The business of devices, machines, and the chunks that go inside them

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.

 

Mi Home

IMG_0240

Back in the Hutong
Thinking Geek
1427 hrs.

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

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

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

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

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

When Lux and Tech Collide

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

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

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

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

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

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

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

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

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

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.

 

Nokia Problem #342: We Ignored Journalists

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

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

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

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

So You Think Apple Should Buy Tesla?

English: Tesla Motors opened its showroom in M...
English: Tesla Motors opened its showroom in Munich in September 2009. (Photo credit: Wikipedia)

Hutong West
Finishing the Table of Contents
1200 hrs., 11 March 2015

So do you think Apple should take some of that massive cash pile and spend it on Tesla? Some shareholders apparently do. And if you did, you might have a point. Who better to finance the disruption of the automobile industry than the largest, most profitable company on the planet?

But for the rest of us, consider this sequence of events that I am betting would take place within 18 months of Apple closing the deal.

Day 1 – Apple buys Tesla

Day 30 – Elon Musk quits, citing creative differences, but attests to his continued faith in Tim Cook and Tesla’s future with Apple. Musk takes his cash hoard and shifts his attention to SpaceX.

Day 60 – Apple hints at major redesign of the sedan by Jony Ive. Tech and automotive media go into spasms of speculation.

Day 120 – Tim Cook takes the stage at the Detroit Auto Show to announce that Apple is dropping the Tesla name. From now on the marque will simply be “Apple.” He then unveils the redesigned sedan, which bears a striking resemblance to the Audi coupe in Will Smith’s “I, Robot.” Except, you know, it’s glossy white. The car will be called the Apple Phaeton, and it will be followed by the Apple Barchetta coupe, and the the Apple Combo crossover SUV.

Day 180 – Apple announces that due to unspecified issues in Fremont, after the first year they will be outsourcing all production to China.

Day 210 – At the Los Angeles Auto Show, Apple announces pricing for the Phaeton and Barchetta, 25% higher than the previous models. They also announce that they are shifting to a proprietary fast-charging system called ePlug. And with the presidents of Exxon-Mobil, Chevron-Texaco, BP, and Valero onstage, announces that all of these chains would begin installing ePlug fast charging systems across their North American units starting that day. Each company agreed to a seven year exclusive with ePlug.

Day 212 – In a class action suit, GM, Ford, and Toyota all sue Apple for violating Sherman Anti-Trust act in gaining a monopoly on electric charging at fueling stations.

Day 300 – The Big Three automakers lose their suits.

Day 350 – Google agrees to buy Ford in an all-cash deal. GM announces that it is being bought by its Chinese partner, Shanghai Automotive.

Day 370 – The Apple Phaeton launches, selling 10,000 cars in its first month.

Seem far-fetched?

Trust me. Remember. I’m the guy who predicted the iPad.

Happy motoring.

 

 

 

 

 

 

 

 

 

The Apple Pay Early Adopter Problem

In the Hutong
Fighting Sleep
24 October 2014

English: People pay tribute outside the Toront...
English: People pay tribute outside the Toronto Apple Store. (Photo credit: Wikipedia)

I am caught in the heart of a swirling vortex of work at the moment and getting ready to fly this weekend, which explains my slow posting of late. More announcements on that soon. In the meantime, I’m going to be firing off a series of short posts on things that I have been itching to share.

Let’s start with Apple Pay.

Arguably the most interesting and revolutionary announcement tha Apple made at its product launch gala this week, Apple Pay promises to finally put the US on the long pathway to doing away with fat wallets, something that has been happening in Hong Kong for nearly two decades and in Australia for almost as long. It is also being touted as the big differentiator for the Apple Watch, and an important one for the iPhone 6.

I have two reservations.

First, I think we all need to take a deep breath and think carefully before entrusting our financial information to any large company. That’s not luddism, that’s wisdom. The recent series of security breaches at major retailers alone should give us pause, and Apple is no exception: a company that has shown itself incapable of protecting Jennifer Lawrence’s photo album has to prove to us that it can be trusted with our wallets.

