One Dragon, Two Nests

In the Hutong
Now using four operating systems
1051 hrs.

There has been some buzz about Air China spending US$812.8 million to buy an additional 12.5% stake in Cathay Pacific Airways, Ltd. from CITIC Pacific, another state-owned enterprise. That’s a lot of greenbacks to lay down at a time when the world economy, rising fuel prices, and the spectre of an influenza pandemic hover over the airline business.

Of course, as both a government-owned business and the national flag carrier, Air China doesn’t need to worry as much about empty coffers as, say, EasyJet or Southwest Airlines. So the cash issue is a bit of a red herring.

The Hong Kong Squeeze Theory

The Wall Street Journal piece about it raises an interesting issue. As UBS analyst Damien Horth noted, Air China is most concerned in the near term about “promoting its base in Beijing as a major travel hub. ‘Anything [Air China] can do to reinforce the position of that hub is critical, by limiting competition from Hong Kong.'”

No conspiracy theorist or long-term China resident could resist the speculation Mr. Horth’s remarks seem designed to arouse. “Hmm,” one might think: “could it be that Air China wants to control Cathay Pacific in order to restrict its growth, and by extension the growth of Hong Kong International Airport as a regional or global hub?”

Living but a stone’s throw from Air China’s opulent new headquarters just west of Beijing Airport, not only would I not be surprised if this were so, I might even be inclined to be sympathetic.

Sadly, I doubt this is the case. Instead, I think Air China has wisely made other plans for Hong Kong.

The Second Hub Theory

First, Air China still sees the heart of its long-term opportunity as leadership in PRC domestic air travel, where demand looks set to grow for the foreseeable future. Armed with leadership at home, it can then fill planes to overseas destinations with Chinese who are starting to travel with increasing frequency.

With that in mind, you can understand why Air China sees its nearest rivals not as Cathay Pacific or Dragonair, but Shanghai-based China Eastern Airlines and, especially, Guangzhou-based China Southern Airlines.

As the Journal points out, Air China was rebuffed last year in its attempt to buy its way into a hub in Shanghai. The idea behind that was to either secure Shanghai as a second hub for itself, or deny it to a rival.

Unable to take on one of its domestic rivals directly, Air China is now pursuing the indirect approach, this time taking on not China Eastern in Shanghai, but China Southern. If Air China can lock down control of a Hong Kong hub either directly (by dominating the airport with its own flights) or indirectly (through its ownership/influence/control over Cathay), it effectively “flanks” China Southern with a south China hub for outbound international traffic.

And for such a large country, that is going to be essential. While Beijing makes for an excellent hub feeding into Europe, Russia, and North America, it does not make sense for over two-thirds of China’s population to fly through Beijing to get to the Middle East, Africa, South Asia, Southeast Asia, Australia, Hong Kong, Taiwan, and the South Pacific.

Other Fish

Air China is better off letting Cathay worry about Hong Kong for now. The flag carrier needs to turn its attention elsewhere, optimizing its domestic route structure to feed into its international hubs, improving the efficiency of its fleet and it operations, and continuing to improve service on the routes it has.

A partnership with Cathay leaves China free to concentrate on the areas that will make it the most money in the long run, while building the route system and the know-how to compete against global carriers. Even better, Cathay remains the competitive foil to sustain pressure on the other premium Asian carriers while Air China matures.

None of which is to say that at some point in the future, keeping Air China, Dragonair, and Cathay running as independent airlines will stop making sense. But for now, each of these three operations – and their attendant brands – are doing well in their own space.

Which is exactly why any concern about Air China putting the squeeze on Hong Kong is overblown. For now.

Brand Reality Check

In the Hutong
A cross between Brad Garrett and John Goodman
1954 hrs.

JWT’s Tom Doctoroff recently wrote an earnest and well-reasoned Viewpoint article in AdAge that described why China would not be producing a bevy of global brands at any time in the near future. (Tip of the Hat to Neil Drewitt for sending this in.) Nicely put and worth a read.

