Perhaps more so than any other market, China gives proof to the axiom that no success is ever permanent, and no failure is ever final.
Category: China Rules
Looking at how the rise of China is altering the rules of diplomacy, economics, business, national security, the academy, and the arts.
In a major relief for the Indian government and consumers, crude palm oil (CPO) prices are likely to decline by nearly 15 per cent before the end of 2017 due to bumper supply from Indonesia and Malaysia, the world’s two largest producers of the oil
A fall in demand of palm oil wouldn’t be a bad thing for the world. Of all of the vegetable-based oils, palm is one of the least healthy, and it tends to get dumped on price-sensitive consumers around Asia.
India is the world’s largest market for palm oil. China held that title as recently as 2009, but as incomes have risen, palm oil has been discarded for a mix of healthier cooking oil alternatives.
China is the harbinger of a bigger trend, and Malaysia and Indonesia should be concerned: this is the beginning of a long-term secular decline in a key commodity.
“It would be a big mistake to adapt to a market,” [Patek Philippe owner Thierry Stern] told the Straits Times in an interview. “If people like Patek Philippe, it’s because they like the design and the philosophy of the brand. If you start to adapt yourself to every market, you are going to lose that.”
Thierry should be lauded for not adapting Patek-Philippe for China. This is a man who understands the problems that arise when you start pandering to your market rather than catering to it.
That said, not every company shows up in China with a Patek Philippe brand cachet or customer base, and few brands could get away with imitating Stern’s strategy.
The lesson to learn from Thierry Stern’s approach is that the decision on whether or not to adapt your strategy, your product, or your entire company to China has to be based on a clear understanding of your appeal with Chinese consumers, as well as a recognition of what you might lose globally by making compromises for a single market.
I hear a lot these days about the ostensible “comeback” in China’s luxury market. LVMH’s recent results suggest more aggressive marketing and a possible dead-cat bounce more than a sudden return to the luxury market.
The social fundamentals in China are changing luxury consumption patterns, and possibly for good. So the luxury market in China is not coming back – it is changing, moving on, evolving.
Back in June, Salon published a listicle detailing “5 Major Threats to Further Hasten Uber’s Decline.” Listing the sexual harassment lawsuits, the mishandling of a driver rape case, improper driver classification, the Waymo issue, and Greyball, it was better clickbait than it was journalism, doing little more than offering a summary of recent headlines. Thanks for the update, Salon.
While each of these represents a serious crisis, and while the company is being tested in its ability to deal with one, much less all of them, arguably each of these are, separately and collectively, crises that the company can survive.
Rather more ominous is the insight offered by RadioFreeMobile on the accelerating erosion of Uber’s global markets. “First Uber lost China, then Russia, and now it looks as if South East Asia may go the same way.”
He then goes on to detail the strategic investments made by Softbank and Didi into Grab, the dominant ride-hailing platform in Malaysia, Singapore, Indonesia, Thailand, Vietnam and Philippines, with a 97% share in those markets. A dominant market leader fortified with loads of cash means that Uber is essentially locked out of markets with over 560 million people, in addition to the 1.5 billion Chinese and 300 million Russians who will not be using an Uber service soon.
The big question now is where India and Brazil will go.
Uber is on its back foot in international markets. You can argue, as does RadioFreeMobile, that the distractions listed by Salon are not helping, and you’d be right. But those issues are not the cause of Uber’s missteps outside the US: the strategic flaws that have undermined Uber’s global expansion predate Salon’s list and are rooted in the nature of the company.
As I said recently on Twitter, when historians ultimately close the book on Uber, they will agree that the fall began with Uber’s failure in China. Not that Uber’s China missteps will be seen as the cause of the company’s demise, mind you, but as the first clear indication that its strategic miscalculations and flawed leadership left the rest of the world beyond Uber’s reach.
Watching the Sino-US relationship evolve, and then not evolve, since the inauguration of President Donald Trump, I have to confess some disappointment. Let me qualify what follows by noting that I am not a fan of POTUS 45. I not only crossed party lines to vote against him, I left the GOP outright and joined a tiny third party when he was selected as the Republican nominee.
