Silicon Hutong

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

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

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.

McKinsey Endorses Our Thinking

“Next-shoring: A CEO’s guide”
Katy George, Sree Ramaswamy, and Lou Rassey

McKinsey Quarterly
January 2014

The end of China’s time as the uncontested factory floor of the planet has become something of a meme. If that has failed to come to the attention of any of the world’s CEOs, McKinsey’s consultants make sure they get caught up.

My take is that McKinsey is late to the party. I made most of these same points two years agoI called it “right-shoring.” In such a circumstance, I would have thought that McKinsey, seeking to retain “thought leadership,” would have offered deeper insights. They don’t, even though they provide endorsement to my original thinking.

Thanks, McKinsey!

For the record, check out:

The Beginning of the End of Outsourcing,” Silicon Hutong, February 7, 2012

China and the Rightshoring Movement,” Silicon Hutong, December 4, 2012

 

Branding from the Ground Up

In the Hutong
Surrounded by snow
1721 hrs.

I am usually suspicious about “thought leadership” pieces on marketing that come out of the major management consultancies. These firms have proven strengths in organizational design, operations, production, logistics, and strategy, but when they venture into marketing they tend to stumble for a range of reasons that would fill a book.

I was doubly suspicious of the McKinsey Quarterly article “Building Brands in Emerging Markets” by Yuval Atsmon, Jean-Frederic Kuentz, and Jeongmin Seong because their approach lumps all emerging markets together.  But while the article has its shortcomings, there are nuggets of critical insights in the paper for businesses operating in China.

China is Different…

The authors correctly note that Chinese consumers generally rely more on word-of-mouth to guide their purchasing decisions than do their counterparts in most other countries, especially the U.S. The in-store experience is also more important here. Chinese are more accustomed to changing their decisions at the point-of-purchase rather than leave a store if they can’t get what they came in to buy. Indeed, many consumer marketers find that point-of-sale is the second largest chunk of their budgets (next to advertising) because they will lose at retail what they won in advertising.

Finally, it is increasingly important in China to eschew a purely national approach to marketing and target consumers with a more local approach. China is a patchwork of local habits, climates, dialects, diets, and sub-cultures, and we are reaching the stage in the nation’s development where marketers can no longer afford to ignore that.

…But the Difference is Changing…

Aside from its geographic overreach (“emerging markets” are not all the same) and its broad-brush approach to consumer goods, I have two major quibbles with the article. First, the authors offer a snapshot of consumer behavior but ignore trends that might undermine their points; and second, apart from geography they treat all Chinese consumers as an undifferentiated mass.

First, where people get their advice is changing. While the authors state that only 53% of China’s consumers find online recommendations credible, they leave out the fact that well over half of China’s consumers don’t have access to the Internet.  If you are a company (like, say, Coca-Cola) who needs to reach most or all of China’s 1.2 billion consumers, the Internet is about half as important as friends and family. Conversely if, like a growing number of companies, your target consumer is likely to be online – that is, if she is young, urban, educated, and has money to spend – the importance of the internet is sorely understated.

What is more, as credible online resources emerge, there is mounting evidence that the 560 million Chinese who can get online are giving outside sources greater credibility. As early as 2009, Sam Flemming’s CIC Data noted that over half of online consumers actively sought online feedback on a product prior to purchase, and that nearly 90% paid attention to online buzz on a product whether they sought it out or not. In that case, the Internet runs a close second to friends and family in the purchasing decision.

The importance of the retail shop in the purchase process is changing as well. I spoke with a senior marketing executive for a consumer electronics brand last week who told me that online sales – e-commerce – had suddenly become more important than in-store sales. A growing number of consumers was apparently hearing about the product from advertising, checking with family, checking online, going to the store to look and feel, and then going home and buying the product online. China’s online retail business has now passed an average of $40,000 per second and continues to grow. If the final point of sale is online, how does that change McKinsey’s equation? We don’t know: McKinsey ignores the internet.

…So let’s not Whitewash the Nuances

Finally, the authors ignore the importance of several demographic factors, most specifically age. Although it should be axiomatic, a growing body of research in China delves into how differently the increasingly prosperous older (55+) consumers behave than their under-30 counterparts. Friends and family are essential to the elderly, but for most purchasing decisions the youngsters are relying on peers and the Internet. Older consumers are more likely to purchase in a store, younger consumers are more likely than the grandparents to buy online.

