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Branding and BRICs

April 2, 2013 By

“Brazil leads in BRICS’s brands”
Jerry Clode
Added Value – Source
March 17, 2013

BRICS summit participants: Prime Minister of I...

BRICS summit participants: Prime Minister of India Manmohan Singh, President of Russia Dmitry Medvedev, President of China Hu Jintao, President of Brazil Dilma Rousseff, President of South Africa Jacob Zuma. (Photo credit: Wikipedia)

In a thought-provoking article in AddedValue’s Source blog, Jerry Clode notes that Brazil’s brands are going global while China and India’s brands seem mired at home. Clode probes why, and believes he has found the answer: Brazil’s brands do well because they have creative Brazilian people who are confident enough in their culture to it in a way that is meaningful to people overseas. And, by implication, China does not.

He notes:

Looking at the two Asian BRICs, China and India, we see increasingly discerning and globally literate middle class consumers who are placing increasing expectations on local brands. But a lack of concomitant confidence to tell local brand stories that move beyond quixotic foreign stereotypes seems largely absent.

The answer to creating Chinese brands, he suggests, is simple: Chinese companies just need to be more confident and down-to-earth when presenting narratives to global customers.

It’s an interesting argument, but I am not sure it would do the trick. National provenence carries different baggage for Chinese and Brazilian brands. Chinese companies must operate against the unappealing background of China’s messy national emergence. China’s assertive geopolitics, cultural differences, and a reputation for producing poisonous foods and questionable quality in toxic sweatshops have left a deeper impression on the world’s consumers than panda bears, kung fu, and calligraphy.

This is a problem that extends far beyond the ken of marketers to solve. The status quo is our canvas, and the aura of Chinese-ness is and will be for the foreseeable future more a curse than a blessing for all but the most extraordinary of Chinese brands.

At a more immediate level, uncertainty around company ownership in the PRC means that Chinese brands are assumed to have some affiliation with the Chinese government and, by extension, its activities. Meanwhile Brazil carries much more positive images for global consumers, it’s government is not perceived as threatening, and it can capitalize on the common European cultural origins of its primary audience.

For the time being, marketers for China, Inc. must address this with the grand strategy followed by Japan’s most successful brands: deodorize. Back when Japanese brands began their global breakout, they did their research and discovered that their “Japanese-ness” was a liability, and behaved accordingly. Nissan used the “Datsun” marque in the US from 1960 to 1980 to avoid being associated with the brand name used on trucks the company made for the Japanese army in World War II. Matsushita picked out the name “Panasonic” for similar reasons.

Most Japanese brands did not go so far as to change their names, but their Japanese origins and essence were played down in all aspects of marketing and sales. Origin was incidental, neither positive nor negative. What was important was the product and the credibility of the company that stood behind it.

Until such time as China’s companies no longer struggle to free themselves of the constraints of the nation’s global image, they can rely only upon their own good work. For most, if not all, that will mean leaving Brand China behind in their quest for global markets.

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Filed Under: China Breaks Out, Craft Tagged With: , , , , , , ,

The Coming Rise of Foxconn

January 10, 2013 By
Deutsch: Foxconn Logo

Deutsch: Foxconn Logo (Photo credit: Wikipedia)

The High-Speed Train “Harmony”
Enroute to Shanghai
1130 hrs.

The attention given to Foxconn over the past several years has largely concentrated on its role as Apple’s leading supplier in Asia. What we have missed in all of that juicy coverage, however, is the longer-term picture. While it is tempting to believe that Apple will always be strong, that it will always rely on offshore outsourcing for its production, and that Foxconn will be content to play Sancho Panza to its client brands, there are several factors that suggest otherwise. In fact, in as little as a decade from now, Foxconn may itself be a global brand.

Hon Hai Precision built its business as a supplier to the world’s computer and consumer electronics brands. Most of us still see the company a contract manufacturer, an assembler of devices and machines. Yet over the past seven years, the company has quietly added to its capabilities to the point where it is one step away from becoming a fully integrated brand-name electronics company.

Making Nice with Consumers

First, it added a name people outside of Asia could recognize as a brand – Foxconn. You could argue that the brand is tarnished, but the one thing it still has going for it is recognition. Think Oscar Wilde: the company has been talked about a lot, and despite the bad press (much of which has landed on Apple), the scale of the brand recognition alone – and the cost of building recognition for a new brand – might tempt the company to stick with it. If not, building a new brand would be a relatively modest investment for the $25 billion company.

Next, Foxconn began experimenting with selling to consumers with a line of branded high-performance computer components. Even though the target was small – gamers, pro-sumers and specialty computer builders – it gave the company a glimpse of what would be required in a wider consumer marketing program. As a part of this experiment, Foxconn then built the rudiments to of a customer support network, again, providing the company a gut-level understanding of what would be involved in supporting a global consumer effort.

Steel Goes In, Cars Come Out

Equally, if not more important, the company slowly built out a vertically-integrated manufacturing capability. The original thinking was to offer customers faster time-to-market while controlling for costs and capricious upstream suppliers – the latter a perpetual, frequently overlooked headache in China. The company began making its own cases, then its own electronic components. Next, it added product design and development and even the basics of a research capability. As of 2006, the company had over a dozen R&D centers worldwide, and 30,000 patents either granted or pending.

To control the variables in supply chain, it built in a logistics and supply chain management team that focused on keeping customer inventory costs low and prepared it to work with the largest retailers in the world, and built a channel sales organization to support the sale of its own branded components and as an extra spiff to smaller customers.

All told, Foxconn could probably start experimenting with selling its own branded consumer products in a matter of months once it made the decision to go ahead.

Gnawing on the Hand that Feeds

The perceptive reader will ask “why?” Why would Foxconn risk upsetting the Apple-cart, risking the custom of the very companies that put it where it is today? There are several answers to that question, none of which alone would be sufficient to make Foxconn take the leap. Taken together, however, they form a compelling case.

First is profit pressure. Foxconn is probably at the point in its development where it has squeezed as much as it can out of its costs, and costs are rising. Inputs aren’t getting cheaper, labor is getting more expensive, and the company faces a major investment in automation, not to mention the additional expenditures every time Apple or HP needs to offer something newer, cooler, and harder to make. Cost pressures on customers, even Apple, remain acute, so Foxconn is unlikely to see much relief from that front. The only way to turn the profit equation around is to start going around its weakest customers directly to retail.