So all of that said, we have reached a point in the relationship between the US and China such that a reset is in order. It has been 44 years since Nixon went to China, and nearly 40 years since Jimmy Carter and Deng Xiaoping recalibrated the US-China relationship.
That relationship was formed when the United States was entering the fourth decade of its Cold War with the Soviet Union and the Sino-US tie-up promised to subtly but importantly shift the balance of power in favor of the West. It was formed when China was crawling out the wreckage of the Cultural Revolution, and out from under the long shadow of Mao Zedong.
That relationship was framed between a large and slightly desperate third-world country that constituted absolutely zero threat the world order and a developed nation that boasted the most prosperous economy in history, the most powerful military on Earth, and leadership of an international system that it had forged with its allies a mere three decades before.
Four decades hence, China has changed, the United States has changed, and the world has changed. Yet we have been conducting this bi-lateral relationship on terms that are increasingly irrelevant and unrealistic. Let me put that another way: the US continues to conduct its side of the relationship on that basis. China has made clear to us for a long time – without ever actually saying it – that it will conduct its relationship with us on terms dictated at least as much by immediate expediency as decades-old agreements.
So it is time for a strategic reset in our relationship that accurately reflects what China is and wishes to become, who we are and what we wish to become, and the fluid state of the global order.
The call that Trump placed to President Tsai of Taiwan, representing as it did a break from diplomatic tradition if not international accords, once appeared to be Trump’s opening gambit in his version of that reset in the Sino-US relationship, and a possible change in the rules that govern that relationship.
That no longer seems the case, and one can hope that the change in tone from the White House reflects a practical desire to compel a resolution to the North Korea question rather than acquiescence to a Chinese view of international affairs. Putting off a reset in Sino-US relations for too long will only make the necessary changes all the more disruptive.
Happy July 4th!
- Trust. For a long time, people in China were wary of e-commerce in China because they were simply afraid of getting ripped off when buying goods sight unseen. We didn’t really face that issue in the US to the same extent, because Sears, Wards, and JC Penney had been selling goods to Americans sight-unseen for over a century. Over that time, we had not only discovered which mail-order brands we could trust to “deliver the goods,” we also compelled the creation of terms, conditions, and practices that formed an (often unspoken) contract between retailer and buyer. When it created Taobao, Alibaba put together a series of terms and conditions that allowed both early adopters and the mass market to trust them enough to send their money into the ether. That trust went deep enough that, with Alipay, Chinese now trust Alibaba with their money.
- Experience. Alibaba understood from the outset that it needed to offer a an efficient and enjoyble buying experience, but that it did not need to go crazy. The company understood that it had a low bar. The Chinese retail experience was always miserable, and has improved only a little over the past two decades. Simply by making the experience a bit better than what you get at a typical Chinese retail store, and spending the rest of their effort on reliability and trust, Alibaba won.
- Scope. As Jeff Bezos understood, the key to winning in electronic commerce was not to focus on being the best bookstore, or grocery store, or anything store. The key was becoming the go-to place to shop, regardless of what you want to buy. Alibaba used Taobao to build unmatchable scope in a very short period of time. Now the default choices are traditional retail and Taobao, and everyone else has to fight harder for consideration, even as a specialized niche site.
It is difficult to see how anyone might knock that wall down.
Still, Alibaba faces two challenges. First, it has to figure out how it can continue to sustain high growth once it has secured its role of China’s national online department store. That market does not continue growing at double-digits forever, and Alibaba is already hunting for how to grab the next large chunk of users’ wallets – or extend its strengths abroad.
The second challenge is that as e-commerce matures, more companies will figure out how to build their own retail empires, much like Xiaomi – and, to a lesser extent, Apple – has done. Once Taobao and TMall have accustomed people to buying big brand merchandise online, the value for brands of building their own sites begins to grow. Alibaba will be challenged to address the defection danger in the coming 2-3 years.
For now, though, Alibaba sits pretty, all based on an unimpeded view and unmatched understanding of the Chinese consumer.
Apropos of my post last week about Wanda, a quick thought.
