Dr. Lionel Vairon talks to Jonathan Landreth about why he believes that it is not in China’s nature to constitute a threat to the outside world http://ow.ly/nEHRm
“Brazil leads in BRICS’s brands”
Added Value – Source
March 17, 2013
In a thought-provoking article in AddedValue’s Source blog, Jerry Clode notes that Brazil’s brands are going global while China and India’s brands seem mired at home. Clode probes why, and believes he has found the answer: Brazil’s brands do well because they have creative Brazilian people who are confident enough in their culture to it in a way that is meaningful to people overseas. And, by implication, China does not.
Looking at the two Asian BRICs, China and India, we see increasingly discerning and globally literate middle class consumers who are placing increasing expectations on local brands. But a lack of concomitant confidence to tell local brand stories that move beyond quixotic foreign stereotypes seems largely absent.
The answer to creating Chinese brands, he suggests, is simple: Chinese companies just need to be more confident and down-to-earth when presenting narratives to global customers.
It’s an interesting argument, but I am not sure it would do the trick. National provenence carries different baggage for Chinese and Brazilian brands. Chinese companies must operate against the unappealing background of China’s messy national emergence. China’s assertive geopolitics, cultural differences, and a reputation for producing poisonous foods and questionable quality in toxic sweatshops have left a deeper impression on the world’s consumers than panda bears, kung fu, and calligraphy.
This is a problem that extends far beyond the ken of marketers to solve. The status quo is our canvas, and the aura of Chinese-ness is and will be for the foreseeable future more a curse than a blessing for all but the most extraordinary of Chinese brands.
At a more immediate level, uncertainty around company ownership in the PRC means that Chinese brands are assumed to have some affiliation with the Chinese government and, by extension, its activities. Meanwhile Brazil carries much more positive images for global consumers, it’s government is not perceived as threatening, and it can capitalize on the common European cultural origins of its primary audience.
For the time being, marketers for China, Inc. must address this with the grand strategy followed by Japan’s most successful brands: deodorize. Back when Japanese brands began their global breakout, they did their research and discovered that their “Japanese-ness” was a liability, and behaved accordingly. Nissan used the “Datsun” marque in the US from 1960 to 1980 to avoid being associated with the brand name used on trucks the company made for the Japanese army in World War II. Matsushita picked out the name “Panasonic” for similar reasons.
Most Japanese brands did not go so far as to change their names, but their Japanese origins and essence were played down in all aspects of marketing and sales. Origin was incidental, neither positive nor negative. What was important was the product and the credibility of the company that stood behind it.
Until such time as China’s companies no longer struggle to free themselves of the constraints of the nation’s global image, they can rely only upon their own good work. For most, if not all, that will mean leaving Brand China behind in their quest for global markets.
- China and the BRICS: Unavoidable Hegemony? (thediplomat.com)
In the Hutong
What, cold again?
Though we may not be talking about it much, those of us who watch China for a living are looking forward with a mixture of dread and anticipation to the upcoming “two meetings,” the annual sessions of the National People’s Congress and the China People’s Political Consultative Committee. Even though the die of China’s future leadership was cast at the Party Congress in November, the coming NPC is the juncture where the reins of government are handed over to the new leadership, and the retiring members of the Hu Jintao/Wen Jiabao entourage graduate to the status of “elder statesmen.” For that reason, this is the point at which we will all be watching for some indication of how Xi Jinping and Li Keqiang will run the show a little differently.
While some will be looking for signs of political reform, my eyes will be cast elsewhere, namely to trade. What I want to find out is whether and how the new administration plans to play by the rules it signed up for when it acceeded to the WTO eleven years ago. Or, indeed, how it intends not to do so.
Since at least the early days of the Hu Jintao administration it was clear that the so-called Fourth Generation of leaders was somewhat less enthusiastic about playing the globalization game, and much more interested in just keeping a lid on the place. Stability was the name of the game, and the spirit of we-can-take-whatever-free-trade-can-dish-out that exuded from Zhu Rongji like a heavy cologne was blown out the window when Zhu left the building in 2003. In its place came a series of policies that I term collectively “Soft Protectionism (软保护主义),” a series of measures and behaviors that allow China to circumvent the intent of the global free trade regime almost at will.
Soft Protectionism, as I see it, consists of several pieces.
National Standards. We see this most blatantly when it comes to technology. The government establishes a standard based on a technology that is locally developed, and by so doing secures all or at least part of the market for Chinese output. The TD-SCDMA standard for third-generation mobile phones is a great example, as is the WAPI wireless LAN standard that was supposed to supplant Wi-Fi. China has learned that this policy is best conducted when it is done within the parameters of global standards-making bodies like the International Telecommunications Union (ITU) and the Institute for Electrical and Electronic Engineers (IEEE.) Through organizational activism, horse-trading, and the occasional theatrical tantrum, China is able to gain acceptance for standards that are, in some cases, little more than laboratory experiments. Using this global legitimacy, the standards ploy becomes legitimate. And lest you accuse me of being biased, let me make clear that we Americans all but invented this game, and we perfected it with our bull-headed nationalist behavior when it came to standards for digital televisions and the first digital phones. China is simply turning the tables.
Creative Use of Non-Tariff Barriers. Despite the openness promulgated by the WTO, there are still back doors that will allow governments to selectively protect industries. The first and favorite of these is the so-called National Security Exemption from the World Trade Agreements. The key phrase is “Nothing in this Agreement shall be construed . . . (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests”
That exemption gives wide latitude to any government willing to interpret it liberally, and China can and does do so, especially when it comes to information products and software. Other countries use this exemption to ensure that they have access to weapons production in the event of international isolation. The U.S. uses it, for example, to ensure its ships, tanks, and warplanes are all made by factories on US soil, but it does not use it to stop the import of foreign merchant hulls, diesel trucks, or civil aircraft. China, according to Nathaniel Ahrens at the Center for Strategic and International Studies, is comfortable crossing that line.
China also manages to restrict the free trade in publications, television, film, and music by stretching the WTO’s Cultural exemption (introduced by France in 1993) beyond the breaking point. Under the guise of protecting its vulnerable culture, China requires specific approval for any publication, recording, video, or film coming into the country. Keep in mind that we are talking about the culture that for nearly two thousand years has managed to assimilate every culture and nation that tried to subjugate it. Nonetheless, the exemption is used at every juncture.
