Silicon Hutong 3.0: The Merchant and the Dragon

In the Hutong
Where have I been lately?
0740 hrs.

If this forum has been silent for the past month, we* have had good reason. It is now evident to anyone watching that China is on the cusp of change so large that its own leaders likely still do not grasp it. We’ve spent the last month trying to do so, and we’ve realized it is time to make some changes.

The End of Harmony

The particulars have been summed up at great length and eloquence elsewhere. In short, China has enjoyed 35 years of relative harmony enabled by acquiescence at home, accommodation abroad, and consensus within the Party. The past five weeks have made clear that this period of harmony is now at an end.

In fact, China is entering a period of great disharmony. The implicit promise of growing, shared prosperity looks increasingly difficult for the Party to keep, just as revelations emerge that suggest widespread malfeasance among the Party’s highest ranks. The willingness of Chongqing’s citizenry to accept Bo Xilai’s microwaved Maoism hints at a national mood that continues to sour. Suggesting that China is on the verge of a new revolution would be hyperbole, but the days of acquiescence are over, and the days of a more vocal, demanding populace are here.

The consensus-building approach that has characterized Party decision-making for the past 25 years appears to have reached its limits as well, and for good reason. When the way ahead was sustaining the status quo, consensus was easy to establish. The way forward is now unclear, and different political end economic visions are battling for precedence. Building general agreement among all leaders, even within the Politburo Standing Committee, will become difficult if not impossible.  The choice will be between paralysis and the end of the consensus-based system. Either direction will have vast repercussions.

As China takes its place among the leading nations of the world, especially in the wake of the Global Financial Crisis, the nation’s leaders have begun to address the world based on two implicit assumptions. First, that as an emerging world power China is entitled to change the rules of the global system to suit its needs, or ignore those rules if they obstruct China’s goals. Second, that the rest of the world will – or should – continue to accommodate China’s growing international assertiveness, even to the point of appeasement. That such assumptions place China at loggerheads with the rest of the world is of little concern. Japan, Europe, and the U.S. are too saddled with domestic troubles to effectively oppose China’s ambitions.

The Tale of the Merchant and the Dragon

If you watch China, none of the above should come as a surprise. And unless we’re living under a rock, we have to take notice. And we have. As we have done occasionally over Silicon Hutong’s decade in publication, we have taken a strategic pause in order to assess how we need to evolve this forum in light of China’s development. You will begin to see the results immediately.

First, you will see an evolution in our focus. Following the direction of my clients, this space has been moving beyond the original confines of technology, media, and public relations for some time now. We will now take the next step. Whether you do business in China or not, China will alter your playing field, and understanding why that is the case and what to do about it will be essential to everyone’s success. Our focus will become that why and the what. To that end, our five major topic areas will be:

  1. China’s Breakout: The emergence of China, Inc., and its role in global industry;
  2. China Rules: The effort by Beijing, Chinese companies, and Chinese executives to alter business norms, practices, and regulator behavior to favor Chinese firms;
  3. China Goggles: The globalization of China’s media industry and how that will enhance China’s economic and political influence;
  4. China Rewires: China’s consumers are going to alter the world’s business landscape, both for companies and consumers;
  5. Strategy, Action, Behavior, and Communications: Ideas and approaches to help executives and entrepreneurs deal with challenges of China’s rise.

Some of this, especially the last, is a recognition of the direction we have been taking for some time. The other four themes match the major directions I’ve taken in my own research and advising since 2008. It is now time to start delivering those insights.

Discussions about China’s national security, politics, arts, culture, history, and international relations will shift to The Peking Review, and will be delivered in the context of reviews of books, articles, and scholarly works about those topics.

There are more changes as well, but this post is long enough. Expect periodic updates in the coming weeks.

In the meantime, thanks for reading, and keep the feedback and comments coming.

Best,

David

* When I use “we” here, I do so not in the sense of the “royal ‘we,'” which would be a nauseating affectation, but “we” in the sense of myself and my wife and partner. While she does no writing for this forum, she is and has always been my sounding board and editorial adviser. Also, my time is our asset, so any expenditure of that asset needs sign-off. Finally, she has become a deep supporter of this forum (and The Peking Review). For those reasons, any major decision is ours, not mine alone.

Caixin and China’s Great Equity Repatriation

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

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

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

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

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

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

Where is Tencent Going?

QQ Icon
QQ Icon (Photo credit: Wikipedia)

China’s Tencent Raises $600 Million from Note Offering
Josh Ong
The Next Web
August 29, 2012

Chinese Internet giant Tencent Holdings Ltd. (TCTZF.PK) is raising some $600 million from a senior note offering this week. Given that in the second quarter they posted $492 million in profit on $1.7 billion in revenue on top of having some $3 billion in cash, the question has to be “why?”

