The China Vortex

China is a nation of entrepreneurs, and according to statistics, has 85 million businesses compared to the US’s 25 million. Considering that China has about four times the population of the US, the proportion is about right. These numbers reveal that China is in fact, not a socialist nation, but is instead one which has a very capitalist heart. Or as the Chinese government would say, has “market characteristics”.

There are many Chinese university graduates who when choosing a job, prefer to go to a western company over a Chinese company. For many, American companies are the most preferred. Why is this?

For many of them, it is because that they will get good training, learn management, and work within large organizations about how to get a job done. They get a chance to work with people from many different cultures and countries.

These are significant advantages which most Chinese companies, which have not yet gone global, are not yet able to offer. But I believe that there is another perhaps more important reason.

That is, they know that they will be judged more on performance and merit than on personal relationships with the founder and/or CEO. When it comes to relationships, Chinese founders and CEOs are still very reluctant to trust people outside their own inner circle, and it is very difficult, if not impossible, for anyone outside to make it into this inner circle, no matter how good they are. I’m convinced that this attitude has put a natural ceiling or limit on how successful Chinese companies will be in globalizing. When people discover that no matter how smart they are or how hard they work, that they will not make it into the inner circle, they will either move to a company where they know that they are respected, or they will start their own company.

In contrast, Americans and American companies have a different approach. They put value on developing management talent, especially local management talent in a major market like China. They identify rising stars and put them on a management training track soon. Most importantly, they promote them without regard to who they know or are related to.

Most Chinese companies do not do this. This gives American companies human talent scaleability when going global which Chinese companies do not have. Successful American and western companies which have gone global tend to be meritocracies, while Chinese companies are still stuck at the plutocracy stage.

In his book Managing the Dragon, Jack Perkowski stresses how his company ASIMCO is a Chinese company. Technically and legally it is. The important thing is that he was pragmatic about bringing in the best people in their fields as senior and executive management, without regard to who they were related to. This is a very American characteristic, and in China, it works. Ironically, if there is an outsider advantage in China, this is it.

The Chinese government and the management of most Chinese companies have figured this out, but have not been able to apply this lesson to their own organizations yet. This is one of those things which cannot be solved by a government order or administrative guidelines, which the Chinese government likes to use to solve complex problems.

If Chinese companies successfully resolve this problem, there will be no limit to their growth.

Technorati Tags: America, China, companies, global, human, management, talent, training, US

The west never seem to tire of telling the Chinese, especially Chinese government, about how China should become a more open society, and the Chinese never tire of telling the west to shut up and stop interfering in China’s internal affairs.

The great irony is that for the most part, both sides agree on one thing: that China should become more open. It’s just that many westerners think that they should set a timetable which the Chinese should march to, and the Chinese believe that they should make the changes according to their own internal considerations. I believe that by publicly criticizing the Chinese government and policy, many well-intentioned western critics (and some not so well-intentioned), actually slow down the pace of China’s opening up because if the Chinese government and society changed more quickly, they would be seen as bowing to western pressure. That is something no Chinese government can afford to seen doing.

This is the core reason why I have so little time for most western critics of Chinese government and Chinese social reforms. At the end of the day, the Chinese government and people will have to proceed at a pace they are most comfortable with.

Some say that this is a naive approach which favors the government since, after all, they are in power. I don’t agree with this view. Thirty years of reforms have unleashed social forces which not even the Chinese government can hope to control and completely contain.

One interesting story is that of Fan Paopao, the teacher who ran away from his classroom, thinking first of his own personal safety, ahead of those of his students. Then, he wrote about it in his blog. This week, he was fired from his school, and has now become the subject of widespread ridicule.

But the true significance of the story is that Fan Meizhong is alive, and can freely speak and defend his actions and views in China. If he had had the temerity to do this 40 years ago during the Cultural Revolution, or even 20 years ago, there is a good chance that he would have been publicly denounced for the very least, and maybe have even been killed.

But he has not, and continues to defend his actions on his blog.

China has changed a lot.