Second, the high profile of this announcement will surely pique the interest of just about every hacker on the planet, from the kid down my block to certain military units operating from Shanghai suburbs. Even the best systems tend to have hidden vulnerabilities, and those of us who can wait for Apple Pay should do so if only to allow the engineers to discover and addres its most blatant vulnerabilities.

These aren’t deal killers for Apple Pay, but they do suggest that most of us should venture carefully into this new system.

 

Electric Cars and China

“The mechanical value of the automobile is falling, but the electric value of the car is rising.”

— Amit Gattani, Micron Technologies

Let’s take Amit’s point one step further: the trajectory of automotive development is such that the car is evolving into an oversized piece of consumer electronics. If there is a single factor that inveighs in favor of China eventually becoming the automaker to the world, this is it.

China and “Datathermal Energy”

Hutong West
Letting the Sunshine In
0909 hrs.

Much of my March was spent working with clients who are thinking through some of the issues facing the growing data center market in China. For the uninitiated, a “data center” is a place that houses anywhere from one to tens of thousands of servers. This blog sits in a data center, your bank information sits in a data center, there are a lot of them, and these places are growing.

Little wonder. One delightful quote from Smithsonian.com suggests why.

“From the year 2003 and working backwards to the beginning of human history, we generated five exabytes–that’s 5,000,000,000 GB – of information.

By last year, we were cranking out that much data every two days.

By next year, we’ll be doing it every 10 minutes.”

That quote was from two years ago. Draw the curve in your mind, and you can figure that, conservatively, today we could be generating five exabytes of data every five minutes. Not all of that is going to sit in phones, laptops, external hard drives, thumb drives, or those little SD cards that we stick in our digital cameras. Much of it has to sit in data centers.

The Great Heat Sink

Which is fine, until you consider that data centers suck energy the way blue whales suck krill: in massive quantities, and with large amounts of undesirable waste at the end of the process. In the case of data centers, that waste comes in the form of heat, which then demands more energy to power cooling, which in turn generates heat. The bigger data centers get, the more heat we are talking about. And data centers are getting quite large indeed, measured in millions of square feet of servers stacked like so much electronic cord wood.

Some data centers have started addressing heat as a resource, rather than a waste-product: IBM’s Swiss data center heats a pool; Telehouse in the UK is heating homes in London’s Docklands district; and Notre Dame’s Center for Reserch Computing is heating the flowers of a local municipal greenhouse with the heat from a rack of high-performance computing nodes.

Not everyplace where there are data centers needs heat, though. Some places simply need energy. As any engineer will tell you, where there is heat, there is potential energy. The key will be to capture enough heat so that it can be efficiently turned into energy, for example through steam turbines. Energy generated like this – through the waste heat of data centers, we will call “data-thermal energy.”

Data-Thermal China

China is a natural place for the development of data-thermal energy. The country is early enough in the cycle of development for data centers to start designing its largest server farms to capture and channel heat efficiently. And scale will not be an issue in China. Leaving out government-run data centers entirely, some commercial data centers, like one 6.3 million square-foot beast under construction in Langfang just outside of Beijing, will have more floor space than the Pentagon.

The ability to capture and use waste heat efficiently also opens the prospect of cutting down on air-conditioning costs. If the heat can simply be blown – or sucked – away from the servers and into a central collection point for energy generation, the need to actually cool the air should abate a bit.

There is considerable engineering work to be done, but this is a worthy (if not essential) direction of thinking for the people designing and growing China’s server farms. It will demand imagination and discipline: the old way of doing things – stack ’em high, chill ’em down, and blow the hot air out the window – is cheap and pervasive. As the costs of energy grow and sustainability becomes more important, however, Big Data will need to start seeing itself as a utility, not just a customer.

Qualcomm: Cometh the Reaper?

Hutong Forward
Learning not to eat fish 400 miles from the ocean
1840 hrs. local time

LinuxTag 2011 - Qualcomm
LinuxTag 2011 – Qualcomm (Photo credit: LinuxTag)

Two days ago, QUALCOMM (QCOM) announced that its chipset business was the subject of an investigation by China’s powerful National Development and Reform Commission. Details are sketchy, as the company has been instructed to keep the details to itself. It appears, however, that the issue is whether QCOM’s chipset business, QUALCOMM CDMA Technologies, is an effective monopoly in China.

