Is It Possible For A Western-Managed Business To Succeed In China?

February 8th, 2008

China’s increasingly important global role means that more and more businesses are coming to China. While there has been a significant presence among multinationals for nearly 30 years, now companies are coming in at earlier stages. Now some startups are even choosing to start in China instead of Silicon Valley.

This trend has been encouraged by venture capitalists, who now give a premium valuation to companies based in China.

This raises a very interesting question: “Is it possible for a western-managed business to succeed in China?”

First of all, a few qualifications. While there are many western multinationals in China, most of them have heavily localized their staff and management. The general trend in these companies is to localize staff and management as quickly as possible without sacrificing necessary management skills in the process. So, for the most part, while they are western companies, they are largely Chinese-managed.

Since most of my work is with startups, I’ll drill down in this field. Now the trend is for more American startups to start in China, even though they may not see China as their main market. In the gaming field, for example, China has a huge pool of people with talent and experience in the gaming field. This means that there is a pool of people with talent in programming and art, and understand gaming culture. The areas where the local Chinese population are weak is in product management. Chinese tend to gravitate to managing other people; there is a serious attraction to being able to say that a manager manages x number of people. Product management is more about managing resources, and coaxing cooperation from different stakeholders in the organization. Naturally, this requires more in the area of soft skills. And soft skills are an area where most technical people feel less comfortable with, and generally do not do as well in.

And unlike in the US, product management people in China are generally expected to be much more technical. So there is a difference here.

Hence the shortage of good product management people.

Naturally, this gives an advantage to startups which have experienced product management people. One mainly western-managed startup in Beijing which is strong in this area is ECitySky.

What about other kinds of companies, and what about the market for talent?

It all depends on what you are trying to do, and what audience you are trying to reach.

One tendency in the Internet field is that as the technology tools become more mature, the technology plays second fiddle to product marketing and marketing. Since the Internet has had just as long a history in China as it has in the west, it is getting harder for an experienced technology person to differentiate himself purely on technical skills alone. Increasingly he has to bring soft skills to the table, especially team management skills, to the table to be seriously considered. This means that for most technical people in China, the opportunities are becoming fewer, especially when you consider their significantly higher costs.

On the management and marketing side, it becomes more important to know how to communicate with your main audience in China. If the audience you are trying to reach is mainland Chinese, this means you must be keenly aware of social trends, the different social groups in Chinese society, government policy, what the different groups are thinking about, and the dynamics affecting the different groups.

The only way to get a deep feel and grasp is to know the language on a native level, including speaking reading and writing Mandarin Chinese. Basically, you need to become local. Assistants, translators and PR agencies will only get you so far because they cannot provide the social context to digest and understand the raw data to make good business decisions.

And then, even if you have a native command of Mandarin, that is no guarantee of success. I sum it up this way:

  • If you don’t know Chinese (spoken, reading and written) and have not lived long in China, you don’t even know what are the right questions to ask.
  • If you speak, read and write Mandarin on a native level, but do not socialize with mainland Chinese except on special occasions, you may know what you don’t know. More importantly, the most capable and intelligent mainland Chinese will not join the startup, instead choosing to start their own startup, often competing with the company they just left. (I’m thinking of many American-born Chinese, Taiwan and Hong Kong Chinese-managed companies which claim to be Chinese, but do not include mainland Chinese who have grown up in China in their management ranks. For the most part, they do not trust mainland Chinese and in private meetings, it is not unusual to hear them complain about things in China. In my opinion, they are doomed from the start.)
  • If you have a startup which breathes, by which I mean that management does not have an inner circle dominated by any regional group or background, and freely allows people into senior and executive management based on their creativity, communication skills and ability to execute, then your startup will have the greatest chance of success. This is because a startup depends on moving quickly, and rapidly adapting to changes and competition in the marketplace.

So, in my opinion, when you get past the government regulatory issues, which are slanted to favor Chinese-owned companies in some sectors (especially media, where foreign companies are not allowed), it really is not any harder in China than many other parts of the world.

The biggest barrier for many startups is to get the management right so that it does breathe. Management needs to set the right tone from day one.

The best management hires the best people, empowers them, and let’s them go. At that point, it’s no longer a western- or Chinese-managed company; it’s just well-managed.

Get that right and China’s your oyster.

This is a joke, right?

February 8th, 2008

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When I read the first few paragraphs, I thought it might be a joke.

