To Gweilo, or not to Gweilo

In the Hutong
Oggling the Thunderheads
1702 hrs.

In a profile of Francois Curiel, the Hong Kong-based Asia head for British auction house Christie’s, The Wall Street Journal’s Amy Ma focuses on the question of whether it is appropriate to have a white westerner (a “gweiloh,” or “foreign ghost” in Cantonese) running an the Asian arm of a western business.

Mr. Curiel responds that he wonders that himself sometimes, and that he works hard to remain humble and learn from his staff. Further, he notes that only 10 of his 130 staff in Hong Kong are non-Chinese, and that the Beijing and Shanghai offices are both 100% Chinese.

I wish Mr. Curiel the greatest success in Asia. Unfortunately, I think that in giving a politically correct answer he may have sacrificed an excellent opportunity to give the right one.

What’s Race Got to Do With It?

If we can ask “can a Gweilo” lead in Asia,” we should also be able to ask “can a Chinese lead in America,” “can a Filipino lead in France,” or “can an Indian lead in Russia?” It is unlikely you will hear such questions asked, however, for two reasons. First, in the west, to ask such a question would imply a lack of ability based on the ethnicity of the executive, and thus taint the questioner with a heady whiff of racism. Second, the highly-visible three-decade-long procession of otherwise promising non-Chinese executives who have come to China and failed has fostered a myth of Chinese exceptionalism, a belief that to succeed in China you must localize completely.

There are enough examples of executives who have come to China from Europe and North America over the years to prove that this is a canard. The record offers ample proof that, with the proper preparation, skills, attitude, and approach, non-Chinese executives can lead successful enterprises in China. I will not embarrass the individuals by mentioning names, but such executives have been integral to the success in China of companies like General Motors, BHP Billiton, Intel, Caterpillar, Boeing, BASF, Siemens, Nestle, SAP, Ogilvy & Mather and JWT, for starters.

It’s the Talent, Monsieur

It is time we stopped asking this question, and instead acknowledged that the ethnicity of the executive is far less relevant than the abilities of the individual and the internal culture of the corporation. Companies should be expected to understand the specific skills and attributes an executive will need to accomplish the company’s goals in a given location or circumstance, and to hire, train, promote, and retain accordingly. Corporate ethnic cleansing under the guise of localization is not a sustainable human resources strategy, especially as the compensation gap between local and international staff narrows.

If I were a Christie’s investor, bidder, client, or employee, it would be my fervent hope that no matter where in the world the auction house was operating that it was hiring people based not on their ethnicity, but on their skills, their professionalism, and their integrity. If such outstanding people were available locally, all the better. Any CEO who leads a global company should be able to say, with conviction, that localization for its own sake is foolhardy, and that the company hires employees based on talent, not on ethnicity, in China as it does everywhere else in the world.

Purely from a PR standpoint, think of how much more powerful a message Mr. Curiel would have sent had he looked the reporter in the eye and said “we hire the best people in our business in Asia without exception, and in following that policy we have wound up with only 10 non-Chinese in our entire Greater China operation. We see China as a gold mine of talent for our industry.”

There is no nation on Earth that possesses a monopoly on the best talent in a given field of commercial endeavor. Even the not-always-so-worldy members of the U.S. Congress recognize that, hence the existence of a little weapon of global competitiveness called the I-95 visa. The enterprise that ignores that truth does so at its own peril.

The Company Code: Morality, China, and Facebook

In the Hutong
Surrounded by seferim
1126 hrs.

While I was working last week on my business case against Facebook coming to China, the editors of the Financial Times decided to take a moral stand. In “Here be dragons,” the FT posited that in doing business in China, Facebook would be treading on morally dangerous ground.

Facebook may not have set itself some “don’t be evil” style mission, but its raison d’être is to encourage its users to share personal information about themselves. This is morally problematic when the representatives of an authoritarian government are peering over one’s shoulder.

The editors of the FT then call upon Facebook to “articulate a strategy that allows it convincingly to navigate the ethical shoals before venturing into China.”

While I appreciate the FT’s point, I think we are getting ahead of ourselves.

Which Morals?

Before we can judge the morality of what Facebook is doing we must first ask ourselves on what basis we are making that judgment. This is neither trivial nor pedantic.

For better or worse, we live in a world of many moral codes. While there is widespread agreement among most about some general principles (murder is wrong, theft is wrong, etc.), outside of those general principles there is much disagreement, and even within those principles there are vast variances in interpretation. Americans cannot agree on whether abortion is murder or a woman’s right; there are many who feel that the slaughter of a cow is murder, that reading a book in a bookstore without buying it is theft.

If there is great variation among moral codes in America, the question of selecting a moral yardstick becomes more complex when globalization is added to the picture. In most of the world, tolerance for different moral codes and belief systems has replaced the effort – via crusade, inquisition, holy war, and missionary colonialism – to convert everyone on the planet to a universal system of morality and beliefs.   Globalization depends at its core on this toleration, a recognition that the world consists of people with different moral codes, and that there is more to be gained through accommodating those differences in the short term than trying to eliminate them.

This happy state of affairs ends when a company finds itself operating in a country where accepted principles of behavior vary radically from those at home. Under such circumstances, is a company obliged to operate under the moral code of its host country/culture, or its home country/culture? And why? If Facebook provides user information to the Chinese authorities, that may be considered immoral in the U.S., but it may be considered good citizenship in China. And if Facebook provides UK authorities with personal information on terrorist suspects, that may be considered good citizenship in Britain, but an abominable betrayal of trust elsewhere.

Your Morals…or Theirs?

The point of all this is that asking a company to behave morally is not a simple “on/off” proposition. Indeed, a company seeking to operate morally in a multicultural and morally relativistic world thus treads treacherous ground. Does it choose a moral code by which to operate, potentially alienating individuals, groups, and even countries that may find that code offensive, and potentially closing off lucrative opportunities? Or does it take the path of least risk, attempting to dance between those codes, never taking a stand yet never giving offense?

