Silicon Hutong

China and the World of Business • China Business and the World

Silicon Hutong - China and the World of Business • China Business and the World

And Here Come the Microfilm Regulations

In the Hutong
Beijing Youth Politics College
1603 hrs

A few weeks ago, we noted that the growing phenomenon of microfilms – motion pictures produced inexpensively with digital technology and distributed online – was becoming too popular to long avoid the attention of regulators.

Now, it appears, those regulations have come. As the Associated Press notes:

This week’s update of a two-year-old regulation on the supervision of online dramas and microfilms has raised fears of stifling creativity. The broadcast administration now requires content makers to register with their real names, production companies to obtain operating licenses and report their content before it is put online, and video-hosting companies to keep records of uploaded content.

This places microfilm producers in one of two boxes: they will either be legit, or they will go guerrilla, and if they do the latter, the best avenues of distribution will be closed to them. Of all of the regulations, the last is the kicker. Video hosting companies, who thrive because the government chooses not to look too closely at whether their most popular content has been approved for broadcast, will anxious to avoid antagonizing their regulator.

Depending on how stringent the regulations are and the spirit under which they are enforced, there are two likely outcomes to these regulations: a vastly larger and more creative film industry; or the world’s largest guerrilla film market. If the government simply uses the licensing regime to turn microfilms producers into legitimate small businesses, they create a tax base and the wherewithal to fill the digital pipeline with legitimate, local entertainment. They also take a step toward turning China into the global film powerhouse the government aches to create.

At first blush, this outcome seems unlikely: why regulate if you are trying to grow an industry? In China, though, because a business license is granted for one or more specific activities, the act of regulation actually creates a channel to legitimize a business, and thus afford it the ability to operate above board. Further, if the government only requires “reporting” of content and not approval prior to posting, this alone represents a major step for filmmakers.

Even under such a regime, the government will continue order the removal of any film that steps beyond the bounds of Party propriety into forbidden topics or prurient content. That door of control remains open to them, as it is today.

If, on the other hand, the government is niggardly with microfilm licenses, or if it lays upon producers onerous approval requirements as a part of the reporting process, the result will be a community of guerrilla filmmakers and sites that distribute their works. At that point, there will be no regulating the content, and filmmakers will feel free to take on even themes that would discomfit the party.

Under a draconian implementation of these laws, distribution will not stop: it is, actually, easy to envision people sharing forbidden films via email, torrent, thumb drive or other means, from person to person, much as samizdat literature did in the Soviet Union during its final decades.

The rational choice seems to call for a robust, regulated film business that builds China’s soft power and draws its eyeballs away from foreign content. We will know within six months how this will all shake out.

Walter Lippmann on China

“The small American businessman has long complained about how difficult it is for him to survive in the competition with the large American corporation,” [Walter] Lippmann warned. “What will he do when he has to face the competition of totalitarian monopoly organized on a continental scale?”

Alan Brinkley The Publisher: Henry Luce and His American Century

Lippmann was talking about the Soviet Union at the time, but his words do resonate today.

Happy New Year, everyone, from Silicon Hutong.

The Future of Microfilms

nescafe_china_youku_camera_cafe

Video on Youku (Photo credit: Gauravonomics)

Hutong West
Near Hollywood Beach

1037 hrs.

I read today with great interest Louise Watt’s superb AP story about microfilms, a new medium emerging at the intersection of online video, mobile media, and digital filmmaking. Louise explains how microfilms are growing in popularity in China.

What Watt touches, and fortunately does dwell upon, is how microfilms are still quite experimental in the PRC. Beyond the artistic sense, that means that there are no laws, regulations, or administrative rules in China that officially recognize microfilms as a medium, or that provide an official framework for their creation, distribution, and consumption. In most of the world, this would mean nothing. In China, it establishes the arc along which microfilms are set to develop. Or not develop.

A Different Media Market

By definition in China, the media is controlled by the Party. As such, media implicitly plays a different role in Chinese society than it does elsewhere: it performs the function that the Party sees fit.

And media is seen by the Party, first and foremost, as a tool of social administration: a means of communication between the Party, via the government, to the people, designed to support the Party’s goal of sustaining social harmony and support for the Party. Only after that is it seen as a means of conveying entertainment to the people, or as an industry to employ people and generate economic activity.

The mainstream media – newspapers, magazines, books, recordings, live performances, radio, film, and broadcast television – all began in post-revolutionary China in organizations controlled by the state. State control was axiomatic, and the Party created – and later, vetted – all content.

