Not Just China: Russian Government Mobilizing a Cyber-Militia

Darkness Botnet and Russian Politics.

A fascinating look into the organized – and likely government-supported – world of Russian Hacking. Apart from the fact that it was a surprise to read an article on cybersecurity that didn’t even mention China, it provides a glimpse at how Putin seems to be building his own cyber militia. While that capability is aimed internally in this story, how hard would it be for the Russian government to switch targets to overseas servers?

Probably not very.

As tempting as it is to make China the world’s cyber-boogeyman, as this NPR article does, security experts like Jeffrey Carr take a more balanced view. Hacking and cyberwar is a global problem with multiple sources. We should not dismiss the role China plays, but we should not allow focus to shift totally onto China. Doing so only gives comfort to hackers in other countries while making us look both weak and blind to other sources of serious threats.

When Life Should Imitate Art

Meryl Streep in St-Petersburg, Russia
Image via Wikipedia
In the Hutong
Mahndei, Mahndei
0815 hrs.


In a brilliant essay in The Atlantic by Orville Schell, the Arthur Ross Director of the Center on U.S.-China Relations at the Asia Society, the venerable China scholar captures a spontaneous moment in a performance in Beijing by Meryl Streep and Yo-Yo Ma and turns it into the best deconstruction of Chinese international relations that I have read in a very long time.

Every paragraph in the essay is a gem, but my favorite by far is this one, which elegantly encapsulates the conundrum of international relations in the 21st century:

From here on, as China’s wealth and power increases, its national challenge will be to start letting itself feel sufficiently reinstated in the congress of great nations that it does not need to wallow in narratives of victimization, or be so militant about grasping symbolic demonstrations of its equality or superiority. The highest stage of evolution for any truly great power is to reach that point where it is possible to transcend the notion of both inferior and superior, the better to cultivate a self-confidence that leads to modesty. This is a lot to ask of China, or any country. Even the United States, the strongest nation on the globe today, has only rarely demonstrated such national maturity.

Without descending too deeply into moral equivalence, Schell has taken both China and the U.S. to task for their failings in international relations: America, the global power made insecure by the Cassandras of national decline; and China, the emerging global power made insecure by its own, lovingly nurtured national inferiority complex. In one paragraph, Schell tells both countries to get over it, to accept their station, and to begin behaving like mature adults.

The Meryl Streep/Yo-Yo Ma performance that Schell refers to was intended as a piece of privately-funded public diplomacy organized by the Asia Society and the Aspen Center. It succeeded better than its organizers could have hoped, and captured the potential for public diplomacy to accomplish a very great deal. In a single moment, two artists offered proof that if China and America would just grow up, that new-found maturity would go over as well at home as abroad.

Event: The Massification of Chinese Education

In the Hutong
Shrinking the Elephant Arm
1341 hrs

If you are in the Midwest this week and have an interest in China’s education system, you may want to stop by the Kelley School of Business at Indiana University – Bloomington. The Research Center for Chinese Politics and Business is continuing their colloquium series with a talk by Dr. Susan Blum on the Massification of China’s Higher Education System: The Consequences for China’s Youth. Dr. Blum, who serves as Chair of the Department of Anthropology at the University of Notre Dame, has spent some time over here and has put together a talk that will inform the debates around “Tiger Moms” and over the future of higher education in both China and the U.S.

From the event’s flyer:

From a low of approximately 3% just two decades ago to almost 25% in 2006, higher education is no longer an elite and rare good, but is increasingly “massified.” Such independent pursuit of limited opportunities has consequences for the nature of youth and the very meaning of childhood. Though the number of youth has been stabilizing because of China’s birth policies, the competition for entry into the expanding programs of higher education remains fierce. Debates about education often reveal debates about human and social ideals. As Mao and others showed, the very nature of education has the effect of changing society. Chinese intellectuals knew this a century ago, as New Youth drove reform; the current situation is both similar and different in instructive ways. We find enduring centralization and increasing privatization; social and individual goals; and focus on international competition.

The event is free and open to the public, so if you are up that way, please stop by. I’m hoping she comes out to Beijing to give her talk.

(Full disclosure – I’m on the advisory board of the RCCPB.)

