A Small Crack in Apple’s Asia Tablet Story

Image representing iPad as depicted in CrunchBase
Image via CrunchBase

IDG Connect – Kathryn Cave (Asia) – The Tablet Security Conundrum.

Hutong West
Here a week and not a second on my porch
1947 hrs.  

Kathryn Cave at IDG Connect offers a snapshot of her company’s research on how and why Asians are using tablet computers like the Apple iPad, the Samsung Galaxy, and the Motorola XOOM. While Asians trail the world average in tablet use, they are more likely to buy a tablet in the coming three months and are more likely to use the tablet daily for work.

While iPad dominates the market, more Asians than anywhere else in the world believe that Apple’s leadership is unsustainable. 51% believe Android will become the global market leader in tablets within 12 months.

This is important because it offers more evidence that Asians view Apple rather differently than their U.S. and European counterparts. IDG does not delve into why that is the case. My theory has been that Apple has long treated Asia beyond Japan with a degree of benign neglect. By contrast, Apple invested in evangelists, user groups, and a legion of specialized resellers in North America, Europe, Australia, and Japan, who together sustained enthusiasm for the company and its products even in the wilderness years of the mid-1990s.

Tablets have been the category that Apple has ruled most strongly over the past 30 months. What is more, Asia is regarded by punters and competitors alike as the company’s largest font for growth in the coming years. Research suggesting that Asians are less enthusiastic about the future of Apple tablets should send up red flags in Cupertino, and green ones at Samsung and the Googleplex. This is the closest thing we have seen to a strategic vulnerability for Apple.

While the company focuses its efforts in Asia on production and distribution, treating marketing and customer relationship-building as an afterthought, the competition is getting wise. Bet on Samsung and Google targeting this rip in Apple’s chain mail armor. Asia has been Apple’s escalator, but unless it is handled with more than a backhanded marketing effort, it could become the company’s downfall.

The List of the Delisters

Hutong West
Sunshine and Keyboards
1743 hrs.

Last week Ogilvy’s Justin Knapp asked me if I was aware of a list of China-based overseas-listed companies that are considering de-listing overseas. It was a good question, and I have no doubt that somewhere in the dank bowels of Goldman Sachs or Morgan Stanley are a clutch of gnomes/interns who are playing spreadsheet games and cooking up such lists.

To me lists are troublesome because they are so limited. By specifying a set of companies, the chance to miss others is too high. What is more useful is profiling, a process by which we identify what KINDS of companies are best suited to de-list.

While I expect it to evolve over time, I have started to craft such a profile. I’ll admit, it is VERY basic at the moment, but it does allow us to eliminate a fairly large number of overseas listings from consideration.

The first wave or two of offshore delistings will thus have two or more of the following characteristics:

1. Small- or mid-cap companies. Delisting offshore will be a costly process, so we can presume that companies undertaking the effort expect to be able to find a buyer or buyers for their shares in China. The capitalization of China’s formal and informal share markets is improving, but Shanghai is not New York and Shenzhen is not London. The pool of money is not large enough to sustain the wholesale repatriation of large-cap stocks. Mid-sized firms, with listed equity of up to $300-$500 million, however, should have little trouble re-listing at home, and select smaller firms will be able to tap China’s growing pool of private equity.

2. Companies who need to explain their businesses to offshore investors, but whom local investors know well. Say “Shanda” to your average U.S. investor, and he’ll look at you as if he’s waiting for the rest of the sentence. Most Chinese punters, however, know the company and won’t need it explained. As much as we might like to deny it, this “household name” recognition translates into lower investor relations costs and, in China especially, higher valuations.

3. Companies with complex ownership structures. The government is not comfortable with unorthodox shareholding arrangements that seem to skirt the law. The VIE structure I’ve discussed here several times falls into that category, as, arguably, do companies like Huawei, which has recently faced questions about its employee stock ownership program. Complex structures not only rankle government officials and foreign investors with fresh memories of Enron, they also demand a lot time and focus, and are significant time-sucks for corporate leadership. The easy answer is to dump the complex structures required to snare foreign capital and bring the equity home.

4. Companies with “State Secrets.” For all of the government’s lip service about building strong, credible Chinese companies, what is more important to the party is control over the large and high-growth enterprises of the nation. This is not some Neanderthal chest thumper: the interaction between officialdom and commerce in China is…complex. At the core of the recent dustup over global accountants auditing local firms is a fear of what such audits might reveal – not about the firms, mind you, but about opportunistic government officials. If you enjoy the sensation of your neck hairs levitating, get into a conversation with a bunch of auditors over an adult beverage. Nobody is quite sure how deep the rabbit hole goes, but any company with such accounting issues is likely to want to get clear of foreign bourses, preferably before an offshore enforcement action reveals too much of the family linen.