It read: “Oxford university’s latest professor is a top Chinese expert on mathematical finance who aims to understand how markets are affected by traders’ gambling and irrational risk-taking.” This was followed by: A new chair has been created for Xunyu Zhou at Oxford’s Nomura Centre for Mathematical Finance. Prof Zhou started his career at Fudan University, Shanghai, and he has spent the past 14 years at the Chinese University of Hong Kong. Prof Zhou has recently developed mathematical models of financial trading in uncertain environments. At Oxford he aims to focus on the way psychology and emotion affect decision-making and risk control. “It is fascinating to see how mathematical theory can bridge the gulf between finance and social science,” he says.

But when I saw that it was on the technology page of the Financial Times, I took a double-take, and assumed that it might be serious, or at the very least, half-serious.

Given my recent interest in blogging about risk and how it is viewed fundamentally differently by US and Chinese businessmen, I thought that it would be good to bring this matter to the attention of my readers.

Prof. Zhou’s background in Shanghai is a good place to study risk. After all, it is home to the Shanghai stock exchanges, which are well-known for their, ahem, volatility. Anyone who has even the most passing understanding the Shanghainese know that the chosen avocation for Shanghainese over 50 is to talk about the stock market, especially what’s going up and down in the market. Fifty nine years of “socialism” has not been able to change that. By the way, technical analysis is big among Shanghainese; even cleaning ladies understand it and follow it. Then there are all the technical heads of TV, and now Internet served video, where you can get any technical analysis of any share traded in Shanghai.

If you want to start any conversation with any Shanghainese, all you have to do is say something like “Let me tell you why you should sell all your holdings in (fill in any SHA traded share here) NOW!”, regardless of whether you know what you are talking about or not. As a matter of fact, I know of some non-Shanghainese who use this methodology as a pickup line; it never fails.

So I was kind of wondering if I really needed to go to Oxford to get all that.

Of course, if Oxford really wanted to get serious about studying risk in China, then they should go to Macau. Maybe the Venetian would sponsor a chair for that?

Snowstorms, US Economy Slowdown May Help China’s Economy to Cool

February 7th, 2008

It’s beginning to look like the snowstorms and US economic slowdown can help the Chinese government to do something government controls could not do: cool down the Chinese economy and maybe, even damp price inflation.

The greatest worry for Chinese government economists over the past year has been the very real rise in price inflation, especially food prices. In spite of repeated rises in interest rates, the Chinese government was having trouble putting a damper on inflation, something which Chinese leaders have traditionally viewed as a huge threat to social stability.

Now though, there are early signs that the slowdown in the US is welcome news for the Chinese government in its struggle to cool prices down.

Investing in American Science and Technology

February 7th, 2008

One of my recurring themes is that Americans have become too good at consuming, down to the point of consuming their children’s futures through deficit spending, and have not done enough to invest in the future. This is an important legacy of the current Bush administration which has repeatedly mortgaged the future in order to achieve their short-term political goals.

China has done a somewhat better job of investing in education and infrastructure; the recent snowstorms and transportation breakdowns in central and southern China have shown that even though large amounts have been spent, there is still a long road to go before China has a modern transport infrastructure which can serve the needs of its 1.3B citizens.

At one time, Americans were respected worldwide for their ability to make things. Now, these capabilities have been largely outsourced. Instead, American politics is much more focused on fractious issues which have little or no substantive meaning, but are manufactured to capture air time on television or on the Internet. The result: an increasingly polarized society where people increasingly talk at each other, instead of to each other.

For this reason, I was very pleased that a group of concerned Americans have set up a website to debate the future of science in the US, and the platforms of the respective presidential candidates on the issue.

If you are concerned about the future of American science, then you should take a look at it.

Has The Tipping Point Tipped?

February 7th, 2008

Ever since its publication, The Tipping Point, by Malcolm Gladwell, has captured the imagination of marketers and PR people all over the world. Basically, the book argues that ideas are spread by different groups of people, and that some have more influence than others in helping an idea to spread.

For marketers and PR people, the book basically argues that there is a formula for success; just feed your client’s idea or product into this ecosystem, and you can come up with a very predictable result. It’s almost like a software engineer’s dream: given a certain input, then a process, there is a predictable outcome. The marketer/PR agency can argue that the amount of money spent forms a direct correlation with the input, and if a project fails to take fire, it’s because the client didn’t spend enough money. As a result, the right connectors could not be influenced, and the project failed.

This is known as Influentials theory and forms the backbone of much marketing practice.

All clear and simple, right?

I have always had my doubts about it. For one thing, the model fails to take into account what is a good idea and what is a bad idea. And it fails to explain how people decide what is a good idea worth transmitting to one’s network, and what is a bad idea which should be immediately dismissed or ignored. If you were a Google engineer, how would you write an algorithm to describe how these very human and subjective individual judgements are made?

It seems to me that it is impossible to write an algorithm to describe them. What an engineer can do though, is plot how ideas are spread in a time when we are bombarded with more and more information, making our attention spans progressively shorter.