Second, many of Foxconn’s customers – HP being a prime example – are facing headwinds of their own. The computer industry has matured, people aren’t replacing devices as often, and the field is starting to narrow to two or three industry leaders far ahead of everyone else. The opportunity to find a tempting niche and then burst in to exploit it will grow, especially as Lenovo starts to expand its market share. If Lenovo can do it, Gou will reason, so can we.

Even Apple is not immune to headwinds, and if there is one thing that must keep Gou awake at night, it is his growing dependence on this single customer and the decisions made by its leadership team. And if that company starts making strategic errors and the numbers begin to fall, Foxconn needs a Plan B. What is that Plan B? Samsung? Probably not.

Third, for all of the advantage of working from behind the screen, Foxconn’s fortunes are almost entirely beyond its control, resting in the hands of distant executives making decisions that are none of Foxconn’s business. Don’t underestimate the degree to which this frustrates not only Gou, but every Chinese contract manufacturer who ever dealt with an importer. Your can only grow as quickly or consistently as your customer lets you. Again, if the customers start blowing it, the urge to give up and go around them becomes overwhelming.

At the same time, Foxconn’s customers are arguably as locked in to Foxconn as they are to him. For reasons of speed (time to market) and scale (time to ramp up volume), customers don’t have many choices. Short of the most grievous provocation, few could afford to walk away from Foxconn.

How It Will Go Down

For all of these reasons, Foxconn’s move would have to come under circumstances where it could credibly say to its customers that it had no other choice.

There would need to be a trigger event, the three most likely being that a major customer either goes under, stumbles badly, or takes back production. At this point, Foxconn’s continued growth (if not its survival, if the stumbler is Apple), would be at risk, and Foxconn would need to respond.

Foxconn would likely use a production facility with idle capacity to produce products that it could credibly say did not threaten a current customer (say, Apple), and that possibly was aimed at weakening the grip of a rival on its market share. If Foxconn could make a case that it was going after Samsung or LG, for example, Apple’s objections would likely be few. Foxconn could even offer to forge an entirely new brand and build new factories so that the new venture was plausibly firewalled from customer business.

To be sure, the company needs to fix its reputation and build a global marketing capability. The former is underway in earnest: the company has hired PR counsel (not yours truly) to fix the reputation and to lay the foundations of a global branding and marketing effort. It has also built a worldwide sales force that could be expanded quickly to forge the relationships with retailers that it would need to get shelf space in stores.

But make no mistake that Foxconn’s breakout is both plausible and, given the history of business, inevitable. The timing will be soon – Terry Gou is no longer young, and he would want the transition to global brand to at least begin under his watch, and arguably it will either happen under Gou or it will never happen.

If Foxconn could pull it off, however, the company would have a shot at a long-term future free of dependency on other companies, and set up to compete against Samsung, Lenovo, Huawei, and – if it so wished – Apple.

Watch carefully. The shift will start small, but once underway we will watch the birth of a new global brand.

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Filed Under: China Breaks Out, Marketing Tagged With: , , , , , , ,

For China, Inc., Naked Is Not Enough

January 4, 2013 By

Hutong West
Caffinated
1015 hrs.

There is a growing cohort of public relations firms that are opening practices focused on helping Chinese companies build better reputations among global audiences. This is a good thing: heaven knows, no group of companies is more in need of this kind of help than Chinese enterprises.

What is discouraging, however, is that many senior professionals in the PR industry continue to misdiagnose the problem. To take one example, in a pay-walled PRWeek article dated New Year’s day (“Chinese Companies Bridging the Comms Gap in U.S. Market”), a senior global agency executive and a Chinese CEO both single out transparency as the missing element for China Inc. as it ventures abroad.

“When [Chinese businesses] come to the US, they think they are being transparent when they are not because our standards are so high in terms of transparency,” Black says. “They have to be willing to open themselves up to regulatory bodies and the public. It’s been a major adjustment.”

One of the early pioneers of the PR business, Edward Bernays, counseled PR practitioners in his seminal 1928 book Propaganda that to be effective PR has to be more than just corporate spin.

“In relation to industry, the ideal of the [public relations] profession is to eliminate the waste and the friction that result when industry does things or makes things which its public does not want, or when the public does not understand what is being offered it.” (Emphasis mine.)

Simply put, public relations is first about getting the company to behave and act in accordance with public expectations, and then communicate that compliance to ensure the public gets it.

For Chinese companies, transparency is useless if all it reveals is a company engaged in unsavory or nefarious behavior. Further, for reasons both political and cultural, that behavioral bar is higher in the U.S. for Chinese enterprises than it is for U.S. companies (or companies from just about any other country). To borrow from Donald Tapscott, if a company is going to be naked, it had damned-well better be good to look at. And Chinese companies need to better looking than everyone else to merit an equal reputation.

The core challenge for public relations practitioners is not only convincing Chinese companies to be transparent, but also – and first – helping Chinese companies to understand and behave in accordance with the expectations of highly skeptical global audiences. Once that is accomplished – and only then – is it time to open up for full scrutiny and communicate that they are doing so.

Naturally, this is not as simple as it sounds, nor is it a lot of fun. The alternative is to spend a lot of time and money first creating a Potemkin reputation, and then more time and money running around plugging holes in the facade. The end result of that fire drill is an also-ran company with a middling reputation that nobody likes very much, and with whom others will do business only if they have no other choice.

The companies that clean themselves up before venturing abroad (or even while doing it) get double credit, first for being sensitive to the expectations of foreign audiences, and then for doing something about it. The payoff not only in reputation but in credibility and trust would be priceless, the need for spin would disappear, and the positive attention would make sales and marketing simple.

Despite the potential benefits, I understand why some public relations executives balk at that challenge. It is scary to face up to a client and tell him or her truths they have no interest hearing. It is outside the comfort zone of a large number of PR people. And let’s not forget: it can be much more lucrative to provide costly palliatives for a crippled reputation than it is to deliver a genuine cure.

But Chinese firms owe it to themselves and their customers to seek out only the P.R. people – both inside and outside the company – who are prepared to deliver a cure, and who don’t babble on about reputation but focus on creating genuine trust.

