Driving innovation may be a matter of science: driving the adoption and diffusion of innovation, however, is a matter of communications.

Mi Home


Back in the Hutong
Thinking Geek
1427 hrs.

Visiting Xiaomi’s Mi Home store near company headquarters in Beijing.

At first glance, the store’s appearance bears a passing resemblance to the retail outlets of a famous Cupertino fruit company. As with many Xiaomi’s products, though, what is surprising and delightful about the Mi Home store lies beneath the surface.

If I can sum up the difference simply, it is this: Apple stores are a celebration of the devices. Mi Home stores are an on-ramp into a what can best be seen as a modern lifestyle enhanced and simplified at a hundred points by digital devices.

Apple talks about the digital home, but it is mostly smoke and mirrors. Xiaomi is actually delivering in a relevant and affordable way, and the Mi Home stores make that plain.

A growth-focused Apple would be advised to take notes – for their product development teams, not their lawyers.

When Lux and Tech Collide

However, the cost of providing customers with devices and gadgets to gain access to new tech and maintaining them is not a small expenditure for most luxury fashion businesses. What’s more, when a customer is enthusiastic about testing a hi-tech headset in a store, it does not necessarily guarantee that he or she has the desire to purchase a $1,500 handbag.

Source: Village: How to Combine Tech and Luxury Fashion in China the Smart Way | Jing Daily

I confess that when I began my career thirty-odd years ago, I saw the luxury fashion industry as an easy target for ridicule: alien rituals and strange affectations aside, I found it hard to give credence to a group so focused on the capricious whims of the planet’s most pampered posteriors. That perception was both short-sighted and immature.

The opportunity I had to watch China’s luxury market sprout and blossom has given me a different perspective. Luxury consumers are an informal yet exacting standards body. I have found that the more that we can conduct any consumer-oriented business or marketing activity in accordance with the standards of this rarified niche, the better we can serve all consumers.

That’s why I was fascinated by this London panel talking about the use of technology (specifically augmented reality (AR) and virtual reality (VR)) to sell more luxury fashion.

One truism I’ve never forgotten about luxury customers: they all want the most fulfilling possible experience delivered with the least possible friction. The gratuitous application of kludgy technology (and, let’s face it, while AR and VR are getting better, neither are ready to fulfill their promise) seems to be a guaranteed way to chase luxury buyers out of your store.

Which leads to a second truism: The well-to-do are not early adopters. They’re the demanding knife-edge of the mainstream user, the guardians of the far side of the chasm twixt “niche product” and “widespread adoption” into which so many promising inventions fall.

If you can tweak a technology or product to the point wherein you can match the exacting standards of the luxury consumer, the big-time awaits. Smartphones went mainstream when the iPhone passed the lux test; satellite radio went wide after Damlier, Toyota, Nissan and BMW were able to make them accessible to finicky upscale buyers; and electronic cars went mainstream when Tesla introduced its luxury roadster and Toyota made the Prius hip with the well-to-do.

China is no exception to this rule. The Chinese luxury consumer often shares as much of her psychographic profile with her counterparts in Europe and North America as she does with her home-girls in Shanghai or Bengbu. Until you can offer her a great experience with the minimum of friction, forget about being first-to-market: go back to the lab.

Huawei’s PR Struggles

And so within the space of half an hour the Financial Review was shown the new and old face of corporate China.There’s paranoid Huawei that will not answer questions and refuses to explain itself in any detail to its stake holders around the world. Then there’s the likes of Green Valley, which represent a new, more open face to corporate China.

Source: Huawei’s epic PR fail | afr.com

This is an oldy but a goody, and I do not mean to pick on poor old Huawei: the organization is led by people for whom transparency and engagement are just not a part of the plan. This is not an especially Chinese failing: I have watched American, European, and Japanese companies build public relations organizations that were little more than beautiful stone walls.

I agree with reporter Angus Grigg completely: let us hope we see more openness from Chinese companies, rather than less.

What concerns me, though, is that for every wise, open, and transparent company that I encounter, I still come across a dozen more who believe that that the “new” face of corporate China is not private, independent, or entrepreneurial, but government-owned, government-subsidized, and expert at blowing smoke up the hindquarters of foreign journalists.

And of course, that’s not new: that’s a giant leap backwards in China’s evolution into a nimble, innovative, and commercial economy.

Which is why I talk so  much about public relations in China here. The degree to which a nation, and organization, or a company is prepared to institutionalize an ongoing, open, and wide-ranging conversation with its stakeholders has great predictive value about its success, and the degree to which we should feel comfortable dealing with it.

