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

Quotable Friday: Sir Martin Sorrell

“I remain an unabashed bull on China,” said Sorrell. “There are worries about the slowing of growth but that was inevitable. It was natural it was going to slow. We are concerned about the stock market bubble and the fall in the stock markets has implications. Having said that, we still believe in the longer term in the economy. We think it is a short term phenomenon.”

Source: WPP’s Sir Martin Sorrell bullish about China prospects despite sales slowdown | Media | The Guardian


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.

Friday Irrevrence: Labels are Important


My wife’s aunt brought this bottle of wine to a recent family dinner at the Liu Family Restaurant next to the National Art Museum of China (Meishuguan) in Beijing.

Nobody is happier than I to see Chinese vineyards jumping into the wine business. But someone should alert this particular winery that selling a wine without a year on the bottle makes it very hard for all but the utter tyro to trust what is in the bottle.

Shameless Plug Dept.: New Fast-Food Paper

Hutong West
Contemplating lunch
1253 hrs.

My most recent paper, this one on addressing the challenges facing fast food franchisors in China, “Jumping China’s Great Food Wall (pdf),” is now up on the Allison+Partners website.

Failing that, you can find the paper on here.

This is more of a practical paper than my last one, giving a quick overview of the uneven success enjoyed by fast food companies in China, and offering a series of prescriptions designed to avoid some of the more serious rocks and shoals, and mitigate the effects of many others.

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.

Shameless Plug Dept: New Paper on Strategic PR in China


Hutong West
The cool before the heat
1855 hrs.


Public relations people have a word fetish. We invest the aphorism “words have meaning” with an almost scriptural infallibility. Yet when it comes to terms we use to describe our own capabilities, we become maddeningly imprecise, if not deceptively hyperbolic. The best (or perhaps worst) example of that is the word “strategic,” as in “strategic public relations.” In fact, we use it so much when referring to so many different things that the phrase has almost lost its meaning.


In a new paper published last month by Allison+Partners (“Strategic Public Relations in China: Actions, Behavior and Communications”,) I ask the PR industry generally and in China specifically to take a step back. I argue for a definition of strategic public relations that steps completely outside of the communications function: as it was originally intended by the founders of the public relations craft, PR begins with the actions and behaviors of a company, and the obligation of PR counsel to guide them. My point: it is time for all of us to become more strategic, and in no place more so than in China, where so many brands consistently fail to understand, much less live up to, the expectations of their publics.


For my fellow PR practitioners and anyone else who oversees a PR function, the paper is available for free download and review on It’s a fairly quick read.




Yahoo! China According to Susan Decker

An Insider’s Account of the Yahoo!-Alibaba Deal
Sue Decker
HBR Blog Network
August 6, 2014

American businesswoman Susan Decker, president...

Susan Decker at employee all hands meeting in Sunnyvale, California. (Photo credit: Wikipedia)

If you have not yet stumbled across Sue Decker’s article in the Harvard Business Review blogs, please read it. Decker, who left Yahoo! in 2009 after being passed over for the CEO post in lieu of former Autodesk CEO Carol Bartz, delivers her view of the investment that effectively saved Yahoo!, and her role in it.

First person accounts are always suspect: one is never certain about how much of the history so presented is objective and how much is subjective. Thus, it was reassuring that the editors of the Harvard Business Review chose to publish it as an interesting curiosity rather than a definitive account or a case study. Still, the article made me a bit uncomfortable, for a few reasons.

The “Everyone Failed” Gambit

First, the author frames an eloquent but ultimately unconvincing defense of Yahoo!’s failures in China (in essence, everything the company did except the investment in Alibaba) that can be summarized in as “yes, we failed badly, but so did everybody else.”

That’s partly true: the list of US Internet companies that tried to make a go of it in China and failed is long and distinguished. But the ledger is not quite as one-sided as Decker implies that it is. 