One of the issues that remains a matter of our ongoing fascination with Wanda revolves around a series of important questions that remain largely unspoken: Do Wang’s purchases in the US constitute a simple diversification of his investments? Are they part of a strategy to globalize his businesses?
Or are we witnessing something quite different, Wang’s slow divestment out of China and the flight of his capital to safer havens abroad? And if not a flight out of China, is he at least shifting his money out of real estate?
The company bears close scrutiny if for no other reason than they are a harbinger of what is likely to be a larger trend, and understanding the forces that drive this trend are going to be essential in helping business address Wanda as a strategic challenge, and policymakers address it from a regulatory standpoint.
All very interesting, but it serves as a reminder that GM is still playing catch-up with Tesla in the space.
I’d still by a Tesla before a Cadillac, and I reckon I’m not alone in either the US or China. What about you?
Apocryphal, to be sure, but it suggests that the venerable marque has a brand problem that innovation alone will not solve. I suspect that winning in China will be critical for the future of the Cadillac brand, determining whether it keeps up with Lexus, or whether it struggles to keep pace with Lincoln.
In 2007, Yahoo agreed to pay millions of dollars to set up a foundation to aid Chinese political dissidents, after the company was accused of turning over information to the Chinese government. A lawsuit filed on Tuesday claims most of the money is gone, and little went to help imprisoned activists.
Yahoo! made billions on its Alibaba investment, and for many years could credit the Alibaba shares in its vaults for much of its market cap. For that reason, a lot of us would mark Yahoo’s efforts in China as a success.
It is probably too early to make that call. The full story of the company’s China experience has yet to be told, and now that Yahoo no longer exists as an independent entity, it will either be told now or buried for a long time.
But some things won’t die, and if this most recent lawsuit actually makes it to a courtroom, we may get to see the details of how successive generations of leaders at Yahoo used China to burn cash, divert the attention of company leadership, and destroy shareholder value.
Sadly, I’m betting this case will settle. Verizon doesn’t need the headache, and it really wants to get focused on turning its collection of Yahoo and AOL leftovers into something profitable. It is a shame: buried in Yahoo’s vaults lies the raw material of a China business “how-not-to” textbook.
Even if LeEco and the rest of Jia Yueting‘s business holdings implode over the next few weeks, those of us who will pick through the wreckage looking for the lessons will surely learn two things very quickly.
The first thing that we will discover will be that anyone who dismisses Jia as a “fool” or an “idiot” will be wrong. Under the bluster, we will find that Jia is an exceptionally smart guy who had a fantastic vision for his company.
The second thing we will find is that the reason for Jia’s failure was not his overall strategy. Let me explain that a bit.
Jia is an implicit subscriber to an ethos that is common among entrepreneurs that I call “conglomeration mystique.” Seeing himself as cut from the same cloth as Elon Musk, Steve Jobs, and Jeff Bezos, Jia sees no reason why he cannot do what they did.
All things being equal, he’s right. Other entrepreneurs, supported by a war chest from a core cash-cow business, have leapt into unrelated fields and surprised their critics. I know of no gift possessed by those people that Mr. Jia might have lacked. So the vision was not wrong.
Jia’s mistake is one that has plagued so many Chinese entrepreneurs: operating in a market that rewards speed and short-termism, he became convinced that he had to do everything right now, or the opportunity would be lost to him.
As the Bloomberg article hints, Jia’s pace of execution outstripped his ability to build the capital to support it. At several points, he likely had the choice to slow down and let the capital catch up. Instead, he chose to risk overextension, to gamble on things working out just right, and in so doing proved Gordon Sullivan’s maxim that “hope is not a method.”
The question this leaves is thus: how do you get an entrepreneur, forged in China’s Make-It-Today-For-Tomorrow-The-Government-Will-Change-the-Rules business environment, to eschew the very thinking that made him money in the first place? I don’t think you can, which means that the kind of grand-scale Hail Mary approach that has tripped LeEco is likely to become a fixture on the China business scene in the coming years.
For some, it will work. And LeEco is down, but it is not out, yet.