But when new media began emerging to challenge the state’s media monopoly – starting with cable and satellite, but soon moving on to the Web, games, blogs, and social media – the state made it clear that it saw these as subject to its monopoly, whether by licensing or by direct control. It seems unlikely, therefore, that microfilms will escape official notice and regulation.

The Coming Reckoning

So how will this roll out for microfilms? There are two likely outcomes. On the one hand, if the organs of the State Council and the Party Publicity Committee approach them as an undifferentiated part of the mass of videos finding their way online in China, microfilms will ride along with whatever the future is for online video as a whole.

But if those government and party offices for whatever reason decide to see microfilms as a separate development – especially if they become a real, vibrant threat to the growth of China’s mainline film industry, or if they become an outlet for political angst – then microfilms will be treated as a new medium, and they will face turbulent times.

In China, the government tends to go through four stages in the journey to legitimizing a new medium. This is not a formal process as much as it is a modus operandi, but it has been remarkably consistent over the past two decades.

Ignorance – First, the government will decline to pay official attention the microfilm phenomenon. It will, instead, take a stance where it officially ignores the media, all while watching it out of the corner of the eye. This tacit approval allows the government to wait, watch, and bide its time before stepping in.

Reaction – Finally, when somebody makes and distributes a microfilm that crosses an invisible political line and causes an uproar, the government will be left with no choice but to step in and take action. The move will be to slam on the brakes, possibly making the production and/or distribution of such films illegal, and ordering sites like Youku and Tudou to cease production and distribution.

Experimentation – When the government acknowledges the benefits of microfilms (assuming that it sees them,) it will begin a gradual process of experimentation. That might developing a licensing regime and framework that will ensure the films support – or, at least, do not operate in direct opposition to – the state. Alternately, the government could mandate that all microfilms are only distributed through government-approved sites. In the worst case, it would restrict the production of all such films to state-owned entities. Either way, the process will forge a sustainable framework under which microfilms can be made in China.

Accommodation – Once the framework is in place, the government enters a phase of fine-tuning that system, opening it up to more participants, or to less, or under different conditions.

Softening the Blow

It is important to remember that at any of these stages, there is room to influence the process, to soften the government’s approach. The degree to which this is successful depends on the unity of the participants in the process, and the level of self-regulation (read “self-censorship”) the parties are ready to engage in.

For many media – blogs, microblogs, and other user generated content – the process of reckoning with these developments saw the government turn to the platform owners to control the content. The platform owners, in turn, subjected users to rules that would see their content deleted and accounts closed if they posted political or prurient content. That allowed for a relatively easy solution.

If the distribution of microfilms remains limited to sites like Tudou and Youku, the government may not see a need for much further regulation – the authorities already have clear understandings in place with the online video sites, and keeping track of the few dozen microfilms each week is a simple matter.

But the prospect of getting a large group of producers and directors of these films to sign up to a means of self-regulation seems slim, and if distribution goes outside of those channels that the government can control – if peer-to-peer sharing kicks into high gear, for example, the regulation will have to happen at the source. And the government will have to make its controls draconian to enforce control on people making movies with phones, handhelds, and laptops.

Media will Serve

The Party’s broader policy direction of late does not seem to augur a greater opening to ideas and an independent media industry, even though the past twenty years have proven to China’s leaders that absolute control in an age of user generated media is practically impossible.

But when the government needs to use media – including its policies on its use – as a means to sustain social stability, regulators see it as their duty to ensure that media serves the needs of the state. As flexible as the medium may be – and microfilms are an exercise in flexibility of topic, format, creation, and distribution – the government has proven itself increasingly deft in crafting regulatory regimes that permit new media to operate on the Party’s terms.

At some point, microfilms will face a reaction. What filmmakers have to do is decide whether they want to avoid that reaction – or provoke it – as a pathway to a stable, legitimized future, or to another kind of future entirely.

Setting China’s Innovation Bar

Hutong West
Disrupting my reading
1953 hrs. 

Now that I am spending more time in Silicon Valley and its satellite outposts of innovation in the US, the question posed to me over more meals and espressos is “do you think China will ever become innovative?”

After a lot of time to think about that question on planes an in hotel rooms, the best answer I have to that is another question.

“How do you define innovation?”

One expert with whom I shared a panel about a year ago said that innovation is like pornography: “I can’t define it, but I know it when I see it.”

That’s witty, pithy, and, I have found, gets your audience on-side. Which is nice when your audience is a client writing big checks for your advice. Unfortunately, it is also wrong.

A Relevant Definition

You can define innovation if you think about it. Franz Johansson has thought a lot about it, and the way he defines it as something that is both novel (new, never seen before) and useful.