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Congress, Huawei, and ZTE
Disinformation Wants to be Free
The Beijing Consensus isn’t Building Brands

Filed Under: China Breaks Out, Craft Tagged With: , , , , , , ,

Congress, Huawei, and ZTE

October 9, 2012 By

In the Hutong
Catching up post holiday
1108 hrs.

If you have been following the news, you will have heard that a U.S. Congressional committee has issued a report urging U.S. firms not to do business with either Huawei or ZTE. Those two companies, respectively the second- and fifth-largest manufacturers of telecommunications equipment in the world, are accused of a range of offenses. In my opinion, the real offenses for which those companies have been placed in the Congressional mush-pot have little to do with the reasons outlined in the Congressional report. The companies real offenses are:

  1. They are from China, and this is an election year;
  2. They are the first companies in 70 years to challenge American companies for dominance in a core US industry that have not been from an ally or a client state;
  3. They have failed to be sufficiently transparent when doing business in a country that demands transparency from all companies, and even more from those that hail from competitor economies.

If Huawei and ZTE are guilty of anything, it is that they have built their U.S. businesses and ambitions before they have laid a foundation of trust with the American public and its elected officials. Ideally, no company should have to do that as a prerequisite do doing business in America, but trust is the price for any company stepping into a new country. The two companies are learning a lesson that must be absorbed by every Chinese company expanding overseas. China as a nation may or may not be successful in its efforts to reform the global system to suit its ambitions. Even if it is, though, Chinese companies must still conduct themselves in a manner that is acceptable to the governments and consumers in the markets they seek to enter.

At the same time, there is also an effort underway to tar Huawei and ZTE as a malevolent presence in the telecommunications industry, an effort that steps beyond fact and into the realm of speculation and rumor. As I noted in Making the Connection: The Peaceful Rise of China’s Telecommunications Giants, it behooves both the U.S. government and the U.S. telecommunications industry to stop relying on politics and the F.U.D. pump to preserve their markets. Instead, it is essential that American companies focus on Huawei as a competitive threat where it counts: in the market. A failure to do so only postpones their inevitable implosions.

I’ve spent much of the morning talking to reporters about the report, so I won’t belabor this. If you are interested in some balance about the issue, I talked about this this with Kaiser Kuo, Jeremy Goldkorn, and Will Moss on the Sinica podcast recently. Take a listen – I think the podcast covers the issue far better than 60 Minutes did. For a more U.S. policy-oriented viewpoint, I also covered this in The Pacific Bull Moose, my U.S. politics blog.

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Filed Under: China Breaks Out, Innovation, IPR and Licensing, Policy & Governance

Silicon Hutong 3.0: The Merchant and the Dragon

October 3, 2012 By

In the Hutong
Where have I been lately?
0740 hrs.

If this forum has been silent for the past month, we* have had good reason. It is now evident to anyone watching that China is on the cusp of change so large that its own leaders likely still do not grasp it. We’ve spent the last month trying to do so, and we’ve realized it is time to make some changes.

The End of Harmony

The particulars have been summed up at great length and eloquence elsewhere. In short, China has enjoyed 35 years of relative harmony enabled by acquiescence at home, accommodation abroad, and consensus within the Party. The past five weeks have made clear that this period of harmony is now at an end.

In fact, China is entering a period of great disharmony. The implicit promise of growing, shared prosperity looks increasingly difficult for the Party to keep, just as revelations emerge that suggest widespread malfeasance among the Party’s highest ranks. The willingness of Chongqing’s citizenry to accept Bo Xilai’s microwaved Maoism hints at a national mood that continues to sour. Suggesting that China is on the verge of a new revolution would be hyperbole, but the days of acquiescence are over, and the days of a more vocal, demanding populace are here.

The consensus-building approach that has characterized Party decision-making for the past 25 years appears to have reached its limits as well, and for good reason. When the way ahead was sustaining the status quo, consensus was easy to establish. The way forward is now unclear, and different political end economic visions are battling for precedence. Building general agreement among all leaders, even within the Politburo Standing Committee, will become difficult if not impossible.  The choice will be between paralysis and the end of the consensus-based system. Either direction will have vast repercussions.

As China takes its place among the leading nations of the world, especially in the wake of the Global Financial Crisis, the nation’s leaders have begun to address the world based on two implicit assumptions. First, that as an emerging world power China is entitled to change the rules of the global system to suit its needs, or ignore those rules if they obstruct China’s goals. Second, that the rest of the world will – or should – continue to accommodate China’s growing international assertiveness, even to the point of appeasement. That such assumptions place China at loggerheads with the rest of the world is of little concern. Japan, Europe, and the U.S. are too saddled with domestic troubles to effectively oppose China’s ambitions.

The Tale of the Merchant and the Dragon

If you watch China, none of the above should come as a surprise. And unless we’re living under a rock, we have to take notice. And we have. As we have done occasionally over Silicon Hutong’s decade in publication, we have taken a strategic pause in order to assess how we need to evolve this forum in light of China’s development. You will begin to see the results immediately.

First, you will see an evolution in our focus. Following the direction of my clients, this space has been moving beyond the original confines of technology, media, and public relations for some time now. We will now take the next step. Whether you do business in China or not, China will alter your playing field, and understanding why that is the case and what to do about it will be essential to everyone’s success. Our focus will become that why and the what. To that end, our five major topic areas will be:

  1. China’s Breakout: The emergence of China, Inc., and its role in global industry;
  2. China Rules: The effort by Beijing, Chinese companies, and Chinese executives to alter business norms, practices, and regulator behavior to favor Chinese firms;
  3. China Goggles: The globalization of China’s media industry and how that will enhance China’s economic and political influence;
  4. China Rewires: China’s consumers are going to alter the world’s business landscape, both for companies and consumers;
  5. Strategy, Action, Behavior, and Communications: Ideas and approaches to help executives and entrepreneurs deal with challenges of China’s rise.

Some of this, especially the last, is a recognition of the direction we have been taking for some time. The other four themes match the major directions I’ve taken in my own research and advising since 2008. It is now time to start delivering those insights.

Discussions about China’s national security, politics, arts, culture, history, and international relations will shift to The Peking Review, and will be delivered in the context of reviews of books, articles, and scholarly works about those topics.