Google had a viable business in China before it chose to stare down the Chinese government. Amazon has a business and is still in the game, despite having to go head-to-head with China’s 900 lb. e-commerce gorilla, Alibaba. Evernote and LinkedIn are making headway with tightly defined value propositions that make sense for China and the rapid refresh cycles that local users demand. And let’s not forget little South African NASPERS, a firm largely unknown to Valleywags that somehow managed to run circles around everyone else, making a brilliant early investment in Tencent that may ultimately outshine even Yahoo!’s windfall on Alibaba.

Decker suggests that the relative success of each of Yahoo!’s moves in China can be explained by the degree of control exercised over the China venture by Sunnyvale. The less control Sunnyvale tried to wield, the more successful that venture became. If that explanation seems a bit too neat and simplistic for you, join the club. I’ll come back to it shortly.

The False Management Paradigm

Second, the author skims over the fact that the joint venture with Alibaba failed to produce anything of value aside from Yahoo’s partial ownership of its partner. The joint venture did not save Yahoo!’s China business: the company’s China operating unit, valued in negotiations at $700 million, sank quietly beneath the waves soon after the agreement that handed operational control to Alibaba was signed. If anything, the Alibaba agreement destroyed Yahoo!’s operating business in China, or, perhaps more generously, sacrificed it in the name of a harmonious relationship between the parties.

Given the outcome, one might be inclined to say that the sacrifice was worth it. Perhaps. But neither we nor Decker should harbor any illusions about what this means for Yahoo!: that the company failed as an operating business three times in China, and that despite her assertions to the contrary, the degree of control exercised by Sunnyvale had no influence on the final outcome. Tight control, loose control, or no control, all three models failed. The one management lesson she tries to deliver in the article is a canard.

The Forgotten Brand Problem

Third, there is no mention in the article about what happened to Yahoo! and its family of brands in China. The brands that Yahoo! owned during Decker’s tenure – including the “Yahoo!” brand itself, each represented a repository of goodwill. The Yahoo! brand in particular initially occupied a position of great respect among Chinese netizens, both because of its success and because of Jerry Yang‘s Chinese heritage. In the process of thrice failing to make a go in China, Yahoo! squandered that goodwill, and thus destroyed the value of its brand in the largest online market in the world.

As a senior finance officer, Decker certainly understands the value of goodwill, as does Yahoo!: much of what they paid for their acquisitions was based on the goodwill and the brand value of the firms acquired. Any reckoning of the net value of Yahoo!’s investments in China must therefore take into account not only the sunk costs and the book value of the assets written off, but also the brand value it destroyed in its largest addressable market.

That this issue remains unmentioned in Decker’s article is, to a marketer like me, a final though perhaps unnecessary indictment of Decker’s narrative. In the end, her piece is not the full account of the deal from the inside promised in the title. It is, rather, an effort both to stake a claim of some credit for Yahoo!’s Alibaba windfall and to exonerate Yahoo!’s leadership – including herself – for the company’s poor operating record in China during her tenure.

Decker richly deserves her share of the credit for the deal: in the end, it saved the company. What she cannot claim for herself or her colleagues any credit for operational success in China. Porter Erisman, a former Alibaba Vice President who recently released a documentary about his time working inside the company called Crocodile in the Yangtze offers this thought on how to assess Decker’s legacy and her account of Yahoo!’s success:

How Yahoo! performed as an operator and how they performed as an investor are two different questions. If we evaluate Yahoo! as an operator (both inside China and outside,) I think we can all agree that their performance was poor. If we evaluate Yahoo! as an investor, we should take into account their entire history of investments and not just cherry-pick one investment that paid off. On the whole, Yahoo! did well as an investor over the years (due to Alibaba) despite some obvious failures. But people investing in Yahoo! didn’t do so because they believed it was a private equity fund. Luckily, the Alibaba investment turned out well and made up for Yahoo!’s failures on an operating level.

Erisman makes a superb point: Yahoo! did brilliantly as a private equity fund and poorly as an operating company. Nowhere was either more true than in China, so I suspect that if we – or Marissa Mayer – are ever to understand what makes Yahoo! tick, we will find the answers in a thorough, unbiased, and balanced account of Yahoo!’s China odyssey.