Passive resistance to WTO Rulings. Rather than submit to WTO rulings it does not like, China conducts a passive-aggressive policy of resistance, even at the risk of undermining the institution. Dan Harris of China Law Blog fame put it like this:
“China still intends to remain within the WTO so as to be able to obtain certain trade benefits. Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter. China is proud of how it has used “procedural games” to avoid its responsibilities to respond to adverse WTO decisions and it openly states that it will continue to use this approach in these “national interest” cases. In fact, the term “procedural game” has become a standard feature of the China’s trade policy vocabulary.”
Government Catch-up initiatives. These are the micro-level great leaps that the government attempts to engineer over time in order to substitute domestically-made products and technology for locally-made equivalents. The past thirty years has seen China-government sponsored initiatives succeed in “catching up” in several industries, including shipbuilding, digital telephone switches, heavy trucks, wind-power generators, and solar power, and it is attempting to do so in automobiles, commmercial aircraft, microprocessors, and encryption software. The end result is the same: serviceable and appropriate products from overseas are gradually pushed out by government programs designed to deny them access to the market.
Government encouraged SOE support. This comes in many forms, but the most prevalent is outright cash payments. By offering low-interest or permanently rolled-over loans for state owned enterprises through state-managed policy banks at either the national or local level, China creates effective trade subsidies that are not counted according to international standards. A senior Obama administration official confided in me on the sidelines of the Strategic Economic Dialogue in Beijing last year that China’s export loans dwarfed even the U.S.’s generous programs through the Export Import Bank.
There is not much that the US, the EU, or any grouping of governments can do about any of this, short of an all-out trade war, if China chooses to continue with these policies. What this means is that even as a full-fleged WTO member, China is still capable of providing a protected environment for its firms, and has proven willing to do so.
Such policies will help companies beat foreign interlopers at home, but at what cost? At some point China will confront the other edge of that sword, whether in the form of having its behavior mirrored by other countries with tit-for-tat trade measures within the scope of the WTO; or by discovering that the companies it protected at home were weak and unprepared when venturing abroad.
For Xi Jinping, the choice in the coming months is whether to continue to use Soft Protectionism as the nation’s de-facto trade policy, or whether he will instead switch off the pumps and force Chinese companies to build the resilience necessary to beat global competition away from home. For the companies themselves, as Sunzi said, “Enemies strengthen. Allies weaken.” The wise Chinese company will seek to step out from under Beijing’s umbrella as early as possible to learn to compete on a globalized playing field, rather than a nationalized one.
- Business › WTO praises Japan for avoiding protectionism (japantoday.com)
- We must revitalize WTO – Kyerematen (ghanabusinessnews.com)
- Guest post: Forget currency wars, we are in the middle of a trade war (blogs.ft.com)
- Japan faces calls for bold reforms in WTO policy review (japantimes.co.jp)
In the Hutong
On Valentine’s Day, the always excellent Jing Daily published an article (“Ultra-Luxury Auto Sales In China Surprisingly Robust, But Are They Sustainable?“) that calls into question whether those stunning new Lotus, Maserati, Bentley, and Ferrari dealerships that are sprouting up around China are in for some hard times. Economic uncertainty and the potential that Xi Jinping‘s administration might discourage conspicuous consumption apparently has many buyers holding off on purchases. The spectacular Beijing accident a year ago that claimed the son of a powerful Party official and one of his passengers has made ultra-luxury cars an unintentional symbol of cosseted elites and official malfeasance. Markers of success are becoming stigmata of excess.
But the Chinese party is not over for the luxury car-makers, although a change in strategy may be in the offing. It may be time for the Ferraris and Bugattis of the world to learn from the purveyors of less expensive luxury goods, because the real market may not be in China: there is a fair chance that the majority of Chinese who will be buying ultra-luxury cars in the future will be buying them overseas.
Naturally they won’t be doing so in order to ship the cars back to the PRC (with the exception of the occasional gray-market beast that cannot be found in China or Hong Kong). Instead, they will be buying their high-speed bling to park them in the garages and and driveways of the homes they are buying in North America, Europe, and Australia.
Adjusting to this shift will mean changes in the way these cars are sold outside of China. Dealerships will need Chinese speakers on the showroom floor and in the service bays. Sales literature and owners manuals will need to be available in Chinese as well as the local language. Manufacturers will need to create Chinese websites for markets where Chinese isn’t usually spoken. And that is just a starter list.
The really smart manufacturers will set up Chinese-language customer service hotlines and owners clubs that cater to Chinese speakers in North America and Europe at least. They will advertise online in Chinese and in the mass media of the Chinese diaspora. And if they’re really smart, they’ll offer those special models and features that are designed to cater to the tastes of the new global Chinese elite.
None of this is mandatory, of course. For some brands, the snob appeal is derived in part by the derision with which it treats even its best-heeled customers. But the wiser luxury car manufacturers will realize that the Chinese are coming to the world: best to reach out and meet them before they decamp to the competition – or decide to spend their money on something else.
- Tesla Motors plans first China dealership (wantchinatimes.com)
- New Cadillac XTS Sedan Launched in China (autoevolution.com)
- Daimler Rises on Report China Wealth Fund May Buy Stake – Bloomberg (bloomberg.com)
- German luxury cars – big for the next few years – Rupert Hoogewerf (chinaherald.net)
In the Hutong
Warming-up a little
The Chinese New Year holiday is a period where many of China’s well-heeled consumers travel abroad, so it was no surprise that CCTV ran a story on how many Chinese consumers use their trips not just for sightseeing and relaxation, but for buying luxury goods. The national broadcaster took China’s 80 million international travelers to task for spending $30 billion abroad last year buying luxury goods, and criticizing them for not spending that money at home.
Laurie Burkitt at The Wall Street Journal picked up the story, noting that Chinese duties raise the price of Rolex watches, Gucci shoes and Louis Vuitton purses between 30% and 50%. One can see why the government is concerned: that’s somewhere between $9 billion and $15 billion in lost import duties, plus the lost value of rents, income taxes for shop workers, etc. The brands are starting to realize where the bread is landing: Gucci is apparently halting all domestic Chinese expansion plans.
Luxury is an Experience, not a Purse
The media coverage of this transnational luxury buying spree implies that a hunt for bargains is all that sends these buyers abroad. Yet while price is doubtless an important motivator, there is more to it. What most analysts – and probably a few brands – are missing is the unarticulated value luxury consumers place on the experience, those intangible factors that makes buying the purse, the shoes, the watch, the dress so deeply satisfying.
One factor for Chinese in particular is mental comfort. It is not much fun consuming conspicuously in an environment that heaps growing opprobrium on bling buyers. Better to go somewhere where your purchase is at least taken in stride, if not celebrated. These days, that means buying in Hong Kong, Tokyo, Singapore, New York, Beverly Hills, London, Paris, or Milan – not Beijing or Shanghai.