There are more changes as well, but this post is long enough. Expect periodic updates in the coming weeks.

In the meantime, thanks for reading, and keep the feedback and comments coming.

Best,

David

* When I use “we” here, I do so not in the sense of the “royal ‘we,’” which would be a nauseating affectation, but “we” in the sense of myself and my wife and partner. While she does no writing for this forum, she is and has always been my sounding board and editorial adviser. Also, my time is our asset, so any expenditure of that asset needs sign-off. Finally, she has become a deep supporter of this forum (and The Peking Review). For those reasons, any major decision is ours, not mine alone.

Filed Under: China Breaks Out, China Goggles, China Rewires, China Rules, FITG, Strategy Tagged With:

The Beijing Consensus Isn’t Building Brands

June 1, 2012 By

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.

Filed Under: China Breaks Out Tagged With: , ,

China’s Choice

November 4, 2011 By

As Number One, China To Face Hour Of Choice, by Richard Bush, YaleGlobal Online, June 30, 2011

Richard Bush, who is the director of the Center for Northeast Asian Policy Studies and a senior fellow at the Brookings Institution, offers alarmists in the West some perspective about China and its seemingly inevitable rise to economic leadership in this well-worded article in YaleGlobal.

One fascinating point Bush makes is that China faces a choice with its economic might: either build for domestic prosperity and harmony, letting the US “bear the burden of international leadership,” or it may use its treasure to expand its global influence and power. It is a fascinating point, but I would wager most Chinese would reject the choice. The US has (until recently) enjoyed global power and domestic prosperity, as have Britain, France, Spain, and the Netherlands before it. Why, the thinking will go, must China choose? Can it not have both?

The greatest challenge the world faces with China’s rise is the sense of national entitlement that seems to suffuse popular sentiment, in particular among the young. Being the world’s largest economy should come with the trimmings, they think.

Some Chinese believe that passing this milestone will have automatic consequences for international politics, giving China more international influence. In their view, other countries should then confer more deference on China and accommodate to it on issues that China regards as important, rather than China continuing to accommodate them. At some point, Beijing will likely insist that the head of the International Monetary Fund or World Bank be a Chinese.

Whether practical or not, the people of China will want both prosperity and power, and unless the government begins a campaign to manage those expectations rather soon, the Party will find that it has made a mighty rod for its own back. The government will be expected to deliver on both global power and local prosperity.

That challenge will form the primary driving force behind China’s international relations, whether in defense, diplomacy, economic relations, or commerce and trade. A China so pressured from behind will not sit politely in its seat at the table of global power and learn which fork to use. It will have to insist that the rules created to manage a world led by an Atlantic civilization be changed to address a shift to a world dominated by Pacific powers, including the US.

Rather than panic, which Bush suggests is uncalled-for, the time has come for us to determine which aspects of our global systems of security, diplomacy, economy, and commerce are – for us – non-negotiable, and why. We should try to guide China’s hand at the global table much as Britain guided ours, but we should hold true to our principles and our non-negotiables.

China’s choice has been made for it. The real choice belongs to the West.

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Filed Under: China Breaks Out, China Rules

Jack Ma’s American Journey

October 12, 2011 By
Jack Ma, Founder of Alibaba Group

Image via Wikipedia

In the Hutong
And…We’re Back!
1151 hrs.

Amidst all of the recent speculation about Alibaba, Jack Ma, and his intentions toward Yahoo!, the real story keeps slipping below the fold: Jack Ma’s pledge to spend a year living in the United States. It is hard to discern whether that was a genuine promise or a trial balloon, but let’s assume that Jack intends to carry through on it.

Mr. Ma deserves praise for what cannot be an easy move. He appears to understand that if you are going to do business in one of the most complex and competitive markets in the world, you had better know that market in your guts, and not designate some subordinate to do that understanding for you. It is long past time for American and European CEOs to start doing the same in China. We are waiting for the first one to do so, and that little problem is a factor in the challenges that foreign companies face here.

Yet if Mr. Ma believes that his expressed desire to live in America will soften the discomfort of the American public and the Committee on Foreign Investment in the United States will feel toward the purchase of Yahoo! by a Chinese company, he is too late. Assuring both Washington DC and Main Street USA that Alibaba is not the long arm of the Party and is trustworthy enough to be the custodian of a massive storehouse of information on American citizens will demand a lengthy campaign, not well-meaning gestures. A year under American law building visibility, accessibility, and trust is a good start, but no more, and any bid for Yahoo is likely to happen sooner than that.

Finally, before venturing into the North American wilds, both Alibaba and Mr. Ma would do well to consider an adjustment in their approach to the global media. I spend a lot of time with journalists who represent the world’s leading media outlets in China, and whenever the subject of Alibaba comes up, the response is always a shaking of the head. The word is that not only does Mr. Ma appear increasingly inaccessible to the global media, his international PR staff is allegedly not above haranguing journalists whose coverage of Alibaba is deemed less than supportive. If true, this is an approach that will make neither Ma nor Alibaba many friends in the United States. The primary coverage of the company is still going to come from China, and alienating foreign correspondents ill-serves the purposes of a company with audiences outside of the PRC. The global media can be allies or enemies in Alibaba’s leap abroad, an effort that will demand the help of all the friends the company can get. At the moment, that list of friends – inside the Beltway, across America, and in the fourth estate – seems a bit short for Alibaba’s ambitions.

Time to change that.

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Filed Under: China Breaks Out, Internet Business, PR and Communications

To Gweilo, or not to Gweilo

May 31, 2011 By

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.

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Filed Under: China Breaks Out, FITG

Huawei’s American Trust Issue

February 21, 2011 By
Huawei Logo

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In the Hutong
Manic Monday
1425 hrs.

According to the Financial Times, Huawei has decided to unravel its deal to buy the intellectual property of Silicon Vally firm 3Leaf rather than risk a finding by President Obama that the Chinese telecommunications equipment manufacturer was in violation of the law.

That was a wise move, and perhaps the smartest thing Huawei has done with its government relations in a long time. Sadly, they do not go far enough, because while the solution addresses the most pressing issue – the 3Leaf deal – it does not help Huawei with the far more fundamental problem it faces.