Perhaps I’m being overly critical of the authors: these are, after all, nuances that would not fit into a 3,000 word article. But these oversights point to the problem with taking the management consulting approach to marketing. Grand strategies and broad generalizations may make for mind-tickling patter with clients, but as Ludwig Mies van der Rohe said, “God is in the details.” The day is long past when marketers can view Chinese consumers as an amorphous mass with uniform habits, and I would wager that applies in Brazil, India, and South Africa just as well.

Silicon Hutong 3.0: The Merchant and the Dragon

In the Hutong
Where have I been lately?
0740 hrs.

If this forum has been silent for the past month, we* have had good reason. It is now evident to anyone watching that China is on the cusp of change so large that its own leaders likely still do not grasp it. We’ve spent the last month trying to do so, and we’ve realized it is time to make some changes.

The End of Harmony

The particulars have been summed up at great length and eloquence elsewhere. In short, China has enjoyed 35 years of relative harmony enabled by acquiescence at home, accommodation abroad, and consensus within the Party. The past five weeks have made clear that this period of harmony is now at an end.

In fact, China is entering a period of great disharmony. The implicit promise of growing, shared prosperity looks increasingly difficult for the Party to keep, just as revelations emerge that suggest widespread malfeasance among the Party’s highest ranks. The willingness of Chongqing’s citizenry to accept Bo Xilai’s microwaved Maoism hints at a national mood that continues to sour. Suggesting that China is on the verge of a new revolution would be hyperbole, but the days of acquiescence are over, and the days of a more vocal, demanding populace are here.

The consensus-building approach that has characterized Party decision-making for the past 25 years appears to have reached its limits as well, and for good reason. When the way ahead was sustaining the status quo, consensus was easy to establish. The way forward is now unclear, and different political end economic visions are battling for precedence. Building general agreement among all leaders, even within the Politburo Standing Committee, will become difficult if not impossible.  The choice will be between paralysis and the end of the consensus-based system. Either direction will have vast repercussions.

As China takes its place among the leading nations of the world, especially in the wake of the Global Financial Crisis, the nation’s leaders have begun to address the world based on two implicit assumptions. First, that as an emerging world power China is entitled to change the rules of the global system to suit its needs, or ignore those rules if they obstruct China’s goals. Second, that the rest of the world will – or should – continue to accommodate China’s growing international assertiveness, even to the point of appeasement. That such assumptions place China at loggerheads with the rest of the world is of little concern. Japan, Europe, and the U.S. are too saddled with domestic troubles to effectively oppose China’s ambitions.

The Tale of the Merchant and the Dragon

If you watch China, none of the above should come as a surprise. And unless we’re living under a rock, we have to take notice. And we have. As we have done occasionally over Silicon Hutong’s decade in publication, we have taken a strategic pause in order to assess how we need to evolve this forum in light of China’s development. You will begin to see the results immediately.

First, you will see an evolution in our focus. Following the direction of my clients, this space has been moving beyond the original confines of technology, media, and public relations for some time now. We will now take the next step. Whether you do business in China or not, China will alter your playing field, and understanding why that is the case and what to do about it will be essential to everyone’s success. Our focus will become that why and the what. To that end, our five major topic areas will be:

  1. China’s Breakout: The emergence of China, Inc., and its role in global industry;
  2. China Rules: The effort by Beijing, Chinese companies, and Chinese executives to alter business norms, practices, and regulator behavior to favor Chinese firms;
  3. China Goggles: The globalization of China’s media industry and how that will enhance China’s economic and political influence;
  4. China Rewires: China’s consumers are going to alter the world’s business landscape, both for companies and consumers;
  5. Strategy, Action, Behavior, and Communications: Ideas and approaches to help executives and entrepreneurs deal with challenges of China’s rise.

Some of this, especially the last, is a recognition of the direction we have been taking for some time. The other four themes match the major directions I’ve taken in my own research and advising since 2008. It is now time to start delivering those insights.

Discussions about China’s national security, politics, arts, culture, history, and international relations will shift to The Peking Review, and will be delivered in the context of reviews of books, articles, and scholarly works about those topics.

There are more changes as well, but this post is long enough. Expect periodic updates in the coming weeks.

In the meantime, thanks for reading, and keep the feedback and comments coming.

Best,

David

* When I use “we” here, I do so not in the sense of the “royal ‘we,’” which would be a nauseating affectation, but “we” in the sense of myself and my wife and partner. While she does no writing for this forum, she is and has always been my sounding board and editorial adviser. Also, my time is our asset, so any expenditure of that asset needs sign-off. Finally, she has become a deep supporter of this forum (and The Peking Review). For those reasons, any major decision is ours, not mine alone.

