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

Beijing’s New Internet Buzzphrase

Hutong Forward
Planespotting at Reagan National
1655 hrs 

In a ten minute speech last month in London at the 50th Meeting of ICANN, Lu Wei, the Minister of China’s Cyberspace Affairs Administration, introduced a set of seven principles under which, according to him, the Internet should be governed. While not much attention was paid Mr. Lu or his speech outside of the confines of the attendees, we can assume that it was an official statement of government policy, and therefore worth understanding, analyzing, and discussing.

His principles, as I heard them, are:

  1. The Internet should benefit all mankind and all of the world’s peoples, rather than cause harm;

  2. The Internet should bring peace and security to all countries, instead of becoming a channel for one country to attack another;

  3. The Internet should be more concerned with the interests of developing countries, because they are more in need of the opportunities it brings;

  4. The internet should place emphasis on the protection of citizens’ legitimate rights instead of becoming a hotbed for lawbreaking and criminal activities, let alone becoming a channel for carrying out violent terrorist attacks;

  5. The internet should be civilized and credible, instead of being full of rumors and fraud;

  6. The Internet should spread positive energy, and inherit and carry forward the outstanding culture of human beings;

  7. The Internet should be conducive to the healthy growth of young people, because that concerns the future of mankind.

There is a lot to grist in these, but what jumped out at me was this catchphrase “credible Internet.”

There is a ring to it that suggests that we are going to be hearing this much more in the coming months, but the aim seems clear. While in the past the boundaries of online expression have been defined by prurient content on the one hand and seditious content on the other, there is now a third piece to that troika: rumors.

This is worrisome: “non-credible” content implies a much wider scope for restriction than the modus vivendi we have enjoyed in the past, and opens to official censure a vast swath of online content. You can avoid posting prurient content rather easily by avoiding adult themes and illustrations. You can dodge seditious content by steering clear of domestic political issues. But “non-credible” content is in the eye of the beholder, and can easily extend to commercial content and company web sites as well as posts on Weibo or WeChat.

Watch this space, as I suspect we are going to learn more about where the authorities are going to be drawing the line. In the meantime, any company or individual producing a content-laden Chinese site or posts on Weibo or WeChat should err on the side of caution. Chinese law is unkind to those whom the authorities accuse of spreading rumors, and demonstrable veracity may not be enough to keep you out of the wrong kind of spotlight.

Edelman, Rui Chenggang, and China PR

Hutong Forward
In the Shadow of the Pentagon
1710 hrs

As more details about ties between the China operations of Edelman Public Relations and erstwhile China Central Television (CCTV) anchor Rui Chenggang are released, a wave of schadenfreude has risen amongst both Edelman’s rivals and the detractors of public relations. As happened when Edelman was caught in a similar ethical imbroglio when it hired ostensibly independent bloggers to post on behalf of Wal-Mart, PR‘s detractors believe that ethical lapses suffuse China’s public relations industry, while practitioners who don’t work for Edelman see this as a large, hubris-laden market monster getting its due.

Both are wrong.

Ethical lapses are common in PR in China, but “common” is a far cry from endemic. There are PR firms, executives, and teams in China who insist on the highest possible ethical standards. Rather than going broke, they discover that while some clients will shun them for these reasons, a growing number of clients, particularly MNCs, are insisting on high ethical standards and are willing to sacrifice short-term results for a clean reputation. Clean business is good: not only do these PR firms keep very busy, they have to turn opportunities away.

But while these firms are the future of the business, they are still the exception that proves the rule, and no agency executive or corporate PR manager should guffaw too loudly at Edelman’s expense. For far too long as an industry and a craft we have turned a blind eye to practices considered unethical, immoral, or even illegal in more developed markets, failing to see that China was developing and that a reckoning was coming.

Two issues prevent widespread improvement in PR industry ethics in China. First is a persistent exclusivist belief that because this is China, things are done the Chinese way, and always will be. Operating ethically is seen as naive at best, and culturally imperialist at worst (“how dare you impose your values on us!”)

