Does the Internet Make Polling Redundant in China?

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

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

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

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

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

Disinformation Wants to be Free

Hutong West
Afternoon sunshine
1250 hrs.

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

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

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

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

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

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

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

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

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

Professional Service Firms Should Stay Off Wall Street

(With Corrections)
Hutong West
Sunday, Sunday
1228 hrs.

About two years ago, the New Yorker ran an excellent article plumbing the question of whether Wall Street firms were capable of doing social good. In the heart of the article, however, was a revelation that should waken the leaders of any professional service firm from their dreams of IPO riches. (Keep in mind that I am thinking more about advertising agencies, investment banks, management consultancies, PR firms, and the like. As one reader correctly pointed out in comments, law firms, accounting firms, and auditors tend to remain private, though event that structure has limitations.)

Big doesn’t necessarily mean bad, but when the Wall Street firms grew beyond a certain point they faced a set of new challenges. In a private partnership, the people who run the firm, rather than outside shareholders, bear the brunt of losses—a structure that discourages reckless risk-taking. In addition, small banks don’t employ very much capital, which allows them to make a decent return by acting in the interests of their clients and relying on commissions. Big firms, however, have to take on more risk in order to generate the sorts of profits that their stockholders have come to expect.

Not long ago I had a delightful dinner in Beijing with the nonagenarian founder of one of the world’s premiere professional service firms. We spent much of our time talking about the history of the firm, where he had gone right, and where he had gone wrong. I flatter myself to think that there was more to the discussion than a self-indulgent trip down Memory Lane: that is not the style of this old-school Southern gentleman. I prefer to think he was passing me warnings about my own little firm.

He told me that in retrospect one of the greatest errors his industry had made was in trading the partnership structure for public listing. It was an error for the people (it dehumanized them,) the partners (it took away their incentives), and the clients (it refocused firm management on their corporate overlords more than on client work.)

There are many virtues to the corporate structure and public ownership. For professional service firms they are outweighed by the risks and the downsides. Investment banks are learning this the hard way, as are advertising, public relations, and management consultancies. After the one-time IPO payoff for the partners, the benefits of public ownership start looking thin.

I don’t expect this revelation will slow the velocity of conglomeration and public ownership of professional service firms. I do expect, however, that wiser clients are going to start evaluating firm ownership when they choose service providers. The burden of proof will be on the publicly-owned firms to prove that they will get senior-level time and attention and maximum value to the clients.

Asia and the Need to Re-engineer Research

Hutong West
Wonking
1200 hrs. local

Fair warning: I’m about to get a little wonkish, so if you don’t care about market or academic research, skip on down to my last post.

In an otherwise superb review of Doh Chull Shin’s Confucianism and Democratization in East Asia, in Foreign Affairs, (“Confucius and the Ballot Box“, July/August 2012) Andrew Nathan digresses from his eloquent explanation of why “Asian Values” and democracy are not incompatible to defend Shin’s methodology.

Critics view the survey-based study of culture as flawed in three ways. First, if culture is something shared by all members of a society, treating it as a distribution of values and attitudes among individuals ignores the way it works as a shared experience. Second, by reducing culture to a series of questionnaire items, the survey method oversimplifies complex, multilayered attitudes. Third, the questionnaire format forces respondents to choose among rigid response categories that cannot adequately reflect their beliefs.

For all that, the survey method remains indispensable. No other approach does as good a job of finding out what large numbers of people actually believe. And it is less reductive than the older method of gesturing in the direction of an entire nation and claiming that all its members share some vaguely defined set of norms.

This all may seem like a shot in an esoteric battle of academic nit-picking, but it is telling that Nathan feels compelled to conduct this preemptive defense in a review written for a mainstream (rather than purely academic) journal. Dr. Nathan protests overmuch, and in so doing gives us a view to his fear that while they may be one of the few methods available to make the social sciences as scientific as possible, surveys have some innate flaws that call for some extra scrutiny on Shin’s thesis specifically, and the conduct of research in Asia in general.