That’s actually a pretty good starting point, but global experience proves something may be novel, useful, but not particularly relevant. The XboX Kinnect is novel and useful, but not particularly relevant if you live in China, where video game consoles are essentially banned. The Founder Group was built largely on an innovation laser typesetting of Chinese characters, a remarkable breakthrough in China but largely irrelevant to three-quarters of the planet. A review of the history of the Xerox Palo Alto Research Center (PARC) offers a list of innovations that never found the proper context that made them commercial, meaningful, and worthwhile.

A good working definition of an innovation, then, is something that is novel, useful, and relevant to a given audience.

What is more, innovation need not be in product: breakthrough innovations in process can be incredibly disruptive: think Fred Smith’s breakthrough with overnight freight processing that created FedEx, or, classically, Henry Ford’s moving assembly line.

Through a Filter, Darkly

We tend to view innovation in China through the lenses of two fallacies. The first lens is based on our view of China, and the second on our view of innovation.

Our view of China suggests that because China does not have a consistent record of innovation in recent years, and because many Chinese companies and entities proclaim they are being innovative when (by our definition, anyway) they are not, that China does not innovate.

This could be disproved, except for the second fallacy, which is our view of innovation. We tend to look at innovation like John Nash in “A Beautiful Mind,” seeing only landmark breakthroughs and totally original ideas as true innovation. This is a natural prejudice: our lifetimes have witnessed so many breakthroughs that our personal standards are high.

But they are unrealistic. The advances that turned the technologies used for mainframe computers into the personal computer revolution were not breakthroughs, but they were profound innovations nonetheless.

When we reframe our standards and work with the definition of innovation above, we can view China’s current innovation – and its prospects – differently.

Innovation Happens – Even in China

China is not yet an economy that is driven by its own innovations, but by those of others. Nonetheless, there are indicators that innovation is taking place in Chinese enteprises. Huawei’s investments in R&D following the telecom bust in 2002 have been yielding industry-leading innovation for three years in its networks business. BYD is using old battery technology in an innovative way. And Yuneec is on the verge of doing for general aviation aircraft what Tesla has done for the family sedan.

All of which goest back to my clients’ question. If Chinese enterprises are disrupting the mobile communications, automotive, and aviation industries, what industry is next? The best way to answer that is to watch for the little innovations, the process innovations, the incremental breakthroughs that turn out advances that are novel, useful, and relevant. Find those, and you will find the next point of disruption.

Five Predictions: China’s Business Environment in 2014

Hutong West
Sunday Afternoon Countdown to Morning in Beijing
1526 hrs. 

Much ink and focus has been given of late to understanding China’s political evolution. Too little, on the other hand, has been given to what it will all mean to those of us who must decide what role China will play in our business plans in the next two to three years.

Futurism is alchemy in the best of circumstances, and nowhere more so than in the case of China. Nonetheless, if we extrapolate from current events, it appears that China has embarked on a course of commercial nationalism, if not outright mercantilism.

In the spirit of the season, then, we offer our five predictions for 2014:

1. China will build a more protected environment at home for its state-owned, state-coopted, and “accidental champion” enterprises through an increase in the use of soft protectionism.

2. Those enterprises will thrive at home, but increasingly will be pushed abroad, seeking prestige, less competition, and faster growth.

3. Trade and industrial policy will test the absolute limits of what China can get away with under the WTO, and Beijing will conduct a propaganda campaign to try and undermine the Trans-Pacific Partnership.

4. Foreign brands will find it more difficult to gain share in China. In addition to soft protectionism, they will face the continued relative decline in the prestige of foreign goods/brands in a growing number of sectors.

5. In 2014 we will see the beginnings of a new crop of Chinese entrepreneurs, more of whom will be starting their companies from second, third, and fourth tier cities, or even overseas. The cost and complexity of doing business in China’s first tier cities – along with the declining quality of life – will shift focus away from Beijing and Shanghai.

I’ll be addressing these more in the coming year.

The Challenge of the State-Co-opted Enterprise

Hutong West
Santa Ana Fever
1124 hrs.

When we talk about broad categories of Chinese enterprises, we focus on ownership: state-owned enterprises, or those companies owned and guided by the government; private enterprises, or those companies owned by other companies or by individuals; and foreign enterprises, those companies legally or functionally owned by non-Chinese corporations or individuals.

You don’t need to work with this taxonomy for long to discover that it is inadequate. Hybrids abound, and there are a growing number of firms that do not fit neatly into these distinctions.

One type that we must address, even if it seems chimerical, is the “state-co-opted enterprise.” This is a private company, one not owned by the state, that has not only submitted itself to the modicum of government oversight mandated by law and policy, but also by intent or action has made itself an extension of state policy. Most often, this is done in order to secure a right to operate in a particularly sensitive sector.