It is becoming a much more open society, where different views can be heard. There are borders where the government will not countenance criticism, but as the society changes, those areas are becoming fewer and smaller. The society is becoming more and more what was called in Taiwan 多元化 or what is known in China as 多角化. This means that there are more different groups and subgroups, some of which will evolve their own subcultures within Chinese society.

Mao was never comfortable with this approach, he wanted society to be the same, right down to the dress code, not thinking and not criticizing, just obedient to him and his apparatus. Those days are gone. Like Fan Paopao, people are much more individualistic, and are not afraid to speak their minds. And they are willing to stand up for their views and take the consequences.

Without a doubt, there are groups and individuals in the Chinese government who are not comfortable with some of the changes this is leading to, but they cannot turn back the clock of reform and opening up. There may be many admirers of Mao Zedong in China, but you would be hard-pressed to find anyone who would want to have another Cultural Revolution. (In the Chinese government’s official version of history, the Cultural Revolution is referred to as a “national disaster”.)

I think of the past eight years in the US as being much like America’s version of the Cultural Revolution. After 9/11, this administration tried to push its own agenda on the American people and on the rest of the world. Their interpretation was that those who attacked New York on that day hated America for its freedoms, and that the world is divided sharply between good and evil, with no room for anything in between. This meant that there must be a confrontational struggle which will end in final victory for good and defeat for evil. Ironically, in order to defend freedom, torture, the suspension of habeas corpus and other means which most Americans abhor had to be used.

Most Americans don’t subscribe to this view any longer. We’ll find out in November.

So maybe looking past all the political and social rhetoric, the west, America and China are not that different from each other after all? The challenge is that these changes are evolving in China, and do not make the western press because they are not “news”. This is why many western critics are hopeless ignorant. They don’t understand the social context of China, choosing instead to focus media attention on single issues.

In China, most of the most important things which happen do not make news, but in the aggregate, they are indeed revolutionary in scope.

If the west and China understood each other better and looked at each other in these terms, maybe there would be a lot less misunderstanding.

Technorati Tags: 9/11, China, Chinese, culturalrevolution, Fanpaopao, maozedong, media, rhetoric, social, society

This is pretty self-explanatory.

Investors who bought notes due February 2018 on March 17, just after the Fed helped arrange the bailout of Bear Stearns Cos., have lost 6.2 percent, according to Bloomberg data.

The 10-year note, at 4.25 percent, yields no more than the inflation rate, leaving investors with real returns near zero. Consumer prices have exceeded 10-year yields by an average of 36 basis points since December, Bloomberg data show. In 1980, inflation reached a 33-year high of 14.8 percent and yields averaged 11.4 percent.

`Out of the Bottle’

Yields on 10-year notes had dropped to an almost five-year low of 3.28 percent on March 17, after the Fed cut the discount rate at an emergency weekend meeting and backed JPMorgan Chase & Co.’s deal to buy Bear Stearns Cos. Rates on three-month bills plunged to 0.39 percent, the lowest since the 1950s, the same day as investors sought the safety of the shortest maturity government debt.

Consumer prices advanced 4.2 percent in May from a year earlier, the Labor Department said June 13. The rate was above the median forecast of 3.9 percent in a Bloomberg survey of economists, and the highest since January.
Economists at New York-based Morgan Stanley say inflation will reach 5 percent to 5.5 percent this summer, the highest since 1991.

“The global inflation genie is out of the bottle,’’ Morgan Stanley analysts led by Joachim Fels, co-head of global economics, said in a June 11 report. Even if the pace moderates in coming months, “we are likely to see higher average inflation rates,’’ they said. Inflation averaged 3.1 percent during the past two decades.
`Unsustainable Levels’

Inflation is also eliminating the rewards of owning U.S. stocks. Standard & Poor’s 500 Index shares yield 0.2 percentage point more in profits than the interest on 10-year notes, the smallest advantage since 2004, data compiled by Bloomberg show. The last time corporate earnings returned less than bonds, the index posted its biggest monthly decline in five years.

“What did you say? You wanted us to buy more US assets?”

Oh, and I forgot to mention, this is in straight dollar terms only. You need to also figure in how much the US dollar is going to depreciate against other currencies in the coming ten years.

