Logistics, transportation, supply chain, and related topics

Did Uber Win in China?

In all of the discussion lately about Uber in China, one topic that is not getting a lot of airplay is the way in which the outcome for Uber is being positioned. One person for whom I have a great deal of respect believes that Uber did great, that they wound up with exactly what they wanted in the first place, and that overall the outcome – as junior partner to Didi Chuxing in a combined business – is a victory for Uber.

As I mentioned in an earlier post, to me that seems a bit like spin. First, it is highly unlikely that this is the outcome Uber sought all along. Had it sought a minority stake in Didi, it could have (as Apple did recently) simply written a check, swapped stock, and agreed to work together globally. And it could have been done more quickly, easily, and with less of a drain on company attention and coffers.

Second, all that their efforts won them is a weak role in Didi, just another seat at the table with a group of powerful investors to whom Uber is a very small potato. Had they gone in with an offer early, they may well have saved everyone money and saved Didi from the need to turn to outside investors. Uber may well have ended up with a less diluted position.

Third, they sit with no better odds of a payoff now than before. Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.

Finally, with its new A-List of global investors, Didi may well prove to be a more formidable rival outside of China in the long term than it might have been otherwise, especially if Uber had shown up at the beginning offering a strategic tie-up. Now Didi has international ambitions, and with an 85% market share at home in a much bigger market, will be in a better position to face Uber in other markets.

So did Uber win? Events will tell us, but probably not for some time. And that’s about the most you can say. From a removed perspective today, Uber is salvaging the most it can from a shipwreck, and pretending that it intended to be on the rocks all along won’t do much for the company’s credibility with the Street.

 

Does Didi Deserve Credit for Uber’s China Fail?

For two years, Jean Liu and Travis Kalanick were mortal adversaries, as their businesses, the world’s two largest ride-sharing companies, fought an increasingly bitter and expensive war. Kalanick, CEO of Uber, the San Francisco-based ride-hailing app, was trying to muscle into China, where Liu is president of Didi Chuxing, Uber’s Chinese equivalent.

Charles Clover at the FT offers this dramatic lede for an article that lays the credit for Uber’s defeat in China at the feet of Didi Chuxing’s Jean Liu.

Ms. Liu and her team at Didi deserve much credit for their victory in China’s shared-ride wars. All of us wish them only the best as they take on what will undoubtedly prove to be the far more formidable adversary: a Chinese government decidedly uncomfortable with leaving in the hands of a privately-owned company an increasingly essential piece of the nation’s transportation infrastructure.

But an honest assessment of the battle must conclude that Ms. Liu was helped at many turns by a series of unforced errors on Uber’s part. I won’t go into them here – take a look at my interview with Jeremy Goldkorn at SupChina, where I lay out Uber’s four most fundamental mistakes in China.

In addition, let’s also remember a few things:

  • Didi’s financial backers gave the company the war chest it needed to fight a street battle of attrition against one of the planet’s best funded unicorns.
  • Ms. Liu’s boss, Didi Chairman Cheng Wei, was hardly a figure head in this battle. Not for nothing did Forbes Asia name him 2016 Businessman of the Year.
  • Didi came to the battle fighting on familiar, home ground, and was in substantial possession of the field already when Uber showed up. Uber was battling an entrenched player as an interloping underdog in a market increasingly unfriendly to outsiders. Uber’s rhetoric and war-chest aside, they were the weaker player.
  • It was not “Jean vs. Travis.” It was Jean vs. the Uber China team, and as time goes on it will become more clear that Travis and his team were relatively hands-off, allowing the local team to run things. Didi defeated Travis’s partner’s team.
  • Regulatory changes in the market played a significant role in the driving Uber’s surrender. Unless Didi orchestrated those (not impossible), the government was also a player in the game. And if Didi did orchestrate those, protectionism beat Uber as much as Didi’s executive team.

To the victor goeth the spoils, and Ms. Liu is clearly a capable executive whose career is now pointed toward even bigger and better things. But there is nothing learned by pretending that this was not a far more complex battle than the FT seeks to portray as it graces Ms. Liu with the laurels.

One more interesting point from the article. Ms. Liu and Didi continue to play the outcome as a “win-win” for Didi and Uber. I’ve spent a career in PR in China, and to me that messaging carries a very heavy whiff of spin. I’ll explain why in a later post.

 

The True Measure of Urban China

On the Hutong Express
Somewhere in Central China
1123 hrs. 