Nokia Problem #342: We Ignored Journalists

In the Hutong
Watching the tourists shuffle through the Forbidden City
1055 hrs. 

Working on a long paper about China and the demise of Nokia, I came across this interesting little anecdote from a journalist friend from 2011.

“So if you want to leak something, especially since you’re such a big fan of NOK, you can let the world know that a certain journalist found out today that despite having submitted questions for an interview in late July, was informed today, 17 days after the initial deadline, and 10 days after an extended deadline, that the interview would not be available.”

Nokia did not melt down because of the way it handled its media relations. Nonetheless, I contend that the problems that led to the end of Nokia were visible in a hundred facets of the organization long before the high flying handset maker found itself a rump division of a rudderless software company.

Setting the Stage for Chinese Innovation

Near People’s Square, Shanghai
Skyline in Silhouette 
0700 hrs. 

Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.

One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.

But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.

From Buy to Make

Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.

The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.

China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.

Fast Followers

By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”

By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.

Innovation, however, remained a challenge. While a handful of local tech companies –  notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.

Enter the Innovation Platforms

And there it remains today.

This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.

Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:

Significant – The core innovation is a genuine advance that is both useful and relevant;

Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;

Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;

Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.

Supported – Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.

Early Innovation Platforms

Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.

But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:

The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;

The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;

Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.

Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.

Platforms for the Future

In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.

But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.

For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.

But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.

The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?

I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.

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.

Six Principles of Entrepreneurial IPR Protection in China

Hutong Forward
Somewhere in San Francisco
0930 hrs. 

The issue of intellectual property rights and their protection continues to bedevil the agenda between China and the rest of the world. Do Chinese companies cheat? Certainly many do. Does China have on the books a comprehensive set of intellectual property protection laws? Without doubt. Does the government act to protect the IPR of foreign companies? Not as much as they could. All indications are that this situation will continue for at least the foreseeable future.

For that reason, it is perhaps past time to start drawing bigger lessons from this situation. It is time we started approaching IPR less as inventors and their attorneys, and more as businesspeople.

To that end, I propose six principles of what I call “entrepreneurial” IPR protection in China. Lawyers and the like are essential to the IPR protection process, but experience in China has proven that legal protection is insufficient. In addition to having legal eagles at your side, you need to take your own steps to protect yourself.

1. Start by protecting the rights of others. Remember that if it is all about you or a small subgroup, you are going to lose in the name of the greater good. The more protection benefits everyone, the more it benefits you.

2. Make it about citizenship. Actively support the creation of an IPR protection system that serves the interests of all parties, including the public at large.

3. Look inside before looking outside. Do all you can in your internal processes to protect your rights. For example, if you are walking around with a laptop that is not using disk-level encryption, but you pay for a high-power IPR attorney, you are doing this all backwards.

4. Don’t be an IPR troll. Protect only what you must. License what you can. Give away as much as possible.

5. Be a wellspring, not a storehouse. People will support your IPR if they depend on you as a source of innovation more than they depend on the innovations themselves. Remember that the well is more valuable than a bucket of water.

6. Talk about what you are doing. When you are being smart about protecting your IPR outside the court system, talk about it. Each of the steps above will brand you as smart, forward-thinking, and the kind of company people will respect. If nothing else, all of that reputation capital will serve you well when you are forced to take the nuclear option and drag some beloved Chinese company into court, as it strengthens your case politically (and make no mistake – court decisions in China are political.)

In the case of many companies, there are even more steps you can take that are specific to your industry or situation. This list, however, represents a set of general prescriptions and a place to start in rethinking your approach to protecting your IPR in China.

Intellectual Property and Innovation Streams

In the Hutong
Busy week ahead
1948 hrs.

Ryan Block, Editor Emeritus of Engadget, offers a fun little post about innovation at Qualcomm spark.  His lede is provocative: he notes that even though Edison patented the light bulb, he didn’t invent it. An Englishman named Joseph Swan patented his in the UK first.

Thomas A. Edison, knockoff artist and patent troll? Hardly. Anyone familiar with the story of what Edison had to go through to create a practical light bulb, brilliantly recounted by Jill Jonnes in her excellent Empires of Light: Edison, Tesla, Westinghouse and the Race to Electrify the World

The incandescent light bulb
The incandescent light bulb (Photo credit: Anton Fomkin)

will likely agree that Mr. Edison had at least as much right as anyone to his patent, especially when you include his painstaking work on finding the right element for the filament and industrializing the invention. (Even Swan admitted as much.)

