An adviser to corporations and organizations on strategy, communications, and public affairs, David Wolf has been working and living in Beijing since 1995, and now divides his time between China and California. He also serves as a policy and industry analyst focused on innovative and creative industries, a futurist, and an amateur historian.

Consumers: There’s More to Buying Power than the Paycheck

Catching up on reading over the weekend, I came across a report Goldman Sachs published in March about China’s “new consumer class.” (“The Rise of China’s New Consumer Class,”The title is a bit deceptive: the researchers at Goldman note correctly that there is not a single class of consumer, but several. They’re partly right.

The problem with the Goldman report is that it focuses on income as a primary differentiator. While income has some practical value as a predictor of consumer behavior in China (poor peasants are unlikely to be potential buyers for Rolexes or megayachts,) that value is limited because incomes are not as closely tied to buying power as they are in other economies, and for two immediate reasons.

First, as one friend of mine noted on Twitter, incomes are notoriously hard to pin down in China. Reporting is spotty, and even the Chinese government lacks the wherewithal to really understand an individual’s income. What is more, there is a vast population of individuals who nominally make very modest incomes (government officials, leaders of state-owned enterprises, senior military officers), but whose actual buying power far exceeds their incomes. Add a third group – those who supplement their incomes via transfers from relatives overseas – and you can see how any company that targets its consumers by nominal income is going to miss a massive chunk of their addressable market.

Second, China’s consumers tend to consume based less on their income than on their desire for face and fulfillment. Purchases of automobiles (which are 12 to 14 times more expensive in China than in the US based on income and price differences), high-end mobile phones, and houses are far out of line with the incomes of those buying them. Parents and even grandparents will often kick in their own savings to help a young man make a downpayment on a house; newly-graduated urban workers will spend up to three months of their income on a mobile phone or a laptop; and the more entrepreneurial will take up a side business off the books or even engage in illicit activity to allow them to have the things they desire.

Classifying China’s consumers by income is, at best, an economics exercise. Classifying them by their values and priorities is far more relevant to businesses, and is a far better indicator of the degree to which you have a market – or not – in China.

Three Hurdles That Will Define CTrip

The OTA that recorded the strongest performance in 2015 was Ctrip, which grew by an impressive estimated 58%, to reach gross bookings of $27 billion, driven by the booming Chinese domestic and outbound travel markets. Ctrip is today the third global OTA player, and is forecast to be able to challenge Expedia Inc and The Priceline Group for global leadership by 2019.

Source: State of Online Travel Agencies: Ctrip Joins Priceline and Expedia as Global Giant – Skift

Ctrip has, it seems, now officially (and to us in China, somewhat belatedly) joined the ranks of the world’s largest online travel agencies.

In fairness, the company offers the most comprehensive travel agency service in China, and has worked hard to fend off challengers for the past 15 years, either crushing them with size or, when all else fails, buying them out or co-opting them.

Now China’s leader must master three new challenges that come along with its newfound status:

Build a Better Outbound Service. First, the Chinese challenger must figure out how to match the listings and relationships that Expedia and Priceline have built around the world outside of China. Offering a handful of cheap alternatives in major cities is not going to keep hold of China’s 125 million outbound travelers, in particular as many of those who can speak English are already skipping Ctrip for international journeys and going right to Expedia and Priceline.

Defend against tougher local competition at home. Second, it must fight a growing number of challengers at home, both hungry local players all seeking to grab part of the market; platforms like Airbnb and its local imitators that are increasingly offering shared alternatives to traditional travel; and Expedia and Priceline as they bring their challenge into Ctrip’s home market.

Break out of China. Finally, at some point Ctrip must figure out how to evolve beyond the core Chinese market. Massive the travel base in the PRC may be, but the world beckons, and continued growth will eventually depend on deft expansion abroad.

The extent to which Ctrip can address these three challenges will determine whether it will remain a specialized, local player, or whether it will one day be feasting on the remains of Expedia, Priceline, or both.