Joining the Niall Ferguson Pile-On

Galvin Plaza, Wangjing, Beijing
Watching the wires
0931 hrs.

If you haven’t read James Fallows‘ thoughtful deconstruction of Harvard professor Niall Ferguson‘s partisan Newsweek cover story “Obama’s Gotta Go,” read it now, regardless of your political preferences. In the piece, Fallows details two areas where Ferguson has been wrong – or just polemical – about China.

For further reading on this vein, check out the view from the other side of Harvard Yard, Ross Terrill‘s “The Case for Selective Failure” in The Wilson Quarterly (registration required,) and my critique of his take on China’s historical and future competitiveness in Silicon Hutong,How the East Will Rise.”

There are great lessons to be learned from some of those who observe China from afar, not least from Fallows. But those who have genuine insights to offer have paid in time, blood, and treasure for their wisdom. Instant China experts like Ferguson (take scholar, add two weeks in Beijing and Shanghai luxury hotels meeting with assorted locals, stir, and pour into nearest editorial page) on the other hand, need to be consumed with the kind of caution one brings to boxed wine.

The New Public Affairs

Enroute HND – PEK
Dodging thunderstorms
0811 hrs.

A lot of the talk in the public relations industry relates to how much the media business is changing, and what that means to a craft that has traditionally placed a heavy emphasis on informing and (hopefully) influencing journalists. That focus remains viable in markets like China and India, where the media – especially traditional media – retain tremendous influence. In places like America and in Europe, that influence is in decline.

One aspect of public relations that is going through a huge change, however, is what we like to call public affairs. Despite a racy name that implies exhibitionistic behavior, public affairs is the term applied to the craft of understanding the government decision process and effectively influencing policy on behalf of a company or organization.

Whether through direct lobbying or indirect communications, the idea of a company or a special interest group influencing policy does not go down well among the citizens of free and open societies. Events of the past several years have cast this process as a bit underhanded, and perhaps nefarious, and much of the reason for that is that the practice of public affairs was formed at a time where some degree of behind-the-scenes sausage-making was expected in governance. A lot of people simply didn’t want to know about the ugly process, they were interested in the result.

But in the wake of two economic downdrafts in the past decade, alleged commercial-governmental collusion on a vast scale, the failure of regulatory institutions to act in the public benefit (particularly in the US and Europe), and growing public expectations of procedural transparency (thank you, Internet), the process of governance is now a public sport. Public affairs, as practiced, has to catch up. Discretion is no longer the better part of valor: it is suspect.

Updating this practice is going to demand some radical steps and a lot of discussion. In order to start the process, I suggest we alter our approach to government relations worldwide to conform to the following guidelines:

1. Transparency to the greatest possible extent. This means standing up in public and telling the world exactly what you are telling the government, and why. The agenda must be in the clear and open to both scrutiny and debate, as should be the tactical approach the company is taking. This also means that public affairs becomes more than a matter of speaking to government officials about company input on policy: it means involving the public as well.

2. Behavior and actions that withstand public scrutiny. The public is going to find out what you are doing to influence the process. Just ask Big Tobacco, Big Oil, Enron, and the Nuclear Power industry. In addition to making clear what you intend to do, conduct yourself in the process as if an overweight socialist documentary filmmaker from Detroit was following you around with a camera. Forget chummy dinners and back-room deals. When you are influencing public policy, you are going about the public business, and you need to behave accordingly.

3. Avoid behavior for which others have received opprobrium or censure. If someone else has done it before and gotten in trouble for it, why are you taking the risk?

4. Stop playing moneyball politics. Yes, the Citizens United decision in the United States has given corporations an unprecedented opportunity to influence the political process with money, and the opportunity for money or favors to influence the process exists in nearly every market in the world. Don’t do it. Let me say that again: don’t do it. Just because something is permissible doesn’t make it right in the eyes of your publics. The more you use money to influence the process, the more liability you are building in the bank of public opinion, and in each market a reckoning will come, rest assured. Find another way that does not hang a sword over your company’s head.

5. All of this means you will have to create a new set of tactics and techniques for conducting government relations. The way to start the process is to find a way to align your interests with those of the public at large, and keep them there. This will not be easy, but we have ample examples in the history of business to prove that it is not only possible, it is the best way to do business.

Let the discussion begin.

China and the Glocal Mix

Enroute LAX – HND
Looking forward to a day in Tokyo
1500 hrs.

There are two basic schools of thought on marketing best practices in China. One school, the Exceptionalists, holds that China is such a unique place that there is little or nothing of value to be learned from overseas experts, academics, or practitioners about the marketing crafts that is applicable here. Only practices that are home-grown and developed with long local experience and a deep understanding of the Chinese culture can ever hope to succeed.

