Responsa: Schell and Chinese Direct Investment in the US

In the Hutong
Waiting for the Golden Season
2114 hrs.

Venture Sprout founder and CEO Elliott Ng responded my post “Schell Gets China Investment Problem Half Right” with a thought-provoking comment that calls for more than an offhanded reply.

David, Isn’t Party and government involvement in acquisitive Chinese companies part of the problem in getting approval from foreign countries for acquisition, not just a “Brand China” issue? This issue was discussed in MacGregor’s “The Party” and if large companies at scale have significant government ownership and/or Party involvement, it seems that most large, strategic acquisitions will be rejected. Baidu or Tencent buying companies is very different from CNOOC or Anshun [sic] Steel cases mentioned in the Schell piece. All of the Japanese companies mentioned above are not controlled by the ruling political party and/or owned by the Japanese government. I don’t think this is a “Brand China” issue — it is a “Team China” issue. When the acquirers are SOEs — under SASAC purview — it’s only natural that countries around the world would be concerned about assets being acquired by the commercial arm of the Chinese government (and Party).

Elliott raises several interesting issues.

Is this a “Brand China” Issue?

At the heart of the issue lie three problems: first, American people and legislators do not trust Chinese companies or the Chinese government; second, few in the United States understand that some Chinese companies are, in fact, privately owned, believing instead that any company in China is government-owned to some degree; and third, the implicit belief is that any government-owned company is a de-facto arm of the government itself.

Until and unless individual Chinese enterprises and the government itself move credibly to allay those fears, mistrust of any Chinese company and its motives will fester in America, and any acquisition of an American brand by even the biggest Chinese brand will encounter resistance.

Americans do not resist such acquisitions because China has a history of acquiring American firms, running them from Zhongnanhai, and undermining the U.S. economy for the PRC’s own nefarious purposes. Rather, American’s resist because of a not-entirely-unreasonable fear of the unknown and a dislike for past actions of the Chinese government.

China, in short, has an image problem in America, and it is not one that will be solved by propaganda and advertising campaigns alone. It must be solved by a fundamental change of behavior. Call me crazy, but that sounds like a brand problem.

Would Baidu or Tencent Be Any Different?

Elliott also suggests that a truly private Chinese enterprise would not face the same resistance as a large state-owned enterprise like CNOOC or Anshan Steel. I am skeptical.

Chinese companies are not well-known for their transparency in either accounting or governance. Among other issues, this calls into question of the role the government takes not only in the “guidance” of state-owned industrial giants, but in the leaders of China’s emerging private sector. All that would need happen would be for Mrs. Pelosi to raise this question in public and Robin Li, Jack Ma, or Li Ning would all find themselves in the unenviable position of having to prove a negative, that there is no government involvement in the management of their firms, and that there never will be.

The problem, then, afflicts or threatens every company in China, no matter its ownership or pedigree.

What About the Case of Japan?

Elliott suggested that one of the reasons several Japanese companies I mentioned managed to do well during the height of paranoia about Japan in the late 1980s was that they were private companies. Given that Japan did not possess state-owned enterprises in the 1980s as China does now, we cannot prove that either way. On the other hand, one could argue that Japan’s largest industrial combines (keiretsu) were actually informally but deeply integrated with the ruling Liberal Democratic Party (LDP) and the Ministry of International Trade and Industry, blurring the lines between national power and private enterprise. But leave that aside for a moment.

It is useful to note that until 1989 Japan held two cards that China does not today possess that gave Japanese companies a distinct advantage in acquiring U.S. firms. First, Japanese firms and trade associations undertook a collectively widespread and largely sophisticated lobbying effort in Washington that over time wore down resistance to Japanese foreign direct investment in the United States.

Second, until 1989 Japan enjoyed the position as America’s primary Asian redoubt against the Soviet Union, a position enhanced rather than lessened by the departure of American armed forces from Southeast Asia and later Taiwan in the 1970s. This strategic security relationship did much to prevent Capitol Hill from taking too much counsel of America’s Rising Sun fears.