But there are other factors that make up the luxury buying experience, factors captured in such post-buying questions as:
- Where did I buy this?
- What was the service like?
- Did the salespeople make me feel at home?
- Why was the experience special?
- What was different about buying there than in China?
- What was I able to get there that I couldn’t in China…or anywhere else?
Any and all of these factors have the potential add greater meaning to the purchase, make its acquisition more gratifying, and deepen the relationship with the brand. Equally important, they add to the “show-off” or “shai” value of the item. The new owner not only gets to show-off the bauble to her friends, she also gets an excuse to relate the trip, the circumstances, and the feelings she took from the purchase process itself, all to the admiration (or envy) of the people whose respect is important to her.
Some Brands Get It
On a vacation trip in 2008, my wife bought a limited-edition LeSportsac Tokidoki handbag designed by Simone Legno at the LeSportsac store on Waikiki. The store was a delight, the location superb, the service was so good that even my son and I felt good about coming into the store, and that is saying something. My wife had never heard of Tokidoki before, but the whole experience of buying the bag was such a delight that she came back the next day to buy one for her mom. To this day, five years later, she still talks about the bag, and has a deep affinity for LeSportsac.
Christine Lu of Affinity China is out ahead of the industry. She has begun leading luxury shopping tours of the U.S. for Chinese ladies that go beyond high-end store-hopping. Shops on Rodeo Drive, Park Avenue, and Waikiki are prepared in advance, provide engraved invitations, put on private fashion shows with Chinese narration, serve champagne and chocolates, and arrange to have purchases taken back to hotels while the ladies continue their day. As a bonus, Christine will bring along a Chinese celebrity or two, and tweet/blog/weibo aggressively, raising the profile of the trip and making mere attendance prestigious. The stores who work with her get it: the experience is every bit as important as the quality or design of the items that go in the bag. Expect these kinds of events to grow into a trend, traveling trunk shows where the groups come to the stores.
So all of this is interesting to be sure. Here is why it is important.
Today, it’s Price, but Tomorrow it Won’t Be
Understanding the non-price factors that drive Chinese to buy abroad is going to grow in importance. At some point the Chinese government will figure out that it needs to take steps to keep the luxury dollar at home beyond lame propaganda campaigns to shame buyers as unpatriotic. That will mean eliminating the price difference for buying at home. Either the government will have to start levying duties at airports and ports of entry (insanely hard to do and guaranteed to cause congestion at China’s overwhelmed airports and borders,) or they will need to eliminate duties altogether.
It is anyone’s guess on which course Beijing chooses, economic logic notwithstanding. When that happens, luxury brands will have their own choice to make: they can either play the zero-sum game, doing nothing and watching overseas purchases slowly leech back into China; or they can play the growth gambit, sustaining patronage overseas while building sales in China.
I’m betting the brands will want to do the latter, so I expect to see them taking steps to improve and even differentiate the buying experience for Chinese luxury consumers. At the very least, we will see more luxury stores with Chinese speakers and creating the kind of buying experiences that Affinity China is teaching them to offer.
I expect it will (or should) go beyond that. The brands will realize that simply offering a cookie-cutter experience in every store worldwide misses the point for their clientele. Each city, each store has to offer a different but equally compelling experience that reflects the brand in a unique way. This starts with store layout, but also speaks to decor, merchandise, and layout that reflects the location, and even offering items that are exclusive to that store. Let’s face it: even Disneyland has learned to differentiate its parks worldwide. Can luxury brands be far behind?
It is a truism (or should be one) that long after the price of an item is forgotten, the experience is remembered. Price will bring China’s increasingly sophisticated luxury customers in your door, but the experience will form the basis of a lasting relationship.
- Wealthy Chinese Shift Luxury Buying Overseas (cnbc.com)
- Chinese Luxury Spending Plummets At Home As It Skyrockets Abroad (businessinsider.com)
- Why Luxury Brands Are Celebrating China New Year (cnbc.com)
- Will China’s Ban on TV Ads for Luxury Goods Boost Web Ads For Baidu and Youku? (techinasia.com)
- Could Learning Mandarin Be the New Key to Succeeding in the Fashion Industry? (fashionista.com)
- Luxury brands slow down their expansion in China (wantchinatimes.com)
- Chinese luxury shoppers spend a fortune avoiding domestic market (wantchinatimes.com)
- China sits on fashion’s front row (edition.cnn.com)
- You: No let-up in lure of luxury lines (english.people.com.cn)
In the Hutong
Surrounded by snow
I am usually suspicious about “thought leadership” pieces on marketing that come out of the major management consultancies. These firms have proven strengths in organizational design, operations, production, logistics, and strategy, but when they venture into marketing they tend to stumble for a range of reasons that would fill a book.
I was doubly suspicious of the McKinsey Quarterly article “Building Brands in Emerging Markets” by Yuval Atsmon, Jean-Frederic Kuentz, and Jeongmin Seong because their approach lumps all emerging markets together. But while the article has its shortcomings, there are nuggets of critical insights in the paper for businesses operating in China.
China is Different…
The authors correctly note that Chinese consumers generally rely more on word-of-mouth to guide their purchasing decisions than do their counterparts in most other countries, especially the U.S. The in-store experience is also more important here. Chinese are more accustomed to changing their decisions at the point-of-purchase rather than leave a store if they can’t get what they came in to buy. Indeed, many consumer marketers find that point-of-sale is the second largest chunk of their budgets (next to advertising) because they will lose at retail what they won in advertising.
Finally, it is increasingly important in China to eschew a purely national approach to marketing and target consumers with a more local approach. China is a patchwork of local habits, climates, dialects, diets, and sub-cultures, and we are reaching the stage in the nation’s development where marketers can no longer afford to ignore that.
…But the Difference is Changing…
Aside from its geographic overreach (“emerging markets” are not all the same) and its broad-brush approach to consumer goods, I have two major quibbles with the article. First, the authors offer a snapshot of consumer behavior but ignore trends that might undermine their points; and second, apart from geography they treat all Chinese consumers as an undifferentiated mass.
First, where people get their advice is changing. While the authors state that only 53% of China’s consumers find online recommendations credible, they leave out the fact that well over half of China’s consumers don’t have access to the Internet. If you are a company (like, say, Coca-Cola) who needs to reach most or all of China’s 1.2 billion consumers, the Internet is about half as important as friends and family. Conversely if, like a growing number of companies, your target consumer is likely to be online – that is, if she is young, urban, educated, and has money to spend – the importance of the internet is sorely understated.