As I hurtle through 2,800kms of Chinese countryside, a question occurs to me about China’s massive urbanization. The shift is unprecedented, and for that reason alone begs for close examination.

The truth is, we are not examining the scale of urbanization as closely as perhaps we should. Is China urbanizing as quickly as statistics suggest? Or are we – at least in part – witnessing some statistical sleight of hand?

The thought that provoked me on this trip was the villages. Admittedly, my survey was back-of-napkin and limited to those villages alongside the high speed rail lines, but there seemed to be more building, more development, and little blight. That made me wonder. Are people really leaving their villages and heading to the Big City, or are they staying put, and statisticians taking villages and towns previously designated as “rural” or other non-urban areas and predesignating them as “urban?”

There is more to this question than statistical nit-picking. If many people are urbanizing in place, this means that China faces a very different set of challenges in addressing urbanization, including rethinking the infrastructure that needs to be built and probing whether this means that more of the country’s shrinking stock of arable land is in jeopardy.

For marketers, it would mean that a growing percentage of potential customers are physically beyond the reach of their current advertising, retail promotion, and distribution infrastructure.

Either way, it is time we tarted probing China’s urbanization statistics rather than take them as gospel.

Concept of the Week: Urbanizing In Place

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

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

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

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

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

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

Barely Afloat

In the Hutong
Beijing Youth Politics College
0047 hrs

China COSCO Holdings, parent company of China’s largest state-owned steamship company, has reported a return to net profit in 2013, thereby saving itself from delisting. It was not a turnaround in markets or management genius that engineered this seeming turnaround, but financial legerdemain.

Through a series of one-time transactions (it sold chunks of itself to its own parent company), the company is showing a positive bottom line. But things aren’t looking good for 2014, the company is running out of financial tricks, and slow recoveries in Europe and the United States are likely to combine with the companies huge capacity surplus to keep the firm a non-performer.

Waiting for Profits

As a state-owned enterprise, the company has the implicit backing of the government: COSCO can afford to wait for things to turn around, unlike global competitors like Maersk, Neptune Orient Line, Hanjin, Mitsui OSK, and Evergreen.

Government coffers are not bottomless, however, and there is no guarantee that a turnaround in the industry will be sufficient to suck up all of the extra tonnage COSCO has added in recent years. Companies are moving manufacturing of large, bulky items closer to markets, and COSCO’s overshoot on dry-bulk capacity (for carrying everything from wheat to iron ore) may leave new ships idle for a long time.

At some point, Beijing is likely to have to take ships off of COSCO’s hands, or at least remove them from the commercial market. The obvious choice would be to sell the oldest ships to ship breakers. Yet COSCO’s older ships have already been turned into scrap, leaving a fleet that is much younger than before.

And none of this addresses the growing ranks of costly thumb-twiddlers at China’s shipyards. It is hard to keep upgrade an industry when demand is imploding.

PLAN for it

In short, arrows continue to point in a direction we suggested a while ago. China’s navy needs ships of every type. China’s admirals would rather spend their precious cash on boats that shoot rather than boats that schlep, but they need both. COSCO’s surplus of capacity offers the government an opportunity to create an entity that provides full-time contract sealift to China’s armed services, something akin to the Military Sealift Command in the United States.

The spare dry-bulk carriers would probably not be much help: the cost of refitting these to accommodate troops or military cargo would probably not be far off the cost of purpose-built ships. Container and Roll-on/Roll-off vessels, on the other hand, could serve as pre-positioning ships for extended operations outside of Asia (to support China’s UN peacekeepers, for example), shuttle ships for China’s precious few underway replenishment vessels (that by definition need to stay close to their assigned battle groups), or as amphibious support ships.

A move like this seems inevitable, and when it happens it will quietly signal that the People’s Liberation Army Navy has matured, and is clearly thinking about how to start projecting power as well as how to prop up its struggling merchant fleet.

China’s Shipyards on the Ropes

English: Dalian Shipbuilding Industry Company ...
Dalian Shipbuilding Industry Company (Photo credit: Wikipedia)

China shipyards slash prices to survive-industry | Reuters.

In the Hutong
Entrained
2128 hours

A global glut in cargo capacity and the sluggish economies in the U.S. and Europe are slamming China’s shipbuilding industry to the point where the nations shipyards are unable even to sell new bottoms to domestic shipping companies. Now they’re cutting prices to keep busy, and if the industry follows the accepted Chinese patterns, the result will be a beggar-thy-brother price war. Who will pick up the slack when the yards lose money building ships? Most likely the government will support the industry in the short term, working through one or more of the major “policy banks:” Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and the Agricultural Bank of China.