None of this allowed Japanese companies to avoid often substantial resistance to direct investment, but these advantages were effective enough in the face of several other substantive challenges in the Japan-US relationship to allow many deals to go through. The ownership structure was irrelevant: it was, in the end, Japan’s carefully cultivated relationships in Washington, D.C., and in the U.S. states and towns in which it invested that opened the doors.

Here Come the State Capitalists

Finally, there is the issue of state or party ownership. Elliott and I agree that this is a core problem. Where I think we diverge is that Elliott sees this problem as intractable, while I see it as a matter of perception.

Americans are, as a whole, uncomfortable with the concept of state ownership. The evident discomfort with the issue of nationalization of banks and of GM is ample evidence of that fact, as is the manner in which the U.S. has kept its defense production base firmly in private hands even in times of national crisis, and the attention given to the CIA’s proprietary invesments. There is something subtly frightening to Americans about the mixture of government and business.

It is time to probe whether that fear has a basis in reason, or whether it is an ideological matter. State capitalism, whether acquisitive sovereign funds or expanding SOEs, looks to play a wider role as new economic powers emerge around the globe. Rather than forswear dealings with such players, we need to understand the various shades of state capital, to explore in detail our reservations, and take measured steps to ensure our worst fears do not come to pass.

And it is time for state capitalists of all flavors and nations to recognize that the burden of proof lies with them. If they seek to operate in the lucrative world of private enterprise, they must offer transparency, openness, and in some cases a willingness to fundamentally alter the way they operate.

That is the price of trust.

Freeing China’s Free Agents

New Business Elite in China

In the Hutong
Homemade buffalo wings
1809 hrs.

As with many memorable blog posts, Paul denlinger’s excellent article about China and its outdated version of capitalism holds a few hidden gems not to be overlooked. On second reading, this one popped out at me:

“Most of the reasons which [Ronald Harry] Coase outlined for the creation of the corporation in “The Nature of the Firm” no longer exist. Thanks to Google and other tools, small organizations can resolve all of these issues for almost no costs at all. Isn’t it time we start thinking and talking about deprecating large corporations?

Of course, many in the US and China would argue that only a very small and select minority would be able to work on different time zones and in remote locations with minimal supervision; I would beg to differ. For many service jobs where key personal relationships are not important, this will become the norm within 20 years. It’s just that the US and Chinese government haven’t figured it out yet.”

There are still many industries in which scale makes sense, perhaps not because large enterprises are the best loci of production, but because they are as yet unused to the challenges of integrating large-scale projects across multiple businesses. Boeing’s challenges with the 787 Dreamliner leap to mind.

But in his book Free Agent Nation, Daniel Pink made the case that for a growing number businesses, the traditional corporate structure had become a relic of the industrial revolution. Pink’s point was simply this: when the means of production for an industry can fit into a medium-sized backpack or a largish purse, the future belongs to the post-modern equivalent of the skilled craftsman.

Pink was writing about America, but Denlinger’s article poses a question: is China’s future, like America’s, more about forging coalitions of small firms – or even independent professionals – than the massive enterprises that currently dominate her landscape?

Much depends on a factor Pink identifies in the US: the need for an infrastructure to support such enterprises and individuals. Pink calls out several areas where America falls short in supporting free agents, and China has a long way to go.

As the nation begins to debate the issue of political reform, one of the matters on the agenda must be the final liberation of labor, the crafting of a legal and political infrastructure designed to empower not only small and medium businesses, but what Pink calls the “micro-enterprise.” This will be more difficult than it sounds in a nation whose very ideology is rooted in the industrial revolution.

The Real Question for China’s Construction Equipment Makers

Caterpillar HDR

In the Hutong
On a roll
1639 hrs.

In an excellent read in the Forbes ChinaTracker, Jack Perkowski lays out the dynamics of China’s booming construction equipment market. Jack points out, I think correctly, that bit by bit the construction equipment market in China will be taken over by Chinese companies.