Television Regulations: New Bottle, Same Wine (With Corrections)

State Administration of Radio, Film & Televisi...
State Administration of Radio, Film & Television offices in Beijing (Photo credit: Toby Simkin)

In the Hutong
Black Lung Control
1047 hrs.

In the Valentine’s Day edition of The New York Times, Andrew Jacobs describes the new regulations issued yesterday by the State Administration of Radio, Film, and Television (SARFT), most specifically including two key restrictions: the prohibition of foreign programming during prime time, and the limitation of foreign programming to no more than 25% of the total air time on a channel.

There is some new content in the regulations issued yesterday, but contrary to the NYT headline, the major issues addressed vis-a-vis foreign content are not new: indeed, they harken back to regulations that have been in force since 1995. From the unpublished manuscript of a guidebook on Chinese television that I co-authored with William Soileau and Jeane-Marie Gescher in 1998, according to regulations then in force:

Foreign programming must not be distributed between 6:00 p.m. and 10:00 p.m., although actual enforcement varies according to the broadcaster.

and

Foreign programming must not take up more than 25% of total broadcasting time on a station basis.  In reality, while the rule is nominally honoured, many networks apply the quota on a channel by channel basis. Unofficial figures indicate that foreign programming may account for as much as 50% of programming.

The rules governing television are not increasing, as the Times suggests. What seems to be increasing is the degree to which they are openly flaunted by broadcasters. Let me explain.

China has had a wide range of laws and regulations restricting media (and many other industries) in place for a long time. What varies is not the regulations, but the degree to which they are enforced. Laws and regulations, as such, are not de facto restrictions of behavior so much as they are tools for the government to use when political conditions demand it. For that reason, what SARFT does on a fairly regular basis is issue notices designed to remind broadcasters that the regulations exist, and signal to them that enforcement looms. Usually, such initiatives come either when things get too far out of hand (i.e., 25% becoming 50%, as suggested above), or when something happens to make it an issue (Chinese producers complaining about access to TV time, or, say, a  leadership change.)

This is not dissimilar to the way I get my ten-year old to clean his room: I let him know an inspection is coming, and by the time I get there, behold! A clean room! The requirement to keep his room clean always existed. What was lax was the enforcement. What caused me to issue the edict to my son was either the room was getting too messy, or guests are coming over.

Jacobs quoted one Chinese citizen posting his disgust with the regulations on Weibo:  “They should really put Sarft in charge of food safety and have the State Food and Drug Administration regulate TV shows — that way we’ll have safe food and good entertainment.”

I would wager the person posting this was either very young or unborn when the regulations were actually issued. The issue that has provoked SARFT (an underfunded, undermanned, out-gunned agency if there ever was one) is the same that caused the food problem: China is ruled less by policy than law, and political expedience trumps enforcement – until the political expedients change.

UPDATE: Please read the comments conversation between Li Yuanyuan and myself. He raises some excellent points to rebut my point of view. He disagrees that enforcement was ever lax, suggests that it was always tight, and he explains why. We do not share the same memory of events, but he does point out that the prime time ban on foreign programming and the restriction of quantity of content was not in the 1995 Regulation #549.

Will China Actually Import “The Hunger Games”?

‘The Hunger Games’ In China | ThinkProgress.

“The Hunger Games” is apparently scheduled to show in China, according to this piece (h/t to Jacqueline in HK, aka @lantaumama for this.)

This movie, based on the first book of a trilogy telling the tale of a hardy young woman who inspires a rural uprising against a brutal repressive urban dictatorship, will either be pulled at the last minute when the censors actually WATCH the darn thing, or it will be the most subversive piece of democratic propaganda ever to sneak onto Chinese screens.

Or, as occasionally happens, the Chinese audience will take something entirely different from the experience than we would.

The Hunger Games (film)
Image via Wikipedia

Either way, it will be fun to watch what happens.

Apple’s China Strategy: Venturing to the Edge of Coolness

 

Apple Inc.
Apple Inc. (Photo credit: marcopako )

IPhone Scarcity During Chinese New Year May Give Samsung a Happy Holiday – Bloomberg.

 

Right before Chinese New Year, Bloomberg’s Ed Lococo interviewed me for this story, asking me how much I thought iPhone sales would be affected by the company’s decision to sell the newest version of its handset via online channels only. The quote in the story is a good one, but there is more to what I told Ed.

