Silicon Hutong

China and the World of Business • China Business and the World

Silicon Hutong - China and the World of Business • China Business and the World

The Innovation Trail: Hisilicon

Hutong West
Blue Moon and Justified
1942 hrs

When challenged to come up with examples of innovative Chinese companies – or those that might start innovating soon – many of us are hard-pressed to come up with names beyond the obvious Tencent, Huawei, and Lenovo. To help remedy this, and to make a balanced case for China as an innovator, I am going to start highlighting select Chinese companies that I believe are moving in that direction.

One company to keep on the radar is Hisilicon. Formerly Huawei’s application-specific chip (ASIC) division, Hisilicon has developed a system-on-a-chip (SOC) product line designed for mobile devices. The recent announcement that Huawei will be using Hisilicon chips in its upcoming flagship Ascend P7 mobile phone offers no surprise – on the surface. In fact, a skeptic might suggest that Hisense winning a spot on a a Huawei device is so much internal self-dealing.

The skeptic would be only half right. Huawei’s mobile device team are a loyal bunch, but the company’s leaders are no idiots. To risk the company’s tenuous reputation among consumers in an insanely competitive market merely to engage in some gratuitous dogfooding is uncharacteristic of the firm. Something else is going on, and it is likely that Hisilicon is sneaking up on the better-known MicroTek in its ability to provide the processing power for complex smartphones. If that is the case, Hisilicon is about to pop onto the radars of both Qualcomm and Intel as well.

Before we add Hisilicon to the ranks of mobile chip powerhouses, however, we need to add an important caveat. It makes good sense for Huawei to buy from Hisilicon if it can, but it probably does not make as much sense for other manufacturers. Putting a chip into a phone design involves more than just buying processors off the shelf and sticking them on a printed circuit board. Smartphone testing and development demands close cooperation between component providers, essentially letting everyone in the process into a lot of proprietary secrets.

If I were a smartphone manufacturer, I would look at Hisense SOCs in the same way that I would look at Samsung memory: whatever the virtues of the silicon, I am giving my competitor a close-up look at my mojo. In a world where Samsung and Huawei are pulling out all stops to lead the smartphone business, that’s writing an invitation to my own funeral.

So that is why I am watching Hisilicon. The technical capabilities are growing to the point where the company is likely to become a nexus of innovation, but the commercial challenges it faces are interesting indeed.

China’s Great Innovations: Way More than Four

The 50 Greatest Breakthroughs Since the Wheel
James Fallows
The Atlantic

October 23, 2013

Doing book research (and shifting as much of it from my bookshelf to Evernote as possible), I came across this little gem that had escaped my attention while I was on the road last fall.

James Fallows turned to some experts to help him come up with the 50 greatest post-wheel innovations, and while each deserves a book – or at least a long chapter – the list is intriguing for several reasons. My favorite: counting the innovations that first came out of China.

From the top 50, they are:

  • 43. The abacus
  • 17. The compass
  • 14. Gunpowder
  • 6. Paper
  • 1. Moveable type printing

Two points fascinated me. First was printing press showing up on top, and the fact that the article does not ascribe an origin to the invention. People who have studied the history of Chinese innovation understand that the movable-type printing press was invented in China by Bi Sheng some 400 years before Johannes Gutenberg and Laurens Janszoon Coster argued about who of the two of them was first. History will out, though, and China gets credit for the most important innovation since the wheel.

Speaking of wheels, a sort of honorable mention on the list goes to the wheel barrow, a simple device created in China that allows a man to move heavier loads than he can carry without the aid of an animal. And I always search these lists for acknowledgement for China’s invention of investment casting, a process that turned complex metalworking from a handicraft to a mass-production process.

But these are quibbles. The point that the article brings home is that China was once far more innovative than we – and, indeed, Chinese – give it credit. While taking credit for four great innovations, China deserves credit for at least five, and probably more.

The perpetual challenge, of course, is how to make it innovative again. And to that theme we shall return in due course.

Why Robots Won’t Save China’s Factories

Somewhere near Bengbu
Riding the Rails
1112 hrs

If we have not witnessed the peak of mass production in China already, we will soon.

It is not just that costs are rising and production is moving elsewhere: the entire mass production model may well have jumped the shark. The growing costs of energy and commodities, as well as the coming end to the ability of enterprise to externalize the social costs of production will make mass production look increasingly wasteful.

We are leaving the age of “make enough so that everyone has what they want,” and coming into the age of “make just enough of the right stuff.”

Mass is Over…

With due respect to Henry Ford, we are witnessing the birth of a long-term trend away from mass production and toward an industrial model that manufactures a product only when a customer wants it, how she wants it, and where she wants to use it.