I don’t think anyone (except, perhaps, the folks over at Caterpillar, Komatsu, et al.) would disagree. But there are two issues that face the industry that Jack alludes to but does not directly address.

First, China is in the midst of a construction boom, driven by ready bank lending on major projects, a rush of infrastructure development, speculation, and a relatively small number of reasonable investment alternatives for non-institutional investors. At some point, that boom must cease, and there will be a shakeout in the construction equipment industry. Which of the firms in the industry are best positioned to survive that shakeout should it come, say, tomorrow?

Second, when China ceases to be a growth market for construction equipment, which (if any) of China’s local companies will have established sufficient overseas sales and service networks to withstand the contraction at home? Which of the companies is building the skills necessary to operate in markets where Chinese is not the language of business and where deals are done differently? And what are Cat, Komatsu, and company doing in anticipation of Chinese competiton overseas?

The long-term survival and prosperity of these Chinese construction equipment firms is going to depend on answers to these questions, not whether they can win in China or not. And if you have any interest in whether China’s capital goods industries can compete overseas, this is a great sector to watch going forward.

Schell Gets China Investment Problem Half Right

In the Hutong
Working on contracts
1052 hrs.

As is the case with many China watchers who came of age in the 1980s, I am a longtime admirer of Orville Schell’s writings on China. His books have been an essential companion to those of us seeking to understand the PRC and the social impact of the nation’s economic and political evolution.

But in a recent article in Project Syndicate, “The China Investment Challenge,” Schell, the former Dean of the Graduate School of Journalism at the University of California, Berkeley, takes a surprisingly one-sided view on the matter of China’s investments overseas. He concludes:

If American officials do not begin to recognize the realities of today’s globalized world, the US may unwittingly (and self-destructively) find itself cut off from the kinds of new foreign investment flows that are sorely needed to revitalize its manufacturing and infrastructure sectors.

The congressional xenophobia that has blocked major foreign direct investment or acquisitions of ailing U.S. firms is lamentable, if not disgusting. But it is also predictable: America has experienced recurring bouts of fear and loathing toward foreign investment throughout its history. In recent years, Our Distinguished Solons have balked at investments from Japan, the Gulf States, and Europe. China is by no means alone. A well-advised, thoughtful Chinese effort to purchase any major US firm or asset would have considered history, causing the potential buyer to approach the purchase with greater care.

And this is the rub: half of the problem with Chinese companies buying American firms is U.S. opposition to Chinese investment. The other, more important half of the problem – which Schell alludes to but then ignores – is the core cause of that opposition, which is that the average U.S. voter and his elected representative do not trust China or Chinese companies. That is not the fault of the U.S. Congress. That is the failing of a China that has not yet learned the importance of currying the trust of the outside world.

I suspect it will take some time before the leaders of the People’s Republic take that need to heart. In the meantime, it falls upon the shoulders of Chinese enterprises seeking to invest or acquire in the United States to build that trust among Americans in spite of whatever they may think of China as a whole. It is certainly doable. Even in the height of “Rising Sun” Nipponophobia in the United States in the late 1980s, a handful of companies managed to rise above the fracas, including, notably, Sony, Toyota, Nissan, Toshiba, and Nintendo.

Chinese companies serious about investing in the United States – or Australia, New Zealand, Canada, or any other country where trust of China has become an issue – need to recognize that Brand China looks to many Americans like the Death Star from the Star Wars movies, and that the companies on their own need to build contacts, trust, and goodwill among the wider citizenry long before leaping into the fray. Until Chinese firms acknowledge that fact and act on it, the doors will remain closed, and the safe move on Capitol Hill will always be the blocking maneuver.

Two Essential Reads, Fresh Today

In the Hutong
Learning the meaning of “Wu Ti Tou Di”
1049 hrs.

While finishing my presentation on e-Commerce for Marcom Beijing, Twitter alerted me to two outstanding blog posts that are of the stop-and-think variety, and I wanted to call them out.