There could be several reasons, one of which could be a desire to buy back the shares of one or more major shareholders. Keep in mind that South Africa’s NASPERS Group is a major shareholder, and in a volatile regulatory environment policy could shift against foreign holdings in Chinese internet companies at any time. A full or partial buyout of foreign shareholders could insulate Tencent from that problem quickly.

What I think is more likely, and what I told Josh at TNW, is that the company will use the money to support expansion in two non-core but highly strategic areas of its business.

Fighting the China E-commerce War

First, the money will go to e-commerce. The company has already made a huge push into the area, and told analysts at the end of Q2 that it was planning on expanding its effort.

As Amazon discovered when it reached a certain point in its growth, to be truly competitive in e-commerce you need to make major investments in logistics infrastructure. That is especially the case here in China. Being an online e-commerce platform with lots of online bells and whistles is not enough: you have to support merchants and customers with a logistics infrastructure.

At the risk of getting too granular, Bill Schereck, who was the driving force behind the founding of Australia’s TV Shopping Network and its expansion across Asia in the 1990s, defined e-commerce logistics as the effort to surmount five challenges:

1. Get the signal to the customer (i.e., get your portal online, and get people to find it.

2. Get the customer to place an order.

3. Get the order to the customer.

4. Take the payment from the customer

5. Be able to take a return in a way that is both convenient for the customer and economical for the firm.

For Tencent, the first challenge is a matter of having a good website, and the second a matter of marketing and the quality of merchandise being sold.

In many parts of the world, the last three are easy. In certain parts of China, like the downtown areas of major coastal cities, this is all relatively simple, especially if scale is modest. But Tencent wants to sell to users in all of China, and it wants to scale to a point that is likely to exceed the capacity of locally-available package couriers. That is going to mean investments  well into the hundreds of millions of dollars, especially if they want to match Alibaba‘s Taobao.

Tencent’s leadership also understands that Taobao will not be standing still, and that to pass the market leader they will need to outpace Alibaba’s rate of investment, innovation, and improvements in customer service.

For these reasons, I suspect that if this new war-chest is allocated to capex and not buyouts, this is the largest direction that the allocation will take.

Tencent on the Street

The second direction is mobile. Tencent has made some excellent progress in this area with its Weixin/WeChat messaging service, which in its most recent iteration also incorporates much of the functionality of Instagram.

The challenge with mobile is that nobody has quite figured out how to turn a great mobile experience into revenue. People are using the services, but somehow the industry has yet to figure a way to get someone to pay for it all.

Tencent has the sheer mass of users, and it has them engaged not only in social media and chat, but most of the top online games as well. They need to create a mobile platform that replicates their PC experience, and I would wager that is where they are going to focus their efforts.

A case can be made that the future of mobile involves finding a way to mix three technical capabilities: fourth generation wireless broadband networks (4G); the ability to make web pages to essentially become powerful applications that is implicit in version 5 of HTML; and a new, slick version of rule set that governs how the web operates, IPv6. I know that might sound like a lot of technical hogwash, but together these three technical changes mean that the smart phones of the future may be web-based rather than based on apps running on a computer-like operating system.

If and when that change happens, it will give companies like Tencent a phenomenal degree of control over the experience they can offer on a mobile device, and, by extension, the things that they can do to turn that experience into cash. Tencent understands this, as does search giant Baidu, portal/socials Sina and Sohu, and e-commerce leader Alibaba. Each is investigating how to offer web-based mobile operating systems.

The stakes are immense for Tencent. If it can create an immersive, sticky mobile experience, it can tie that into its e-commerce infrastructure and bring both merchants and advertisers to its half-billion plus users via the mobile phone. This looks tiny now, but it could be what makes the difference between decline (as users shift from desktop to mobile) and dominance of mobile social media, mobile commerce, and mobile advertising in the country with the most mobile users of any in the world.

If that’s not worth taking out a little $600 million loan for, I’m not sure what is.

Update: Peter Schloss, who in over two decades in China has been in the middle of some of the most interesting and complex deals in the media and internet industries, makes an excellent point about why Tencent is doing this deal now. “Tencent was able to tap the markets at a good time for the company, and getting money was cheap,” Schloss noted. “They also wanted to break new ground for Chinese issuers.”

I think Peter offers a reasonable explanation for Tencent’s timing. I do not think the company intends for the money to sit idle, however, hence this post.

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.

Fredrik Öqvist does some interesting reading of the VIE tea-leaves. The Ministry of Commerce, he suggests, doesn’t like VIEs very much, but they are less likely to outlaw them outright than slowly squeeze them so the structure becomes more headache than benefit.