This will undermine the consumer model predicated on planned obsolescence, overproduction, and disposable components, and will ultimately destroy economies of scale as the means to lower costs and profit. That means moving the production closer and closer to the customer, and the growth of mass customization. That, in turn, spells the end of our reliance on mass production, and that will turn every shopping mall into a factory floor.

None of this should come as much of a surprise. Mass customization has been a meme of futurists for over a decade, and technologies like print-on-demand and 3D printing are but the harbingers of a new industrial revolution that will turn the point-of-sale into not only the point of production, but, increasingly, the point of design as well.

…So are China’s Days as the World’s Factory

But the implications for China are potentially immense. It suggest that, for most Chinese manufacturers, automation will only delay the inevitable. After all, who needs a factory in China manufacturing blue jeans when you can get yours custom sewed based on your measurements and preference right at the store? Or have your phone assembled for you at a local factory, shipped to you, then upgraded rather than changed when the time comes?

What applies to finished product applies to components as well. Fabric can be woven in custom lots as and when needed – it is not hard to visualize a Home Depot-sized warehouse store filled with machines that will knit, weave, and dye on demand, or a ballroom-sized microchip fab that turns out programmable or application-specific chips in tiny lots.

The future of Chinese manufacturing, then, lies not in producing consumer products for the world, but in producing consumer products for itself, and, I expect, building the machines that make local, personal production possible.

China’s Microfacturing Future

This will not happen right away: China’s mass-production manufacturers still have a long runway ahead as the world retools. It is also likely that the economies of mass production will continue to be essential for low-cost products for sale to developing nations.

But for producers catering to the developed world and the global upper- and middle-classes, that runway is not as long as some would wish. Our best guess: a decade at the outside, but likely less.

Watching this evolve will be fascinating. China, Europe, and the US will be scrambling for the lead as the world’s factory moves in next to the cash register, and it’s anyone’s horse race.

Luxury Cars: The Non-China Chinese Market

Lamborghini & Ferraris

Lamborghini & Ferraris (Photo credit: Axion23)

In the Hutong
Work Break
1945 hrs.

On Valentine’s Day, the always excellent Jing Daily published an article (“Ultra-Luxury Auto Sales In China Surprisingly Robust, But Are They Sustainable?“) that calls into question whether those stunning new Lotus, Maserati, Bentley, and Ferrari dealerships that are sprouting up around China are in for some hard times. Economic uncertainty and the potential that Xi Jinping‘s administration might discourage conspicuous consumption apparently has many buyers holding off on purchases. The spectacular Beijing accident a year ago that claimed the son of a powerful Party official and one of his passengers has made ultra-luxury cars an unintentional symbol of cosseted elites and official malfeasance. Markers of success are becoming stigmata of excess.

But the Chinese party is not over for the luxury car-makers, although a change in strategy may be in the offing. It may be time for the Ferraris and Bugattis of the world to learn from the purveyors of less expensive luxury goods, because the real market may not be in China: there is a fair chance that the majority of Chinese who will be buying ultra-luxury cars in the future will be buying them overseas.

Naturally they won’t be doing so in order to ship the cars back to the PRC (with the exception of the occasional gray-market beast that cannot be found in China or Hong Kong). Instead, they will be buying their high-speed bling to park them in the garages and and driveways of the homes they are buying in North America, Europe, and Australia.

Adjusting to this shift will mean changes in the way these cars are sold outside of China. Dealerships will need Chinese speakers on the showroom floor and in the service bays. Sales literature and owners manuals will need to be available in Chinese as well as the local language. Manufacturers will need to create Chinese websites for markets where Chinese isn’t usually spoken. And that is just a starter list.

The really smart manufacturers will set up Chinese-language customer service hotlines and owners clubs that cater to Chinese speakers in North America and Europe at least. They will advertise online in Chinese and in the mass media of the Chinese diaspora. And if they’re really smart, they’ll offer those special models and features that are designed to cater to the tastes of the new global Chinese elite.

None of this is mandatory, of course. For some brands, the snob appeal is derived in part by the derision with which it treats even its best-heeled customers. But the wiser luxury car manufacturers will realize that the Chinese are coming to the world: best to reach out and meet them before they decamp to the competition – or decide to spend their money on something else.

Luxury Goods: Meet the Experience Hunters

Rodeo Drive in Beverly Hills

Rodeo Drive in Beverly Hills (Photo credit: Wikipedia)

In the Hutong
Warming-up a little
1453 hrs.

The Chinese New Year holiday is a period where many of China’s well-heeled consumers travel abroad, so it was no surprise that CCTV ran a story on how many Chinese consumers use their trips not just for sightseeing and relaxation, but for buying luxury goods. The national broadcaster took China’s 80 million international travelers to task for spending $30 billion abroad last year buying luxury goods, and criticizing them for not spending that money at home.