Yesterday I got a note from Edmond Lococo at Bloomberg, who was curious about the degree to which QCOM’s critical China business will take a hit as a result. (Full disclosure: QCOM was a client from 2000 to 2004, but I have had no direct interaction with the company for nine years.)

As I told Edmond, reports of QCOM’s monopoly are exaggerated, to say the least. Apple makes their own chips, as does Huawei, and MicroTek and local upstart Spreadtrum been supplying China’s smartphone market for years. To suggest that Qualcomm has anything approaching a monopoly defies the facts: one need only check the specs on the 10 most popular phones in China to ascertain as much.

Impact on QUALOMM

At this point, though, it is hard to say what impact this will have on QCOM’s sales in China, which represents some 49% of the company’s revenues. There have been no specific accusations made, and few handset manufacturers who are committed to the QCOM architecture are likely to change on the basis of an unspecified investigation, particularly for those devices well along in the development cycle.

Where this may impact QCOM will be in the case of companies who are not committed to the architecture for devices in development, but who are looking to make a decision on chipsets in the coming months. This means that the longer this goes on, or if there are accusations of a specific nature levied at QCOM, there may be a meaningful impact. In the meantime, however, I expect many manufacturers to take a “wait-and-see” attitude.

Why Qualcomm, and Why Now?

There could be any number of reasons behind this: it could be concern about Snowden’s allegations; retaliation for Huawei’s treatment in the US; a growing nationalist discomfort with the success some foreign companies have enjoyed in China; or, indeed, a specific issue with QCOM. But suggesting any or all of these reasons at this time is little more than speculation.

As this all plays out, I expect we will learn more, and that we will soon know whether this is aimed at a single company, or whether all foreign enterprises in China should be concerned.

In the meantime, the wise course for any company would be to assume that “the bell is tolling for thee,” and address the specter of a changing business climate head-on.

A Small Crack in Apple’s Asia Tablet Story

Image representing iPad as depicted in CrunchBase
Image via CrunchBase

IDG Connect – Kathryn Cave (Asia) – The Tablet Security Conundrum.

Hutong West
Here a week and not a second on my porch
1947 hrs.  

Kathryn Cave at IDG Connect offers a snapshot of her company’s research on how and why Asians are using tablet computers like the Apple iPad, the Samsung Galaxy, and the Motorola XOOM. While Asians trail the world average in tablet use, they are more likely to buy a tablet in the coming three months and are more likely to use the tablet daily for work.

While iPad dominates the market, more Asians than anywhere else in the world believe that Apple’s leadership is unsustainable. 51% believe Android will become the global market leader in tablets within 12 months.

This is important because it offers more evidence that Asians view Apple rather differently than their U.S. and European counterparts. IDG does not delve into why that is the case. My theory has been that Apple has long treated Asia beyond Japan with a degree of benign neglect. By contrast, Apple invested in evangelists, user groups, and a legion of specialized resellers in North America, Europe, Australia, and Japan, who together sustained enthusiasm for the company and its products even in the wilderness years of the mid-1990s.

Tablets have been the category that Apple has ruled most strongly over the past 30 months. What is more, Asia is regarded by punters and competitors alike as the company’s largest font for growth in the coming years. Research suggesting that Asians are less enthusiastic about the future of Apple tablets should send up red flags in Cupertino, and green ones at Samsung and the Googleplex. This is the closest thing we have seen to a strategic vulnerability for Apple.

While the company focuses its efforts in Asia on production and distribution, treating marketing and customer relationship-building as an afterthought, the competition is getting wise. Bet on Samsung and Google targeting this rip in Apple’s chain mail armor. Asia has been Apple’s escalator, but unless it is handled with more than a backhanded marketing effort, it could become the company’s downfall.