5. Ego listings. Over the last decade there have been a flood of listings, many by companies who don’t really need the capital and who could certainly do without the hassles, but who listed anyway in order to gain the prestige of the offshore listing. Such baubles are increasingly expensive and troublesome, and there are surely a few Chinese founder/CEOs who have watched Muddy Waters administer its transparency high-colonic to Sino-Forest with growing horror. These folks will quietly buy shares back, shut the listing or sell the pink sheet, and slink out of town.

Again, this is all a work in progress, and this list will evolve over time. However, you can see the outlines what will be left when this tide recedes, and what, if any, Chinese companies are liable to seek offshore listings in the future.

Intellectual Property and Innovation Streams

In the Hutong
Busy week ahead
1948 hrs.

Ryan Block, Editor Emeritus of Engadget, offers a fun little post about innovation at Qualcomm spark.  His lede is provocative: he notes that even though Edison patented the light bulb, he didn’t invent it. An Englishman named Joseph Swan patented his in the UK first.

Thomas A. Edison, knockoff artist and patent troll? Hardly. Anyone familiar with the story of what Edison had to go through to create a practical light bulb, brilliantly recounted by Jill Jonnes in her excellent Empires of Light: Edison, Tesla, Westinghouse and the Race to Electrify the World

The incandescent light bulb
The incandescent light bulb (Photo credit: Anton Fomkin)

will likely agree that Mr. Edison had at least as much right as anyone to his patent, especially when you include his painstaking work on finding the right element for the filament and industrializing the invention. (Even Swan admitted as much.)

Edison deserved his patent, but the most important lesson from Edison and the light bulb is that he didn’t sit back on his duff and try to extract royalties as others improved the technology. As Block notes:

Better still: only a few months after Edison received his patent, he’d already moved on to the next iteration, which increased the bulb’s life a thousand-fold. The story of Edison and his light bulb isn’t just a story of invention; it’s about the invariable trajectory of progress.

I want to take Block’s point a step further. Our intellectual property protection system in the west is focused on protecting inventions, to the point that the IPR bar has all of us thinking about how to protect each and every incremental innovation in the process.

For the most successful innovators, however, what is important is not the increments, but the stream of innovation. There is value to protecting your work, but that should never detract from the effort to continually out-innovate oneself. Due respect to Nathan Myhrvold, the future does not belong the the companies who hire more lawyers than engineers. If there was a resounding lesson from Oracle’s loss in court to Google, it is this: those who focus on defending the status quo more than building the future will have the future taken away from them.

China’s Shipyards on the Ropes

English: Dalian Shipbuilding Industry Company ...
Dalian Shipbuilding Industry Company (Photo credit: Wikipedia)

China shipyards slash prices to survive-industry | Reuters.

In the Hutong
Entrained
2128 hours

A global glut in cargo capacity and the sluggish economies in the U.S. and Europe are slamming China’s shipbuilding industry to the point where the nations shipyards are unable even to sell new bottoms to domestic shipping companies. Now they’re cutting prices to keep busy, and if the industry follows the accepted Chinese patterns, the result will be a beggar-thy-brother price war. Who will pick up the slack when the yards lose money building ships? Most likely the government will support the industry in the short term, working through one or more of the major “policy banks:” Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and the Agricultural Bank of China.

In the long term, writing the shipyards blank checks is unsustainable. There are two interesting issues that will frame the long-term policy response to the growing shipbuilding crisis.

First is the matter of how long the downturn will last. If this is a blip and orders start pouring in within 2-3 years, the near-term solution will suffice. If experience is any indication, however, it is probable that we face a longer adjustment that will take years to work excess capacity out of the shipping industry. Even more concerning is the uncertainty around the price of oil. At what point does bunker oil become so expensive that manufacturers begin to shift production to a point closer to the customer rather than relying on supply chains that bring finished goods across oceans? For the people building or buying ships, this is more than idle speculation: it is the issue that will decide the future.

Second is at what point the Chinese Navy (PLAN) will decide that the shipyard slump offers a precious opportunity to expand the fleet at prices it may never see again. Retooling civilian shipyards to produce warships is no easy task, but the PLAN will need auxiliaries and support ships to support operations far from shore, and civilian yards can produce those with relative ease.

The two of these issues come together with a relatively straightforward solution: rather than simply pour money into shipyards and pay them not to produce ships, the government could have those same yards start turning out oilers, transports, and tenders to form the logistical tail of a truly “blue-water” navy.

The only question is how long it will take for the Central Military Commission to come to the same conclusion.

Bringing Chinese Equity Home, Continued

Chinese RTOs Covertly Going Private – Seeking Alpha.

In the Hutong
Heading to Shanghai
2044 hrs.