What is more, as credible online resources emerge, there is mounting evidence that the 560 million Chinese who can get online are giving outside sources greater credibility. As early as 2009, Sam Flemming’s CIC Data noted that over half of online consumers actively sought online feedback on a product prior to purchase, and that nearly 90% paid attention to online buzz on a product whether they sought it out or not. In that case, the Internet runs a close second to friends and family in the purchasing decision.
The importance of the retail shop in the purchase process is changing as well. I spoke with a senior marketing executive for a consumer electronics brand last week who told me that online sales – e-commerce – had suddenly become more important than in-store sales. A growing number of consumers was apparently hearing about the product from advertising, checking with family, checking online, going to the store to look and feel, and then going home and buying the product online. China’s online retail business has now passed an average of $40,000 per second and continues to grow. If the final point of sale is online, how does that change McKinsey’s equation? We don’t know: McKinsey ignores the internet.
…So let’s not Whitewash the Nuances
Finally, the authors ignore the importance of several demographic factors, most specifically age. Although it should be axiomatic, a growing body of research in China delves into how differently the increasingly prosperous older (55+) consumers behave than their under-30 counterparts. Friends and family are essential to the elderly, but for most purchasing decisions the youngsters are relying on peers and the Internet. Older consumers are more likely to purchase in a store, younger consumers are more likely than the grandparents to buy online.
Perhaps I’m being overly critical of the authors: these are, after all, nuances that would not fit into a 3,000 word article. But these oversights point to the problem with taking the management consulting approach to marketing. Grand strategies and broad generalizations may make for mind-tickling patter with clients, but as Ludwig Mies van der Rohe said, “God is in the details.” The day is long past when marketers can view Chinese consumers as an amorphous mass with uniform habits, and I would wager that applies in Brazil, India, and South Africa just as well.
- The emerging-world consumer is king (economist.com)
- Alipay issues report on Chinese consumer behavior (wantchinatimes.com)
- Why Apple Inc. (NASDAQ:AAPL) Is So Focused On China Sales (etfdailynews.com)
- Home-Grown Luxury Brands A Tough Sell In China (forbes.com)
The High-Speed Train “Harmony”
Enroute to Shanghai
The attention given to Foxconn over the past several years has largely concentrated on its role as Apple’s leading supplier in Asia. What we have missed in all of that juicy coverage, however, is the longer-term picture. While it is tempting to believe that Apple will always be strong, that it will always rely on offshore outsourcing for its production, and that Foxconn will be content to play Sancho Panza to its client brands, there are several factors that suggest otherwise. In fact, in as little as a decade from now, Foxconn may itself be a global brand.
Hon Hai Precision built its business as a supplier to the world’s computer and consumer electronics brands. Most of us still see the company a contract manufacturer, an assembler of devices and machines. Yet over the past seven years, the company has quietly added to its capabilities to the point where it is one step away from becoming a fully integrated brand-name electronics company.
Making Nice with Consumers
First, it added a name people outside of Asia could recognize as a brand – Foxconn. You could argue that the brand is tarnished, but the one thing it still has going for it is recognition. Think Oscar Wilde: the company has been talked about a lot, and despite the bad press (much of which has landed on Apple), the scale of the brand recognition alone – and the cost of building recognition for a new brand – might tempt the company to stick with it. If not, building a new brand would be a relatively modest investment for the $25 billion company.
Next, Foxconn began experimenting with selling to consumers with a line of branded high-performance computer components. Even though the target was small – gamers, pro-sumers and specialty computer builders – it gave the company a glimpse of what would be required in a wider consumer marketing program. As a part of this experiment, Foxconn then built the rudiments to of a customer support network, again, providing the company a gut-level understanding of what would be involved in supporting a global consumer effort.
Steel Goes In, Cars Come Out
Equally, if not more important, the company slowly built out a vertically-integrated manufacturing capability. The original thinking was to offer customers faster time-to-market while controlling for costs and capricious upstream suppliers – the latter a perpetual, frequently overlooked headache in China. The company began making its own cases, then its own electronic components. Next, it added product design and development and even the basics of a research capability. As of 2006, the company had over a dozen R&D centers worldwide, and 30,000 patents either granted or pending.
To control the variables in supply chain, it built in a logistics and supply chain management team that focused on keeping customer inventory costs low and prepared it to work with the largest retailers in the world, and built a channel sales organization to support the sale of its own branded components and as an extra spiff to smaller customers.
All told, Foxconn could probably start experimenting with selling its own branded consumer products in a matter of months once it made the decision to go ahead.
Gnawing on the Hand that Feeds
The perceptive reader will ask “why?” Why would Foxconn risk upsetting the Apple-cart, risking the custom of the very companies that put it where it is today? There are several answers to that question, none of which alone would be sufficient to make Foxconn take the leap. Taken together, however, they form a compelling case.
First is profit pressure. Foxconn is probably at the point in its development where it has squeezed as much as it can out of its costs, and costs are rising. Inputs aren’t getting cheaper, labor is getting more expensive, and the company faces a major investment in automation, not to mention the additional expenditures every time Apple or HP needs to offer something newer, cooler, and harder to make. Cost pressures on customers, even Apple, remain acute, so Foxconn is unlikely to see much relief from that front. The only way to turn the profit equation around is to start going around its weakest customers directly to retail.
Second, many of Foxconn’s customers – HP being a prime example – are facing headwinds of their own. The computer industry has matured, people aren’t replacing devices as often, and the field is starting to narrow to two or three industry leaders far ahead of everyone else. The opportunity to find a tempting niche and then burst in to exploit it will grow, especially as Lenovo starts to expand its market share. If Lenovo can do it, Gou will reason, so can we.
Even Apple is not immune to headwinds, and if there is one thing that must keep Gou awake at night, it is his growing dependence on this single customer and the decisions made by its leadership team. And if that company starts making strategic errors and the numbers begin to fall, Foxconn needs a Plan B. What is that Plan B? Samsung? Probably not.
Third, for all of the advantage of working from behind the screen, Foxconn’s fortunes are almost entirely beyond its control, resting in the hands of distant executives making decisions that are none of Foxconn’s business. Don’t underestimate the degree to which this frustrates not only Gou, but every Chinese contract manufacturer who ever dealt with an importer. Your can only grow as quickly or consistently as your customer lets you. Again, if the customers start blowing it, the urge to give up and go around them becomes overwhelming.
At the same time, Foxconn’s customers are arguably as locked in to Foxconn as they are to him. For reasons of speed (time to market) and scale (time to ramp up volume), customers don’t have many choices. Short of the most grievous provocation, few could afford to walk away from Foxconn.