Further Reading:

VIEs: The Long Resolution (siliconhutong.com)

Joining the Niall Ferguson Pile-On

Galvin Plaza, Wangjing, Beijing
Watching the wires
0931 hrs.

If you haven’t read James Fallows‘ thoughtful deconstruction of Harvard professor Niall Ferguson‘s partisan Newsweek cover story “Obama’s Gotta Go,” read it now, regardless of your political preferences. In the piece, Fallows details two areas where Ferguson has been wrong – or just polemical – about China.

For further reading on this vein, check out the view from the other side of Harvard Yard, Ross Terrill‘s “The Case for Selective Failure” in The Wilson Quarterly (registration required,) and my critique of his take on China’s historical and future competitiveness in Silicon Hutong,How the East Will Rise.”

There are great lessons to be learned from some of those who observe China from afar, not least from Fallows. But those who have genuine insights to offer have paid in time, blood, and treasure for their wisdom. Instant China experts like Ferguson (take scholar, add two weeks in Beijing and Shanghai luxury hotels meeting with assorted locals, stir, and pour into nearest editorial page) on the other hand, need to be consumed with the kind of caution one brings to boxed wine.

Chinese Want 3-D Movies, and They’ll Make Their Own

James Cameron speaking at 2010 TED Conference.
James Cameron speaking at 2010 TED Conference. (Photo credit: Wikipedia)

“U.S. Filmmakers Eager to Feed China’s Appetite for 3-D”
Jonathan Landreth

The New York Times
August 12, 2012

China has made few concessions to the U.S. in the effort to gain more access to Chinese audiences for Hollywood films of late, and no significant concessions since China’s accession to the WTO. Then, on a U.S. visit in February, Chinese Vice-President Xi Jinping told U.S. Vice-President Joe Biden that 14 additional films would be allowed into China each year. The catch: they had to be either 3-D or IMAX pictures.

The reasoning behind this concession is not hard to surmise: the number of Chinese cinema screens has leapt to 11,000 screens after languishing for over a decade at around 3,000 screens. Why the boom? Simple: China’s hyperactive real estate developers have begun including cinemas in their commercial, retail, and mixed-use complexes throughout China’s 600 cities. Cinemas, apparently, attract the kind of foot traffic that supports retail business. Those developers wield considerable political influence, and they want more foreign films because in order to fill the seats.

Across the proverbial table are the party ideologues and China’s own film production industry whom, after decades of effort, are just starting to see Chinese going to the cinema in droves, and increasingly to see Chinese films. They don’t want to give it all away just as they’re capturing the market.

Enter 3-D.

There are over 7,000 screens in China that are 3-D capable, yet only a tiny number of Chinese films produced each year can take advantage of that additional investment. For the government to allow access to 3-D films was almost cost-free: it made the developers happy without upsetting the film industry.

This is going to be a good thing for Hollywood as well, but we must hope that the MPAA was not expecting any further 3-D slots beyond what has already been granted. Any hope of that was dashed last week by none other than James Cameron.

Mr. Cameron, the mercurial director of “Terminator,” “Titanic,” and “Avatar,” announced on August 8th that it would set up a joint venture with the Tianjin government to produce 3-D films and television content. In short, Mr. Cameron proposes to teach Chinese filmmakers how to make 3-D content of their own.

As I’ve noted before, China’s goal is neither to partner with the U.S. in the movie business, nor focus exclusively on its large and growing home market. China – and by that I mean not only China’s film industry but also the central government and the Communist Party – has every intention of competing with the U.S. and European film industries globally and, if possible, beating them. It is only realistic to see any partnerships with and concessions to Hollywood in the light of that effort.

One hopes Mr. Cameron understands his role in The Big Picture: China will happily use the Cameron Pace Group as a means to learn how to make fantastic 3-D content. Once that is done, Chinese 3-D filmmakers will not only be able to fill the growing number of 3-D cinemas at home, they’ll come gunning for Hollywood in its own increasingly-essential overseas markets. Cameron Pace may make a lot of money, or it may not. It will certainly make a competitor for Hollywood in 3-D.

Mr. Cameron may not mind: he’s near enough to the end of his storied career not to care. At the same time, you have to wonder how the students at NYU, USC, and the Directors Guild might feel about it.

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.

China and the Glocal Mix

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

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

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

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

Marketing Mixology

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

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

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

The Geek and the Chic

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

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

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

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

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

Meet the Glocal Team

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

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

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

Being Experimental

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

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

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

Does the Internet Make Polling Redundant in China?

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

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

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

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

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

Disinformation Wants to be Free

Hutong West
Afternoon sunshine
1250 hrs.

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

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

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

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

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

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

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

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

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

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.