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

Barely Afloat

In the Hutong
Beijing Youth Politics College
0047 hrs

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

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

Waiting for Profits

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

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

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

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

PLAN for it

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

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

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

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.

On Goldman’s Future in China

 

English: Logo of The Goldman Sachs Group, Inc....

Logo of The Goldman Sachs Group, Inc. (Photo credit: Wikipedia)

“Breakingviews: Goldman still on wrong side of China’s great wall”
John Foley

Reuters
August 21, 2012

John Foley quesitons whether Goldman Sachs‘ new leadership in China, coupled with a greater focus on offshore listings and cross-border mergers, will be enough to keep the firm’s business growing in China.

Maybe not, if that’s the full scope of the company’s prospects. I’m no particular fan of Goldman, but I suspect they are also looking to expand in two other business areas: listings of foreign companies in Chinese markets, and financing the stock buybacks that will help Chinese companies listed in the US to repatriate their equity.

Those are certainly growth areas, and Goldman is well positioned to capture a lot of that business. What is unclear is the degree to which such deals would face regulatory challenges. Both of these new business areas would have regulatory ramifications in China, if for no other reason than Chinese officials are uncomfortable with foreign companies in novel business lines.

Foley’s core point – that the company needs a regulatory point person, is thus at least half correct. Where practiced best, government relations is no longer a discrete function within companies in China. Rather, it is something that has to be a core competency of management at every level of the firm.

The challenge for Goldman’s new China leads, Mark Schwartz and Matthew Westerman, then, will be to address regulatory challenges proactively while trying to build deal flow. In this market, and at this point in China’s development, that’s a big ask. We’ll soon find out if Goldman sent the right team.

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.

It’s Media, Chief, But Not As We Know It

In the Hutong
Hoping rain will clear the air
1224 hours

In late July I noted in “The Alipay Warning” that an overlooked editorial from Xinhua might be an early warning to foreign investors in many Chinese online companies that the party is almost over. My point was that the government is signalling that virtual ownership structures have run their course, and are now more liabilities than assets. Signs that this is the case have become more common in the time since, as Bill Bishop notes over at DigiCha:

In the space of a few weeks we have heard from various official or semi-official media about the dangers of online rumors, the risks from excessive foreign ownership of China’s Internet companies, new rules that could potentially invalidate the corporate structure of most Chinese Internet companies, rumors of a real name registration policy for microblog and other social media users, and the launch by Sina of new rumor busting features. Tightening is coming, the question is how far it will go.

In other words, while the hammer has still not fallen, evidence is growing that the blacksmith seems ready to strike.

I am betting that the hammer is coming for several reasons, but one important one: the way China’s regulators look at and understand internet companies has changed.

Laissez Tech-Faire

Ever since the early days of China’s internet in the late 1990s, regulators have seen a distinction between online services and media. Internet companies tended to be stuffed with engineers, work closely with the computer and telecommunications industries, and offer services just slightly beyond the comprehension of cadres in their 50s and 60s. The bureaucrats were not entirely credulous: they enacted regulations restricting foreign investment in Chinese online firms. At the same time, though, they turned a blind eye to companies that used highly contrived investment structures to channel foreign capital and expertise into China’s online giants.

I see three reasons why they allowed a high degree of virtual foreign ownership of these companies. First, they saw foreign investors as unwitting accomplices in a government plan to ensure that local companies dominated the Chinese internet. Foreign capital and the Silicon Valley-sourced know-how that came with it would create local champions in an industry that was unlikely to get much support from state-owned policy banks. Indeed, with time and a little luck, some of these local companies might even turn out to be global players.

Second, ever since the start of reforming and opening, the government’s approach to new developments has been to allow a new practice, a new industry, or a new kind of company to grow first, and then step in and regulate only when such experiments got out of hand. Did the foreigners want to invest a little through a multi-layered ownership structure? Hmm. Let’s see how that works out – we might come up with something that can be used elsewhere in the economy.

Third, though, is that many regulators saw online services as, to borrow from Douglas Adams, “mostly harmless,” the technological playthings of a young generation out to find love, diversion, and a little shopping. Sure, the potential for misbehavior was there, but the people running the services were near at hand, easy to rein in if things started to go awry. They were not, therefore, like film or television.

Not Your Father’s Media

Imagine the reaction of these leaders in late July, in the wake of the train wreck, when they wake up and realize that there are a half billion Chinese citizens online; that a quarter billion spend more time watching TV online than watching state-owned, Party-controlled broadcasters; and that a quarter billion now get at least as much “news” from Weibo and QQ as they get from newspapers or TV. What must have been even more sobering was realizing that the demographic most affected by online services is the very demographic that has driven every popular rising in modern Chinese history.