“Ouch!”

I wonder how the Chinese government is going to explain this to Chinese citizens, since it is their official responsibility to protect Chinese investments and assets? And that the situation, particularly re inflation, is going to get much worse before it gets better?

And it really doesn’t matter who becomes US president either, at least with regard to this set of issues.

Not even a US president can do anything about this.

Technorati Tags: assets, bearstearns, bloomberg, China, corporate, dollar, earnings, inflation, investment, notes, US

“Interfering in another country’s internal affairs” is a routine mantra often used by Chinese government spokespersons, and is used most often when pointed at the US and US critics, especially with regard to human rights policies.

On the surface, this makes a lot of sense, especially with regards to generally ignorant US politicians, movie stars and others, who would have a hard time finding places like Tibet and Darfur on a map, but are moved by some of the images they see on television. For them, China and Chinese policies are a very convenient whipping boy, even though they have very little context and understanding of the real underlying issues.

This naturally puts the Chinese government on the defensive and more recently, some Chinese have become angry at the overseas criticism.

So who’s right and who’s wrong? Those who argue against interfering in another country’s internal affairs, or those who say it’s OK to do so?

The fact is that if a country is big and has a strong economy, whatever it does has an effect on other country’s economies, and on the global economy. Even though only American citizens’ can vote in their elections, the gross stupidity and ineptitude of American economic and trade policies in recent years do not end at America’s borders.

They go far beyond it.

And the Chinese government has started complaining about it. After all, they hold huge amounts of US dollar-denominated treasuries which are losing their value daily as the US dollar loses value, and their sovereign wealth funds are blocked from making investments in Europe and the US, mainly on political and not economic grounds.

So aren’t Chinese government officials interfering in US internal affairs? Yes, but the two countries’ economies are so tightly intertwined, the US policies are having an effect on the Chinese economy. When they are so tightly bound together by trade and economics, there is no borderline. It’s as silly as the right arm complaining about the left arm.

The fact is that the US and China are like two handicapped people: one is blind and the other is deaf. They need each other in order to survive.

The sooner politicians, officials and miserably deficient media on both sides recognize that, the better. If they don’t, ordinary people will continue to get caught in the middle and distracted by bad policies and ignorant offline and online media pundits getting them to chase red herrings while the real problems get worse.

Technorati Tags: China, Darfur, dollar, economy, media, policy, Tibet, trade, US

Several days ago, Sam Flemming of CIC, a Shanghai-based online reputation management company pointed me to a news article on Business Week called “Inside The War Against China’s Blogs”.

The article specifically highlighted a company called Daqi.com (in Chinese the name means “Big Flag” which has a certain nationalistic appeal), and cited a case in which it helped Toyota satisfy a customer who had not received his car after three months. According to the company’s CEO, her company, an Internet online reputation management company, helps its customers, mostly western multinationals, to monitor their online reputations and help put out fires with users in China.

Out of curiosity, I then entered Daqi.com into my browser address bar so that I could visit the site and learn more about the company and what they do.

What I found, and what I did not find, were very interesting.

First of all, I thought I was going to find an online reputation management company, or public relations company, or whatever buzzwords they are using now to lure in corporate business.

But I found nothing of the kind. Instead, I was confronted with what I would call a typical Chinese portal website, complete with channels for “Homepage”, “Society”, “Military”, “Strange and Curious”, “Autos”, “Digital”, “Women’s Makeup”, “Pictures”, and “Reputations” (in beta).

(I have uploaded the screenshots of the pages mentioned below to Picasa and you can access them here.)

Aha, I thought to myself, I’ll click on “Reputations” and see what I find. When I went there, I found that it was full of forums divided into the categories “Cars”, “Cameras”, “Notebooks”, “Digital Cameras”, “MP3″, and “MP4″. The page is very long, and like most Chinese pages, scrolls on quite a distance with recommended products in each product category. This page, like the rest of the website, was designed very much to lure Chinese visitors. To visit the page, you can go to http://exp.daqi.com/

My next question was whether they took advertising? The only banner advertising I saw was for Dell, which ran on the two pages I visited. But it would be foolish to think that their only revenue came from banner advertising. Looking at how the page was designed, and the way some of the products were given larger photos and highlighted, it was easy to see that some makers were paying for higher rankings for higher visibility.