 

 

Concept of the Week: Leftover Students

Leftover students – concept – that group of high school graduates in China who aspire to higher education – and who appear to have the ability to complete a degree – but who are denied that education and the attendant social mobility by China’s limited university seats and the caprice of the gaokao.

Leta Hong Fincher has done an incredible job framing and documenting the phenomenon of “leftover women” in China, explaining the roots of the phenomenon and the challenges facing women who have, for all the best of reasons, passed what serves as a marriageable age, or who have careers that make finding a suitable spouse all but impossible. If you have not picked up her book, by all means do so. As you would expect, the work does more than simply describe a unique demographic: it also offers an insight into an underlying dynamic of China’s winner-take-all culture: the leftovers.

Indeed, riffing on Leta’s research, it is not hard to discern that unmarried women of a certain age are not the only leftovers in China. Last week saw this year’s administration of the gaokao, China’s national university entrance examination. Nine million students sat for the three-day exam this year, but there are seats in China’s universities for no more than three million. While some of those who fail to gain entrance in university will try again next year, we can count on over five million young people facing a future without a university education.

These “leftover students” are a challenge for China’s leaders and an opportunity for international educators. For the Communist Party, it is no small thing to say to six million families a year that the promise of a better life for their children through education is out of reach: every four years that tallies a population equal to the membership of the Party that has often invested its hopes and treasure into the promise of education, only to have it tossed back to them.

For tertiary educators around the world, many of whom are suffering from secular population and economic trends that are pushing enrollments downwards, leftover students represent an massive pool of potential enrollees, many from prosperous families, that could save and sustain many of the world’s less popular colleges and universities, and that could potentially fuel the creation of the world’s largest market for continuing education.

Anbang Quits Starwood I – Run From the Light

China’s Anbang Insurance Group Co said on Thursday it has abandoned its $14 billion bid for Starwood Hotels & Resorts Worldwide Inc (HOT.N), paving the way for Marriott International Inc (MAR.O) to buy the Sheraton and Westin hotels operator.

Source: China’s Anbang abandons $14 billion bid to buy Starwood Hotels | Reuters

I have a longer post about this in the works, but it will take me most of the weekend to compile it from this stack of research. In the meantime, a thought, based on the possibility that Anbang was too afraid to untie its kimono to continue the process:

We say in my business that sunlight is the best disinfectant. What most of my colleagues outside of China rarely have cause to contemplate is this: what happens when the company in question is itself one giant festering bacteria culture?

Beware ye who shaketh hands with a well-heeled investor from afar: due diligence should always work two ways.

Why Mooney Aviation Should Forget the China Market


Mooney International has made the first flight of the M10T proof-of-concept trainer aircraft. Certification is expected in the next few years.

Alton Marsh
Mooney M10T Trainer Makes First Flight
AOPA
December 23, 2015

There is a lot of excitement in China around the Mooney M10, a small diesel-powered airplane, for reasons originally flagged by Michele Travierso in Wired about a year ago (see “The American Diesel Plane that Could Bring Private Flight to China,” November 11, 2014).

First, the Mooney brand and its related assets were acquired in 2013 by Zhengzhou-based real estate developer Meijing Group. While the company is still US-based, it is, in ownership at least, a Chinese company.

Second, the M10 will be primarily manufactured in China after it is certified by the FAA and, presumably, the Chinese authorities as well.

Third, the aircraft is ostensibly targeted at the long-nascent Chinese general aviation market. Boasting a unique diesel engine, the plane would be cheaper to fuel in China (where standard aviation fuel can cost up to four times its US price), and the use of diesel would give the plane a 500 mile range – critical in a market where civil airfields are still depressingly rare.

The folks at Mooney have a fine-looking aircraft, but it is a very long way from changing aviation in China.

The plane’s primary advantage – the cost of fuel – is the result of the relative immaturity of the general aviation. There is not a lot of demand for Avgas (as opposed to jet fuel) in the market, so little is made, and the product is sold at a premium. If suddenly there were thousands, or even hundreds, of private aircraft in China, the economics of Avgas production and distribution would begin to narrow the gap between the cost of diesel and avgas.