The other school, the Integrationists, holds that China is basically like any other market, just not quite as far along in its development. You may not be able to pull the latest marketing books off of the shelves at Barnes & Noble in New York and apply the recommendations here, but China is pretty much like the U.S. was 10, 20, or 30 years ago. (One member of this school of thought actually said that Chinese advertising agencies bore spooky resemblance to the HBO Miniseries Mad Men.)

I have been to both schools, and I have wound up as what I would call an Experimentalist. I believe that effective marketing in China comes from a combination of global best practices and locally-specific, highly relevant tactics and techniques. Let’s call this the Glocal Mix.

Marketing Mixology

If that seems like a no-brainer, think again. The challenge is that there is no viable formula for how to strike this balance. Not only does the Glocal Mix vary from company to company and sometimes from product to product, but also the given Glocal Mix of a product changes over time as new tools are introduced, old ones lose effectiveness, and the media mix changes.

The most obvious issues with a global approach come in social media. Facebook pages are de riguer for companies around the world, but they don’t work in China for obvious reasons. Simply “localizing” the tactic by taking pages on social media site Renren.com will not garner comparable results, if for no other reason than differences in how people in China use social media, and how much those people have to spend. A year from now, however, this might not be the case.

Engaging bloggers is less effective in China than elsewhere as well, because with a few notable exceptions, blogs play a lesser role in shaping opinions than, say, online forums, QQ, or microblogs. Yet changes in China’s political landscape, and the growing willingness of China’s online “opinion platforms” to actively manage the conversations could well change that. When public discourse is controlled, private platforms get precedence, and it will be the voices who can master tools like WordPress.org who will retain their influence.

The Geek and the Chic

But for those industries where customers around the world share many of the same concerns, lifestyles, and habits (and indeed often directly influence each other), the Glocal Mix tends to be more global. Early adopters of technology and luxury products are prime examples.

Technology early adopters are a part of a global subculture, so much so that buying habits and priorities are often more similar between, say, an early adopter in China and his Korean counterpart than between the Chinese early adopter and his less technically-oriented next-door neighbor. This phenomenon is not restricted to hardware: games tend to make the leap among global early adopters faster than they leak into the general populations of any country.

Luxury early adopters also share a global sub-culture. It would be trite and simplistic to think of this as the global “jet-set,” because the crossover in relationships is limited to the pinnacle consumers in the group, but the similarities in culture are notable: Hong Kong society types may not mix with their counterparts in Paris, Beverly Hills, or the Hamptons, but the toolkits to reach the women waiting for the next LV purse or the men waiting for the next Breitling watch are remarkably similar.

The challenge in selling to the global early adopters is the same for each group: finding the global mix early, and executing simultaneously worldwide.

Once the early adopters are on board, however, companies find that the tactics and approaches need to change in order to reach into the wider market. This is where local focus comes into the mix. Culturally specific, locally-relevant approaches become essential.

Meet the Glocal Team

Operationally, this means that rather than fighting over who owns the campaign design and strategy function among local and global marketing teams, the answer is more nuanced. For those companies, products, and campaigns that depend on an initial bump from early adopters or from markets where there is a high degree of cultural commonality across geographies, global marketing teams create the master plan and strategy, and local teams localize (in coordination with global) and then oversee execution.

For those products or campaigns that seek to leap into wider, even mass markets, the strategy, messages, creative, and execution all need to be developed in market, sharing as much commonality with the global campaign as possible, but not shackled to it. This is the point where considerable autonomy must be granted to local marketing teams.

The challenge for the CMO and his direct reports is to come up with a shared view of the nature of the global market. Is there a global sub-culture that would allow for a more global approach? Or is it necessary to reach a culturally distinct audience in each market, and thus decentralize campaign planning. Regardless of company, this is the essential step, and it can be the most difficult of all.

Being Experimental

Once that agreement is reached, however, focus should be off of massive annual marketing plans and onto highly flexible teams (including agencies) working from clear, measurable, and consistent objectives. Strategies should be in flux as the nature of the market changes and as competitors respond to campaigns.

The idea of committing to yearlong media buys and marketing commitments is passe, especially with both the media landscape and the global economy in a state of flux. Experimentation (in the form of rapid measure-analyze-strategize-execute cycles) takes precedence over research and commitments, and diverse toolkits made up of global and local approaches, tactics, and techniques become more valuable than Big Bang marketing.

