“China Developer Buys Robinsons-May Site in Beverly Hills” Julie Makinen Los Angeles Times August 8, 2014
The Times scored a win in picking up this story about how Chinese development giant Wanda is raising its bets on US real estate. Based in Beijing, Makinen can be forgiven, though, for not addressing what the real story is likely to be: the challenges the company is likely to face in gaining approval for its project.
Wanda has yet to reveal plans for the site, but the location has some particular challenges familiar to locals. Traffic is already very heavy going into the area on both Wilshire Boulevard and on Santa Monica Boulevard, which border the site, and during large parts of the day the proximity of Century City makes Santa Monica Boulevard a parking lot for several miles of its length. The development of a high-density complex on the eight-acre site would only exacerbate the problem.
That issue alone is likely to provoke public opposition to a sizable development. The NIMBY factor in the area is high. I know: I grew up three blocks away, and worked at the recently-demolished department store between college and grad school.
If Wanda is wise, it will embark on a campaign to woo local residents, most of whom live in homes with values far in excess of $3 million (and who are accustomed to wielding political clout with the local government,) as well as the Beverly Hills City Council. It will have architects focus on creating a site that integrates elegantly with the Century City, downtown Beverly Hills, with the Hilton, and with the elementary school and neighborhoods to the north.
If the project is clearly woven into the broader fabric of Beverly Hills, seeking to update an enhance rather than just plonking another Chinese multi-use center like it created in Beijing, Wanda will wind up with a flagship property and the respect of the business community in Southern California.
That costs money, of course. But Wanda has plenty of money, and it has every reason to make nice in the US as it diversifies its portfolio beyond China’s increasingly uncertain real estate market.
I have done a lot of work over the past several years with companies in different parts of the healthcare industry, each seeking a way into the China market. Almost every first meeting entails the client bringing up China’s current Five-Year Plan, and trying to figure out how to capture opportunities around the nation’s healthcare priorities as laid out in the plan.
Unfortunately, everyone does that, so the result is that the entire industry is chasing the same set of opportunities. In healthcare, that’s shortsighted. The best opportunities lie outside the stated government priorities, in part because the field is less crowded, and in part because those are usually the problems that the government finds most embarrassing and is anxious to address quietly.
An example is the scourge that diabetes has become in China. Before Johns Hopkins and the China Center for Disease Control and Prevention released their report last week, few had an idea of how large diabetes had become in a relatively short period of time. China now has 114 million diabetics, a third of the world’s total and representing 11.4% of the adult population – a higher rate than the US (11.3%). What is more, Chinese are developing diabetes at a lower body mass index than the US, so the rate of growth of the disease is not likely to abate soon.
China’s problem with diabetes: medications and treatment are more expensive than the average patient can afford. The obvious opportunity, then, a less expensive treatment regimen aimed at China’s massive population.
The upshot is this: global healthcare firms are going to find their best success not in chasing the obvious opportunities with remedies created for developed markets, but in addressing the health challenges that remain largely hidden from public view, and doing so with drugs and regimens that fit China’s local conditions.
If you have not yet stumbled across Sue Decker’s article in the Harvard Business Review blogs, please read it. Decker, who left Yahoo! in 2009 after being passed over for the CEO post in lieu of former Autodesk CEO Carol Bartz, delivers her view of the investment that effectively saved Yahoo!, and her role in it.
First person accounts are always suspect: one is never certain about how much of the history so presented is objective and how much is subjective. Thus, it was reassuring that the editors of the Harvard Business Review chose to publish it as an interesting curiosity rather than a definitive account or a case study. Still, the article made me a bit uncomfortable, for a few reasons.
The “Everyone Failed” Gambit
First, the author frames an eloquent but ultimately unconvincing defense of Yahoo!’s failures in China (in essence, everything the company did except the investment in Alibaba) that can be summarized in as “yes, we failed badly, but so did everybody else.”
That’s partly true: the list of US Internet companies that tried to make a go of it in China and failed is long and distinguished. But the ledger is not quite as one-sided as Decker implies that it is.
Google had a viable business in China before it chose to stare down the Chinese government. Amazon has a business and is still in the game, despite having to go head-to-head with China’s 900 lb. e-commerce gorilla, Alibaba. Evernote and LinkedIn are making headway with tightly defined value propositions that make sense for China and the rapid refresh cycles that local users demand. And let’s not forget little South African NASPERS, a firm largely unknown to Valleywags that somehow managed to run circles around everyone else, making a brilliant early investment in Tencent that may ultimately outshine even Yahoo!’s windfall on Alibaba.