But nowhere did I see anything about their online reputation management services. So I thought to myself, “Surely the person who wrote the Business Week story, Dexter Roberts, could point to a website where Daqi offered their online reputation management services, in either Chinese or English.”

I could find nothing of the kind.

Daqi claims that it regularly searches 500,000 forums daily for its corporate clients. I’m sure that it works on many sites which are not related to Daqi. However, it also raises the very uncomfortable possibility that it may actually manipulate online reputations by starting flame wars over product reputation, then charging their corporate clients money to put them out. (I’m not claiming that Daqi does, but the very fact that they run their own portal under their own company name and URI means that they have very little respect for their non-Chinese corporate clients and western journalists’ capability to conduct online research in Chinese.)

The clash of interests which arises from revenue from makers for higher rankings on their own portal site, and then revenue from non-Chinese corporate clients for “research insights” and “firefighting services” into Chinese online behavior is obvious to anyone. The temptation to use their own forums to “seed” opinions must be very great. These seeded opinions would then quickly proliferate to other sites.

There is a simple way to find out, and that is to check timestamps of postings. All forum software includes a posting timestamp, and it’s easy to check the timestamps on a subject to push it back in time to where and when a rumor started. What is harder to find out is the identity of the poster, but this can sometimes be done by checking the IP address of the poster if IP cloaking is not used. Different online identities sharing the same IP would most likely be the same poster.

I wonder how many corporate clients do this kind of checking?

I find the whole practice of hiring Chinese and paying them to post favorable comments on a per posting basis to be an unethical PR practice. According to the BW article, this is a common practice. A Beijing-based PR professional, William Moss, talks about this in more detail.

Online public relations firms will have to draw up and aggressively publicize clear guidelines on what they do, and what they don’t do when it comes to monitoring online behavior in China. Playing multiple roles as player and referee doesn’t make it in my book. I have talked about some of the skills needed in a previous posting.

This is part of the problem which actually slows down Internet growth in China. In spite of it all, there are healthy groups for product discussions.

Of course, each corporate client will have to make its own call as to what it is most comfortable with. And so will their VC backers. (I wonder if they read Chinese?)

But if someone does do an article on a Chinese company, at the very least, the URI mentioned should include, in either Chinese or English, the business they are in which is mentioned in the article.

Nobody likes bait and switch tactics, and I’m no exception.

Is that too much to ask for?

Technorati Tags: advertising, BBS, China, Chinese, cic, forums, imagethief, management, marketing, online, postings, PR, publicrelations, reputationmanagement, VCs, venturecapital

On June 11, I attended an event in Beijing where Jack Perkowski, author of the book Managing the Dragon talked about his experiences doing business in China and on the Chinese economy. He also keeps a blog where he talks about China-related topics. In March, I had read the book and wrote an online review which you can read here.

During the dinner talk, Mr. Perkowski talked in greater depth about some of the issues he talked about in the book. Most of the audience of 20+ people were people who had considerable experience living and working in China.

He talked about how he saw China as having two different economies, which he calls the “local foreign economy” and the “local local economy”. He sees the local foreign economy as being made up of 400M people who have average annual income of US7500. The other 900M people have an annual average income of US2500. Right now, these are almost separate economies in the same country. The existence of the local local economy, which is very cost- and price-sensitive, means that there is a large part of the economy which needs modern things, but cannot afford western prices. Many Chinese companies are looking for new ways to reach this audience. This means that manufacturers are always looking for new ways to constantly cut their costs to reach them, which in turn leads to a very high rate of innovation.

An example he mentioned were piston rings. There are six global piston rings makers in the world, but there are 400 in China. The reason for the China discrepancy is because there is demand for cheaper solutions from the local local market, who are always looking for cheaper and more competitive components. While they have the same need for transport as the foreign local market, they cannot afford the expensive brand components.

