The China Vortex

I have spent a lot of time recently thinking, writing and researching on the implications of the Internet (hence my sparse article posting; my apologies) and what that means for how people do things in a corporate setting.

The most important takeaway so far is that blogging and the Internet will accelerate the death of corporatespeak. By “corporatespeak” I mean the gargled and mangled language which comes out of public relations agencies in the form of press releases, and which sometimes make it into mainstream articles in magazines and newspapers. This is the stuff where a company tries to preserve and protect its “corporate image” and speaks with authority to its customers, and ends up sounding like a robot because the message has been run through corporate communications and the legal department to insure that the company won’t get sued for any claims it makes. Ad agencies spend a good part of their time undoing corporatespeak in order to get the company message through to consumers in a way which sounds like there are actually human beings on the corporate side.

Even though I come from a marketing background, I have really hated corporatespeak with a passion, which is an important part of why I like the Internet. For me, the Internet is about facilitating asynchronous conversations. It allows me to meet people I have never met before, and would never have the opportunity to meet before if the medium had not existed. For instance, just yesterday, I connected with a group of IT professionals in France who enjoy reading this blog. It was good to know that there are people in France, and maybe other countries, who enjoy the content of this blog. The Internet is like a huge room with many small groups of people chatting away. If you are polite and friendly, you can walk up, introduce yourself, listen and contribute to the conversation. Then, when you want, you can say thank you, and move on to another conversation.

And the neat thing is that these conversations need not be going on at the same time.

Now, marketing and corporate communications departments are wondering what to do because they have been set up to “protect the corporate image” and “protect the management” respectively, and really don’t know what their new roles are. It takes a new kind of corporate communicator and a new kind of marketer to say “My job is to engage with the customers (or shareholders) in a new kind of one-on-one conversation” when that is not what they are used to doing.

It takes a certain of confidence and good judgment to engage in conversation. They can’t be corporate drones anymore; that way doesn’t work in this new world.

Did you know that corporate CEOs are human beings too? It would be really good if some of them expressed their thoughts online, without having to worry about getting spammed, etc.

One of the things I have noticed in China which is very different from the US is the huge number of people always in bookstores, especially the larger ones. Many Americans like to get their information from radio and TV and think of reading as a chore. I have never understood this attitude; I prefer reading to radio and TV. Words and text in an article expose how a person thinks, and how they analyze a problem in a way video and audio do not. It goes deep while television, especially in the US, is all about sound bites. It encourages shallow thought, which leads to (surprise!) shallow behavior.

This is why sometimes, when asked to comment on a given subject on radio or TV, I say no. If I feel that I cannot add something new, or a deeper viewpoint which people can think about later, I prefer to keep quiet. If I want to offer a viewpoint which will make people think a little longer and deeper, then an article is the best approach.

The great irony about the Internet is that it encourages the development of a whole new set of soft skills. Traditional advertising stressed divisions along media; now those divisions no longer exist. People have a whole smorgasbord of media available and they don’t divide along media lines; they divide according to where the content is and what is most convenient for them at the time.

The new soft skills will stress:

• How to converse intelligently with people, one on one, even in asynchronous conversations;
• How to listen to people and use that information to get insights;
• How to handle a difficult or bad situation and turn it into a good situation;
• How to keep the conversation going and add to it from time to time;
• Being proactive all the time;
• And maybe most importantly, knowing when not to say anything

Marketers and advertisers being able to have intelligent conversations? What a revolutionary idea!

If you will excuse my initial sarcasm, that is exactly what is needed. In writing, I have found the greatest challenge to be finding a voice I’m comfortable with. Now it’s easy.

The new advertisers and communicators will have to be able to think this way too.

It will be interesting to watch how this all develops…

With all the talk about globalization, as well as what is working and what isn’t about it, it’s time to drill down and find out what businesses are global by nature, and what businesses are local by nature.

For companies who are entering China, or are planning to go from China into international markets, this is a very important issue. There are some businesses which by their nature are global and others which are more local.

There are several businesses which by their nature are global. They are:

• Raw materials and commodities
• Transport, logisitics and distribution
• Manufacturing
• Commoditized services such as back-office operations and software outsourcing
• Finance, especially wholesale banking
• New technology development and research

Then there are other businesses which are more local/national in nature:

• Retail and brand marketing
• Most legal services
• Internet services
• Accounting services
• Foods and food-related services

My experience is that the businesses which are more wholesale in nature tend to cross national borders and become more global in nature, while those which are closer to end consumers tend to be more local and national.

