Selling Hong Kong

In the Hutong
Lactose Intolerance is my Cross
0832 hrs.

BusinessWeek reprints Gareth Powell’s China Economic Review piece documenting how Shenzhen is about to overtake Hong Kong as the world’s third-busiest cargo port.

On trah what?

Hong Kong began and grew as a trade entrepot, and for many years after 1949 was a busy center for manufacturing as well. Reforming and opening of the mainland have sucked most of the manufacturing upriver and inland, and (as today’s story underscores) Hong Kong’s importance as a center of transshipment declines as its picturesque harbor is pinched by reclamation and development – not to mention rising property values, growing pollution restrictions, and the climbing cost of labor.

In spite of all of this, Hong Kong’s port will continue to prosper for a time. But to rely on the port for growth or economic vitality is growing less practical. Even the city’s major port operators are betting on investments in faraway quays and harbors for their long term prosperity. Clearly, physical logistics is not the basis on which the SAR’s leaders can or should build a vision for the future.

(Nor, for that matter, is some well-intentioned belief that the city is a great place to build online businesses – many of those industries are highly labor, power, and real-estate intensive, and the back rooms of Shenzhen, Hangzhou, Beijing, and Dalian are arguably better suited to become multimedia centers.)

More than Ports and Property

As many readers know, I hardly qualify as a Hong Kong booster: I think many of its people (Chinese and foreign) believe themselves far more expert in mainland affairs than they truly are, and I believe that the city clung to its role as a gateway to China long after that ceased being either true or necessary.

But I believe in Hong Kong, and feel that if the SAR could understand what it offers – and what it doesn’t – it need not decline to become a lesser light than Shanghai and Singapore, a path it appears to be treading.

Where Hong Kong excels is in services. It remains perhaps the easiest city in all of Asia to get a lot of stuff done in a very little time. Every time I go to Hong Kong I am amazed at how many things I can knock off my list in the space of a morning or a single day. My company is domiciled there. My lawyers, travel agent, and accountant are all there, as are my bank, my tailor, my computer store, and my dive shop. What is more, I can get to every single one of those places in a single day, with time left over for lunch and some random shopping.

It remains the best place in the region to hold meetings, attend conventions, or run training programs. Setting up – and operating – a company there is about as easy as it gets. It is simpler and faster in Hong Kong than Singapore, Beijing, Shanghai, or Tokyo to do my banking, send a parcel (or myself) anywhere on the planet, buy a mobile phone, shop for just about anything, get a suit made, watch a movie, find a wi-fi hotspot, eat a meal, rent an office, buy a CD, or find a Moleskine notebook.

Where else is there a higher density of every business craft or profession? Law firms, accounting firms, advertising agencies, investment banks, venture capitalists, and head hunters abound in such profusion that you could probably get your needs met in any given office tower in Central.

(The Village Grouch and I frequently swap Hong Kong stories, each trying to outdo the other on how fast we got from the gate to the train at the airport, how much we got done in a morning or an afternoon, or comparing notes on our latest “Hong Kong hack.” Yes, I know, it’s a pathetic hobby, but it is mine.)

It’s the Services, Guys

If I were doing a marketing campaign for Hong Kong, I wouldn’t be pushing it as a “city of light” or “Asia’s world city.” Both campaigns are fine for people who have never been to the city and are looking to spend a few days in a conveniently compact Asian metropolis. They will not, however, bring people – and their investment dollars – back.

If I were doing a campaign for Hong Kong, the tagline would be simple:

Hong Kong. At Your Service.

Forget real estate and shipping. If I were Donald Tsang or any of his staff, I would be giving a lot of thought to how to shift the SAR’s industrial policy and external marketing toward highlighting – and growing – Hong Kong’s role as the service entrepot of – if not Asia – certainly of Greater China.

Getting Serious about Service

To make that happen, the SAR government needs to get itself a laser-focus on becoming the place where stuff that is unnecessarily difficult to do elsewhere is utterly simple to do in Hong Kong.

That means a marketing campaign aimed at three separate audiences – tourists, business people, and corporations – that all emphasize how Hong Kong is a critical part of Asia for them because Hong Kong will help them a) get stuff done, and b) make getting stuff done elsewhere in the region simpler.

