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

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 BRICs

English: The BRICS - Brazil, Russia, India, Ch...

English: The BRICS – Brazil, Russia, India, China and South Africa. Português: As Potências regionais. (Photo credit: Wikipedia)

BRICS: In Search of Unity? | Institute for Defence Studies and Analyses.

Hutong West
Dealing with plumbers
1228 hrs.

While the Fourth BRICS (Brazil, Russia, India, China, and South Africa) summit was nearly three months ago, the meta-message that is emerging from the aftermath is that these countries do not yet form anything resembling a bloc of interests.

Ruchita Beri’s short piece (linked above) is guardedly optimistic about the grouping, but if you read between the lines you can almost feel the divergence of interests that is pulling this grouping apart. Beri, a senior researcher at India’s Institute for Defence Studies and Analyses, gently suggests that China is part of the problem.

While the BRICS grouping does provide an opportunity for each member to play an important role on the global stage, one of the challenges that it faces is cohesiveness. Take the issue of the BRICS development bank. While it is indeed a laudable initiative, the challenge lies in aligning the differing interests of the member countries. Moreover, other members of the grouping are wary of China’s domination over the bank given that China holds very large foreign exchange reserves ($ 3 trillion).

All of this serves to underscore the real elephant in the room, which is the fact that while some of the BRICS might trust each other, most are having a hard time trusting China. As it considers its soft power challenges, China also needs to see that being a trustworthy player in the global system would do a lot toward making it influential (rather than disruptive) in such international groupings, and in turn toward making those groupings influential.

The List of the Delisters

Hutong West
Sunshine and Keyboards
1743 hrs.

Last week Ogilvy’s Justin Knapp asked me if I was aware of a list of China-based overseas-listed companies that are considering de-listing overseas. It was a good question, and I have no doubt that somewhere in the dank bowels of Goldman Sachs or Morgan Stanley are a clutch of gnomes/interns who are playing spreadsheet games and cooking up such lists.

To me lists are troublesome because they are so limited. By specifying a set of companies, the chance to miss others is too high. What is more useful is profiling, a process by which we identify what KINDS of companies are best suited to de-list.

While I expect it to evolve over time, I have started to craft such a profile. I’ll admit, it is VERY basic at the moment, but it does allow us to eliminate a fairly large number of overseas listings from consideration.

The first wave or two of offshore delistings will thus have two or more of the following characteristics:

1. Small- or mid-cap companies. Delisting offshore will be a costly process, so we can presume that companies undertaking the effort expect to be able to find a buyer or buyers for their shares in China. The capitalization of China’s formal and informal share markets is improving, but Shanghai is not New York and Shenzhen is not London. The pool of money is not large enough to sustain the wholesale repatriation of large-cap stocks. Mid-sized firms, with listed equity of up to $300-$500 million, however, should have little trouble re-listing at home, and select smaller firms will be able to tap China’s growing pool of private equity.

2. Companies who need to explain their businesses to offshore investors, but whom local investors know well. Say “Shanda” to your average U.S. investor, and he’ll look at you as if he’s waiting for the rest of the sentence. Most Chinese punters, however, know the company and won’t need it explained. As much as we might like to deny it, this “household name” recognition translates into lower investor relations costs and, in China especially, higher valuations.

3. Companies with complex ownership structures. The government is not comfortable with unorthodox shareholding arrangements that seem to skirt the law. The VIE structure I’ve discussed here several times falls into that category, as, arguably, do companies like Huawei, which has recently faced questions about its employee stock ownership program. Complex structures not only rankle government officials and foreign investors with fresh memories of Enron, they also demand a lot time and focus, and are significant time-sucks for corporate leadership. The easy answer is to dump the complex structures required to snare foreign capital and bring the equity home.

4. Companies with “State Secrets.” For all of the government’s lip service about building strong, credible Chinese companies, what is more important to the party is control over the large and high-growth enterprises of the nation. This is not some Neanderthal chest thumper: the interaction between officialdom and commerce in China is…complex. At the core of the recent dustup over global accountants auditing local firms is a fear of what such audits might reveal – not about the firms, mind you, but about opportunistic government officials. If you enjoy the sensation of your neck hairs levitating, get into a conversation with a bunch of auditors over an adult beverage. Nobody is quite sure how deep the rabbit hole goes, but any company with such accounting issues is likely to want to get clear of foreign bourses, preferably before an offshore enforcement action reveals too much of the family linen.