If there is an irony, it is that the least sexy businesses are the most global in nature, while the more sexy brands and Internet businesses are in fact, local. I believe that there are several reasons for this:

Some of you may be surprised to note that I include Internet services in local businesses. If fact, they are. The struggle between Baidu and Google is largely a struggle over who has the larger local language search advertising market, Google, which gets most of its revenue from its home US market in English, or Baidu, whose services are almost entirely in Chinese. Even though China has four times the population of the US, the time when Baidu will overtake Google in terms of advertising revenue is still far far away.

One of my pet peeves is the amount of hype first-time visitors to China swallow, thinking that they can plan their retirement on a “China strategy” without in fact coming and living in China and making an effort to understand the people and culture and building relationships on the ground. More often than not, the people who have dollar (or yuan) signs in their eyes come from the services sectors, which are in fact, more local in nature. The ones who are making the money in China are the big wholesalers, but they have enough presence of mind to keep their mouths shut.

Lately, Dan Harris of China Law Blog has been talking about the opportunities opening up in the Chinese services sector because of policy changes. Most likely these changes will be led by another wave of service entrepreneurs coming into the country, or as is more likely, a new batch of local Chinese entrepreneurs offering services to China’s urban middle class. After all, they know the language, have the opportunities and can make the fast move.

For businesses which are local by nature, and are mostly in retail, the challenges come in several forms. The costs of crossing national boundaries to establish a name presence are always huge. This is an area global ad agencies are designed to address, even though their market has undergone huge changes.

The other huge challenge is human talent. How do you find the human talent who understand the needs of the parent company, and at the same time, can build relationships in a new market and understand what consumers want?

This is the real challenge of globalization.

Readers know that I have spent quite some time thinking about how the Internet and online advertising will affect the whole overall advertising industry. A recent post on Ogilvy China Digital Watch made me think more about how some of the changes the rapid rise in online advertising spending will affect the advertising industry as a whole.

The advertising industry grew at a time when the divisions and demarcations between different media and media audiences were very clear (TV, radio, print and below the line advertising). It was a good business, and permitted the ad agencies to buy large amounts of media, then resell it to their advertisers, while offering other services (creative, PR, direct mail, etc.) on top as value-added services. Advertising could be divided into brand advertising for global brands and more targeted ads for small local clients. All in all, it was a good service business with healthy margins.

That whole business model has been blown apart with the Internet, and ad agencies are adjusting to the changes. These changes are just starting, and will ripple out to affect other services as well.

The single greatest change brought by the Internet is the shortening of the business cycle. People have more things to do, which means that they need to make decisions, even important decisions, in much shorter time cycles. This means that if they want to find out something about a product/service, they want to know it in as short a time as possible.

This has been enabled by search, a business which Google has built to near-perfection. Add advertising to search results, and you have the Google money machine. Advertising appears in a welcome context instead of being disruptive.

Search advertising has had some negative effect on brand advertising because it is possible, in a very short time, to find out what others are saying about a given product or service. This is not the line from the corporation, but what other buyers are saying. More disruption of the communications process.

The immediate effect for ad agencies is that their whole time-cycle has been disrupted. Instead of the normal annual budgets and precious planning time which goes into big-budget ad campaigns, more corporate attention is going to fighting fires, which usually fall into the PR realm. The agencies are trying to protect their creative and media teams from this hyper speed development cycle in-house, but it is impossible to control what is happening on the advertising client’s side, who is getting continuously distracted by what sounds like noise and chatter.

What is the ad agency to do in order to adapt and survive?

First of all, it is necessary to tell the clients that it is no longer possible to control the message to the customers. The customers are talking back, and there is no way to tell them to shut up. A lot of the customer feedback is noise, but there are also very valuable pieces of information in there.

There is a need for a new kind of ad agency warrior who can go out there and slay the dragons , and collect the valuable information and give it back to the creative teams and client so that they can act on that information in its product and marketing cycle.