What is more, the primary challenge for general aviation in China (defined as all aviation other than military and scheduled commercial airlines) has little to do with the price of fuel. The biggest problem remains air. The Chinese Communist Party has placed control of China’s airspace over military rather than civilian authorities. For its own reasons, the PLA is parsimonious with airspace, and wresting control of a piece of the sky for private aviation has been a difficult battle.

Airports are another issue. China has just over 250 non-military airports for the entire country. By comparison, with a similar geographic area, the US has more than 5,000 airports, and Euorpe has 3,900. What is more, few of those airports have the facilities necessary to service general aviation aircraft.

Finally, any new aircraft would face a market filled with formidable competitors. Textron Aviation, owner of Cessna, Beechcraft, and Hawker, already has deep ties in the country and broad product lines more attuned with both the business aviation and training/education markets. And Cirrus Aircraft, with its reputable SR series, is now owned by China’s largest aircraft manufacturer. All of these players will see Mooney coming, as any sales are still years away.

Even with its new pedigree as a Chinese manufacturer, Mooney faces an unenviable uphill battle. China is a market that tends to favor giants over upstarts, even its own, and that applies double for aviation. Mooney would be better off finding a way to build the plane in China, but focus on markets where the local competition was not so well positioned to crush it.

 

Three Trends to Watch in China Hospitality

Even if 2016 does not turn out to be the year Airbnb announces an initial public offering, it may turn out to be the year of deep, fascinating Airbnb data

Source: Measuring Airbnb’s Real Threat to U.S. Hotels Using Industry Metrics – Skift

Thanks to Airbnb, apparently, we now no longer have a “hotel industry.” what we have is an evolving “hospitality ecosystem.” Nowhere is this evolution taking place more quickly than in China.

Hotel brands – and their offerings – have been diversifying beyond the traditional rankings of luxury. Local brand Orange and Starwood’s W, and boutiques like Opposite House introduced lifestyle choices to that mix. Expect to see more of that as we see greater consolidation among global brands and increasing competition for domestic tourist dollars.

Two trends to watch in hospitality in China this year: shared and recreational. Shared lodging services like Xiaozhu and Airbnb look set to take off this year for both domestic and outbound travelers as these services begin offering fapiao for business guests and usage moves beyond early adopters.

Recreational lodging, specifically camping, is the second trend to watch. We are seeing the rapid growth of legitimate, licensed campgrounds this year, primarily front-country sites that allow guests to drive up to their unimproved sites and camp. In addition, the growth of the RV industry in China is driving growth in campsites designed for Airstreams and Winnebagos as China’s prosperous are learning the joys of the road.

Finally, we’re witnessing the birth of what can be best called “nostalgia hospitality,” where lodgers are offering boutique lodgings reminiscent of earlier and simpler times in China. This deliberate step backward in time is a sort of bed-and-breakfast with Chinese characteristics, an experience designed for urbanites looking for a true getaway from the complexities of daily life. This is beginning as a part of the shared lodging trend, but will become a sub-phenomenon of its own in the next two to three years.

 

Will China be The Last Bastion of the 747?

Hutong West
Digging Out
0955 hrs.

As Air France and other developed-nation air carriers around the world put their venerable fleets of Boeing 747s out to pasture (or, more accurately, into storage at massive desert airfields,) one may come under the mistaken impression that the “the humpback Boeing” may be disappearing from the skies.

That probably won’t happen as soon as we think. While dozens of 747-400s sit unused around the world, China has been quietly buying up these still-very-usable aircraft for as little as $16 million apiece (they run $350 million new) and converting them to freighters to deliver high-value cargo from China to points around the world.

The video above shows an old Saudi Arabian Airlines 747-400 being converted by Israeli Aircraft Industries/Barak into a like-new freighter. IAI is not the only company doing this – there are probably half a dozen major, reputable companies around the world doing this work.