This will all be brutally difficult for companies used to more traditional marketing practices. Those who can master it, however, will turn marketing from a cost center into a genuine competitive advantage.

Does the Internet Make Polling Redundant in China?

Hutong West
Planning a trip to In-n-Out
1410 hrs.

I have a friend who is in China trying to expand the business of a major global organization that conducts opinion polls. Not surprisingly, he is finding the effort a bit rough going.

Part of the problem is a question as to whether or not polls are a tool that could work in China, a matter I touched on in my rather wonkish recent piece about market research. Another is the political sensitivity of what the Chinese government calls “social research.” Having an organization not controlled by the government or the party conducting polls among the Chinese people about social and political issues is extremely sensitive. Indeed, until recently such research was supposed to be approved in advance by the National Bureau of Statistics. (I believe this still to be the case, but enforcement is spotty.)

But the other part of the problem is whether traditional polling is even necessary in China anymore. While a poll takes days or weeks to set up, conduct, analyze, and disseminate, China’s social media offers a realtime glimpse at the Chinese zeitgeist that would be adequate for many (if not most) purposes. Indeed, I’ve watched demonstrations of public opinion dashboards based on real-time online analysis, and the process of gathering that data is becoming increasingly automated. Right now, companies in the advertising, marketing, and PR industries are deep into this business, and it is probably only political caution that is keeping Baidu, Sina, and Tencent from openly offering realtime “mood of the public” analysis to anyone willing to pay for it.

The only real question, then, is how long it will take American politicians to replace organizations like Harris, Roper, and Gallup with less expensive, real-time tools? While I suspect polling will never go away, the industry is in for some disruption over the next four years. Election 2016 is bound to be much more about Twitter, Facebook, and Google Analytics than about the old polling organizations. I would bet that at least one, if not all three, of those organizations either launches new, commercial election products in the coming quadrennium, or they buy companies that already have them.

Disinformation Wants to be Free

Hutong West
Afternoon sunshine
1250 hrs.

One of the book projects for which I have been gathering string for years is a book on disinformation, so I have been following the issue of corporate disinformation and deception in China with great interest.

One of the core questions I have to deal with (both intellectually and as a professional) is whether corporate disinformation is ethical or permissible at any time. Despite Japanese maxims that business is the moral equivalent of war, there are some things that might be acceptable on the battlefield that are less tolerable in the marketplace. In a day of the internet and corporate transparency, I have yet to frame an ethical case for a company to deliberately misinform its publics.

So I was interested in how Agenda Beijing dealt with the issue in its interview with corporate espionage specialist Bruce Wimmer.

[Agenda Beijing:] Would you recommend companies to employ offensive tactics as well?

[Bruce Wimmer:] Yes.  Companies need to be able to detect and neutralize the attacks.  In boxing or martial arts that would mean not just deflecting the attack but countering with attacks that might neutralize the threat.  This could involve passing disinformation, legal actions and working with various government and law enforcement agencies.

I can see Wimmer’s point, and he is not alone in believing that there might be circumstances where passing deliberately incorrect information is acceptable. He wants to use it as a way to catch a thief, and I think it would be an excellent method to throw off competitors.

But I am not sure if Wimmer has run into the problem I have discovered, which is that once information is passed, it cannot be contained. Even if you were surgical in delivery, ensuring that your intended audiences and nobody else received the initial transmission of that information, that audience would almost certainly pass the information onward. If the disinfo was credible enough to be believed by hackers or your competition, everyone would believe it. The competitor or hacker could pass it onto a credible third party source, who himself could say he got it from a credible source, then everyone would believe it was true. Some examples, neutered to protect the parties in question:

  • Using a proxy, one Chinese dairy allegedly passed on disinformation that the products of a competitor dairy were causing toddlers to grow breasts. The target audience, consumers, reacted perfectly, and the competitor’s sales took a hit. Unfortunately, that information also found its way to authorities, whom upon investigating discovered that the disinformation was false, and the credibility and business of the originating company took a hit;
  • A market leader in a high-tech gets wind that a competitor is planning on introducing a product using an innovative technology. The market leader passes word to that competitor that, in fact, the market leader already has such a product, and is about to launch it. The competitor stops development, but then announces it is doing so because it understands the market leader is planning such a move. The originating company is then left in a quandary: deny the move, and look like a market follower (the impression it had sought to avoid), or confirm it is pursuing the product despite its earlier decision to ignore the technology. (I can count at least three instances of this occurring, and one company that crashed and burned as a result);
  • Motivated by worrying scientific data, Congress is considering legislation that would affect the future of an industry. The industry pays for the development of studies that impugn the original data and the scientists who gathered it, then pass that information to Congressional staffs. The disinformation leaks and is publicly discredited, effectively discrediting the industry and any legitimate case it seeks to make against the legislation.