My first concern is general: does the survey method travel well? The survey method was developed in the West by sociologists who were operating in a specific culture and political environment, one in which people feel relatively comfortable about voicing their honest opinions without worrying about political reprisals or pleasing the person doing the survey. This is important because if you stop to think about it, the value of any answer to a survey absolutely depends on those two conditions.

Yet common sense and a passing knowledge of Asian cultures call into question whether these conditions exist to the same degree in Asia as the West, and, equally important, whether they exist to the same degree among Asian cultures. Indians, for example, might be very ready to answer frankly and at length. Would Koreans be as willing? Would Singaporeans? Would Japanese? Would there not be differences between how Americans would answer and how any Asians would answer?

I would be less concerned if Shin had conducted his survey in the context of a single culture, because he could have designed an survey and delivery method that compensate for the variances between that country’s culture and the outspoken West. One firm I know in China, for example, has learned how to compensate for cultural factors by making the interviewer someone who is known and trusted by the interviewee, and focuses on interviewer training to work the variances out of the responses.

But Shin’s survey cuts across sixteen different cultures and nationalities, and this brings me to my second concern. By using the survey method across a range of cultures and polities where there are likely to be huge variances in the willingness to speak out and the cultural desire to please, is it even possible to wind up with comparable results?

I have no answers that I can prove scientifically, but the questions need to be addressed before we accept Shin’s findings or those of any survey in Asia – whether academic of for business research. If we are genuinely interested in defensible research, we need to question our implicit assumption that the tools created in one culture work just as well in any other, and then test our answers.

I would feel a lot better about Dr. Shin’s book if either Shin – or Dr. Nathan, whom I admire greatly – had hinted that they had even considered whether the survey method is culturally appropriate outside of America at all, and whether and how it can be meaningfully administered across cultures.

They did not, and I believe that they did not because they cannot. The minute they start questioning the precious few tools on which their peer-reviewed research rests, they lose the ability to conduct the kind of research their professions and employers expect them to conduct. When our best scholars are shackled to weak tools, what can we expect but debatable outcomes?

Without more substantive answers, I’m led to the conclusion that for the sake of marketers, academics, and policymakers, we need to re-engineer research. The realities of globalization demand new tools. It is time to create them.

 

The Innovator’s Dilemma with Chinese Characteristics

Hutong West
Catching up
2009 hrs

In what has to have been one of the most important moments of my life, while running errands today in the car my wife touched my hand, looked into my eyes, and said “the time has come in our lives for you to focus on what is important: your books, your blogs, your research, your speaking, and your teaching. Let me worry about the other stuff from now on.”

Talk about a lump in the throat. I do not deserve a partner like her. With that kind of support, however, I’m rolling up the sleeves.

With this post, I am beginning an effort to write the posts I have been dying to write, but have put off over the years because of other obligations. Not everything will be timely, but it will all be relevant. I can promise you, though, that I’ll keep most of them short and pithy. To keep these grouped together, I will mark each of them with my “FITG” (“flag in the ground”) category.

Is China like Japan, Only Bigger?

In a thoughtful article in The New York Times from January 2011 [see, I told you I’d been waiting a long time to write these – dw], Steve Lohr suggested that perhaps the U.S. trade disputes and commercial competition with Japan were mere warm-ups for what we would face in China. It’s a provocative thesis, but the passage that got me in the article was this one:

“The bet for I.B.M. in Japan, as it is for companies like Boeing and General Electric today in China, is that they can stay ahead, innovate faster than the potential competitors they are helping,” says Edward J. Lincoln, professor of economics at the Stern School of Business at New York University, and director of its Japan-U.S. Center for Business and Economic Studies.

I’m on record in this blog for suggesting that the way for companies to keep ahead of the Chinese was with a flow of innovation. But when I read Professor Lincoln’s words, my brain goes straight to Clayton Christiansen’s Innovator’s Dilemma. Piling innovations on top of each other to stay ahead is great, but at some point your customers are going to wake up and ask exactly how much of this innovation they really need, or whether buying “good enough” products will do just fine?

