A Welcome Oil Crisis

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

Source: Crude palm oil prices may decline up to 15% by year-end | Business Standard News

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.

 

Kushneria

Prediction of the week: by the time the investigation into the business dealings of Jared Kushner and his family by the DoJ and/or Congress is complete, the writing will be on the wall for the entire EB-5 program.

There has always been an ugly side to EB-5, but it has managed to stay beneath the surface. Thanks to Kushner et al, it rises like a kraken from the depths, and will incite the desire of men to slay it.

Time for a Sino-US Reset

English: President and Mrs. Ford, Vice Premier...
English: President and Mrs. Ford, Vice Premier Deng Xiao Ping, and Deng’s interpreter have a cordial chat during an informal meeting in Beijing, China. ID #A7598-20A. Français : Gerald Ford, sa femme, Deng Xiaoping et une traductrice lors d’une réunion à Pékin en Chine (1975). (Photo credit: Wikipedia)

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!

Concept of the Week: Bio-luddite

Bio-luddite (n.) a person opposed to the introduction of new biological technologies, usually without regard to the scientific evidence regarding their safety.

Bio-luddism is nothing particularly new, but it is becoming more important as the rate of spread of biological innovations increases, as the rate of innovation increases, and as this becomes a matter of concern not just for a small number of markets, but for the globe.

China, which was one of the major beneficiaries of the Green Revolution, understands the value of genetic modification. What it has yet to do with any kind of credibility, though, is make a public case for the safety of genetically modified organisms separate from hand-wringing about the abuses of a small number of very large ag-tech companies. If the failure continues, bio-luddism in policy-making circles may eventually serve to slow or throttle competitiveness China’s biotech industry.

Did Apple and Uber make the right call on Didi?

Late last year I noted that life after Uber would not necessarily be a picnic for Chinese ride-sharing giant Didi. While an 85% market share looks unassailable, it will need a lot more money to secure its position.

I was prepping a post on why that is the case, but Dr. Richard Windsor at Radio Free Mobile beat me to it. Read the whole post. His bottom line:

Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.

Windsor believes that the only logical response for Didi is a change in strategy, but finds it hard to see how any strategic choices open to Didi justify its $34 billion valuation. Fair enough.

Now, second-order effects time. Uber and Apple are Didi investors. As I mentioned in December:

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 [or Apple] 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.

If you are an investor in either Uber or Apple, and you count the company’s holdings in Didi as a part of the firm’s underlying value or future earnings, have a look at Windsor’s post. You may want to re-run your numbers.

The rule for disruptive companies in China, regardless of provenance, is this: your future depends on more than just being able to make a handsome profit off of disruption. You have to convince a host of powerful individuals and groups that China is better off with the industry disrupted than with the status quo.

 

The LeEco Problem

Source: Outspoken Billionaire Works to Salvage His Tech Empire in China – Bloomberg

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.

 

Concept of the Week: Leftover Students

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

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

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

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

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

NGOs and Chinese Law

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

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

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

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

Quotable Friday: Sir Martin Sorrell

“I remain an unabashed bull on China,” said Sorrell. “There are worries about the slowing of growth but that was inevitable. It was natural it was going to slow. We are concerned about the stock market bubble and the fall in the stock markets has implications. Having said that, we still believe in the longer term in the economy. We think it is a short term phenomenon.”

Source: WPP’s Sir Martin Sorrell bullish about China prospects despite sales slowdown | Media | The Guardian

 

Concept of the Week: Urbanizing In Place

Urbanizing in placeconcept – the idea that China’s urbanization is not being driven entirely by migration from the countryside to the cities, but that large areas that Beijing’s statisticians might once have considered “rural” are now considered “urban.”

In-place urbanization could occur in one of three scenarios.

The physical area of a municipality has been expanded to include what was once surrounding countryside.

In the second scenario, a village that was once considered part of the countryside has now grown into a town that a demographer or statistician would now classify as urban.

In the third scenario, a group of villages in a given area are considered to be conglomerated as a single administrative entity and reclassified as a single town.

In these cases, China’s urbanization is taking place without migration, and presents a different set of policy, marketing, and personal challenges and opportunities than classical migration-based urbanization.

The Third Way on Xi

English: "Long live the great Communist P...
English: “Long live the great Communist Party of China” in Xinhuamen, Beijing ‪中文(简体)‬: 新华门左标语“伟大的中国共产党万岁” (Photo credit: Wikipedia)

“Is the Chinese dragon losing its puff?”
Peter Harcher
The Canberra Times
March 16, 2015

Professor David Shambaugh’s recent essay in the Wall Street Journal suggesting that China’s political system is about to hit some very rough times (“The Coming Chinese Crackup“) has provoked intense debate. Peter Harcher’s article written in response offers a neat summary of what makes Shamgaugh’s conclusions so debatable.

