Flags In The Ground, laying out a viewpoint on a key or controversial issue.

Luxury’s Comeback?

I hear a lot these days about the ostensible “comeback” in China’s luxury market. LVMH’s recent results suggest more aggressive marketing and a possible dead-cat bounce more than a sudden return to the luxury market.

The social fundamentals in China are changing luxury consumption patterns, and possibly for good.  So the luxury market in China is not coming back – it is changing, moving on, evolving.

PR World

Over the past four years I have discovered that there is an implicit belief among many US public relations (PR) practitioners – especially in the large global firms – that PR around the world will develop to become similar to what it is in the US, and will follow the US lead as the profession evolves.

Axiom: it will not. If the PR industry manages to rise above its straightjacket of inertia and hubris, it will find itself changed by forces from India, China, Latin America, Russia, and Africa.

What keeps me awake at night is the fear is that ethics in the name of expedience will be the first sacrifice in that process.

Memory Loss

Watching the winds in the semiconductor industry, especially in China, hints at a coming consolidation of products. To wit:

  1. Within 18 months, Intel will be back in the memory business in a big way, but not in the way we think about memory today.
  2. Within three years they will not be alone.
  3. Within five years, specialty memory producers will either diversify, be in mortal danger, be M&A bait, or some combination thereof.

 

Wanda and Hollywood: Three Questions

The craft of filmmaking is a perilous one, a balancing act between the art of cinematic storytelling and capricious public taste. Overt inclusion of foreign propaganda would likely be a destabilizing ingredient in any film, just enough to turn a potential blockbuster into an expensive turkey, undermining a studio’s reputation in the process.

But facing a U.S. administration that is hostile to China (at least on the surface), Hollywood’s new Mandarins, in particular the squires of Wanda’s interests in The Business, must be prepared for three questions that are likely to arise in the coming months from either the public, a Republican-dominated Congress, or the new Administration.

First is a matter of US law. In what is known as the Paramount Decree, in 1948 the U.S. Supreme Court ruled on an anti-trust case against Paramount Pictures, a ruling that compelled the separation of motion picture production and exhibition companies. On its face, Wanda owning both production assets like Legendary and exhibition companies like AMC appears to be a potential violation of US Law, and Wanda will be required to explain why it is not.

The second question touches on the issue of whether films made by a studio owned by a Chinese company will produce propaganda. To this point, we have focused on Wanda CEO Wang Jialin’s promise not to turn the studio into a propaganda machine. For what it is worth, I believe that is Wang’s intention. But let us not forget that the Party still holds considerable sway over Wanda’s fortunes and its core assets in China. Wang’s best intentions aside, Wanda must prepare to answer this question: what will Wang Jialin do when or if Xi Jinping comes calling with an unrefusible offer? Can Wanda afford to decline the call of Beijing if that call should come?

And finally, a third question. We have, in the last forty years, taught China how to create everything from machine tools to smartphones, and Chinese companies now lead the world in the creation of those products. Motion pictures and microchips are not analogous, but what has ensured Hollywood’s continued global leadership in filmed entertainment has been an accumulated century of technical and process know-how that results in marketable films if not global entertainment phenomena. Hollywood as a whole must be prepared to answer: at what point will Hollywood have sold its Mojo to Beijing? And to what degree does the presence of Chinese conglomerates in Hollywood speed that process?

At the very least, these companies must have answers at the ready. Ignoring or dismissing them will only serve to convince potential opponents that there is more to Wanda’s motives than a good business deal.

 

Acronym of the Week: “HIPRA”

HIPRA, acronymHuge International Public Relations Agency, a term that refers to a public relations firm with over 1,000 employees or fee billings in excess of US$250 million.

These massive public relations corporations usually combine a broad global footprint with a headcount large enough to be able to service extremely labor-intensive PR work. These are firms like Edelman, Blue Focus, Burson-Marsteller, Ogilvy, Weber-Shandwick, and the like.

With Blue Focus, China has an entry in this list, and it is worth watching as BF looks set to grapple with Edelman for the title of the biggest, particularly as market trends are pointing away from the scale-based business model upon which both have built their businesses.