How It Will Go Down
For all of these reasons, Foxconn’s move would have to come under circumstances where it could credibly say to its customers that it had no other choice.
There would need to be a trigger event, the three most likely being that a major customer either goes under, stumbles badly, or takes back production. At this point, Foxconn’s continued growth (if not its survival, if the stumbler is Apple), would be at risk, and Foxconn would need to respond.
Foxconn would likely use a production facility with idle capacity to produce products that it could credibly say did not threaten a current customer (say, Apple), and that possibly was aimed at weakening the grip of a rival on its market share. If Foxconn could make a case that it was going after Samsung or LG, for example, Apple’s objections would likely be few. Foxconn could even offer to forge an entirely new brand and build new factories so that the new venture was plausibly firewalled from customer business.
To be sure, the company needs to fix its reputation and build a global marketing capability. The former is underway in earnest: the company has hired PR counsel (not yours truly) to fix the reputation and to lay the foundations of a global branding and marketing effort. It has also built a worldwide sales force that could be expanded quickly to forge the relationships with retailers that it would need to get shelf space in stores.
But make no mistake that Foxconn’s breakout is both plausible and, given the history of business, inevitable. The timing will be soon – Terry Gou is no longer young, and he would want the transition to global brand to at least begin under his watch, and arguably it will either happen under Gou or it will never happen.
If Foxconn could pull it off, however, the company would have a shot at a long-term future free of dependency on other companies, and set up to compete against Samsung, Lenovo, Huawei, and – if it so wished – Apple.
Watch carefully. The shift will start small, but once underway we will watch the birth of a new global brand.
- Signs of Changes Taking Hold in Electronics Factories in China – NYTimes.com (mbcalyn.com)
- Foxconn takes stake in US GoPro (bbc.co.uk)
- To Secure Its Future, Foxconn Branches Out Beyond Apple and China (minyanville.com)
- Foxconn to expand to the US for clients seeking made in USA designation (slashgear.com)
- Foxconn Getting Its Act Together on Employee Working Conditions (dailytech.com)
There is a growing cohort of public relations firms that are opening practices focused on helping Chinese companies build better reputations among global audiences. This is a good thing: heaven knows, no group of companies is more in need of this kind of help than Chinese enterprises.
What is discouraging, however, is that many senior professionals in the PR industry continue to misdiagnose the problem. To take one example, in a pay-walled PRWeek article dated New Year’s day (“Chinese Companies Bridging the Comms Gap in U.S. Market”), a senior global agency executive and a Chinese CEO both single out transparency as the missing element for China Inc. as it ventures abroad.
“When [Chinese businesses] come to the US, they think they are being transparent when they are not because our standards are so high in terms of transparency,” Black says. “They have to be willing to open themselves up to regulatory bodies and the public. It’s been a major adjustment.”
One of the early pioneers of the PR business, Edward Bernays, counseled PR practitioners in his seminal 1928 book Propaganda that to be effective PR has to be more than just corporate spin.
“In relation to industry, the ideal of the [public relations] profession is to eliminate the waste and the friction that result when industry does things or makes things which its public does not want, or when the public does not understand what is being offered it.” (Emphasis mine.)
Simply put, public relations is first about getting the company to behave and act in accordance with public expectations, and then communicate that compliance to ensure the public gets it.
For Chinese companies, transparency is useless if all it reveals is a company engaged in unsavory or nefarious behavior. Further, for reasons both political and cultural, that behavioral bar is higher in the U.S. for Chinese enterprises than it is for U.S. companies (or companies from just about any other country). To borrow from Donald Tapscott, if a company is going to be naked, it had damned-well better be good to look at. And Chinese companies need to better looking than everyone else to merit an equal reputation.
The core challenge for public relations practitioners is not only convincing Chinese companies to be transparent, but also – and first – helping Chinese companies to understand and behave in accordance with the expectations of highly skeptical global audiences. Once that is accomplished – and only then – is it time to open up for full scrutiny and communicate that they are doing so.
Naturally, this is not as simple as it sounds, nor is it a lot of fun. The alternative is to spend a lot of time and money first creating a Potemkin reputation, and then more time and money running around plugging holes in the facade. The end result of that fire drill is an also-ran company with a middling reputation that nobody likes very much, and with whom others will do business only if they have no other choice.
The companies that clean themselves up before venturing abroad (or even while doing it) get double credit, first for being sensitive to the expectations of foreign audiences, and then for doing something about it. The payoff not only in reputation but in credibility and trust would be priceless, the need for spin would disappear, and the positive attention would make sales and marketing simple.
Despite the potential benefits, I understand why some public relations executives balk at that challenge. It is scary to face up to a client and tell him or her truths they have no interest hearing. It is outside the comfort zone of a large number of PR people. And let’s not forget: it can be much more lucrative to provide costly palliatives for a crippled reputation than it is to deliver a genuine cure.
But Chinese firms owe it to themselves and their customers to seek out only the P.R. people – both inside and outside the company – who are prepared to deliver a cure, and who don’t babble on about reputation but focus on creating genuine trust.
Enjoying the Air
Canada has given the “all clear” for the China National Offshore Oil Corporation (CNOOC) to purchase upstream oil and gas developer Nexen, a company with reserves in Canada and the Gulf of Mexico (among other places) and, perhaps more important, some interesting capabilities in shale oil and oil sands. CNOOC’s interest begins with the reserves but the long-term value of Nexen lies in its oil sands capabilities. China has an estimated 14.5 billion barrels of oil locked up in oil sands, a quantity that is over twice the nation’s proven conventional reserves. Even with the technological hurdles, the value of Nexen to China and its energy security would be huge.
CNOOC faces one last hurdle: the Committee on Foreign Investment in the United States (CFIUS.) That body has not been particularly kind to Chinese companies of late, and it has come under fire at home for an approval process that is opaque by Washington standards. There are still those in Congress and industry who flatly oppose any Chinese investment in U.S. fossil fuel assets or reserves. What this decision will come down to is how well CNOOC has laid the groundwork.
Regardless of the outcome in Washington, the fact that the purchase of what one senior Canadian executive called a “bit player” in the energy business has caused such a stir is an indicator that despite CNOOC’s groundbreaking efforts to build goodwill in government and industry, China, Inc. has a long way to go before it is viewed in American capitals with anything but suspicion.
The next bit, though, is the hard part. Building support among like-minded oilmen and politicians with bigger fish to fry is easy. Winning over the growing slice of America that believes the worst about China and state-owned enterprises is going to demand more than schmoozing: a wholesale rethink of corporate behavior is in order.