First is Paul Denlinger’s essay “Has China Embraced an Outdated Version of Corporate Capitalism?” in his always-entertaining, often-provoking ChinaVortex. What Paul is really asking, I think, is whether the form of corporate caplitalism China has embraced, which I would argue served China well for the first three decades, is now outdated, and dangerously so. Paul is a contrarian, to say the least, but his thoughts here demand consideration.

Second is Kevin Lee’s superb “What the Media Won’t Tell You About China’s Youth” on his genYchina blog. The media in the west, with a few notable exceptions, tend to focus on those aspects of Chinese youth that best reflect either the fears or preconceptions of their audiences. (This is understandable: as I have said here before, mainstream media are, for the most part, in the business of catering to their audiences, not challenging them.) Kevin sets some of those misconceptions straight in a forthright piece in his blog, an article that should be required reading among marketers in China.

The Case for Splitting Hollywood

paramount 117
Image by photoNiki via Flickr

In the Hutong
1558 hrs.

While I was absorbing caffeine and beta carotene at a sunny Beverly Hills espresso spigot earlier this month, I came across a superb article in the Wall Street Journal explaining how the U.S. motion picture business is starting to make films that are aimed at an international market. The phenomenon has reached such a stage, in fact, that movies ONLY likely to appeal to a domestic U.S. audience are not getting the green light, and those films deemed promising but too US centric are being given script and casting makeovers to make themselves more appealing to international audience.

Darn those Foreigners Paying to See Our Movies!

About time Hollywood woke up to the rest of the planet, I say, but writing in The City Journal, New York’s local Neoconservative periodical, author Andrew Klavan apparently thinks otherwise. He suggests that the reason there is such poor fare in the theaters this summer is because Hollywood is spending too much time making movies for the rest of the world, and not spending enough time making American Movies.

“…perhaps the economic necessity of appealing to countries other than America has sapped American movies of their quality. For surely, the thing that once made American movies so great was the greatness of unique American values: individualism, self-reliance, a healthy disrespect for the powerful, and the romance of infinite territory.”

And it gets better (or worse:)

“American movies will not be great again until they’re made by artists who comprehend America’s unique greatness. Let the rest of the world make its own movies.”

Klavan’s xenophobia-suffused, evidence-free rant is unbecoming of a journal that one would think advocates the competitiveness of American enterprise abroad, in particular an industry as important to U.S. export numbers as film and entertainment. Let us take a look at why.

This Year’s Movies Are The Worst…Again

First, the summer is not without some fine examples of filmmaking. I saw four films while I was in the US, all dictated by the tastes and sensitivities of my eight-year old: “Toy Story 3,” “The Last Airbender,” “Despicable Me,” and “Cats & Dogs 2: The Revenge of Kitty Galore.” The first was superb, the second tolerable, the third excellent, and the fourth…well, let’s just say the kid really enjoyed it. It is a limited sample, I will grant, but it does not seem to imply that the US industry is incapable of making great films.

And the stream of complaints about the “garbage” coming out of Hollywood predates the establishment of the Motion Picture Production code of 1930. Hollywood turns out its share of dreck (as does Mr. Klavan’s own industry, publishing), but suggesting that somehow that Hollywood’s Crap Coefficient has increased of late without providing anything more than a single anecdote is a failure of logic. To go even further and offer a reason for such an unproven phenomenon is plain nonsense.

I think Hollywood actually goes through cycles, and is not on one-way elevator to Hell. Just as soon as people lose their tolerance for big-screen sludge, corrective action will be taken. It is worth noting, however, that usually the people decrying most loudly the poverty of what gets produced in Hollywood are those who either see themselves as artists rather than makers of commercial films, and those whose pictures get overlooked by The Dream Factories. It is hard, therefore, not to sniff the vintage of sour grapes in Mr. Klavan’s dismissal of recently released motion pictures.