The second issue is fear. PR executives and their agencies believe that if they don’t take advantage of every opportunity, however morally ambiguous, they will lose revenue and clients to competitors who lack – or opportunistically ignore – their moral compasses. The pressure is greatest among the larger agencies where the focus is exclusively financial performance. The accountants calling the shots in New York and London are not measuring ethical compliance: they measure revenues and profits. Faced with the choice of losing a sizable client or cutting some ethical corners, there is no contest.

But the persistent idea that China is an island untouched by ethical standards for the conduct of public relations is now demonstrably so much cow manure. Those who cling to such exceptionalism – and you know who you are – are dinosaurs whose time in this business is limited, regardless of the success they appear to enjoy today.

What happened to Edelman could have happened to any of dozens of local and international PR firms. Rui had made himself a target, and Edelman is the largest PR firm in the world. But the rest of us have now been given a shot across our bows. Either we bite the bullet now, change course and adopt ethical tactics and practices, or we leave our firms, our people, and our livelihoods at the mercy of government caprice. If we don’t, this will happen again, and when it does we will all find that it will not be a single firm in the spotlight – it will be every PR practitioner in China.

Why Robots Won’t Save China’s Factories

Somewhere near Bengbu
Riding the Rails
1112 hrs

If we have not witnessed the peak of mass production in China already, we will soon.

It is not just that costs are rising and production is moving elsewhere: the entire mass production model may well have jumped the shark. The growing costs of energy and commodities, as well as the coming end to the ability of enterprise to externalize the social costs of production will make mass production look increasingly wasteful.

We are leaving the age of “make enough so that everyone has what they want,” and coming into the age of “make just enough of the right stuff.”

Mass is Over…

With due respect to Henry Ford, we are witnessing the birth of a long-term trend away from mass production and toward an industrial model that manufactures a product only when a customer wants it, how she wants it, and where she wants to use it.

This will undermine the consumer model predicated on planned obsolescence, overproduction, and disposable components, and will ultimately destroy economies of scale as the means to lower costs and profit. That means moving the production closer and closer to the customer, and the growth of mass customization. That, in turn, spells the end of our reliance on mass production, and that will turn every shopping mall into a factory floor.

None of this should come as much of a surprise. Mass customization has been a meme of futurists for over a decade, and technologies like print-on-demand and 3D printing are but the harbingers of a new industrial revolution that will turn the point-of-sale into not only the point of production, but, increasingly, the point of design as well.

…So are China’s Days as the World’s Factory

But the implications for China are potentially immense. It suggest that, for most Chinese manufacturers, automation will only delay the inevitable. After all, who needs a factory in China manufacturing blue jeans when you can get yours custom sewed based on your measurements and preference right at the store? Or have your phone assembled for you at a local factory, shipped to you, then upgraded rather than changed when the time comes?

What applies to finished product applies to components as well. Fabric can be woven in custom lots as and when needed – it is not hard to visualize a Home Depot-sized warehouse store filled with machines that will knit, weave, and dye on demand, or a ballroom-sized microchip fab that turns out programmable or application-specific chips in tiny lots.

The future of Chinese manufacturing, then, lies not in producing consumer products for the world, but in producing consumer products for itself, and, I expect, building the machines that make local, personal production possible.

China’s Microfacturing Future

This will not happen right away: China’s mass-production manufacturers still have a long runway ahead as the world retools. It is also likely that the economies of mass production will continue to be essential for low-cost products for sale to developing nations.

But for producers catering to the developed world and the global upper- and middle-classes, that runway is not as long as some would wish. Our best guess: a decade at the outside, but likely less.

Watching this evolve will be fascinating. China, Europe, and the US will be scrambling for the lead as the world’s factory moves in next to the cash register, and it’s anyone’s horse race.

Why China’s Factories Will Automate

North China Plain
On the G11 HST Harmony
0900 hrs.