We will have to wait for someone else to write that account. In the meantime, please read Ms. Decker’s article. If nothing else, it is a valuable contribution to the oral history of American business in China.

Rethinking Mobile Advertising in China

Mobile Advertising Lags China’s Smartphone Explosion
Angela Doland
Advertising Age
January 24, 2014

Reporting from Shanghai, AdAge‘s Angela Doland writes a thought-provoking piece on how mobile e-commerce continues to outpace the growth of mobile advertising in the world’s largest smartphone market. As a percentage of all e-commerce, mobile is creeping into the double-digits, reaching as much as 21% during major holiday promotions.

At the same time, after years of effort, the most optimistic projections would have mobile advertising reach 3% of total ad spend in China this year. Given that Chinese users spend some 40% of their media consumption time staring at their mobile screens, you can understand the frustration of the advertisers.

Mobile Advertising Done Right

On the one hand, this trend should not surprise us. History teaches that effective advertising techniques for any new medium emerge only after an often extended period of trial and error. E-commerce initially grew much more quickly as a percentage of Internet-based revenues than advertising, and advertising was slow to find purchase in print news, radio, and television.

What this suggests is that the problem is not whether advertising can be adapted to mobile. The problem, rather, is that advertisers have yet to find an approach that makes the channel compelling.

Mobile Ad 1.0

There are three ways to approach mobile advertising. The first is to approach it as another channel for online advertising. This is where you talk about text-based advertising, display banners sized for the mobile screen, mobile search-based advertising, and ways to insert clever ads into music, videos, books and games consumed on a phone or tablet. Let’s call this “Mobile Advertising 1.0.”

My experience is that this has been the common approach in China, but that the challenges involved in making it work across three carriers, a half-dozen operating systems, hundreds of devices, and thousands of apps have made it difficult to get economies of scale. This alone might, in fact, explain why we are yet at such low numbers. Would it be easier with one carrier, one phone, and one operating system? Indeed. But I suspect that is not the real problem.

Perhaps, instead, we are misunderstanding the channel, and need to rethink how we do things. Back in 2006, I was in the room when my friend and former client Ian Chapman-Banks explained to a Japanese reporter that the reason that mobile advertising was having so much trouble was that we had failed to understand the value proposition.

Mobile Ad 2.0

Ian’s point (and I am paraphrasing heavily here) was that advetising as we know it was based on reaching out to chunks of people with similar characteristics at a given point in time. Mobile, Ian noted, had the ability to enable us to deliver a specific message to a specific person at a specific location and specific time.

In other words, what was keeping mobile advertising from being effective was that we were not using what made it fundamentally better than mass media advertising. This is the first time in history that advertisers could reach a person of their choosing at the time and place of their choosing, and all advertisers seemed to worry about was where to stick the banner on a small mobile screen.

Mobile advertising would be effective, Ian implied, when we figured out a way to make these capabilities work for the advertiser. Clearly, we are still looking for that combination, yet given the speed with which mobile is evolving and the innate conservatism of the advertising industry, this should come as no surprise. The key was to experiment and to keep experimenting.

The Mobile Ad 2.0 argument, then, is that if we want to figure out how to make mobile work for the nearly 1 billion mobile users in China (not to mention the rest of the world,) we have to experiment. Ian, who at the time had a generous marketing budget at his disposal, had allocated 10% of it to what he called “R&D:” money to try new channels of advertising and marketing that would not be evaluated alongside traditional channels, but that were just there to make sure that when something new worked, the company would be ready to exploit it.

So we aren’t at Mobile Ad 2.0 yet, but if we stick with it, we will get there eventually.

Is there a Mobile Ad 3.0?

Late last year I wrote a post that summarized why there are a number of ways to approach social media, each of which is guided by the marketing or technology silo from which one has emerged: practitioners who come out of advertising see social media as an advertising medium; people who come out of direct marketing see it as a direct marketing channel; PR people see it as a means of delivering messages; and so on.