In my experience, most companies choose the latter path, taking shelter under Nobel laureate Milton Friedman’s famous dictum that the social responsibility of business is to increase its profits.

Friedman’s point, while technically correct, comes off as anachronistic and unenlightened a decade into the 21st century. Consumers, governments, media and other audiences now expect companies to conduct themselves not only according to the law and the interests of their shareholders, but also in a moral manner over and above what the law stipulates, and in keeping with the moral codes of those audiences.

The Facebook Code

We are coming into a time, then, where companies can no longer afford to be morally ambiguous. A company that fails to articulate its own moral code of conduct will have one, two, or even several articulated for it, created by online publics using behavioral exegesis: “ah, see, their privacy controls are weak, so they put profits ahead of user interests.”

This is the situation Facebook finds itself in today. It has been much clearer and open about a code of conduct for its users than it has been for itself. We cannot count on Facebook to do the right thing in China, not because we think Facebook, its officers, and investors are necessarily bad, but because we have been given no reason to believe that they will be good when presented with the kinds of moral quandaries they can expect in China. All we can look at is whether they have transgressed somebody’s moral code in the past. Have they? Yup. Uh-oh.

Until and unless Facebook articulates and promulgates a global code of conduct that applies to itself and all of its employees, that sets forth non-negotiable principles that can cover a wide range of situations, that has the support of morally credible third parties, is subject to audit, and spells out meaningful penalties for failure to comply, Facebook’s motives and intent in morally challenging situations will be suspect. And we will, of course, suspect the worst.

Reconnoiter the Moral High Ground

None of this is meaningful unless Facebook understands the full scope of the potential moral quandaries it will face in China and addresses them right now. While it is drafting its moral code, and perhaps before, Facebook needs to conduct a due diligence process to assess not the financial or regulatory risks implicit in doing business in China (though one would hope they are doing those as well,) but also the moral risks.

Those risks are not limited to what what the government likely to demand of Facebook, both initially and in the future, in return for the right to do business in China, and the potential consequences (both in China and to the business as a whole) of those compromises. They also include the moral hazards implicit in operating in a business environment with widespread corruption, and ways in which the behavior, background, and associations of Facebook’s potential partners might cast the company in a morally unfavorable light.

If you value your money, you assess financial risk. If you value your right to conduct business, you evaluate regulatory risk. And if you value what is right, you assess your moral risk. I have to believe Facebook values all of those things.

The People Factor

They may believe in those things to such an extent that Facebook’s own people may not allow the company to leap into China – that’s how I read what Bill Bishop wrote in this Digicha post on Thursday. If the company does make the decision to come here, however, what will determine the propriety of Facebook’s actions will not be codes of conduct or due diligence, but the behavior and scruples of the individuals in the Facebook China enterprise.

This is a significant challenge. It is difficult enough to identify, hire, and retain individuals with strong work habits and technical skills in China’s hyper-competitive and talent-constrained labor market. It is even more challenging to find people with the requisite talents and finely-tuned moral compasses.

Yet these are precisely the kinds of people Facebook will need most, and these will be the people whose decisions, more than those of Mark Zuckerberg or Sheryl Sandberg, will determine whether Facebook operates in accordance with any ethical rectitude in China. This should not only guide Facebook’s hiring decisions, but its choices on who to partner with, and how much to trust them with the human resources task.

Because in the end, a company’s moral standing is no greater or less than that of its most morally-challenged employee. Facebook should get that: it has always been about the people.

One Final Note

I feel compelled at this point to write a brief postscript to this series of articles.

There was once a old captain who lived in a small but neat house near the mouth of the Congo River in what was then called Leopoldville. When he wasn’t off on the business of The Company, he would spend his quiet days and evenings along the docks near the river, watching boats go upstream, watching fewer come back down, and seeing in the flotsam reminders of his own lessons on Africa’s mightiest current.

One evening down at the docks, he spied a new, elegantly fitted-out, beautifully varnished yacht tied up alongside. He went into his usual watering hole to find a party of equally-well fitted-out Englishmen at the tables, clearly pausing for an evening of revelry before continuing upriver. He walked up to the Englishman at the head of the table and, introducing himself, asked if that was his vessel outside.

“Yes it is,” beamed the Briton. “She’s a beauty, isn’t she?”

“She is,” replied the captain. “And she’ll swamp at the bend below the first rapids. Her beam is too narrow,  she draws too much water, and her bows are all wrong. With respect, sir, please find yourself another vessel before continuing upstream.”

There was a brief silence at the table, and then one of the men further down jumped up and berated the captain. “Now see here, sir, but do you know to whom you speak? This man, Sir –––, is a Fellow of the Royal Geographic Society, has been up every river in Europe, plus the Nile, Amazon, and Mississippi. We here are the most experienced river crew in the world. How dare you tell him his vessel is not ready.”

The old captain smiled, tipped his hat to the table, apologized, and bade them a safe journey.

It was not three days later when the captain spied drifting downstream in the current a varnished plank of wood, and a torn Union Jack. The sight gave him no happiness.

Safe journey, Facebook, whatever you decide.

Primer on China’s Leadership Transition (via Patrick Chovanec)

In the Hutong
Reading Heavily
1841 hrs.

I have never reposted other bloggers here on Silicon Hutong, but after reading this piece I decided it was time to start a new tradition. Professor Chovanec offers what is without doubt one of the most concise yet complete overviews ever of a political event in China, and it is worth reading and absorbing:

Primer on China's Leadership Transition Over the past few months, several people have written asking me to offer a short “primer” on China’s upcoming leadership transition, which begins next year.  The handover to a new president and premier has generated plenty of speculation in the press, about who the leaders are and what is will all mean, but sometimes it’s useful to go back and fill in the very basics, since China has a unique and in some ways quite confusing political system. The … Read More

via Patrick Chovanec

Nine Things Facebook Must Do to Better its Chances in China

In the Hutong
Up with the Birds
0615 hrs.