Huawei has a trust issue in America of such magnitude that it all but closes the door to the company in the US market.

Starting with a Trust Deficit

Huawei starts in America with three strikes against it. First, it is foreign, and there is enough latent xenophobia in the United States to any form of direct investment from offshore a political challenge, even in the best of times. This is not the best of times, and no matter how bad the economy gets, nobody likes the idea of selling America’s innovative crown jewels (i.e., Silicon Valley companies laden with valuable intellectual property) just to keep the lights on.

Second, Huawei is Chinese. The level of suspicion and distrust of Chinese companies in America is high, rooted in causes too diverse to mention, from lead-painted toys to alleged currency manipulation, from movie piracy to industrial espionage, and from political causes from China’s handling of dissent to its opaque defense agenda. Giving the greatest possible benefit of doubt, Huawei is guilty of none of this, but the fallout of such a record – as an early international emergent from China’s corporate cauldron – falls upon the company nonetheless.

Third, Huawei’s links to the People’s Liberation Army are still not sufficiently transparent to sever the two in the minds of American regulators. Whether this is fair or not is hard to say. The company protests that there are no ties at all. But the opacity of China’s military-industrial complex, coupled with the nation’s ambitions, its focus on network-centric warfare, and the status of the company’s founder as a PLA veteran eat away at the credibility of such statements. The court of public opinion, as it were, rules against Huawei on this count.

So despite the company’s statements to the contrary, it clearly has not done anywhere near enough to overcome those issues in the U.S. As such, even before the 3Leaf deal came up, Huawei had a serious trust problem in North America. The company’s leaders either did not know this was a problem (thus proving that they are ill-informed and out of touch with the U.S.,) or they disregarded it as a serious issue (thus proving they were either foolish or arrogant, and, again, out of touch.)

For had the company known this was an issue and appreciated its severity, they would have done much more to solve it before they went shopping in Silicon Valley.

Sneaky and Opaque Are No Way to Go Through Life, Son

All of which made the entire 3Leaf deal look sneaky and underhanded, rather than smart and well-handled. Had Huawei bought 3Leaf as an outright acquistion, the company would have been expected to ask the Committee on Foreign Investment in the United States (CFIUS) for approval. Instead, Huawei waited for 3Leaf to declare insolvency, buying up assets and hiring staff. This may have been technically legal, but as Huawei discovered, it is perceptually suspect.

An untrusted company and tactics that arguably skirt the intent if not the letter of the law is a bad combination, bad enough that retrospect should not have been necessary to know that a more careful approach was necessary. As it is, had Huawei gone to the CFIUS for approval in the first place, and had the answer been “no,” Huawei would still be ahead of the game: they could have earned perceptual points for going through the process and for being upfront. Now, they have four strikes against them: foreign, Chinese, the alleged PLA connection, and sneaky.

This raises another question: why? Maybe they were arrogant. Maybe they were ignorant, even willfully so. If you believe either of those answers, you must accept that Huawei is many years from being ready to operate in developed, transparent, regulated markets. If you reject that line of thought, the only other compelling answer is that Huawei believed that what it would get from 3Leaf was so valuable that it was worth more to them than the trust of the industry, the US government, and by extension the American people. What could have motivated a company to burn such bridges?

Given that the Pentagon flagged the Huawei/3Leaf situation to the CFIUS, it is entirely possible that Huawei was engaged in the acquisition of technology that would have been beneficial to the defense of China at the expense of the U.S. For Huawei’s sake, I hope this was not the case, for if it was, not only is Huawei’s name in America under a cloud, so is its credibility in Europe, in India, in Russia, and elsewhere, for it will have proven by its actions that it serves the Chinese defense establishment before its own interests, thus undermining its earnest protests to the contrary.

Somebody Snitched

While we ponder this, let us not forget that there are unanswered questions on the U.S. side as well. We know that the Pentagon dropped the dime on Huawei to the CFIUS. What we do not know, and what we may never know, is who dropped the dime on Huawei to the Department of Defense? Who told somebody in the Pentagon “hey, guys, you need to look at what is happening and go for the block on this deal.” If it was a competitor, this is politics, plain and simple: some smart company may well have capitalized on Huawei’s lack of trust in the US to block this.

We could go Ian Fleming on this situation ad nauseam. But there are three essential takeaways.

Three Problems, Three Fixes

First, Huawei has a slow-burning but serious trust crisis that it must move immediately and resolutely to resolve if the company is not going to find itself the object of suspicion in the U.S. and elsewhere, and thus locked out of countless deals for non-commercial reasons.

Second, Huawei has proven itself a tyro at navigating the U.S. political and regulatory process. It needs to take drastic action to rectify this problem and repair the damage done this far, or it can write off the U.S. market for the foreseeable future. (Which I think they should anyway, because pickings are better elsewhere, but that’s another issue.)

Third, the morass around cross-border mergers and acquisitions continues to deepen. Eighty percent of the problem in this case was poor communications on Huawei’s part, but the other twenty percent is a problem in the global foreign investment regime. Standards of approval for foreign investments are made on a country-by-country basis, are thus inconsistent, and are becoming a growing source of friction between countries that could easily (in the case of the U.S. and China particularly) devolve into a costly and profitless tit-for-tat rejection of each other’s investment forays.

Just as was done with trade, first through GATT and later the WTO, China and the U.S. need to lead the way toward the forging of a more transparent and consistent global regime governing direct investment.

These lessons would be well-learned by other Chinese companies seeking access to overseas markets or intellectual property via acquisition: the deck is stacked against you before you start, so play accordingly.

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Filed Under: China Breaks Out

Should Li-Ning Be Taking On America Now?

January 21, 2011 By

In the Hutong
In Pinewood Derby Mode
1432 hrs.

Li-Ning is popping up on the radar. On Wednesday I got a call from Bo Jin of Campaign magazine in Hong Kong asking me what I thought about the company’s announcement that it would be launching a multi-million dollar ad campaign in the US in May, Then today, catching up on my reading, I read Christopher Shay’s excellent piece in Time magazine about Li-Ning’s foray into the US athletic shoe market.

Let me say at the outset that I have a soft spot for the company: Li Ning gave me a job when I really needed one in the early 1990s, and I was fortunate to spend some time working with him and some of the people who helped form the company. Despite that history–or perhaps because of it–I have to wonder whether now is the right time for Li-Ning to be venturing overseas, and more specifically into the worlds most competitive and challenging sportswear market: United States.