China has passed what I like to call “Peak Toil,” the point at which the size of the pool of labor available to manufacturing reaches its apogee and begins a long decline. Chinese workers are becoming more educated, their salary, benefit, and lifestyle expectations are rising, and because of the demographics of single-child families, their numbers are shrinking. If cheap labor isn’t dead in China, it is terminally ill.

In the coming decades, China will go from being “THE factory floor” to “A factory floor.” Many things will force that change – a shrinking pool of workers, growing local opportunities in services, tightening environmental regulations, and more expensive energy. The economics, in short, will change, and so must industrial China.

The Big Ones First

Manufacturers are facing a stark choice: raise prices, downsize, or automate. Raising prices isn’t an option in a Wal-Mart world where places like Malaysia, Bangladesh, Mexico, Eastern Europe and even parts of the U.S. are already offering competitive pricing. Downsizing only offers a short-term answer when economies of scale are driving manufacturing, and is really only an option for companies who can make the shift to higher value-added products.

Which leaves automation as the answer for large manufacturers, especially contract manufacturers like Foxconn, Flextronics, and Quanta. Unable to depend on masses of workers lining up at their gates willing to work for a modest daily wage, each is thinking long and hard about automation.

Robots Don’t Jump

Beyond rising wages, law and custom in China leave companies liable for a range of benefits. Robots, on the other hand, do not require the company to invest in the real estate for dorms, cafeterias, break rooms, and other facilities, enabling the company to utilize all of its floor space for production, logistics, and support. What is more, robots don’t get sick, charge overtime, demand bonuses, or require companies to pay the additional “social” costs to the state that it would be required to pay for each worker.

And equally important, robots don’t jump out of windows. The Foxcon story has proven that there is a perception liability that comes with a larger number of workers. Whether Foxconn has ten thousand workers or two million, a single suicide or accident affects hurts the company just as much. Statistically the likelihood of such incidents rises as the number of employees grows. The coverage given to the company’s HR troubles proves that more workers mean more problems, so the best approach from the company’s point of view is to hire fewer workers.

Not Just Tech

I talk a lot about Foxconn and the technology outsourcing firms, but they are not alone. The automobile industry is a global pioneer of robotics, and Chinese factories are increasing the number of robots they are using. The packaged foods sectors rely on automation.

It is fair to say, though, that every sector is considering automation. Until last June I lived about 400 meters from the Beijing International Exhibition Center, and in 2013 the second most popular trade show – right after the Beijing International Auto Show – was the production automation exhibition. That’s apocryphal, but it is telling, and industrial robotics is about to get very hot in China.

For Better or Worse

None of this is designed to pass moral judgment on automation. The social issues that surround the process are complex, and deserve a wider airing.

But it is safe to say that automation is the beginning of the end of The Factory Girl in China, and that this is a good thing. Having spent a lot of time in factories in this country, met some of the people on the floor, and having read Leslie Chang’s book and Alexandra Harney’s superb “The China Price,” it is hard to get sentimental about The Factory Girls passing from the scene.

For the first time in decades we now have more workers serving people than making things in China. As long as the economy keeps chugging ahead, China’s shrinking pool of young workers will have a wider scope of opportunities than their predecessors. The real question is whether China will provide these young people an opportunity to learn the skills they will need in a changing environment. Given the rigidity of the educational system, that’s an open question.

Even the most automated industries need people on the line. With respect to my friends in the software industry, there are some things that cannot be reduced to code. When it comes to quality, you cannot replace the human senses, especially a critical eye. Smart companies will reprogram robots to keep them flexible. And the best automated processes have humans watching at every step. But humans will need to improve their skills to be a part of that equation.

Whether automation works in an enterprise is a question of management. But the question of whether it will revitalize China’s economy and society or undermine them can only be answered in the realm of industry practice and government policy. The change is coming, and China’s leaders had best be ready.