With state-supported airlines, a growing share of high-value manufactures, and a military very interested in building up China’s civilian airlift fleet, China could well become the citadel of the 747 in years to come.

Responsa: The Influence of Business on Government

Hutong West
Shivering in SoCal
1601 hrs.

In response to my article “Standards of Influence,” an old friend and fellow China PR executive raised his hand to offer a gentle objection. While agreeing with the premise, he suggested that if commercial interest disclose their efforts, won’t the public sector put up resistance to their input, as it would be seen as bowing to foreign interests. He further suggested that there might be circumstances when it would be best to allow such processes to take place behind close doors.

This is a fair point, and needs to be addressed.

The combination of popular sentiment, social media watchdogs, and the Party’s desire to short-circuit the cycle of corruption is fostering greater transparency in China around the influence that companies (especially multinationals) try to exert on political decisions. Companies caught trying to change the rules in their favor are finding their operations subject to greater official scrutiny, and officials who appear to have taken part in such discussions are being investigated (or worse) with greater regularity. The potential downsides of the process are starting to outweigh the potential benefits.

This does not mean businesses cannot or should not have a voice in public decision making. Indeed, the wise regulator seeks the open input of a wide range of stakeholders, and businesses owe it to their own stakeholders to stand up and be counted. But when that voice is cloaked, the slope to malfeasance and corruption steepens and is carpeted with bacon grease. Sunlight ensures that the role of commerce in the process serves the public good as well as the private interest.

This means that those of us who operate at the nexus between industry and government in China cannot rely on the time-tested tools of government influence. We must chart a new path that is radically transparent yet equally (if not more) effective. That is a very narrow bridge to walk, and will require a great deal of imagination even in those cases where there is a high congruence between the needs of the nation and the desires of the merchant.

Yet it is critical for us to do so – and not only in China. Around the world there is a growing distaste for (and pushback against) the role that commercial interests play in the formulation of policy. Indeed, China has a deep ideological bias against such interactions. To continue to act as if these sentiments are irrelevant is aught more than denial.

Certainly, there will always be situations where it is better for all – including the public at large – for government discussions with industry to take place behind closed doors. But we should take for granted that in most cases, secrecy does not serve the public, and companies should thus shy from such approaches. If the mounting social and environmental costs of China’s development offer proof of nothing else, it is for the virtue of public scrutiny.

For a company to have real influence in policy in the future, it must first carry the burden of proof that the policies it is advocating are in the service of the public interest. Public relations people should encourage this: not only does this eliminate for companies the risk of later disclosure and the implication of impropriety, it also serves as prima facie proof of good corporate citizenship.

South China Morning Post: 1903-2015

Some question how The South China Morning Post, based in Hong Kong, can stay editorially independent if its new owners explicitly seek to improve China’s image.

Source: By Buying Paper, Alibaba Seeks To Polish China’s Image – The New York Times

Worrying about the editorial independence of the SCMP after its acquisition by Alibaba is much like fixing the fence after the horses have bolted. Those of us who have read the paper for thirty years or more know it to be a journalistic zombie.

The Post’s halcyon years ended with Rupert Murdoch’s privatization of the paper in 1987, and its subsequent stewardship by a Malaysian Chinese family known to be pro-Beijing has only hastened the end of editorial independence at the paper. The departures of journalists like Danny Gittings, Jasper Becker, Willy Lam, Nury Vittachi, Larry Feign, and Paul Mooney stand as mute testament to a newsroom increasingly constrained by the China apologetics of its owners.

Once the South China Morning Post and The Far East Economic Review offered between two covers the kind of insight and focus that we all need about the region. Today, all we can do to re-create what once landed on our doorsteps each morning is seek from across the web the sharp China coverage of a shrinking rank of publications willing to hire and pay for insightful and knowledgeable journalism on China.

Update: Edited Paul Mooney’s name for spelling.

Standards of Influence

One of the early chapters in my book Public Relations in China focuses on the importance of the government as a stakeholder, and the means by which a non-Chinese firm could make its influence felt in the policy-making process.