Edison deserved his patent, but the most important lesson from Edison and the light bulb is that he didn’t sit back on his duff and try to extract royalties as others improved the technology. As Block notes:

Better still: only a few months after Edison received his patent, he’d already moved on to the next iteration, which increased the bulb’s life a thousand-fold. The story of Edison and his light bulb isn’t just a story of invention; it’s about the invariable trajectory of progress.

I want to take Block’s point a step further. Our intellectual property protection system in the west is focused on protecting inventions, to the point that the IPR bar has all of us thinking about how to protect each and every incremental innovation in the process.

For the most successful innovators, however, what is important is not the increments, but the stream of innovation. There is value to protecting your work, but that should never detract from the effort to continually out-innovate oneself. Due respect to Nathan Myhrvold, the future does not belong the the companies who hire more lawyers than engineers. If there was a resounding lesson from Oracle’s loss in court to Google, it is this: those who focus on defending the status quo more than building the future will have the future taken away from them.

Stop Shunning Beijing’s Foreign Correspondents

Me Reading the Financial Times
Image via Wikipedia

In the Hutong
Good grief, Thursday already?
1317 hrs.

In a recent profile of Michael Lewis, arguably the leading long-form journalist of our age, New York magazine’s Jessica Pressler quotes her subject on the gulf between journalists and the people and organizations they cover:

It is amazing how much contempt there is for the professional media that surrounds any given enterprise,” he says. “I find it all the time. Silicon Valley entrepreneurs think the tech journalists are all stupid. The sports people think that about the sports journalists. They don’t say that to the sports journalists, because they want the sports journalists to be nice to them. But the level of contempt is very high.

As someone who is called upon to bridge the gap between companies and the media who cover them, I can attest that this contempt, mixed with more than a little fear, is a problem here in China as well. In defense of the companies, part of that contempt is self-inflicted: any journalist who cheapens himself and his trade by taking payment or expensive gifts from a company he covers earns his full measure of scorn and contempt, and splatters his fellow journalists in the process.

But it is not always justified, in particular in the case of the global media. There are hacks in every crowd, to be sure, but China has been blessed with a crop of some of the most astute, erudite, and talented people ever to face a daily deadline. I challenge anyone to impugn the intelligence or abilities of people like Andrew Browne at The Wall Street Journal; Tania Branigan of The Guardian, Louisa Lim of NPR, James Kynge (formerly of the Financial Times), Charles Hutzler of the Associated Press, Barbara Demick of The Los Angeles Times, or anyone working behind the veil of anonymity at The Economist, including their most recent addition, Gady Epstein. And for every one I mention, I am skipping a half dozen of equal or greater talent, as well as those who have been here and left, like the brilliant James Fallows.

Granted, engaging with foreign correspondents can be painful at first: there is much to explain about one’s business and industry, because most of these reporters are by necessity generalists. One executive complained to me that it was a lot of trouble to explain the basics of their business to someone who had not bothered to do the research ahead of time. My response to him was that as bright as these folks are, they are also under the constant gun of a deadline and cannot always afford to do the research ahead. But a stupid question is a golden opportunity: when a foreign correspondent asks you to explain your business in your terms, it doesn’t get any better than that. And nowhere do those opportunities crop up more often than here in China, especially Beijing.

A generation ago, the “best and the brightest” young stars of international journalism made their careers covering the Vietnam War. Today, many are making or sustaining their careers by covering the rise of China. If your company is not taking advantage of that opportunity, (and plenty of both Chinese and foreign companies are blowing that one terribly,) what excuse do you have?

A Chinese Al-Jazeera – Five Reasons this is a Good Thing

The Ascott, Beijing

WTF, February already?

1440 hrs

Recent revelations that China is planning on investing over US$7 billion in an effort to create a credible global radio and television news service using Al-Jazeera English as a model have provoked comments that range from the dismissive to the skeptical to the paranoid.

I am not convinced China is going to create a credible global voice in the near term, but I think it is only a matter of time before it happens. Rather than concern America and the world, however, we should see this effort as a positive development because even the sketchy details we have of the program suggest a new maturity in China’s approach to strategic communications, public diplomacy, and indeed world opinion.

1. China Needs to Care About What the World Thinks – the fact that China is ready to undertake this effort means that China’s senior leadership acknowledges that global opinion matters to China. This may be obvious to those of us steeped in communications, international relations, soft power, and/or public diplomacy, but it is a light-bulb moment for China’s leaders. Since declaring the People’s Republic sixty years ago, China has maintained an almost cussed independence of action, speaking and acting as if it cared nothing for what the world thought. This is apparently no longer the case, and that opens a new series of doors to influence Chinese policy.