America Alone Makes No Blockbusters, And That’s Good for America

Second, the lurch overseas is a good thing, both for Hollywood and America. As Mr. Klavan implied, the reason Hollywood makes the movies that it does (and by this I mean Big Hollywood: Columbia, Disney, Fox, Paramount, Warner Brothers, and Universal) is because the town has become addicted making their major bets on “tentpole” films. These large- and super-sized-budget films are believed to be necessary in order to get American viewers out from behind their small screens and over to a multiplex. That, in turn, has led to budgets so large that even a decent US showing with tickets selling for upwards of $10 a pop is no longer enough to deliver profits to the studios. With DVD sales flat or shrinking, there is only one place for a healthy American industry to go: overseas. Mr. Klavan and I both understand this “economic necessity.”

But here is where Mr. Klavan and I part ways: this trend is unlikely to cease, and I don’t think it should. From a purely American/Hollywood point of view, is it in fact better to let the world make their own movies? National motion picture industries around the world have followed similar patterns, but the result for most has been to surrender a lucrative chunk of their markets to American filmmakers. Those that have succeeded in making movies for themselves – like China and India – seek now to create global audiences for their own fare, reaching into Hollywood’s own back yard, much in the way that Britain’s better filmmakers have done.

General Motors, Ford, and Chrysler for many years focused their efforts on building American cars for American drivers, cars that expressed values believed to be uniquely American. The result not only clear on the roads of the world, but on America’s roads. Does Mr. Klavan wish the same outcome upon Hollywood as upon Detroit?

Time to Really Split Hollywood

As with the writings of Karl Marx, I don’t disagree quite as much with the writer’s observations as I do with his diagnosis and perscription. The real solution to Mr. Klavan’s conundrum is to recognize that there should really be two Hollywoods: one that makes movies for the world (including Americans), and one that makes movies for Americans.

The former would continue in the industry’s proven ways, spending heavily on films aimed at a worldwide audience, including (one presumes) the United States. This is where I suspect the Big Six studios, the membership of the Motion Picture Association of America (MPAA) to focus most of their efforts, endowed as they are not only with the financing and production resources, but also highly developed global marketing and distribution networks.

The other Hollywood would make movies for Americans, but because it was addressing the specialized needs of the U.S. market (and the remainder of the moviegoing dollar after Americans had enjoyed the global flicks). The budgets would be much more modest, the marketing more guerrilla and less major media. The MPAA members might make some of these films, but most of them would come from independent filmmakers.

One could argue that Hollywood is actually already moving in this direction now. What it is going to take to complete that migration into two parallel industries is much more vocal support for independent filmmaking from influential voices in the industry and from the movie-going public. With more public support for independent film, financing and distribution could give what Mr. Klavan would call The American Film a fighting chance in an increasingly global industry.

However the present trend shakes out, one brutal fact must be acknowledged: the films of the sort that Mr. Klavan once made cannot be delivered with eight-figure budgets. If the heyday of The American Film is to return, then the makers of those films must rediscover a treasured but nearly lost American virtue: thrift. As a fellow conservative, I find it disturbing that Mr. Klavan is silent on Hollywood’s budgetary profligacy even as he skewers the Administration for the same failing. I would argue that the sheer cost of making a movie has already done more lasting damage to the industry than catering to global audiences ever could.

Time for Bottom-Up Social Media Marketing

Sanlitun Village
Dining with the Grouch
1230 hrs.

Before I took off on my prolonged LA/SF/Seattle roadtrip in June, I had the honor of joining a panel discussion on social media with Sam Flemming, Donna Li, and Lakeer Chen, moderated by Wunderman‘s Paul Blake at Wunderman’s Digital Day at Microsoft.

There were some excellent questions from Paul and the audience of Microsofties, who I have to say were incredibly engaged. Near the end, one of the senior Microsoft people asked a critical question: what traps face companies trying to use social media in marketing in China?

RenRen Is Not The Moral Equivalent of Facebook

We could have held a full-day seminar on that topic alone, so I stuck to the one answer that has been the biggest trap for social media so far: localization.

Despite rhetoric about globalization, and despite the comfort with many companies to give operational independence to local subsidiaries, a discouraging number of companies – primarily multinationals – still create global social media plans in New York or London, and when they get ready to implement those plans in China they simply “localize” them.