The Beginning of the End of Outsourcing

Apple’s iPad and the Human Costs for Workers in China – NYTimes.com

In the Hutong
Working like hell
1530 hrs.

In what China-based business sustainability expert Richard Brubaker calls “the best piece to date on just how rotten [Apple’s] supply chain is,” Charles Duhigg and David Barboza of The New York Times have actually done more than that. They have written a piece that underscores the ethical risks implicit in both outsourcing and offshoring.

Control is the Issue

You could argue that this story and the reception it is getting is a function, in part, of the end of the Steve Jobs Reality Distortion Field, or, as I overheard someone say the other day in reference to Apple, “the King is Dead, the Gloves are Off.” That may be true, in part, but I think that this story is the harbinger of a wider issue plaguing the global manufacturing sector, and the challenges Apple is facing with its suppliers are simply the most visible examples.

The problem goes deeper than the conflict implicit in asking a supplier to give you the best price AND to manage its business in a way that increases its costs. The mater of working conditions is part of a bigger question about the value and importance of control over the means of production. (Don’t worry, I’m not about to go off on a Marxist tangent here. Bear with me.)

I started my career managing the output of 30-odd factories and suppliers in greater China making furniture, jewelry boxes, and small gift items for a medium-sized US importer. I learned a hell of a lot from that job, but the lesson that has stuck with me throughout my career is that you cannot change what you cannot control. We like to think that a customer like Apple would, by virtue of the size of its business, be able to strong arm its suppliers into complying with its codes of behavior, or even “incentivize” a supplier to go along by raising prices. In reality, it is nowhere near that easy. Any customer, even one the size of Apple, exerts influence over how a supplier is run, but not control. A customer can exact some concessions from a supplier on factors outside of product features and quality, but at some point, any self-respecting factory owner is going to push back and say “you may buy from me, you may be my biggest customer, but you don’t own me. I’ll give in to you on some things, but beyond that, you need to let me run my own business.”

Outsourcing and Reputation

As long as governments, NGOs, unions, activist shareholders, and bloggers aren’t looking over the customer’s shoulder, as long as the supplier is compelled to operate according to strict occupational health and safety regulations, or as long as the customer’s customers don’t care, that is an acceptable arrangement. But if the supplier operates in an environment that rewards risking health and safety, has the world watching them online, or has an activist bunch of end-users, the risks of outsourcing grows until it lands the customer and supplier in the hot water that Foxconn and Apple find themselves in today.

Barring an incident that disrupts production, the costs to Apple of its supply chain problems are in goodwill and reputation. Apple, arguably, has amassed enough goodwill and reputation to be able to afford to pay such costs for a while at least. The rest of us must live in a world where we must guard our goodwill and reputation as the corporate crown jewels, spending both with care and amassing more if possible. Indeed, if we replace “Apple” in the NYT story with Nokia, Dell, or Samsung, the report would have very real and unpleasant ramifications for any of those companies.

Apple notwithstanding, we are leaving the age when spin, messaging, great products, and generous corporate philanthropy are enough to pave over corporate practices that governments, shareholders, and consumers find objectionable. We are entering an age where the Spin Gap, the difference between a company’s reputation and the reality of its behavior, is closing, and approaching a time when behavior and reputation are essentially the same thing.

Beyond Goodwill

I tend to harp on reputation and goodwill first because these assets, always important, have become both more important and more fleeting when bad news travels at the speed of Twitter. But the problems with outsourcing and the loss of control over production goes beyond the risk to reputation posed by supplier misbehavior.

We in the west have forgotten that much of the value of our companies create happens in production. The stock market rewards companies for outsourcing their production because of a short-term focus on cost savings and on superficial measures like return on capital. But investors ignore – because they cannot see or measure – the implicit value of keeping production in house.

But, as The Economist pointed out in a superb editorial comparing the fortunes of bankrupt Kodak with those of prospering Fujifilm:

It is easy to think that companies can compete by outsourcing production and focus on developing and marketing. But many innovations bubble up from the factory floor. Even Apple, a master in outsourcing and orchestrating manufacturing, has in-house expertise and occasionally acquires certain technologies. Today, as debates rage in America over the degree to which returns on capital exceed those from actual business operations, and the relative merits of employment in manufacturing versus the services sector, the history of Kodak is more relevant than ever.