Here are my draft job requirements for an ideal candidate:

• Information researcher, able to use Internet and mobile tools to monitor client-relevant information in real-time;
• Able to engage with client at all levels (executive and manager) to understand evolving client needs, and to report in real-time on rapid changes in market situation;
• Able to understand client’s corporate position and voice, and act as a responsible spokesperson and advocate in the digital realm while upholding client’s integrity;
• Understands how to communicate to different clients on different levels and is able to quickly adjust accordingly
• Can quickly analyze and learn and communicate this information back to creative and media teams and back to client on a frequent basis;
• Proactively pushes out information to other team members and clients for their use;
• Comfortable working with amorphous teams which are changing on a constant basis;
• Is comfortable communicating in at least two human languages;

Requirements:

• More than two years’ blogging experience, including acting as an advocate for a product/service;
• Knowledge of SEO tools and terminology;
• Understanding of corporate structures and organizations and how they work, and how to get things done in them;
• Must love doing things fast and independently

Notice that I didn’t include academic credentials? I told you that we needed a new kind of ad agency warrior, didn’t I?

Several days ago I attended Urbancamp Beijing, hosted by Orange Labs in Beijing.

The purpose of the event was to explore how cities of the not-too-distant future will look like; the theme was the Chinese City 2.0. Because China is growing so rapidly in this area, it has become a sociologist’s paradise for study. Neville Mars of the Dynamic City Foundation is a Beijing-based architect who is actively studying this field, and will come out shortly with an 800-page book on the subject in January.

His presentation was presented in a very interesting and chaotic manner, as if to reflect the chaotic development of the subject he covers. He alluded to how rampant growth in China was being fostered by the government, and then in most cases, the government took over development from the artistic groups.

Another group which is studying Chinese urban growth is the Urban Forum, which is studying the effects of China’s urban development. A Chinese language magazine, Urban China, is now covering China’s development, and a speaker unveiled plans for a web version of the magazine for global distribution.

Shang Dan of Orange Labs Beijing provided a fascinating report on car clubs in China, which bring together car owners to join in social activities. Since Chinese treat cars mainly as symbols of social rank and status, it is natural for them to research the car clubs before buying the model they want. This fits well into the city landscape well because it hard to find like-minded people in a literally new city, and the car club provides a welcome activity club for the new car-owner.

I wonder what kind of car club there is for owners of black Audi A6s? (If you have lived in China for a while, you’ll get this joke.)

Kenneth Fields of Peking University spoke about how to use tagging for location data, and City8 introduced their 3D mapping software for cities.

The afternoon discussion, which was a free discussion, was about the different themes in the definitions of place and city.

One subject which was not clear to me was what is the definition of city where people spend more and more time online on the Internet? Most of us spend a good part of the day jacked into the Internet; is it really important to have cities anymore? Has the city become a state of mind instead of a physical place? When pollution and hydrocarbons and global warming become ever greater issues, why bother with physical cities anyway? What are online and offline communities, and how do they map to each other?

Are Chinese developers and the Chinese government going exactly contrary to development trends by developing physical urban cities now, when they are falling into discredit?

These are interesting questions which need to be explored further.

On Sunday November 4 I had the opportunity to attend the first Creative Commons Photo Awards ever held worldwide at the National Library in Beijing. I was invited, and there was a wide range of overseas guests, including Joichi Ito, president of Creative Commons and Dr. Catharina Maracke, director. The whole event was put together by Prof. Wang Chunyan, who is the project lead for the Creative Commons Mainland China. She also serves as assistant professor of law at Renmin University of China.

There were some 4,000 photographers who submitted their photos for judging. The judging panel was made up of independent photographers and photo editors at Xinhua News Agency. There were some excellent speeches in Chinese about the development of Chinese photography. Joichi Ito spoke about Creative Commons licenses and about how to select them, while Dr. Maracke made an introduction to the CC licensing model, and how it has been implemented in some 80 countries, giving content creators some level of control over the degree of licensing they wanted to give.

Stewart Cheifet, who serves on the board of Creative Commons Mainland China, discussed how there are now new software programs which help content creators easily choose the license they want to grant.

Overall, the exhibition reached a perfect balance between photo appreciation/education and legal licensing. Photos were judged and voted on online which was made available through a Chinese language website for this event.

The whole event was covered by Sohu, the leading media sponsor, one of China’s leading news portals. Here is the Sohu article (in Chinese).

In the evening, I had dinner with Joichi Ito and the Sohu correspondent, Cherry Cheng, about how Creative Commons licensing lowers the costs of marketing for new content creators. By making low-resolution photos available for free, they can lower the very considerable costs of marketing their works. He told about how a new musician from Colombia released her vocals on the Internet, and found it incorporated into the music of other musicians, giving it far wider coverage than she would have had under traditional licensing methods.

Most who are new to the CC licensing model grant very limited rights, but when they become more comfortable with it, they grant more generous licensing terms, including commercial uses of their works. This is a strong trend.