5. Ego listings. Over the last decade there have been a flood of listings, many by companies who don’t really need the capital and who could certainly do without the hassles, but who listed anyway in order to gain the prestige of the offshore listing. Such baubles are increasingly expensive and troublesome, and there are surely a few Chinese founder/CEOs who have watched Muddy Waters administer its transparency high-colonic to Sino-Forest with growing horror. These folks will quietly buy shares back, shut the listing or sell the pink sheet, and slink out of town.

Again, this is all a work in progress, and this list will evolve over time. However, you can see the outlines what will be left when this tide recedes, and what, if any, Chinese companies are liable to seek offshore listings in the future.

Cross Post: In Defense of the CFIUS

In the Hutong
I should be doing this in Linux
1551 hrs.

In recognition of a simmering foreign investment stand-off between China and the US, I’ve started a review of the policy literature on both sides of the Pacific. Over at The Peking Review, I posted the following review of an interesting defense of the American approach to foreign investment review. I post the full review below, with some appropriate additions.

Damming Capital

The United States has a long-established system for reviewing foreign investments in the United States, a process that is understandably highly political given both self-interested protectionism and legitimate national defense concerns that grapple with the interests of entrepreneurs and shareholders seeking greater opportunity or a simple cash-out.

China’s growing hunger for offshore investments has already begun testing that process, in particular with Huawei‘s recent attempt to snap up the leftover assets of a bankrupt technology startup in California. Huawei’s application – filed after the fact – was rejected, and it seems likely that more Chinese companies will face challenges as they attempt to use acquisitions as a pathway to globalization.

At some point China is likely to want to cast a global spotlight on the U.S. foreign investment review process (and would have done so sooner but for the attention it would have brought to its own), and when it does, the Committee on Foreign Investment in the United States (CFIUS) will find itself under global scrutiny.

Following the 2006 controversy around Dubai Ports World and its attempt to acquire the U.S. port operations of P&O Steam Navigation Company, Alan Larson and David Marchick at the Council on Foreign Relations conducted a study on the U.S. foreign investment review process and the CFIUS in particular. The recommendations made in Foreign Investment and National Security: Getting the Balance Right suggest that the U.S. needs to ensure that the process remains sheltered from political and commercial interests, remaining a purely national security issue.

Setting a Transparent Example

At its heart, though, the short book is a reasoned defense of what the authors clearly believe to be a fair process, if not quite a model for similar processes overseas. Their greatest concern is in the matter of transparency, and it is worth dwelling on that for a bit.

China is in the habit of rejecting foreign investments with greater frequency, an expression of an all-but-explicit national industrial policy that implicitly questions the value of foreign ownership of Chinese companies. That foreign firms – most recently YUM Brands – continue to pursue acquisitions of healthy Chinese corporations in blithe ignorance of this policy implies either willful ignorance on the part of executives, legal counsel, and investment banks, or that it is time for China to be more transparent in the criteria it uses to evaluate foreign investments.

A fair case could be made that the CFIUS is less interested in transparency than it is in national security, and this is fair. But if the cross-border flow of investments and ownership are to continue between the world’s two largest economies and the ties that bind them to a common interest are not to be severed, the CFIUS must ensure that it offers the greatest transparency possible consistent with national security.

For this reason alone, Larson and Marchick’s work calls for appreciative review. Indeed, their recommendations deserve a read in Europe, Japan, Australia, and anywhere in the world where foreign acquisitions are placed under regulatory scrutiny or a political microscope.

Regulation is Not the Problem - Communication is

And while we’re on the topic, let my reiterate my concern about the levees that appear to be rising against foreign investment. Whether you accept globalization as a step into a better future or condemn it as a leap into a corporatized hell, you must accept that the lack of a global framework for standardizing foreign direct investment review is arguably the global system’s point of greatest vulnerability.

It is difficult under current treaties for the U.S. to prevent, say, a Chinese shipyard from selling tugboats to a U.S. tugboat operator. It is simple, however, to stop that same Chinese company from buying a shipyard in Michigan to build those tugboats in the U.S. with American workers. Similarly,  while Chinese policymakers would be hard pressed to stop the import of ingredients for Coke or take the American beverage off the shelves of Chinese stores, it was a snap for them to block Coke’s acquisition of local juice maker Huiyuan. And while I am free to visit Australia as often as I wish, I have require government approval to buy a home there.