That means an effort to attract and retain major personal and business service companies from around the world.

That means an education policy that prepares Hong Kong’s children to be leaders in service based industries, including a commitment to restoring Hong Kong’s leadership in English language instruction.

That means a policy focus aimed at encouraging – even subsidizing – companies who are genuine innovators in services. You have a better way to do something for people? This is where you want to be.

The great part of all of this is that Hong Kong is already half way there. Services dominate the economy. Hong Kong’s major brands – Cathay Pacific, HSBC, A.S. Watson, Hutchinson, Shangri-La – are almost all service brands.

The greatest problem is one of positioning: Hong Kong has never articulated these strengths well. That needs to change. Now.

Otherwise the city is doomed to become a sad provincial shadow of itself, a narrow stretch of water surrounded by expensive real estate and the effluent of the Pear River estuary.

The Education of a Mogulette

In the Hutong
Ignoring
American Idol while the Party Secretary watches
0001 hrs.

Wendi Deng has told Vogue that she will be collaborating with her pals Zhang Ziyi and Florence Sloan to establish a new film production company based on the DreamWorks model. The first project of the unnamed venture is apparently an adaptation of Shan Sa’s novel The Empress, and Ms. Deng dropped the name of Ridley Scott as a possible director.

Let us set aside for a moment the fact that DreamWorks SKG was built on the collective talent, track records, and Hollywood street credibility of Steven Spielberg, Jeffrey Katzenberg, and David Geffen. Ignore for a moment that whatever the strengths Deng, Zhang, and Sloan bring to the table, they are simply not in the same league as the the DreamWorks founders. All of that doesn’t matter: with the support of Rupert’s money and Zhang’s screen success, they will likely get some movies made.

You may also remember that MySpace China was publicized as Ms. Deng’s deal. From Joseph Kahn’s piece in The New York Times last June:

Wendi Murdoch has stepped up her role in China. She plotted a strategy for the News Corporation’s social networking site, MySpace, to enter the Chinese market, people involved with the company said. The News Corporation decided to license the MySpace name to a local consortium of investors organized by Ms. Murdoch.

There is a pattern to all of this, an internal logic.

Ms. Deng is not a News Corporation executive. She plays no official role in the business. When she helped put together the MySpace China deal (assuming, of course, that her participation was real and not some form of positioning), she was basically doing it as The Boss’ Wife, as News Corporation laobanniang. That would probably rankle anyone who had an MBA from Yale and a little ambition, so it probably rankled Ms. Deng.

The venture with Zhang and Sloan – let’s call it QueenWorks – gives Ms. Deng more than a project on which to occupy her time. It is her first real job since marrying her husband, and her first shot at running her own gig. It is also her shot at a lasting piece of the action, a legitimate business she can build independent of News Corporation that she can use as the foundation of her own media organization. It makes her something more than Mrs. Murdoch, and yet she carries that cachet into every meeting she walks into.

Providing she is serious about it, providing it is not simply a toy for a bored wealthy housewife, she could actually make something out of the organization. Either way, what we will have will be a litmus test: given a wealthy backer (her husband) and interesting partners, is Wendi capable of running a successful business?

This is an important question to News Corporation. If Wendi can prove herself an able executive in her own Hollywood operation, it gives her considerably more credibility at a later date when the complex issue of Rupert’s succession comes up. It is one thing for the spouse of the boss to seek a role in the business. It is another entirely when that spouse also has made her bones as a successful businessperson.

This new venture will bear watching.

Why Krispy Kreme is Doomed in Mainland China

In the Hutong
Breathing those little airborne cotton balls
2056 hrs.

Via Danwei, China Economic Review is quoting Krispy Kreme’s HK CEO explaining why the confection pushers are planning to start their invasion of the People’s Republic of China in Shenzhen.

“Shenzhen is a migrant city, many are from the north, and the people are more receptive to fried products.”

Krispy Kreme is doomed in China.

Write it off.

It’s going the way of Jack-in-the-Box. Or Wendy’s.

You Don’t Really Want to Be Here, Do You?

