State of the Union: American Business and The China Challenge

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.

 

Wanda Behind the Mask

Wanda’s Wang Jianlin has now made his fourth major acquisition in the US film industry. To his stable of the AMC and Carmike cinema chains and the Legendary Pictures production company he is now adding Dick Clark Productions. But it is rare indeed that something in China is as it seems, and that is why it is worth probing a bit into Wanda’s US acquisitions.

To their credit, US media are trying to do exactly that. Over the past several months, I’ve spoken to experienced reporters from the world’s leading financial news services, all of whom are trying to discern whether to take Wang Jianlin at face value, or whether there is something happening beneath the surface at Dalian Wanda Group that is at odds with its founder’s public positions.

What they’re getting is frustrated. It is always challenging to get information out of a firm unbound by the disclosure laws that govern public US companies. For what are probably very practical reasons related to its China business, Wanda apparently makes a fetish out of opacity.

When the world’s best investigative financial journalists start coming up empty, we are left with seeking answers based on clues rather than on answers. The best place to look is in the behavior of their partners and subsidiary companies. Some potential clues:

  • Check IMDB. Does Legendary look like it’s production slate is shrinking, or its production rate is slowing? Is Dick Clark increasing production, or is production on decline?
  • Check reviews of AMC and Carmike cinemas, especially their bigger, newer, flagship multiplexes in large US cities, on Yelp! and similar sites. Are reviews trending upward, or are they in decline? Are there complaints related to quality of service, of food, of cleanliness?
  • What is the status of partnerships with companies like Sony and IMAX? Are we seeing any action, or have things gone quiet after big announcements? Is Wanda living up to its commitments?
  • And, of course, watch for news on major moves in China’s real estate market, or from the government on restricting Chinese investments abroad.

Good reporters are already doing all of this. But journalistic standards won’t allow them to report on such circumstantial indicators. For the rest of us, they can help us gain a general hunch about where the company stands, how it is operating in the US, and where it is likely to go next.

Longer term, though, Wang will have to learn to operate in a part of the world where deep scrutiny of his operations are encouraged rather than prohibited, and where transparency is a necessary precondition for the trust he will need to sow in order to prosper.

Did Uber Win in China?

In all of the discussion lately about Uber in China, one topic that is not getting a lot of airplay is the way in which the outcome for Uber is being positioned. One person for whom I have a great deal of respect believes that Uber did great, that they wound up with exactly what they wanted in the first place, and that overall the outcome – as junior partner to Didi Chuxing in a combined business – is a victory for Uber.

As I mentioned in an earlier post, to me that seems a bit like spin. First, it is highly unlikely that this is the outcome Uber sought all along. Had it sought a minority stake in Didi, it could have (as Apple did recently) simply written a check, swapped stock, and agreed to work together globally. And it could have been done more quickly, easily, and with less of a drain on company attention and coffers.

Second, all that their efforts won them is a weak role in Didi, just another seat at the table with a group of powerful investors to whom Uber is a very small potato. Had they gone in with an offer early, they may well have saved everyone money and saved Didi from the need to turn to outside investors. Uber may well have ended up with a less diluted position.

Third, they sit with no better odds of a payoff now than before. 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 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.

Finally, with its new A-List of global investors, Didi may well prove to be a more formidable rival outside of China in the long term than it might have been otherwise, especially if Uber had shown up at the beginning offering a strategic tie-up. Now Didi has international ambitions, and with an 85% market share at home in a much bigger market, will be in a better position to face Uber in other markets.

So did Uber win? Events will tell us, but probably not for some time. And that’s about the most you can say. From a removed perspective today, Uber is salvaging the most it can from a shipwreck, and pretending that it intended to be on the rocks all along won’t do much for the company’s credibility with the Street.

 

Why Mooney Aviation Should Forget the China Market


Mooney International has made the first flight of the M10T proof-of-concept trainer aircraft. Certification is expected in the next few years.

Alton Marsh
Mooney M10T Trainer Makes First Flight
AOPA
December 23, 2015

There is a lot of excitement in China around the Mooney M10, a small diesel-powered airplane, for reasons originally flagged by Michele Travierso in Wired about a year ago (see “The American Diesel Plane that Could Bring Private Flight to China,” November 11, 2014).