Suddenly, these aren’t “telecommunications value-added services,” or “online sites,” or “technology companies.” They are media, privately-owned media in a country where media must be state-owned; partly owned, influenced, and controlled by foreign interests in a sector where foreign ownership is explicitly forbidden; and influential media largely outside of the control of the Party. Such a situation calls for a change. But what?

The Art of the Possible

The question that faces China’s regulators, then, is not merely whether to continue to allow variable interest entities to exist, but whether an entire sector of the telecommunications and technology industries has been transmogrified by growth and events into media, and thus whether and how to extend Party control and state ownership into the hearts of these companies. What stays the hammer is not, I would argue, any hesitation about whether to make a change, but how to unravel the ownership and control issues without destroying online properties that are of immense potential value to the nation.

Politics complicates matters further. There are powerful people and entities in China with a vested interest in the outcome, and in a nation governed by consensus these interests must be addressed rather than ignored. That this is all taking place on the cusp of a generational change in national leadership is sauce for the goose.

Together these factors mean that action taken will be more incremental than sudden. That is both good and bad. It is good in that it offers foreign investors who catch the wind soon enough to work through the problem, create new and fair structures that recognize the value of the investments, and possibly even to influence thinking in Beijing on the problem. But it is bad in that the heat will build slowly, allowing many companies and investors to deny that anything is changing until they find themselves completely boiled.

“Hope,” Bill Bishop correctly notes, “not an investment strategy, and given the current political climate, including the buildup to the 2012 leadership change, investors would be justified in wondering if something bigger is going on.”

Something bigger is going on, and the appropriate strategy if you are invested in any of these entities is to go out and learn all you can, accept no easy answers or placation from the executives of the companies in question, and start thinking about what you will need to do to ensure the best possible outcome.

Railway Reform is Coming to Town

In the Hutong
Managing Chaos
1311 hrs.

In a characteristically articulate editorial last week, Caixin called for an extensive overhaul of China’s Ministry of Railways (MoR) in the wake of the high-speed train crash in Wenzhou on July 23rd. The publication called for an open investigation into the accident conducted by experts from outside the control or influence of the MoR, for the functions of railway development, construction, operation, and regulation to be divided among independent entities, and for the folding of the resulting regulator into a larger ministry with a purview over the wider transport sector.

These changes are not without precedent in China. Aviation went through a similar change in the early 1990s, the telecommunications sector was similarly reformed five years later, and the energy sector has gone through a series of reforms that have separated the regulatory function from the business of generating and distributing energy. There are so many examples of where this has happened, in fact, that not only is the MoR something of a relic of China’s pre-reforming-and-opening past, it is also a matter of suggestive speculation as to why the MoR was left alone for so long.

So this sort of reform is overdue, and it looks like the higher organs of the Chinese government will try to unravel the hairball of conflicts-of-interest and mismanagement that serve as China’s railway industry.

Quis Custodiet Ipsos Custodes?

Unfortunately, even the measures suggested in Ciaxin’s excellent piece will not be enough. The world is replete with examples of industry-specific regulators who have become intertwined with – and co-opted by – the very industries they were created to regulate. One need look no further than the U.S. financial industry and its relationship with the Federal Reserve, the Department of the Treasury, and the Securities and Exchange commission to find proof, and there are ample additional examples.

The lesson of history is that regulators are most effective when they themselves are watched from the outside. While Caixin’s editors would be too modest (or timid) to say so, it is Caixin and all of the others who are watching the regulators from the outside who provide the best guarantee of a better and safer railway system for China.

Cross-Post: Rethinking How to Win Hearts and Minds

Soldiers from the U.S. Army's 350th Tactical P...

Image via Wikipedia

In the Hutong
Thinking about my phone
1445 hrs.

In my day job as a corporate communications strategist, I work with companies who want other people to think good things about them and their products. As a rule, the companies who find that easy do not seek me out, so I wind up working with companies who are having a hard time connecting with the people they need to make them successful.

Anyone who has tried it will tell you that communications is easy, but influence is hard, and the Internet, cultural differences, and the psychic baggage of globalization challenge the best of us. We learn a lot from experience, but we are always hungry for ideas that will help us not only improve our results, but also make the process itself more transparent and eliminate spin and disinformation from the corporate playbook.

One of the places to which I occasionally turn for inspiration about what to do – or what not to do – is the growing mass of literature on what is euphemistically called “information operations,” including psychological operations. I reviewed a fascinating work from the RAND Corporation for my other blog, The Peking Review, and I share it (with some additions) below.