The point about innovations on the factory floor deserves some amplification. Apart from the product innovations that come from the factory floor, innovations in the production process itself can become a huge source of competitive advantage. Ford, Toyota, Hewlett-Packard, and Dell are just four companies that built their success to a great degree on innovations in the production processes.

Owning production is a hard sell to a lot of American business, not just because of Wall Street’s expectations, but because so few young Americans learn production or operations management anymore, preferring courses in finance and marketing in the hopes of getting a job in an office. That does not take away from The Economist’s point. You start outsourcing, and not only do you lose control, you mortgage your future for near-term returns.

There is no shortage of companies who, consciously or otherwise, defend their future by hanging onto their factories. Two examples off the top of my head are Boeing and Intel. Boeing got so good at manufacturing that it was able to cut an entire time-consuming step – full-size mockups – out of the development process, going straight from computer model to production on the 777 jetliner. When the company tried to go the “design and market” route with the new 787 dreamliner, they got hit with a three-year delay on their critical 787 program and, until they took back production from several contractors, they were on the verge of sacrificing expertise in a critical new skill area: manufacturing all-composite aircraft components.

Intel has always been a leader in manufacturing processes, being first in the industry to try new, expensive, and often risky technologies, working out the kinks, and sustaining leadership as a result of that expertise. Even today, Intel outsources little: the company continues to build, own, and operate manufacturing incredibly expensive manufacturing facilities – from chip fabricators to pack-and-test assembly lines – because the company understands that there is more to their business than design and marketing.

And the idea of outsourcing would be anathema to Mercedes-Benz, Fender Guitars, Microsoft, or most companies in the service industries. In all of those cases, keeping the production close is either an important part of the value delivered or the very source of  company’s differentiation.

The Vote of History

Outsourcing has saved its share of companies and returned its share of profits. But the persistent challenges encountered in its execution by one of the smartest and healthiest companies in the world is a warning: short-term expedients do not create long-term winners. Those of us who love Apple and the products it makes and who understand the nature of its relationship with its suppliers (and their own ambitions) make us worry that the company is forgetting a key source of its uniqueness.

The upshot of the above is simple: two years from now even Apple could find its reputation savaged by the perfect storm of one bad product, one down quarter, and a mishap caused by a factory it did not control; or fifteen years from now it could follow Bethlehem Steel, General Motors, and Kodak into the ignominy of Chapter 11. Either would be the ultimate result of depending on somebody else’s factory for the production of Apple devices.

What is true for Apple applies doubly for the rest of us. The factory floor matters. It’s time to take it back.

There is More to Tablets than Cheap vs. Dear

 

English: motorola xoom tablet
Image via Wikipedia

How Apple Can Keep Control of the Tablet Market – BusinessWeek.

GigaOM‘s Darrell Etherington believes that the way for Apple to sustain its dominance in the tablet market in response to challenges from the Kindle Fire is to offer a smaller, cheaper tablet. The case he makes – that a cheap tablet with a tightly integrated “content ecosystem” is the best response – is not a bad one, but it misses the wider point.

The issue with tablets going forward will not be large versus small or high-end versus low-end, but general versus specialized. The iPad, the Motorola XOOM, and the Samsung Galaxy Tab are examples of high-end, tablet format computing devices that are designed to perform an array of tasks. The Kindle Fire, despite the other things you can do with it, is designed to offer a quality book, music, and possibly movie experience. At doing other things, even browsing the web, it is somewhat weaker.

And this is not a bad thing. Not everybody wants a tablet to act like a laptop without a keyboard, and in fact the great untapped opportunity is in finding ways to target the format for specific experiences or vertical markets where the iPad or XOOM would be too much machine for the job.

China and the Oracle Gambit, or The Coming Softwar with China

Oracle logo at the Oracle headquarters.
Image via Wikipedia

In the Hutong
Still in Uniform
2052 hrs.