First, the Mooney brand and its related assets were acquired in 2013 by Zhengzhou-based real estate developer Meijing Group. While the company is still US-based, it is, in ownership at least, a Chinese company.

Second, the M10 will be primarily manufactured in China after it is certified by the FAA and, presumably, the Chinese authorities as well.

Third, the aircraft is ostensibly targeted at the long-nascent Chinese general aviation market. Boasting a unique diesel engine, the plane would be cheaper to fuel in China (where standard aviation fuel can cost up to four times its US price), and the use of diesel would give the plane a 500 mile range – critical in a market where civil airfields are still depressingly rare.

The folks at Mooney have a fine-looking aircraft, but it is a very long way from changing aviation in China.

The plane’s primary advantage – the cost of fuel – is the result of the relative immaturity of the general aviation. There is not a lot of demand for Avgas (as opposed to jet fuel) in the market, so little is made, and the product is sold at a premium. If suddenly there were thousands, or even hundreds, of private aircraft in China, the economics of Avgas production and distribution would begin to narrow the gap between the cost of diesel and avgas.

What is more, the primary challenge for general aviation in China (defined as all aviation other than military and scheduled commercial airlines) has little to do with the price of fuel. The biggest problem remains air. The Chinese Communist Party has placed control of China’s airspace over military rather than civilian authorities. For its own reasons, the PLA is parsimonious with airspace, and wresting control of a piece of the sky for private aviation has been a difficult battle.

Airports are another issue. China has just over 250 non-military airports for the entire country. By comparison, with a similar geographic area, the US has more than 5,000 airports, and Euorpe has 3,900. What is more, few of those airports have the facilities necessary to service general aviation aircraft.

Finally, any new aircraft would face a market filled with formidable competitors. Textron Aviation, owner of Cessna, Beechcraft, and Hawker, already has deep ties in the country and broad product lines more attuned with both the business aviation and training/education markets. And Cirrus Aircraft, with its reputable SR series, is now owned by China’s largest aircraft manufacturer. All of these players will see Mooney coming, as any sales are still years away.

Even with its new pedigree as a Chinese manufacturer, Mooney faces an unenviable uphill battle. China is a market that tends to favor giants over upstarts, even its own, and that applies double for aviation. Mooney would be better off finding a way to build the plane in China, but focus on markets where the local competition was not so well positioned to crush it.

 

Responsa: The Influence of Business on Government

Hutong West
Shivering in SoCal
1601 hrs.

In response to my article “Standards of Influence,” an old friend and fellow China PR executive raised his hand to offer a gentle objection. While agreeing with the premise, he suggested that if commercial interest disclose their efforts, won’t the public sector put up resistance to their input, as it would be seen as bowing to foreign interests. He further suggested that there might be circumstances when it would be best to allow such processes to take place behind close doors.

This is a fair point, and needs to be addressed.

The combination of popular sentiment, social media watchdogs, and the Party’s desire to short-circuit the cycle of corruption is fostering greater transparency in China around the influence that companies (especially multinationals) try to exert on political decisions. Companies caught trying to change the rules in their favor are finding their operations subject to greater official scrutiny, and officials who appear to have taken part in such discussions are being investigated (or worse) with greater regularity. The potential downsides of the process are starting to outweigh the potential benefits.

This does not mean businesses cannot or should not have a voice in public decision making. Indeed, the wise regulator seeks the open input of a wide range of stakeholders, and businesses owe it to their own stakeholders to stand up and be counted. But when that voice is cloaked, the slope to malfeasance and corruption steepens and is carpeted with bacon grease. Sunlight ensures that the role of commerce in the process serves the public good as well as the private interest.

This means that those of us who operate at the nexus between industry and government in China cannot rely on the time-tested tools of government influence. We must chart a new path that is radically transparent yet equally (if not more) effective. That is a very narrow bridge to walk, and will require a great deal of imagination even in those cases where there is a high congruence between the needs of the nation and the desires of the merchant.

Yet it is critical for us to do so – and not only in China. Around the world there is a growing distaste for (and pushback against) the role that commercial interests play in the formulation of policy. Indeed, China has a deep ideological bias against such interactions. To continue to act as if these sentiments are irrelevant is aught more than denial.