The reason this phenomenon needs to be examined is that there is an implicit belief outside of China that many Chinese companies, while ostensibly not state-owned, are in fact controlled by the Party or some arm of the Chinese government. This is especially the case for large Chinese companies with a growing international presence and opaque ownership structures.

Huawei’s singular employee-ownership structure, for example, vexed US Congressional investigators. The ownership of Qingdao-based white-goods maker Haier remains obscure at best. Lenovo protests that it is “100% market oriented,” but the Chinese Academy of Sciences retains 36% ownership of the enterprise. And Tsingtao Brewery Group, the majority owner of Qingdao’s Tsingtao Brewery, has an ownership structure that remains unclear. These arrangements, unconventional and strange to western observers, seem tailor-made to hide the hand of government or military behind these enterprises.

But ownership is not the sole source of concern. There seems little question that China’s internet giants – Baidu, Youku/Tudou, Alibaba, Tencent, and Sina – are not state-owned by any measure. But their leadership in an industry where foreign participation is limited by government policy gives them the status of what Piper Jaffray analyst Gene Munster called “a state-sponsored monopoly.” Such a status could be seen as leaving these companies inordinately beholden to the government if the Party were ever to call in its chits. Worse, as we enter an era where cyberwarfare is becoming a core mode of international conflict, the capabilities encompassed by China’s internet giants offer the Party and PLA motive and opportunity to co-opt these companies.

None of this is to say that these companies dance to the government’s every pull on the string. But for each of these firms it is going to require more than bold assertions of independence under questioning to convince the world that they are not somehow in the thrall of the Party, particularly if Xi Jinping stokes commercial nationalism.

Those of us who work with, represent, or do business with China’s emerging non-state enterprises either need to be demonstrate their independence from the outset, or we need to address the relationship between these firms and the government proactively, so they are not “discovered” by accident.

Is Apple Going (China) Mobile?

Hutong West
Two hours sleep, three cups coffee
1039 hrs. 

 

China Mobile

China Mobile (Photo credit: Wikipedia)

The Wall Street Journal has lit up the net with an article proclaiming that the ink is drying on a deal between Apple and China Mobile for the carrier to (finally) (officially) offer iPhones on its network. Nothing has been confirmed by either Apple or China Mobile, but that has not stopped the speculation.

My take on the deal has not changed from when I wrote this piece in September: the value of this deal is far from clear. As such, it might be time to add a few more points to the debate to provide some perspective:

1. There have been 89 million iPhone 5 handsets sold thus far.

2. There are already 42 million iPhones using the China Mobile network. These are people with iPhones and a China Mobile account.

3. Optimistic analysts expect another 20 million iPhones will be sold next year in the event of an China Mobile deal, around 1.5 million phones a month.

4. Said analysis suggests that just under 3% of China Mobile’s subscribers will buy iPhones in the first year, and presumably a percentage of those will be replacements, given that your average Chinese smartphone user replaces his/her device every 15-18 months.

5. If Apple did sell an additional 20 million iPhones in the first year of its business with China Mobile, at, say, $400 revenue per unit, that would be $8 billion. A very nice chunk of change, and it would deliver a respectable jump in iPhone sales worldwide.

6. Putting that in perspective, Apple’s revenues for the 52 weeks prior the end of last quarter were over $170 billion. Therefore, even a very successful debut with China Mobile would give Apple a 5% revenue bump.

None of this is to say that this will be a bad deal for Apple. Even if Apple sold only an additional 10 million units, selling 10 million units of anything in the mobile business counts as a win, even for Apple. At the same time, it is important to keep in perspective exactly what a China Mobile deal would mean – and, more important, what it would not mean – for the company.

Will Chinese Pay for Content?

Hutong Forward
An undisclosed location
in the American Midwest

1649 hrs. local

Happy shoppers

Happy shoppers (Photo credit: Phillie Casablanca)

A contentious debate about China in the media industry is whether or not Chinese will pay for content. Most intelligent observers would answer no: Early experiments selling music were not encouraging, and with search engine Baidu offering links to free downloads, and later a legitimate streaming service, China’s mostly-young internet users could be forgiven for thinking “what’s the point of paying?”

Indeed, piracy of music has been so rampant that many thoughtful commentators, including Eric Priest at the University of Oregon, have championed the use of “alternative compensation systems” that presume that nobody will pay for the content itself. Like, ever.