Six Principles of Entrepreneurial IPR Protection in China

Hutong Forward
Somewhere in San Francisco
0930 hrs. 

The issue of intellectual property rights and their protection continues to bedevil the agenda between China and the rest of the world. Do Chinese companies cheat? Certainly many do. Does China have on the books a comprehensive set of intellectual property protection laws? Without doubt. Does the government act to protect the IPR of foreign companies? Not as much as they could. All indications are that this situation will continue for at least the foreseeable future.

For that reason, it is perhaps past time to start drawing bigger lessons from this situation. It is time we started approaching IPR less as inventors and their attorneys, and more as businesspeople.

To that end, I propose six principles of what I call “entrepreneurial” IPR protection in China. Lawyers and the like are essential to the IPR protection process, but experience in China has proven that legal protection is insufficient. In addition to having legal eagles at your side, you need to take your own steps to protect yourself.

1. Start by protecting the rights of others. Remember that if it is all about you or a small subgroup, you are going to lose in the name of the greater good. The more protection benefits everyone, the more it benefits you.

2. Make it about citizenship. Actively support the creation of an IPR protection system that serves the interests of all parties, including the public at large.

3. Look inside before looking outside. Do all you can in your internal processes to protect your rights. For example, if you are walking around with a laptop that is not using disk-level encryption, but you pay for a high-power IPR attorney, you are doing this all backwards.

4. Don’t be an IPR troll. Protect only what you must. License what you can. Give away as much as possible.

5. Be a wellspring, not a storehouse. People will support your IPR if they depend on you as a source of innovation more than they depend on the innovations themselves. Remember that the well is more valuable than a bucket of water.

6. Talk about what you are doing. When you are being smart about protecting your IPR outside the court system, talk about it. Each of the steps above will brand you as smart, forward-thinking, and the kind of company people will respect. If nothing else, all of that reputation capital will serve you well when you are forced to take the nuclear option and drag some beloved Chinese company into court, as it strengthens your case politically (and make no mistake – court decisions in China are political.)

In the case of many companies, there are even more steps you can take that are specific to your industry or situation. This list, however, represents a set of general prescriptions and a place to start in rethinking your approach to protecting your IPR in China.

China and Soft Protectionism

In the Hutong
What, cold again?
2142 hrs.

Protest in Hong-Kong against WTO on december 2005

(Photo credit: Wikipedia)

Though we may not be talking about it much, those of us who watch China for a living are looking forward with a mixture of dread and anticipation to the upcoming “two meetings,” the annual sessions of the National People’s Congress and the China People’s Political Consultative Committee. Even though the die of China’s future leadership was cast at the Party Congress in November, the coming NPC is the juncture where the reins of government are handed over to the new leadership, and the retiring members of the Hu Jintao/Wen Jiabao entourage graduate to the status of “elder statesmen.” For that reason, this is the point at which we will all be watching for some indication of how Xi Jinping and Li Keqiang will run the show a little differently.

While some will be looking for signs of political reform, my eyes will be cast elsewhere, namely to trade. What I want to find out is whether and how the new administration plans to play by the rules it signed up for when it acceeded to the WTO eleven years ago. Or, indeed, how it intends not to do so.

Since at least the early days of the Hu Jintao administration it was clear that the so-called Fourth Generation of leaders was somewhat less enthusiastic about playing the globalization game, and much more interested in just keeping a lid on the place. Stability was the name of the game, and the spirit of we-can-take-whatever-free-trade-can-dish-out that exuded from Zhu Rongji like a heavy cologne was blown out the window when Zhu left the building in 2003. In its place came a series of policies that I term collectively “Soft Protectionism (软保护主义),” a series of measures and behaviors that allow China to circumvent the intent of the global free trade regime almost at will.

Soft Protectionism, as I see it, consists of several pieces.