The lesson is simple and should not be forgotten: disinformation cannot be confined to a single target audience. Every time a company sets out to deceive (however pure the motive), that information will get out. No company or industry can withstand the hit to its credibility and public trust that such a campaign engenders. We are nearing the day when a nation cannot, either.

Professional Service Firms Should Stay Off Wall Street

(With Corrections)
Hutong West
Sunday, Sunday
1228 hrs.

About two years ago, the New Yorker ran an excellent article plumbing the question of whether Wall Street firms were capable of doing social good. In the heart of the article, however, was a revelation that should waken the leaders of any professional service firm from their dreams of IPO riches. (Keep in mind that I am thinking more about advertising agencies, investment banks, management consultancies, PR firms, and the like. As one reader correctly pointed out in comments, law firms, accounting firms, and auditors tend to remain private, though event that structure has limitations.)

Big doesn’t necessarily mean bad, but when the Wall Street firms grew beyond a certain point they faced a set of new challenges. In a private partnership, the people who run the firm, rather than outside shareholders, bear the brunt of losses—a structure that discourages reckless risk-taking. In addition, small banks don’t employ very much capital, which allows them to make a decent return by acting in the interests of their clients and relying on commissions. Big firms, however, have to take on more risk in order to generate the sorts of profits that their stockholders have come to expect.

Not long ago I had a delightful dinner in Beijing with the nonagenarian founder of one of the world’s premiere professional service firms. We spent much of our time talking about the history of the firm, where he had gone right, and where he had gone wrong. I flatter myself to think that there was more to the discussion than a self-indulgent trip down Memory Lane: that is not the style of this old-school Southern gentleman. I prefer to think he was passing me warnings about my own little firm.

He told me that in retrospect one of the greatest errors his industry had made was in trading the partnership structure for public listing. It was an error for the people (it dehumanized them,) the partners (it took away their incentives), and the clients (it refocused firm management on their corporate overlords more than on client work.)

There are many virtues to the corporate structure and public ownership. For professional service firms they are outweighed by the risks and the downsides. Investment banks are learning this the hard way, as are advertising, public relations, and management consultancies. After the one-time IPO payoff for the partners, the benefits of public ownership start looking thin.

I don’t expect this revelation will slow the velocity of conglomeration and public ownership of professional service firms. I do expect, however, that wiser clients are going to start evaluating firm ownership when they choose service providers. The burden of proof will be on the publicly-owned firms to prove that they will get senior-level time and attention and maximum value to the clients.

The Innovator’s Dilemma with Chinese Characteristics

Hutong West
Catching up
2009 hrs

In what has to have been one of the most important moments of my life, while running errands today in the car my wife touched my hand, looked into my eyes, and said “the time has come in our lives for you to focus on what is important: your books, your blogs, your research, your speaking, and your teaching. Let me worry about the other stuff from now on.”

Talk about a lump in the throat. I do not deserve a partner like her. With that kind of support, however, I’m rolling up the sleeves.

With this post, I am beginning an effort to write the posts I have been dying to write, but have put off over the years because of other obligations. Not everything will be timely, but it will all be relevant. I can promise you, though, that I’ll keep most of them short and pithy. To keep these grouped together, I will mark each of them with my “FITG” (“flag in the ground”) category.

Is China like Japan, Only Bigger?

In a thoughtful article in The New York Times from January 2011 [see, I told you I’d been waiting a long time to write these – dw], Steve Lohr suggested that perhaps the U.S. trade disputes and commercial competition with Japan were mere warm-ups for what we would face in China. It’s a provocative thesis, but the passage that got me in the article was this one:

“The bet for I.B.M. in Japan, as it is for companies like Boeing and General Electric today in China, is that they can stay ahead, innovate faster than the potential competitors they are helping,” says Edward J. Lincoln, professor of economics at the Stern School of Business at New York University, and director of its Japan-U.S. Center for Business and Economic Studies.

I’m on record in this blog for suggesting that the way for companies to keep ahead of the Chinese was with a flow of innovation. But when I read Professor Lincoln’s words, my brain goes straight to Clayton Christiansen’s Innovator’s Dilemma. Piling innovations on top of each other to stay ahead is great, but at some point your customers are going to wake up and ask exactly how much of this innovation they really need, or whether buying “good enough” products will do just fine?