I nevertheless absolutely reject his conclusion which I find astonishingly ill-informed. The pervasive sense of dramatic change is, I have found, combined in almost all Chinese minds with satisfaction and confidence that the change is urgently needed–indeed long overdue—and in the right direction.

It also demonstrates that the American academy has powerful competition as a source of cogent analysis on Chinese politics.

Any serious discussion of China’s future must include non-Academics like economist Arthur Kroeber and Australians like Geremie Barmé of the Australian National University and David Kelly of China Policy in Beijing.

Barmé, for his part, writes off Shambaugh’s collapsism as the view of an American deeply anxious about America. Kroeber, an American himself, argues that the Party remains as strong and adaptable as it was in 2008, when Shambaugh wrote his excellent China’s Communist Party: Atrophy and Adaptation.

My problem with both sides is the determinism implicit in the arguments. The Party’s collapse might not be imminent, but neither is its adaptability without real limits, imposed upon it by important groups and individuals within its own ranks. I find it hard to believe that Barmé and Kroeber would argue that point.

We thus must agree that there may be circumstances under which the Party might prove insufficiently adaptable to avert an existential crisis. And before you protest, let us agree that there may be circumstances under which any polity, however strong and adaptable, might face the same limits. In that case, the answer is neither “the Party will collapse” nor “the Party is too adaptable to collapse.” It is, rather “under what circumstances would the Party face the danger of collapse?”

Like most of us, neither I nor my clients can afford to treat China like its future is a game of roulette: bet on Red, the Party stays in power. Bet on black, and it collapses. Creating strategy in business means contending with all possibilities, balancing them, and coming up with a pathway that appropriately addresses them.

We can be neither Cassandra nor Polyanna. We should not overestimate the considerable challenges Xi Jinping faces as he guides the nation through roiling and uncharted waters, but none of us can afford to underestimate them.

Shameless Plug Dept.: New Fast-Food Paper

Hutong West
Contemplating lunch
1253 hrs.

My most recent paper, this one on addressing the challenges facing fast food franchisors in China, “Jumping China’s Great Food Wall (pdf),” is now up on the Allison+Partners website.

Failing that, you can find the paper on Academia.edu here.

This is more of a practical paper than my last one, giving a quick overview of the uneven success enjoyed by fast food companies in China, and offering a series of prescriptions designed to avoid some of the more serious rocks and shoals, and mitigate the effects of many others.

Case Study: Why You Should Seek Multiple Opinions on China

“Three Things TLD Registries Must Know About China’s Domain Name Regulation”
Chang Jian-Chuan
CircleID
June 18, 2015

I get to talk to groups of businesspeople and business students on a regular basis, and one of the maxims I include in just about every speech or presentation is this:

Don’t get your China advice, whether generally or on a specific issue, from any single individual. China is too large and complex for you to trust the future of your enterprise in this market to the viewpoint of one source, however knowledgeable he/she/they may seem.

The news this week offers a superb example of why this is the case. The Ministry of Industry and Information Technology (MIIT) has had one if its periodic regulatory spasms regarding the Internet. One of the specific areas covered by the current policy outburst is the arcane but important area of top-level domains (TLDs).

The Internet Corporation for Assigned Names and Numbers (ICANN, the international body that, among other things, operates the system that makes it possible for you to type “amazon.com” into your browser and get to a bookstore instead of an error page) has recently presided over an explosion of top-level domains (TLDs), those bits of an site name to the right of the dot, like “.com,” “.net,” and “.org.” Where there was once only a handful (in addition to nation-specific top-level domains,) there are now literally hundreds, if not thousands of these, and we’re all having to adjust to a world that includes “.law,” “.ninja,” “.guru,” and “.me,” and .”porn,” among hundreds of others.

China’s adjustment is coming in the form of a new regulation (“Interpretation (Reading) on Carrying Out the Domain Name Registration Services Market Special Action Policy”, promulgated by the MIIT on May 12) restricting how registries (the companies that own the top level domains and collect fees for domain names that use them) can sell domains to customers in China. This is causing a bit of a panic.

Chang Jian-Chuan, a Ph.D. and a research fellow who covers the field for a local registry, offers this piece in a leading industry publication as something of a palliative, and I agree that panic is unhelpful, but he loses me when he writes:

Nowadays a revision of the regulation is under way to reflect the latest expansion of registry operators. However, except for the new requirement that any foreign registry has to establish a legal entity in China, all the other requirements for the license have maintained unchanged. Therefore, it is fairly safe to conclude that there is no “tightened control” or “new move” against New gTLD registries and registrars.

What we have here is a disagreement (to put it mildly) over terms. While a superficial reading of the regulations may suggest no significant change, if you understand both the challenges faced by the companies affected and the knock-on effects of the law, it is clear that the change doe represent a new move that tightens control of the industry and endangers the business of many foreign registries currently selling into China.