Decker suggests that the relative success of each of Yahoo!’s moves in China can be explained by the degree of control exercised over the China venture by Sunnyvale. The less control Sunnyvale tried to wield, the more successful that venture became. If that explanation seems a bit too neat and simplistic for you, join the club. I’ll come back to it shortly.
The False Management Paradigm
Second, the author skims over the fact that the joint venture with Alibaba failed to produce anything of value aside from Yahoo’s partial ownership of its partner. The joint venture did not save Yahoo!’s China business: the company’s China operating unit, valued in negotiations at $700 million, sank quietly beneath the waves soon after the agreement that handed operational control to Alibaba was signed. If anything, the Alibaba agreement destroyed Yahoo!’s operating business in China, or, perhaps more generously, sacrificed it in the name of a harmonious relationship between the parties.
Given the outcome, one might be inclined to say that the sacrifice was worth it. Perhaps. But neither we nor Decker should harbor any illusions about what this means for Yahoo!: that the company failed as an operating business three times in China, and that despite her assertions to the contrary, the degree of control exercised by Sunnyvale had no influence on the final outcome. Tight control, loose control, or no control, all three models failed. The one management lesson she tries to deliver in the article is a canard.
The Forgotten Brand Problem
Third, there is no mention in the article about what happened to Yahoo! and its family of brands in China. The brands that Yahoo! owned during Decker’s tenure – including the “Yahoo!” brand itself, each represented a repository of goodwill. The Yahoo! brand in particular initially occupied a position of great respect among Chinese netizens, both because of its success and because of Jerry Yang‘s Chinese heritage. In the process of thrice failing to make a go in China, Yahoo! squandered that goodwill, and thus destroyed the value of its brand in the largest online market in the world.
As a senior finance officer, Decker certainly understands the value of goodwill, as does Yahoo!: much of what they paid for their acquisitions was based on the goodwill and the brand value of the firms acquired. Any reckoning of the net value of Yahoo!’s investments in China must therefore take into account not only the sunk costs and the book value of the assets written off, but also the brand value it destroyed in its largest addressable market.
That this issue remains unmentioned in Decker’s article is, to a marketer like me, a final though perhaps unnecessary indictment of Decker’s narrative. In the end, her piece is not the full account of the deal from the inside promised in the title. It is, rather, an effort both to stake a claim of some credit for Yahoo!’s Alibaba windfall and to exonerate Yahoo!’s leadership – including herself – for the company’s poor operating record in China during her tenure.
Decker richly deserves her share of the credit for the deal: in the end, it saved the company. What she cannot claim for herself or her colleagues any credit for operational success in China. Porter Erisman, a former Alibaba Vice President who recently released a documentary about his time working inside the company called Crocodile in the Yangtze offers this thought on how to assess Decker’s legacy and her account of Yahoo!’s success:
How Yahoo! performed as an operator and how they performed as an investor are two different questions. If we evaluate Yahoo! as an operator (both inside China and outside,) I think we can all agree that their performance was poor. If we evaluate Yahoo! as an investor, we should take into account their entire history of investments and not just cherry-pick one investment that paid off. On the whole, Yahoo! did well as an investor over the years (due to Alibaba) despite some obvious failures. But people investing in Yahoo! didn’t do so because they believed it was a private equity fund. Luckily, the Alibaba investment turned out well and made up for Yahoo!’s failures on an operating level.
Erisman makes a superb point: Yahoo! did brilliantly as a private equity fund and poorly as an operating company. Nowhere was either more true than in China, so I suspect that if we – or Marissa Mayer – are ever to understand what makes Yahoo! tick, we will find the answers in a thorough, unbiased, and balanced account of Yahoo!’s China odyssey.
We will have to wait for someone else to write that account. In the meantime, please read Ms. Decker’s article. If nothing else, it is a valuable contribution to the oral history of American business in China.
If you’re in or near Shanghai and interested at all in the issues raised in my post on China’s evolving approach to Internet governance, you definitely want to catch “Who Controls China’s Internet,” a talk being given by Professor Mark Grabowski of New York’s Adelphi University on Monday, August 11 at 7pm at C3 Cafe. Grabowski, who has focused on the Internet and media, is working to help frame a viable scheme of Internet governance that would head off the possibility of fragmentation – a path towards which China’s policymakers appear to be treading. Go if you can. huang pi south road 700, building A, room 105 上海黄浦区黄陂南路700号Ａ105（过 合肥路）