Over the last two decades, I have watched China’s allure overwhelm the reasoning powers of a battalion of intelligent, experienced, and successful executives. I have seen massive companies enter the market on the thinnest of pretexts without bothering to identify and evaluate the opportunity first. And in some cases I have watched, helplessly, as great companies and captains ignored good advice and their own common sense in the dogged pursuit of a billion customers.

There is something altogether too enticing in the image of a great leader, impelled by nothing more than animal drive and gritty determination, ignoring his counselors, spitting in history’s face, and in the end accomplishing what others said was impossible. If that self-conception proves too seductive for a baron of industry who bears the scars of five decades of experience, it must be irresistible to a twenty-seven year old billionaire CEO who has succeeded at almost everything he has attempted in his life thus far.

I suspect that this and perhaps pressure from investors is what draws Facebook to China.

Motivations notwithstanding, if Facebook has made the decision to enter China, all that is left is to offer advice that may smooth the path ahead.  The obstacles ahead of Facebook are formidable, and I enumerated many of them yesterday. While there is nothing Facebook could do to guarantee its success in light of those obstacles, there are steps it could take to improve its chances for success in China, should it decide to take the plunge.

At the top of the list of those steps are the following:

1. Explain exactly what you plan to do. To everyone. The largest risk to Facebook is the potential of a backlash from users and censure by U.S. lawmakers for complying with Chinese requirements to control content and provide user information on request. Google has been through that storm, and it is hard to see how Facebook can avoid it.

What Facebook can do is eschew Google’s approach, which amounted to ignoring the potential for a problem in the hopes it would never become an issue. We all saw how that turned out, and what Facebook must do is tell its investors, its users, and the public how it plans to operate in China and why. It has to assess, plan for, and communicate in preparation for the worst case scenario. And it has to be completely open with its users in China that it will hand their information to authorities on request.

Further, Facebook needs to explain how it is going to secure the personal information of users around the world from the prying eyes of Chinese hackers, whether they are simply rogue electrical engineering majors with nothing better to do or in the employ of the national government. Information released around Google’s departure from China has left the impression, right or wrong, that servers in China are something of a huge trojan horse. Facebook needs to tackle that head-on.

If the company cannot take those steps and publicly defend its approach in China today, better to avoid doing business in China altogether.

2. Build a local service from the ground up. Websites and online services that are transplanted wholesale from the US to China are doomed to die in the alien cultural soil. Facebook China should not be Facebook in Chinese, but a service that grows and evolves naturally out of Chinese culture the way MySpace grew out of the US collegiate music scene and Facebook itself grew out of American university culture. That means that Facebook in China may look nothing like Facebook anywhere else, and everyone needs to be comfortable with that.

That doesn’t mean throwing out everything that’s been created elsewhere. It means letting user preferences and local conditions dictate the thousands of little choices about what to create and how it should look, rather than allowing those decisions to be dictated by what was created elsewhere.

3. Move Mark Zuckerberg to Beijing. As I said at GMIC in 2010, there is no way any foreign web company can beat a local competitor in China, because the guy running the local competitor is here, and the foreign competitor’s boss is between 6,000 and 8,000 miles away. If Facebook is serious about China, the company should yank the CEO out of his apartment in Palo Alto and drop him into a 4th floor walkup in Haidian for at least a year if not two.

Zuckerberg’s job will not be to create the site, but to enable the team on the ground, to keep the company’s resources at hand, to provide quality control, to give the authorities comfort, and to learn what it is like to do business in China’s internet industry. And please, no objections about how he cannot run Facebook in the US while sitting in China. He’ll have a much easier time doing that than trying to run Facebook China from Palo Alto.

4. Find The Guy/Girl. Facebook needs a local CEO to be the chief site visionary and to actually create the service. The foreigners – even the overseas Chinese – cannot do it. Facebook China needs to be local down to its core, or the results will be disappointing. This will be one of the most important hires in the company’s history, and the individual needs to be selected with great care.

That person probably should be fluent in English, have SNS leadership experience, should be a coding monster, and be a natural leader in a Chinese context. And be ready – he or she will be expensive. But Facebook will fail without him or her.

5. Get a great Chinese name. If they can’t say your name (and say it without laughing at the dumb foreigners), they won’t use your service. Facebook needs to hire a locally-wise branding agency in Beijing to come up with a brand and test the hell out of the name using a great marketing research firm. The name should reflect what the service is about, and Facebook’s leaders shouldn’t worry if it they cannot pronounce it or it doesn’t sound like “Facebook.” They just don’t want to wind up with a name like feici buke (非死不可).

6. Think lean. The easiest thing to do to a China startup is to drown it with too much cash. The funds should be there when necessary, but the offices should be inexpensive and things kept as lean as possible. Great sites and great code come from people who are improvising because they cannot afford to throw money at a problem. Facebook China should forget fancy offices, company cars, and Herman Miller furniture. Replicate the dorm-room mentality, forge a tight team, and spend money on talent, IT, and the stuff that will show up on screen. Zuckerberg should take a taxi to work, or a simple Volkswagen Santana with a bodyguard.

7. Forget revenue – for now. The China service should replicate the Facebook growth story – forget revenues for 2-3 years while focusing all efforts on experience and scale. Having to go out and sell ads is a monstrous drain of senior executive time right when the focus should be on forging the product. Build something great, and the advertisers will come to you.

8. Get humble. Facebook China needs to talk and play like the underdogs, be grateful to be allowed the opportunity, and learn to be superb listeners. The company’s success overseas only buys them a skeptical reception. The way to overcome all of that, and to create a successful company and a lot of goodwill, is by personifying humility at every step.

That also means eschewing the limelight. The first temptation will be to throw a big press conference at every milestone, starting with a big announcement of the company’s decision to enter China. Facebook has to resist that temptation. Expectations and awareness will already be high enough. Speak softly and create a superb service.