National Standards. We see this most blatantly when it comes to technology. The government establishes a standard based on a technology that is locally developed, and by so doing secures all or at least part of the market for Chinese output. The TD-SCDMA standard for third-generation mobile phones is a great example, as is the WAPI wireless LAN standard that was supposed to supplant Wi-Fi. China has learned that this policy is best conducted when it is done within the parameters of global standards-making bodies like the International Telecommunications Union (ITU) and the Institute for Electrical and Electronic Engineers (IEEE.) Through organizational activism, horse-trading, and the occasional theatrical tantrum, China is able to gain acceptance for standards that are, in some cases, little more than laboratory experiments. Using this global legitimacy, the standards ploy becomes legitimate. And lest you accuse me of being biased, let me make clear that we Americans all but invented this game, and we perfected it with our bull-headed nationalist behavior when it came to standards for digital televisions and the first digital phones. China is simply turning the tables.

Creative Use of Non-Tariff Barriers. Despite the openness promulgated by the WTO, there are still back doors that will allow governments to selectively protect industries. The first and favorite of these is the so-called National Security Exemption from the World Trade Agreements. The key phrase is “Nothing in this Agreement shall be construed . . . (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests”

That exemption gives wide latitude to any government willing to interpret it liberally, and China can and does do so, especially when it comes to information products and software. Other countries use this exemption to ensure that they have access to weapons production in the event of international isolation. The U.S. uses it, for example, to ensure its ships, tanks, and warplanes are all made by factories on US soil, but it does not use it to stop the import of foreign merchant hulls, diesel trucks, or civil aircraft. China, according to Nathaniel Ahrens at the Center for Strategic and International Studies, is comfortable crossing that line.

China also manages to restrict the free trade in publications, television, film, and music by stretching the WTO’s Cultural exemption (introduced by France in 1993) beyond the breaking point. Under the guise of protecting its vulnerable culture, China requires specific approval for any publication, recording, video, or film coming into the country. Keep in mind that we are talking about the culture that for nearly two thousand years has managed to assimilate every culture and nation that tried to subjugate it. Nonetheless, the exemption is used at every juncture.

Passive resistance to WTO Rulings. Rather than submit to WTO rulings it does not like, China conducts a passive-aggressive policy of resistance, even at the risk of undermining the institution. Dan Harris of China Law Blog fame put it like this:

“China still intends to remain within the WTO so as to be able to obtain certain trade benefits. Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter. China is proud of how it has  used “procedural games” to avoid its responsibilities to respond to adverse WTO decisions and it openly states that it will continue to use this approach in these “national interest” cases. In fact, the term “procedural game” has become a standard feature of the China’s trade policy vocabulary.”

Government Catch-up initiatives. These are the micro-level great leaps that the government attempts to engineer over time in order to substitute domestically-made products and technology for locally-made equivalents. The past thirty years has seen China-government sponsored initiatives succeed in “catching up” in several industries, including shipbuilding, digital telephone switches, heavy trucks, wind-power generators, and solar power, and it is attempting to do so in automobiles, commmercial aircraft, microprocessors, and encryption software. The end result is the same: serviceable and appropriate products from overseas are gradually pushed out by government programs designed to deny them access to the market.

Government encouraged SOE support. This comes in many forms, but the most prevalent is outright cash payments. By offering low-interest or permanently rolled-over loans for state owned enterprises through state-managed policy banks at either the national or local level, China creates effective trade subsidies that are not counted according to international standards. A senior Obama administration official confided in me on the sidelines of the Strategic Economic Dialogue in Beijing last year that China’s export loans dwarfed even the U.S.’s generous programs through the Export Import Bank.

There is not much that the US, the EU, or any grouping of governments can do about any of this, short of an all-out trade war, if China chooses to continue with these policies. What this means is that even as a full-fleged WTO member, China is still capable of providing a protected environment for its firms, and has proven willing to do so.

Such policies will help companies beat foreign interlopers at home, but at what cost? At some point China will confront the other edge of that sword, whether in the form of having its behavior mirrored by other countries with tit-for-tat trade measures within the scope of the WTO; or by discovering that the companies it protected at home were weak and unprepared when venturing abroad.

