Public relations people have a word fetish. We invest the aphorism “words have meaning” with an almost scriptural infallibility. Yet when it comes to terms we use to describe our own capabilities, we become maddeningly imprecise, if not deceptively hyperbolic. The best (or perhaps worst) example of that is the word “strategic,” as in “strategic public relations.” In fact, we use it so much when referring to so many different things that the phrase has almost lost its meaning.
In a new paper published last month by Allison+Partners (“Strategic Public Relations in China: Actions, Behavior and Communications”,) I ask the PR industry generally and in China specifically to take a step back. I argue for a definition of strategic public relations that steps completely outside of the communications function: as it was originally intended by the founders of the public relations craft, PR begins with the actions and behaviors of a company, and the obligation of PR counsel to guide them. My point: it is time for all of us to become more strategic, and in no place more so than in China, where so many brands consistently fail to understand, much less live up to, the expectations of their publics.
For my fellow PR practitioners and anyone else who oversees a PR function, the paper is available for free download and review on academia.edu. It’s a fairly quick read.
I am caught in the heart of a swirling vortex of work at the moment and getting ready to fly this weekend, which explains my slow posting of late. More announcements on that soon. In the meantime, I’m going to be firing off a series of short posts on things that I have been itching to share.
Arguably the most interesting and revolutionary announcement tha Apple made at its product launch gala this week, Apple Pay promises to finally put the US on the long pathway to doing away with fat wallets, something that has been happening in Hong Kong for nearly two decades and in Australia for almost as long. It is also being touted as the big differentiator for the Apple Watch, and an important one for the iPhone 6.
I have two reservations.
First, I think we all need to take a deep breath and think carefully before entrusting our financial information to any large company. That’s not luddism, that’s wisdom. The recent series of security breaches at major retailers alone should give us pause, and Apple is no exception: a company that has shown itself incapable of protecting Jennifer Lawrence’s photo album has to prove to us that it can be trusted with our wallets.
Second, the high profile of this announcement will surely pique the interest of just about every hacker on the planet, from the kid down my block to certain military units operating from Shanghai suburbs. Even the best systems tend to have hidden vulnerabilities, and those of us who can wait for Apple Pay should do so if only to allow the engineers to discover and addres its most blatant vulnerabilities.
These aren’t deal killers for Apple Pay, but they do suggest that most of us should venture carefully into this new system.
Hutong West Two hours sleep, three cups coffee 1039 hrs.
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.
Hutong Forward Learning not to eat fish 400 miles from the ocean 1840 hrs. local time
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.
I had a long talk with Michael Kan at IDG recently about China mobile phone maker Xiaomi and its high-profile hire of Google refugee Hugo Barra to head up the company’s international expansion. The core of our discussion was around whether it would make a difference. Michael was circumspect about his opinion, but I wasn’t: Hugo is a great hire, but he will not easily solve the challenges to Xiaomi’s global ambitions.
Xiaomi has a strong market in China, built on powerful devices that sell at very modest prices, on a slightly patriotic appeal (buy Chinese!), and on some deft PR by founder and CEO Lei Jun. Where the company differs from other Chinese manufacturers of inexpensive Android phones is that it is attempting to build an ecosystem of its own that is meant lock in users and draw revenue on content and services in the same way that Apple has done.
Now that Barra is aboard, the bet in some quarters is that a major international push is in the offing. If it is, I wish Lei, Barra, & Co. best of luck. They are going to need it, because the minute they step outside of their China cocoon, things are going to get different for them very quickly. The three biggest challenges I see aren’t even marketing related. They boil down to distribution, strategy, and resources.
They Can’t Buy What They Don’t See
China is a retail-based mobile device market. This means that any mobile phone manufacturer can get counter space in a retail store and sell an unlocked phone to the public. The only challenge is to get people’s attention so they look for you. Lei has figured that out, which is what draws people into the stores.
Markets like the US, though, are carrier-based. This means that in order to be sold to the public, you must first win over one or more of the mobile network operators, who will then sell your device (locked) for their network both directly and through authorized retailers. As a result, there is a relatively modest number of devices available in the US, and breaking in is tough. Most carriers start out with new manufacturers (think LG and ZTE) in an arrangement where the manufacturer’s brand never shows up on the device: it is branded by the carrier. Over several years, that can change, but it will take time, and there are unlikely to be shortcuts for Xiaomi.
Cheap May Not Be Enough
Xiaomi is no stranger to competition: China’s mobile market probably has 70 handset manufacturers offering 800 devices on sale at any given time. In the US, however, it will face competitors who have the home-court advantage that Xiaomi is used to having. Apple, Samsung, HTC, LG, Google, Microsoft, Huawei, and ZTE bring more cash, technical muscle, marketing prowess, and corporate attention to the global markets than Xiaomi can afford.