What is different with mobile is that, in part because the challenge in putting mobile to work is, at the moment, much more technically intensive, the companies, departments, and agencies playing in that field have been those with lots of money. In short, it has been the advertising people. For that reason, we tend to talk about mobile as an advertising platform.

That exposes an assumption that is not necessarily supported by the facts. Zooming out of our ad-focused myopia one step further, then, we have to ask this: does mobile marketing need to be advertising-based, or are we missing something?

It’s Mobile Marketing, Jim, But Not As We Know It

In addition to allowing us to target an individual based on habits, time, and location, mobile also allows us to engage that individual in a conversation at a specific time and place. Mobile market research is based on that premise, and some of the early results hae been promising. As long as market researchers do not bombard us to the point of insensitivity with intrusive polls, and provided that we make it worth someone’s while to respond (good information is never free), this is likely to be a fruitful channel for some time to come.

Mobile has great value for point-of-sale applications based on near-field technology that go beyond completion of a sale. I walk into a hotel, and I am already getting notes on Foursquare about specials in the coffee shop. That’s a good start: it would be better if those specials were relevant to my dietary needs (e.g., “hi, David! We have great vegetarian options for you today!”)

Or how about direct-response on demand? When driving from city to city, I could tell Google’s Waze app on my phone that I needed a Sinopec station, and it would tell me distance, directions, prices, and offer me a coupon for stopping in.

I could go on, but you get the point. If there is a Mobile 3.0, and I think there should be, the opportunity is to start from the targeted user’s wants, needs, location, situation, and time, and work backward to the advertiser. This demands an intermediary who can make the match, of course. That’s why I think services like Criteo are going to translate well into the mobile space, and, in the long run, so will Baidu and possibly Tencent. The real gold rush will be for those companies who have the mass of advertisers on the one hand and the mass of users on the other.

Hence, Baidu’s ongoing interest in mobile. IF there is a single Chinese company that should make mobile advertising 2.0 or 3.0 happen, Baidu is it.

No PR Playground

What I am still trying to figure out, though, is where public relations has room to play in mobile. I have heard a few ideas, but I don’t see anything compelling so far. Classic advertising and classic PR don’t yet have roles to play in mobile to the degree that advertising does with online and PR does with social.

Yet every time I sit down and watch another compelling mobile technology demonstration, I am reminded that the tools we are creating today will be hopelessly antiquated, irrelevant, or both in five years. At some point, we are going to figure out how to make a connection between a company and a mobile user work out well for everyone. But we aren’t there yet.

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Will Chinese Pay for Content?

Hutong Forward
An undisclosed location
in the American Midwest

1649 hrs. local

Happy shoppers

Happy shoppers (Photo credit: Phillie Casablanca)

A contentious debate about China in the media industry is whether or not Chinese will pay for content. Most intelligent observers would answer no: Early experiments selling music were not encouraging, and with search engine Baidu offering links to free downloads, and later a legitimate streaming service, China’s mostly-young internet users could be forgiven for thinking “what’s the point of paying?”

Indeed, piracy of music has been so rampant that many thoughtful commentators, including Eric Priest at the University of Oregon, have championed the use of “alternative compensation systems” that presume that nobody will pay for the content itself. Like, ever.

At the China 2.0 conference at Stanford last month, there was gloom in the room when the people funding content plays took the stage. Annabelle Yu Long, the CEO of Bertelsmann’s China Corporate Center and managing director of the music giant’s Asian investment arm, noted that China, with a quarter of the planet’s ears, represented only 2% of Bertelsmann’s business, and this after decades of effort. The rest of the money people on the stage – Jenny Lee of GGV Capital, Raymond Yang of WestSummit Capital, and David Chao of DCM – Chinese all, agreed with the simple proposition that the Chinese do not pay for content, ergo they would not ever pay for it. As it is, so shall it ever be.

Getting Beyond ASCAP’s Messages

But as the discussion at China 2.0 progressed, and the panelists exhausted their messages and began to share experiences, a more nuanced truth came out. After talking about music, ebooks, and even movies, one of the panelists summed up by saying that as Chinese users become more prosperous and as quality and convenience become more important, they are  proving themselves willing to pay for music, movies, and even ebooks.