What keeps these restrictions in place, and what prevents the world from sitting down and hammering out a General Agreement on Direct Investment (GADI for short), is public perception. Larson and Marchick note that in America, arguably the most small-l liberal country in the world, 53% of the people are opposed to foreign ownership of U.S. assets.

The most pressing problem in the path of foreign investment is, then, not regulation, but communication. Governments and NGOs are unlikely to take on the burden of advocacy for the cause. This means corporations are on their own, and that every effort to purchase a company overseas demands that the acquirer make a convincing public case for that acquisition, because, as Larson and Marchick point out, the regulator charged with reviewing it will be required to justify his/her decision as well.

Joseph Nye on the Future of American Power

In the Hutong
Winter Reading Blitz
1842 hrs.

The essay by Joseph S. Nye in the December issue of Foreign Affairs was by itself worth the cost of my subscription. Decrying those who have already dragged their morose carcasses onto the Declining America/Rising China bandwagon, Nye, who coined the term “soft power,” makes a critical distinction in the essay between relative and absolute declines in American power:

Some Americans react emotionally to the idea of decline, but it would be counterintuitive and ahistorical to believe that the United States will have a preponderant share of power resources forever. The word “decline” mixes up two different dimensions: absolute decline, in the sense of decay, and relative decline, in which the power resources of other states grow or are used more effectively.

Nye suggests that relative decline is not only natural, but to some extent should be welcomed as the logical outcome of an increasingly prosperous planet. Decay at home, he suggests, is what undermines American power abroad.

On the question of absolute, rather than relative, American decline, the United States faces serious problems in areas such as debt, secondary education, and political gridlock. But they are only part of the picture. Of the multiple possible futures, stronger cases can be made for the positive ones than the negative ones. But among the negative futures, the most plausible is one in which the United States overreacts to terrorist attacks by turning inward and thus cuts itself off from the strength it obtains from openness.

Nye doesn’t quite come out and utter the famous Rooseveltian “we have nothing to fear but fear itself,” but he underscores that the way Americans perceive ourselves is perhaps our greatest vulnerability in the formative years of this century. Declinism, he suggests, can too readily become a self-fulfiling prophecy. Stop whining, stop talking about just giving up, Nye seems to tell us, and deal with the issues that plague America at home rather than what to do about a Chinese aircraft carrier.

I do not disagree with Nye, and I agree that his point needs to be made to quench some of the rhetorical and perceptual excesses that Americans have begun to harbor about themselves and China. At the same time I am wary that his palliatives underplay some key strategic complexities in the Sino-US relationship.

Nye addresses Chinese capabilities (rightly noting that while China has come a long way on the road to global power, it has a road of at least equal distance yet to travel,) but he ignores Chinese challenges, intentions, perceptions and aspirations and the role they may play in bending China’s strategic calculus.

Worse perhaps is the decidedly Western lens Nye uses to examine an Eastern power and culture.  China may not yet be able to match American power according to our measures, but neither Neoliberals like Nye nor Neorealists like John Mearsheimer bother analyzing China’s options and capabilities through a lens polished by Eastern theories of strategy, international relations or power. That is a critical error, because in so doing they place far too much emphasis on Chinese physical strength and far to little on its wiles. China, after all, has been practicing and honing its own version of “smart power” since long before Sun Tzu took up a pen.

As an aspirin for America’s alarmist declinism, Nye’s article is a masterstroke. At the same time, he subtly reminds us of the persistent blind spot in the worldview of the West’s leading international relations theorists.

America, Lead China by Example

In the Hutong
Partaking of Yale Lit Classes on iTunes U
1651 hrs.

In an excellent editorial in The New York Times, “Scolding China Won’t Help,” Beijing-based attorney James Zimmerman offers his prescription for anyone in the West interested in helping China transition to a more democratic form of government.

First, Western leaders should appreciate that open and frequent government-to-government dialogue and legal, cultural and commercial exchanges are the most effective tools. China came out of its shell three decades ago due to vigorous engagement with, not lectures from, Washington and Brussels.

Second, we should give Beijing credit where credit is due. Those that deserve credit are the moderate voices that have taken bold steps to lead China down a path of reform. Unfortunately, few elected officials in the United States would even consider giving the Communist leadership praise for its accomplishments. Acknowledging progress on problems like poverty helps build credibility on more contentious issues.