Wouldn’t there come a point when influence becomes almost random, when Influentials lose most of their influence? And doesn’t this coincide with the breakdown of the “mass market”, a concept which has collapsed with the rise of the social networking phenomenon and the long tail?

I had long suspected this, but I had never been able to prove the thesis. However, the results of some serious research by Duncan Watts supports this thesis. In this article published in Fast Company, his experiments suggest that the success of many fads has become, for all practical purposes, random. The article is an excellent read.

For one thing, I believe that The Tipping Point was written too long ago, and it described a world vastly different from ours in 2008. When it was published in 2002, the book described a time when people still read paper newspapers and books and before blogs. You may remember a term then called the “mass media”.

Now, ideas spread much faster, and within smaller groups which may appear random. It is also very likely that products/services/ideas will be served to much smaller groups of people.

One example is the gaming industry where the shelf life of titles has become progressively shorter, almost to the point where the marketing industry has trouble keeping up with the shorter time cycles. Hollywood movies have to prove their box-office success in their opening weekend in the US. These two industries have yet to adapt to lower production expense models which fit in with the lower shelf-life of their titles.

Basically, they need to downsize their costs.

If you boil it down to essentials, it means that you will have to market your ideas/products/services yourself, since you know your own audience best and understand how to pitch it to them. If they like what you have to say/sell, then they will become your connectors, and push it beyond your immediate circle, creating a breakout phenomenon.

In the end, the Internet empowers smart generalists who understand technology and keep the human touch in their marketing. Dumb messages may have short-time entertainment appeal, but they are unlikely to be profitable unless there is something behind them.

And marketing cannot buy credibility.

Mark Anderson Chimes In On Microsoft!

February 6th, 2008

Mark Anderson of Strategic News Service has written an open letter to Steve Ballmer on Microsoft strategy which is posted at the new online version of The Industry Standard.

FYI, Mark Anderson is the owner of Strategic News Service, which publishes a newsletter aimed at technology executives. It’s full of insights and he pulls no punches.

If you read this blog, you should read SNS.

More on Microsoft!

February 5th, 2008

Information Arbitrage has an excellent article on how the different cultures at Microsoft and Yahoo! would have trouble coming together; he compares it to the difference between football players and baseball players.

This is one of those soft things which the number crunchers and bean counters usually miss, but invariably hits the outcome of a merger.

Why Google Loves Microsoft-Yahoo On So Many Levels

February 5th, 2008

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The quality and amount of discourse on the proposed takeover of Yahoo! by Microsoft has had my bullshit meter jumping off the charts, and I felt I just had to chime in.

Paul Kedrosky summed it up best when he said that it would benefit Google the most. Anyone with half a brain and who has worked in corporate management more than one week knows that the most painful thing to do in business is to grow by acquisition. Acquisitions are especially hard to do in a market which has matured relatively quickly in the US, such as search advertising. But analysts and senior management sometimes like to do acquisitions because it creates a lot of buzz. And in the lousy US market nowadays, any buzz which does not include the keyword “subprime” is welcome buzz.

Organic growth is the much better way, and in the long run, yields better results. A lot of early Google talent has been cashing in their chips and leaving the company; shouldn’t Microsoft focus on hiring some of those very smart people to beef up their search offerings? Wouldn’t that be a better way to catch up to Google’s search technology? Yes, and I’m sure that Microsoft is doing that right now, but it doesn’t capture the imagination of the old media folks the way Microsoft! would.

“Let’s toss a big fat red herring to the dumb masses!”

In spite of its management problems, Microsoft still has a formidable technology pool of talent. The fact that it cannot create an operating system as reliable as Apple’s Leopard even though it has more than three times the number of employees is more a testament to bad management of talent and resources than to anything else. It could even be argued that Ubuntu Linux has a friendlier and more stable operating system, and it has almost no revenue, and almost everyone working on it is a volunteer!

So why does Microsoft’s Steve Ballmer want to do this deal? I see it as hail-Mary desperation pass to show that he is “doing something”. If you are saying that it is useless and dumb, then you have a problem. You see, you have committed the unforgiveable sin of looking too closely and thinking too much.

Shame on you!

To add to the entertainment value of this show, Google has jumped in with claims that it is seeking to protect the “openness of the Internet from a closed company like Microsoft”. Now, I have had many images of the Internet, but I have never quite had the image of the Internet as this beautiful bride about to be horribly ravished by some mean thug in the northwest. As a matter of fact, I think that the Internet has been ravished many times before, continues to be ravished, and somehow manages to live with it and get along with life.

Now, if Google has suddenly discovered that Microsoft is closed, why should it limit itself to complaining about Microsoft? Why not go after nation-states which are not famous for openness, and frequently tinker with the “openness” of the Internet. If they have any trouble thinking of any, they are welcome to call me.