Two days later and an hour away at the annual conference of the Hua Yuan Science and Technology Association (HYSTA), the discussion was more optimistic. Oliver Lu of AppAnnie showed a chart that compared app downloads in China over the past several years to app revenues. Interestingly, over the past three quarters, the rate of growth of revenues has passed – and nearly doubled – the rate of growth in downloads. Chinese are starting to pay for apps. The numbers are not huge – your average Chinese spends 1/12 of the average Japanese user on apps – but the trend is clearly pointing in a positive direction.

Play with Me, Pay for Me

The difference lies in a generational shift – as well as a cultural shift – in consumption and a presumption of value. My generation thinks of content in terms of music, video, movies, and books. China’s post-80s and post-90s generations, on the other hand, grew up eschewing those formats because those were the most tightly controlled and least interesting.

Instead, they grew up playing games, and that cohort is only just reaching the age where they can afford to pay good money for their interactive diversions. Over half – 53% – of the revenue of Tencent, China’s huge portal and social media player, comes from games, which are now a $6.3 billion business in China, more than search advertising and display advertising combined. Ten of the top ten downloaded mobile apps in China are games.

A Future that Pays

That’s great for game developers, you’ll think. But what about everyone else in the content business. But that is exactly a the point. Once you get Chinese used to paying for one form of content (games), the door can then open for them to start paying for other forms. Develop the habit, create a value around legal versus pirated downloads, and you are on your way.

Call me a pollyanna, but it genuinely seems too early for the content makers to write China off. Use models like Eric Priest’s in the meantime if you have to, but lay the long term groundwork so that when your audience has more money than time, you are ready to capitalize on a very different kind of Chinese content consumer.

Whom Can You Trust with your Social Media in China?

Hutong Forward
Counting the helicopters outside my window
1629 hrs. local

Note: Over the summer I taped a segment for Thoughtful China where I talked briefly about what agencies to use for social media. The response has been huge, so I wanted to expand on my point here, especially as so many people are in the later stages of planning their China marketing efforts to begin after Chinese New Year.

Yunnan 2009-02-04 08-10

Internet cafe in Yunnan (Photo credit: sweart)

Most companies in China have yet to realize out that making the best use of social media demands more than a twenty-something customer service person posting links to content on the corporate website. This is understandable: social media is a relatively recent phenomenon (compared to, say, print media, or even the web), and the art of using social media for business is evolving with blinding speed. That means that today’s smart social media strategy is obsolete tomorrow.

This has provoked the companies who want to stay ahead of the game to turn to outside agencies. Unfortunately, the solution is more confusing than the problem. Jockeying for relevance and revenues, nearly every kind of agency in the marketing business is cooking up products and services to help companies handle their Chinese social media programs. Social media absorbs so much of the Chinese public’s time and attention that agencies feel they either must create a social media offering or consign themselves to the junk pile of history. The one-upsmanship between agencies is earnest, and sometimes desperate.

Elephants and blind men, meet social media and agencies

That would be fine if the solutions proffered were similar. They’re not, because each type of agency sees social media through its own prism, and approaches the medium accordingly. Advertisers approach social media as another form of advertising, or as an appendage of offline campaigns. PR people approach it as a fast channel to reporters or as a way to bypass journalists altogether. Digital agencies approach social media as a way to drive hits to digital content lodged elsewhere. And social media specialists want us to believe that social media is so different that it demands a special mojo, and it should be left to them as experts.

Ultimately, the agency a company ends up choosing for social media management is usually a function of how the firm has organized its internal marketing function. If there is a social media team, the agency is likely to be a specialist social media house (after all, if you are a specialist in social media, how would it look if you hired an ad agency?) If, on the other hand, advertising covers social, the ad agency will get the nod. And so on.

(I won’t bother to talk about companies who hire agencies to scoop up masses of zombie followers or who astroturf social sites with fake laudatory posts: any firm engaging in that kind of behaviour is going to get its just desserts in the form of bad publicity and ultimately negative ROI).