Certainly, there will always be situations where it is better for all – including the public at large – for government discussions with industry to take place behind closed doors. But we should take for granted that in most cases, secrecy does not serve the public, and companies should thus shy from such approaches. If the mounting social and environmental costs of China’s development offer proof of nothing else, it is for the virtue of public scrutiny.

For a company to have real influence in policy in the future, it must first carry the burden of proof that the policies it is advocating are in the service of the public interest. Public relations people should encourage this: not only does this eliminate for companies the risk of later disclosure and the implication of impropriety, it also serves as prima facie proof of good corporate citizenship.

Standards of Influence

One of the early chapters in my book Public Relations in China focuses on the importance of the government as a stakeholder, and the means by which a non-Chinese firm could make its influence felt in the policy-making process.

In a time when the collusion between moneyed interests and government power has become a challenge in countries around the world, we have to ask, “is there any circumstance in which it is right for a commercial interest to influence policy and regulation?”

My answer is a qualified “yes.” There is no shortage of companies that have proven themselves to be bad actors, wielding a degree of influence far out of proportion to that wielded by other stakeholders, and too often acting in ways that undermine the popular best interest.

At the same time, there are occasions when it is proper for a company to make its point of view known to those proposing regulation, and, indeed, there are circumstances in which a company’s decision to withhold its expertise from the regulatory process represents an abandonment of the firm’s civic duty.

What we need is a standard, a framework within which companies can offer their input in the regulatory process without drowning the popular interest. In an effort to incite a discussion on the topic, I’ll suggest the first six criteria.

  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity has nothing to gain or lose from the resolution of the question, that entity is obliged to offer its information and analysis to influence policy for the greater good.
  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity stands to gain or lose from the resolution of the question, that entity may to offer its information and analysis to influence policy provided that it is open about its interests.
  • At no time should a commercial entity use its influence to mute or silence other voices, even those in opposition.
  • At all times the information provided to the government agency must be factual and presented in as clear a manner as possible.
  • At no time may any commercial entity provide direct or indirect payments to any government official or agency that would serve to influence the resolution of a regulatory question.
  • All efforts should be publicly disclosed in real time.

Arguably, China’s central government has never been as open to outside (and particularly foreign) influence as have those of the West. Looking at the lobbying-industrial complex that has turned entire neighborhoods of the US capital into ghettos of influence peddling, that is not entirely a bad thing. But the nation needs legitimate pathways to allow an appropriate degree of input by all stakeholders, and foreign companies are no exception. Those pathways should never be closed to companies that adhere to a clear and publicly-acceptable set of standards.

No China Experts

Hutong West
In search of macro-fauna
1241 hrs.

I have said this in other fora, and as my book Public Relations in China goes to bookstores I am getting questions from media and others that have caused me to lay out the following disclaimer:

  1. I am not a “China expert.”

  2. There is no such thing as a “China expert.”

  3. Anyone who comes to you claiming to be a “China expert” is either deluded (and thus to be pitied), lying (and thus suspect), or out to separate you from your money (and thus to be avoided.)

  4. You don’t have to believe me. Dr. Fan Gang, the head of China’s National Economic Research Institute and the Secretary-General of the China Reform Foundation (among many other titles), once said as much to a reporter when she asked Dr. Fan and I whether, “as China experts,” we saw China’s economy improving or in decline in coming years. He denied being a China expert, told the reporter that he knew I agreed, and questioned the very existence of anyone who could claim the title of a China experts.

  5. China is too large, too old, and too complex to be sufficiently understood by a single individual. At the very most, we can be “specialists.” We can never be “experts.”

When doing business in China, you thus cannot rely on the counsel of a single individual, regardless of how experienced, well-connected or erudite. Instead, seek and genuinely consider the advice of a range of people of different backgrounds, and in so doing form your own view based on a synthesis of their views.

China “experts” will only get you into trouble.

The Cost of a Revolving Door

In the Hutong
Watching Fall Arrive
1223 hrs.

