Late last year I noted that life after Uber would not necessarily be a picnic for Chinese ride-sharing giant Didi. While an 85% market share looks unassailable, it will need a lot more money to secure its position.
I was prepping a post on why that is the case, but Dr. Richard Windsor at Radio Free Mobile beat me to it. Read the whole post. His bottom line:
Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.
Windsor believes that the only logical response for Didi is a change in strategy, but finds it hard to see how any strategic choices open to Didi justify its $34 billion valuation. Fair enough.
Now, second-order effects time. Uber and Apple are Didi investors. As I mentioned in December:
Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber [or Apple] will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.
If you are an investor in either Uber or Apple, and you count the company’s holdings in Didi as a part of the firm’s underlying value or future earnings, have a look at Windsor’s post. You may want to re-run your numbers.
The rule for disruptive companies in China, regardless of provenance, is this: your future depends on more than just being able to make a handsome profit off of disruption. You have to convince a host of powerful individuals and groups that China is better off with the industry disrupted than with the status quo.
In the wake of the inauguration of Donald Trump, I have been getting calls from clients, from past clients, and from perspective clients all asking what this is going to mean to them. I expected to get the calls from US and European companies. What surprised me – and probably should not have – was the number of calls coming from Chinese companies. On the surface, one is tempted to ascribe this preoccupation to Trump’s acerbic anti-trade rhetoric.
But concerns about China are nothing new to American elections. The role of China in business and the US economy has been on the national docket since Bill Clinton ran for his first term. What is more, the concerns coming from the people I was speaking to were both immediate and urgent. They weren’t worried about some abstract degree of market access in the coming years: they wanted to know what would happen to their plans over the next twelve months. All of this stands as circumstantial evidence that, more than at any other similar juncture in the past, Chinese companies appear poised to leap into the American sea, and right soon.
Challenged but Determined
Perhaps the most urgent challenge facing China’s enterprises today is learning how to reach successfully beyond the home market and build viable international, if not global, businesses. China’s more thoughtfully-led companies are figuring out that in order to “go out” they need to learn how to operate in environments where local government and consumers are at best indifferent, and at worst hostile. They are learning that they will need to figure out how to innovate consistently and meaningfully; and that creating, building, and defend their own brands against local and global competitors overseas (and especially in the US) is going to require a new thinking, a lot of money, and outside help.
Of course, understanding this intellectually and actually doing it are two different things, and considerable cultural obstacles lie ahead of China, Inc. But leaders of US, European, and Japanese companies would be foolish to assume that China’s companies will all fail in that effort. Some, possibly many, will succeed. The challenge for which we should all be preparing, then, is how to compete with – and beat – China’s emerging global companies.†
We’re From the Government, and We’re Not Here to Help
For the moment, let’s leave aside the rhetoric coming out of the Trump administration. Belligerent bombast aside, there is not much that the White House can do to halt the slow but inexorable globalization of Chinese brands. Raising barriers to protect domestic enterprises against a Chinese onslaught requires more than the election of a populist president with anti-trade chops. Without a broad national consensus against trade, Congress and economists remain too haunted by the ghost of the Smoot-Hawley Act of 1930* to raise significant barriers to a global trading giant like China, and the number of US jobs that depend on exports to China is significant and continues to rise.
Even if legislators found the resolve to act, the speed of business and the nature of lawmaking limit the ability of legislation to respond to specific commercial threats. Ditto the creaking machinery of the World Trade Organization: even when a government can be persuaded to lodge a formal protest against China, such cases require years to work their way through the process and evoke an outcome.
And all of this ignores the expanding influence of Chinese investment in US and European business. High-profile investors like the Dalian Wanda Group and Anbang Securities are just the visible apex a vast and varied group of companies and cash-rich entrepreneurs setting down commercial roots in America. Except in matters of national security, legislating against such inflows would be political suicide, especially as Chinese investments reach ever deeper into the rusting industrial hinterlands of the developed west.
We Are On Our Own
In short, the Chinese competition is coming to America and Europe, and companies need to rely on themselves to address this new threat.
Doing so will mean approaching the China challenge with the same resolve and flexibility with which American enterprise addressed the Japanese challenge, but doing it sooner and with greater alacrity. Japan’s economic expansion in the 1970s and 1980s wrought unprecedented disruption to US business in no small part because most executives didn’t see it coming. They were too late to realize that the iron triangle of government, enterprise, and organized crime in Japan left many US industries facing an existential threat.
The US business community cannot afford to be as slow on the uptake with China. Forget wait-and-see: a nimble and aggressive Chinese company with a deep home market in China is an existential threat even before you find out they’re looking in your patch. Assume they’re coming, and will hire the local expertise to disrupt your markets, undermine your customer relationships, and beat you to innovations.