A Long Time Coming

In the company’s defense, this move did not happen on a whim. Li Ning has been thinking about the U.S. market at least since the early 1990s, but the company held back, knowing that a secure market position at home and a positive view of Chinese products abroad would be essential before venturing into the home turf of its strongest rivals. They learned that lesson up close: Li-Ning’s parent company at the time, sports drink maker Jianlibao, made a premature and costly foray into more than a dozen countries overseas, including the US. Not only did Jianlibao fail to take off overseas, the drink maker soon found itself under siege at home from Coca-Cola and Pepsico. Today, though I may look, I cannot find a can or bottle of Jianlibao in any Beijing store.

The company–and it founder–believed then that they would go overseas eventually. But with Nike and Adidas starting to make huge forays into China at the time, the immediate focus was to retrench out of first-tier cities in China and learn to beat the global majors at their own game.

Today, sixteen years later, it is clear Li-Ning has made immense progress toward that goal. The brand is  number 2 in China, behind Nike and ahead of Adidas. The company is public, profitable, and took in over $1 billion in 2009. It has set up a flagship store/design center/listening post in Portland, Oregon, America’s unofficial sportswear capital, enabling it to start tapping into that city’s deep concentration of industry talent. And it has signed an NBA star, Baron Davis, as a spokesman.

So why not blitz America?

Leave aside the fact that Nike alone is twenty times the size of Li-Ning, or that the U.S. is an insanely expensive and competitive market in which to do business. Is this the right time for Li-Ning to be leaping into what is probably the richest and toughest sportswear market in the world? Or is there a better path to global leadership for the Chinese upstart?

I would say no, and here is why.

China is Still not Won

Yes, Li-Ning is now the second largest sportswear company in China. But that position is not unassailable. Nike is still tops, and leads in the more prosperous cities where styles, tastes, and habits more closely match those in developed markets like the U.S. I would argue that until the company can beat Nike in the high-end market in China (which more closely matches the mid-range in the U.S.,) the move abroad is premature.

What is more, foreign brands are delving deeper into Li-Ning’s traditional strongholds in 3rd, 4th, and 5th tier cities. The global majors are finding the going challenging, but they have learned that the formula for success in those cities is different than what it is in Shanghai, and persistent and well-funded, they are adapting. And the big international brands are not the only ones to watch: don’t forget Anta and others are fighting for a chance to steal Li-Ning’s crown at home.

Just when Li-Ning should be using its local advantage to secure the home field against the interlopers, it is turning its attention away.

In America, China Isn’t Cuddly Yet

This is not a particularly opportune time for a Chinese manufacturer to go venturing into the U.S. There is a lot of angst and a certain amount of distaste toward China in the U.S. at the moment. I suppose you could argue that as China rises, there will always be some underlying friction and, after all, the Cold War didn’t kill anyone’s taste for Russian vodka or caviar.

Practically, though, the first four or five high-profile Chinese brands to venture into the West are going to be carrying the burden of America’s China Anxiety with it. The Chinese government hasn’t done much of a job burnishing Brand China lately, and the government does not appear ready to soften its stance merely to ease the marketing challenges of its fledgling global champions. (Nor, for that matter, should it.) What that means, though, is that Li-Ning will need to succeed in spite of China carrying a poor reputation for product quality AND serving as the nation’s bogeyman for its economic challenges.

That’s a lot for a company to carry, and doing so will be expensive. You have to wonder if it might not be wise to wait for a day where the headwinds are not blowing quite as stiffly.

Home Is Where The Growth Is

If Li-Ning goes to battle against the majors in the U.S., they are going to be competing against a host of more familiar brands whose products also extend from the top of the line to the outlet store/bargain basement. The profit share in the US is going to the top-end players. Diving into a market with high sales costs and thin margins is no way to build a war chest to defeat Nike in a global battle.

In China, conversely, more people every day have the ability to buy branded sportswear and footwear, and the market remains the largest in the world. What is more, the tastes of millions of loyal Li-Ning buyers are evolving. They are no longer looking for the basics, but more stylish and higher quality apparel. This is where the company has an opportunity not only to grow in unit sales, but to start using its overseas-built design expertise to grow its unit profits as well. Those profits, long term, will be Li-Ning’s competitive advantage as it takes on Nike and Adidas worldwide.

Other, Easier Fruit is Rotting

There are other markets in the world where the global majors remain weak, others where their products are inappropriate to local tastes and incomes, and even some where Nike and Adidas are only present on the gray market. Li-Ning could use its greater experience selling into developing markets to build deeper footholds into India, South America, Eastern Europe, Turkey, and Russia (and possibly Africa). This would help Li-Ning scale up to a size to be able to match the global giants, and it would fight the big boys on turf that suits its own strengths.

If Li-Ning can establish and retain leadership in China and build market-leading positions in the world’s most populated, high-growth markets, they could then take on Nike, Adidas et al at its leisure in their home markets, supported by immense economies of scale and a global footprint.

Better to Follow Mao

The above approach hearkens back to Mao’s strategy to win the revolution in China. Win the countryside and surround the cities. By dominating the developing markets first, and using those as a power/revenue/scale base from which to take on the more cosmopolitan markets of the world is the strategy that makes the most sense for Li-Ning, along with many of China’s bevy of global brand hopefuls.

So the question is what is compelling Li-Ning to jump into the US before taking the logical intermediary steps that might save it from Jianlibao’s fate? I could figure on several possible reasons. Perhaps analysts feel the “time is right.” Maybe it is all of the buzz about Li-Ning being a presumptive “global Chinese brand.” Perhaps the company wants to capitalize on the still-somewhat-fresh image of Li Ning doing his wire-assisted Peter Pan torch run during the Olympic opening ceremonies 30 months ago.

Or perhaps the company is getting impatient. Maybe they have bought into the idea that the global financial crisis somehow opens the door for them in the US and that they’ll never get a chance like this again. Or maybe it is a much simpler explanation: they signed Baron Davis, so that makes it time to go big time in the US.