2. If You Build It, They May Not Care – whatever else China Radio International, CCTV-4, and CCTV-9 have accomplished, their growing availability worldwide has not had much apparent effect on how China is perceived abroad. China’s leaders have learned an important lesson: they do not get a hearing purely by virtue of China’s size or growing importance.

3. Propaganda Fails – the acknowledgement that the service’s credibility depends on a level of editorial objectivity unknown elsewhere in Chinese media (including the current global radio and television services) is an implicit recognition that propaganda is dead as a tool of public diplomacy. This is not only a rejection of previous practice but of orthodox Communist communications doctrine.

4. The Audience is King – the initiative recognizes that China must communicate with the world in a way that audiences can appreciate, rather than using a the intonation and buzzwords of Chinese political orthodoxy. If you’ve ever heard a government official speak in public – or watched a Chinese newscast – you know what I mean.

5. Being Heard Means Looking Good – the initiative recognizes that China must compete in a global marketplace of information, and China’s take on world affairs will not be heard unless it is packaged and delivered in a format and context that is comfortable to non-Chinese viewers. If there is a single lesson from Al-Jazeera, this is it.

If you are not certain that China coming to these conclusions is necessarily a good thing for the rest of the world, consider this. If I have learned one lesson in my career as a communicator, it is that the more a government or company alters its approaches to appeal to an audience, the more responsive that entity becomes to its audiences in its thinking, policies, and behavior.

The unspoken secret of the “perception management” process – the part we don’t always share with our clients – is that the process changes both sides, not just the audience. This will be especially true as we move out of the Age of Broadcast and into the Age of Conversation.

I am in no way suggesting that China will suddenly change its domestic policies, drop single-party rule, or gang-stomp the Somali regime because the PRC desires greater global influence. But if China is committed to its stated global communications objectives, small but significant changes in the nation and its international relations are an inevitable result. As the Bush administration learned, global influence is unsustainable when foreign policy and strategic communications are formulated and conducted in willful ignorance of global opinion.

On the other hand, I have had some people suggest to me that, providing China sticks to its commitment to offer evenhanded reporting on its global channels, this may signal to Chinese leaders that they can use the same approach at home. At best, this is wishful thinking. Media aimed at overseas audiences will serve the purpose of building Chinese credibility abroad. Media aimed at home will remain focused on maintaining social stability and supporting the evolution of a “harmonious society.” We can expect a wide “Chinese wall” between the two.

For now, anyway.

Seeking Truths in Marketing

Silicon Hutong Table, Peters Tex-Mex Grill

Experiencing Tryptophan Withdrawal

12:22 hrs.

Despite valiant efforts to convince ourselves otherwise, it is a truism that the marketing and communications crafts have lost their way after a decade-long deluge of online media. We put on a brave face in public, but in truth we have been attempting to deal with an entirely new phenomenon with old tools.

I am on the verge of taking a six-month semi-sabbatical in 2010 to read, write, and blog about this issue and what it means in the context of the rise of Asia generally and China specifically. Frustrated by the often soporific, wishful, It’s Going to Be Okay As Long As We Buy 20% More Display Ads This Year thinking that passes for futurism in our business, I have started to prepare by going back to the seminal thinking that laid the groundwork for modern marketing and communications. I figure this is a safe bet, based in part on my status as an amateur historian, and in part on my wife’s success as an Neo-Grahamian value investor.

My first three stops in the process are David Ogilvy’s Ogilvy on Advertising, Claude Hawkins’ Scientific Advertising, (Ogilvy based a lot of his approach on Hawkins’ work), and, somewhat closer to home for a corporate communicator, Edward Bernays’ superior Propaganda.

Full disclosure: I am an advertising skeptic (too much push in the way it is practiced today), and a public relations skeptic (too much spin, not enough conversation), but I think the issue is more in how these tools are practiced and the belief systems that have built up around them than in the crafts themselves. In Tim Burton’s Batman, the Joker famously proclaims of Gotham “this town needs an enema.” He could just as well been strolling up Madison Avenue.

So I hunt for the grains of truth supporting the ziggurats of a decaying industry.