PsyOps is Dead

The theory and practice of military psychological operations find their roots in World War II, and for decades remained largely unchanged. There was good reason for this: the media via which psychological operations were conducted were largely of a broadcast type. Aside from the advent of television, psychological operations were conducted with media that existed since the early 20th Century.

Now that the Internet has become all but pervasive, and mass media have begun to change, the military is being forced to take a step back from the channels of its communications and start to explore the nature of influence before trying to decide how to exert that influence. The result of that overdue introspection is Foundations of Effective Influence Operations.

I am a communicator by profession, and in the fraught, complex, and often dirty world of business in Asia I face challenges that bear notable similarities to those facing Army PsyOps people on the battlefield. As such, I was interested to see what a team of seven really bright RAND scholars had to say.

Actions First, Communications Later

The result was both surprising and delightful. Surprising, because the book is so good that it could serve as a capstone or entry-level introduction for anyone studying communications or marketing; delightful, because I found so many of my own conclusions echoed in its pages. My favorite passage:

Put simply, because what we actually do often matters far more than what we say, influence operations frequently will focus on explain- ing and leveraging off tangible actions by casting them in a positive context and thereby building trust with an audience or by countering adversary claims about such actions with factual information that is buttressed by facts on the ground and averred by local opinion leaders whose credibility and trustworthiness is judged to be high.

The other conclusion that hit home with me was that there are no easy formulas that will translate across different situations, much less across cultures, and that artful improvisation in the development of communications campaigns was essential. I’ve long believed that great communications is not a template, and to have that affirmed in this study was edifying indeed.

These glimpses only scratch the surface. The book also surveys the full range of communications theory, offers pointers to further reading, and elegantly addresses the question of online influence. There is great depth and much insight in this book that can only be appreciated by reading it.

An Old China Hand and China’s New Foreign Policy Factory

In the Hutong
New Year Day Five
1718 hrs.

Ross Terrill of the Fairbank Center is an old China Hand, and he writes incisively about a range of topics on China, most notably the nation’s foreign policy.

Recently, he contributed a brilliant article to the Wilson Quarterly entitled “The Case for Selective Failure“, in which he argues for and posits several scenarios where China would stumble just enough to provoke positive and meaningful reform but without experiencing complete systemic breakdown. Undoubtedly we could talk all day about the likelihood of such an event occurring and argue ourselves to a standstill: there is just no way of knowing until after it happened, but the uncertainties are enough that you’d never want to purposely try to provoke such an outcome.

What interested me most, though, was Terrill’s view of China’s foreign policy-making process, revealed in this bit of the article.

There are wise heads in Beijing who understand the latent power of American nationalism and other dangers facing a Chinese rush to the top. They urge their leaders to stick with Deng’s maxim of “hide our strength and bide our time.” These cautious folk in well-connected think tanks and even government ministries do not believe the public mantra that the United States is “holding China back.” Rather, they see clearly that the United States is a force fueling China’s rebirth—by buying Chinese exports and supplying technology for Chinese industry, among many other ways.

There are indeed wise and cool heads in Beijing, but Terrill’s view of how foreign policy is formulated in China comes across as a tad outdated. As I wrote in “The Case for a New Public Diplomacy in China” both here and in AdAge China in 2008, the “cautious folk in well-connected think tanks and even government ministries” are no longer the sole nexus for the creation of policy. As we have seen evinced all too clearly in the past several months, there are a lot of chefs in China’s foreign policy kitchen, and two of the most important new entrants to the process are the PLA and popular opinion.

Over time, these two players will the formulation and execution of foreign policy a complex, slow, and highly politicized process that threatens to retard the conduct of diplomacy in China. To depend on the realists and ignore the idealists, irredentists, and nationalists in Chinese foreign policy would be like ignoring the progressives and the Tea Party in the United States.

Terrill “hopes” that events will see these players in Chinese foreign policy marginalized. But hope is not a method, and it is a poor approach to the conduct of international relations. Wise heads in Washington, DC, Tokyo, Brussels, London, and elsewhere need to adjust their efforts, strategies, and toolkits to incorporate the full set of foreign policy influencers in China, not just the ones who play by the old rules.

The above aside, the article is superb, especially the barbs he tosses at Nouveau Sinologists like Niall Ferguson and American Declinistas. Give it a read.

Matching the Dragon

In the Hutong
Watching the Skies
1512 hrs.