Third, it is important to keep in mind the internal struggle between moderate and conservative voices within China. The Chinese people continue to view with suspicion any attempt to impose Western values on China. Liberal institutions need to be nurtured, rather than thrust upon Beijing. Keeping this tension in mind serves as a framework for productive engagement.

Leaving aside the fraught matters of whether democracy is the right system for China, and if so what form it would take, Zimmerman makes some valid points that should be made to those behind every door of importance within the Beltway. There is no good reason to coddle or appease Beijing, but lecturing it on its national governance gives aid and comfort to the opponents of political progress in China, and paints every would-be reformer with a patina of American stoogedom.

Nonetheless, there is an important point that Mr. Zimmerman leaves out in this process: that is America’s role as an exemplar of the principles for which it stands in both its domestic and international conduct, and thus as an inspiration to those seeking a better model of government. We can debate what those principles are, but when we abandon them we cease to light the way forward for all of the nations and peoples seeking more representative and responsive forms of government.

We cannot lead when we preach clean government but tolerate the fig-leafed corruption of campaign financing, when we call for multilateralism but act unilaterally, when we argue for tolerance then show ourselves to be intolerant, or when we call for greater consumer spending even as we recover from the debilitating economic hangover of our last consumer spending spree.

The people of China see right through these contradictions and call us, not without justification, hypocrites. And along with their leaders, they laugh and shake their heads at our temerity, our chutzpah.

And our messages, our words, and our ideals go unheeded or, worse, are dismissed altogether.

No house is totally clean, no family ever bereft of dirty linen. But until we openly acknowledge and address the cracks in our own democratic edifice, the peoples of the world will look elsewhere for lights, even in places we wish they daren’t look.

China’s Ad Campaign: To Whom Are We Selling?

In the Hutong
Trying to be impressionable
1306 hrs.

I am a qualified China fan but a detractor of advertising in general, so it was with some trepidation that I read in Gady Epstein’s blog at Forbes.com that China was planning on a TV ad campaign as a means of making China less threatening to Americans. As Gady pointed out, it was bound to be a tough sell, and for my part I subscribe to the theory that advertising is a fine tool to defend a strong brand, but a lousy one to build or re-build a weak or tainted one.

Now, I am working from an assumption that the American people were the audience, here. The fact that this may not have been the case I deal with below.

Start with the Audience, Guys

Having watched the first effort, I have to confess to being underwhelmed. It is not abysmal, but it is still a profound disappointment. The production values were fine, and the general direction of giving China a human face is a step in the right direction. But the ad struck me as so much self-conscious preening, a request if not a demand for respect, rather than than a friendly, human face.

There are, I know, many Chinese who love the ad, and cannot understand what the problem is. Which, in fact, is the problem. The ad, ostensibly, was not meant for Chinese but American eyes. Whoever approved the ad missed one of the first principles uber-adman David Ogilvy spells out in his 1983 classic Ogilvy on Advertising:

“Now comes research among consumers. Find out how they think about your kind of product, what language they use when they discuss the subject, what attributes are  important to them, and what promise would be most likely to make them buy your brand.” [Italics his]

If China was trying to sell itself to the American people, did it know what Americans were ready to “buy?” Because it seemed like the ad was trying to say “look at us – we’re strong, beautiful, and rich, so you’d better make friends with us.”

This sort of message likely to fall flat outside of the Panda-hugger crowd. Indeed, it is a pretty good example a “fear, uncertainty, and doubt” campaign rather than a “hi, let’s be friends” campaign. And if it was designed to make friends, I would bet the government will learn pretty quickly that it failed to work as promised.

Don’t Blame the Agency

While it would be easy to blame the ad agency or producer of the ad for this (and they may wind up tossed under the virtual truck if their client thinks the ad fell flat), I would wager the problem is at least as much, if  not more, on the client side.

Client executives who are new to the ad game tend to fall in love with ads, slogans, and messages that tell them what THEY like to hear, not what will move their audiences.That is, unfortunately, human nature, and in fact what separates a good marketer from your average Zhou is not so much the possession of special skills or knowledge, but the deep empathy for and understanding of group of people and the ability to substitute their preferences for your own. China’s government and business leaders have yet to demonstrate this skill, much less an instinctive feel for the Yankee Zeitgeist.

Make Next Time Better

In my conversation with Loretta Chao from The Wall Street Journal I said we need to expect these sorts of missteps. The Chinese government is caught in that vast chasm between understanding they must communicate with the peoples of the world and being able to do so effectively. We have to expect its initial efforts to be ham-handed, and sometimes laughably so. But we have to applaud their effort, because it reflects their realization that they actually need our trust and support to reach their goals.

