Costa Coffee, PCP Beijing
The Economist does a superb write-up (“Join the Party,” May 6th) on China’s growing effort to unionize the China staffs of multinational companies in China. Most apt is the magazine’s recommendation to the leaders of MNCs: accept unionization as inevitable.
The New Reality in China is that the nation’s leaders see the participation of foreign companies in as less and less vital to China’s economy. (I respectfully disagree with them – I think the importance is changing, but not declining, but leave that aside for the moment.) If foreign enterprises aren’t being tossed out of China, the government is determined to strip away the special operating conditions to which companies from overseas have grown to feel entitled.
We are in for a long sequence of these measures. Tax holidays, special services, foreign enterprise service companies, and the other explicit and implicit special conditions afforded to foreign enterprises are all being pulled. And with them are going many of the special privileges foreign individuals have enjoyed over the years.
The best we can hope for is equal treatment with local enterprises, but I suspect that the direction of the pendulum is going to take us into discriminatory territory: the government is going to be tougher of foreigners than the locals, and this is going to have personal, commercial, economic, and political ramifications.
The “good old days” aren’t coming back. Ever.
But that doesn’t mean China should be permitted to discriminate against foreign enterprises in violation of its international commitments and, more importantly, its own enlightened self-interest. It does mean that we are now going to have to start making a consistent and convincing case for a long-term role for foreign enterprise in China, and each enterprise is going to have to make its own case to be allowed into China, or to be allowed to continue operating here.
The extent to which this case comes from credible local voices rather than indignant foreign sources will determine its palatablity to local leaders and to the Chinese as a whole, and will thus determine its success. This means we have a profoundly challenging effort ahead of us.
In the Hutong
Watching “Amok Time”
Moving my posts from my TypePad site to this my WordPress site, I came across this post, “Cupertino Dreamin’” from December 2007. I explained what I hoped Apple would introudce the following month at MacWorld January 2008.
One wish was for an Apple Tablet computer. Check out the name I suggested – and the specs. I got some of it right, anyway.
China Tightens Purse Strings in Guinea and Other African Nations
China’s approach to securing minerals in Africa has been to sign agreements to build huge projects in exchange for minerals.But that formulation has proved problematic in an economic downturn. African governments are now realizing that these deals are in essence loans against future revenue, and falling prices could leave them saddled with giant piles of debt.
China, Inc. is starting to realize that the road to globalization for Chinese enterprises does not begin with Europe or North America, but with emerging and developing markets like the nations of Africa.
They are also starting to understand that winning friends, influencing people, and building markets demands more than dumping a few fat wads of cash on the natives. The problem is that few of these companies – if any – know what to do to arrest the tattering of their image in their most promising markets.
There is a cottage industry taking root around corporate social responsibility in China, and over the last six months, I have picked up amongst their numbers a growing concern about the health and prospects for non-governmental organizations (NGOs), especially those not directly chartered and managed by the government.Normally I might have taken this as sour grapes: CSR is not growing as quickly as it should in China, and the people who have devoted their lives to getting corporations to “serve the people” have been having a hard go. But then I talked to some NGO administrators, many of whom have been here for a while and all of them involved in organizations largely in sync with China’s policy priorities, and I started to hear the same thing. Then The Washington Post noted in March:
This month, [the government] announced regulations designed to make it harder for China’s fledgling community of nongovernmental organizations to get financial support from overseas.
Non SequiturIt would be easy to read into these regulations any range of motives, but I think what is happening goes deeper than some short term policy change, and is rooted in a deeper discomfort among policymakers with NGOs. I would argue that a growing part of the challenge NGOs of any stripe or origin face in China is that there is no ideological framework that would make a place for those organizations within the Chinese system. At the core of modern China’s social contract is that the government, the Party, and the Army, either directly or via the work unit, are supposed to provide all of the social needs of the people. This is not purely a “communist” thing: paternalistic governments have been a part of China since before Master Kong wrote his Analects, and the government serving in loco parentis has become a core assumption of many of Asia’s political systems. Theoretically, then, there should be no need for NGOs: it is the job of the government, Party, and Army to provide. At best, once again in theory, an NGO with a social mission operating in China is a de-facto indictment of the government and Party, an implicit admission that the government is not fulfilling its moral role. At worst, the NGO is the seed of a rival center of domestic political power, or (like many pre-liberation missionary groups) a subversive element or tool of a foreign government. There is no conceptual framework in the Chinese polity for a private institution to take a social role, and even the social role of work units has been reduced over the past thirty years to little more than a basic benefits package. And without a clear, articulated (or at least understood) place for NGOs in Chinese society, each organization represents latent disruption inimical to a Harmonious Society. Leaders of China, We Are Not The Enemy In order for NGOs to take their full role in Chinese society, NGOs themselves are going to have to first make a case that civil organizations have a necessary and proper role in Chinese society, one that fits within Confucian ideology and that implicitly legitimizes rather than indicts the government that accepts them. This means making an ideological case – not just a practical one – that carves out a legitimate niche for NGOs as serving a role that government or enterprise are not only unable to fill, but that they should never have been expected to fill in the first place. The best scenario to make this happen would be for NGOs to team with respected party ideologues at the Party School to make the case by drawing from the foundational documents of the People’s Republic. The NGOs would then work with those ideologues to help create a legal (read “constitutional”) role for NGOs in society, rather than muck about with trying to get a single law passed that could be negated by policy. Of course, I’m not betting this is going to happen anytime soon. Fighting Inactivism First, for many people who staff and support international NGOs, doing or saying anything to legitimize the Chinese government would be a non-starter. That is sad, but understandable. It would gall not a small number of them to have to argue for their role in a society where the need is ostensibly plain to see, in a polity many of them see as morally bankrupt, or worse. Second, we have to consider the possibility that whatever framework would result from such an approach would involve a loss of some of the autonomy NGOs are used to experiencing elsewhere, especially in the Anglophone world. Most NGOs guard their independence with ferocious jealousy, and would be hesitant to surrender that which they believe makes them most effective. Third is what I would call “The Google Trap.” In making concessions to government control or oversight to facilitate operations in China, NGOs would put at risk their global support ecosystem, from contributors, staff, partners, beneficiaries, and other NGOs to government and the media. Whatever the prospects in China, no NGO would put its global operations at risk by compromising on their principles in China. All of this leaves NGOs waiting for China’s leaders – perhaps the next administration, perhaps the one after that, or the one after that – to reach the conclusion that it is beyond the abilities of government, Party, Army or enterprise to carry the full burden of China’s social challenges, and to conclude that there is indeed a role for non-governmental “social organizations.” All fine and good. But what happens in the meantime? Given that many issues addressed by NGOs are attached to a ticking clock, can NGOs afford to wait? When faced with the prospect of compromise vs. inaction, does it not run counter to an activists’ creed to accept the latter? This is the hidden conundrum facing NGOs in China, and until it is addressed the social action sector will find itself increasingly hemmed in by policies and regulations made by regulators with an incomplete appreciation of the role NGOs can – indeed, should – play in the Chinese system. But first, the NGOs themselves have to figure that out.