Robert Gates, a longstanding opponent to big-budget weapons systems like the F-35 Joint Strike Fighter, a man who has made it his mission (rightly, in my opinion) to bring to heel the Fighter/Bomber mafia that has been running the U.S. Air Force since 1947, is singing a very different tune this week, all thanks to our friends in Chinese Aerospace. From Elizabeth Bumiller’s piece in The New York Times:

The American weapons that Mr. Gates was referring to included investments in a new long-range nuclear-capable bomber aircraft, which the Pentagon had stopped developing in 2009, as well as a new generation of electronic jammers for the Navy that are designed to thwart a missile from finding and hitting a target. At a Pentagon briefing on Thursday, Mr. Gates said that the jammers would improve the Navy’s ability to “fight and survive” in waters where it is challenged.

Mr. Gates was also referring to continued investment in the Joint Strike Fighter, the Pentagon’s newest radar-evading fighter jet.

The Pentagon provided no estimate on Saturday of the total cost of the three programs or others meant to counter the Chinese buildup in the Pacific.

If a skeptic like Bob Gates is changing his mind about these programs, China may well have pushed the U.S. past a critical tipping point in the nation’s perceptions of China’s intentions. Despite protests to the contrary today (“no, really, Mr. Gates, this is not about YOU. We just want to feel safe,”) these seem to be systems designed if not to defeat the U.S. military in actual combat, then to carve out a sphere of influence into which the U.S. could no longer comfortably project its influence.

What is Beijing Thinking?

In which case, you have to wonder what the Chinese were thinking by showing off two disruptive weapons systems in the space of three months. One school of thought would say that they are doing this for domestic reasons that have nothing to do with the U.S. That’s possible.

Another school would say that the Chinese wanted to give the Americans pause, but gave no consideration to the fact that doing so would fundamentally alter the way the PLA is perceived by fence-sitters in the U.S.

But a third school would suggest that the Chinese new precisely what they were doing, that they knew this would provoke some instant anti-Chinese sentiment on Capital Hill, bolster the Panda-Sluggers in the Pentagon, and cause America to start pumping cash into weapons systems designed to combat a “near-peer” power. In this case, the theory goes, the Chinese want to provoke the U.S. into an orgy of weapons acquisitions that effectively derail the U.S. economic recovery (or at least slash the investments the Obama administration wants to make into rebuilding infrastructure), undermining long-term competitiveness and leaving  the country even more dependent on Chinese financial support.

The last one seems a tad far-fetched. But the more I think about it, the more it seems like a stratagem straight out of Sun Tzu. After all, isn’t this how America ostensibly won the Cold War? By making the Soviets spend way more than they could afford on matching NATO all while having to pour more money into Afghanistan?

Four Strategic Directions

The ball is now in America’s court. China and the world will be looking to see how the U.S. responds. And the smart thing to do is nothing…yet.

It would be foolhardy to be provoked into a spasm of military spending, especially if the grand strategy behind China’s hardware ante-upping may not be about goading America and its allies into a confrontation, but to drive us into a costly and ineffective military buildup that the Security Council powers can no longer afford. What greater triumph could the West hand China than an America doubly weakened by profligacy in consumer credit and arms procurement, lessened in stature, and compelled by domestic politics to retreat behind the dubious security of its coastlines?

Reverting to the postures and strategies of the Cold War would not bring the result America desires. No, this deserves a better, wiser response, one more suited to the strengths, weaknesses, desires, and vanities of a would-be challenger.

1. Calculate – Think Grand Strategy, Don’t React

Time to go back into the planning rooms and devise a grand strategy for addressing a rising Chinese military power, one that does not presume unlimited defense budgets, and one that takes the growth of four rival powers on the Eurasian content as a given (those being China, India, Russia, and the EU.) How does America’s perception of threats evolve? And what, precisely, are China’s true aims? Not the aims they claim, or those Fox News gives them, but what they really seek, what they’re willing to sacrifice to achieve those aims, and how and why those aims might change.

Until the leaders of the services have a better grasp on China’s strategic calculus, they cannot respond with any effect.

2. Educate – Admit America is China-Ignorant, and Start Doing Something About It

It is time to accept that the Chinese know a lot more about America than America knows about them. And that’s not a matter of bad intelligence, but a matter of misplaced priorities. It is time to change that, starting with the Pentagon. As Commander Tom Henderschedt and Lt. Colonel Chad Sbragia wrote in the Armed Forces Journal last September:

Conversely, while many U.S. maritime services personnel are dedicated to China, few currently on the “China account” have visited China, fewer still speak Chinese and nearly none have enjoyed direct, day-to-day experience with the PLAN and PLAN strategic initiatives. Disappointingly, no experts are placed to affect critical Navy Department planning and policy efforts. The deep understanding by the PLAN allows its officers to be extremely predictive on how the U.S. will act, react and negotiate. The inverse is also true — our superficial approach does not allow deep, predictive analysis of PLAN strategic initiatives.