 

Concept of the Week: Conglomeration Mystique

Conglomeration Mystique – concept – a business ethos with two components.

First, the conviction on the part of a successful entrepreneur or company that a) because it is successful in one field it can be successful in any field to which it applies its brand or capital, and b) that to be a truly great company a firm must be in a diverse range of businesses rather than focus on a single field, all regardless of actual market conditions. Entrepreneurs with this ethos frequently cite examples like Elon Musk, Jeff Bezos, and Steve Jobs as proof of the concept.

The second component is the compulsion, usually the result of the above, to build a conglomerate business, either via acquisition or startups, and usually accompanied by rapid geographic expansion.

Related condition: gigantism

If you believe the writings of Tom Peters – whose thinking informed a lot of my early business career – the conglomerate is a really dumb idea. Peters was not necessarily wrong. During the economic boom following World War II, Corporate America decided that the best, easiest path to growth was acquiring profitable companies with stock, excess cash, and cheap debt.

The decade 1973-1983 threw a sequence of challenges at US businesses that exposed the weaknesses of these companies. The end of cheap energy, the conclusion of the Vietnam War, the end of the Gold Standard, the rise of Japanese and German companies, the emergence of corporate raiders, and the growing disruption of technology all landed on US companies in rapid succession. The conglomerates were the largest and most unwieldy of America’s corporate dinosaurs, and they crumbled: Fansteel, ITT, LTV, Olin, Teledyne, Esmark, Litton, Continental Group, and Sperry were all conglomerates in the Fortune 100 in 1970, and are today either gone or are leftovers of their former selves.

The verdict – and now the accepted wisdom, at least outside of China – is that specialization and focus pay. While a degree of strategic diversification might be good, lumping radically disparate businesses together under a single roof creates more management problems than it solves.

Donning my historian’s hat, I think the verdict is more qualified. During times of rapid economic growth and boom, using cash-cow businesses to fund expansion and acquisition into other promising markets is a viable strategy. And there are exceptions.  GE has used a long sequence of acquisitions and spinoffs to keep it a going concern, swinging from industry-to-industry like Tarzan swinging on vines through a jungle. And call it what you will, Warren Buffet’s Berkshire-Hathaway is aught more than a very well managed conglomerate, drawing free cash-flow from insurance operations to fund its growth elsewhere.

So conglomerates can work under some very specific circumstances. Where Peters’ research still stands, though, is that corporate conglomeration is not a viable default strategy, especially when it is used as a substitute for an imaginative strategy.

When any company in China – whether a large state-owned enterprise or an entrepreneurial operation like LeEco – appears to be turning itself into a diversified holding company, the burden of proof rests on the company to demonstrate that there is some really smart thinking behind the activity, and that it is not simply hiding strategic failure.

 

Standards of Influence

One of the early chapters in my book Public Relations in China focuses on the importance of the government as a stakeholder, and the means by which a non-Chinese firm could make its influence felt in the policy-making process.

In a time when the collusion between moneyed interests and government power has become a challenge in countries around the world, we have to ask, “is there any circumstance in which it is right for a commercial interest to influence policy and regulation?”

My answer is a qualified “yes.” There is no shortage of companies that have proven themselves to be bad actors, wielding a degree of influence far out of proportion to that wielded by other stakeholders, and too often acting in ways that undermine the popular best interest.

At the same time, there are occasions when it is proper for a company to make its point of view known to those proposing regulation, and, indeed, there are circumstances in which a company’s decision to withhold its expertise from the regulatory process represents an abandonment of the firm’s civic duty.

What we need is a standard, a framework within which companies can offer their input in the regulatory process without drowning the popular interest. In an effort to incite a discussion on the topic, I’ll suggest the first six criteria.

  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity has nothing to gain or lose from the resolution of the question, that entity is obliged to offer its information and analysis to influence policy for the greater good.
  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity stands to gain or lose from the resolution of the question, that entity may to offer its information and analysis to influence policy provided that it is open about its interests.
  • At no time should a commercial entity use its influence to mute or silence other voices, even those in opposition.
  • At all times the information provided to the government agency must be factual and presented in as clear a manner as possible.
  • At no time may any commercial entity provide direct or indirect payments to any government official or agency that would serve to influence the resolution of a regulatory question.
  • All efforts should be publicly disclosed in real time.