Social Done Better

This approach is understandable, but it is bass-ackward. What social media does that is unique is provide a space where people, not brands, dominate the channel. It is a space that is not just about promulgating a message, but about listening, responding, and demonstrating that a brand can be a person, too.

The real ROI from social, therefor, comes from the conversations people have about a company and its products with minimal encouragement on the company’s part. In short, the he trick to winning in social media is to get other people talking about you and delivering your messages far more than you do about yourself in all other media, and the more influential those people are on the behaviour of others, the better.

For that reason, the agency that should be handling your social media in China should be:

  • A firm that is used to cultivating influencers over time
  • A firm that understands how to develop, deliver, sustain, and support powerful messages; and
  • A firm that knows how to monitor opinion, respond rapidly and appropriately in the face of a crisis or opportunity, whether that is a product problem or a corporate scandal.

To me, that’s not an agency full of creatives, of people who write apps, or of social media “experts.” It is, on the other hand, an agency filled with smart communicators. Find one of those, and you have found the agency to help you in China’s lava-fluid social media milieu.

Branding from the Ground Up

In the Hutong
Surrounded by snow
1721 hrs.

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

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

China is Different…

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

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

…But the Difference is Changing…

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

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

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

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

…So let’s not Whitewash the Nuances

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

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

The Coming Rise of Foxconn

Deutsch: Foxconn Logo

Deutsch: Foxconn Logo (Photo credit: Wikipedia)

The High-Speed Train “Harmony”
Enroute to Shanghai
1130 hrs.

The attention given to Foxconn over the past several years has largely concentrated on its role as Apple’s leading supplier in Asia. What we have missed in all of that juicy coverage, however, is the longer-term picture. While it is tempting to believe that Apple will always be strong, that it will always rely on offshore outsourcing for its production, and that Foxconn will be content to play Sancho Panza to its client brands, there are several factors that suggest otherwise. In fact, in as little as a decade from now, Foxconn may itself be a global brand.

Hon Hai Precision built its business as a supplier to the world’s computer and consumer electronics brands. Most of us still see the company a contract manufacturer, an assembler of devices and machines. Yet over the past seven years, the company has quietly added to its capabilities to the point where it is one step away from becoming a fully integrated brand-name electronics company.

Making Nice with Consumers

First, it added a name people outside of Asia could recognize as a brand – Foxconn. You could argue that the brand is tarnished, but the one thing it still has going for it is recognition. Think Oscar Wilde: the company has been talked about a lot, and despite the bad press (much of which has landed on Apple), the scale of the brand recognition alone – and the cost of building recognition for a new brand – might tempt the company to stick with it. If not, building a new brand would be a relatively modest investment for the $25 billion company.

Next, Foxconn began experimenting with selling to consumers with a line of branded high-performance computer components. Even though the target was small – gamers, pro-sumers and specialty computer builders – it gave the company a glimpse of what would be required in a wider consumer marketing program. As a part of this experiment, Foxconn then built the rudiments to of a customer support network, again, providing the company a gut-level understanding of what would be involved in supporting a global consumer effort.

Steel Goes In, Cars Come Out

Equally, if not more important, the company slowly built out a vertically-integrated manufacturing capability. The original thinking was to offer customers faster time-to-market while controlling for costs and capricious upstream suppliers – the latter a perpetual, frequently overlooked headache in China. The company began making its own cases, then its own electronic components. Next, it added product design and development and even the basics of a research capability. As of 2006, the company had over a dozen R&D centers worldwide, and 30,000 patents either granted or pending.

To control the variables in supply chain, it built in a logistics and supply chain management team that focused on keeping customer inventory costs low and prepared it to work with the largest retailers in the world, and built a channel sales organization to support the sale of its own branded components and as an extra spiff to smaller customers.

All told, Foxconn could probably start experimenting with selling its own branded consumer products in a matter of months once it made the decision to go ahead.