In the long term, writing the shipyards blank checks is unsustainable. There are two interesting issues that will frame the long-term policy response to the growing shipbuilding crisis.

First is the matter of how long the downturn will last. If this is a blip and orders start pouring in within 2-3 years, the near-term solution will suffice. If experience is any indication, however, it is probable that we face a longer adjustment that will take years to work excess capacity out of the shipping industry. Even more concerning is the uncertainty around the price of oil. At what point does bunker oil become so expensive that manufacturers begin to shift production to a point closer to the customer rather than relying on supply chains that bring finished goods across oceans? For the people building or buying ships, this is more than idle speculation: it is the issue that will decide the future.

Second is at what point the Chinese Navy (PLAN) will decide that the shipyard slump offers a precious opportunity to expand the fleet at prices it may never see again. Retooling civilian shipyards to produce warships is no easy task, but the PLAN will need auxiliaries and support ships to support operations far from shore, and civilian yards can produce those with relative ease.

The two of these issues come together with a relatively straightforward solution: rather than simply pour money into shipyards and pay them not to produce ships, the government could have those same yards start turning out oilers, transports, and tenders to form the logistical tail of a truly “blue-water” navy.

The only question is how long it will take for the Central Military Commission to come to the same conclusion.

Dissecting China’s High-Speed Rail Fail

China Railways CRH5
Image via Wikipedia

In the Hutong
Trying to translate “Casey Jr.”
1238 hrs.

In the face of recent revelations around irregularities at the top China’s Rail ministry there is a growing meme afoot suggesting that we have been too quick to praise China’s high-speed rail system. In reality, we are told, the PRC’s high-speed rail system is a corruption-ridden white elephant that the people cannot afford to ride.

Reading from his copy of the South China Morning Post, Tim Ferguson of Forbes.com writes:

The larger issue with the vast (16,000 kilometers planned by 2020) endeavor is that it isn’t, in fact, so appropriate to China’s needs. Rather, it may be another symptom of a bubble economy in which vast sums are misspent on underutilized assets.

Not So White An Elephant

My father always taught me to be skeptical of blanket condemnations of this flavor, as they reek of demagoguery and are often wrong. In fairness, let us grant to Mr. Ferguson and like-minded folks like Joel Kotkin two points: first, that there has been waste, possibly massive, in the development of China’s high speed rail system. Second, until we run out of ways to economically fuel passenger aircraft,  or until the US population quadruples, that high-speed rail is probably not an panacea for North American intercity travel. Still, neither of these factors militate against the viability of–and the long-term need for–high-speed passenger rail in China.

China has had for some time examples of high-speed intercity rail lines that are both successful and popular. Indeed, one could argue that it was the success of the Hong Kong–Guangzhou, Beijing–Tianjian, and Shanghai–Hangzhou lines that provided proof-points for the expansion of China’s own bullet trains. So let us dispense quickly of the question of whether high-speed rail is workable in China: it is, and it forms an essential part of the nation’s intercity infrastructure.

Note, however, that the lines mentioned above are limited examples of routes with extraordinary situations. The distances between the city pairs is too great or too traffic-laden for taxi, bus, or personal automobile, and are too near to justify air travel. There is also already a great deal of traffic between the two cities, with one sometimes serving as a satellite to the other. Other city pairs like this would include  Chongqing–Chengdu, Shanghai–Nanjing, Wuhan–Changsha, Jinan–Qingdao, and Shenyang–Dalian. There is an argument to be made that China should have limited its high-speed intercity rail to just such city pairs, and if China were a developed country, I would be making that very point.

Driving High Speed Rail

Of course, China is not a developed country, and indeed its rapid growth compels the nation’s leaders to project two decades or more into the future when making infrastructure investment decisions. A series of factors that argue in favor of wider rollout of high-speed passenger rail complicate such decisions.

Urbanization – China’s population is leaving the countryside and becoming increasingly urban. As Richard Hobbs noted in a recent article in Foreign Policy, by 2030 China will have 44 cities boasting populations in excess of 4 million souls, and 221 cities with over 1 million in population. Let’s put that into perspective: in 2009 the United States had two cities in excess of 4 million souls, New York and Los Angeles, and only 10 with a population over 1 million. Here is what this means: in 20 years, China will have 44 cities the size of Los Angeles or larger. It also means viable high-speed rail city pairs will grow in number as well.