Not only I am one of that growing number of believers who expects Oracle to make a bid for a major computer hardware manufacturer, I also think it will be a good thing. Whatever the virtues of the present structure of the enterprise I.T. industry, the average company has so many things to buy (and so many people to buy it from) that setting up, upgrading, or rebuilding a corporate IT system has become more complex than buying a jetliner.

Give Larry a Chance

Even in the biggest of companies, this means that iT managers spend a disproportionate percentage of their time dealing with procurement, a costly distraction that takes away from what IT managers should be doing, which is figuring out ways to put IT at the better service of the company and its people.

(Mind you, there are probably more than a few IT managers who prefer things to be this way. The sheer headache of buying and integrating these systems not only provides gainful employment, it has helped turn an MCSE qualification into keys to the executive washroom. The computer guy has become a Wizard, a Guardian of Data, The Gatekeeper, the Cee-Tee-Oh.)

Yet I would wager that there are a few companies – and CTOs – who would love to have their purchasing choices greatly simplified, allowing them to stop worrying so much about the plumbing and focus on how to better use the water, if you will. I am no fan of Larry Ellison, but if he believes he can eliminate that complexity with the help of Mark Hurd and a checkbook, doing for enterprise information systems what Steve Jobs did for personal computing, I say the sooner he gets started, the better. And let him start by buying HP or Dell.

When I talk to people in the industry about this, their eyes get big, their lips purse, and they say in low tones “whoa – what would Microsoft do in that case?” After having a delightfully speculative discussion about how much Ellison would enjoy becoming Steve Ballmer’s worst nightmare, though, the question comes to China.

The China Response

China probably needs more enterprise IT than any other country in the world, by virtue not only of the sheer number of tech-handicapped companies in the PRC, but also how many still do everything on abacuses and paper or Excel spreadsheets. Experience suggests that a company able to offer simplified, integrated solutions delivered ready to configure for the specifics of each firm would have a massive market in China. And the first one to do it would have the market to itself for some time.

Maybe.

That would first depend on how Oracle would price the offering. There are circumstances when Chinese enterprises have proven themselves willing to pay a premium for a product or service, but the tendency is to look first at price.

The automatic cachet of going with the big global company no longer exists: major foreign IT suppliers are assumed to be overpriced, and have the burden to prove otherwise, especially in the face of local companies offering “almost-as-good” solutions for a fraction of the cost.

Oracle would need to price aggressively to succeed with an integrated offering in China. That sort of thing tends to mean lower overall margins, which I would suggest is the direction things are headed in enterprise IT in China anyway.

Cultivating the Competition

Second would be how China saw this changing the overall competitive landscape in the global IT industry. You can expect China’s regulators would demand the opportunity to review and approve a merger of this size, alongside their European and American counterparts.

What would be harder to gauge is the industrial response, and this is where I think it gets interesting. Many key policymakers in Beijing understand, at least intellectually, that really good corporate information technology infrastructure is going to be essential to China creating globally competitive multinational firms of its own.

At the same time, the idea of exporting boatloads of cash to foreign IT vendors does not sit well with local leaders. If China sees the consolidation of the global IT business as a threat to China’s own fledgeling enterprise IT industry, expect Beijing to raise shields.

Such barriers could take many forms. But if history is a guide, China would want to have their own national champion to serve as a foil to a global enterprise IT giant.

The way I think it would play out would be that China would play for time while looking for ways to build a domestic response to Oracle. An extended merger review would buy some time, and it would allow Chinese regulators a privileged look under the hood of what a New Oracle would look like. Regulators could also modify the procurement law to require SOE and government purchases of IT systems from multiple vendors so as to slow a merged Oracle from taking too much market share.

The end goal, though, would be to create one or two unified Chinese IT firms capable of offering one-stop shops for local enterprises looking to “informatize” (think a merger of Lenovo and local software vendor Kingdee.) Could such a firm hope to match what Oracle offers? Certainly not, at least right away.