I’ve just finished Bernays for the second time (a simple feat – Bernays was so pithy that his work disappears on my bookshelf twixt weighter tomes), and I explained what I thought was one of his enduring truths in an OpEd in Media Asia: The public relations industry has become the captive of its tactics, bastions of execution that have either forgotten how to be counselors on business conduct or who have blown whatever credibility they may have once had in that role.

And China, where the industry has an opportunity to start with something of a blank slate, we are off to a tough start. Execution is wonderful, but we are all too often either swimming in a sea of spin or we are reduced to wrangling reporters.

The other two works are somewhat harder going, for me, anyway. David Ogilvy was the quintessential (M)Ad Man, and his prose carries the assurance of a man offering a service for which the need is a given. Hawkins is somewhat better, but the matter of advertising is a matter of “how” rather than “if.”

Yet good things surface. Ogilvy assumed pandemic attention-deficit disorder in his audiences, and he built his craft firm in the conviction that people had to be convinced to care. This seems self-evident, but it is too often forgotten in China. How, after all, are we to convince anyone of anything with a commercial that lasts less time than it takes us to read a headline?

To me, banner ads, search ads, and meat-grinder public relations that counts clippings from China’s content-xerox websites too often assume the audience cares.

Something is wrong, and so many of us know it. If we are ever going to have the cojones to do something about it, we need to begin by calling bulls**t on ourselves.

Seven Reasons for the Coke-Huiyuan Epic Fail

In The Hutong

Having a Coke and a smile

1911 hrs.

Just after the Ministry of Commerce announced that it had rejected Coca-Cola’s bid for Chinese juice-maker Huiyuan, I got a message from a very astute friend of mine who noted “that deal was dead the minute it made the headlines in the South China Morning Post.”

We are going to hear a lot of hindsight-laden “I knew it was going to be rejected” statements in the coming days. So let me start by stating for the record that this will at first sound like one of those posts, but the that what I really want to do is explore (with the full benefit of hindsight) why this deal may have been killed, in the fervent hope we can learn something at Coke’s expense.

It Sounded Like a Hard Sell at the Time

A momentary slide into the “I told you so” zone.

Not long after this deal was announced, I noted in this post that this was going to be a rough sell for Coke in Beijing. Apart from the threat of the deal falling afoul of China’s shiny, new, and not-yet-tested anti-monopoly law, I said that Beijing has over the years actually made its current policy on FDI rather clear. Looking at that policy, it was fairly clear that the deal would have a difficult time passing muster with the government. and that Beijing might relish an opportunity to say “no.”

Rather than suggesting the deal was DOA, however, I noted that Coke had best kick a communications program into gear to start building support for the deal, because doing so would be their only hope in getting past the barriers they faced.

“Whether this deal succeeds, then, has less to do with its considerable business merits or with the law itself. It has much more to do with how well Coke handles the government debates and public discussion on the deal’s merit.

Hopefully, Coke has learned from Carlyle’s experience, and has prepared a case that will convince the nation’s leaders to make an exception to policy and will gain the support of consumers and influential public voices in China.”

Coke, in short, needed to manage the public debate, because regardless of the reason given by the Ministry of Commerce for rejecting the deal, there was actually a lot more stacked against Coke in its bid for Huiyuan. I count at least seven.

Reason One: One Man’s Market Leadership…

The first reason is the one the government gave, that the deal would violate the spirit of section 23 of the Anti-Monopoly Law, which is appears to be designed to ensure that a single player does not become so dominant as to be able to dictate market terms. As the Ministry of Commerce noted, their concern was that the deal would hurt small local players, drive up the consumer price of juice, and limited consumer choices.

Market share figures are painful to discern in most markets, and in China, where data flows like concrete doesn’t, the numbers are much harder to pin down. As best as we can tell, Huiyuan as market leader holds a bit over a third and possibly as much as 42% of China’s estimated $10 billion market in juices and nectars. That’s a pretty dominant position in a fragmented market.

Coke, for its part, is number two with about 10% of the market. If we use those figures, Coke would have owned somewhere around half of an otherwise fragmented $10 billion market. Does this count as a “monopoly” in the classic economic sense? Probably not.

But without other strong players to act as a counter (if Coke was #2 with 9.7%, the next biggest player would have held much less than 10%), you can see that the government was concerned about allowing the creation of a company that would have the brand, manufacturing, and distribution muscle to dictate market terms.

Would that concern have been enough by itself to derail the deal? Maybe. But there were other factors involved as well.

Reason Two: Not Our Kind of FDI

China’s foreign direct investment policy since the country began its “reform and opening” process three decades ago has been to create laws and administrative regulations to channel the investment into the sectors and vehicles where China needed it most. The policy has not changed, but the means of the channeling – and the government’s general attitude toward FDI – have.