9. Play clean. There is a double (maybe a triple) standard for companies in China. There is one set of rules for state-owned enterprises, one set of rules for private companies, and a third set of rules for foreign companies. Foreign companies have to operate with greater integrity, transparency, and care than local companies do.

For this reason, Facebook needs to operate in China as if it was in the United States and being simultaneously investigated by the FBI, OSHA, and the EPA. Doing otherwise will give the competition and the government an perfect opportunity to prove that Facebook is a scofflaw company at best, and at worse subversive. Facebook cannot afford the distraction of government harassment.

I could go on, but these are the most important steps Facebook needs to take right now, some of which need to be done before setting up shop in China.

I will be watching with great interest to see how many of these Facebook decides to follow.

Tomorrow, a post on the moral question of Facebook’s entry into China.

Seven Reasons Facebook Should Stay Home

In the Hutong
Upgrading to Firefox 4
1730 hrs.

Judging by the number of calls I have taken on the subject in the past four days, the rumors of Facebook’s imminent arrival in China are reaching a crescendo. And while the lack of an emphatic denial from Facebook’s appointed spokespeople does not count as a confirmation of such plans, it is a fair bet that the company is considering it.

I think coming to China would be a bad move for the company, and I am not alone. Imagethief Will Moss has explained that operating in China by China’s rules puts Facebook’s global reputation, and thus the goodwill of its worldwide users, at risk. Gady Epstein at Forbes argues that government suspicion of Facebook’s ulterior motives will stand in the way. And Bill Bishop at Digicha thinks Facebook’s own uncoordinated communications will undermine the entire effort.

To me, the core problem with a Facebook venture in China is a weak business case: the risks are high, the costs would be significant, and the upside declines daily.  Avoiding the moral issue for now (not ignoring it, just saving it for a separate post), here are the reasons I think Facebook’s board should just say “no” to China.

1. Facebook is too late. There was a time when Facebook had an opportunity to be something amazing in China. My best guess puts that window somewhere between January 2007 and June 2008. Chinese users of the English Facebook site were on the upswing, the government had not blocked the service, and there was some real buzz about the company in the market.

But Facebook, busy with other things, decided that doing a Chinese site would fall into the “too-hard” pile. The moment passed, and local companies have had three years to to clone, localize, and improve on Facebook’s offering, then scale up, consolidate, and in Renren’s case, go public. There is no virgin territory for Facebook in China, no blue ocean, just the prospect of having to slug it out with a bunch of wily local tigers sitting atop the hill using Facebook’s own tactics and sharpening their claws.

Worse, Facebook is contemplating market entry at a time when, according to this presentation from RedTech China, Facebook-style social networking sites are experiencing a slowing in growth, something also suggested by Renren’s quiet restatement of its Q1 user growth numbers.

2. China’s users have been there, done that. As noted above, Chinese users have seen Facebook before, and they have seen it imitated in a dozen different ways. Unless Facebook is planning to offer something radically different, more enticing to Chinese users, and completely impossible for others to imitate, users will come, they will play, they will yawn, and they will go back to what they were doing.

Facebook confronts a distateful choice in China: stick with the company’s trademark formula, hoping to win on name recognition alone, or abandon its core essence in search of differentiation. Doing the former risks getting lumped into the rest of China’s social-networking has-beens, while the latter would deprive the company use of its most important asset – its code – and force it to start from scratch in China while the competition leaped ahead.

3. Competition is brutal, and it is not just RenRen. And speaking of competition, Facebook is coming into a social media environment that is not limited to Facebook lookalikes. The company must also fight chat giant QQ, Sina’s booming Weibo microblogging service, and online forums or BBSs, all of which have either mass, momentum, or both.

Weibo is the uber-threat, with Sina.com prepared to use its deep-pockets to help build its user base far beyond its current 100 million while adding features to take the service far beyond a simple Twitter clone. By the time Facebook launches in China, it may find itself without a market.

4. Facebook was not invented here. As I argued at some length in Advertising Age early last year, online services are born and grow in a specific cultural context. Sometimes those services travel well. Often they do not, and in the case of services that are transplanted from the US to China, successful transplants are all but unknown.

The most important reason those transplants fail is that they apply the formula they used for success in the United States to an online population that uses the internet in subtly but importantly different ways. Local engineers and entrepreneurs, themselves products of the local culture, can see with startling clarity where those gaps lie, and how to exploit them.

There is no reason to believe that Facebook will be any different. And before you suggest that somehow a local partner like Baidu would ameliorate that disadvantage, see below.

5. Welcome to the Post-Foreign China. There was a time when being a foreign company bestowed a cachet that meant ready acceptance among consumers and helpful policies from government. The helpful policies are gone, replaced with a mixture of suspicion, petty harassment, and a belief that foreigners have precious little to offer China anymore; the ready consumer acceptance – in the internet sector specifically – is gone, worn down by a parade of global brands that never lived up to their promise.

Today, being a foreign internet company is a liability, and Facebook will meet widespread doubt, skepticism, derision, and hostility when it launches in China. Many netizens will be pulling for Facebook to fail, will exert themselves to make that failure happen, and will find ready accomplices in competitors and their legions of fanboys/girls.

6. Don’t count on Baidu to help much. Baidu will be the best possible partner for Facebook, but that does not mean that the Chinese search giant will make Facebook’s China problems go away. Baidu has no experience running a successful social networking site, so they will be learning along with Facebook. Facebook will rely on Baidu for air cover with the government, but Baidu has its own mounting issues with the government, ranging from legal action over IPR violations to the recent appearance of two government-sponsored competitors for Baidu’s search business.

If head Facebooker Mark Zuckerberg expects Baidu to focus on the success of Facebook China, he may want to consider the company’s full plate: Baidu has to defend its search position against its own government, handle a new paid music site, build out its efforts in online video and e-commerce ventures against formidable competitors, and create a mobile operating system to beat Android, iPhone, and a dozen other competitors. That does not leave a lot of executive attention or engineering resources for Facebook China.