Winning demands insight. Executives have to understand how Chinese companies work, how they make use of relationships and government support, and the strategy they will use to take markets away from global competitors. Then they need to drill into their specific competitors, learning the strengths of a Chinese challenger so as to use those strengths against them.
(Such strengths vary from firm to firm, but you won’t go far wrong to assume that they come with a) a deeply supportive government at home; b) the world’s largest home market, able to provide global economies of scale before they make their first sale overseas; c) a readiness to play fast-and-loose with intellectual property; and d) momentum.)
The discussion America’s business leaders should be having about China, then, must go beyond “how do we make money in China?” If that question isn’t academic by now, it soon will be. It must also be “how do we meet – and crush – our Chinese competition both at home and around the world?”
† The use of “we” here is not an affectation. China, Inc. it is no less a challenge in business services than it is with manufacturing. Sometime in the next five years, the leaders of the marketing and PR business in the US are going to face severe disruption from China.
* Also known as The Tariff Act of 1930, The Smoot-Hawley Act was a protectionist measure passed by the US Congress that wound up inciting a trade war, one that arguably deepened the Great Depression and helped speed Europe into conflict a decade later.
In this intriguing essay, Shanghai-based consultant Kaiser suggests that for foreign companies, the glory days are over, and the only two strategies left are to either fight for one of the top two positions in your industry (against what might be brutal competition) or accept that your market in China will be modest, picking up what others cannot.
I really enjoyed the essay, because I like contrarian thinking on business in China. But I have a couple of problems right out of the gate.
First, I find it hard to accept that all companies in all industries face such a stark, binary choice. Airlines and banks do not face the same challenges or opportunities as McDonald’s or Intel.
Second, Kaiser’s choices seem better suited to Fortune 500 multinationals with a single line of business. Many large companies will do very well being modest players in multiple markets or product lines without ever being a market leader or settling for modest returns, and many small- and medium-sized businesses will gorge themselves on a modest market position.
Third, the market is immense, and opens the door for a wide range of niche and multi-niche strategies that would be incredibly lucrative, especially for small- and medium-sized businesses from outside of China.
Finally, and perhaps most important, Kaiser implies that there is but a single motive that brings companies to China: profits from China operations. For many companies this is true, but for others, being in China offers other rewards. Companies in the mobile industry benefit from participating in the largest, most lucrative market in the world; other firms are in China so they can better defend against Chinese rivals elsewhere; still others could care less about profits, as China drives volume that supports lower unit costs in more lucrative markets.
One reason there are few good “China strategy” books out there is that there is no good, blanket approach for China that spans across a wide range of companies and industries over a modest span of time. Corporate strategy is bespoke, like the course for a ship. When we write books, we can talk about avoiding storms, rocks, and shoals, and we can talk about the processes that lead to great strategy or effective implementation. Everything else is situational.
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.
Bandwidth? What Bandwidth?
A quick, slightly irreverent digression.
Watching Channel V on a particularly jet-lagged Saturday night in Beijing, I was confronted with the MCountdown Summer Special, a live K-Pop extravaganza featuring girl-bands and a few of their male equivalents in a sort of contest, with one live performance after another. After nearly an hour of suggestive choreography, revealing costumes, plastic surgery, and male dancers used as, shall we say, props, all set to music that can most charitably be described as “unremarkable,” you are led to an inescapable conclusion: this is not music, it is soft-core porn.
For a sample, Don’t believe me? Go to your favorite online video site and look for videos by a band called “Girl’s Generation,” Korea’s own Pussycat Dolls. Try this one. Watch. Uh-huh. The appeal is decidedly more glandular than aesthetic. I don’t mean to pick on this particular group, they’re just one example of the genre.
As Richard Burger and others have proven, Asia has a schizophrenic relationship with sex. Prostitution is openly tolerated in Confucian Asia, and functional polygamy – in the form of mistresses and their male equivalents – is censured only in the extreme, usually when corruption is involved or the male shirks his marital obligations. At the same time, the region is home to some of the most repressive laws regarding pornography. Leaving Muslim Asia aside (where the public discussion of sex is limited to political spitball contests, the courtroom, and scholarly discussions on what the Koran permits), it is brutally difficult to buy, view, or download porn. Touch, the authorities seem to tell us, but don’t look.
Music videos are the exception. Across Asia they are the one place you can go to watch young, healthy, attractive females gyrate suggestively, anytime you want.
And that’s the point to all of this. If your target market is hormonally-active Asian males, regardless of age or nation, this is clearly your outlet. Forget print and movie celebs: this is where you want to spend your advertising and endorsement dollars.
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.
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.
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.