As Steve Dickinson of Harris & Moure noted in an article unrelated to the deal a week before it was announced, the policy may be implicit, but it is clear:

“• Foreigners are free to invest in China through WFOEs [wholly-foreign-owned enterprises] or JVs [joint ventures] in the areas of investment classified as permitted or encouraged in the current Catalog for Guiding Foreign Investment.

• Foreigners are permitted to purchase small established Chinese companies where the government is too busy to be concerned with management of the small company

• Foreigners are permitted to purchase large established Chinese companies suffering from financial problems, provided the foreign purchaser will restructure the company and assume the company’s obligations to workers and creditors.

• Foreigners are permitted to acquire a minority interest in large and successful Chinese companies, provided such investment will provide collateral benefits in the form of technology transfer or access to new markets.

• Foreigners are not permitted under any circumstances to purchase a majority interest in a large and successful established Chinese company.”

I can’t speak to the first issue, but it seems fairly clear that the Coke-Huiyuan deal failed to qualify under the other four.

This might have actually been the deal-killer, but since none of this is written down anyplace, it was easier to cite the Anti-Monopoly law.

But wait. There’s more.

Reason Three: Hands Off the Brands, Boys

An unwritten goal of China’s industrial policy is the creation of leading brands that will not only lead to a healthy, stable market at home, but also form the basis of a bevy of global Chinese brands. Even though candidates arise from time to time, China’s enterprises are still in the early stages of creating international markets.

Huiyuan, however, was a better-than-average candidate, with a leading position at home, smart marketing, and an brand that consumers associated with quality and purity. To have a potential champion gobbled up by a foreign company before it even had a chance to go abroad was probably too much for China’s leaders to stomach.

Which is probably the reasoning underlying China’s restriction on purchasing a majority interest in a “large and successful established” Chinese company.

Reason Four: What We Have Here is a Failure to Communicate

As my former colleague and frequent lunch companion Imagethief noted, public sentiment was probably not too terribly in favor of the deal to begin with, and things went from bad to worse as allegations came out that Coke’s people were trying to quash criticism of the deal.

A core rule of public relations is that you don’t try to stop journalists or others from trying to criticize your company because that effort then becomes a story, and you lose all credibility. Now, this rule is often ignored in China, in particular by Chinese companies, who use all kinds of creative and interesting tactics ranging from calling the government, to placing (or withholding) advertising dollars, to outright paying the reporter in order to try to keep negative stories about their company out of the press. Some foreign firms, sadly, have decided that the best thing to do in Rome is wear a toga, and so have picked up the practice.

Whether or not Coke actually did any of these things is not the point – the perception is that they did. That perception was built atop public sentiment that appeared to be skewing neutral to negative on an issue where what Coke needed was widespread support.

Coke failed to realize that it is now a truism that foreign companies cannot hope to successfully test the limits of government policy unless that effort appears to have widespread support – not just among China’s elites, but increasingly among the broader public as well.

Few companies will remember that, I’m sure, but the wiser heads among M&A advisors – investment banks, attorneys, and accountants – will realize they need to make room at the table for someone who understands how to win in the court of public opinion.

Reason Five: Morning After Syndrome

Speculation has been rampant of late that Coke may well have been looking for a way out of the Huiyuan deal long before it was dealt its regulatory death blow. Coke, for its part, denied the rumors, and we may never know the truth.

But less than two weeks after the announcement, the U.S. government decided not to rescue the beleaguered Lehman brothers, setting off a chain of events that immediately altered the priorities of companies around the world. Certainly if I were sitting at Coke headquarters in Atlanta, I’d be worried about whether I could afford to part with $2.4 billion in cash right as world credit markets were drying up and consumers were rethinking their spending habits.

Even if Coke lost a little of its ardor for the deal, that might have been enough for the company to give less than its full effort in trying to gain approval.

Or, indeed, it might have been enough for the company to become completely ambivalent about it. Given the challenges they faced, that might have been enough to weaken Coke’s chances.

Reason Six: Kindergarten Dynamics

There is a school of thought that Coke’s bid was sabotaged before it happened, not by either company or the Chinese government, but by the U.S. government when it blocked the acquisition of Unocal by CNOOC, or when it blocked the purchase of 3Com by a group led by Huawei. The belief is that this rejection was a tit-for-tat, China treating a U.S. company in a manner to which Chinese companies have become accustomed in America.