The formula that CNOOC and its fellow Chinese companies will need to follow when pursuing global mergers and acquisitions begins with the company’s actions. How has the company behaved in its operations both in China and abroad? Has it operated in a transparent manner, or has it used its government ownership as a fig-leaf to hide its activities behind a veil of secrecy?
Has the company been fair with its partners? Has it built up a genuinely positive environmental record (one that partners and foreign competitors would agree is world-class?) Does it behave in a high-handed manner, or does it operate with humility? Is it out for long-term cooperation, or does it just want to dismember its acquisitions for a few key personnel, some technology, and its reserves?
Next, the company has to consider its reputaiton. If it is behaving well, does it get credit for its actions across the full scope of its stakeholders, or do too many people fail to discern a difference between CNOOC and other oil companies? For that matter, is it seen as a company, or is it perceived as little more than an extension of the Chinese government? Is it telling its story to enough of the right people to matter? And, by the way, who are the right people?
M&A success for China’s companies abroad – for any perceived interloper, for that matter – rests on cash plus positive corporate behavior plus credit for that good behavior with all audiences. Actions + Reputation + Cash. Anything less leaves a deal dangerously vulnerable.
It will be interesting to see how things progress. CNOOC – and China – have a lot riding on this deal.
- U.S. must approve sale of Nexen to Chinese (metronews.ca)
- Biggest China Deal Sours as Cnooc Ratings Hit 3-Year Low (bloomberg.com)
- China’s CNOOC lauds Canadian approval of Nexen buy (seattlepi.com)
- Federal government’s deadline for decision on CNOOC-Nexen deal ‘could be extended’ (canada.com)
- Insight: Security fears dogged Canada debate on China energy bid (news.terra.com)
In the Hutong
Monday Morning with Chinese Characteristics
Back in February I posted an article here (“The Beginning of the End of Outsourcing“) declaring that the thirty-year trend that had shifted jobs and manufacturing to developing countries had hit its apogee. I focused on the Apple-Foxconn relationship, but the point was not about either company. Rather, it was that this powerful partnership, one that has defined the limits of what is possible with contract manufacturing in a developing economy, was also quietly drawing the high-water mark of the offshoring/outsourcing trend. The pendulum was starting to swing back toward corporate control of manufacturing as a core competency and a return to manufacturing close to markets, rather than at the end of a trans-Pacific supply chain.
Entrepreneurs, Stay Home
Proving once again the value of a subscription to The Atlantic, James Fallows and Charles Fishman deliver a pair of superb features in the December issue that offer some more anecdotal examples to suggest that we may be witnessing the beginning of a tectonic movement in manufacturing. Fallows surveys Foxconn and finds its working conditions much improved but sees in those improvements the subtle signs that China’s traditional comparative advantages are in decline.
He then talks to a group of manufacturing entrepreneurs in San Francisco (of all places) who explain that global supply chains are simply not nimble enough to support many businesses. Offering the example of DODOcase, the guys making some of the most stylish smartphone and tablet cases anywhere, Fallows quotes co-founder Patrick Buckley as saying “To figure out all the things we needed to do, and design the product, and launch, and fulfill orders within one month—that meant that outsourcing to China was not ever a feasible option.”
One month. That’s the speed of business. The founders were quoted nine months from design to fulfillment to work with China. Would it have been cheaper? Maybe. Would it have lost them huge opportunities? Absolutely. Would it have exposed them to early knockoffs, possibly by their own contract manufacturer? Hell yes. And Fallows apparently spoke to several companies in the same predicament as DODOcase.
Made in Louisville
Interesting indeed, but a couple of guys in a loft making semi-custom luggage is a very different animal than a Fortune 500 company.
This is where Fishman steps in, telling the story of the revival of GE’s Appliance Park in Louisville, Kentucky. Five years ago the place was the definition of rust belt, a facility built for six production lines and 16,000 workers that had lost nearly everything to China. Things were so bad that GE tried to sell the division, but nobody would buy. As it turns out, that was a good thing. Today there are four production lines making high-end appliances and components for GE products that used to be made in either China or Mexico. One in particular, the high-tech, low-energy GeoSpring home water heater, became a corporate revelation.
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs. Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.
As it turns out, the factory floor is a core competency. What is more, some things can actually be made better and cheaper in America by U.S. labor, especially if those products are destined for markets nearby. Harry Moser, an MIT-trained engineer quoted in Fishman’s article estimates that as much as a quarter of what is made offshore for the US market could be made more cheaply in the US than overseas. After reading Paul Midler’s excellent Poorly Made in China and going back over my notebooks from my own four years as a factory inspector for a U.S. furniture importer, I am betting that not only is Moser onto something, he may actually be underestimating. The GE case proves something that I and Midler have long suspected – that too many companies have outsourced their production to China because they lack the imagination or intelligence to do anything else.
We can’t get carried away here, though. The idea that China is reaching the end of its stint as the world’s factory floor is getting tired, and it is too tempting to see in a few examples a trend of factories re-opening across America. Not only would believing either meme be unrealistic, it would miss what is actually going on. We are witnessing the beginning of two trends, rightsourcing and rightshoring.
Rightsourcing, as its name implies, is the science of deciding whether to make something or buy it. That decision used to be such a simple one that the “build or buy” formula was taught in first year managerial accounting. What we have discovered in the past two decades is that there is more to the decision than just the math, that there are attendant risks and variables that make the formula far more complex. Is somebody going to steal my designs and formulas and sell them to my competition? Can I really trust somebody else to help me avoid quality or labor issues that could hurt my business? Am I pouring away a hidden competitive advantage by getting out of manufacturing?
Rightshoring, by contrast, is the science of deciding where to make something. We used to think that making things in a country where people worked for less money would be cheaper. But that difference is dissipating, and more questions arise. How much is it costing me to keep a transpacific pipeline full? What are the opportunity costs involved in a six- to nine-month product development process? What are the hidden risks in making something six thousand miles away from the customer? And what happens if there is an uprising or the price of oil goes up 5o%?
We are going to hear a lot more about these trends in the coming months, but it is important to emphasize that this does not mean the end of manufacturing in China, or anything close to it. These trends do point to a future where manufacturing begins to seep back into the world’s great companies, and where products are made closer to where they will be consumed. China will still make a lot of stuff, but it will make less stuff for Europe and America and more stuff for China and the rest of Asia.
At the same time, Chinese companies will set up factories closer to their customers. Think Haier in North Carolina, Lenovo in Europe and Brazil, and Great Wall Motors just about anywhere it sells cars. China will remain a hub of manufacturing as long as consumers in China and the rest of Asia are buying products. But the percentage of goods in the American or European shopping baskets that will be marked “Made in China” looks set to decline over time.