Yes, there is something exciting about the prospect of a Chinese brand leaping into the global fray, and the company should be applauded for its guts. But when the applause and the excitement die, I hope they can give us all greater clarity as to why they chose this particular path to globalization.

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Filed Under: China Breaks Out, Craft

China’s M&A Communications Problem: The Bankers Get It…

November 29, 2010 By

In the Hutong
Wikileaking
1531 hrs.

In an excellent article in today’s Wall Street Journal, Alison Tudor notes that Chinese firms are increasingly targeting consumer and media companies in their acquisition efforts abroad. Whether or not you agree if this is a new trend, Tudor’s review of China’s challenges in this effort is very good.

I say that because in particular her identification of communications issues as an M&A barrier comes up just below the fold:

Expansion-hungry Chinese companies are likely to encounter some of the same resistance that has snarled foreign deals in nonconsumer industries. To ease fears of the “800-pound gorilla that’s called China,” acquirers should communicate extensively with regulators and the public before pouncing, said Fred Hu, chairman of Primavera Capital Corp.

The good news in this story is that the warning comes not from another communications professional, but from the chairman of a respected investment house. Now that the bankers have caught on to the problem, the question is whether the prospective Chinese acquirers plan to do anything about it.

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Filed Under: China Breaks Out, Craft

Rebuilding Hollywood with BRICs

September 14, 2010 By
Hollywood is a well-known area of Los Angeles ...

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In the Hutong
Running a sand-table exercise
1930 hrs.

Keith Richburg and Zhang Jie wrote an enjoyable piece in The Washington Post about the different ways in which the U.S. film industry is seeking to tap Hollywood. The article is encouraging in that it suggests that Hollywood is getting over its blinkered view of China as a really big version of France (big market, different language, resists our product, resistance is futile, will eventually be assimilated.)

The article notes that product placement, scripts (read “story ideas”) and locales have made China more interesting to Hollywood. There is even a bit about the importance of “co-productions.”

It’s Spelled O-P-M

The biggest attraction, however, is cash.

For Hollywood, the reason for the sudden interest in China might be described as more mercenary. Hollywood traditionally runs on other people’s money – and China has a lot of cash to spread around these days.

Our favorite films notwithstanding, Tinseltown’s most remarkable achievement is its consistent ability to get outsiders to fund a business that is as unapologetically opaque as it is inherently risky.

In succession, Hollywood has tapped (and tapped out) Main Street USA (Gulf & Western, Kinney, Coca-Cola, General Electric), Main Street Japan (Matsushita, Sony) Main Street Europe (Vivendi), and Wall Street (take your pick of hedge fund and private equity-funded film partnerships and virtual studios). In the wake of the financial crisis and the drying of the Wall Street wells, the emerging markets were a logical next target.

It took someone with the foresight (or desperation) of Stephen Spielberg to lead the way. Spielberg, a producer/director not normally associated with low-budget, high-return films, began the trend when he longtime collaborator Stacey Snider closed a $1.2 billion deal with India’s Reliance ADA Group to produce six films a year.

Barring an abrupt change in the mood on Wall Street, China looks to be next to fall into the celluloid web.

Or is it?

I’m Ready for my Closeup Now, Mr. Lou

Hollywood’s major studios and their affiliated production companies need literally billions of dollars a year to finance slates of films costing upwards of $100 million each to produce and market. There are a very limited number of entities in China capable of investing at that scale: the major state-owned banks, China Investment Corporation, and a handful of large state-owned industrial companies.

And while the leaders of those firms might well be attracted to Hollywood’s glamour, the Industry’s need comes at an inopportune time. CIC’s large paper losses in Blackstone Group caused an uproar, and the financial crisis has placed the stewards of the people’s funds under uncomfortable scrutiny at home. Senior cadres can well imagine the popular backlash that would occur if it were to become known that national wealth was lost investing in Hollywood flicks, and would be anxious to avoid such a scenario.

It is also instructive to remember the popular consternation whipped up in the US when Japanese keiretsu began to invest heavily in Hollywood. That storm would be a squall compared to the typhoon of opposition and angst blowing out of all corners of the US if a Chinese government-owned entity attempted to buy into Hollywood. Hollywood’s leaders need to think carefully about whether they want to fritter their political capital in Washington on such a quest.

None of which is to suggest that China will stay out of Hollywood: the kind of picture-by-picture deals that the WaPo article alludes to will continue and grow, and I think we can expect slow but growing connections between the US and Chinese film industries.

But we would be wrong to forget that the dynamics driving The Biz in the two countries are vastly different, as are the cultures they are spawning, and that it is a sizeable leap from an increase in co-productions to China replacing Wall Street as Hollywood’s Sugar Daddy.

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Filed Under: China Breaks Out, Film

Responsa: Dealing With the Disposable Backhoe

September 1, 2010 By
Caterpillar 12G grader.

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In the Hutong
Managing the Phoenix
1330 hrs.

Jack Perkowski continues our serve-and-volley on the future of China’s construction equipment makers here on his Managing The Dragon blog, and he brings out the Caterpillar fanboy in me when he notes:

“How should Cat, Komatsu, and the other global leaders prepare for Chinese competition overseas? By far, the best way is to compete successfully with them in China.  That is why the battle for the construction equipment market in China is so critically important.”

That seems obvious, but the next logical question is how?

They Drive ‘Em Different Here

The global majors are geared up to compete in very different kinds of markets. In any ordinary market, you are selling a piece of equipment to a construction company that is concerned about things like the total cost of ownership of a road grader over a 10-20 year life. To serve markets like that, companies like Caterpillar design their equipment to maybe be a bit more expensive up front, but cheaper to own over the long term. They support that with a dealer network, and they have a growing division that rebuilds the big machines, extending the lives of the equipment even further.

China is not an ordinary market. There are exceptions, but I am willing to bet that the average construction equipment customer is thinking rather less long term. He probably wants to buy a backhoe that will be less expensive up front, will save enough money so he can buy two rather than one, that can be repaired cheaply, and that may even be dumped or sold to someone in one of the inland provinces after a couple of major jobs.

As an aside, I know a little something of what I speak. The Hutong Party Secretary spent a good bit of time in her career trying to sell Linde forklifts to both Chinese and Western companies here in China. (For those who are not in the materials handling business, it is worth noting that Linde are the Porsche of forklifts, and offer many of the advantages over their local competition that Cat and Komatsu do.) No surprise: the western companies, concerned about total cost of ownership and the lot, bought lots of Linde forklifts. But our Hutong Party Secretary was extremely challenged trying to sell any to local firms.