At the China 2.0 conference at Stanford last month, there was gloom in the room when the people funding content plays took the stage. Annabelle Yu Long, the CEO of Bertelsmann’s China Corporate Center and managing director of the music giant’s Asian investment arm, noted that China, with a quarter of the planet’s ears, represented only 2% of Bertelsmann’s business, and this after decades of effort. The rest of the money people on the stage – Jenny Lee of GGV Capital, Raymond Yang of WestSummit Capital, and David Chao of DCM – Chinese all, agreed with the simple proposition that the Chinese do not pay for content, ergo they would not ever pay for it. As it is, so shall it ever be.

Getting Beyond ASCAP’s Messages

But as the discussion at China 2.0 progressed, and the panelists exhausted their messages and began to share experiences, a more nuanced truth came out. After talking about music, ebooks, and even movies, one of the panelists summed up by saying that as Chinese users become more prosperous and as quality and convenience become more important, they are  proving themselves willing to pay for music, movies, and even ebooks.

Two days later and an hour away at the annual conference of the Hua Yuan Science and Technology Association (HYSTA), the discussion was more optimistic. Oliver Lu of AppAnnie showed a chart that compared app downloads in China over the past several years to app revenues. Interestingly, over the past three quarters, the rate of growth of revenues has passed – and nearly doubled – the rate of growth in downloads. Chinese are starting to pay for apps. The numbers are not huge – your average Chinese spends 1/12 of the average Japanese user on apps – but the trend is clearly pointing in a positive direction.

Play with Me, Pay for Me

The difference lies in a generational shift – as well as a cultural shift – in consumption and a presumption of value. My generation thinks of content in terms of music, video, movies, and books. China’s post-80s and post-90s generations, on the other hand, grew up eschewing those formats because those were the most tightly controlled and least interesting.

Instead, they grew up playing games, and that cohort is only just reaching the age where they can afford to pay good money for their interactive diversions. Over half – 53% – of the revenue of Tencent, China’s huge portal and social media player, comes from games, which are now a $6.3 billion business in China, more than search advertising and display advertising combined. Ten of the top ten downloaded mobile apps in China are games.

A Future that Pays

That’s great for game developers, you’ll think. But what about everyone else in the content business. But that is exactly a the point. Once you get Chinese used to paying for one form of content (games), the door can then open for them to start paying for other forms. Develop the habit, create a value around legal versus pirated downloads, and you are on your way.

Call me a pollyanna, but it genuinely seems too early for the content makers to write China off. Use models like Eric Priest’s in the meantime if you have to, but lay the long term groundwork so that when your audience has more money than time, you are ready to capitalize on a very different kind of Chinese content consumer.

Six Principles of Entrepreneurial IPR Protection in China

Hutong Forward
Somewhere in San Francisco
0930 hrs. 

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

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

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

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

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

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

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

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

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

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

Whom Can You Trust with your Social Media in China?

Hutong Forward
Counting the helicopters outside my window
1629 hrs. local

Note: Over the summer I taped a segment for Thoughtful China where I talked briefly about what agencies to use for social media. The response has been huge, so I wanted to expand on my point here, especially as so many people are in the later stages of planning their China marketing efforts to begin after Chinese New Year.

Yunnan 2009-02-04 08-10

Internet cafe in Yunnan (Photo credit: sweart)

Most companies in China have yet to realize out that making the best use of social media demands more than a twenty-something customer service person posting links to content on the corporate website. This is understandable: social media is a relatively recent phenomenon (compared to, say, print media, or even the web), and the art of using social media for business is evolving with blinding speed. That means that today’s smart social media strategy is obsolete tomorrow.

This has provoked the companies who want to stay ahead of the game to turn to outside agencies. Unfortunately, the solution is more confusing than the problem. Jockeying for relevance and revenues, nearly every kind of agency in the marketing business is cooking up products and services to help companies handle their Chinese social media programs. Social media absorbs so much of the Chinese public’s time and attention that agencies feel they either must create a social media offering or consign themselves to the junk pile of history. The one-upsmanship between agencies is earnest, and sometimes desperate.

Elephants and blind men, meet social media and agencies

That would be fine if the solutions proffered were similar. They’re not, because each type of agency sees social media through its own prism, and approaches the medium accordingly. Advertisers approach social media as another form of advertising, or as an appendage of offline campaigns. PR people approach it as a fast channel to reporters or as a way to bypass journalists altogether. Digital agencies approach social media as a way to drive hits to digital content lodged elsewhere. And social media specialists want us to believe that social media is so different that it demands a special mojo, and it should be left to them as experts.