Laurie Burkitt at The Wall Street Journal picked up the story, noting that Chinese duties raise the price of Rolex watches, Gucci shoes and Louis Vuitton purses between 30% and 50%. One can see why the government is concerned: that’s somewhere between $9 billion and $15 billion in lost import duties, plus the lost value of rents, income taxes for shop workers, etc. The brands are starting to realize where the bread is landing: Gucci is apparently halting all domestic Chinese expansion plans.

Luxury is an Experience, not a Purse

The media coverage of this transnational luxury buying spree implies that a hunt for bargains is all that sends these buyers abroad. Yet while price is doubtless an important motivator, there is more to it. What most analysts – and probably a few brands – are missing is the unarticulated value luxury consumers place on the experience, those intangible factors that makes buying the purse, the shoes, the watch, the dress so deeply satisfying.

One factor for Chinese in particular is mental comfort. It is not much fun consuming conspicuously in an environment that heaps growing opprobrium on bling buyers. Better to go somewhere where your purchase is at least taken in stride, if not celebrated. These days, that means buying in Hong Kong, Tokyo, Singapore, New York, Beverly Hills, London, Paris, or Milan – not Beijing or Shanghai.

But there are other factors that make up the luxury buying experience, factors captured in such post-buying questions as:

  • Where did I buy this?
  • What was the service like?
  • Did the salespeople make me feel at home?
  • Why was the experience special?
  • What was different  about buying there than in China?
  • What was I able to get there that I couldn’t in China…or anywhere else?

Any and all of these factors have the potential add greater meaning to the purchase, make its acquisition more gratifying, and deepen the relationship with the brand. Equally important, they add to the “show-off” or “shai” value of the item. The new owner not only gets to show-off the bauble to her friends, she also gets an excuse to relate the trip, the circumstances, and the feelings she took from the purchase process itself, all to the admiration (or envy) of the people whose respect is important to her.

Some Brands Get It

On a vacation trip in 2008, my wife bought a limited-edition LeSportsac Tokidoki handbag designed by Simone Legno at the LeSportsac store on Waikiki. The store was a delight, the location superb, the service was so good that even my son and I felt good about coming into the store, and that is saying something. My wife had never heard of Tokidoki  before, but the whole experience of buying the bag was such a delight that she came back the next day to buy one for her mom. To this day, five years later, she still talks about the bag, and has a deep affinity for LeSportsac.

Christine Lu of Affinity China is out ahead of the industry. She has begun leading luxury shopping tours of the U.S. for Chinese ladies that go beyond high-end store-hopping. Shops on Rodeo Drive, Park Avenue, and Waikiki are prepared in advance, provide engraved invitations, put on private fashion shows with Chinese narration, serve champagne and chocolates, and arrange to have purchases taken back to hotels while the ladies continue their day. As a bonus, Christine will bring along a Chinese celebrity or two, and tweet/blog/weibo aggressively, raising the profile of the trip and making mere attendance prestigious. The stores who work with her get it: the experience is every bit as important as the quality or design of the items that go in the bag. Expect these kinds of events to grow into a trend, traveling trunk shows where the groups come to the stores.

So all of this is interesting to be sure. Here is why it is important.

Today, it’s Price, but Tomorrow it Won’t Be

Understanding the non-price factors that drive Chinese to buy abroad is going to grow in importance. At some point the Chinese government will figure out that it needs to take steps to keep the luxury dollar at home beyond lame propaganda campaigns to shame buyers as unpatriotic. That will mean eliminating the price difference for buying at home. Either the government will have to start levying duties at airports and ports of entry (insanely hard to do and guaranteed to cause congestion at China’s overwhelmed airports and borders,) or they will need to eliminate duties altogether.

It is anyone’s guess on which course Beijing chooses, economic logic notwithstanding. When that happens, luxury brands will have their own choice to make: they can either play the zero-sum game, doing nothing and watching overseas purchases slowly leech back into China; or they can play the growth gambit, sustaining patronage overseas while building sales in China.

I’m betting the brands will want to do the latter, so I expect to see them taking steps to improve and even differentiate the buying experience for Chinese luxury consumers. At the very least, we will see more luxury stores with Chinese speakers and creating the kind of buying experiences that Affinity China is teaching them to offer.

I expect it will (or should) go beyond that. The brands will realize that simply offering a cookie-cutter experience in every store worldwide misses the point for their clientele. Each city, each store has to offer a different but equally compelling experience that reflects the brand in a unique way. This starts with store layout, but also speaks to decor, merchandise, and layout that reflects the location, and even offering items that are exclusive to that store. Let’s face it: even Disneyland has learned to differentiate its parks worldwide. Can luxury brands be far behind?