The pushback? They didn’t care about the quality. Breakdowns a problem? No worries – if we can buy three local machines for the price of one Linde (the differential wasn’t that large, but this is for illustration), we’ll buy two local machines and one will be operating while the other is being fixed, and we’ll still save money.

How does a company that extols its innovation, quality, durability, technology, and dealer support go head to head against companies that are ready to sell two disposable backhoes for the price of one good one?

Playing A New Game

At some point, in order to fight back without undermining their own corporate image, Caterpillar, Komatsu, Volvo, Bobcat, Kubota, and any other global equipment maker who wants to compete in China is going to have to find a way to win on the customer’s terms. And they are starting to get that.

Late in August, Caterpillar’s new CEO, Doug Oberhelman, came through China in the wake of a promise he made to Cat shareholders that he would make the company the leader in construction equipment in China by 2015. In an interview with Andrew Browne at The Wall Street Journal, Oberhelman hints at the foundation of a new China strategy.

[Oberhelman] said Tuesday that some Chinese equipment companies have become “pretty darned good” and that Caterpillar is studying their operations, including their product designs, as it goes toe-to-toe with them in China and, increasingly, in the U.S. and Europe, where good-quality Chinese exports are taking hold.

The exercise is driving down costs at Caterpillar and encouraging innovation, he said. Already, Chinese engineers are developing parts for Caterpillar wheel-loaders, a type of tractor that is made in China for a domestic market. Of the company’s 6,200 employees in China, only about 100 are expatriates, Mr. Oberhelman said, including managers brought in from other Asian countries. “We’re pretty Chinese,” he said.

Based on these and other directions that the market is taking, I would expect a global construction equipment maker to pursue some mix of the following three approaches in the effort to go head-to-head with the locals.

Three Strategic Directions

First would be to sell second-hand, factory refurbished machines. As I noted, Caterpillar has made a huge businesses rebuilding and refurbishing construction equipment. China might be a good place to sell some of that gear, especially since I suspect there is plenty of it floating around in the depressed construction markets of the world.

Second would be to buy a local construction equipment manufacturer. That might be tough, though: China has proven itself rather touchy about selling off healthy companies, especially in this sector. As other companies have discovered, betting your future on a complex local acquisition often takes management attention away from other means of building business. But if the right opportunity comes along (an underperforming factory, for example) and the government gives a quiet nod, expect a bidding war.

Third – and I like this best – would be to launch an OEM line of construction equipment carrying a different brand, using local designs but with inspectors and other “soft inputs” from the international company. It would not be necessary to own the factory, just to contract the production capacity. The separate brand creates the division between the quality standard of the core brand, while offering many of the advantages of working with the global brand. The company would offer that brand alongside its own in China and in export markets in the developing world, where Perkowski notes the Chinese manufacturers will be looking when it is time for them to export.

The Stakes

I am reflexively skeptical of any company who makes the case for doing business in China by saying that success elsewhere depends on success in China. That sort of thinking tends to lead to bad business decisions, like foregoing profits for market-share victory. If you are not planning on making money in a given market, you are effectively declaring it a money sewer, and down that path lies heartache.

But for the world’s leading construction equipment manufacturers, what is at stake is that in order to thrive on the development of the world’s emerging economies, those companies need to build large and profitable businesses in China serving the full range of customers. China is a must win, but the Big Iron merchants must win on China’s terms, not their own.

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Filed Under: China Breaks Out, Development, Policy & Governance

Schell Gets China Investment Problem Half Right

August 24, 2010 By

In the Hutong
Working on contracts
1052 hrs.

As is the case with many China watchers who came of age in the 1980s, I am a longtime admirer of Orville Schell’s writings on China. His books have been an essential companion to those of us seeking to understand the PRC and the social impact of the nation’s economic and political evolution.

But in a recent article in Project Syndicate, “The China Investment Challenge,” Schell, the former Dean of the Graduate School of Journalism at the University of California, Berkeley, takes a surprisingly one-sided view on the matter of China’s investments overseas. He concludes:

If American officials do not begin to recognize the realities of today’s globalized world, the US may unwittingly (and self-destructively) find itself cut off from the kinds of new foreign investment flows that are sorely needed to revitalize its manufacturing and infrastructure sectors.

The congressional xenophobia that has blocked major foreign direct investment or acquisitions of ailing U.S. firms is lamentable, if not disgusting. But it is also predictable: America has experienced recurring bouts of fear and loathing toward foreign investment throughout its history. In recent years, Our Distinguished Solons have balked at investments from Japan, the Gulf States, and Europe. China is by no means alone. A well-advised, thoughtful Chinese effort to purchase any major US firm or asset would have considered history, causing the potential buyer to approach the purchase with greater care.

And this is the rub: half of the problem with Chinese companies buying American firms is U.S. opposition to Chinese investment. The other, more important half of the problem – which Schell alludes to but then ignores – is the core cause of that opposition, which is that the average U.S. voter and his elected representative do not trust China or Chinese companies. That is not the fault of the U.S. Congress. That is the failing of a China that has not yet learned the importance of currying the trust of the outside world.

I suspect it will take some time before the leaders of the People’s Republic take that need to heart. In the meantime, it falls upon the shoulders of Chinese enterprises seeking to invest or acquire in the United States to build that trust among Americans in spite of whatever they may think of China as a whole. It is certainly doable. Even in the height of “Rising Sun” Nipponophobia in the United States in the late 1980s, a handful of companies managed to rise above the fracas, including, notably, Sony, Toyota, Nissan, Toshiba, and Nintendo.

Chinese companies serious about investing in the United States – or Australia, New Zealand, Canada, or any other country where trust of China has become an issue – need to recognize that Brand China looks to many Americans like the Death Star from the Star Wars movies, and that the companies on their own need to build contacts, trust, and goodwill among the wider citizenry long before leaping into the fray. Until Chinese firms acknowledge that fact and act on it, the doors will remain closed, and the safe move on Capitol Hill will always be the blocking maneuver.

Filed Under: China Breaks Out
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