Bells, Whistles, and Value

What triggered me was the reference to Boeing. I’ve been compiling notes and research on a book about Chinese aerospace over the years, and the issue I keep coming back to is that at some point Boeing’s innovations – as remarkable as they may be – may not mean enough to a Chinese, Latin American, or African customer to make a 11o passenger jet worth 25% or 30% more.

In construction equipment, for example, the global manufacturers have created so many process innovations that their earth movers, graders, and loaders will last for a decade or more. But those innovations don’t pay off with many Chinese customers: they amortize the cost of the equipment over a year or two, so they would rather buy cheap equipment, burn it up, and then sell it used to companies in the poorer parts of China than pay a premium for the longer-lasting equipment.

With airliners, many carriers in the developing world have been getting by with used Boeings and Airbuses for years because they simply could not afford to equip their airlines with the newest planes. But at some point, a company (like China’s COMAC, for instance) will come to those carriers and say “look, we’ll sell you our new airliners for just a bit more than you have been paying for the used Boeings and Airbuses. You get new planes rather than used ones, and it doesn’t cost you much more. Sure, they don’t use the latest technologies, but you don’t really need composites and Garmin avionics – you’d be perfectly happy with aluminum planes with old-fashioned dials for instruments. Your maintenance costs will drop substantially, and you’ll have happier passengers.”

Apologies to Debbie Fields of Mrs. Field Cookies, but sometimes, good enough is good enough.

What KIND of Innovation Stream?

So what do companies like Boeing need to do?

Part of the answer is to go back to Franz Johansson’s definition of “innovation” from his book The Medici Effect. A true innovation, Johansson noted, has two characteristics: it is novel (i.e., new or never been done before), and it is useful. That last bit, he noted was the part most people missed. But I think companies like Boeing and GE manage to get both the “novel” and “useful” bits right, but that is not enough: just ask the guys who make earth moving equipment. Something is missing.

I once had a jolly debate by mail with an auto reviewer for the L.A. Times who felt that Mitsubishi’s inclusion of an inclinometer in the instrument panel of its off-road vehicles was useless. I thought it was quite useful, as it is possible to get disoriented when bouncing around off-road, especially in low light. He responded by suggesting that maybe I needed my inner ear checked. I ended the conversation before calling him an effete Limey, which is just as well. Twenty years on, I think we were both right. For him, the doohickey was useless, but for me, it was useful.

Herein, I think, lies an answer to the challenge innovative companies are going to face with Chinese competitors. An innovation must be novel, and it must be useful, but it also must be relevant: it must be meaningful to the specific customer given that customer’s preferences and proclivities. In fact, the more relevant an innovation is, the less truly novel it need be.

This simple question reframes the thinking around innovation and around the value proposition an innovation offers. Instead of assuming that, say, because Singapore Airlines will value an innovation, Air Afrique will value it equally, we automatically assume that some of our customers will value an innovation and that some will not, and we start seeing innovations as targeted rather than as generic. This means that there will be multiple streams of innovations that are targeted to customers with different needs and preferences.

So yes, as Professor Lincoln said, to keep ahead of the competition who are innovating on your heels, innovate faster. But keep the innovations relevant, or you may turn around and realize that you missed a turn, but the competition didn’t.

China and the BRICs

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

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

Hutong West
Dealing with plumbers
1228 hrs.

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

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

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

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

A Small Crack in Apple’s Asia Tablet Story

Image representing iPad as depicted in CrunchBase
Image via CrunchBase

IDG Connect – Kathryn Cave (Asia) – The Tablet Security Conundrum.

Hutong West
Here a week and not a second on my porch
1947 hrs.  

Kathryn Cave at IDG Connect offers a snapshot of her company’s research on how and why Asians are using tablet computers like the Apple iPad, the Samsung Galaxy, and the Motorola XOOM. While Asians trail the world average in tablet use, they are more likely to buy a tablet in the coming three months and are more likely to use the tablet daily for work.

While iPad dominates the market, more Asians than anywhere else in the world believe that Apple’s leadership is unsustainable. 51% believe Android will become the global market leader in tablets within 12 months.