Later on, we discussed some of the continuing misunderstandings between Japan and China, and how both sides needed to do more to build trust with each other. Aside from his involvement in the Creative Commons, Joichi also offered excellent insights into understanding Japanese politics, a subject which he covered very well in an article published by the New York Times.

Creative Commons is becoming more active in China, which is a very good thing. The Chinese are used to getting beaten over the head by the US congress about IP violations; now it is apparent that even many Americans feel that the US copyright law, which is largely dictated by larger traditional media companies, is broken and needs to be fixed. Earlier on, I posted about Cory Doctorow’s visit to Beijing in September, which was very well received.

It is Monday morning in Beijing as I write this, and I see that Joi has already posted about the event on his blog.

Amazing!

When I look at web apps and ideas in China today, practically everything I see has to do with the retail consumer. Popular fields are gaming, because it proven and China has a large gaming population, not to mention the success of the major players including Shanda and The9, and music and search.

The result has been a plethora of startups in these fields. After all, they have a demonstrated and successful business model based on advertising. God knows that there are huge amounts of advertising dollars just looking for half-decent excuses to be spent in China. VCs can use these as references in their decision-making and in valuation, which is good.

But the real money is always made when a new company breaks out in a field which was considered dead or dying. Right now, I think that field in China is web productivity apps.

There is a big hole between Office (Word, Excel, Powerpoint) and the web. In the US and Europe, this area is occupied by Oracle, SAP and Salesforce. There are Chinese competitors such as Yongyou and Kingdee. Google has made some significant headway with Google Docs, but there is still a long ways to go.

So far though, none of them have passed my Internet cafe test. This means that I have not seen anyone sitting on a computer in an Internet cafe using any of their apps. They are all playing games or chatting away.

This creates a chicken and egg situation; VCs fund companies which get the eyeballs, and hold back on those productivity apps which do not get the attention, but are far more meaningful and productive. And the companies which are making productivity apps, which take far longer to develop and mature, have trouble getting funding. The investment cycle gets shorter and shorter, but it takes longer to develop meaningful apps. As a result, the productivity apps market gets starved.

Something has got to change, and I hope that it isn’t too far away… Sometime soon, people will have to start earning money to play those games.

Sure, today it sounds like some kind of a joke.

But there are early signs that this may indeed be the case. After all, these are two huge issues which are, shall we say, pretty serious matters in China today? Yet there are early signs that point to China, or Chinese companies, possibly being able to take a lead in fixing some of the problems created by rampant development over the past thirty years.

Chinese companies have played a role in mapping out the human genome project, and have recently sequenced the first Asian genome in Shenzhen. Worldwide, 2007 has been a banner year in helping our understanding of the genome and how diseases are transmitted and/or inherited.

With its rapidly aging population, the Chinese government has a special incentive for taking care of its population and keeping them working well past retirement age. This is especially important for people with rare or special skills.

Everyone knows that the environmental situation is a mess because of massive overbuilding and inefficient industries which are manufacturing just to keep their doors open. As oil prices go up, the Chinese government has a special interest in developing new non-petroleum alternative energies which produce no or very few hydrocarbons, and do not affect the environment badly as some of the current technologies.

A few companies have already started to develop new products, but the market is still young.

On the government side, the Chinese government is already taking an active role in cleanup, as evidenced by its plan to clean up Lake Tai. I believe that in the next 10 years the government will take steps to retire or roll back the Three Gorges Dam, as the project is already being openly criticized in government publications. Premier Wen Jiabao has been the main spokesman for environmental causes in the Chinese government, and he has personally staked his reputation on cleaning up the Chinese environment.

Since the Chinese government has put its reputation behind healthcare and the environment, my belief is that these two fields will become as important to this generation as computer hardware and software were for the previous generation. Many of the breakthroughs which are now occurring in these two fields have been made possible by IT breakthroughs.

Besides, the smart money is already going there…

In an article for the Oct. 29 issue of Caijing, writer Xu Shanda (许善达) claims that Chinese corporate earnings are inflated. In the Chinese language article, Xu claims that there is an earnings bubble. The article summary says this (my translation):

The government should no longer listen to Chinese enterprises’ requests to turn their costs to social costs. It can no longer listen to their efforts to infringe on the rights of all citizens to suit only their own unreasonable and illegal corporate earnings requirements. In real terms, this means that the government must step up its own efforts to build a social welfare system, an environmental welfare system, strengthen legal enforcement, and at the same time, create a new market system for the trading of resources so that a pricing system which more realistically reflects market realities can take root.