What I hope is that the agency and the State Council Information Office commission some really good research on the effectiveness of the ad, understanding what went right and what went wrong, and hopefully winding up with a clearer idea of what China needs say (and, more important, do) in order to earn the friendship and trust of the American people.

And I hope they realize that soft power does not come out of an advertising campaign. You build it by representing to the people of the world something admirable, desirable, and attractive. Soft power is, after all, like sex appeal on a national scale: it is more a reflection of who you are than how you talk about yourself, and if you say you have it, you probably don’t.

Finally, I think it is time that the Party realizes that as China rises, the nation’s audiences now extend far past its borders. It is, therefore, time to identify and promote capable cadres who can communicate well across national boundaries.

Maybe the Echo was the Message

I note above that the ad was “ostensibly” for American audience. We have to entertain in our critique of this campaign the possibility that the real audience for this campaign was actually Chinese.

It is a not uncommon practice in China to say something to overseas audiences or do something in overseas that is actually done with a view to the effect the message or the action will have when it echoes back into China. This is called “chukou zhuan nei xiao,” or exporting something to sell it at home. We do this in corporate communications in China, and the government (and dissidents) have made it a fine art.

It may well be that the most important effect of this campaign as it was designed was to show the Chinese people that the government is spending money to project a strong, proud image abroad. Indeed, it is possible that an ad designed to cater to US audiences would have come across at home as “weak” or too craven to the foreigners.

If the ad was designed with the Echo Effect at the top of the minds of the officials that okayed it, it was actually not a bad campaign.

…if so, that’s a Bigger Problem

But then it brings up a larger, more troubling issue, which is the growing disconnect between China’s self-image and the image it projects abroad.

A nation that conducts its diplomacy – and especially its public diplomacy – so as to cater to domestic audiences is placing its international relations into deep jeopardy. America did so under Bush and in so doing frivolously squandered its soft power.

The statesmen of a powerful nation must endeavor to create a nation of statesmen, communicating to build a strong domestic constituency to support locally politically unpopular but globally essential diplomacy. History is replete with examples, and the one that pops most readily to mind is Franklin D. Roosevelt’s Lend-Lease act.

Coming to this realization is going to be one of the painful parts of China’s maturation as a world power. It will be fascinating to watch how long it will take the Party to confront this particular quandary.

GM’s Business is China

Hutong West
It’s quiet, alright
2032 hrs.

The Atlantic’s Megan McArdle asks an important question in her article “Can GM Get Its Groove Back?” Sadly for the subject and surprisingly for McArdle, she predicates her answer on a single factor: GM’s prospects in North America.

The home market is critical for GM, of course. At the same time, the U.S. is a mature and probably shrinking market, so It is not where GM’s growth prospects are. Even though the company downplayed its growing dependence on global markets (and global production) during the government bailout, GM’s reliance on China and Europe are no secret.

Indeed, one wonders how it is possible to conduct even a cursory analysis of GM’s prospects (or those of Ford, Boeing, Coca-Cola’s, or McDonald’s) without considering or even mentioning China.

But I’ll take it one step further: anyone really looking at the prospects of these companies should assume that the U.S. market will shrink over time while experiencing increased competition. Can GM survive if the US market declines…or implodes? And if not, why not?

 

A Last Chance for Public Diplomacy in China?

In the Hutong
Blogbuilding
2027 hrs.

MIT’s Yasheng Huang notes in Foreign Policy that U.S. diplomacy with China is focused on far too narrow an audience.

But to engage only with official Beijing is no longer enough. It is vital that American leaders learn to communicate more effectively with the Chinese people — lest the conspiracy theorists do the communicating for them.

Dr. Huang echoes a post I made here and in AdAge China two years ago following the election of Barack Obama, calling for a renewed and expanded public diplomacy effort in China:

First, while the government and party remain in control, the means by which decisions are reached is evolving. China is increasingly governed through a process by which consensus is reached among groups and policy makers, or as I like to say “one party, many factions.”

Second, this change has opened a window for groups outside of the government to exert more regular influence on policy making. While China’s leaders and bureaucrats still operate in a system where they are free to ignore public opinion when they forge policy, they are (for a variety of reasons) seeking more input from business leaders, academics, foreign experts, and even the public itself.