The Baidu partnership will be helpful, and it will look great to The Street, but it is not going to make Facebook China a success. That will devolve on on Facebook itself.

7. China is mobile, and Facebook does not do mobile very well. I use the Facebook mobile software on two Apple devices, and I am being kind when I say the experience is underwhelming. Facebook still has not figured out how to make an elegant transition to mobile, but China is maybe three years away from more users accessing the Internet on a mobile device than on a PC. Weibo on mobile is not great, but its experience translates much more readily to a mobile screen, and it is easier and more intuitive to use the Weibo app than the Facebook app. Unless Facebook can figure out the formula for success on mobile – including figuring out how to integrate ads – they are going to get creamed in China.

Come if you must

In order for its efforts in China not to backfire on it – much less to be considered a success – Facebook has to proactively address each of these issues, and deal with the implicit opposition of Chinese regulators and U.S. Congresspeople, and avoid backlash among its users, and start offering some consistent messages about how it will deal with operating in China.

Given the time and attention this will take away from keeping the service appealing to the half-billion users it already has and managing an eventual public offering, China looks like a massive potential waste of time and money with a declining upside. But if they are absolutely determined, tomorrow I’ll have a list of what Facebook needs to do to improve their chances for success.

Is Film Finance in China About to Change?

In the Hutong
Break time
1120 hrs.

Since China began the reforming and opening process in the late 1970s, a small number of industries have been held outside the reforms that most other sectors have enjoyed. One of those industries has been the national defense complex, and the other has been media.

The media and entertainment sector in the world’s largest and most entertainment-hungry market has been kept in the hands of government at the insistence of the Party. This has meant that the government has rebuffed not only attempts by foreign investors to buy into domestic traditional media properties, but similar attempts by powerful local companies as well.

The result has been the anemic development of the domestic media industry, forced as it is to rely on its revenues, the government, and ingenuity to support its efforts. This has been particularly challenging for the film and music businesses in China, making it difficult for those businesses not only to finance new projects, but to make long-term capital investments and to attract and retain talent.

Not so constrained have been new media companies, in particular the online video websites, the largest of which are taking foreign venture capital investments, conducting offshore IPOs, and starting to produce their own television/video programming. This contradiction is a latent problem in Chinese policy, one that is frustrating to the leaders of China’s state-owned traditional media, and it becomes more severe as the online video sites grow in revenue and production capacity.

The government will have to level he playing field at some point. They can do so either by forcing the online video sites to buy out their foreign investors (not so easy after an IPO,) or by allowing traditional media companies to seek outside investment. The latter would mark a radical shift for Chinese policy makers, and one fraught with risk. The implicit belief in Beijing is that once private interests control media, the Party loses control. In China’s system, this risk is nigh unacceptable.

But there are some signs that the party is willing to experiment with a degree of private ownership in traditional media. South Africa’s NASPERS has long held an interest in Beijing Media Corporation, a marketing and advertising vehicle for print media in Beijing, and a joint venture with Anhui Daily Newspaper Group. These deals took place with the implicit approval of the Party, and it appears they are being watched with great care.

That degree of experimentation appears to have now extended to film. Last week, Beijing Xiangqiao International Media, a film and animation production company and subsidiary of state-owned Hunan Broadcasting, went private in a management buy-out, and there are apparent plans for a domestic IPO at some point in the future.

This will be an important development to watch. If this is allowed to go forward, this marks a limited but key precedent for wider privatization – and private finance – in China’s growing film industry.

This could also be a watershed moment for online video providers like Youku (YOKU) and Ku6 (KUTV). If regulators are prepared to allow domestic production houses outside investment, it could mean that they are also prepared to allow Youku, Tudou, Ku6 and others to continue their evolution toward becoming integrated media companies.

Cross Post: In Defense of the CFIUS

In the Hutong
I should be doing this in Linux
1551 hrs.

In recognition of a simmering foreign investment stand-off between China and the US, I’ve started a review of the policy literature on both sides of the Pacific. Over at The Peking Review, I posted the following review of an interesting defense of the American approach to foreign investment review. I post the full review below, with some appropriate additions.

Damming Capital

The United States has a long-established system for reviewing foreign investments in the United States, a process that is understandably highly political given both self-interested protectionism and legitimate national defense concerns that grapple with the interests of entrepreneurs and shareholders seeking greater opportunity or a simple cash-out.

China’s growing hunger for offshore investments has already begun testing that process, in particular with Huawei‘s recent attempt to snap up the leftover assets of a bankrupt technology startup in California. Huawei’s application – filed after the fact – was rejected, and it seems likely that more Chinese companies will face challenges as they attempt to use acquisitions as a pathway to globalization.

At some point China is likely to want to cast a global spotlight on the U.S. foreign investment review process (and would have done so sooner but for the attention it would have brought to its own), and when it does, the Committee on Foreign Investment in the United States (CFIUS) will find itself under global scrutiny.

Following the 2006 controversy around Dubai Ports World and its attempt to acquire the U.S. port operations of P&O Steam Navigation Company, Alan Larson and David Marchick at the Council on Foreign Relations conducted a study on the U.S. foreign investment review process and the CFIUS in particular. The recommendations made in Foreign Investment and National Security: Getting the Balance Right suggest that the U.S. needs to ensure that the process remains sheltered from political and commercial interests, remaining a purely national security issue.

Setting a Transparent Example

At its heart, though, the short book is a reasoned defense of what the authors clearly believe to be a fair process, if not quite a model for similar processes overseas. Their greatest concern is in the matter of transparency, and it is worth dwelling on that for a bit.

China is in the habit of rejecting foreign investments with greater frequency, an expression of an all-but-explicit national industrial policy that implicitly questions the value of foreign ownership of Chinese companies. That foreign firms – most recently YUM Brands – continue to pursue acquisitions of healthy Chinese corporations in blithe ignorance of this policy implies either willful ignorance on the part of executives, legal counsel, and investment banks, or that it is time for China to be more transparent in the criteria it uses to evaluate foreign investments.