Gnawing on the Hand that Feeds

The perceptive reader will ask “why?” Why would Foxconn risk upsetting the Apple-cart, risking the custom of the very companies that put it where it is today? There are several answers to that question, none of which alone would be sufficient to make Foxconn take the leap. Taken together, however, they form a compelling case.

First is profit pressure. Foxconn is probably at the point in its development where it has squeezed as much as it can out of its costs, and costs are rising. Inputs aren’t getting cheaper, labor is getting more expensive, and the company faces a major investment in automation, not to mention the additional expenditures every time Apple or HP needs to offer something newer, cooler, and harder to make. Cost pressures on customers, even Apple, remain acute, so Foxconn is unlikely to see much relief from that front. The only way to turn the profit equation around is to start going around its weakest customers directly to retail.

Second, many of Foxconn’s customers – HP being a prime example – are facing headwinds of their own. The computer industry has matured, people aren’t replacing devices as often, and the field is starting to narrow to two or three industry leaders far ahead of everyone else. The opportunity to find a tempting niche and then burst in to exploit it will grow, especially as Lenovo starts to expand its market share. If Lenovo can do it, Gou will reason, so can we.

Even Apple is not immune to headwinds, and if there is one thing that must keep Gou awake at night, it is his growing dependence on this single customer and the decisions made by its leadership team. And if that company starts making strategic errors and the numbers begin to fall, Foxconn needs a Plan B. What is that Plan B? Samsung? Probably not.

Third, for all of the advantage of working from behind the screen, Foxconn’s fortunes are almost entirely beyond its control, resting in the hands of distant executives making decisions that are none of Foxconn’s business. Don’t underestimate the degree to which this frustrates not only Gou, but every Chinese contract manufacturer who ever dealt with an importer. Your can only grow as quickly or consistently as your customer lets you. Again, if the customers start blowing it, the urge to give up and go around them becomes overwhelming.

At the same time, Foxconn’s customers are arguably as locked in to Foxconn as they are to him. For reasons of speed (time to market) and scale (time to ramp up volume), customers don’t have many choices. Short of the most grievous provocation, few could afford to walk away from Foxconn.

How It Will Go Down

For all of these reasons, Foxconn’s move would have to come under circumstances where it could credibly say to its customers that it had no other choice.

There would need to be a trigger event, the three most likely being that a major customer either goes under, stumbles badly, or takes back production. At this point, Foxconn’s continued growth (if not its survival, if the stumbler is Apple), would be at risk, and Foxconn would need to respond.

Foxconn would likely use a production facility with idle capacity to produce products that it could credibly say did not threaten a current customer (say, Apple), and that possibly was aimed at weakening the grip of a rival on its market share. If Foxconn could make a case that it was going after Samsung or LG, for example, Apple’s objections would likely be few. Foxconn could even offer to forge an entirely new brand and build new factories so that the new venture was plausibly firewalled from customer business.

To be sure, the company needs to fix its reputation and build a global marketing capability. The former is underway in earnest: the company has hired PR counsel (not yours truly) to fix the reputation and to lay the foundations of a global branding and marketing effort. It has also built a worldwide sales force that could be expanded quickly to forge the relationships with retailers that it would need to get shelf space in stores.

But make no mistake that Foxconn’s breakout is both plausible and, given the history of business, inevitable. The timing will be soon – Terry Gou is no longer young, and he would want the transition to global brand to at least begin under his watch, and arguably it will either happen under Gou or it will never happen.

If Foxconn could pull it off, however, the company would have a shot at a long-term future free of dependency on other companies, and set up to compete against Samsung, Lenovo, Huawei, and – if it so wished – Apple.

Watch carefully. The shift will start small, but once underway we will watch the birth of a new global brand.

China and the Glocal Mix

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

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

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

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

Marketing Mixology

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

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

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

The Geek and the Chic

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

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

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

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

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

Meet the Glocal Team

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

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

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

Being Experimental

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

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

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

Does the Internet Make Polling Redundant in China?

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

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

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

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

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

Disinformation Wants to be Free

Hutong West
Afternoon sunshine
1250 hrs.

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

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

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

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

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

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

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

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

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