I would venture that, while Henderschedt and Sbragia contain their comments to members of the maritime (i.e., Navy, Marine Corps, and Coast Guard) services, their comments apply to the Army and Air Force with equal or greater veracity. They counsel:

The most important near-term task is not establishing whether the PLAN is or is not a threat, but truly establishing a deep understanding of the PLA Navy, one that would rival the PLAN’s understanding of the U.S. Navy. Then, with clear penetration of Chinese maritime strategic thought, U.S. Navy “China hands” will be prepared to answer any call — from a PLAN threat or a PLAN partner.

China expertise can no longer reside solely among the China specialists in the U.S. armed forces. That knowledge needs to be disseminated, absorbed, debated, studied, and applied. Responding to a “Chinese threat” before truly understanding whether it is even a threat or whether it is something else entirely serves neither America nor China.

3. Rennovate – Don’t Prepare for Cold War II, Rebuild for The World As It Is.

Mr. Gates needs to make some radical changes to service leadership in the same way he took a fire hose to the Air Force. A few more warriors and fewer careerists atop the Pentagon would be a good start. But what really needs fixing is the military’s procurement system.

A list of prescriptions would be book-length, but it is clearly time to burn the old book, because things aren’t working. The focus has to return to a) superb research and development to keep the most recent innovations on tap, b) taking care of the people in uniform, getting them systems that enhance and protect them, and c) disrupting the capabilities of challengers in the most cost-effective way possible. Our challengers have learned to think asymmetrically about us. We need to start doing the same in return, rather than just buying more and bigger gold-plated systems.

We can argue about specifics, but America’s sword is not only tarnished, it is no longer the right weapon. Time for a rethink.

4. Communicate – The Future Lies With Bloodless Victors

Not everything as about knowledge and armaments. The Chinese know better than we that the best victories are won without fighting. And that means good communications. Elucidating America’s intentions around the world in a way designed to promote support for our goals, rather than have the US branded a loose cannon or worse, would be a good way to start. Mr. Obama began his administration that way, and the State Department is doing its part, but the military are, like it or not, diplomats in uniform, and they need to do more.

First, as Hendereschedt and Sbragia urge, there need to be more interactions between U.S. and Chinese military personnel, not to try to “win them over,” as that is unrealistic, but simply to know them better and to open more channels of communication.

Second, the military needs to craft a peacetime psychological operations capability that can work alongside (but separate from) an enhanced U.S. public diplomacy effort. Deterring a challenger without resorting to violence or coming close does not happen by accident: it is the result of a concerted effort to make clear the fruitlessness of a challenge. For too long the U.S. armed forces have shunted psychological operations into the reserve, calling upon its capability tactically and only in time of armed conflict. In this day and age, if you wait for the war to start psyops, you’ve waited too long. And it needs to be strategic, not tactical.

Finally, it is time to answer loudly the public criticism of small-team U.S. military engagement around the world. The oft-repeated wails of academics like Stephen Walt of Harvard that U.S. deployment in 140 countries is ridiculous only demonstrates their misunderstanding of the costs and benefits of such missions. Argue Iraq and Afghanistan all you want, but ignore the benefits of small-footprint presence at your peril. It is just those sorts of missions that are helping the U.S. military make it more challenging for China to achieve low-cost victories in the region. That’s communications, that’s asymmetric.

Again we can argue specifics, but these are the four strategic directions that the U.S. military should take in response to China today. To do less would be foolhardy, but to do more would be premature at best, and at worst could put us on a path to an avoidable and unnecessary conflict.

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

In the Hutong
Sushi for Dinner
1713 hrs.

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

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

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

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

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

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

A Chinese Al-Jazeera – Five Reasons this is a Good Thing

The Ascott, Beijing

WTF, February already?

1440 hrs


Recent revelations that China is planning on investing over US$7 billion in an effort to create a credible global radio and television news service using Al-Jazeera English as a model have provoked comments that range from the dismissive to the skeptical to the paranoid.

I am not convinced China is going to create a credible global voice in the near term, but I think it is only a matter of time before it happens. Rather than concern America and the world, however, we should see this effort as a positive development because even the sketchy details we have of the program suggest a new maturity in China’s approach to strategic communications, public diplomacy, and indeed world opinion.