For Xi Jinping, the choice in the coming months is whether to continue to use Soft Protectionism as the nation’s de-facto trade policy, or whether he will instead switch off the pumps and force Chinese companies to build the resilience necessary to beat global competition away from home. For the companies themselves, as Sunzi said, “Enemies strengthen. Allies weaken.” The wise Chinese company will seek to step out from under Beijing’s umbrella as early as possible to learn to compete on a globalized playing field, rather than a nationalized one.

Business and The Xi Team: Focus on the Drivers

Xi Jinping 习近平

Xi Jinping 习近平 (Photo credit: Wikipedia)

In the Hutong
Information coma
1958 hrs.

Over the last couple of weeks, several people have asked me what the changeover in the Communist Party leadership will mean for international business in China. The short answer is that if I knew, I’d be wealthy. The longer answer is a bit more helpful.

Many years ago I had a mentor and boss who taught me that the parade of personalities and the flow of policies were fun to watch, but that sticking your finger up to feel the political winds would never offer the insight a business requires to make decisions beyond a six month threshold. What you need to understand, she told me, were the fundamental drivers of policy, not the policies themselves.

By fundamental drivers she meant the five or six issues that the nation’s leaders worried about the most, overlaid with the three core goals of the party at any given time. Add to that a general understanding of the climate in the country, and any relatively educated person could at least have a general hunch about a company’s horizons.

For example, I believe the thee core goals of the Party are:

  1. The continuance of Party rule
  2. The social stability of the nation
  3. China’s rise to global economic and political leadership

No rocket science there. Beyond this, though, things get tricker. What are the five things the members of the Politburo Standing Committee worry about when they wakes up at four o’clock in the morning?

Here is my list of the top five.

  • Controlling corruption without blackening the entire Party in the process
  • Getting the economy stabilized and on track for continuing growth
  • Keeping the PLA in line while retaining its political support
  • Cleaning up the environment without disrupting the economy
  • Keeping expressions of popular discontent from coalescing into a coherent anti-party front.

These are certainly open for debate, but what all of this suggests is that global companies will be welcome in China to the extent that they address (i.e., demonstrably take into account) these five priorities. What is more, given that domestic attitudes about foreign investment in China have, in the past five years, gone from “generally positive” to “generally ambivalent,” companies are going to find themselves compelled to make a case to their local stakeholders that they have something unique to offer just by being here.

Mind you, I’m not necessarily talking about approvals to do business, although that is an issue. Instead what I mean is that with every audience, from regulators to consumers, every business would do well to remember that being foreign no longer buys you much, and that in the current environment there is no particular priority placed on letting foreign firms into China.

In short, the outlook is not exceptionally good in the near term, but there is as yet little cause to be pessimistic. All of us need to stay tuned.

Congress, Huawei, and ZTE

In the Hutong
Catching up post holiday
1108 hrs.

If you have been following the news, you will have heard that a U.S. Congressional committee has issued a report urging U.S. firms not to do business with either Huawei or ZTE. Those two companies, respectively the second- and fifth-largest manufacturers of telecommunications equipment in the world, are accused of a range of offenses. In my opinion, the real offenses for which those companies have been placed in the Congressional mush-pot have little to do with the reasons outlined in the Congressional report. The companies real offenses are:

  1. They are from China, and this is an election year;
  2. They are the first companies in 70 years to challenge American companies for dominance in a core US industry that have not been from an ally or a client state;
  3. They have failed to be sufficiently transparent when doing business in a country that demands transparency from all companies, and even more from those that hail from competitor economies.