Those who disagree with Tom (and manage to eschew ad hominem attacks) point out that Haier has managed to build a global brand entirely without marketing. While that point would be debatable (if you could buy a Siemens fridge for the same price as a Haier fridge, which would YOU buy, and why?), let’s not go there.

Instead, let us grant for a the sake of argument that Haier is indeed a global Chinese brand. Let’s even grant that Lenovo, Tsingtao Beer, and Li-Ning are global brands.

When you look across China’s landscape of millions of companies, could it not be said that these companies are at best the exceptions to prove the rule? That China has so few international brands in so few industries that what we are witnessing is not a trend but a statistically irrelevant series of accidents?

I do not enjoy running down Chinese companies. I want desperately to be a cheerleader for them, and I know for a fact that Tom Doctoroff wants to as well.  Neither he, nor I, nor a host of other well-intentioned commentators are trying to “keep them down by talking them down.”

But to ignore the fundamental barriers these companies face in their evolution by giving them credit for having evolved further than they have is like encouraging a four year old to learn to read by sending him directly to college. At best, it is misguided. And at worst, it will do irreparable damage.

Kudos to Tom for having the courage to say something that needed to be said, and that if anything will not help his business in the near term. Great brands are built: they do not happen by executive fiat or government edict. And the sooner China’s companies learn the rules of that game, the better off China will be.

Talking Green

Second Ring Road
Trying to avoid looking at the traffic
1150 hrs.

Thomas Malthus once told us that as a race we are doomed because the planet could not grow enough food to support our exploding numbers. He was right, of course, until a sequence of changes in the way food is grown, produced, packaged, and distributed altered the equation. Malthus was, in effect, trumped by technology.

We now face a dilemma that echoes Malthus’ fear. What climate change implies is that as a race we are doomed because the planet cannot support the lifestyles to which we aspire. Just as Malthus challenged us to chose between reproduction and our future, today’s climatologists and other scientists challenge us to choose between the way we live and the well-being of the human race and the planet.

These are not choices we want to make.

The promise of green technology is that we will not have to make those choices – not right away, at least, and perhaps never. Six billion people will be able to live – if not like late 20th Century Americans, at least a lot better than they live today, all without sacrificing the future of the planet, of our race, and of our families.

It’s a huge ask. And nowhere is there a greater need for greentech to live up to its promise than right here in China. It is here, after all, where the innovations are likely to have their largest market. And it is China’s manufacturing capacity and surfeit of engineering headcount where many of the world’s green products are likely to be produced.

All of which serves to make the Greentech: A Call To Action conference organized by The American Chamber of Commerce in Shanghai and The Asia Society on September 7-8 probably THE single most important gabfest of the year in China (apart from the National People’s Congress, of course.)

Yes, the lineup of speakers is stellar. Yes, the topics are lean-forward-in-your -seat compelling.

But if you are like me, you don’t really go to conferences for what’s on the program. You go for the conversation, for the discussions that take place in between, during, and around the sessions. The Shanghai Chamber’s greentech forum looks unusually attractive in this regard, and I’m petitioning The Party Secretary for permission and funding to go.

Personally, I’m still in the middle of a long-term dissection of greentech, it’s promise, its realities, and where the interesting stuff is really happening. Once I start getting a comfortable handle on it all (in other words, once I’m reasonably sure I will not be talking out of my backside when I have something to say), I’ll be posting more.
In the meantime, take a moment to look at the website for the Shanghai event, and if you are in town, make it a point to go.

It’s Not About the Pig

In the Hutong
Avoiding the Radar
1819 hrs

Standing in line at the gate at Narita, I was talking with another flier about China’s aggressive screening for H1N1 among arriving passengers, and the seemingly draconian quarantine measures. Why, he wondered, given that the virus seemed to be just like any other flu, was China treating this so seriously?