By doing so, what they do in most cases is say, in effect, is “well, Facebook and Twitter are blocked in China, so let’s cross out ‘Facebook’ and put down ‘Renren’ and let’s drop ‘Twitter’ and put ‘Sina Weibo’ instead.” 

Social Media Are Not Global

If this approach doesn’t strike you immediately as intrinsically flawed, let me explain:

First is the matter of usage. How and why Chinese people use social networking services adn social media sites, and how their usage of those sites affects the way they perceive companies, brands and products, and thus how they influence buying decisions is different in China than in the west. This is as it should be. Social media, unlike traditional media, are as much products of culture as they are of technology. For evidence, one only need to compare the user base and usage of Twitter with Plurk, MySpace with Facebook, or Facebook with Friendster.

My favorite example (hat-tip to Sam) is that if you wanted to find online influencers in China, you would not necessarily look at blogs. You would more likely want to be looking at popular online forums that covered topics relevant to your company.

Even then, you would want to remember that while in the west we like to consult experts, in China the marked preference remains consulting trusted relatives, friends, colleagues, and classmates first. They may get information on a product from experts, but that final decision will be determined by friends and family much more so than the opinion of some stranger who happens to be an informed monomaniac.

I suspect that over time this will change to an extent, but it underscores a subtle reason why simple localization of social media plans will not work.

Second, there are different types of social media that are more important here than they are in the west. Social gaming, for example, is a much wider phenomenon here, and you’d miss that if you were just localizing a global plan. Ditto with the BBSs mentioned above. And how would you fit QQ into a neat little U.S.-centric niche? You couldn’t. QQ is much more than just chat, but you really wouldn’t understand how unless you actually used it.

Cool Today, Lame Tomorrow

Third, as fast as change is in the west, it is arguably faster here. A year ago, Renren was brand new, and microblogging was stillborn. Today, Renren is an important force in China (though it is not Facebook – not yet anyway,) microblogging has exploded, and the emergence of Android and the iPhone are finally making mobile social media into viable channels.

None of these changes could possibly have been incorporated into plans prepared a year ago (or even in December) by marketers working thousands of miles and a huge cultural divide away. There is just as little likelihood that said planners will understand before the end of this year which social media will be important for them a year from now.

Bottom Up, Not Top Down

The solution comes in two parts. First, companies and their agencies must allow social media marketing efforts to be driven and created in each market, and THEN integrated (to the greatest extent possible) into a unified global effort. This will not go down easily with either headquarters or agencies, who are jealous of their role in driving the global effort, and often are paid to do so. They can still “lead” the global effort, but the job will be more of guidance and integration than imposing their will on local organizations.

Second, whatever plans are made need to be prescriptive, not restrictive. The plans need to be changeable at the discretion of local teams (at least every quarter) to ensure that new opportunities will not be missed, and that social media that are out of favor can be dropped at will. It is far too early in the development of the media to be betting on partnerships with sites and services that extend for longer than 3-6 months.

China is merely an extreme example of how social media is anchored in local culture. What goes for China goes as readily for any Asian markets, Latin America, and in a more subtle way, Europe.

It all goes back to what my dear, departed mentor J. Corbett Donohue once told me. “There is no such thing as global marketing. You may brand globally, but you market locally.”

Social media proves that fundamental truth.

Technology and China’s Offshore Farms

In the Hutong
Thinking “Tortillas”
1433 hrs.

Analysis of China’s resource dependence – a primary driver of the nation’s effort to extend its commercial ties overseas and to create an expeditionary People’s Liberation Army – tends to focus on mineral wealth. But in a superb analysis of China’s growing food imports, T. Marc Schober, who blogs at Farmland Forecast, calls to our attention how strategic commodities are now starting to include corn, soybeans, and even meat.

The article is a worthy read by itself, but the part that hooked me was this:

…China committed $5 billion for agricultural development in Africa in 2008. China is sending expatriate farmers to Africa to cultivate the land and export the grain directly back home to ensure a consistent supply of grains. According to the Chinese Ministry of Commerce, over one million Chinese are farming in Africa dispersed throughout 18 countries.