In all of the discussion lately about Uber in China, one topic that is not getting a lot of airplay is the way in which the outcome for Uber is being positioned. One person for whom I have a great deal of respect believes that Uber did great, that they wound up with exactly what they wanted in the first place, and that overall the outcome – as junior partner to Didi Chuxing in a combined business – is a victory for Uber.
As I mentioned in an earlier post, to me that seems a bit like spin. First, it is highly unlikely that this is the outcome Uber sought all along. Had it sought a minority stake in Didi, it could have (as Apple did recently) simply written a check, swapped stock, and agreed to work together globally. And it could have been done more quickly, easily, and with less of a drain on company attention and coffers.
Second, all that their efforts won them is a weak role in Didi, just another seat at the table with a group of powerful investors to whom Uber is a very small potato. Had they gone in with an offer early, they may well have saved everyone money and saved Didi from the need to turn to outside investors. Uber may well have ended up with a less diluted position.
Third, they sit with no better odds of a payoff now than before. Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.
Finally, with its new A-List of global investors, Didi may well prove to be a more formidable rival outside of China in the long term than it might have been otherwise, especially if Uber had shown up at the beginning offering a strategic tie-up. Now Didi has international ambitions, and with an 85% market share at home in a much bigger market, will be in a better position to face Uber in other markets.
So did Uber win? Events will tell us, but probably not for some time. And that’s about the most you can say. From a removed perspective today, Uber is salvaging the most it can from a shipwreck, and pretending that it intended to be on the rocks all along won’t do much for the company’s credibility with the Street.
For two years, Jean Liu and Travis Kalanick were mortal adversaries, as their businesses, the world’s two largest ride-sharing companies, fought an increasingly bitter and expensive war. Kalanick, CEO of Uber, the San Francisco-based ride-hailing app, was trying to muscle into China, where Liu is president of Didi Chuxing, Uber’s Chinese equivalent.
Charles Clover at the FT offers this dramatic lede for an article that lays the credit for Uber’s defeat in China at the feet of Didi Chuxing’s Jean Liu.
Ms. Liu and her team at Didi deserve much credit for their victory in China’s shared-ride wars. All of us wish them only the best as they take on what will undoubtedly prove to be the far more formidable adversary: a Chinese government decidedly uncomfortable with leaving in the hands of a privately-owned company an increasingly essential piece of the nation’s transportation infrastructure.
But an honest assessment of the battle must conclude that Ms. Liu was helped at many turns by a series of unforced errors on Uber’s part. I won’t go into them here – take a look at my interview with Jeremy Goldkorn at SupChina, where I lay out Uber’s four most fundamental mistakes in China.
In addition, let’s also remember a few things:
- Didi’s financial backers gave the company the war chest it needed to fight a street battle of attrition against one of the planet’s best funded unicorns.
- Ms. Liu’s boss, Didi Chairman Cheng Wei, was hardly a figure head in this battle. Not for nothing did Forbes Asia name him 2016 Businessman of the Year.
- Didi came to the battle fighting on familiar, home ground, and was in substantial possession of the field already when Uber showed up. Uber was battling an entrenched player as an interloping underdog in a market increasingly unfriendly to outsiders. Uber’s rhetoric and war-chest aside, they were the weaker player.
- It was not “Jean vs. Travis.” It was Jean vs. the Uber China team, and as time goes on it will become more clear that Travis and his team were relatively hands-off, allowing the local team to run things. Didi defeated Travis’s partner’s team.
- Regulatory changes in the market played a significant role in the driving Uber’s surrender. Unless Didi orchestrated those (not impossible), the government was also a player in the game. And if Didi did orchestrate those, protectionism beat Uber as much as Didi’s executive team.
To the victor goeth the spoils, and Ms. Liu is clearly a capable executive whose career is now pointed toward even bigger and better things. But there is nothing learned by pretending that this was not a far more complex battle than the FT seeks to portray as it graces Ms. Liu with the laurels.
One more interesting point from the article. Ms. Liu and Didi continue to play the outcome as a “win-win” for Didi and Uber. I’ve spent a career in PR in China, and to me that messaging carries a very heavy whiff of spin. I’ll explain why in a later post.
Shivering in SoCal
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.
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.