Ultimately, the agency a company ends up choosing for social media management is usually a function of how the firm has organized its internal marketing function. If there is a social media team, the agency is likely to be a specialist social media house (after all, if you are a specialist in social media, how would it look if you hired an ad agency?) If, on the other hand, advertising covers social, the ad agency will get the nod. And so on.

(I won’t bother to talk about companies who hire agencies to scoop up masses of zombie followers or who astroturf social sites with fake laudatory posts: any firm engaging in that kind of behaviour is going to get its just desserts in the form of bad publicity and ultimately negative ROI).

Social Done Better

This approach is understandable, but it is bass-ackward. What social media does that is unique is provide a space where people, not brands, dominate the channel. It is a space that is not just about promulgating a message, but about listening, responding, and demonstrating that a brand can be a person, too.

The real ROI from social, therefor, comes from the conversations people have about a company and its products with minimal encouragement on the company’s part. In short, the he trick to winning in social media is to get other people talking about you and delivering your messages far more than you do about yourself in all other media, and the more influential those people are on the behaviour of others, the better.

For that reason, the agency that should be handling your social media in China should be:

  • A firm that is used to cultivating influencers over time
  • A firm that understands how to develop, deliver, sustain, and support powerful messages; and
  • A firm that knows how to monitor opinion, respond rapidly and appropriately in the face of a crisis or opportunity, whether that is a product problem or a corporate scandal.

To me, that’s not an agency full of creatives, of people who write apps, or of social media “experts.” It is, on the other hand, an agency filled with smart communicators. Find one of those, and you have found the agency to help you in China’s lava-fluid social media milieu.

Qualcomm: Cometh the Reaper?

Hutong Forward
Learning not to eat fish 400 miles from the ocean
1840 hrs. local time

LinuxTag 2011 - Qualcomm

LinuxTag 2011 – Qualcomm (Photo credit: LinuxTag)

Two days ago, QUALCOMM (QCOM) announced that its chipset business was the subject of an investigation by China’s powerful National Development and Reform Commission. Details are sketchy, as the company has been instructed to keep the details to itself. It appears, however, that the issue is whether QCOM’s chipset business, QUALCOMM CDMA Technologies, is an effective monopoly in China.

Yesterday I got a note from Edmond Lococo at Bloomberg, who was curious about the degree to which QCOM’s critical China business will take a hit as a result. (Full disclosure: QCOM was a client from 2000 to 2004, but I have had no direct interaction with the company for nine years.)

As I told Edmond, reports of QCOM’s monopoly are exaggerated, to say the least. Apple makes their own chips, as does Huawei, and MicroTek and local upstart Spreadtrum been supplying China’s smartphone market for years. To suggest that Qualcomm has anything approaching a monopoly defies the facts: one need only check the specs on the 10 most popular phones in China to ascertain as much.

Impact on QUALOMM

At this point, though, it is hard to say what impact this will have on QCOM’s sales in China, which represents some 49% of the company’s revenues. There have been no specific accusations made, and few handset manufacturers who are committed to the QCOM architecture are likely to change on the basis of an unspecified investigation, particularly for those devices well along in the development cycle.

Where this may impact QCOM will be in the case of companies who are not committed to the architecture for devices in development, but who are looking to make a decision on chipsets in the coming months. This means that the longer this goes on, or if there are accusations of a specific nature levied at QCOM, there may be a meaningful impact. In the meantime, however, I expect many manufacturers to take a “wait-and-see” attitude.

Why Qualcomm, and Why Now?

There could be any number of reasons behind this: it could be concern about Snowden’s allegations; retaliation for Huawei’s treatment in the US; a growing nationalist discomfort with the success some foreign companies have enjoyed in China; or, indeed, a specific issue with QCOM. But suggesting any or all of these reasons at this time is little more than speculation.

As this all plays out, I expect we will learn more, and that we will soon know whether this is aimed at a single company, or whether all foreign enterprises in China should be concerned.

In the meantime, the wise course for any company would be to assume that “the bell is tolling for thee,” and address the specter of a changing business climate head-on.

Bill Bishop on Apple: We Need More Mojo

Temporary Hutong, Wangjing
K-Pop O.D.
1307 hrs. 

Sinocism editor Bill Bishop wrote a thoughtful piece about Apple (“Apple Needs China Mobile Deal to Regain Smartphone Mojo”)  that ran in USAToday late last week. Reading between the lines, Bill’s motive for writing the article is to give context to the excitement that rumors of a China Mobile deal are stoking among Apple shareholders. Since even before the iPhone was officially introduced in China in late 2008, speculation has been rife about whether, when, and how China Mobile (CMMC), the nation’s largest carrier in number of subscribers, would offer the phone to its users.