This is not unlikely. China is a big fan of reciprocal behavior in its international relations, even raising visa charges for citizens of countries that have raised the cost of a visa for Chinese travelers.

Certainly there must have been a bit of that sentiment in the smoky room in Beijing where this matter was decided. How much of a role it played we will never know.

Reason Seven: The Global FDI Problem

Last June the Council on Foreign Relations published a special report, Global FDI Policy: Correcting a Protectionist Drift, in which the authors quantify a decided chill in the past several years by a number of countries toward foreign direct investment. While the authors (a Carlyle executive and a distinguished academic) might well have turned the report into a China-spank, the report is remarkably data-focused and even handed.

What they quantified – before the world lurched into its current state – was a decided tendency by nearly all of the world’s major polities to restrict foreign direct investment. The biggest culprit in the report was the United States, but the authors note that there is evidence of this trend worldwide.

The problem is that unlike trade, there is no global policy protocol around cross-border direct investment and acquisitions, kind of like the situation we had with international trade prior to World War II. And frankly, this is no time for countries to be turning off the tap, especially (as the authors note) local affiliates of foreign firms on average deliver greater economic benefit to host countries than local firms.

The Coke-Huiyuan deal was taking place in an global FDI policy environment that is starting to sour, and may come to be emblematic of the need to raise the matter of FDI to a global intergovernmental level – once the banks are sorted out, of course.

The lesson here is that the problem of FDI policy to an extent transcends Coke, Huiyuan, China, and the United States, and that those issues probably played some role here.

Making it Better

The above list is by no means balanced in terms of the relative importance of the factors, and it is by no means complete. Taken together, though, they underscore that Coke had to climb a cliff on this deal, and they will not be the last who face such a political escarpment.

But as China extends its policy fence around those companies and industries it wants to keep in Chinese hands, there are some lessons to be drawn from the above.

1. We need to begin with a clearer idea for how China defines a “monopoly,” so that we either avoid deals that test that definition, or we recognize the risk and seek to mitigate it intelligently yet aggressively. That definition will change on a case-by-case basis, based on the industry, the intended target, the buyer, and who is asking the questions.

2. The FDI policies that matter may not be written down, but they exist, they evolve, and they are ignored at one’s peril.

3. Healthy companies that may one day become global Chinese brands are not good targets. Sickly companies that could blossom under better management, with capital injections, and with a global owner are much safer. Of course, they bring their own problems, but China’s government wants value-add from foreign investors, not just a fat check.

4. Any acquisition of a local firm by a foreign company demands a communications effort directed at both the general public and the policy making elite that makes a logical, intelligent, and sensitive case for the purchase. The bigger the buy, the better you need to be at the communications.

5. Don’t ever let up or appear to hesitate.

6. International relations matter in business, and especially with M&A. Companies need to lobby their home governments to be as open with FDI as they are with trade, because the alternative is a deteriorating global FDI environment with companies caught in the middle.

A Final Note

As I said in my September post, I am no fan of mergers and acquisitions. I think they burn management attention and corporate capital, they are often used as a substitute for innovative strategy, and they rarely deliver the benefits promised. But I also recognize I am spitting in the wind – there is going to be a lot more of this activity in the coming years, particularly as Chinese companies step abroad.

The best we can do is work to reduce the friction of the process. As more about these events comes to light in the coming weeks, It is incumbent on those of us whose work touches M&A in China to learn whatever lessons we can. The next one will probably not be any easier.

Glocal Branding: Dormant US Brands

In the Hutong

Listening to Gordon England talk Export Controls
1734 hrs.
As an illustration of the possibilities open to Chinese companies who want to buy a brand when they move into the US market rather than build their own, this is a partial list of some of the brands that sit, unused, in the inventories of American companies: (Mind you, I’m not suggesting any or all of these as good potential choices – merely as a sampling of what is out there – but there is some real gold on this list in the hands of the right marketer)
Aero Commander
Hughes Aircraft
North American
American Motors
International Harvester
Indian Motorcycles (currently attempting a comeback)
Electronics & Technology
Aldus Software
Banyan Networks
Bay Networks
Control Data
Data General
Digital Equipment Corporation
Hallicrafters radios
Tandem Computer
Fast-Moving Consumer Goods
Banner toilet tissue
Citrus Hill orange drink
Duz laundry detergent
Encaprin pain reliever
General Foods
High Point coffee
Monchelle soap
Pace home permanent
Puritan vegetable oil
Rely tampons
Thrill dishwashing liquid
Wahoos snack foods
White Cloud toilet tissue
Wondra skin lotion
Petroleum Products and Retailing
Humble Oil
Union 76
Retailers (potential apparel brands)
Abraham & Strauss
Broadway, The
Emporium, The
I. Magnin
Kinney Shoes
Bethlehem Steel
Bethlehem Shipbuilding
International Steel
National Steel
You get the idea – you could run through this exercise with any sector or industry.
Keep in mind that these are the brands that are dormant and out of circulation for the most part. There is an entirely different category of brands – semi-active brands – that are still in use but in desperate need for a revamp.