Third, this is all taking place in an environment where the role of the web is growing in China, and the permissible scope of discourse is wider than most non-Chinese appreciate.

That Dr. Huang is having to repeat the point makes clear that the Obama administration has lost an opportunity it could have taken from the beginning. That failure is now starting to erode whatever popular support the U.S. had in China, and is postponing the day when that support might be grown.

The hour is not too late, but there is no time to lose. The Chinese people have a growing influence on the conduct of Chinese foreign affairs, and the balance of power in domestic politics is and has always been the key driver of China’s foreign policy. Washington must understand that it is no longer playing to China’s Party elite. It is also playing to the masses, and thus far it has done a poor job.

How the U.S. Senate Handed the Climate Talks to China

In the Hutong
Sushi for Dinner
1713 hrs.

A spate of conferences, clients in from out-of-town, and paid writing assignments has kept Silicon Hutong quiet of late, but that’s set to change as of now, at least for the next couple of weeks.

A quick one to get going and for your weekend reading: a superb article in The New Yorker that displays in painful detail the dealmaking, egos, self-dealing, and trans-branch communications failures that pulled a critical piece of climate change legislation off of the national agenda this year. Regardless of how you might feel about climate change, unless you have spent some time inside the beltway and are comfortable or fatalistic about the process, you are certain to be either alarmed or disgusted by what you read.

You can read the article and write this off as just another dysfunction of the American polity, an explanation of why it is difficult to forge a workable coalition around any major government initiative regardless of how much each side gives away to make it happen.

Yet this article raises another, more salient point. If the United States cannot commit itself to policies to reduce carbon emissions even with a sitting Democratic President and Congress, how can Washington hope to lead the world in that direction? And if American cannot forge such a coalition, in a nation that by any account could afford to wean itself at least partially off of carbon, how can we expect China and the teeming emerging nations of the world to do so?

There are villains aplenty in this tale: Congress, special interests, the Obama administration, or the American consumer. Casting blame is not the pressing issue. It is this: the United States has surrendered its role as a global leader in one of the most important issues of our time, leaving a vacuum to be filled by a nation or nations with a very different set of interests.

As we count down to the next round of climate talks in Cancún at the end of November, America goes in as a lame duck, and China is in a position to forestall any U.S. initiatives at those talks merely by holding a mirror to the U.S. ambassador. Watch China take a very active and vocal role in this round. And if you are frustrated about the outcome, before you make China the heavy, call your Senator and find out where he/she stood on the Kerry/Graham/Lieberman bill.

Responsa: Schell and Chinese Direct Investment in the US

In the Hutong
Waiting for the Golden Season
2114 hrs.

Venture Sprout founder and CEO Elliott Ng responded my post “Schell Gets China Investment Problem Half Right” with a thought-provoking comment that calls for more than an offhanded reply.

David, Isn’t Party and government involvement in acquisitive Chinese companies part of the problem in getting approval from foreign countries for acquisition, not just a “Brand China” issue? This issue was discussed in MacGregor’s “The Party” and if large companies at scale have significant government ownership and/or Party involvement, it seems that most large, strategic acquisitions will be rejected. Baidu or Tencent buying companies is very different from CNOOC or Anshun [sic] Steel cases mentioned in the Schell piece. All of the Japanese companies mentioned above are not controlled by the ruling political party and/or owned by the Japanese government. I don’t think this is a “Brand China” issue — it is a “Team China” issue. When the acquirers are SOEs — under SASAC purview — it’s only natural that countries around the world would be concerned about assets being acquired by the commercial arm of the Chinese government (and Party).

Elliott raises several interesting issues.

Is this a “Brand China” Issue?

At the heart of the issue lie three problems: first, American people and legislators do not trust Chinese companies or the Chinese government; second, few in the United States understand that some Chinese companies are, in fact, privately owned, believing instead that any company in China is government-owned to some degree; and third, the implicit belief is that any government-owned company is a de-facto arm of the government itself.

Until and unless individual Chinese enterprises and the government itself move credibly to allay those fears, mistrust of any Chinese company and its motives will fester in America, and any acquisition of an American brand by even the biggest Chinese brand will encounter resistance.

Americans do not resist such acquisitions because China has a history of acquiring American firms, running them from Zhongnanhai, and undermining the U.S. economy for the PRC’s own nefarious purposes. Rather, American’s resist because of a not-entirely-unreasonable fear of the unknown and a dislike for past actions of the Chinese government.