1. China Needs to Care About What the World Thinks – the fact that China is ready to undertake this effort means that China’s senior leadership acknowledges that global opinion matters to China. This may be obvious to those of us steeped in communications, international relations, soft power, and/or public diplomacy, but it is a light-bulb moment for China’s leaders. Since declaring the People’s Republic sixty years ago, China has maintained an almost cussed independence of action, speaking and acting as if it cared nothing for what the world thought. This is apparently no longer the case, and that opens a new series of doors to influence Chinese policy.

2. If You Build It, They May Not Care – whatever else China Radio International, CCTV-4, and CCTV-9 have accomplished, their growing availability worldwide has not had much apparent effect on how China is perceived abroad. China’s leaders have learned an important lesson: they do not get a hearing purely by virtue of China’s size or growing importance.

3. Propaganda Fails – the acknowledgement that the service’s credibility depends on a level of editorial objectivity unknown elsewhere in Chinese media (including the current global radio and television services) is an implicit recognition that propaganda is dead as a tool of public diplomacy. This is not only a rejection of previous practice but of orthodox Communist communications doctrine.

4. The Audience is King – the initiative recognizes that China must communicate with the world in a way that audiences can appreciate, rather than using a the intonation and buzzwords of Chinese political orthodoxy. If you’ve ever heard a government official speak in public – or watched a Chinese newscast – you know what I mean.

5. Being Heard Means Looking Good – the initiative recognizes that China must compete in a global marketplace of information, and China’s take on world affairs will not be heard unless it is packaged and delivered in a format and context that is comfortable to non-Chinese viewers. If there is a single lesson from Al-Jazeera, this is it.

If you are not certain that China coming to these conclusions is necessarily a good thing for the rest of the world, consider this. If I have learned one lesson in my career as a communicator, it is that the more a government or company alters its approaches to appeal to an audience, the more responsive that entity becomes to its audiences in its thinking, policies, and behavior.

The unspoken secret of the “perception management” process – the part we don’t always share with our clients – is that the process changes both sides, not just the audience. This will be especially true as we move out of the Age of Broadcast and into the Age of Conversation.

I am in no way suggesting that China will suddenly change its domestic policies, drop single-party rule, or gang-stomp the Somali regime because the PRC desires greater global influence. But if China is committed to its stated global communications objectives, small but significant changes in the nation and its international relations are an inevitable result. As the Bush administration learned, global influence is unsustainable when foreign policy and strategic communications are formulated and conducted in willful ignorance of global opinion.

On the other hand, I have had some people suggest to me that, providing China sticks to its commitment to offer evenhanded reporting on its global channels, this may signal to Chinese leaders that they can use the same approach at home. At best, this is wishful thinking. Media aimed at overseas audiences will serve the purpose of building Chinese credibility abroad. Media aimed at home will remain focused on maintaining social stability and supporting the evolution of a “harmonious society.” We can expect a wide “Chinese wall” between the two.

For now, anyway.

Seeking Truths in Marketing

Silicon Hutong Table, Peters Tex-Mex Grill

Experiencing Tryptophan Withdrawal

12:22 hrs.

Despite valiant efforts to convince ourselves otherwise, it is a truism that the marketing and communications crafts have lost their way after a decade-long deluge of online media. We put on a brave face in public, but in truth we have been attempting to deal with an entirely new phenomenon with old tools.

I am on the verge of taking a six-month semi-sabbatical in 2010 to read, write, and blog about this issue and what it means in the context of the rise of Asia generally and China specifically. Frustrated by the often soporific, wishful, It’s Going to Be Okay As Long As We Buy 20% More Display Ads This Year thinking that passes for futurism in our business, I have started to prepare by going back to the seminal thinking that laid the groundwork for modern marketing and communications. I figure this is a safe bet, based in part on my status as an amateur historian, and in part on my wife’s success as an Neo-Grahamian value investor.

My first three stops in the process are David Ogilvy’s Ogilvy on Advertising, Claude Hawkins’ Scientific Advertising, (Ogilvy based a lot of his approach on Hawkins’ work), and, somewhat closer to home for a corporate communicator, Edward Bernays’ superior Propaganda.

Full disclosure: I am an advertising skeptic (too much push in the way it is practiced today), and a public relations skeptic (too much spin, not enough conversation), but I think the issue is more in how these tools are practiced and the belief systems that have built up around them than in the crafts themselves. In Tim Burton’s Batman, the Joker famously proclaims of Gotham “this town needs an enema.” He could just as well been strolling up Madison Avenue.