In the article, Xu claims that corporate earnings for many Chinese companies have continued to go up because they have not had to pay for social security and environmental costs. With such low operating costs, of course they would have high corporate earnings.

Now here is where it gets interesting. Xu Shanda is not an outsider; he serves as an independent director of ICBC, one of China’s state-owned banks, and was the former vice director of the National Tax Bureau.

In effect, Xu is arguing for a social security system to protect the poor, and for increased taxes to clean up the environment during China’s high-growth phase. High-growth was a top priority during the last years of Deng Xiaoping and during the Jiang Zemin years. In contrast, the administration of Hu Jintao is recognizing the high costs of the environmental damage created by reckless growth. The person now leading the charge re environmental affairs is Wen Jiabao, who is reviewing many major engineering projects.

For many Europeans, Xu sounds like a social democrat, or what is called in US politics, a liberal.As a an American, it is very ironic to see a Chinese government official argue for the kinds of things which the Bush administration is so keen on dismantling in the US, even though US public opinion largely believes that there are serious environmental issues which need to be addressed.

For the Chinese government, the current situation is about finding the right balancing point for China. If China adopts a social welfare system like western Europe’s, they are afraid that costs will go up and so will unemployment. Chinese goods will be less competitive on the global market. However, if they do not raise them, the destruction of the environment in China will continue, and many businesses will not be held accountable. It would become like the US, where the system favors large corporations while offering lip service to the little guy. (It was not always this way in the US, but it has markedly changed because of recent US changes to the US Supreme Court and recent court rulings.)

There are early signs that the Hu administration is taking steps to bring market realities to resource pricing; yesterday the Chinese government raised oil prices by nearly 10%.

So, there is strong internal pressure in China to make corporations more accountable, just while the US is privatizing more public sector services and is making them less accountable.

For those in the US who believe that privatization is the answer to all of the country’s problems, they would do well to come to China and look at some of the effects. A lot of this damage is done by a combination of corruption, cronyism and privatization.

Ironic, isn’t it?

UPDATEIf you are interested in how the Bush administration’s proposed tort reform would largely take away from US citizens the right to sue corporations for environmental and product violations, please visit the Wikipedia entry on tort reforms. This is the kind of legislation China needs to curb corporate excesses, although the Chinese are very conscious that they want to limit misuses and abuses of the system as have occurred in the US. What the Bush administration is proposing though, is not a reform, but more or less turning the clock back and making consumers rely on the “goodwill” of large corporations to protect them. Since I am not an attorney, this may be an area Dan Harris, publisher of China Law Blog, may want to shed some light.

Richard Spencer also has an article which suggests that the western interest in China’s conditions and policies may be more tied to China’s rise as an economic power than to a true interest in those issues.

Hmmm…That’s good food for thought.

Today I picked up a copy of the October 29 issue of the Chinese language biweekly, Caijing. Caijing is roughly equivalent to The Economist in US and European financial circles, and I like to think of it as the magazine for the thinking Chinese business person.

Most western journalists, especially American journalists, when it comes to covering China, start from the point “So what does it have to do with me?” With this as a starting point, it is all too easy to fall into the “You can make billions in China” or “The Chinese are going to take everything away from us” schools of thought, both of which are very far away from the truth.

The simple truth is that the west, and Americans, are not that important. I would say that more than 90% of the things which happen in China have no US/western angle; the Chinese make their decisions mostly based only on internal social and political considerations.

Just like in the US.

Caijing’s influence extends far beyond anything The Economist aspires to; it offers many insights into various topics which most other publications do not dare touch. In many cases, I believe that is floats trial balloons for policy issues. For this reason, I make it a point to pick up a copy when I have time; it offers all kinds of insights and debates many policy issues in its columns. (It may come as a surprise to many who don’t read Chinese that there are increasingly vigorous debates on many policy issues in China. There are, and you would be surprised by how open many of the subjects are.)

The October 29 issue is really excellent; it has opinions and summaries of the 17th Party Congress, which just ended in October. The party congress, held once every five years, sets the policy agenda for the next period. For this reason, it is something which is closely watched by most Chinese, and those who seek a deeper understanding of how the Chinese and the Chinese government see their changing roles.

Because many western observers of China come with their own agenda, I found this issue’s articles particularly interesting. I plan to write on some of the issues raised in the articles shortly, so if you are interested too, remember to come back.