In contrast, the foreign local economy accepts a higher level of costs, and is less sensitive to pricing pressure. These are mainly export manufacturers which have come to China from the US or Europe and come to manufacture auto parts first for their home markets and then later, other markets. Mr. Perkowski believes that in order to survive, it’s essential to reach down into the local local market. Unfortunately, many American car makers were unaware of this market, and wanted to sell only into the foreign local market. In the meantime, the toughest Chinese makers which have prospered and survived, claw their way into the local foreign market, where they are much leaner, meaner and smarter than the major US makers.

It made me think that in reality, China has a domestic market and an export market. The domestic market can be thought of as the local local market, and the export market is the local foreign market. Eventually, the two markets will merge, but it will take some time before that happens.

Mr Perkowski mentioned that the US “makes” 16M vehicles annually, of which 5M are imported from other countries. This means that in reality, the US makes some 11M vehicles annually. According to him, American makers are not able to make money on small cars, only on larger vehicles such as SUVs, which Americans are no longer buying because of high gasoline prices. The Chinese auto makers, in comparison, are able to manufacture small cars profitably. This year, Chinese makers will make some 10M+ vehicles, putting Chinese manufacturing capacity on a par with US makers. He believes that China will overtake the US economy in size, and Americans will have to get used to the idea of having the second largest economy in the world. (My note: Of course, it will take some time for India to take the world’s second largest economy position away from the US.)

He believes that the place where the US will continue to be dominant will be in efficient capital markets. This is a place where America will continue to be the world’s leader.

Mr. Perkowski does not speak Chinese, but his good common sense about doing business in China showed that he had a good deal more knowledge about China than many of those who speak the language. In his case, common sense and a good attitude have more than compensated.

Technorati Tags: autos, capital, cars, China, Chinese, components, economy, efficiency, india, managingthedragon, markets, US

In a final closeout post on his blog, MSFTExtremeMakeover takes a hard look at MSFT’s performance over the past eight years.

The picture which emerges is not pretty, but it’s true.

Technorati Tags: microsoft, steveballmer, technology

Just as with a master go player, whose moves seemingly look random in the beginning, Apple’s moves in the mobile and desktop space are beginning to come together.

While the iPhone3G was expected, the real aggressive play came with MobileMe, Apple’s completely revamped version of it’s .Mac subscription service.

With Apple’s announcement of the new iPhone3G and MobileMe web-based push-sync solution, Apple further closed the loop on the competition with a complete soup-to-nuts offering for consumers, and now has a strong entry into the corporate market. By licensing Microsoft Exchange to Apple, the Redmond giant gave Apple an entry path into corporations for the iPhone3G at the expense of Blackberry, and the future of its own Windows Mobile platform.

How will future versions of Windows Mobile differentiate themselves in the corporate marketplace, traditionally Microsoft’s stronghold?

Alvin Foo has excellent coverage of the iPhone3G on his blog, and now also provides a robust development environment for mobile developers.

The feature comparison chart above gives some feel for how things are shaping up for Apple, Microsoft, Blackberry, Nokia and Adobe. The immediate pressure is on Blackberry, then pressure will shift to Nokia which has a very wide product line, and is the largest seller of mobile handsets in the world.

Apple and Nokia have two different visions of the future: Apple wants to sync multiple devices including computers and mobile phones. Nokia needs to offer single computing platforms in multiple markets which provide excellent computing capabilities with voice capability as their only computer of choice, making it unnecessary to have multiple computers.

Can Nokia pull it off? Unfortunately Nokia is still too married to the voice phone capabilities of its phones, and has not been able to come up with a single data-centric vision of the future for the OS and applications.

Microsoft’s vision of the future is the same as Apple’s: multiple devices with push-sync across platforms. The trouble is that Microsoft cannot have solutions as elegant as Apple’s. The company is reliant on its strong corporate presence to continue to get revenue, but now Apple has a backdoor entry into that marketplace with its licensing of Microsoft Exchange for the iPhone3G. The next step is for developers to come up with iPhone versions of corporate apps for the iPhone. This will give IT departments an opportunity to evaluate the stability and security of OS X.