A fair case could be made that the CFIUS is less interested in transparency than it is in national security, and this is fair. But if the cross-border flow of investments and ownership are to continue between the world’s two largest economies and the ties that bind them to a common interest are not to be severed, the CFIUS must ensure that it offers the greatest transparency possible consistent with national security.

For this reason alone, Larson and Marchick’s work calls for appreciative review. Indeed, their recommendations deserve a read in Europe, Japan, Australia, and anywhere in the world where foreign acquisitions are placed under regulatory scrutiny or a political microscope.

Regulation is Not the Problem – Communication is

And while we’re on the topic, let my reiterate my concern about the levees that appear to be rising against foreign investment. Whether you accept globalization as a step into a better future or condemn it as a leap into a corporatized hell, you must accept that the lack of a global framework for standardizing foreign direct investment review is arguably the global system’s point of greatest vulnerability.

It is difficult under current treaties for the U.S. to prevent, say, a Chinese shipyard from selling tugboats to a U.S. tugboat operator. It is simple, however, to stop that same Chinese company from buying a shipyard in Michigan to build those tugboats in the U.S. with American workers. Similarly,  while Chinese policymakers would be hard pressed to stop the import of ingredients for Coke or take the American beverage off the shelves of Chinese stores, it was a snap for them to block Coke’s acquisition of local juice maker Huiyuan. And while I am free to visit Australia as often as I wish, I have require government approval to buy a home there.

What keeps these restrictions in place, and what prevents the world from sitting down and hammering out a General Agreement on Direct Investment (GADI for short), is public perception. Larson and Marchick note that in America, arguably the most small-l liberal country in the world, 53% of the people are opposed to foreign ownership of U.S. assets.

The most pressing problem in the path of foreign investment is, then, not regulation, but communication. Governments and NGOs are unlikely to take on the burden of advocacy for the cause. This means corporations are on their own, and that every effort to purchase a company overseas demands that the acquirer make a convincing public case for that acquisition, because, as Larson and Marchick point out, the regulator charged with reviewing it will be required to justify his/her decision as well.

Cross-Post: Rethinking How to Win Hearts and Minds

Soldiers from the U.S. Army's 350th Tactical P...
Image via Wikipedia

In the Hutong
Thinking about my phone
1445 hrs.

In my day job as a corporate communications strategist, I work with companies who want other people to think good things about them and their products. As a rule, the companies who find that easy do not seek me out, so I wind up working with companies who are having a hard time connecting with the people they need to make them successful.

Anyone who has tried it will tell you that communications is easy, but influence is hard, and the Internet, cultural differences, and the psychic baggage of globalization challenge the best of us. We learn a lot from experience, but we are always hungry for ideas that will help us not only improve our results, but also make the process itself more transparent and eliminate spin and disinformation from the corporate playbook.

One of the places to which I occasionally turn for inspiration about what to do – or what not to do – is the growing mass of literature on what is euphemistically called “information operations,” including psychological operations. I reviewed a fascinating work from the RAND Corporation for my other blog, The Peking Review, and I share it (with some additions) below.

PsyOps is Dead

The theory and practice of military psychological operations find their roots in World War II, and for decades remained largely unchanged. There was good reason for this: the media via which psychological operations were conducted were largely of a broadcast type. Aside from the advent of television, psychological operations were conducted with media that existed since the early 20th Century.

Now that the Internet has become all but pervasive, and mass media have begun to change, the military is being forced to take a step back from the channels of its communications and start to explore the nature of influence before trying to decide how to exert that influence. The result of that overdue introspection is Foundations of Effective Influence Operations.

I am a communicator by profession, and in the fraught, complex, and often dirty world of business in Asia I face challenges that bear notable similarities to those facing Army PsyOps people on the battlefield. As such, I was interested to see what a team of seven really bright RAND scholars had to say.

Actions First, Communications Later

The result was both surprising and delightful. Surprising, because the book is so good that it could serve as a capstone or entry-level introduction for anyone studying communications or marketing; delightful, because I found so many of my own conclusions echoed in its pages. My favorite passage:

Put simply, because what we actually do often matters far more than what we say, influence operations frequently will focus on explain- ing and leveraging off tangible actions by casting them in a positive context and thereby building trust with an audience or by countering adversary claims about such actions with factual information that is buttressed by facts on the ground and averred by local opinion leaders whose credibility and trustworthiness is judged to be high.

The other conclusion that hit home with me was that there are no easy formulas that will translate across different situations, much less across cultures, and that artful improvisation in the development of communications campaigns was essential. I’ve long believed that great communications is not a template, and to have that affirmed in this study was edifying indeed.

These glimpses only scratch the surface. The book also surveys the full range of communications theory, offers pointers to further reading, and elegantly addresses the question of online influence. There is great depth and much insight in this book that can only be appreciated by reading it.

Silicon Hutong on the Sinica Podcast

In the Hutong
Going postprandial
1235 hrs.

On the theory “better late than never,” I’m attaching a link to my debut as a guest on Kaiser Kuo‘s insightful “Sinica Podcast,” a series of weekly discussions among the Beijing cognoscenti. Our topic was whether China was going through an internet bubble, given some of the valuations of recent and upcoming public offerings of Chinese internet firms.

Sharing the room with Kaiser, Gady Epstein from Forbes, Techrice‘s Kai Luckoff, Danwei.org‘s Jeremy Goldkorn, and Digicha‘s Bill Bishop, I walked in wondering if I’d have anything useful to add, but everyone made an effort to make me feel welcome and useful, for which I’m eternally grateful.

Give the show a listen here, and if you don’t already, make sure to check out Sinica on a weekly basis.

Alibaba’s Upcoming Mobile Operating System?

Jack Ma, Founder of Alibaba Group
Image via Wikipedia

In the Hutong
Sifting through the intel
1656 hrs.