Density – China’s urban population density is high, and it is growing, in particular along nation’s seaboard. Even as of 2006, China’s urban population density – the average number of people living in a square mile of a city – was 27,300, three times the global average and nine times the U.S. average, even excluding Macao and Hong Kong in China’s figures.

Megacities – China is planning the creation of at least two and possibly more mega-cities, one clustered around Guangzhou in the Pearl River Delta, and one around Beijing and the North China plain. These cities will be so large as to require a re-thinking of intracity transportation. High-speed passenger rail is likely to form the core of the mega-city rapid transit system, linking thence to subways, taxis, and bus lines.

Energy – Built around gasoline-powered automobiles, diesel-powered buses, and kerosene-powered aircraft, China’s transportation network is dependent on supplies of imported petroleum, and that dependence is growing as China grows. Policy-makers seeking viable transportation options that are not beholden to the petroleum supply are naturally drawn to rail, and would like to see high speed rail as a substitute for air travel on shorter routes.

Environment – China’s leaders breathe the same air the rest of us do, and it would take a theatrical degree of paranoia to think that they delight in modern cities with sludge-enshrouded skylines. High-speed rail, if fueled by dirty-coal generated electricity, is not going to make China’s air any cleaner, but the ability to drive it based on nuclear, wind, solar, wave and other forms of cleanly-generated electricity make it a potentially greener means of intercity travel than buses and aircraft.

Expertise – The other development motive behind high-speed rail is the belief that if China can build tens of thousands of kilometers of high-speed railways, along with the equipment, locomotives, rolling stock, and software to make it all run, the nation can become a global player in the construction and management of such railroads. The effort is already underway, most notably in California’s on-again, off-again high speed rail project, where CSR is partnering with GE on one bid for the trains themselves, China Rail Construction Corporation is partnering with Fresno County to bid on a maintenance and repair facility, and China itself has dropped hints about financing the whole venture.

Execution, Execution, Execution

The case for high-speed passenger rail in China is, thus, compelling, far more so than in the United States. The danger is in applying high-speed rail as the answer for all of China’s transportation needs. What critics should be focused on, therefore, is less Chinese high-speed rail qua high speed rail, but on factors that threaten the success and viability of the system.

As cool as the upcoming Beijing-Shanghai high-speed railway sounds, the route between the two cities probably stretches the distance limit of a viable high-speed rail system. For me, on most days, it would make more sense to take a 350 km/hr train to Shanghai than a plane, but only because of the spectre of weather and air traffic delays. A high-speed train to Hong Kong, on the other hand, would need to be very fast indeed, even though I am over seven hours from my front door in Beijing to my office in Central when I fly.

What the government needs is some systemic sobriety to counter the early intoxication with high-speed rail. Because of the fixed, inflexible nature of high-speed rail’s assets (as opposed to, say, those of an airline,) a good start would be creating a framework against which the National Development and Reform Commission can evaluate the economics of a given line over the long term. Clearly the success of the early lines suggest the beginnings of such a template: Beijing to Shenyang, yes, Beijing to Urumqi, probably not.

Time-in-motion studies and other engineering homework would be worthwhile, as would be getting outside agencies to double-check the arithmetic of the Railroad-Industrial Complex to make sure each line is worth building. With the national budgets at stake, and given the mess at the top of the Railways ministry, I would not be surprised if these sorts of controls were not already in the offing.

The Wrong Solution

The issue, however, is not what Ferguson thinks it is. He suggests that the problem in China is that the market mechanism is missing, and that all of this money spent on high-speed rail is a “massive misallocation of resources that is a hallmark of top-down systems such as in Communist China.”

Taking the time to rebut Mr. Ferguson with a catalogue of the massive misallocations of resources that take place in America, Britain, Japan, and the E.U. would be both pedantic and off-topic. Suffice to say that the historical record gives ample proof that “top-down systems” like those in China enjoy no monopoly over expensive government boondoggles.

It is worth pointing out, however, that one of the few downsides of market mechanisms is that they occasionally stand in the way of solutions that make more sense when the full costs of implementation are considered. I grew up in a Los Angeles choked by its forced dependence on the automobile, the results of a local government abetted by automotive interests that abandoned a viable interurban rapid transit system because it didn’t want to pay for upgrades. Half a century later, a new generation of southern Californians confronting the limitations of automotive transport is footing the bill to rebuild it completely. This kind of market mechanism China can afford far less than America could.