It is a truism (or should be one) that long after the price of an item is forgotten, the experience is remembered. Price will bring China’s increasingly sophisticated luxury customers in your door, but the experience will form the basis of a lasting relationship.

CNOOC and The ARC of Chinese Global Acquisitions

China National Offshore Oil Corporation, Beiji...

CNOOC Headquarters: transparent enough? (Photo credit: william veerbeek)

Hutong West
Enjoying the Air
1825 hrs.

Canada has given the “all clear” for the China National Offshore Oil Corporation (CNOOC) to purchase upstream oil and gas developer Nexen, a company with reserves in Canada and the Gulf of Mexico (among other places) and, perhaps more important, some interesting capabilities in shale oil and oil sands. CNOOC’s interest begins with the reserves but the long-term value of Nexen lies in its oil sands capabilities. China has an estimated 14.5 billion barrels of oil locked up in oil sands, a quantity that is over twice the nation’s proven conventional reserves. Even with the technological hurdles, the value of Nexen to China and its energy security would be huge.

One Down…

CNOOC faces one last hurdle: the Committee on Foreign Investment in the United States (CFIUS.) That body has not been particularly kind to Chinese companies of late, and it has come under fire at home for an approval process that is opaque by Washington standards. There are still those in Congress and industry who flatly oppose any Chinese investment in U.S. fossil fuel assets or reserves. What this decision will come down to is how well CNOOC has laid the groundwork.

Regardless of the outcome in Washington, the fact that the purchase of what one senior Canadian executive called a “bit player” in the energy business has caused such a stir is an indicator that despite CNOOC’s groundbreaking efforts to build goodwill in government and industry, China, Inc. has a long way to go before it is viewed in American capitals with anything but suspicion.

More Spadework

The next bit, though, is the hard part. Building support among like-minded oilmen and politicians with bigger fish to fry is easy. Winning over the growing slice of America that believes the worst about China and state-owned enterprises is going to demand more than schmoozing: a wholesale rethink of corporate behavior is in order.

The formula that CNOOC and its fellow Chinese companies will need to follow when pursuing global mergers and acquisitions begins with the company’s actions. How has the company behaved in its operations both in China and abroad? Has it operated in a transparent manner, or has it used its government ownership as a fig-leaf to hide its activities behind a veil of secrecy?

Has the company been fair with its partners? Has it built up a genuinely positive environmental record (one that partners and foreign competitors would agree is world-class?) Does it behave in a high-handed manner, or does it operate with humility? Is it out for long-term cooperation, or does it just want to dismember its acquisitions for a few key personnel, some technology, and its reserves?

Next, the company has to consider its reputaiton. If it is behaving well, does it get credit for its actions across the full scope of its stakeholders, or do too many people fail to discern a difference between CNOOC and other oil companies? For that matter, is it seen as a company, or is it perceived as little more than an extension of the Chinese government? Is it telling its story to enough of the right people to matter? And, by the way, who are the right people?

M&A success for China’s companies abroad – for any perceived interloper, for that matter – rests on cash plus positive corporate behavior plus credit for that good behavior with all audiences. Actions + Reputation + Cash. Anything less leaves a deal dangerously vulnerable.

It will be interesting to see how things progress. CNOOC – and China – have a lot riding on this deal.

Shipyards Will Get Their Naval Salvation

In the Hutong
Cowering from the chill
0845 hrs.

I wrote in June that the current downturn in the worldwide market for large ships would hit Chinese shipyards especially hard, constituting as they do some 20% of global shipbuilding capacity. The shipyards had little to fear, I noted: if for no other reason than the sheer number of people employed at China’s shipyards (and memory of the Gdansk shipyards as the birthplace of Lech Walesa‘s Solidarity movement, an event that presaged the disintegration of communism in Eastern Europe), the central government would do anything they could to keep the yards operating, orders or not. Yet rather than simply pay for the production of more surplus tonnage that nobody would want, or for make-work or no work, the government would instead get the yards to re-tool to produce naval vessels – if not warships and landing vessels, then naval auxiliaries like replenishment ships, transports, and maritime patrol ships.

Sure enough, Hu Wenming, chairman of China’s second largest shipyard operator, China State Shipbuilding Corporation, was in Beijing during the just-wrapped 18th Party Congress lobbying to get orders for naval and “fishing” vessels. He is the first: expect the line of shipyard managers and owners to form behind him.

With China’s now-open goal of becoming a maritime power, the timing of the global shipbuilding downturn and stiff domestic competition means China can conduct its naval buildup at an accelerated pace AND at a lower cost that it might have otherwise. And the yards, instead of going bankrupt, will get contracts that will likely be more lucrative than orders for container ships, cruise liners, bulk carriers, and tankers. Who knows? Many may never go back.