Going through my notes while writing my report on last week’s Global Mobile Internet Conference for Warc.com, I am starting to realize that GMIC was one of those conferences where I wish I could have cloned myself. I’ve just fired a request for more materials to Edelman, the PR agency for the show, and I’m hoping they come through.

One of the better tidbits of the show was a speech by Wang Jian, Alibaba‘s Chief Architect and the CEO of its Cloud Computing group. Originally billed as a “Keynote and Product Launch,” the presentation was just a speech. Or, as I noted to myself at the time, a launch without the product.

All Foreplay, No Payoff

In his speech, Wang acknowledged the power and advantages of the app-based mobile phone operating systems, Apples iOS and Google’s Android, but he noted that even these most modern of mobile platforms had a failing. Apps, he noted, cannot replace the web, and a mobile browser does not adequately deliver a web experience on the mobile phone. More important (to Alibaba, especially), the web economy on the Internet has yet to be delivered onto the mobile phone.

Wang called for an open mobile platform designed and optimized to help people run their businesses on the web, and told the assembled 3,000 delegates that the web economy (not the app economy) is the future of the mobile internet.

This raised all kinds of red flags. The rhetoric and the way the speech built sounded like he was going to announce just such a product, and then he ended abruptly just as the speech reached a high point: “Think about a platform OS that allows you to make your web business bigger by definition.”

I could almost hear the music and see the scantily clad girls walk out with mobile devices running just such a platform.

And then Wang thanked the audience and walked off.

Waiting for the Genie

You don’t write a speech like that just to put a flag in the ground and issue a clarion call for the industry to do something. You write a speech like that when you are ready to launch the very product for which you are calling. The conclusion I’ve reached, sitting here in the Hutong after the intervening long weekend, is that Alibaba has something in the works, but either could not or would not announce it last week.

Apart from the launchus interruptus keynote speech, here are the five most important reasons why I think Alibaba has something in its lamp.

1. Baidu did it. The degree of rivalry and one-upsmanship between Baidu and Alibaba should not be underestimated, a rivalry that dates at least as far back as Alibaba’s partnership with Yahoo! in China, if not further. Baidu has announced a mobile operating system, albeit one based on Android. Alibaba would be compelled to respond, if for no other reason than to keep from being locked out of mobile commerce by a Baidu operating system that pushes users to Baidu’s chosen commerce site (instead of Taobao) and payment site (instead of Alipay).

2. Alipay. Creating their own mobile operating system would allow Alibaba to integrate Alipay, their popular electronic payments system, into the phone. An Alipay-based electronic wallet could be integrated into the device, at the very least allowing encrypted transmission of payment information for anything purchased on the Internet, from e-books to stuff ordered on Taobao.

But that would only be the beginning. Alipay could also integrate near-field communications so that you could use Alipay to pay for a taxi ride, for your lunch at McDonald’s, for your movie tickets, and for that cute pair of shoes you saw in the store downstairs from your office. You could pass money to a friend or relative by an SMS (or an MMM –  mobile money message.) With an Alibaba system, Alipay would become the default means of making every payment with your phone, regardless of what you were doing. No need to even open an app.

This could substantially expand the volume of business Alipay is doing in China, and even secure its leadership as the payment method of choice for consumers in the PRC, making it the VISA of the 21st Century in a way PayPal still dreams about.

3. The Enterprise Hole in Mobile. While it is interesting to think of running a large e-commerce enterprise on a mobile phone, concerns about security and logistical challenges seem to inveigh against it. On the other hand, using a mobile device to help conduct a physical inventory, tie into a complex enterprise management system for order entry, CRM, or other enterprise functions would extend enterprise IT to mobile in a way that iOS and Android are only starting to address.

And of course, there would be an Alibaba enterprise e-commerce system integrated into the device, making it a simple matter to log onto your Alibaba page and buy, sell, update inventory, etc.

4. Taobao. This is even more compelling in the near term than the enterprise. Selling what would essentially be a Taobao phone would allow you to buy a mobile device, sign it into your Taobao account, then use the built in camera to take a picture or video (with voice-over description) of what you want to sell, add in pricing and details, and with the push of a button upload that to your Taobao store.

You could monitor your store in real time, make purchases, and handle all of your payments via your phone. In effect, your phone becomes your store.

This would be a convenience to those already selling or buying on Taobao. And for those who aren’t, it would make doing so much easier and much more accessible, possibly tripling the addressable market for the company. And that’s in China alone.

5. Global. If Alibaba succeeds at crafting an alternate web-based mobile phone operating platform, this would be an important opportunity for the company to take its platform – and itself – global. Despite the company’s phenomenal success in China, it has limited recognition among consumers abroad, and this could change the equation radically. At that point, all Alibaba properties could be taken global, or at least to those markets without strong online platforms for small business and consumers and mobile payment systems. That would cover something like 3/4 of the planet. A tempting opportunity.

6. The Time is Right: As I noted in my earlier post about Baidu’s bid to become a mobile OS provider, it is still early days for the mobile internet, especially here in China. Conservatively, some 3/4 of the nation’s mobile users have yet to upgrade to a phone that offers much more than a bare-bones online experience. That is set to change, but it won’t change overnight. Timing is still good for Alibaba to get in on the game.

All of the foregoing is, of course, little more than thoughtful speculation. I would not be basing any stock purchases or investment decisions on the basis of the above. But it does suggest reasons why a bid by Alibaba to enter the mobile platform race should not be taken as a prima facie bad thing.

If Alibaba does decide to jump into the fray, they will gain little by doing so before they design a superb experience. In that sense, the company’s failure to launch anything at GMIC is heartening. It suggests that Jack Ma understands the challenges Alibaba faces in offering a whole new way for people to use the mobile internet.

Watch this space.

Handicapping Little Sheep

little (fat) sheep
Image by conbon33 via Flickr

In the Hutong
I hate writing about food before dinner
1721 hrs

Tom Orlick, who does the Heard on the Street pieces for China at the Wall Street Journal, did a short but excellent rundown of some of the commercial challenges Chinese hot-pot chain Little Sheep faces as global fast-food monster YUM (owner of KFC, Pizza Hut, and Taco Bell) sets out to acquire the company. There are other bogeymen in the basement of this deal, however, and the largest of those is the Chinese government.