Do we need to be careful about building costly high-speed rail systems in the U.S.? Definitely. Are there problems in the way China is laying high-speed rail lines? Almost certainly. But even despite all of this, is China going to need more high-speed passenger rail networks? Count on it. Let us focus on helping them build wisely and well.

Bluetooth: Not Dead Yet, but Not Looking Good

Command Center
Silicon Hutong Plaza
Beijing

Among the avalanche of information pouring out of CTIA 2005 comes this piece in Engadget that suggests Bluetooth is blossoming.

Respects to Ross Rubin, who I think is a very switched-on and entertaining writer, this comes across as a badly disguised piece of sponsored PR dreck from the heart of the Bluetooth SIG. The entry is long on declaration (“CTIA made a convincing case that this is Bluetooth’s moment to shine”) and very short on supporting evidence. Wow – half a dozen high-end phones have Bluetooth, there are some Bluetooth enabled GPS devices, a couple of peripherals, and an MIT-designed Bluetooth stuffed animal.

WIth respect, this is the sort of uptake and support that befits a new technology, not one that’s been around for several years. Ross makes the point in the article that Bluetooth is hardly ubiquitous, and he’s right. It may not be a novelty, but if it isn’t ubiquitous now, it never will be. There are a lot of little reasons for this, but to me, there are really only three that matter:

1. Muddled Positioning: The industry is still operating under the misconception that Bluetooth would act as what Ross calls an “Internet Gateway” for personal area networks. I’m sorry – isn’t that what WiFi does? My understanding of Bluetooth was that it would replace the serial cable, IRdA, and other hookups between devices, accessories, and peripherals, NOT create an Internet hookup. If the industry hasn’t figured out the positioning of the Bluetooth relative to the other technologies out there, how are users to understand how to use it?

2. Unclear Value: Following on from the positioning problem, neither the Bluetooth SIG nor the industry has made sufficiently clear the advantages of using Bluetooth to your average. What IS a personal area network, and how does making it wireless make my life better. By failing to communicate the basic, simple advantages of eliminating half of the cords in ones laptop bag or on ones desktop, the SIG and manufacturers have insured that mainstream users cannot but fail to get it, and visionaries – who understand the value of the technology – think that because it’s not being pushed, maybe the technology doesn’t live up to its promise.

3. Impending Obsolescence: The standards groups around what has been called Ultra Wideband (UWB) and is now being called Wireless USB are just coalescing, and we are certainly some ways away from real product. But the positioning – starting with the new name – has begun in earnest, and the advantages are clear – eliminate your USB wires. Period. Awesome. Fast. Cool. I’m there. And thanks very much, Bluetooth, but I’m waiting.

Nowhere are these failures more a pity than in Asia, where consumers have proven willing to experiment with these kinds of technologies and implement them into their lifestyles, and where the mobile phone plays a role far greater than anywhere else in the world.

Ericsson did a great thing creating Bluetooth, and it has given a lot of us a chance to tinker and play with he idea of unplugging cables. Unfortunately, it’s really clear that Bluetooth has fallen into Gordon Moore’s chasm and will eventually land in the Graveyard of Technologies with Unrealized Potential.

UPS Success Depends on Breaking China Customs/China Post Axis

Somewhere on Second Ring Road East

Kudos to UPS for making the decision to buy out Sinotrans’ share of their joint venture. Sinotrans is living proof that you can’t have multiple, competitive joint ventures with the same local partner and expect all of them to be equally successful. DHL was first into China and first in with Sinotrans, and as a result got the best people and most attention. Add that to DHL’s tightly focused and very aggressive push into the market, and you get a formula for success.

Just as an aside, TNT is another company in UPS’ position. They too have a Sinotrans JV that has been going nowhere. TNT needs to swap out of its partnership as well if it plans to be competitive.

None of this suggests that UPS’ troubles are over in the market. Now they will have Sinotrans as an enemy rather than a lead weight, which might redound to DHL’s favor. The other problem is the one they all face: China Post is allegedly in cahoots with the Customs Service to delay clearance of all non-document express parcels coming into China using anything but Express Mail in a fairly brazen attempt to damage the prospects of UPS, DHL, TNT, and FedEx. Until they can get over this workaround, UPS will be unable to compete effectively in China. Without a strong local partner, UPS needs to build a powerful constituency in China and ally themselves with their rivals to end the customs nonsense, or they will find their business in the PRC unsustainable. Remember where you heard it first.