China, in short, has an image problem in America, and it is not one that will be solved by propaganda and advertising campaigns alone. It must be solved by a fundamental change of behavior. Call me crazy, but that sounds like a brand problem.

Would Baidu or Tencent Be Any Different?

Elliott also suggests that a truly private Chinese enterprise would not face the same resistance as a large state-owned enterprise like CNOOC or Anshan Steel. I am skeptical.

Chinese companies are not well-known for their transparency in either accounting or governance. Among other issues, this calls into question of the role the government takes not only in the “guidance” of state-owned industrial giants, but in the leaders of China’s emerging private sector. All that would need happen would be for Mrs. Pelosi to raise this question in public and Robin Li, Jack Ma, or Li Ning would all find themselves in the unenviable position of having to prove a negative, that there is no government involvement in the management of their firms, and that there never will be.

The problem, then, afflicts or threatens every company in China, no matter its ownership or pedigree.

What About the Case of Japan?

Elliott suggested that one of the reasons several Japanese companies I mentioned managed to do well during the height of paranoia about Japan in the late 1980s was that they were private companies. Given that Japan did not possess state-owned enterprises in the 1980s as China does now, we cannot prove that either way. On the other hand, one could argue that Japan’s largest industrial combines (keiretsu) were actually informally but deeply integrated with the ruling Liberal Democratic Party (LDP) and the Ministry of International Trade and Industry, blurring the lines between national power and private enterprise. But leave that aside for a moment.

It is useful to note that until 1989 Japan held two cards that China does not today possess that gave Japanese companies a distinct advantage in acquiring U.S. firms. First, Japanese firms and trade associations undertook a collectively widespread and largely sophisticated lobbying effort in Washington that over time wore down resistance to Japanese foreign direct investment in the United States.

Second, until 1989 Japan enjoyed the position as America’s primary Asian redoubt against the Soviet Union, a position enhanced rather than lessened by the departure of American armed forces from Southeast Asia and later Taiwan in the 1970s. This strategic security relationship did much to prevent Capitol Hill from taking too much counsel of America’s Rising Sun fears.

None of this allowed Japanese companies to avoid often substantial resistance to direct investment, but these advantages were effective enough in the face of several other substantive challenges in the Japan-US relationship to allow many deals to go through. The ownership structure was irrelevant: it was, in the end, Japan’s carefully cultivated relationships in Washington, D.C., and in the U.S. states and towns in which it invested that opened the doors.

Here Come the State Capitalists

Finally, there is the issue of state or party ownership. Elliott and I agree that this is a core problem. Where I think we diverge is that Elliott sees this problem as intractable, while I see it as a matter of perception.

Americans are, as a whole, uncomfortable with the concept of state ownership. The evident discomfort with the issue of nationalization of banks and of GM is ample evidence of that fact, as is the manner in which the U.S. has kept its defense production base firmly in private hands even in times of national crisis, and the attention given to the CIA’s proprietary invesments. There is something subtly frightening to Americans about the mixture of government and business.

It is time to probe whether that fear has a basis in reason, or whether it is an ideological matter. State capitalism, whether acquisitive sovereign funds or expanding SOEs, looks to play a wider role as new economic powers emerge around the globe. Rather than forswear dealings with such players, we need to understand the various shades of state capital, to explore in detail our reservations, and take measured steps to ensure our worst fears do not come to pass.

And it is time for state capitalists of all flavors and nations to recognize that the burden of proof lies with them. If they seek to operate in the lucrative world of private enterprise, they must offer transparency, openness, and in some cases a willingness to fundamentally alter the way they operate.

That is the price of trust.

Tastes Great, Less Filling

Yanglin Toll Station, Beijing Airport Expressway
Affixing a knife to the front bumper to cut the air
1153 hrs.

Silicon Hutong Lite is my blog for off-topic posts and thought shots (i.e., stuff that has nothing to do with China’s tech, media, innovation, marketing and communications scenes.) In keeping with the ImageThief Theory of Unified Online Presence, I will occasionally post links here to some of the choice pickings from SiliconHutong.org.

For today: Musings on a San Francisco Defanged, and City Mice

There is not much in the way of re-postable material there yet, but as there is, I’ll link it here.

Sailor, Statesman, Scholar, Communicator

In the Hutong
Flying between concalls
1042 hrs.