Bells, Whistles, and Value

What triggered me was the reference to Boeing. I’ve been compiling notes and research on a book about Chinese aerospace over the years, and the issue I keep coming back to is that at some point Boeing’s innovations – as remarkable as they may be – may not mean enough to a Chinese, Latin American, or African customer to make a 11o passenger jet worth 25% or 30% more.

In construction equipment, for example, the global manufacturers have created so many process innovations that their earth movers, graders, and loaders will last for a decade or more. But those innovations don’t pay off with many Chinese customers: they amortize the cost of the equipment over a year or two, so they would rather buy cheap equipment, burn it up, and then sell it used to companies in the poorer parts of China than pay a premium for the longer-lasting equipment.

With airliners, many carriers in the developing world have been getting by with used Boeings and Airbuses for years because they simply could not afford to equip their airlines with the newest planes. But at some point, a company (like China’s COMAC, for instance) will come to those carriers and say “look, we’ll sell you our new airliners for just a bit more than you have been paying for the used Boeings and Airbuses. You get new planes rather than used ones, and it doesn’t cost you much more. Sure, they don’t use the latest technologies, but you don’t really need composites and Garmin avionics – you’d be perfectly happy with aluminum planes with old-fashioned dials for instruments. Your maintenance costs will drop substantially, and you’ll have happier passengers.”

Apologies to Debbie Fields of Mrs. Field Cookies, but sometimes, good enough is good enough.

What KIND of Innovation Stream?

So what do companies like Boeing need to do?

Part of the answer is to go back to Franz Johansson’s definition of “innovation” from his book The Medici Effect. A true innovation, Johansson noted, has two characteristics: it is novel (i.e., new or never been done before), and it is useful. That last bit, he noted was the part most people missed. But I think companies like Boeing and GE manage to get both the “novel” and “useful” bits right, but that is not enough: just ask the guys who make earth moving equipment. Something is missing.

I once had a jolly debate by mail with an auto reviewer for the L.A. Times who felt that Mitsubishi’s inclusion of an inclinometer in the instrument panel of its off-road vehicles was useless. I thought it was quite useful, as it is possible to get disoriented when bouncing around off-road, especially in low light. He responded by suggesting that maybe I needed my inner ear checked. I ended the conversation before calling him an effete Limey, which is just as well. Twenty years on, I think we were both right. For him, the doohickey was useless, but for me, it was useful.

Herein, I think, lies an answer to the challenge innovative companies are going to face with Chinese competitors. An innovation must be novel, and it must be useful, but it also must be relevant: it must be meaningful to the specific customer given that customer’s preferences and proclivities. In fact, the more relevant an innovation is, the less truly novel it need be.

This simple question reframes the thinking around innovation and around the value proposition an innovation offers. Instead of assuming that, say, because Singapore Airlines will value an innovation, Air Afrique will value it equally, we automatically assume that some of our customers will value an innovation and that some will not, and we start seeing innovations as targeted rather than as generic. This means that there will be multiple streams of innovations that are targeted to customers with different needs and preferences.

So yes, as Professor Lincoln said, to keep ahead of the competition who are innovating on your heels, innovate faster. But keep the innovations relevant, or you may turn around and realize that you missed a turn, but the competition didn’t.

Not Just China: Russian Government Mobilizing a Cyber-Militia

Darkness Botnet and Russian Politics.

A fascinating look into the organized – and likely government-supported – world of Russian Hacking. Apart from the fact that it was a surprise to read an article on cybersecurity that didn’t even mention China, it provides a glimpse at how Putin seems to be building his own cyber militia. While that capability is aimed internally in this story, how hard would it be for the Russian government to switch targets to overseas servers?

Probably not very.

As tempting as it is to make China the world’s cyber-boogeyman, as this NPR article does, security experts like Jeffrey Carr take a more balanced view. Hacking and cyberwar is a global problem with multiple sources. We should not dismiss the role China plays, but we should not allow focus to shift totally onto China. Doing so only gives comfort to hackers in other countries while making us look both weak and blind to other sources of serious threats.

Television Regulations: New Bottle, Same Wine (With Corrections)

State Administration of Radio, Film & Televisi...

State Administration of Radio, Film & Television offices in Beijing (Photo credit: Toby Simkin)

In the Hutong
Black Lung Control
1047 hrs.

In the Valentine’s Day edition of The New York Times, Andrew Jacobs describes the new regulations issued yesterday by the State Administration of Radio, Film, and Television (SARFT), most specifically including two key restrictions: the prohibition of foreign programming during prime time, and the limitation of foreign programming to no more than 25% of the total air time on a channel.