From a business standpoint, the regulations throw the business of many registrars into a spin, if for no other reason than they are required to set up and register a local operation in China with $170,000 in registered capital, with local technicians and customer service personnel. Someone familiar with the global registry sector would know that most registries, including some of the larger ones, are not yet operating in China, and for all of those this represents a costly process and significant ongoing expense. For the vast majority of non-Chinese registries the cost will be prohibitive, in effect shutting them out of China.

From a legal standpoint, attorney Allan Marson at Ishimarulaw.com noted in November:

When MIIT promulgates these revisions (and barring any last-minute amendments), they will substantially change the status quo for non-Chinese registries in China. While users in China will continue to be able to access websites outside China (subject to passing through the “Great Fire Wall“), in order to promote and serve Chinese customers, a non-Chinese registry will be required to set up a subsidiary registry or entrust a China-based registry to operate its TLDs in China. Failure to do so will likely result in Chinese registrars refusing to sell domain names under the non-Chinese registries TLDs and preventing resolution of any websites that are already registered under those TLDs.

Contrary to Dr. Chang’s fairly offhanded dismissal, a common sense reading of the regulations from the viewpoint of a foreign registry and from an attorney is that this regulation and its knock-on effects represent a new move and tightened control over the field, one that significantly changes the way most companies in an entire industry must operate in China.

While most of us shy from anything that may seem ad hominem, when seeking advice in China you must consider the provenance and possible motives of any advisor. For example, Dr. Chang is a former official with CNNIC working for a local Chinese registry. This would suggest that, far from being a dispassionate observer, Dr. Chang has some skin in the game. It is worth noting that his company, KNET, stands to gain if the new regulations are enforced to the greatest extent possible. It is also worth noting that his publishing an article in an international industry publication praising an MIIT regulation will not hurt his company’s regulations with its regulatory overlords at MIIT, and that it would have been impolitic – if not commercially suicidal – for Dr. Chang to have written a different opinion.

Let me be clear: the goal of this article is neither to impugn Dr. Chang nor his employer. I am sure Dr. Chang is a wonderful person and an academic of great integrity, and that his company is a fine organization operating in a highly competitive and heavily regulated industry.

The point, rather, is that the advice you receive from anyone about China is often influenced on where the individual comes from, where he or she sits, and the pressures under which he or she operates. The only way to get a true picture of the challenges and opportunities your company faces in China is to reach out to a range of advisors, tapping each for their thoughts, questioning each, and forming a picture based on all of the above.

Beijing’s New Internet Buzzphrase

Hutong Forward
Planespotting at Reagan National
1655 hrs 

In a ten minute speech last month in London at the 50th Meeting of ICANN, Lu Wei, the Minister of China’s Cyberspace Affairs Administration, introduced a set of seven principles under which, according to him, the Internet should be governed. While not much attention was paid Mr. Lu or his speech outside of the confines of the attendees, we can assume that it was an official statement of government policy, and therefore worth understanding, analyzing, and discussing.

His principles, as I heard them, are:

  1. The Internet should benefit all mankind and all of the world’s peoples, rather than cause harm;

  2. The Internet should bring peace and security to all countries, instead of becoming a channel for one country to attack another;

  3. The Internet should be more concerned with the interests of developing countries, because they are more in need of the opportunities it brings;

  4. The internet should place emphasis on the protection of citizens’ legitimate rights instead of becoming a hotbed for lawbreaking and criminal activities, let alone becoming a channel for carrying out violent terrorist attacks;

  5. The internet should be civilized and credible, instead of being full of rumors and fraud;

  6. The Internet should spread positive energy, and inherit and carry forward the outstanding culture of human beings;

  7. The Internet should be conducive to the healthy growth of young people, because that concerns the future of mankind.

There is a lot to grist in these, but what jumped out at me was this catchphrase “credible Internet.”

There is a ring to it that suggests that we are going to be hearing this much more in the coming months, but the aim seems clear. While in the past the boundaries of online expression have been defined by prurient content on the one hand and seditious content on the other, there is now a third piece to that troika: rumors.

This is worrisome: “non-credible” content implies a much wider scope for restriction than the modus vivendi we have enjoyed in the past, and opens to official censure a vast swath of online content. You can avoid posting prurient content rather easily by avoiding adult themes and illustrations. You can dodge seditious content by steering clear of domestic political issues. But “non-credible” content is in the eye of the beholder, and can easily extend to commercial content and company web sites as well as posts on Weibo or WeChat.

Watch this space, as I suspect we are going to learn more about where the authorities are going to be drawing the line. In the meantime, any company or individual producing a content-laden Chinese site or posts on Weibo or WeChat should err on the side of caution. Chinese law is unkind to those whom the authorities accuse of spreading rumors, and demonstrable veracity may not be enough to keep you out of the wrong kind of spotlight.