If Huawei and ZTE are guilty of anything, it is that they have built their U.S. businesses and ambitions before they have laid a foundation of trust with the American public and its elected officials. Ideally, no company should have to do that as a prerequisite do doing business in America, but trust is the price for any company stepping into a new country. The two companies are learning a lesson that must be absorbed by every Chinese company expanding overseas. China as a nation may or may not be successful in its efforts to reform the global system to suit its ambitions. Even if it is, though, Chinese companies must still conduct themselves in a manner that is acceptable to the governments and consumers in the markets they seek to enter.

At the same time, there is also an effort underway to tar Huawei and ZTE as a malevolent presence in the telecommunications industry, an effort that steps beyond fact and into the realm of speculation and rumor. As I noted in Making the Connection: The Peaceful Rise of China’s Telecommunications Giantsit behooves both the U.S. government and the U.S. telecommunications industry to stop relying on politics and the F.U.D. pump to preserve their markets. Instead, it is essential that American companies focus on Huawei as a competitive threat where it counts: in the market. A failure to do so only postpones their inevitable implosions.

I’ve spent much of the morning talking to reporters about the report, so I won’t belabor this. If you are interested in some balance about the issue, I talked about this this with Kaiser Kuo, Jeremy Goldkorn, and Will Moss on the Sinica podcast recently. Take a listen – I think the podcast covers the issue far better than 60 Minutes did. For a more U.S. policy-oriented viewpoint, I also covered this in The Pacific Bull Moose, my U.S. politics blog.

Caixin and China’s Great Equity Repatriation

LG Twin Towers, Beijing
Can’t see the ground through the haze
1018 hrs.

Just under a year ago I suggested that a large number of Chinese companies that are listed on stock exchanges in the United States and Europe were going to be de-listing, buying out their offshore investors and bringing the equity home. This has now become a large enough trend to capture the attention of mainstream media, and China’s excellent Caixin picked up the story this week (“Overseas Listed Firms Seek a Path Home.“)

Under the increased pressure of competition and regulatory oversight in the U.S. market, many Chinese companies that are primarily listed on overseas markets are returning home. One by one these companies have fled overseas markets seeking the high prices and loose regulatory environment in China’s A-share market.

The constant public oversight, pressure of short-sellers, and the persistent difficulty of dealing with investors who have only a vague idea of what you do is trying for even the best-run companies. If you’re not so well-run, regulations are a burden as well, especially the dreaded audit requirement.

Which brings us to the less-discussed political issues. The Party is concerned about foreign auditors digging into domestic companies, not because the CCP wants China’s companies to be poorly run lash-ups that systematically deceive investors, but because the Party is concerned about the political fallout from “unmanaged” revelations that result from public audits. In the past year the CCP has had their fill of such revelations in the Bo Xilai/Gu Kailai case, and the leadership is rightfully concerned about the effect of such disruptions.

Further, though, the Party would like the soft-power win of having its stock exchanges match, then exceed, the power and importance of the world’s leading exchanges. You can’t do that when your best companies head offshore for their indirect capital. For this reason, expect the CCP to grease the ways for the Great Equity Repatriation.

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.

Jacques and the Need for China to Change

Deng Xiaoping bust in the Zhuhai High-Tech Zone

Deng Xiaoping bust in the Zhuhai High-Tech Zone (Photo credit: Wikipedia)

China’s path to reform | Martin Jacques | Comment is free | The Guardian.

In this well-written editorial, Martin Jacques captures why the Party’s next generation of leaders needs to engage in a rethink. The key graf:

First, the era of cheap labour and low value-added production is coming to an end as the economy becomes increasingly sophisticated: a major shift in economic strategy is under way. Second, China has acquired a panoply of global interests that require its foreign policy, presently based on keeping itself to itself, to be rethought. Third, the enormous growth in social inequality, combined with mounting corruption, has fostered a sense of grievance that, if unchecked, could threaten the country’s stability. And fourth, major political reform must be instituted.

The important takeaway here: this is not a matter of a change in a single dimension of national power, but a change in all of them. The fundamentals of the policy legacy left by Deng Xiaoping are now in question.

The Economist Nails the Case for Elections in Hong Kong

Consultation Document on the Methods for Selec...