I could easily come up with more than 190 names.

So Google can now also score points with your senile old grandfather, the one who criticized Microsoft for being a monopoly way back in the 90s, but still makes sure to keep his copies of Microsoft Office current.

YEAH, GOOGLE STANDS FOR OPENNESS!

Now, to add to Uncle Steve’s general cluelessness, he comes out with this gem stating that Google has no products, it only has search. He may not have heard it, but there is a whole bunch of businesses which don’t have products; they’re called services.

Yes, Google doesn’t have any products; it only has services. But the services produce something called search advertising revenue by matching advertisers with content providers using keywords and taking a chunk of revenue in the process.

Do you think that Steve knows why he’s buying Yahoo?

Frightening thought, isn’t it?

Understanding the Chinese Hockey Stick

February 3rd, 2008

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One of the things past experience has taught me that while it is possible to guess that some business will take off in China, it is almost impossible to tell when. The most common scenario is that for many years, a western business will devote its people and resources to making its business popular with Chinese, it will not show results. Frustrated, it will depart China with nothing to show for its hard work and investment. (This happened frequently in the eighties and nineties; now it is much more rare.)

This rule does not just apply to business; it even applies to Chinese government policy. For years, the Chinese government actively urged the Chinese people to travel more; it even increased the number of public holidays, creating the Golden Week holiday around the May Day holiday in the late 90s to get Chinese to travel more, and spend some of their savings. For years, the policy yielded no solid results.

But later it worked, and beginning this year, the May Golden Week holiday will be abolished. Put simply, it’s no longer needed. Chinese now travel freely, are willing to spend their savings, and the incentive is now no longer needed.

The same phenomenon occurred in the auto industry. For years, local Chinese automakers were unable to get Chinese to spend money on automobiles; most of their production went to taxis and to Chinese government ministries and officials. These habits changed suddenly with the SARS crisis in 2003. All of a sudden, Chinese were afraid to take public transport and started buying cars. And unlike in the west, they paid for their cars in cash.

This trend, which started in 2003, has continued to this day. Now, if a young man in China’s cities wants to get married, more and more young brides are expecting an apartment and car to go with their husband-to-be. Today, in Beijing, 1,000 new cars are being added daily to the city’s traffic woes.

This creates a phenomenon which I call the “Chinese hockey stick”. In simple terms, this means that “It is likely that a new business/service/product will take off in China, but it is hard to say when.” This can be endlessly frustrating for businesses which need to plan their expenditures on an annual or quarterly basis. When are they going to see some of their investment money come back? Country heads need to tell their head offices when the hockey stick will finally take off, and more often than not, it is very hard, if not impossible, to tell.

Part of my rationale for the Chinese hockey stick is that Chinese consumer spending patterns will track more closely to the spending habits of their Asian neighbors in South Korea, Japan, Hong Kong and Taiwan, than to the west, as Chinese society becomes more prosperous. If you want to understand how Chinese spending habits are likely to develop, take a close look at these places. You will learn a lot. In culture and language, these places are closer to how Chinese think, act and behave than the societies of North American and the EU.

Most frequently, the businesses which are able to time the rise of the hockey stick are local Chinese entrepreneurs. Unlike western companies which try to sell their foreign-designed products in China; these Chinese entrepreneurs stand in the wings, just waiting to swoop in at just the right moment. Unlike western corporations, these companies do not have the big budgets of western companies, but their knowledge of their countrymen’s thinking and spending habits more than compensates for this. This is why many leading Chinese Internet companies such as Tencent, Baidu and Sohu have been able to prosper, while their much larger and richer western competitors have been unable to gain traction.

With the dramatic growth of the Chinese consumer market in the past five years, you would think that western observers would learn to be quiet instead of sticking their necks out and betting against the spending power of Chinese consumers.

Apparently not.

David Wolf’s Silicon Hutong has pointed to an article by Donald dePalma in which he claims that China’s buyers account for only 1.1% of what he calls “online GDP”. Unfortunately, he does not explain his methodology as to how he gathered his numbers.

In the west, the Internet led to the creation of some whole new businesses, with Amazon and Google being the best examples. In China, many Internet companies are front-ends for established brick and mortar businesses. For many Chinese consumers, the Internet is like a shop window; when they buy, they still prefer to buy from a person in a store.

These fundamental differences in consumer spending habits make me question the value of even measuring something like “online GDP”. And as David Wolf alludes to, the eGDP is a static number; it does not capture or reflect trends. It is like trying to understand a movie storyline from a still photo.

That’s why I’ll stick with my analogy for the Chinese hockey stick, at least for the time being.