Arguably, China’s central government has never been as open to outside (and particularly foreign) influence as have those of the West. Looking at the lobbying-industrial complex that has turned entire neighborhoods of the US capital into ghettos of influence peddling, that is not entirely a bad thing. But the nation needs legitimate pathways to allow an appropriate degree of input by all stakeholders, and foreign companies are no exception. Those pathways should never be closed to companies that adhere to a clear and publicly-acceptable set of standards.

On Ending Media Pay-offs in China

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On Monday Advertising Age published my editorial calling for an end to the common practice of paying journalists in China for coverage. You can read the editorial here.

Early reactions are mostly supportive, but there are a number of people who believe that the problem will never be solved. I respectfully disagree. Historically the media in every society have gone through a corrupt phase. Current journalistic practice and standards in the developed world did not suddenly appear ex nihilo: nearly all were created to address an extant practice rather than to anticipate one that might arise.

Viewed against the canvas of history, China’s media are relatively young, and the industry has experienced profound disruptions in the past 70 years. There has been too little time for standards and high-minded practices to develop, and we are probably a generation away from seeing Chinese journalism rise above the shackles of propaganda, yellow journalism, and corruption.

But rise they will, and the sooner we discard the notion that there is no hope for these practices to end, the sooner the problem gets fixed.

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.

Concept of the Week: WaterTech

WaterTechnoun – the discipline combining elements of of biology, agronomy, engineering, environmental science, and electronics to find ways to make more efficient and effective use of limited water resources.

In an upcoming post in The Golden West Review, I suggest that the California drought is really a great big hint from the universe at one of the greatest business opportunities facing both China and the United States. The companies and countries that are able to develop the products, technologies, skills, techniques and services that significantly reduce per-capita water usage will be the winners in the 21st century.

As the steam slowly leaks from the microelectronics and telecommunications revolutions that created Silicon Valley, we need to start looking for the next revolution. WaterTech will no doubt be a major part of that, and Sand Hill Road would be stupid to leave the opportunities to foundations and foreign firms.

Get off the plane

English: Business class at grand opening of Be...
English: Business class at grand opening of Beijing–Shanghai (Jinghu) High-Speed Railway. (Photo credit: Wikipedia)

In the Hutong
Watching the pigeon hutches
1011 hrs.

Speaking to a group of students touring China from the UK, I asked how they traveled from Shanghai to Beijing. Their response, of course, was that they flew.

I understand the rationale for flying inside of China. Under the best circumstances it is fast, and other forms of travel are harder to arrange from overseas.

That said, my recommendation to anyone organizing a trip to China for a group of executives, students, or scholars is to do yourself and them a favor: on the leg between Shanghai and Beijing, put them on a high-speed train, in either First or Business Class.

(Be aware that for reasons that escape everyone but the Ministry of Railways, Business Class is the better, more comfortable, and more expensive of the two.)

Even if flights are on time, the elapsed time from downtown Shanghai to Downtown Beijing (or the reverse) is not that much greater, especially if you purchase your train tickets in advance. And if there are flight delays (and there are frequent delays, because of weather, VIP flights, or because the Air Force feels like it), the trip can actually be faster. But that’s not the best reason to take the train.

The best reason to take the train is that the people you are squiring across China will actually get to see out their windows something more than modern cities and clouds. They will see farms, villages, half-completed roads, factories, and the insides of a half-dozen cities of a million souls or more that they had never heard of.

Send them home with visions of modern cities in their heads, and they will get the wrong idea about China, making the same mistake made by instant China experts like Thomas Friedman and Niall Ferguson. Expose them to a bigger slice of China, and they will understand that a large part of the nation is still 40, 70, of 100 years behind Shanghai. Then they will start to understand the forces that drive this Asian Leviathan. And is that not the point of bringing a group to China in the first place?

Code

“In the future, coding will be a core skill, not a specialization.”

— Why I am learning Python at the age of 49