China’s Hobby Renaissance

In the Hutong
Minding the store
2018 hrs.

One of the profound trends that is taking place across China today that I haven’t seen anybody pick up on is the rebirth of hobbies.

For much of China’s history, hobbies have been limited to a tiny elite with a lot of extra time on their hands. Most hobbies were cultural in nature (brush painting, collecting, gardening), but some in the merchant and mandarin classes had some eclectic interests (I’m speaking of the non-prurient variety, here. This is a family blog.) Hobbies, in other words, were not a part of China’s mainstream culture, and those that were – kite flying, bird raising, calligraphy – were considered by most Chinese to be something for old folks.

That has all begun to change over the past decade. Growing numbers of Chinese not only have the leisure time to pursue activities outside of work, family, and school, they also have the financial wherewithal to pursue their newfound avocations. Media are carrying more stories about hobbies, and the Internet makes information about their choice of hobbies readily accessible.

What is interesting about this is that hobbies create a new class of consumer for goods and services already available, and create entirely new markets for products that were never of much interest before.

Some examples:

  • For the first time, it is possible to obtain a civil pilot’s license as a non-professional, and to purchase and own an aircraft for private use.
  • Collecting militaria and military uniforms is an increasingly popular hobby among a startlingly diverse group of collectors, most of whom network online. And they’re not only buying Chinese items – they’re collecting from overseas as well, either via eBay or as a part of their travels.
  • Bicycling used to be about transportation in China, not recreation. No longer. Manufacturers from Giant to Trek have realized that a growing number of Chinese who ride to work in cars, busses, or trains want back on their bikes, either for exercise, competition, or adventure.
  • A growing number of Chinese are taking up SCUBA diving, despite the fact that few Chinese have ever even had swimming lessons. International organizations like PADI, the British Sub-Aqua club, and NAUI are setting up representation in China to work with the Chinese Underwater Association.
  • Outdoor activities generally are growing incredibly fast. Skiing, hiking, camping – all sports popular overseas but with little history in China – are growing quickly. Outside Magazine‘s China edition is now up to 200 pages per month, printed on what one reader described as “gorgeous, thick, glossy paper.” North Face, Sony, and Motorola are but a few of the advertisers who are either reaching out to the lifestyle or who are producing products that appeal to the specific hobbies Outside covers.

Here is a simple truth: if there is a hobby somewhere, somebody in China is practicing it, and the numbers are probably growing.

Some of the other hobbies that are showing early signs of major growth:

  • Gardening, both indoor and outdoor, is on the rise as more people buy homes and discover the value (both physical and therapeutic) of having plants in and around the home. The biggest issue here – knowledge, especially in the care and feeding of house plants.
  • Salt water and fresh water aquariums are also growing in popularity in part because of feng-shui, and in part because the sound of the pump and the fish is so soothing.
  • Scrapbooking, as a nation of people cut off from the memorabilia of their past by the paroxysms of the 20th century seeks to recapture and preserve what is left, and what they are creating now.
  • Collecting generally is big, and if Hong Kong has proven anything, it is that Chinese are avid collectors. Almost any type of collecting is growing except for stamp and coin collecting, which many seem to see as old or passe. (At the same time, those who are collecting stamps and coins have more money to spend, and so the hobby will grow in real dollar terms for some time, even as the new generation eschews it.)
  • Photography, which many are discovering through their cell phones, and which a growing number seek to step into more “pro-sumer” equipment.
  • In keeping with the switch of bicycle from transportation tool to recreational gear, cars and motorcycles are heading that way as well. In particular, after-market performance parts, body kits, finishes, and the like are growing quickly. We’re seeing the first modified cars on Beijing’s freeways, and even though the customized motorcycles tend to be limited to the CJ 750 (the BMW R71 in disguise), can choppers be far behind?

Watch for this trend to grow in importance over the next five years, and to begin to change the nature of several industries.

The question each of us needs to ask is this: how are China’s hobbyists going to change our business?