It’s a fair question, and I am not sure there is a single, simple answer. There are good medical reasons, for example to protect the people from a new virus about which not much is really known and that, once into China’s population, could mutate into something more devastating.

There are good political reasons. The nation’s health and sanitary bodies want to demonstrate that they can (and will) protect the country from pandemic. China wants to show the world that it can be as tough as any other country when it comes to quarantine laws.

And, after SARS and Avian flu, they are happy to grab the chance to point out, however subtly, that other countries harbor and incubate scary pathogens as well.

But I also think there is something deeply practical going on. Whatever the medical, political, or perceptual reasons behind this costly quarantine, of arguably greater importance is the activity itself. H1N1 may prove to be a mild pandemic, but the spectre of far more virulent pathogens lurks in its shadows.

What we are witnessing is a full-scale dress rehearsal for “the big one,” an effort to develop and test the people, equipment, procedures, and policies China would need to face and overcome a killer pandemic. Disasters need drills, as any first responder who cares about his job will tell you, and the more technical and logistically complex the response, the more practice needed.

In that sense, H1N1 is a Godsend: it is an excuse for China to push the alarm button and see what works, what doesn’t work, and what needs to be improved for the time when we have The Real Thing.

There are those who would suggest that when The Real Thing comes all travel and trade will be shut down anyway. Early in the crisis, that may be the case. But at some point, the total shutdown of commerce and travel will be impractical, if not disastrous. China – and to a similar extent, Japan – are looking for ways to run an effective quarantine process so that the doors can be reopened as soon as possible after an outbreak.

So the next time you have to sit on a plane and wait for someone to come aboard and take your temperature, recognize that you are taking place in a drill for what could be the largest scourge humanity has ever faced. Damned right they’re serious.

DoD Playing Defense, Again

In the Hutong
Fall cleaning
1448 hrs

Once again it seems like the guardians of data at the Pentagon are raising the cyber-shields. Attempts to access from the Hutong, with and without VPN, are meeting with timeouts.

Not that I blame them, but it’s just sad that the second-largest line-item in the U.S. budget can’t come up with a better way of ferreting out malicious attacks than simply slamming the door on everyone. It is also sad that the Pentagon is losing its opportunity to conduct some decent public diplomacy among the curious Chinese.

Tear down these walls, Secretary Gates, and demand that your cyber-warriors come up with a better approach than simply slamming the fort doors. The best defenses only keep the friendlies out and make the bad guys up their game.

Are You Globally Competitive

In the Hutong
Playing with the new TypePad interface
1147 hrs.

While in the United States in July, I had an opportunity to meet up with Brian Hollowaty, currently leading business development for executive education at the UCLA Anderson School of Management.

Brian is an exceptionally bright guy, has spent his share of time on factory floors in China, and has over time built his own area of expertise in what makes enterprises competitive, not just in the narrow manner most companies define the term, but in the broadest terms possible: globally.

He is early in the process of starting his Globally Competitive blog, and I promised him when we met that I wouldn’t toot his horn until he was ready to go public, but I’m already finding really valuable nuggets in the blog.

In our too-short meeting at Cafe Roma next door to Anderson’s fantastic building on the UCLA campus, Brian began laying out, in simple, non-jargonistic terms, where competitiveness comes from. Anyone who can bridge the factory floor with the ivory tower is a rare bird, so check out Brian’s blog and encourage more posting.

Back in the Hutong Again

Starbucks Pinnacle Plaza

Cloudy with a Chance of Sweatballs

1140 hrs

We’re back in the Hutong after four brutal months, three in Beijing working our collective backsides off, and one visiting family in California in a fruitless attempt to assuage the effects of burnout.

It’s been two months since the last post here, and I have a lot to talk about now, so stay tuned: there is going to be a bit of a deluge in the coming weeks.

TypePad has switched its interface, so you might see some differences in typestyles, graphics, etc.