So I hunt for the grains of truth supporting the ziggurats of a decaying industry.

I’ve just finished Bernays for the second time (a simple feat – Bernays was so pithy that his work disappears on my bookshelf twixt weighter tomes), and I explained what I thought was one of his enduring truths in an OpEd in Media Asia: The public relations industry has become the captive of its tactics, bastions of execution that have either forgotten how to be counselors on business conduct or who have blown whatever credibility they may have once had in that role.

And China, where the industry has an opportunity to start with something of a blank slate, we are off to a tough start. Execution is wonderful, but we are all too often either swimming in a sea of spin or we are reduced to wrangling reporters.

The other two works are somewhat harder going, for me, anyway. David Ogilvy was the quintessential (M)Ad Man, and his prose carries the assurance of a man offering a service for which the need is a given. Hawkins is somewhat better, but the matter of advertising is a matter of “how” rather than “if.”

Yet good things surface. Ogilvy assumed pandemic attention-deficit disorder in his audiences, and he built his craft firm in the conviction that people had to be convinced to care. This seems self-evident, but it is too often forgotten in China. How, after all, are we to convince anyone of anything with a commercial that lasts less time than it takes us to read a headline?

To me, banner ads, search ads, and meat-grinder public relations that counts clippings from China’s content-xerox websites too often assume the audience cares.

Something is wrong, and so many of us know it. If we are ever going to have the cojones to do something about it, we need to begin by calling bulls**t on ourselves.

Afghanistan 2009 = China 1945

In the Hutong

Contemplating Awareness

0936 hrs

Starting to catch up with my reading – I’m at least four years behind – I came across some of the writing CFR Fellow Elizabeth Rubin is doing from Afghanistan, in particular an August 4 piece in the New York Times Magazine called “Karzai in His Labyrinth.” I spend less time than I should reading into the situation in China’s neighbor to the southwest (an oversight, because much of China’s thinking about the world is dictated by the “near abroad”), so this piece was something of an eye-opener.

The more I read about the Afghan political scene in the midst of a brutal civil war, the more similarities I see with China in 1945. The United States is, once again, essentially supporting a leader who has forged a weak and tenuous polity out of an uneasy alliance of warlords and narco-barons that have emerged from the wreckage of a weak and brutal neo-feudal theocracy offers.

The U.S. has  done this in the name of expediency and ideology, preferring a corrupt, secular, and nominally democratic alliance to a centralized fundamentalist state. And, to be fair, the U.S. did so with the best of intentions but with painfully little care, planning, and expertise.

As a result, it is working little better in Afghanistan than it did in China 65 years ago.

None of this is to suggest that America and its NATO allies should throw in the towel and come home. It is, however, time for some realpolitik and some more creative thinking.

In World War II, the U.S. sent a combined military-civilian mission to Yan’an to investigate the possibility of working with the Communists after the war. Called  the “Dixie Mission,” the three year effort was eventually undermined by a combination of McCarthyism, a failure to appreciate the latent rifts between the  Soviet Union and the Chinese Communist Party, and the policy myopia of the Truman Administration and specifically Ambassador Patrick J. Hurley.

If there is an implicit message coming from the ground in Afghanistan, it is that we need to start looking for alternatives to the present situation rather than bolstering it. Even if the Taliban were to pack it in tomorrow, would what was left truly be the kind of government of which we could be proud – or that would promise stability for anything longer than a lunch break?

None of this is meant to suggest that the U.S. ally itself with the kind of regime that ruled Afghanistan prior to October 2001. Instead, it is time to start getting a little more creative in casting about for solutions, rather than “backing a horse and sticking to him.”

“Sticking to our horse” failed in China in 1946, in Cuba in 1959, in Vietnam in 1975, and in Iran in 1978. It has failed in Afghanistan for two centuries at least. History may not repeat itself, but it does echo, and this is an echo worth heeding.

It is also an echo that suggests that China has as much – and perhaps more – at stake in the eventual outcomes in Afghanistan than the U.S. and NATO (as do Iran, Pakistan, India, and the Central Asian Republics), and that if there was ever an opportunity for China to begin exercising itself on the world stage, this is it.

That is, of course, unless China’s strategy is to hang back, watch the U.S. make a mess of Afghanistan, and then swoop in and try to clean up the mess afterward. In which case, we can only hope they learn from the mistakes of their predecessors rather than repeat them.