First, any company that would stoop to concocting such a nonsense justification for locating a high-value franchise somewhere is engaged in some high-level self-delusion. I would bet that real reason they’re going to do Shenzhen first is that the HK CEO is getting stuck with the job on the mainland, probably likes his mid-levels flat, and doesn’t want to be flying to Beijing or Shanghai all the time. Shenzhen, on the other hand, is 45 minutes from Central by car.

Second, if Krispy Kreme was really serious about China, they wouldn’t hand the responsibility to a guy in Hong Kong. They would do their research and put a guy on the ground in Shanghai, Beijing, or somewhere else in China to act as representative, get to know the local government, and find local franchisees. Behaving like you need to enter China from Hong Kong, then Shenzhen, is a modus operandi far more appropriate to China’s circumstances circa 1990.

Third, if Krispy Kreme really understood the way into China, they would start someplace where there are a lot of people who already like donuts, can’t get them, and will form long, slavering lines outside their door each morning. If you’re afraid of Shanghai, go with Beijing. Call me crazy, but tens of thousands of American and Canadian businesspeople, students, diplomats, and families seem like a built-in market for a store or ten, better (especially initially) than a million or two migrant workers and their factory bosses.

Alas, Krispy Kreme appears content to sit in Hong Kong and wait for the franchisees to come to them, and then invade the market slowly.

Watch the Other Guy Feel the Stones

Time to study the tactics of companies like Starbucks, McDonalds, KFC, Pizza Hut, Dominos, and Papa John’s. They knew where their ready markets were, started with those places, put people on the ground in the mainland separate from Hong Kong, and have insanely thriving businesses today because of it.

And, as The Village Grouch correctly points out, Krispy Kreme can also build on the experience – and failure – of Dunkin Donuts in Beijing. In the late 1990s, Dunkin rolled out about 10 stores very quickly, many located in the same space as their Allied-Domecq sister company, Baskin-Robbins.

However, they did little or no consumer education, and when faced with the choice between something they knew and liked – ice cream – and the cakey things they found too sweet for their palates, the uneducated consumer went with what they knew.

Beijing is without a franchised donut store today. But that has as much to do with timing as anything, and it could be argued that the timing is far better today than it was a decade ago.

Where Giants Have Trod

American-born, Thai-based billionaire Bill Heinecke helped to bring Pizza Hut to China in the early 1990s. (If you ate at Pizza Hut in Beijing back then, thank Bill.) However, the going was slow, the joint venture arrangement difficult (as they are), and Heinecke’s group sold their shares after a few years and went back to selling pizza in Thailand, which they did quite well.

After a spat with Yum Brands, the parent company of Pizza Hut, Heinecke founded his own pizza chain, The Pizza Company. Seen any of those popping up in the Hutong lately? Right.

Now, after Pizza Hut, Domino’s and Papa John’s (not to mention the superior product at Kro’s Nest) have all established a foothold, The Pizza Company comes to a market where it must fight for a crust, rather than cut itself a large slice of the pie.

So heads up, Krispy Kreme. You have neither the money nor time to burn on timid, ill-conceived strategies in China.

A Last Word

The above said, I must add the caveat below.

Many of us still remember the days when “experts,” Chinese and foreign, were saying that pizza would never sell in China because Chinese lack the enzyme required to digest cheese and other milk products. The aforementioned chains give lie to that.

Beware of people who give you reasons why something will work someplace and won’t work another. There is no substitute for ignoring all of the naysayers and getting in there and trying.

Fortune in China usually tends to favor the brave and the wise. Be both.

Cable TV in China: Invest Elsewhere

In the Hutong
Yes, dear, toast is dinner
1938 hrs.

Earlier this month, I was honored to sit on a panel on the future of China’s cable television industry sponsored by the American Chamber of Commerce, joined by my friend Kris Kender from CMM Intelligence (the guys who publish the China Media Yearbook & Directory), Leo Austin of Augus Partners, and Tao Libao of China Multimedia Networks. The panel was expertly guided by Jeremy Goldkorn of Danwei.org.