We could wax philosophical and talk about the growing importance of Chinese peasants as an export commodity, or about how Americans offshore manufacturing while Chinese offshore their farming, but we would be missing the point.

At some stage, the traditional labor-intensive agricultural practices that China has employed will not be adequate for its offshore farms. The need for more advanced farming methods and hardware designed to increase yields in water-constrained environments is going to grow. All of this is to suggest that China’s grain giants (like China Cereals and Oils Import and Export Corporation, COFCO, the Archer-Daniels Midland of China) or their contracted suppliers (also Chinese-owned) are likely to need to make major investments in agricultural technology in the coming five years.

Some of those investments will go to global leaders in green revolution technologies, like Israel’s Netafim, but in the long run China will need to develop its own AgTech giants, if for no other reason than a reluctance to spend billions on foreign-supplied tech that will just be put on a boat for Africa.

Just as we have watched alternative energy companies grow in China, I expect to see a wave of AgTech firms emerge in the coming decade, supplying not only local needs but also the growing demand from China’s offshore farms.

This all assumes not only growing demand in China, but also that China will be unable to fulfill its requirements more economically using standard imports. The pressure is on the commodity-producing nations to keep costs below China’s own offshore resources.

Tastes Great, Less Filling

Yanglin Toll Station, Beijing Airport Expressway
Affixing a knife to the front bumper to cut the air
1153 hrs.

Silicon Hutong Lite is my blog for off-topic posts and thought shots (i.e., stuff that has nothing to do with China’s tech, media, innovation, marketing and communications scenes.) In keeping with the ImageThief Theory of Unified Online Presence, I will occasionally post links here to some of the choice pickings from

For today: Musings on a San Francisco Defanged, and City Mice

There is not much in the way of re-postable material there yet, but as there is, I’ll link it here.

Plug/PSA: Shanghai AmCham’s 2010 Sustainability Conference

Beijing Airport Expressway
Counting the Mercedes Sedans
1157 hrs.

It is that time of year again, and the folks at the American Chamber of Commerce in Shanghai have put together a more-impressive-than-normal slate of speakers for their 2010 Conference being held in September. The topic this year is Green Cities: A Call to Action.

This is a profoundly important topic for China specifically, but for the emerging markets and developing world in particular. Scientists are still trying to get their heads around the environmental effects of a billion and a half people (between China and India alone) moving to cities in the next few decades. Mitigating those effects is going to require more than band-aid, single-system solution. What is becoming clear is that cities the way we have been building them for the last 150 years cannot be the cities we live in a century from now.

The Shanghai conference looks set to start a debate about which way this needs to go. Confirmed speakers include:

• Mark Ginsberg, Senior Executive, Office of Energy Efficiency and Renewable Energy, U.S. Department of Energy
• Christine Gregoire, Governor of the U.S. State of Washington
• Hunter Jiang, CEO, GCL Solar
• David Leonhardt, Economics Reporter, The New York Times
• Gene Lupia, President, Environmental Services, CH2M HILL
• Gary Rieschel, Founder & Managing Director, Qiming Ventures
• Jonathan Woetzel, Director, McKinsey & Company
• Kevin Wale, President & Managing Director, General Motors China

Expected Chinese officials include:

• Liu Yajun, the Chief Commissioner for Foreign Investment of MOFCOM
• Lu Zhushan, the Governor of Zhejiang province
• Fu Zhihuan, Chairman of the Finance Committee of the 10th National People’s Congress
• Han Wenke, Director General, Professor, Energy Research Institute, National Development and Reform Commission (NDRC) & Co-Chairman, U.S.-China Clean Energy Forum

While on the one hand the participants seem uniformly “establishment,” I would argue that it is going to require the involvement of entities of these sizes to make green cities something more than a graduate student’s wet dream.

My understanding is that there are still some seats available for the conference, and you can find them (and more information) at <a href=”

In Search of Chinese Monopolies

In the Hutong
Parent-Teacher Conference Day
1253 hrs.