I’ll examine what this means for several specific industries in later posts. In the meantime, it would do many of us a lot of good to start reading up on manufacturing and operations management.
- The problem with the return of manufacturing (blogs.reuters.com)
- Insourcing Booms at GE (drudge.com)
- Here comes the insourcing boom (wnd.com)
- China: Manufacturing sector expands (money.cnn.com)
- Mr. China Thinks of Becoming Mr. America (theatlantic.com)
- How America Can Steal Manufacturing Back from Foxconn (Really) (theatlanticwire.com)
- How China will Change the Cars America Drives (motortrend.com)
- James Fallows Goes Inside Foxconn (theatlantic.com)
In the Hutong
Over the last couple of weeks, several people have asked me what the changeover in the Communist Party leadership will mean for international business in China. The short answer is that if I knew, I’d be wealthy. The longer answer is a bit more helpful.
Many years ago I had a mentor and boss who taught me that the parade of personalities and the flow of policies were fun to watch, but that sticking your finger up to feel the political winds would never offer the insight a business requires to make decisions beyond a six month threshold. What you need to understand, she told me, were the fundamental drivers of policy, not the policies themselves.
By fundamental drivers she meant the five or six issues that the nation’s leaders worried about the most, overlaid with the three core goals of the party at any given time. Add to that a general understanding of the climate in the country, and any relatively educated person could at least have a general hunch about a company’s horizons.
For example, I believe the thee core goals of the Party are:
- The continuance of Party rule
- The social stability of the nation
- China’s rise to global economic and political leadership
No rocket science there. Beyond this, though, things get tricker. What are the five things the members of the Politburo Standing Committee worry about when they wakes up at four o’clock in the morning?
Here is my list of the top five.
- Controlling corruption without blackening the entire Party in the process
- Getting the economy stabilized and on track for continuing growth
- Keeping the PLA in line while retaining its political support
- Cleaning up the environment without disrupting the economy
- Keeping expressions of popular discontent from coalescing into a coherent anti-party front.
These are certainly open for debate, but what all of this suggests is that global companies will be welcome in China to the extent that they address (i.e., demonstrably take into account) these five priorities. What is more, given that domestic attitudes about foreign investment in China have, in the past five years, gone from “generally positive” to “generally ambivalent,” companies are going to find themselves compelled to make a case to their local stakeholders that they have something unique to offer just by being here.
Mind you, I’m not necessarily talking about approvals to do business, although that is an issue. Instead what I mean is that with every audience, from regulators to consumers, every business would do well to remember that being foreign no longer buys you much, and that in the current environment there is no particular priority placed on letting foreign firms into China.
In short, the outlook is not exceptionally good in the near term, but there is as yet little cause to be pessimistic. All of us need to stay tuned.
- How much will China’s foreign policy change under Xi Jinping? Errrr… (lookingbeyondborders.com)
- Resurgent China Seen in Poll by Investors Who Prefer Xi Over Hu (bloomberg.com)
- Xi Jinping Is The New Emperor Of China. But Has He Any Clothes On? (stirringtrouble.wordpress.com)
- China: (Mis)reading Xi (blogs.ft.com)
- Locked up by Mao‚ U.S. ex-revolutionary places hopes on Xi (thehimalayantimes.com)
In the Hutong
Doctor, Doctor, Gimme some news
In addition to the matter of whether China remains a suitable regional headquarters for international firms, the recent government-imposed internet clotting also points to major changes that are taking place in the global topography of the Internet. Despite the long-treasured hope of Internet Libertarians that the ‘net would remain unified and self-governing, Bill Bishop’s prognostications of an internet fragmenting along national lines is looking increasingly likely.
Earlier this year I moderated a panel on the Cloud in China at the 2012 Roundtable on Intellectual Property Rights Protection convened by the U.S. Embassy in Beijing. There were representative of both foreign and Chinese entities on the panel, and while the focus was on the Cloud and its role in either helping or exacerbating the problem of copyright piracy, a few interesting bits came out that are relevant to the recent blockage.
First, the panel understood that there are two Clouds: one for China, and one for everyone else. The reason is not technical, but regulatory: the government has built a policy framework that hampers access to Cloud-based services based offshore to the point where they are not viable alternatives to local storage. You don’t see very many ChromeBooks in China (I haven’t seen even one,) I can’t get workable access to Amazon Prime Videos, and downloading a movie from iTunes takes 16-20 hours – on a good day.
Second, that international firms seeking to offer software as a service (SAAS) in China must either base their offerings onshore or not bother. As the Google affair made clear to all, however, data based onshore remains particularly vulnerable to local compromise. Why do the cops need to bother with hackers when they can just show up at the door of the server farm and demand access?
Third, all of the panel participants noted a growing willingness on the part of Chinese businesses and consumers to pay for SAAS and Cloud services. There is an irony in that for the foreign SAAS providers, but there is an insight as well. Government policies that restrict access to foreign SAAS providers are functionally protecting local Chinese companies who want to get into the game.
What we face, then, is the development of a parallel Cloud sector in China that will mirror the SAAS business outside of the PRC. That sector will likely consist of two elements: local companies (i.e., Baidu, Tencent, Sina, and service-specific start-ups) that will provide Cloud/SAAS offerings; and international firms who find ways to address the challenges of latency and government access restriction, usually by setting up a subsidiary in China with localized offerings (i.e., Evernote.)
For the international providers, this means figuring out how to operate two separate services while still offering the advantages of a global service to customers in China. This adds yet another degree of operational complexity to an already challenging market.
Yet for the local Chinese SAAS/Cloud service companies, it means a doubling of their home court advantage. Not only are they arguably better suited to offer more culturally relevant Cloud services than their foreign counterparts, they will also be playing inside of an electronic fence built for them (inadvertently or or otherwise) by government policy. Long term, though, this will make the effort to compete overseas more difficult.
Whether the meiosis of the Internet continues beyond the split twixt China and the rest of the world is unclear, but for the SAAS industry, the world now has at least two separate internets, and it needs separate clouds to go with it. Long term, the SAAS and cloud companies that succeed will be those who can thrive in an internet with increasingly high walls.
In the Hutong
Last week I had a chance to talk with Carlos Tejada at The Wall Street Journal about how Google services have become all-but-inaccessible for users in many parts of China, and how this all seems to have gotten worse over the last several weeks. What is worse, access to virtual private networks (VPNs,) most of which require offshore payment to access and upon which many business are dependent, has been all but severed.