Consultation Document on the Methods for Selecting the Chief Executive and for Forming the LegCo in 2012 (Photo credit: Wikipedia)

Leaving aside any ideological preferences one might have, The Economist makes a realist’s case for elections in Hong Kong.

In this case, though, there are practical reasons for China allowing a proper election, with non-acceptable candidates running too. It would bolster the mainland’s pitch to Taiwan: that “one country, two systems” means what it says. Full democracy may also be the safest option in Hong Kong. The uneasy coalition of Beijing’s supporters on the island—tycoons, party hacks, trade-unionists—could fracture under the weight of another ludicrous selection process. As for everyone else in Hong Kong, they showed in 2003 that when denied electoral outlets for their frustrations, they will take to the streets.

via Hong Kong’s chief-executive “election”: The worst system, including all the others | The Economist.

I can add two more: it would offer the world an opportunity to see the Party administering a high-profile local election, thus adding a much-needed bit of buoyancy to China’s bid for global soft power; and it would provide a laboratory for the Party in its own efforts to evolve.

When Life Should Imitate Art

Meryl Streep in St-Petersburg, Russia

Image via Wikipedia

In the Hutong
Mahndei, Mahndei
0815 hrs.


In a brilliant essay in The Atlantic by Orville Schell, the Arthur Ross Director of the Center on U.S.-China Relations at the Asia Society, the venerable China scholar captures a spontaneous moment in a performance in Beijing by Meryl Streep and Yo-Yo Ma and turns it into the best deconstruction of Chinese international relations that I have read in a very long time.

Every paragraph in the essay is a gem, but my favorite by far is this one, which elegantly encapsulates the conundrum of international relations in the 21st century:

From here on, as China’s wealth and power increases, its national challenge will be to start letting itself feel sufficiently reinstated in the congress of great nations that it does not need to wallow in narratives of victimization, or be so militant about grasping symbolic demonstrations of its equality or superiority. The highest stage of evolution for any truly great power is to reach that point where it is possible to transcend the notion of both inferior and superior, the better to cultivate a self-confidence that leads to modesty. This is a lot to ask of China, or any country. Even the United States, the strongest nation on the globe today, has only rarely demonstrated such national maturity.

Without descending too deeply into moral equivalence, Schell has taken both China and the U.S. to task for their failings in international relations: America, the global power made insecure by the Cassandras of national decline; and China, the emerging global power made insecure by its own, lovingly nurtured national inferiority complex. In one paragraph, Schell tells both countries to get over it, to accept their station, and to begin behaving like mature adults.

The Meryl Streep/Yo-Yo Ma performance that Schell refers to was intended as a piece of privately-funded public diplomacy organized by the Asia Society and the Aspen Center. It succeeded better than its organizers could have hoped, and captured the potential for public diplomacy to accomplish a very great deal. In a single moment, two artists offered proof that if China and America would just grow up, that new-found maturity would go over as well at home as abroad.

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

State Administration of Radio, Film & Televisi...

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

In the Hutong
Black Lung Control
1047 hrs.

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

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

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

and

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

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

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

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

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

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

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

Deconstructing China’s Nationalists

To Screw Foreigners by Geremie R. Barmé

In an essay from 15 years ago that remains one of the best background pieces on Chinese nationalism that I have ever read, professor Jeremy Barmé of the Australian National University delves into the historical and philosophical underpinnings of this rising ethos.

There is a growing consensus among Beijing-watchers that nationalism has replaced economic development as the primary driver of domestic Chinese politics on the eve of a generational leadership transition. For that reason, there is no better time than now to dive beneath the surface of this phenomenon and understand it from the roots.

I read Barme’s piece with great interest. While I didn’t come away with any profound conclusions, I see what is happening today with somewhat greater clarity. It also helps peer behind the Red Rhetoric of Bo Xilai’s campaigns to see something older and more elemental at work.

Not a short read, but a great one.