This is important because it offers more evidence that Asians view Apple rather differently than their U.S. and European counterparts. IDG does not delve into why that is the case. My theory has been that Apple has long treated Asia beyond Japan with a degree of benign neglect. By contrast, Apple invested in evangelists, user groups, and a legion of specialized resellers in North America, Europe, Australia, and Japan, who together sustained enthusiasm for the company and its products even in the wilderness years of the mid-1990s.

Tablets have been the category that Apple has ruled most strongly over the past 30 months. What is more, Asia is regarded by punters and competitors alike as the company’s largest font for growth in the coming years. Research suggesting that Asians are less enthusiastic about the future of Apple tablets should send up red flags in Cupertino, and green ones at Samsung and the Googleplex. This is the closest thing we have seen to a strategic vulnerability for Apple.

While the company focuses its efforts in Asia on production and distribution, treating marketing and customer relationship-building as an afterthought, the competition is getting wise. Bet on Samsung and Google targeting this rip in Apple’s chain mail armor. Asia has been Apple’s escalator, but unless it is handled with more than a backhanded marketing effort, it could become the company’s downfall.

The List of the Delisters

Hutong West
Sunshine and Keyboards
1743 hrs.

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

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

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

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

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

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

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

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

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

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

Intellectual Property and Innovation Streams

In the Hutong
Busy week ahead
1948 hrs.

Ryan Block, Editor Emeritus of Engadget, offers a fun little post about innovation at Qualcomm spark.  His lede is provocative: he notes that even though Edison patented the light bulb, he didn’t invent it. An Englishman named Joseph Swan patented his in the UK first.

Thomas A. Edison, knockoff artist and patent troll? Hardly. Anyone familiar with the story of what Edison had to go through to create a practical light bulb, brilliantly recounted by Jill Jonnes in her excellent Empires of Light: Edison, Tesla, Westinghouse and the Race to Electrify the World

The incandescent light bulb
The incandescent light bulb (Photo credit: Anton Fomkin)

will likely agree that Mr. Edison had at least as much right as anyone to his patent, especially when you include his painstaking work on finding the right element for the filament and industrializing the invention. (Even Swan admitted as much.)

Edison deserved his patent, but the most important lesson from Edison and the light bulb is that he didn’t sit back on his duff and try to extract royalties as others improved the technology. As Block notes:

Better still: only a few months after Edison received his patent, he’d already moved on to the next iteration, which increased the bulb’s life a thousand-fold. The story of Edison and his light bulb isn’t just a story of invention; it’s about the invariable trajectory of progress.

I want to take Block’s point a step further. Our intellectual property protection system in the west is focused on protecting inventions, to the point that the IPR bar has all of us thinking about how to protect each and every incremental innovation in the process.

For the most successful innovators, however, what is important is not the increments, but the stream of innovation. There is value to protecting your work, but that should never detract from the effort to continually out-innovate oneself. Due respect to Nathan Myhrvold, the future does not belong the the companies who hire more lawyers than engineers. If there was a resounding lesson from Oracle’s loss in court to Google, it is this: those who focus on defending the status quo more than building the future will have the future taken away from them.

China’s Shipyards on the Ropes

English: Dalian Shipbuilding Industry Company ...
Dalian Shipbuilding Industry Company (Photo credit: Wikipedia)

China shipyards slash prices to survive-industry | Reuters.

In the Hutong
Entrained
2128 hours

A global glut in cargo capacity and the sluggish economies in the U.S. and Europe are slamming China’s shipbuilding industry to the point where the nations shipyards are unable even to sell new bottoms to domestic shipping companies. Now they’re cutting prices to keep busy, and if the industry follows the accepted Chinese patterns, the result will be a beggar-thy-brother price war. Who will pick up the slack when the yards lose money building ships? Most likely the government will support the industry in the short term, working through one or more of the major “policy banks:” Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and the Agricultural Bank of China.

In the long term, writing the shipyards blank checks is unsustainable. There are two interesting issues that will frame the long-term policy response to the growing shipbuilding crisis.