There is some new content in the regulations issued yesterday, but contrary to the NYT headline, the major issues addressed vis-a-vis foreign content are not new: indeed, they harken back to regulations that have been in force since 1995. From the unpublished manuscript of a guidebook on Chinese television that I co-authored with William Soileau and Jeane-Marie Gescher in 1998, according to regulations then in force:

Foreign programming must not be distributed between 6:00 p.m. and 10:00 p.m., although actual enforcement varies according to the broadcaster.

and

Foreign programming must not take up more than 25% of total broadcasting time on a station basis.  In reality, while the rule is nominally honoured, many networks apply the quota on a channel by channel basis. Unofficial figures indicate that foreign programming may account for as much as 50% of programming.

The rules governing television are not increasing, as the Times suggests. What seems to be increasing is the degree to which they are openly flaunted by broadcasters. Let me explain.

China has had a wide range of laws and regulations restricting media (and many other industries) in place for a long time. What varies is not the regulations, but the degree to which they are enforced. Laws and regulations, as such, are not de facto restrictions of behavior so much as they are tools for the government to use when political conditions demand it. For that reason, what SARFT does on a fairly regular basis is issue notices designed to remind broadcasters that the regulations exist, and signal to them that enforcement looms. Usually, such initiatives come either when things get too far out of hand (i.e., 25% becoming 50%, as suggested above), or when something happens to make it an issue (Chinese producers complaining about access to TV time, or, say, a  leadership change.)

This is not dissimilar to the way I get my ten-year old to clean his room: I let him know an inspection is coming, and by the time I get there, behold! A clean room! The requirement to keep his room clean always existed. What was lax was the enforcement. What caused me to issue the edict to my son was either the room was getting too messy, or guests are coming over.

Jacobs quoted one Chinese citizen posting his disgust with the regulations on Weibo:  “They should really put Sarft in charge of food safety and have the State Food and Drug Administration regulate TV shows — that way we’ll have safe food and good entertainment.”

I would wager the person posting this was either very young or unborn when the regulations were actually issued. The issue that has provoked SARFT (an underfunded, undermanned, out-gunned agency if there ever was one) is the same that caused the food problem: China is ruled less by policy than law, and political expedience trumps enforcement – until the political expedients change.

UPDATE: Please read the comments conversation between Li Yuanyuan and myself. He raises some excellent points to rebut my point of view. He disagrees that enforcement was ever lax, suggests that it was always tight, and he explains why. We do not share the same memory of events, but he does point out that the prime time ban on foreign programming and the restriction of quantity of content was not in the 1995 Regulation #549.

The Winds Are a Changin’

Russian communist in China to set up Chinese C...

Image via Wikipedia

Hutong West
Staying awake for a conference call
2259 hrs.

In making the case that the business climate for foreign businesses in China is changing for the worse, I have been challenged by people I respect greatly to “prove” it. There is no shortage of large foreign enterprises doing well in the PRC, something I have to admit as a few of them are my clients. As such, it seems that the complaints of the various foreign chambers of commerce that there is a tilt against foreign companies should thus be dismissed as the groundless whining of a privileged and ungrateful elite.

Yet while there is no shortage of success among foreign companies in China, only willful ignorance would allow anyone to deny that the winds are shifting in China, and in Beijing in particular. A case in point comes from an article I read recently in The China Daily about how Unilever was slapped with an RMB¥2 million fine for making statements that caused panic buying of staples in some parts of China. Reading through the article, I was initially struck at how clearly the government’s case was laid out, and how reasonable the action seemed.

Then came this paragraph, completely out of context:

“Foreign companies get too many benefits compared to local companies, it’s time to make a change,” Pan Ping, a white-collar worker at a private company in Shanghai told China Daily.

I have lived in China too long to believe that this was an accidental inclusion, and I know too much about The China Daily to think this is some reporter or editor playing a prank. The China Daily is the English-language mouthpiece of the Chinese Communist Party. If the quote attributed to the worker was not a statement of policy, it was certainly a statement of position.

I have argued in these pages that despite all efforts to establish a consensus-based orthodoxy, neither the Party nor the Chinese government is not as monolithic as they are often portrayed. What articles like this suggest is that even if the government has not reached consensus about the future role of foreign companies in the Chinese economy, at the very least there are those in positions of power who question whether they have been too successful for too long here.

Be assured that the raison d’etre for foreign firms in China is one of the issues that will be addressed in the coming changeover in Party leadership, and is another reason why foreign enterprises, journalists, trade associations, and bloggers will be spending so much time reading the tea leaves in the coming months.