In a time when the collusion between moneyed interests and government power has become a challenge in countries around the world, we have to ask, “is there any circumstance in which it is right for a commercial interest to influence policy and regulation?”

My answer is a qualified “yes.” There is no shortage of companies that have proven themselves to be bad actors, wielding a degree of influence far out of proportion to that wielded by other stakeholders, and too often acting in ways that undermine the popular best interest.

At the same time, there are occasions when it is proper for a company to make its point of view known to those proposing regulation, and, indeed, there are circumstances in which a company’s decision to withhold its expertise from the regulatory process represents an abandonment of the firm’s civic duty.

What we need is a standard, a framework within which companies can offer their input in the regulatory process without drowning the popular interest. In an effort to incite a discussion on the topic, I’ll suggest the first six criteria.

  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity has nothing to gain or lose from the resolution of the question, that entity is obliged to offer its information and analysis to influence policy for the greater good.
  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity stands to gain or lose from the resolution of the question, that entity may to offer its information and analysis to influence policy provided that it is open about its interests.
  • At no time should a commercial entity use its influence to mute or silence other voices, even those in opposition.
  • At all times the information provided to the government agency must be factual and presented in as clear a manner as possible.
  • At no time may any commercial entity provide direct or indirect payments to any government official or agency that would serve to influence the resolution of a regulatory question.
  • All efforts should be publicly disclosed in real time.

Arguably, China’s central government has never been as open to outside (and particularly foreign) influence as have those of the West. Looking at the lobbying-industrial complex that has turned entire neighborhoods of the US capital into ghettos of influence peddling, that is not entirely a bad thing. But the nation needs legitimate pathways to allow an appropriate degree of input by all stakeholders, and foreign companies are no exception. Those pathways should never be closed to companies that adhere to a clear and publicly-acceptable set of standards.

Marketing in China

In China:

Average marketers drive awareness.

Good marketers drive sales.

Great marketers transform companies by the sheer force of their research, their data-driven insight, and their instinctive feel for what all stakeholders want from their company.

I’ll agree, this is not rocket science. It’s just something I put in front of me to look at every day as a goal, and I thought I’d share.

NGOs and Chinese Law

At the invitation of the folks from LinkedIn, I am experimenting with blogging on their platform as a compliment to what I do here. LinkedIn won’t replace what I do on this blog – in fact, as I’ve discovered, it is getting me back into blogging after my overlong book hiatus – but I’m going to avoid cross-posting entire posts – I’ll just link back-and-forth as I figure out what best belongs here, and what is more suited for posting there.

One of the first posts I’ve placed on the site is one that examines the meaning of the upcoming legislation on international NGOs in China. My prognosis for the law itself is not cheery – no surprise to anyone following the current regulatory climate in Beijing. Nonetheless, the piece is not a screed against the Chinese government as much as it is a warning to NGOs to prepare in advance for the government to be more meddlesome.

If you are not on LinkedIn, Dan Harris at the superb China Law Blog reprinted the post in its entirety, with some very generous prefatory comments.

I’ve got another article in the works on NGOs in China, so any thoughts you might have on this one would be welcome.

On Ending Media Pay-offs in China

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On Monday Advertising Age published my editorial calling for an end to the common practice of paying journalists in China for coverage. You can read the editorial here.

Early reactions are mostly supportive, but there are a number of people who believe that the problem will never be solved. I respectfully disagree. Historically the media in every society have gone through a corrupt phase. Current journalistic practice and standards in the developed world did not suddenly appear ex nihilo: nearly all were created to address an extant practice rather than to anticipate one that might arise.

Viewed against the canvas of history, China’s media are relatively young, and the industry has experienced profound disruptions in the past 70 years. There has been too little time for standards and high-minded practices to develop, and we are probably a generation away from seeing Chinese journalism rise above the shackles of propaganda, yellow journalism, and corruption.

But rise they will, and the sooner we discard the notion that there is no hope for these practices to end, the sooner the problem gets fixed.