group who are either privately tired of coddling China’s weak broadcasters, who see the Internet as the more important medium for the future, or both. They aren’t so quick to leap to CCTV’s aid, and want to see China turn into an influential power on the Internet.

So they come up with a policy that ensures they have the tools to maintain control, and that assures broadcasters that the government is ready to protect their monopoly over commercial broadcast content.

And then they sit back and watch and see what happens.

What the new regulations do is reiterate what is already government policy, and they leave room to allow the experiment to continue uninterrupted.

Investors are going to be wary for a time – this adds a level of uncertainty into the process that won’t go away, but eventually they’ll get comfortable again.

This does, however, serve as a dual reminder: these sites prosper not only at the whim of the government, but under the threat of a jealous broadcast sector with strong support in the party.