Ten Reasons We Are Watching the National People’s Congress

In the Hutong
Rising Peacefully
1941 hrs.
Now that we are into the third month of the year, the time has come for the annual pageantry of pomp, politics, and propaganda colloquially known as “liang hui,” the twin meetings of China’s legislature, the National People’s Congress(NPC), and its advisory auxiliary, the Chinese People’s Political Consultative Conference (CPPCC).
The meetings are met with a fair amount of cynicism, particularly among those of us raised in democracies where, even if our legislators accomplish little more of value than the liang hui, at least they manage to do so without messing up the traffic with thrice-daily motorcades.
Yet while it is not unfair to categorize the NPC and CPPCC as “rubber-stamp” bodies, there are years when it is worth stopping to listen to some of the speeches and taking the time to absorb the coverage. And this year is one of those years.
Here is what we will be listening for in the Hutong:
1. Stability and Harmonious Society: I suspect we will get a healthy dose of this, but what will be worth listening for is specifics on welfare, employment, and social security programs for rural citizens, laid-off factory workers, and retired cadres.
2. Independent Innovation: This little chestnut was pretty hot a few years ago, but has faded into the background as the government faces the darkening horizons of the global economic crisis. While there are more urgent concerns, it will be interesting to see whether this has fallen off the radar, or if any new and significant measures are planned in this area. If the importance of independent innovation has receded, this will imply continued opportunities for foreign innovators, but continued problems defending IPR.
3. Infrastructure: Look for indications on how the central government is going to channel and manage all of the funds for infrastructure investments. I’ll be looking for mentions of specific high-profile projects, a new agency to manage them and their expenditures, and some indication that employment is a focus, not just spending a lot of cash.
4. Financial Sector Reform: In the wake of what has transpired on Wall Street over the past year, it would be hard to justify reshaping China’s financial sector to look like that of the U.S. Nonetheless, China’s banks, insurance companies, bourses, and brokerages face their own challenges after 30 years of rapid growth, and the global financial crisis is a signal that it is time to look for and address problems rather than wallow in schadenfreude.
5. State-Owned Enterprise Reform: Hard times justify hard measures, and it is likely the coming 18 months will see Beijing compelling the restructuring of several industries dominated by state-owned enterprises. The effort will be to strike a balance that will allow for competition while creating national champions through compelled mashups. The auto industry will almost certainly undergo a forced winnowing from 14 passenger car makers to 10 (which I’ll address in a post tomorrow), and we are betting on another round of consolidation in the airline business and the steel industry. The question will be what other sectors will come under the knife, and our ears are perked up for clues.
6. Drought Relief: The environment – specifically air and water pollution – will be a major theme, but a larger problem that looms is the issue of the drought in Northern China. Beyond the general challenges facing rural China, we expect some discussion of water supply, if not in one of the work reports, then in some of the side sessions.
7. Taiwan: For the first time in recent memory, Taiwan is likely to be a feel-good issue at the meetings. A quiet movement is underway in Taipei to build on the newly-established air and sea links between Taiwan and the mainland with what would amount to a free trade agreement. This is a touchy issue in Taiwan, so it will be interesting to see if – and how – Hu Jintao, Wen Jiabao, or any of the other leaders discuss this.
8. Defense: In the wake of Sino-US military discussions and China’s deployment of naval vessels on anti-piracy patrol off of Africa, we will of course be watching for acknowledgement of closer cooperation between the two nations in addressing mutual security issues. More important, however, is whether China’s economic stimulus will extend to spending in “dual-use” industries like aerospace and shipbuilding.
9. Media: I am not expecting 2009 to be a memorable year in reforming and opening China’s media sector: the political sensitivities at the nexus of the global financial crisis and the 60th Anniversary of the founding of the People’s Republic make it far too sensitive. What we will be listening for is any mention of the media sectors at all. I am hoping there will be none: no news is good news here.
10. Peaceful Rise: China made more progress in its strategy of pursuing a “peaceful rise” in its global stature in 2008 than it could have dreamed of a year ago. It will be interesting to hear whether that is sustainable, whether China will allow itself to mirror the US Congress’ protectionist “buy American” rhetoric, or instead will take the high road and position the PRC as the guardian of free trade.
For decades, the Liang Hui have had only needed to address domestic audiences, because they were dismissed by others as ceremonial and ultimately irrelevant. That has changed, and ever since former Premier Zhu Rongji began holding post-Congress press conferences for the global media, China has begun to use the occasion to send messages abroad.
This year the world will be watching the proceedings with greater interest than ever. The leaders must know that, and it will be fascinating to see if anything in the two-week session changes as a result.

Five Reasons Obama Will Go Slow on China

Starbucks Guomao 1

I thought this was a work day

1133 hrs.


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

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

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

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

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

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

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

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

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