First, I do not expect Apple unit sales to suffer severely from this shift in distribution. When the Chinese people want a product that is difficult to get, they tend to find ways to get it, as evinced by the huge gray market in iPhones that existed long before they were introduced in China. The Chinese consumers who can afford these devices are net-savvy, and the online store will not present a major obstacle, and they should continue to be available through China Unicom’s retail outlets.

I also expect Apple will see a jump in iPhone sales through Apple’s channels in Hong Kong and other major Chinese New Year travel destinations for outbound PRC tourists. However, I noted:

A large portion of Chinese New Year sales are about having the gifts in hand right now, so I expect that Motorola, HTC, and Samsung, all of whom offer Android devices competitive with the iPhone, will benefit among buyers who are ambivalent about the brand of their device or who were on the fence about Android.

Ed also asked me whether I thought Apple would use this as a justification to expand its distribution in China, adding carriers or retail outlets. I imagine Apple will continue to expand its stores, albeit slowly, but I also think they walk a fine line between stoking demand and burning its mojo.

Apple owes much of its profitability in China to the perception that its devices are highly desirable yet difficult to obtain. The company is likely loath to tamper with that aura by significantly broadening its distribution, and that doesn’t even address the engineering challenges of creating an iPhone that will work on China Mobile’s TD-SCDMA network. Apple’s problem is that once two or more carriers offer the device and the phone seems to become ubiquitous, the mystique falls away and Chinese consumers will look elsewhere for their desirable device.

Make no mistake: most of Apple’s recent converts in China are much less emotionally vested in the Apple ecosystem than their counterparts in Japan or the United States. Apple is making a valiant effort to change that, but it needs more time, perhaps years, to develop in China the devoted following it enjoys elsewhere. Until then, it needs to remain in the business of making pretty, hard-to-get devices for prosperous people.

The Beginning of the End of Outsourcing

Apple’s iPad and the Human Costs for Workers in China – NYTimes.com

In the Hutong
Working like hell
1530 hrs.

In what China-based business sustainability expert Richard Brubaker calls “the best piece to date on just how rotten [Apple’s] supply chain is,” Charles Duhigg and David Barboza of The New York Times have actually done more than that. They have written a piece that underscores the ethical risks implicit in both outsourcing and offshoring.

Control is the Issue

You could argue that this story and the reception it is getting is a function, in part, of the end of the Steve Jobs Reality Distortion Field, or, as I overheard someone say the other day in reference to Apple, “the King is Dead, the Gloves are Off.” That may be true, in part, but I think that this story is the harbinger of a wider issue plaguing the global manufacturing sector, and the challenges Apple is facing with its suppliers are simply the most visible examples.

The problem goes deeper than the conflict implicit in asking a supplier to give you the best price AND to manage its business in a way that increases its costs. The mater of working conditions is part of a bigger question about the value and importance of control over the means of production. (Don’t worry, I’m not about to go off on a Marxist tangent here. Bear with me.)

I started my career managing the output of 30-odd factories and suppliers in greater China making furniture, jewelry boxes, and small gift items for a medium-sized US importer. I learned a hell of a lot from that job, but the lesson that has stuck with me throughout my career is that you cannot change what you cannot control. We like to think that a customer like Apple would, by virtue of the size of its business, be able to strong arm its suppliers into complying with its codes of behavior, or even “incentivize” a supplier to go along by raising prices. In reality, it is nowhere near that easy. Any customer, even one the size of Apple, exerts influence over how a supplier is run, but not control. A customer can exact some concessions from a supplier on factors outside of product features and quality, but at some point, any self-respecting factory owner is going to push back and say “you may buy from me, you may be my biggest customer, but you don’t own me. I’ll give in to you on some things, but beyond that, you need to let me run my own business.”

Outsourcing and Reputation

As long as governments, NGOs, unions, activist shareholders, and bloggers aren’t looking over the customer’s shoulder, as long as the supplier is compelled to operate according to strict occupational health and safety regulations, or as long as the customer’s customers don’t care, that is an acceptable arrangement. But if the supplier operates in an environment that rewards risking health and safety, has the world watching them online, or has an activist bunch of end-users, the risks of outsourcing grows until it lands the customer and supplier in the hot water that Foxconn and Apple find themselves in today.