First is the matter of how long the downturn will last. If this is a blip and orders start pouring in within 2-3 years, the near-term solution will suffice. If experience is any indication, however, it is probable that we face a longer adjustment that will take years to work excess capacity out of the shipping industry. Even more concerning is the uncertainty around the price of oil. At what point does bunker oil become so expensive that manufacturers begin to shift production to a point closer to the customer rather than relying on supply chains that bring finished goods across oceans? For the people building or buying ships, this is more than idle speculation: it is the issue that will decide the future.

Second is at what point the Chinese Navy (PLAN) will decide that the shipyard slump offers a precious opportunity to expand the fleet at prices it may never see again. Retooling civilian shipyards to produce warships is no easy task, but the PLAN will need auxiliaries and support ships to support operations far from shore, and civilian yards can produce those with relative ease.

The two of these issues come together with a relatively straightforward solution: rather than simply pour money into shipyards and pay them not to produce ships, the government could have those same yards start turning out oilers, transports, and tenders to form the logistical tail of a truly “blue-water” navy.

The only question is how long it will take for the Central Military Commission to come to the same conclusion.

Bringing Chinese Equity Home, Continued

Chinese RTOs Covertly Going Private – Seeking Alpha.

In the Hutong
Heading to Shanghai
2044 hrs.

As I have noted here and in Euromoney Magazine, we are witnessing the beginning of an important shift for Chinese enterprises and the way they are financed. A growing number of Chinese businesses that have listed overseas, especially mid-sized and growing companies, are quietly de-listing from the NYSE and NASDAQ.

Adam Gefvert offers two more examples of this delisting trend at Seeking Alpha, China Medical Technologies and ZST Digital Networks, and offers a description of how they are doing so by hiring proxies to purchase shares on their behalf.

Leaving aside questions of propriety or legality of this process, it offers an important insight. While the Chinese companies that have listed in the U.S. did so with great fanfare, they will most likely depart quietly, attracting as little attention as possible. I suspect we will wake one morning and find that NYSE and NASDAQ no longer boast a bevy of mid-sized Chinese stocks.

Why is this important? For Chinese companies, it means that they will focus on listing in places where their value is understood by the common punter. For the small investor, participating in China’s economy will become more difficult.

There are a lot of things that can push living in China to the edge of bearability, but in-your-face nationalism and xenophobia is not one of them. If there is one thing that has made living in China these past 17 years so wonderful, it has been the people I meet.
It never seems to get lost in a conversation that there is a difference between an individual and a government. Even at the height of anger over the Belgrade Embassy bombing, the vitriol was never personal: it was about a government’s mistake, not the mistake of a nation.
At the same time, it’s incumbent on every one of us living as a guest on this soil to behave as a guest should, and not as an entitled drunken teenager on Grad Night at Disneyland.
By the way, if you don’t read Sinostand regularly, you should. Great stuff.

The Beijing Consensus Isn’t Building Brands

Duxton Hill, Singapore
Enjoying the Chinatown Sunset
1807 hrs.

In describing the results of Millward-Brown‘s BrandZ report of the 100 most valuable global brands in 2012, the Wall Street Journal’s Laurie Burkitt notes a trend that should worry the Beijing bureaucrats who are crafting the nation’s industrial policy. (China’s ‘State-Owned’ Brand Slips in Value – China Real Time Report – WSJ)

While eight of China’s state owned companies maket the list, their collective “brand equity” has fallen by 9% in the past year. By contrast, the three private Chinese companies on the list – online giants Baidu and Tencent and China’s legendary spirits brand Maotai – have watched their collective brand equity rise by 8% in the same period. Even granting that measuring something like brand equity is an inexact science, this does not bode well for China’s national industrial policy.

Stumbling Champions

That policy, which advocates providing implicit government support for large, state-owned enterprises at the expense of small and medium-sized, private, and foreign-invested companies, is ostensibly designed to create national champions while keeping the nation’s most powerful economic entities under state control.