As I have noted here and in Euromoney Magazine, we are witnessing the beginning of an important shift for Chinese enterprises and the way they are financed. A growing number of Chinese businesses that have listed overseas, especially mid-sized and growing companies, are quietly de-listing from the NYSE and NASDAQ.

Adam Gefvert offers two more examples of this delisting trend at Seeking Alpha, China Medical Technologies and ZST Digital Networks, and offers a description of how they are doing so by hiring proxies to purchase shares on their behalf.

Leaving aside questions of propriety or legality of this process, it offers an important insight. While the Chinese companies that have listed in the U.S. did so with great fanfare, they will most likely depart quietly, attracting as little attention as possible. I suspect we will wake one morning and find that NYSE and NASDAQ no longer boast a bevy of mid-sized Chinese stocks.

Why is this important? For Chinese companies, it means that they will focus on listing in places where their value is understood by the common punter. For the small investor, participating in China’s economy will become more difficult.

There are a lot of things that can push living in China to the edge of bearability, but in-your-face nationalism and xenophobia is not one of them. If there is one thing that has made living in China these past 17 years so wonderful, it has been the people I meet.
It never seems to get lost in a conversation that there is a difference between an individual and a government. Even at the height of anger over the Belgrade Embassy bombing, the vitriol was never personal: it was about a government’s mistake, not the mistake of a nation.
At the same time, it’s incumbent on every one of us living as a guest on this soil to behave as a guest should, and not as an entitled drunken teenager on Grad Night at Disneyland.
By the way, if you don’t read Sinostand regularly, you should. Great stuff.

The Beijing Consensus Isn’t Building Brands

Duxton Hill, Singapore
Enjoying the Chinatown Sunset
1807 hrs.

In describing the results of Millward-Brown‘s BrandZ report of the 100 most valuable global brands in 2012, the Wall Street Journal’s Laurie Burkitt notes a trend that should worry the Beijing bureaucrats who are crafting the nation’s industrial policy. (China’s ‘State-Owned’ Brand Slips in Value – China Real Time Report – WSJ)

While eight of China’s state owned companies maket the list, their collective “brand equity” has fallen by 9% in the past year. By contrast, the three private Chinese companies on the list – online giants Baidu and Tencent and China’s legendary spirits brand Maotai – have watched their collective brand equity rise by 8% in the same period. Even granting that measuring something like brand equity is an inexact science, this does not bode well for China’s national industrial policy.

Stumbling Champions

That policy, which advocates providing implicit government support for large, state-owned enterprises at the expense of small and medium-sized, private, and foreign-invested companies, is ostensibly designed to create national champions while keeping the nation’s most powerful economic entities under state control.

That these massive companies are losing brand cachet despite explicit state assistance suggests one or more of the following:

  • State-owned companies lag private and foreign companies in understanding the value of their brands;
  • State-owned companies do not understand how to build or sustain brands; and/or
  • A brand’s association with government control is seen increasingly as a liability.

There are some industry-specific factors at work here, to be sure. In the case of China Mobile, for example, the brand is gradually losing cachet as the company struggles against increasingly robust competition from China Unicom and China Telecom. China’s leading banks have been the target of derision lately from both consumers and Premier Wen Jiabao for consistently pissing-off their retail customer base.

Yet these are the very companies that the government has protected, offering them preferential policies and practices that have allowed them to prosper. As Burkitt points out, they still rely on China for 95% of their business. Each of these companies has ambitions abroad, and the implicit belief in Beijing is that the way to build global winners

And here is the kicker: in a world where brand and reputation are so essential that even Warren Buffett places their protection higher in importance than profits, how does China expect to turn its coddled domestic champions into global brands when they can’t keep up appearances at home?

Time to Kick ‘Em Out of the Nest

If this were a matter of a few companies or a single industry, no policy change would be necessary. But Milward-Brown has stumbled on an important trend, one which hints at a problem with China’s much-vaunted state capitalism model: picking and protecting national champions creates large companies, but it does not guarantee market success.

China’s state capitalism has come under some pretty heavy attacks of late, following a brief honeymoon with Western intellectuals. The Economist picked at the system’s failings in January; Stefano Casertano of the Brandenberg Institute explained why SOEs become the playthings of policymakers in The European; and MIT economist Huang Yasheng made macroeconomic mincemeat of the strategy in a paper in Asia Policy. Even the World Bank, in its China 2030 report, gently but firmly urged the government to stop running its enterprises.

Most of the criticism has been made from the macro-economic viewpoint: state capitalism is bad for China. What is starting to come out, in Burkitt’s article and two recent books on China’s telecommunications and aerospace sectors, is that state capitalism is bad for the companies themselves. Creating national champions demands tough love early: let them fly or let them fall.