Barring an incident that disrupts production, the costs to Apple of its supply chain problems are in goodwill and reputation. Apple, arguably, has amassed enough goodwill and reputation to be able to afford to pay such costs for a while at least. The rest of us must live in a world where we must guard our goodwill and reputation as the corporate crown jewels, spending both with care and amassing more if possible. Indeed, if we replace “Apple” in the NYT story with Nokia, Dell, or Samsung, the report would have very real and unpleasant ramifications for any of those companies.

Apple notwithstanding, we are leaving the age when spin, messaging, great products, and generous corporate philanthropy are enough to pave over corporate practices that governments, shareholders, and consumers find objectionable. We are entering an age where the Spin Gap, the difference between a company’s reputation and the reality of its behavior, is closing, and approaching a time when behavior and reputation are essentially the same thing.

Beyond Goodwill

I tend to harp on reputation and goodwill first because these assets, always important, have become both more important and more fleeting when bad news travels at the speed of Twitter. But the problems with outsourcing and the loss of control over production goes beyond the risk to reputation posed by supplier misbehavior.

We in the west have forgotten that much of the value of our companies create happens in production. The stock market rewards companies for outsourcing their production because of a short-term focus on cost savings and on superficial measures like return on capital. But investors ignore – because they cannot see or measure – the implicit value of keeping production in house.

But, as The Economist pointed out in a superb editorial comparing the fortunes of bankrupt Kodak with those of prospering Fujifilm:

It is easy to think that companies can compete by outsourcing production and focus on developing and marketing. But many innovations bubble up from the factory floor. Even Apple, a master in outsourcing and orchestrating manufacturing, has in-house expertise and occasionally acquires certain technologies. Today, as debates rage in America over the degree to which returns on capital exceed those from actual business operations, and the relative merits of employment in manufacturing versus the services sector, the history of Kodak is more relevant than ever.

The point about innovations on the factory floor deserves some amplification. Apart from the product innovations that come from the factory floor, innovations in the production process itself can become a huge source of competitive advantage. Ford, Toyota, Hewlett-Packard, and Dell are just four companies that built their success to a great degree on innovations in the production processes.

Owning production is a hard sell to a lot of American business, not just because of Wall Street’s expectations, but because so few young Americans learn production or operations management anymore, preferring courses in finance and marketing in the hopes of getting a job in an office. That does not take away from The Economist’s point. You start outsourcing, and not only do you lose control, you mortgage your future for near-term returns.

There is no shortage of companies who, consciously or otherwise, defend their future by hanging onto their factories. Two examples off the top of my head are Boeing and Intel. Boeing got so good at manufacturing that it was able to cut an entire time-consuming step – full-size mockups – out of the development process, going straight from computer model to production on the 777 jetliner. When the company tried to go the “design and market” route with the new 787 dreamliner, they got hit with a three-year delay on their critical 787 program and, until they took back production from several contractors, they were on the verge of sacrificing expertise in a critical new skill area: manufacturing all-composite aircraft components.

Intel has always been a leader in manufacturing processes, being first in the industry to try new, expensive, and often risky technologies, working out the kinks, and sustaining leadership as a result of that expertise. Even today, Intel outsources little: the company continues to build, own, and operate manufacturing incredibly expensive manufacturing facilities – from chip fabricators to pack-and-test assembly lines – because the company understands that there is more to their business than design and marketing.

And the idea of outsourcing would be anathema to Mercedes-Benz, Fender Guitars, Microsoft, or most companies in the service industries. In all of those cases, keeping the production close is either an important part of the value delivered or the very source of  company’s differentiation.

The Vote of History

Outsourcing has saved its share of companies and returned its share of profits. But the persistent challenges encountered in its execution by one of the smartest and healthiest companies in the world is a warning: short-term expedients do not create long-term winners. Those of us who love Apple and the products it makes and who understand the nature of its relationship with its suppliers (and their own ambitions) make us worry that the company is forgetting a key source of its uniqueness.

The upshot of the above is simple: two years from now even Apple could find its reputation savaged by the perfect storm of one bad product, one down quarter, and a mishap caused by a factory it did not control; or fifteen years from now it could follow Bethlehem Steel, General Motors, and Kodak into the ignominy of Chapter 11. Either would be the ultimate result of depending on somebody else’s factory for the production of Apple devices.

What is true for Apple applies doubly for the rest of us. The factory floor matters. It’s time to take it back.