That these massive companies are losing brand cachet despite explicit state assistance suggests one or more of the following:

  • State-owned companies lag private and foreign companies in understanding the value of their brands;
  • State-owned companies do not understand how to build or sustain brands; and/or
  • A brand’s association with government control is seen increasingly as a liability.

There are some industry-specific factors at work here, to be sure. In the case of China Mobile, for example, the brand is gradually losing cachet as the company struggles against increasingly robust competition from China Unicom and China Telecom. China’s leading banks have been the target of derision lately from both consumers and Premier Wen Jiabao for consistently pissing-off their retail customer base.

Yet these are the very companies that the government has protected, offering them preferential policies and practices that have allowed them to prosper. As Burkitt points out, they still rely on China for 95% of their business. Each of these companies has ambitions abroad, and the implicit belief in Beijing is that the way to build global winners

And here is the kicker: in a world where brand and reputation are so essential that even Warren Buffett places their protection higher in importance than profits, how does China expect to turn its coddled domestic champions into global brands when they can’t keep up appearances at home?

Time to Kick ‘Em Out of the Nest

If this were a matter of a few companies or a single industry, no policy change would be necessary. But Milward-Brown has stumbled on an important trend, one which hints at a problem with China’s much-vaunted state capitalism model: picking and protecting national champions creates large companies, but it does not guarantee market success.

China’s state capitalism has come under some pretty heavy attacks of late, following a brief honeymoon with Western intellectuals. The Economist picked at the system’s failings in January; Stefano Casertano of the Brandenberg Institute explained why SOEs become the playthings of policymakers in The European; and MIT economist Huang Yasheng made macroeconomic mincemeat of the strategy in a paper in Asia Policy. Even the World Bank, in its China 2030 report, gently but firmly urged the government to stop running its enterprises.

Most of the criticism has been made from the macro-economic viewpoint: state capitalism is bad for China. What is starting to come out, in Burkitt’s article and two recent books on China’s telecommunications and aerospace sectors, is that state capitalism is bad for the companies themselves. Creating national champions demands tough love early: let them fly or let them fall.

The Return of News Corporation

The Speaker Lounge, Digital Matters 2012
Charging the Devices
1025 hrs.

In an excellent post in the Company Town blog over at The Los Angeles Times, Jonathan Landreth describes News Corporation’s announcement that it is purchasing just under 20% of Beijing-based Bona Film Group. (“News Corp. buys stake in Chinese film studio”)

The deal is interesting for several reasons. First, it marks a strategic departure for News Corp., which has in the past preferred to own larger stakes in its China ventures. It is also the first major investment News Corp. has made in traditional media since 2006, when CEO Rupert Murdoch told a meeting of industry executives in New York that he’d hit “a brick wall” in China.

Second, it is interesting because News Corp. is now leading from behind in China, preferring to play a fast second rather than trying to beat the rest of the industry. Similar linkages between Legendary Pictures and Orange Sky Golden Harvest, DreamWorks Animation and Shanghai Media Group, and Walt Disney and the Ministry of Culture/Tencent have been announced over the last year.

Despite some secrecy around specifics of the deal and Murdoch’s real intentions behind it, the move represents a wiser China strategy than News Corp.’s previous, dingo-in-the-butcher-shop approach. The history of foreign business in China has been dominated by a preference for speed over calculation: if we don’t get in early/first/biggest, the thinking went, we have no chance of success. It now seems that Murdoch has learned from costly experience the fallacy of such thinking, and now that Legendary, DreamWorks, and Disney have paved the way, he has followed.

Neither News Corp. nor its CEO have been idle these past six years, either. A quiet charm offensive has apparently been underway for at least the past two years, a period during which I think News Corp. has done a lot of listening and learning, understanding what is possible and permissible for a foreign media company here, and calibrating its ambitions accordingly. Many whom have dealt with the News kraken or one of its tentacles can attest that this is an uncharacteristic approach: normally it is News that defines what is possible in a given market.

I suspect, therefore, that this is a first step for News with Bona, and that we can expect the relationship to mature and expand based on the signals that come from the Party and the market in the next several years.

This is without doubt a deal to watch.

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.