The government has regularly demonstrated (but not often communicated) its policy on foreign companies buying local firms, a topic I last covered in the wake of Coca-Cola’s failure to acquire Chinese juice giant Huiyuan. Put simply, while the government is comfortable allowing foreigners to acquire struggling or failing Chinese companies, they object to healthy, growing local companies winding up in foreign portfolios.

Regulators especially object to budding local brands like Little Sheep falling into non-Chinese hands. Chinese regulators may see Little Sheep c. 2011 as McDonalds c. 1960, and would be in no hurry to see that brand captured so young and turned into an American global franchise operation.

Worse, regulators get very squeamish when a local brand is being acquired by a foreign company already dominant in the sectors. The PRC restaurant industry is incredibly fragmented, but there is arguably no company with a wider collective brand presence in mainland eateries than YUM.

There are enough parallels between the YUM/Little Sheep deal and the Coke/Huiyuan deal, then, to suggest that regulatory review is going to be a major hurdle, if not a deal killer.

YUM has one hope for success, and that is an astute and persuasive communications full-court press to build local support for the purchase among both regulators and the public at large. That campaign needs to start yesterday.

If, however, YUM skimps on the effort to build support for its efforts among any and all groups in China that could raise reasonable objections (and there are plenty of those, beginning with Little Sheep’s competition), this will turn out to be a long, expensive, and ultimately fruitless effort.

In the west, we are used to using acquisitions as a tool. Deciding to buy a company is a straightforward mathematical exercise: would it be cheaper to replicate what you want to build in a given market, or to simply go out and buy it? In China, though, the analysis is undermined by the calculus of a Party bent on nurturing and building its own global brands. Just ask Coke. Or Carlyle.

Having spent a quarter century building two successful businesses in China (KFC and Pizza Hut) and having failed in China with two others (Taco Bell and A&W), YUM can be forgiven for wanting to take a shortcut to its next success in the PRC. Unless it undertakes a brilliant charm offensive, YUM may wind up wondering if it wouldn’t have been easier to cook its own mutton.

When Marketing is Useless

In the Hutong
The Summer of Blogging Begins
1420 hrs.

Yesterday on Weibo I suggested that while some companies in China were either muffing their marketing by not putting enough time, money, and CEO attention into the function, there are actually some companies for whom marketing would be a waste of money. Naturally, somebody asked “oh yeah, like whom?”

In about five minutes, the Hutong Party Secretary and I came up with a baker’s dozen Chinese companies that I would argue don’t need to bother doing anything but taking care of product/service quality and paying their salespeople well.

Air China – The nation’s flag carrier is slowly raising its service standards to match the expectations of Asia’s spoiled-for-choice air travelers. In the meantime, relationships, a growing lock on key hubs in China, and rapid market growth help ensure its planes remain full.

Capital Car (Shouqi) – As a customer I’ve never had any complaints about Shouqi’s service, whether in buses, vans, or taxis, but I also recognize that it owes its success at least as much to its semi-protected status as its management.

China Aviation Oil – The exclusive or preferred supplier of jet fuel at China’s busiest airports, CAO needs traders, salespeople, and guys who can pump fuel into jets. They don’t need marketers.

China Minmetals – China’s minerals conglomerate, pumping mined materials into China’s economic furnace. Procurement determines success, not marketing.

China National Railroad – Except for high-speed rail (for now), CNR manages to fill most of its trains despite zero marketing and a ticket purchasing system that harkens back half a century.

China Ocean Shipping Corporation (COSCO) – China’s state-owned and dominant steamship company. Not only does it not need marketing, it needs to keep those sorts of costs as low as possible as it fights the likes of Japan’s Mitsui OSK, Taiwan’s Evergreen, Hong Kong’s OOCL, and Singapore’s NOL in the commoditized Transpacific ocean freight business.

China Ceroils (COFCO) – If you don’t know this company, think of Archer-Daniels Midland backed by the power of the Chinese central government. Some of its processed food subsidiaries and real estate companies may need marketing, but the parent company surely does not.

Gehua Cable – Beijing’s dominant cable television service provider. Decent customer service, fair collection of channels, and no need for a marketing department.

Sinopec, Petrochina, CNOOC – Lining China’s filling highways with service stations and convenience stores, the problem for China’s oil giants is securing enough fuel to sell and getting the government to let them do so at profit-making prices, not pulling cars into their service courts.

State Cigarette Monopoly – When you have a corner on an addictive product, people will find you. Don’t bother with marketing.

State Grid Corporation – A power transmission monopoly. Your local utility buys from State Grid, or the town goes dark.

Tong Ren Tang Pharmacies – A Beijing institution, the familiar red and yellow signs mix traditional Chinese medicine, over-the-counter remedies, first aid supplies, and inconsistent service into an apparently successful business. The company could use an attitude overhaul at the counter and some better merchandising, but marketing is probably unnecessary.

By now you will have noticed that these companies share one or more of the following characteristics:

  1. They are either monopolies or near-monopolies in their areas.
  2. They are the dominant players in their markets, either by government decree or acquiescence.
  3. They offer reasonable enough products or services at reasonable enough terms and conditions that customers are not running away screaming.

Obviously, not every company can afford to rely entirely on their sales force to win business, and my bet is that at some point all of the companies listed above will need to get serious about marketing.

But there is a lesson hidden in these cases, extreme as they are. As marketers we too often make the self-interested assumption that our companies or clients need marketing. Maybe they do. It would serve us well, though, to question that assumption when taking on a new job, a new client or a new campaign, or even argue the opposite (“this company doesn’t need a marketing program.”)

At the very least, we will find that doing so frees us to toss the baggage that comes with our craft, get away from the “one of each” check-the-box approach to market, and get on with only doing the things that actually sell more stuff.