Five years later, the speculation continues. Yet while Apple fans talk up the company’s stock with visions of a Yangtze-sized cataract of money that flow into Cupertino’s coffers, questions persist about exactly how big of a win it would be for the company.

Tim’s Empty Quiver

First, as Bishop points out, Apple lacks leverage with China Mobile. At this point, Tim Cook’s company needs CMMC more than the carrier needs Apple. The iPhone has a shrinking share of an increasingly competitive market, and the company has made no secret of the extent to which its profits depend on China. China Mobile would almost certainly have used those facts as leverage in negotiations.

Arguably, China Mobile does suffer for not having the iPhone in its display cases, but the company has managed to do quite well without Apple, especially as the selection of devices that run on its unique TD-SCDMA 3G network and its new TD-LTE fourth-generation network. For this reason, it is possible, if not likely, that Apple made commercial concessions to get China Mobile to offer the phone. China Mobile is unlikely to be prepared to subsidize sales of the phone, especially given its keen watch on cost management over the past years. Apple may not be able to expect the high returns it once enjoyed on the device, especially if China Mobile agrees to put a bunch of advertising dollars behind the introduction.

More Users, or Same Old Users?

Second, and more important, we do not know the extent to which China Unicom and China Telecom have slurped up everyone in China who wanted an iPhone. Because a phone number change is mandatory when upgrading to a smartphone, many people took the leap with China Unicom, whose once anemic network has improved radically in recent years. As such, most of those who really wanted an iPhone may well have gone ahead and jumped to China Unicom or China Telecom.

Granted, China Mobile does have 130 million 3G users who don’t have an iPhone, and you can bet if China Mobile cuts a deal with Apple both companies will put big marketing dollars behind the device. But most of those users were added to CMMC’s 3G rolls after China Unicom introduced the iPhone, so you have to wonder whether those users are really going to care.

Finally, while a deal with China Mobile is a necessary step for the iPhone to regain its market share and “mojo” in China, it is not likely to be sufficient. As even Bishop admits, the iPhone is not “cool” anymore. Making it available to a whole lot more people is not going to help the cool factor much, and is likely to sandblast off whatever remains of the iPhone’s snob appeal. It will become, in the words of a good friend of mine, like “wallpaper:” ubiquitous and unremarkable. And that, for Apple investors, means that the premium will be eroded.

More than just Distribution

Facing a steroidal Samsung, plucky HTC, and local favorites Xiaomi, Huawei, ZTE, and Lenovo, all running some form of the increasingly impressive Android operating system, the iPhone needs more than a larger addressable market: it needs to get sexy again.

That’s a tall order. Chinese mobile users swarm to and discard phone manufacturers periodically, never to return in the same masses again. This happened to Ericsson and Nokia in China. Within three years of getting dumped by Chinese users, Ericsson was groping for a partner to save its bacon in the devices business. Nokia lost its luster three years ago, and today its mobile phone business on its way to becoming part of Microsoft.

I’m not ready to suggest that Apple is entering a similar tailspin. But what it does over the next six months will determine whether it regains its seat at the head of China’s mobile phone table, or whether it gets shoved further and further down the ranks in a very robust market.

Big Pharma, Bad Medicine, and What GSK Can Teach MNCs in China

Hutong West
Watching Louis Malle films
0813 hrs

I’m a little late to the bar with my take on this, but here it is, in three parts. Experienced China hands – go straight to the third section below.

When I first joined a global PR firm in China in 2000, I spent one day in my first week reviewing potential clients with my new boss. While my beat at the time was technology companies, I suggested we also look at pursuing some healthcare clients, maybe the big pharmaceutical companies. Surely, I thought, growing prosperity would send the demand for medicines skyrocketing, but local challengers would bring increasingly heated competition. A high-profit industry vulnerable to local competition sounded like the ideal client for us.

My boss gave a derisive snort and told me to forget big pharma. Seeing my confusion and taking pity upon the ignorant, she softened, and then gave me an eye-opening education in the ways of the pharmaceutical business in China. I won’t recount the details, but the gist was that pharmaceutical firms didn’t need public relations, because, allegedly, they marketed their wares in a rather more straightforward manner: they simply spiffed hospitals and physicians for prescribing the drugs.

Why spend money on PR, the thinking went, if what you needed was sacks of cash? I promptly forgot about Big Pharma in China until two weeks ago. Now it is clear that the plight of GSK and its cohorts is something none of us should forget.

The China operation of GSK stands accused of price fixing, of bribing doctors and hospitals by funneling those funds through travel agencies, hiding the bribes as travel costs and thus engaging in fraudulent financial accounting, and of conducting an internal investigation that failed to turn up any of these actions – actions the company now acknowledges were perpetrated by at least some employees.