Sitting in the lobby of my hotel in Beijing, I watched over an hour on a Saturday morning as several groups of tourists negotiated an automatic door. One group overfilled it, jamming the door and compelling doormen to come to the rescue.

Two other families (who came in separately) did not get the idea of an automatic revolving door, and pushed the glass partition as they believed that this was what was causing the door to turn. A third family let their kids play in the door, causing several jams and frustrating groups of other guests, one almost to distraction.

The hotel, as a result, posts a doorman nearby to help tourists negotiate issues with the door that was installed in order to eliminate the need for a doorman; and a cleaning lady was hired to clean the door that was installed to minimize the cleaning of the lobby.

All of this serves as another fun reminder that the most prosaic things can have unintended consequences and unexpected costs in a Chinese enterprise.

Sophisticated Chongqing

Hutong Forward
LAX bound for Bangkok and Shanghai
1215 hrs.

My first trip to Chongqing summarily destroyed all of my preconceptions of the central Chinese river terminus.

Instead of an immense but slightly provincial city, I came away after three days with the impression that Chongqing is about as provincial as Hong Kong, and is in many ways a lot more livable than its coastal cousin.

People were fashionable and stylish, at least as much as Beijing. The streets along the river were lined with remarkable restaurants and shopping districts that made Shanghai’s Xintiandi look both quiet and unsophisticated by comparison. The Pedestrian Street between Minzu Road and the Liberation Monument bisected the central business district with a sophistication that rivals Nanjing Road and Wangfujing. And the people have that warmth that seems to come so readily to the people of Sichuan.

I berate myself now for delaying my visit for so long. There really is more to Chongqing than a foggy, overgrown river port, and I suspect that I will be going back again soon.

The Limits of Coercion

Persuasion trumps coercion. Even in China. The government has a monopoly on force, but it does not retain that monopoly by employing it without consideration of public opinion.

The days of high-handed government action are over, and this makes the government’s task more complex – and delicate – than ever. Power my grow from the barrel of a gun, but the nation’s leadership cannot ignore that it remains rooted in the people.

Concept of the Week: Urbanizing In Place

Urbanizing in placeconcept – the idea that China’s urbanization is not being driven entirely by migration from the countryside to the cities, but that large areas that Beijing’s statisticians might once have considered “rural” are now considered “urban.”

In-place urbanization could occur in one of three scenarios.

The physical area of a municipality has been expanded to include what was once surrounding countryside.

In the second scenario, a village that was once considered part of the countryside has now grown into a town that a demographer or statistician would now classify as urban.

In the third scenario, a group of villages in a given area are considered to be conglomerated as a single administrative entity and reclassified as a single town.

In these cases, China’s urbanization is taking place without migration, and presents a different set of policy, marketing, and personal challenges and opportunities than classical migration-based urbanization.

The Third Way on Xi

English: "Long live the great Communist P...
English: “Long live the great Communist Party of China” in Xinhuamen, Beijing ‪中文(简体)‬: 新华门左标语“伟大的中国共产党万岁” (Photo credit: Wikipedia)

“Is the Chinese dragon losing its puff?”
Peter Harcher
The Canberra Times
March 16, 2015

Professor David Shambaugh’s recent essay in the Wall Street Journal suggesting that China’s political system is about to hit some very rough times (“The Coming Chinese Crackup“) has provoked intense debate. Peter Harcher’s article written in response offers a neat summary of what makes Shamgaugh’s conclusions so debatable.

I nevertheless absolutely reject his conclusion which I find astonishingly ill-informed. The pervasive sense of dramatic change is, I have found, combined in almost all Chinese minds with satisfaction and confidence that the change is urgently needed–indeed long overdue—and in the right direction.

It also demonstrates that the American academy has powerful competition as a source of cogent analysis on Chinese politics.

Any serious discussion of China’s future must include non-Academics like economist Arthur Kroeber and Australians like Geremie Barmé of the Australian National University and David Kelly of China Policy in Beijing.

Barmé, for his part, writes off Shambaugh’s collapsism as the view of an American deeply anxious about America. Kroeber, an American himself, argues that the Party remains as strong and adaptable as it was in 2008, when Shambaugh wrote his excellent China’s Communist Party: Atrophy and Adaptation.