Take a look at this release about the highest-ranking social networker in the U.S. Armed Forces who actually gets it. (Why is he not at SXSW?) The last paragraph was the hook for me. Strategic connections is where strategic communications really moves into the 21st century. Brilliant.

Insights are stock in trade for Admiral James Stavridis. For the past two decades, Stavridis has been one of the Navy’s most outspoken, erudite, risk-taking, and forward-thinking officers, an expert rifle shot with an MALD and a PhD from Fletcher. Keep an eye on him – he’s wrapping up his naval career with his second major command posting in a row (the first naval officer to serve as Supreme Allied Commander, Europe), but Jim Stavridis is going places.

For fans of the literature on leadership, check out Stavridis’ slim but excellent memoir, Destroyer Captain: Lessons of a First Command.

DoD Playing Defense, Again

In the Hutong
Fall cleaning
1448 hrs

Once again it seems like the guardians of data at the Pentagon are raising the cyber-shields. Attempts to access defenselink.mil from the Hutong, with and without VPN, are meeting with timeouts.

Not that I blame them, but it’s just sad that the second-largest line-item in the U.S. budget can’t come up with a better way of ferreting out malicious attacks than simply slamming the door on everyone. It is also sad that the Pentagon is losing its opportunity to conduct some decent public diplomacy among the curious Chinese.

Tear down these walls, Secretary Gates, and demand that your cyber-warriors come up with a better approach than simply slamming the fort doors. The best defenses only keep the friendlies out and make the bad guys up their game.

Five Reasons Obama Will Go Slow on China

Starbucks Guomao 1

I thought this was a work day

1133 hrs.


Now that America’s new president is settling into the Oval Office and a few of his key cabinet appointments have been confirmed, some folks here in Beijing are starting to wonder when Obama is going to start making changes to America’s policies toward China.

Don’t hold your breath. For a number of reasons, you should not expect significant changes in the China-US relationship in the near term.

1. New Kids in Town: Obama hit the ground running, but the velocity of initiatives coming first out of the transition team and now the White House belies the complexity of getting a new administration into place. It will be months before all of the President’s appointees are in their offices and operating smoothly with their own teams. Meantime, the West Wing is focused on building momentum on the problems worrying the American people, and sustaining the bipartisan sentiment in the Capital.

2. China was not a Campaign Issue: For a host of reasons, China was not a major issue in the Presidential campaign, allowing Obama a flexibility on China enjoyed by no other president in the past two decades. Able to take a pragmatic rather than ideological approach to US-China relations (Inaugural remarks notwithstanding), the administration can allow its approach to China to be dictated by the role it needs China to play in addressing its more pressing economic, security, and diplomatic challenges.

3. Better Things to Do: Team Obama has plenty of urgent issues on its plate: the financial crisis, the economy, the stimulus program, a new economic system, Iraq, Afghanistan, calming the Middle East, terrorism, and repairing the rift in trans-Atlantic relations wrought by eight years of neo-conservative unilateralism, just to name a few. American policy toward the PRC will be dictated by these issues more than any other factor, meaning that China will be approached once the administration is moving toward solutions on those issues.

4. No Ambassador: There is as yet no U.S. ambassador to China, and to my knowledge the President has named no candidate for the role. Given the extensive approval and briefing process, we probably won’t see Obama’s ambassador presenting his credentials before April, and perhaps not until May. Work will continue at the embassy, but significant new initiatives in the relationship will likely wait for the new ambassador

5. Getting to Know You: Like a couple of fighters sizing each other up in the ring, Hu Jintao, Barack Obama, and their respective administrations are watching each other carefully, making initial contacts, and learning enough about the other side to understand the basis on which the relationship will proceed. This is as it should be. It is no exaggeration to call the Sino-US relationship “the most important bilateral dialogue in the world today,” and as such improving those ties and the fruits thereof demands deliberate care, not headlong haste.

I would bet on six months before we see a significant initiative, and a year before we see state visits. Obama and Hu may well have an initial sit down at a major global conference, but short of that, relations will likely be status-quo ante in the near future.

Recently a diplomat asked me who I thought would be the first senior administration official to visit China. My money is on Defense Secretary Robert Gates. As a carryover from the previous administration, he would be the ideal messenger to talk about how the new team plans to take a more multilateral, inclusive approach to global security than its predecessor, and would signal recognition of the growing role China is and should be playing in addressing piracy, terrorism, nuclear proliferation, and a host of other issues.