Certainly there have been David-Goliath stories before: every company in the US mobile phone business with the exception of Motorola started out as an underdog. But against a particularly brutal array of competition – including Chinese rivals who can match and beat any cost advantage Xiaomi can bring to the table – Xiaomi is going to have to figure out what it can offer to non-Chinese users that its well-funded, technological-powerhouse rivals cannot. Will it be innovative, and how? Can it find a neglected niche? Will it grab onto a powerful partner, and if so, whom?
Or will the company try to duplicate its software and services ecosystem overseas?
To his credit, I get the feeling Lei understands that “cheap and cheerful” is not an option.
Going Too Many Places At Once?
China’s entrepreneurs face great temptation. Once they are successful in one business, many of them begin to think they can be successful in other, unrelated lines. There are so many green fields and blue oceans in China that the urge to move into those new areas is almost irresistible. That siren song is too-often fatal. I have watched from the inside of two giant Chinese companies as these sideline businesses sucked capital and attention from the company, allowing more focused rivals (often foreign) to leap ahead.
Xiaomi is showing early signs of entrepreneurial attention-deficit disorder. The company is already in software and services in order to secure profits that it would be hard-pressed to make on its inexpensive devices. Now Lei wants to move into internet-ready televisions, a product line that has become much easier to make but no less difficult to sell to the public, and dozens of local brands already crank them out, undercutting prices. This means that Lei will need to get into a services and content business in order to make profits from any TVs he sells.
Then comes the globalization. Lei has said that he will turn to Barra to run international markets. That would be ideal if it would work. Chances are, though, that it won’t. The fundamental business decisions that will need to be made in order to turn Xiaomi from a Chinese company to a global one are going to draw on the valuable time of Lei and his lieutenants.
All of that distraction will take place at a time where Lei will need to shore up Xiaomi’s position and defend it against the onslaught of competitors keen to rip his market out from under him. The company is number six in China in smartphone sales according to some analysts, but that position is far from secure. One misstep in its core business and it could go very wrong.
Oh, and About that Name…
This is normally the point where I would bring up the fact that non-Chinese outside of China would be able to pronounce “Xiaomi.” The real issue, though, is not getting people to pronounce the name, but getting people to care enough to even try. Consumers around the world have no idea who Xiaomi is, or whether it is a creation of the Ministry of State Security in a plot to listen in on the world’s conversations. Beyond the technical, beyond the strategic, there is the simple issue of getting people to know and care about you. Chinese companies are notoriously bad at this, and as adept as Xiaomi has proven itself in China, it is a long leap to build that faith across the Pacific.
The good news for Xiaomi is that Barra gets all of this. When I saw him at the China 2.0 conference at Stanford earlier this month, he had no illusions. In his offhand remarks you could hear him honing his messages as much for external audiences as internal ones: this is going to be a long slog, and Xiaomi needs to be ready for it. At the moment, though, it is unclear whether Lei Jun has the stomach or the war chest for a long battle against the established names.
The hard decision that the company will face soon is this: are we better off focusing that effort today on winning in China, engaging in a token overseas effort to seed long-term awareness and eventual trust; or do we go whole hog in both directions, aiming for the top spot in China and a dozen international markets at the same time?
If Lei Jun has is way, watch for Xiaomi to try to score some quick, modest wins overseas to generate buzz. The wise move at that point would be for Lei and Barra to start raising serious money to enable them to take on Samsung, Google, Apple, HTC, and Microsoft.
Either way, this is going to be both fun and educational to watch.
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.
The High-Speed Train “Harmony” Enroute to Shanghai 1130 hrs.
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.
Hutong West Here a week and not a second on my porch 1947 hrs.
Kathryn Cave at IDG Connect offers a snapshot of her company’s research on how and why Asians are using tablet computers like the Apple iPad, the Samsung Galaxy, and the Motorola XOOM. While Asians trail the world average in tablet use, they are more likely to buy a tablet in the coming three months and are more likely to use the tablet daily for work.
While iPad dominates the market, more Asians than anywhere else in the world believe that Apple’s leadership is unsustainable. 51% believe Android will become the global market leader in tablets within 12 months.
This is important because it offers more evidence that Asians view Apple rather differently than their U.S. and European counterparts. IDG does not delve into why that is the case. My theory has been that Apple has long treated Asia beyond Japan with a degree of benign neglect. By contrast, Apple invested in evangelists, user groups, and a legion of specialized resellers in North America, Europe, Australia, and Japan, who together sustained enthusiasm for the company and its products even in the wilderness years of the mid-1990s.
Tablets have been the category that Apple has ruled most strongly over the past 30 months. What is more, Asia is regarded by punters and competitors alike as the company’s largest font for growth in the coming years. Research suggesting that Asians are less enthusiastic about the future of Apple tablets should send up red flags in Cupertino, and green ones at Samsung and the Googleplex. This is the closest thing we have seen to a strategic vulnerability for Apple.
While the company focuses its efforts in Asia on production and distribution, treating marketing and customer relationship-building as an afterthought, the competition is getting wise. Bet on Samsung and Google targeting this rip in Apple’s chain mail armor. Asia has been Apple’s escalator, but unless it is handled with more than a backhanded marketing effort, it could become the company’s downfall.