My problem with both sides is the determinism implicit in the arguments. The Party’s collapse might not be imminent, but neither is its adaptability without real limits, imposed upon it by important groups and individuals within its own ranks. I find it hard to believe that Barmé and Kroeber would argue that point.

We thus must agree that there may be circumstances under which the Party might prove insufficiently adaptable to avert an existential crisis. And before you protest, let us agree that there may be circumstances under which any polity, however strong and adaptable, might face the same limits. In that case, the answer is neither “the Party will collapse” nor “the Party is too adaptable to collapse.” It is, rather “under what circumstances would the Party face the danger of collapse?”

Like most of us, neither I nor my clients can afford to treat China like its future is a game of roulette: bet on Red, the Party stays in power. Bet on black, and it collapses. Creating strategy in business means contending with all possibilities, balancing them, and coming up with a pathway that appropriately addresses them.

We can be neither Cassandra nor Polyanna. We should not overestimate the considerable challenges Xi Jinping faces as he guides the nation through roiling and uncharted waters, but none of us can afford to underestimate them.

Shameless Plug Dept.: New Fast-Food Paper

Hutong West
Contemplating lunch
1253 hrs.

My most recent paper, this one on addressing the challenges facing fast food franchisors in China, “Jumping China’s Great Food Wall (pdf),” is now up on the Allison+Partners website.

Failing that, you can find the paper on Academia.edu here.

This is more of a practical paper than my last one, giving a quick overview of the uneven success enjoyed by fast food companies in China, and offering a series of prescriptions designed to avoid some of the more serious rocks and shoals, and mitigate the effects of many others.

Get off the plane

English: Business class at grand opening of Be...
English: Business class at grand opening of Beijing–Shanghai (Jinghu) High-Speed Railway. (Photo credit: Wikipedia)

In the Hutong
Watching the pigeon hutches
1011 hrs.

Speaking to a group of students touring China from the UK, I asked how they traveled from Shanghai to Beijing. Their response, of course, was that they flew.

I understand the rationale for flying inside of China. Under the best circumstances it is fast, and other forms of travel are harder to arrange from overseas.

That said, my recommendation to anyone organizing a trip to China for a group of executives, students, or scholars is to do yourself and them a favor: on the leg between Shanghai and Beijing, put them on a high-speed train, in either First or Business Class.

(Be aware that for reasons that escape everyone but the Ministry of Railways, Business Class is the better, more comfortable, and more expensive of the two.)

Even if flights are on time, the elapsed time from downtown Shanghai to Downtown Beijing (or the reverse) is not that much greater, especially if you purchase your train tickets in advance. And if there are flight delays (and there are frequent delays, because of weather, VIP flights, or because the Air Force feels like it), the trip can actually be faster. But that’s not the best reason to take the train.

The best reason to take the train is that the people you are squiring across China will actually get to see out their windows something more than modern cities and clouds. They will see farms, villages, half-completed roads, factories, and the insides of a half-dozen cities of a million souls or more that they had never heard of.

Send them home with visions of modern cities in their heads, and they will get the wrong idea about China, making the same mistake made by instant China experts like Thomas Friedman and Niall Ferguson. Expose them to a bigger slice of China, and they will understand that a large part of the nation is still 40, 70, of 100 years behind Shanghai. Then they will start to understand the forces that drive this Asian Leviathan. And is that not the point of bringing a group to China in the first place?

Case Study: Why You Should Seek Multiple Opinions on China

“Three Things TLD Registries Must Know About China’s Domain Name Regulation”
Chang Jian-Chuan
CircleID
June 18, 2015

I get to talk to groups of businesspeople and business students on a regular basis, and one of the maxims I include in just about every speech or presentation is this:

Don’t get your China advice, whether generally or on a specific issue, from any single individual. China is too large and complex for you to trust the future of your enterprise in this market to the viewpoint of one source, however knowledgeable he/she/they may seem.

The news this week offers a superb example of why this is the case. The Ministry of Industry and Information Technology (MIIT) has had one if its periodic regulatory spasms regarding the Internet. One of the specific areas covered by the current policy outburst is the arcane but important area of top-level domains (TLDs).