139 Million What? I’d Like Some of That…

On the minds of many of the people in our audience was when and how it would be possible for foreign companies to make some money on the 139 million cable TV subscribers (that’s households, not people) in China.

The hopes of the industry are pinned upon some valid commercial and economic truths:

– After nearly two decades of development, cable TV in China is little more than basic cable, a depressing collection of 40 or so look-alike channels with content that is occasionally superb but more commonly mediocre;

– Cable operators make a pittance – maybe RMB 14 per month per subscriber on average;

– Getting cable operators out of this low-end rut means adding more and better programs, new channels, more services, and putting in the systems that will allow operators to charge for them;

– The country (i.e., the nation’s cable operators, taken collectively) has invested billions of dollars on fiber-optic and cable networks, and would clearly want to get the most economic value out of all of that wiring;

– Chinese people love home entertainment.

All of this would seem to spell endless opportunity for companies, both foreign and domestic, seeking to make fortunes selling networking equipment, head-ends, set-top boxes, software, expertise, and even programming to China’s cable industry.

Funny, It Didn’t LOOK Like a Mirage

There is only one problem:

Cable TV in China is not an industry.

At best, it is a highly regulated utility.

At worst, it is a technological laboratory for engineers.

Chinese law and policy state emphatically that foreigners cannot own or control cable TV stations or channels – that is reserved of Chinese organizations, and only those so authorized by the State Administration for Radio, Film, and Television (SARFT).

Some of the world’s largest media organizations – News Corp. and Viacom not least among them – have repeatedly attempted to work around the letter of the law, only to find themselves each time face-to-face with the law’s intent in the form of agitated, vengeful aparatchiks.

The vast majority of the air time and cable bandwidth available to the operators remains unfilled, hampered by party-enforced restrictions on the local creation of programs and import of content. And value-added services? Cable is rapidly losing out to the Internet and mobile.

Indeed, with operators eking out an operational living from the narrow, shallow stream of subscription revenues and their shares of advertising, they can barely contemplate investing in the network upgrades that would enable them to provide the premium content and value-added services that not only don’t exist, but are unlikely to leap into existence as long as the industry is constrained from taking outside investment.

Are there experiments taking place in high-definition television, IPTV, digital, and premium channels? Sure. But these experiments and others like them have been going on for over a decade. And the government seems content to allow experiments to continue, but commercial rollouts have yet to happen.

There is more to it, of course, but that’s the gist.

The painful consensus of the panel was that among the multitude of Chinese national treasures we evil foreigners want to get our claws into, the cable TV business is not only among the least accessible, it is also among the least appealing.

Jeremy Goldkorn asked me if I had money to invest in cable television in China, what would I invest in. I wasn’t much of a sport. I told the truth: if I had money to invest, the last place in China I would invest it is cable TV.

The End of Cable

Cable television will continue to lumber along for some time in the future, for a couple of reasons. First, the growing appetite for television advertising time – ANY television advertising time – will ensure that revenues continue to pace economic growth. Second, China’s urbanization plays right into the hands of cable operators, although returns will decline as they make investments to service the growing urban working class.

But unless something significant changes about the way the sector is regulated, at some point in the future, things are going to turn ugly for the operators. With no means at their disposal of significantly improving revenue streams or financing the hardware that would enable new revenues, cable will become what radio and terrestrial television are today – lowest common denominator entertainment. It’s what everyone will have, but everyone will want more.

From a macro-policy level, the course of action that makes the most sense, that will allow the country to get the most out of its cable networks and to use them the way they are most needed, is a radical one:

• Set a basis for fairly valuing the networks.

• Have the local municipalities and the provinces sell them to the telcos after the anticipated round of telecommunications industry restructuring is complete.

• Separate out the channel production and advertising sales functions, spinning them into independent entities that will continue to be regulated by SARFT and the Party.

• Lay out must-carry regulations that ensure that current channels have grandfathered carriage.

• Let the telcos invest in the networks as both programming delivery and service delivery systems, parallel with other broadband but aimed at consumers who want alacarte services, not raw Internet coming into their TVs.

Is this a radical solution? You betcha.

Will it happen tomorrow? No.

Is this the likely eventual fate of the cable networks? Absolutely.