This is an ugly litany, but it is not a new one. For over a decade it has been something of an open secret that some major pharmaceutical firms have been pursuing some variant of the pay-for-prescribe model. Doubtless, over the years many of those companies were counseled to cease such practices by employees and advisers. (There is some speculation as to why GSK was singled out as the monkey that would kill the chicken, but I’ll leave that to others.)

But one wonders whether, under the circumstances, GSK had a choice. It is a China business truism is that once a company has been through the market entry obstacle course and has begun generating (often spectacular) profits here, the pressure to sustain and grow that flow of cash is enormous. News about a company’s business in China moves the share price, and the prospects for business in the PRC is a key topic at a growing number of quarterly earnings calls. And the question is never “how” a company is doing business in China, but “how much.”

Capital, like justice, is willfully blind.

In a market where doctors make a pittance, where hospitals are overwhelmed yet constrained from charging reasonable rates for  care, the medical profession aches for streams of revenue that will keep the wheels on, if not line the otherwise threadbare pockets of underpaid physicians and administrators. Pharmaceutical companies foreign and domestic offer a ready source of cash, inciting a practice so pervasive that any drug firm unwilling to pony-up is simply not in the game. Add those pressures together, and a company could find itself fairly pushed down a slippery slope.

Having invested heavily for years in people and facilities and immersed in an industry where “everyone does it” and apparently gets away with it, it is easy to see why a company like GSK might be tempted – nay, compelled – to engage in behavior considered unethical or illegal elsewhere. At that point, the only alternative was to pack up and leave. This, it seems, was never an option.

And that is precisely the point.

GSK and several other multinational pharmaceutical firms look set to undergo a public revelation of the ugliest parts of their China businesses. That these revelations will damage the companies prospects in the world’s largest market is a given. All that remains to be seen is how far the Chinese government is prepared to go in sanctioning these companies for their past behavior.

Those events will take their own course. What must concern us now is a more urgent question: what other industries in China hide similar practices?

Already in the past week the Chinese government has taken to task the handful of international firms supplying infant formula to the Chinese market. The charge: price-fixing. Never mind that local companies in the same industry, by taking production shortcuts, have earned a reputation for sickening and killing children with their product, and that parents able to afford it in desperation have taken to buying imported formula often smuggled from abroad.

In so doing the government has sent a powerful message not once, but twice: no industry or company, however vital to the well-being of the Chinese people, will be allowed to engage in illegal and unethical business practices, and the foreign firms will be punished first and with greatest vigor.

In so doing, the government accomplishes three aims: it slows or stops practices likely to enrage the populace; it sends an unequivocal warning to its own local industry; and it cripples or eliminates foreign competition for its own local firms.

To every other multinational company in every other industry in China, ask not for whom the bell tolls. Xi Jinping’s administration has put the world on notice that no matter what local firms do, unethical and illegal business practices on the part of multinationals in China will no longer be tolerated, and in fact they’re coming for the foreigners first.

It is time for an immediate and thorough self-examination for the kinds of business practices that will not withstand government or public scrutiny. The time to clean up is right now, even if it cost contracts, relationships, and hard-won business. Failure to do so only puts off the reckoning and ensures that the cost will be much higher when that reckoning comes.

And there is one more lesson for the leaders and directors of any company that does or would do business in China, perhaps the most important of all.

A company entering the China market may well decide how much it is willing to spend in time, resources, and capital to attempt success there. No board worth its name would underwrite a leap into the PRC with a blank check: at some point, the cost is higher than it is worth. There would be no shame in such a decision, if for no other reason than the list of companies who have given up on China after finding no long-term payoff is long and distinguished.

But it is rare to find a company that has set an explicit limit on how far it is willing to go ethically to succeed in China, to say “here are the things we will absolutely not do in order to win in this market,” and gain board and shareholder support for that initiative. The readiness to define how much a company is willing to invest in the pursuit of success in China, but the failure to define how far it is willing to go to do so is what ensnares good companies like GSK in a web of worst practices.

And that is the lesson for all of us: if we do not draw a line in the ethical sand, stating in advance that our success in China will not be won at the cost of our ethical bottom line, we are effectively licensing the people building and operating our offices and operations in the PRC to do anything in the pursuit of financial gain.

Whatever your ethics, the Chinese government is now making clear the practical costs of pursuing such a path. If there is a future for foreign enterprise in the PRC, it belongs to companies who are prepared to live and die by a better standard of behavior, not to those who follow the lead of the meanest actors in the market.