The Internet Corporation for Assigned Names and Numbers (ICANN, the international body that, among other things, operates the system that makes it possible for you to type “amazon.com” into your browser and get to a bookstore instead of an error page) has recently presided over an explosion of top-level domains (TLDs), those bits of an site name to the right of the dot, like “.com,” “.net,” and “.org.” Where there was once only a handful (in addition to nation-specific top-level domains,) there are now literally hundreds, if not thousands of these, and we’re all having to adjust to a world that includes “.law,” “.ninja,” “.guru,” and “.me,” and .”porn,” among hundreds of others.

China’s adjustment is coming in the form of a new regulation (“Interpretation (Reading) on Carrying Out the Domain Name Registration Services Market Special Action Policy”, promulgated by the MIIT on May 12) restricting how registries (the companies that own the top level domains and collect fees for domain names that use them) can sell domains to customers in China. This is causing a bit of a panic.

Chang Jian-Chuan, a Ph.D. and a research fellow who covers the field for a local registry, offers this piece in a leading industry publication as something of a palliative, and I agree that panic is unhelpful, but he loses me when he writes:

Nowadays a revision of the regulation is under way to reflect the latest expansion of registry operators. However, except for the new requirement that any foreign registry has to establish a legal entity in China, all the other requirements for the license have maintained unchanged. Therefore, it is fairly safe to conclude that there is no “tightened control” or “new move” against New gTLD registries and registrars.

What we have here is a disagreement (to put it mildly) over terms. While a superficial reading of the regulations may suggest no significant change, if you understand both the challenges faced by the companies affected and the knock-on effects of the law, it is clear that the change doe represent a new move that tightens control of the industry and endangers the business of many foreign registries currently selling into China.

From a business standpoint, the regulations throw the business of many registrars into a spin, if for no other reason than they are required to set up and register a local operation in China with $170,000 in registered capital, with local technicians and customer service personnel. Someone familiar with the global registry sector would know that most registries, including some of the larger ones, are not yet operating in China, and for all of those this represents a costly process and significant ongoing expense. For the vast majority of non-Chinese registries the cost will be prohibitive, in effect shutting them out of China.

From a legal standpoint, attorney Allan Marson at Ishimarulaw.com noted in November:

When MIIT promulgates these revisions (and barring any last-minute amendments), they will substantially change the status quo for non-Chinese registries in China. While users in China will continue to be able to access websites outside China (subject to passing through the “Great Fire Wall“), in order to promote and serve Chinese customers, a non-Chinese registry will be required to set up a subsidiary registry or entrust a China-based registry to operate its TLDs in China. Failure to do so will likely result in Chinese registrars refusing to sell domain names under the non-Chinese registries TLDs and preventing resolution of any websites that are already registered under those TLDs.

Contrary to Dr. Chang’s fairly offhanded dismissal, a common sense reading of the regulations from the viewpoint of a foreign registry and from an attorney is that this regulation and its knock-on effects represent a new move and tightened control over the field, one that significantly changes the way most companies in an entire industry must operate in China.

While most of us shy from anything that may seem ad hominem, when seeking advice in China you must consider the provenance and possible motives of any advisor. For example, Dr. Chang is a former official with CNNIC working for a local Chinese registry. This would suggest that, far from being a dispassionate observer, Dr. Chang has some skin in the game. It is worth noting that his company, KNET, stands to gain if the new regulations are enforced to the greatest extent possible. It is also worth noting that his publishing an article in an international industry publication praising an MIIT regulation will not hurt his company’s regulations with its regulatory overlords at MIIT, and that it would have been impolitic – if not commercially suicidal – for Dr. Chang to have written a different opinion.

Let me be clear: the goal of this article is neither to impugn Dr. Chang nor his employer. I am sure Dr. Chang is a wonderful person and an academic of great integrity, and that his company is a fine organization operating in a highly competitive and heavily regulated industry.

The point, rather, is that the advice you receive from anyone about China is often influenced on where the individual comes from, where he or she sits, and the pressures under which he or she operates. The only way to get a true picture of the challenges and opportunities your company faces in China is to reach out to a range of advisors, tapping each for their thoughts, questioning each, and forming a picture based on all of the above.