The Hobbled Headquarters
I made the point to Carlos that there are a growing number of businesses who depend on cloud access – not just foreign firms, but organizations based in China who actively collaborate with groups overseas to conduct research and development as well as commerce. To these companies, access constriction is a man-made disaster that is in some aspects worse than a natural one: at least with natural disasters, even one like Superstorm Sandy, there are ways to fix or work around problems of data disruption. With access constriction like this imposed by an unaccountable, unseen human entity, there is no telling when it will end, and the work-arounds are cut off as well.
The longer this goes, the more it will force businesses to re-examine the wisdom of locating headquarters or back-office operations in China:
“If China insists in the medium and long term of creating another Great Firewall between the China cloud and the rest of the world, China will be an increasingly untenable place to do business.”
Anyone who wants to do business in China is well-advised to have a presence here. But China has long made it a goal to get foreign companies to locate their Asia-Pacific headquarters in places like Shanghai and Beijing rather than, say, Hong Kong and Singapore. How many companies are likely to consider that option with a sword of Damocles hovering over their links to data and the outside world?
A Lesson in Chinese Political Economy
There is a wider issue here than just the risk and inconvenience of having to do international business through an increasingly impermeable data force-field. The past two weeks have been a rude reminder that the government and the Party place social stability and continued Party control far above commerce; that they see commerce as serving the interests of the government and the Party rather than the other way around; and that the implicit conflict between the interests of the Party and the interests of business (especially SMBs and foreign-invested businesses) are more fundamental and closer to the surface than we might wish to think.
Let us not kid ourselves, then, and suggest that when you scratch a Chinese official you will find a capitalist not far under his Communist skin. There will ever be opportunists in positions of power, but in the end all business in China remains subject to the whim of the central government’s leadership. Thirty-five years after Deng Xiaoping declared China’s reforming and opening to the outside world, political risk for every company operating in the PRC remains as real and immediate as ever.
And it shouldn’t take an internet outage to remind us of that fact.
- The Great Firewall of China looms higher around the Communist Party congress (qz.com)
- Reform and the Internet, With Chinese Characteristics (dealbook.nytimes.com)
- Facebook, Twitter Growth in China Has Lots of Caveats (businessweek.com)
- Reports: Google Services, VPNs Blocked in China (techinasia.com)
- Google+ Blocked by the Great Firewall of China (socialtimes.com)
- Web monitor: China takes extraordinary step of blocking Google (washingtonpost.com)
- Google services ‘disrupted’ in China; traffic declines rapidly (zdnet.com)
- Following Iran’s Lead, China Blocks Google (thinkprogress.org)
- China top censor gets leadership role (bigpondnews.com)
- Some Google services reportedly blocked in China (9to5google.com)
In the Hutong
Cowering from the chill
I wrote in June that the current downturn in the worldwide market for large ships would hit Chinese shipyards especially hard, constituting as they do some 20% of global shipbuilding capacity. The shipyards had little to fear, I noted: if for no other reason than the sheer number of people employed at China’s shipyards (and memory of the Gdansk shipyards as the birthplace of Lech Walesa‘s Solidarity movement, an event that presaged the disintegration of communism in Eastern Europe), the central government would do anything they could to keep the yards operating, orders or not. Yet rather than simply pay for the production of more surplus tonnage that nobody would want, or for make-work or no work, the government would instead get the yards to re-tool to produce naval vessels – if not warships and landing vessels, then naval auxiliaries like replenishment ships, transports, and maritime patrol ships.
Sure enough, Hu Wenming, chairman of China’s second largest shipyard operator, China State Shipbuilding Corporation, was in Beijing during the just-wrapped 18th Party Congress lobbying to get orders for naval and “fishing” vessels. He is the first: expect the line of shipyard managers and owners to form behind him.
With China’s now-open goal of becoming a maritime power, the timing of the global shipbuilding downturn and stiff domestic competition means China can conduct its naval buildup at an accelerated pace AND at a lower cost that it might have otherwise. And the yards, instead of going bankrupt, will get contracts that will likely be more lucrative than orders for container ships, cruise liners, bulk carriers, and tankers. Who knows? Many may never go back.
- Dalian shipyard makes huge profits from Varyag refit (wantchinatimes.com)
- U.S. Navy Take Notice: China is Becoming a World-Class Military Shipbuilder (thediplomat.com)
In the Hutong
Catching up post holiday
If you have been following the news, you will have heard that a U.S. Congressional committee has issued a report urging U.S. firms not to do business with either Huawei or ZTE. Those two companies, respectively the second- and fifth-largest manufacturers of telecommunications equipment in the world, are accused of a range of offenses. In my opinion, the real offenses for which those companies have been placed in the Congressional mush-pot have little to do with the reasons outlined in the Congressional report. The companies real offenses are:
- They are from China, and this is an election year;
- They are the first companies in 70 years to challenge American companies for dominance in a core US industry that have not been from an ally or a client state;
- They have failed to be sufficiently transparent when doing business in a country that demands transparency from all companies, and even more from those that hail from competitor economies.
If Huawei and ZTE are guilty of anything, it is that they have built their U.S. businesses and ambitions before they have laid a foundation of trust with the American public and its elected officials. Ideally, no company should have to do that as a prerequisite do doing business in America, but trust is the price for any company stepping into a new country. The two companies are learning a lesson that must be absorbed by every Chinese company expanding overseas. China as a nation may or may not be successful in its efforts to reform the global system to suit its ambitions. Even if it is, though, Chinese companies must still conduct themselves in a manner that is acceptable to the governments and consumers in the markets they seek to enter.
At the same time, there is also an effort underway to tar Huawei and ZTE as a malevolent presence in the telecommunications industry, an effort that steps beyond fact and into the realm of speculation and rumor. As I noted in Making the Connection: The Peaceful Rise of China’s Telecommunications Giants, it behooves both the U.S. government and the U.S. telecommunications industry to stop relying on politics and the F.U.D. pump to preserve their markets. Instead, it is essential that American companies focus on Huawei as a competitive threat where it counts: in the market. A failure to do so only postpones their inevitable implosions.
I’ve spent much of the morning talking to reporters about the report, so I won’t belabor this. If you are interested in some balance about the issue, I talked about this this with Kaiser Kuo, Jeremy Goldkorn, and Will Moss on the Sinica podcast recently. Take a listen – I think the podcast covers the issue far better than 60 Minutes did. For a more U.S. policy-oriented viewpoint, I also covered this in The Pacific Bull Moose, my U.S. politics blog.
- On the Huawei/ZTE Issue (pacificbullmoose.wordpress.com)
- Politics, not security, at centre of Huawei, ZTE allegations, say analysts (computerworld.co.nz)