But think “Innovator’s Dilemma” here: all the Chinese firm or firms would have to do is offer a “good enough” solution for the middle-tier of companies in China (and then India, Africa, Southeast Asia, and Eastern Europe). Not only would that give the Chinese players ample room to grow, it would let them stake a claim in what look to be the most promising growth markets for enterprise IT.

All of this is build on a deep foundation of speculation: there is no guarantee that Larry Ellison could effectively achieve the dream of a profoundly simplified enterprise IT industry, no matter how compelling the economics. The takeaway, however, is this: China could either be the cradle of Oracle’s next major competitor, or of the company that disrupts the enterprise IT industry.

Scaling up through acquisitions will not change that: it will only raise the stakes enough to invite Beijing in to midwife the birth of a company that can challenge Oracle in some of its most promising markets.

So go off and buy, Larry, and nurture the dream of making Oracle into the Apple of the Enterprise. Just remember that China is watching.

Cheerleading the Bankers

Starbucks, China World Tower 2, Beijing
In the course of human events
1001 hrs.

Contemplating the irrational messiness of China’s corporate landscape, investment bankers around the world must salivate in anticipation of the fees and bonuses that will be theirs when they finally convince China’s ambitious business leaders that mergers and acquisitions are a viable growth strategy.

Success for Whom?

The pressure to sell M&A to China’s corporate leadership must be particularly acute in the wake of the financial crisis, since the flow of such deals in the U.S. and Europe have dried to a trickle. What other reason for this recent pronouncement coming out of Wall Street’s alma mater, Wharton:

“Lenovo is probably the prime example — having bought IBM’s PC business — where [a company] did successfully use the acquisition strategy. And the main reason is that, beyond quick access to markets like the United States and Europe and so forth, they need high-end technologies and also established brands. Those are the elements that the Chinese firms have been missing. And so it fits very well to combine the strong and cost-efficient back end of Chinese firms with the branding, market access and technology that Western developed firms can offer them.”

I find it puzzling that a professor at one of the world’s most prestigious business schools is still able to characterize Lenovo’s acquisition of the IBM PC division as a “success.” The only unqualified success to date is the one for which the investment bankers received a fee. A more holistic analysis of the acquisition – such as the performance of the combined company in the wake of the merger, falling market share, and a failure to capitalize on the assets acquired – might yield a much different assessment.

Let us grant the possibility that at some point in the future, the move will have been a good one, and possibly even justifiable from a financial or brand value standpoint. The evidence to date does not support the idea that the money Lenovo spent buying IBM’s PC division would not have been better spent pursuing a more targeted, more organic, and more manageable international growth strategy.

What the evidence does appear to support – to date – is that Lenovo pursued the acquisition at the urging of an young and ambitious senior executive who managed to dazzle Lenovo’s leadership with the sheer audacity of the buyout, in the wake of an utter failure to build consensus on a realistic strategy for international expansion.

Lenovo’s own preliminary verdict on that acquisition came when Liu Chuanzhi returned last year and refocused the company’s international growth strategy on emerging markets like Russia and India, rather than the developed countries where IBM had been stronger.

Leaning Tower of Ivory

Wharton, for its part, would have served itself better with a less sanguine assessment of Lenovo’s purchase of IBM. As an institution whose primary product – and major source of alumni largess – is investment bankers, Wharton faculty must appreciate the implicit conflict of interest in publicly praising the work of its benefactors.

Knowledge at Wharton may not be a peer-reviewed publication, but the public holds members of the academy to the same high standard regardless of medium. We expect academics to be, by virtue of their sinecured isolation from the rough-and-tumble of commerce, an intellectual priesthood focused on finding and telling The Truth. We do not expect them to be tenured fanboys for Wall Street’s Big Swinging Dicks and Chicks. If the last two years have proven anything, it is that Wall Street could use more informed criticism from trusted and respected observers.

If China and her companies are proceeding cautiously in considering the value of mergers and acquisitions as a growth strategy, the record suggests that they should be encouraged to be careful. The last thing China needs is to spend her national treasure in a global corporate shopping spree. And given the size of the bonus checks in New York this year, I would suggest it is the last thing Wall Street needs as well.