In a provocative dispatch today, the Associated Press is reporting that the chief of the Anti-Monopoly Bureau of China’s Ministry of Commerce, Mr. Shang Ming, acknowledged in a news conference that the only companies that have been required to scrap or change merger or acqusition plans under the 2008 Anti-Monopoly Law have been foreign companies.

Regulators have examined 140 cases [of mergers and acquisitions and whether they violated the Anti-Monopoly law] and rejected outright only one, Coca-Cola’s 2008 bid to buy Chinese fruit juice maker Huiyuan, said Shang Ming, chief of the Commerce Ministry’s anti-monopoly bureau. He said five other deals, all involving foreign companies, were passed with conditions such as selling off some assets.

This upsets foreign businesspeople in China, because it has been the abiding suspicion of many of our number since the drafts of the law began circulating in 2006 that the law was aimed squarely at foreign companies. I have been on the somewhat more reserved side of the equation, believing that the history of China demonstrates that what is important is not the law, but how it is enforced.

The frank admission by Mr. Shang that the foreign companies are bearing the brunt of the law tends to support the critics who saw its passage as Protectionism by Another Name. I am not yet convinced.

First, the outright rejection of a single foreign deal does not constitute a trend, and as I have argued elsewhere (“Seven Reasons for the Coke-Huiyuan Epic Fail“) there were enough other miscalculations in Cokes attempt to buy Huiyuan, so it cannot be used as a litmus test. That would, I would suggest, leave us with the five deals that required some rearrangement of assets that would need to be evaluated individually before we can make a call.

Second, Mr. Shang’s contention that the data is skewed because there was so much more foreign-driven M&A in the period in question than locally-driven deals may well be true. Again, we would need more data to make that call.

Third, we must consider the possibility that the foreigners are not the primary targets, but are intentionally the first targets of the law. China watchers familiar with the necessities of Chinese politics will acknowledge that any effort by an organ of the central government to block a politically powerful SOE from an acquisition is fraught with peril for the regulators involved. All the more so when the organ doing the enforcing – the Anti-Monopoly Bureau – is still building its own political legitimacy in China.

A good way of establishing that legitimacy – and the legitimacy of any later action against a Chinese enterprise – is to go after some foreign scalps first. Prove to the government, to SOEs, to the provincial leaders, and to the people that you have made the foreigners pay first, and they will be more inclined (or readily compelled) to acknowledge the legitimacy of the action against the local enterprise.

In fact, I would argue that this is the reason the Anti-Monopoly Bureau held the press conference in the first place, and why it did not shy from laying out the statistics like they did. The Ministry of Commerce is playing to a domestic audience, one that believes that foreign companies have more than their fair share of the local market. Against such popular sentiment, the first target can only be foreigners.

This is neither to apologize for the AMB nor suggest that the critics of the Anti-Monopoly Law are necessarily wrong. But it does suggest that at the very least we need more time and more data before we can make a strong case for veiled protectionism.

Institutionalizing China’s Hackers

Back in the Hutong
What a Long, Strange Trip it Was
2129 hrs.

An interesting thought from a professor at Case-Western Reserve University: the freelance Chinese hacker is a double-edged sword. On the one hand, he can serve to disrupt and hack on behalf of his government. On the other, he can help himself and hundreds of others break through the firewalls put into place by the very same government.

I tend to agree, and as such I would wager neither the Chinese government nor Internet libertarians would like to see Chinese hackers go away anytime soon. It’s an ugly bargain out of a William Gibson novel, but it works: even if the central government could bring adequate cyberwar talent in-house, there is a lot to be said for deniability.

What I suspect will happen eventually is the development of a large and varied defense industry that focuses on information warfare in China, both for defensive, offensive, and stealth penetration purposes. Instead of just being suppliers of hardware and software, however, I would wager these companies will actually conduct operations on behalf of the government – info-defense contractors, if you will. That leaves in the deniability, ensures that the government retains access to high-quality talent, and allows the uniformed services to focus on “kinetic” defense.