In the Hutong
Writing is Freedom
Susquehanna Financial made a bold call last week on Baidu’s share price, targeting $1,000 per share for Baidu. Ignore for a moment that SFC actively seeks to do business with the companies it covers, thus tainting the analysts’ independence. Instead, let us ask whether Susquehanna is underplaying the risks, which they think are primarily:
1) Customer growth slower than expected; 2) Market overly pricing in impact from Google’s departure; 3) Monetization up to high causing lower ROI for advertisers and hence losing customers to competitors; 4) Emerging competitors Tencent, Taobao, and Alibaba.com, among other domestic search engines; 5) A hard landing in the Chinese economy.
Had SFC taken the time to elaborate on each of these and explain exactly why they were risks, I am not certain the company could have justified its target quite so persuasively to its readers.
What is more, there are significant risks that SFC failed to enumerate, including:
6. Advertiser abandonment of search in favor of other means of digital advertising;
7. User backlash against Baidu for mixing paid results with natural search, and for blocking results of the competitors of its advertisers;
8. Creative recovery by Google from Hong Kong that allows Google to continue narrowing the gap with Baidu on the mainland;
9. Continued failure of the company to stabilize its leadership team, hampering its progress in addressing the significant challenges in its core business.
10. Fragmentation of management attention and engineering resources caused by pursuing too many divergent opportunities at once.
All of which is to say that the risks Baidu and its investors face deserve more attention than they are getting, certainly from the investors, and possibly from management as well.
(Full disclosure: I own 5 shares of Google common.)
In the Hutong
Fruit or Toast
Sebastian Cohen examines both the wisdom and madness of China’s online empire builders in a quick read in this month’s China International Business (the one with JP Morgan’s Jing Ulrich on the cover.)
My take on China’s online giants expanding their reach is mixed, and Sebastian quotes me to that effect:
‘Baidu, China’s search engine giant, has been as active as anyone else in the quest for new businesses. March appears to have been a busy month for the company as it contemplated the acquisition of B2B e-commerce site Netsun Toocle while simultaneously planning to start a new e-book publishing venture which would offer a wide range of licensed content. David Wolf, of Wolf Group Asia, sees Baidu as having one of the more questionable expansion policies. “They continue to expand into unprofitable or complex businesses like online video or e-commerce even before fixing the fundamental issues in their core business; which is selling search ads,” he says. “Normally there would be nothing wrong with that, but at a time when the company is hemorrhaging management talent and the largest competitor appears poised to leave the market, is this the time to take your eyes off the ball?”‘
China’s companies have a long and undistinguished record when it comes to diversification, even when moving into similar industries, and even under the best possible circumstances. Baidu in particular faces some major challenges and opportunities in the coming months.
But I don’t mean to pick on poor old Baidu. It is hubris season around here since Google packed off to Hong Kong, and it would be very easy for a brilliant Chinese Internet entrepreneur to decide that the time has come to turn his business into an online conglomerate, or to make an ambitious play to globalize.
Focus, guys. The real opportunities are right here. There will be plenty of time to play diversification and M&A games when growth in China settles down a bit.
As it was with Japan and the Yen throughout the 1980’s, the RMB exchange rate is going to be a persistent foreign policy priority for the next decade. If history is a guide, it would be an issue even if China floated the RMB.
There is no magic bullet to solve the problem. Instead, the United States needs to be prepared to place constant pressure on The Chinese central government to adjust its currency in order to offset (at least partially) the unrelenting domestic pushback to hold down the value of the RMB.
In order to do this, the United States needs to expand the range of tools it can use to apply that pressure. The hammer of Congressional backlash and the sword of putative tariffs have their place, but they are insufficient.
To compliment those cherished approaches, the United States needs to be actively influencing the domestic debate surrounding currency and economic policy within China. It needs to find local, not just international, allies to help make the case that despite the record of the past three decades, dependence on exports as the primary economic engine is unsustainable.
A long-term, multi-level and multifaceted public diplomacy campaign will be a core part of that effort. Unfortunately, it is unclear whether any part of the US government is capable of planning, coordinating, leading, or executing such a campaign.
It is not too late, but it is now urgent. Secetaries Geithner and Clinton need to pool resources and, working with the President get a plan together on this issue. Failure to do so will leave the US once again unable to employ its vaunted soft power on the nation’s – and the world’s – behalf.