Microsoft’s matrix management and multiple business units and product lines make it difficult, if not impossible, to come up with single elegant solutions for both corporate and consumer markets. If Microsoft continues to launch operating systems like Vista on a much slower launch schedule than Apple, their position in the marketplace will continue to erode.

In order to pull off a plan as aggressive as Apple’s, you need a strong division management with limited product lines, reporting directly to The Man, Steve Jobs, who has the vision, and gets everybody in line to execute.

Apple’s loop continues to close…

Technorati Tags: .mac, adobe, Apple, blackberry, chart, comparison, feature, iPhone, iphone3g, microsoft, mobileme, Nokia, stevejobs

Seeking Alpha has an interesting article The Power of the Market: 600 Million People Lifted Out of Poverty Since 1981. The article comes with two graphs, one of which is above.

This shows that there has been a gradual fall in numbers of poor since 1981, but there was a bump in the years from about 1988 to 1994, when the numbers of poor stubbornly resisted to fall. This was a time of high inflation in China.

Do I need to tell you what happened in China in 1989?

This graph gives a rough indication that as long as the Chinese government is able to show a descending line that poverty numbers are going down in absolute terms, then the government’s position is safe. If inflation should pick up and the number of poor goes up, then they have something to worry about.

So far, developments on the economic front have been going well in China, with the noted exception of high inflation in China, much of which is due to higher commodity costs (food and energy costs) and capital inflows. Much of the capital inflow into China is due to investors who want to get out of the US dollar, and see China as the most attractive growth market for their money.

Rising inflation is usually an early indicator of other economic and social problems to come.

A few years ago, investment money coming into China was welcomed with open arms, but now times have changed, and the government doesn’t see them nearly as favorably as they did just one year ago. Capital inflows which are liquid can come into China, and also leave it very quickly, leaving the country’s economy and society in a lurch, just as it did during the Asian financial crisis of 1997 for the countries of Southeast Asia.

With the US economy heading for the dumpster, and Europe showing signs of weakness due to rising energy prices, that is not something the Chinese government wants. It is more than likely that the Chinese government will do anything to keep those poverty numbers going down in China, regardless of what it means for the rest of the global economy.

The need for social stability in China trumps everything else. Including commitments to globalization and the WTO.

Fasten your seat belts.

Technorati Tags: 1997, asia, China, crisis, economy, financial, indicator, inflation, poverty, US

In 72 hours, more than 600,000 persons in China, and 6-7M persons worldwide, are going to turn to that little something dearest to them and say those dreaded words, “Honey, you’re looking old”.

I’m not talking about their spouse, I’m talking about something they normally spend far more time with: their iPhones. Within 72 hours in San Francisco, Steve Jobs will take center stage at the Apple Worldwide Developers Conference (WWDC) to announce the second generation of the iPhone, which many refer to as the JesusPhone. We already know that the new phone will include 3G and GPS features.

Hmmmm…. Does that mean we can call the second generation of the iPhone the Second Coming of the JesusPhone?

For China, the big question is whether the new revs of the iPhone will include the Chinese government backed and developed TD-SCDMA technology, which is the local version of the 3G standard, and has now been handed over to China Mobile for care.

China Unicom and China Telecom will support competing 3G standards which are not China developed and are most likely already supported in the current chipset for the 3G iPhone.

The thing to watch for will be whether Apple starts ordering TD-SCDMA chipsets. In the meantime, dedicated users of the Apple iPhone in China will most likely switch their mobile phone accounts to China Unicom and China Telecom if they want to take advantage of China’s not-yet-launched 3G services. The thing that they should remember is that China Mobile holds the vast majority of mobile phone accounts, with China Unicom coming in a distant second and China Telecom just recently starting to offer mobile services. And 3G services have not yet launched in China, though everyone is expecting that to happen within the next six months.

In the meantime, you might not want to tell your spouse yet that she is looking old.

Technorati Tags: 3G, Apple, chinamobile, chinatelecom, chinaunicom, gps, iPhone, stevejobs, td_scdma