The China Vortex

There has been a lot of concern about the tainted milk scandal in China, and with each passing day, the scope of the scandal gets bigger. How did this happen, why was it covered up, and what needs to be done about it?

My answer is simple: this is the kind of thing which happens when the bureaucracy becomes politicized, and government appointments are made for political instead of professional reasons.

For more than 2,000 years, when China was ruled by an imperial bureaucracy, China had a complex system of imperial exams to insure that anyone who passed could enter the government bureaucracy. This bureaucracy was largely apolitical, except for the most senior appointments in the imperial court or on the provincial level. Most were just professional officials, and would serve their masters, whoever they were.

With the overthrow of the Qing dynasty, and with the foundation of new China in 1949, the party organization affected all levels of the bureaucracy. Endless political movements until 1978 politicized the whole society, not just the bureaucracy. Appointments were made for political reasons instead of professional capabilities. Sometimes, professional qualifications were completely ignored.

The tainted milk scandal is an example of what happens when political considerations override business, health and even ethical concerns. This is what happens when government officials are judged by how much investment they attract and how many jobs they create. Then there is a natural tendency to cover up any information which draws a conflicting picture. What should be a health and ethical issue instead becomes a political issue.

The problem now in China is that there is a severe shortage of people who are apolitical professionals, not politicians. How do they fit in, even survive, in a completely politicized bureaucracy? Does the government have the energy and will to depoliticize the bureaucracy, and create a professional bureaucracy which will fulfill the needs of modern Chinese society?

That is the question for the next stage of Chinese reforms.

In the past few days, Henry Paulson has come up with his US$700B proposal to save the major lending institutions which made bad decisions re CDOs, with all the bad loans being covered by the US taxpayer. This is happening at a time when the US middle class is under unprecedented pressure already.

Over the next year, all the bad decisions made by China’s economic planners over the past 30 years will show through. These include:

• The decision to become overly dependent on the US as an export market, and buying US treasuries to effectively buy this single captive market and continue to sell it goods far beyond its capacity to pay for China’s exports.
• Somewhere along the line, a decision was made to jumpstart China’s economy and put it on the fast-track of economic development. To a large extent, this has happened. But China’s economy is like a body builder whose upper body strength is massive, but has toothpick legs. More incidents like the melamine milk incidents will become common, simply because the government is not equipped to handle incidents of this kind.
• China, unfortunately, has a reputation for cheap, low-quality products, in spite of the successful Beijing Olympics. For the most part, Chinese companies do not have the talent to work up the value chain creating better products. (There are some, but they are too few to make a significant difference.) This takes time to build.
• Exports will slow, and the Chinese domestic market will not pick up the slack fast enough to prevent major unemployment problems, especially among university graduates.
• The wealth gap between the rich and poor will widen dangerously, and real estate prices, which are already falling, will fall even more.

China became addicted to US orders and the US dollar the same way Americans became addicted to Chinese junk products. (This is a generalization; many goods are not junk. But the general image is of, well, junk.) For both sides, it was a dream which was too good to be true.

Now it’s over, and the Beijing Olympics are turning into the final hurrah for that period.

If you would like a well-presented systematic presentation, my friend Corbett Wall has written an interesting piece.

The fat days are over, and we are in for a tough 20-30 years ahead.

Just in case you had any doubts that the world was going to hell in a handbasket, and that the inmates were running the asylum, you just might have had some of those doubts removed in the past week. And those doubts were removed in a very dramatic fashion, as in frontal lobotomy fashion.

“George Carlin, why did you have to die so soon, just before all the fireworks started? Did you actually think that the world was becoming so ludicrous that you couldn’t take it anymore, or think that you would run out of material?”

Let’s look at some of the fun things which happened this week:

• Sanlu’s dairy products were found to have killed three babies, and caused injury to several thousand others (at least)
• Baidu was accused of offering to help cover up the scandal by not showing the scope of the scandal in its search results. I wonder what genius came up with the idea that they could cover up a scandal of such immense proportions for a miserable 3M yuan? And who was the genius on the management side who approved such a deal? This would have taken at least two people who had frontal lobotomies. Most of the time, people who come up with dumb ideas like this are only employed in government (Most notably the US government, where they usually run smear campaigns for politicians during elections.) As for Baidu/Alibaba, now Baidu is threatening to sue Alibaba for spreading the Sanlu story. (Isn’t China becoming more like the US every day? At this rate China will be run by lawyers in five years. A sure sign of national dementia.) Are these initial signs that the Americans’ efforts to package and sell stupidity to the Chinese are showing signs of success?
• Lehman Bros., a US investment bank, declared bankruptcy, and Merrill Lynch sold itself to Bank of America for $50B. I have the utmost admiration for John Thain: Imagine taking a company which was rapidly going down the tubes, whose assets were unclear, and whose non-performing CDOs were increasing by the hour, and he SOLD it for $50B, finding a buyer in BA? Wow, that’s neat! How’d he do that? These bankers are amazing. None of that piddly million here, million there kindergarten dotcom stuff for these guys, we’re talking real money here (even though it’s US dollars).
• Is it just me, or am I thinking that Imagethief’s time has come in China? I keep on fantasizing what his first lessons for new official clients might be like. How about this:
  

  “First of all, let’s get it clear that lies, coverups and people getting poisoned are a necessary part of any nation’s path to greatness. There is no need to deny or cover it up; we must celebrate each event as achieving yet another milestone to greatness! Let’s celebrate it! Let’s roll in it! And let’s become more and more like America with each passing moment! Look at how the Americans don’t discriminate against the mentally handicapped anymore; instead they make them their leaders! If America can do that, then why can’t China! Our goal must be to pollute the global financial system on an even greater scale than the Americans have: this will show the world China’s power!”

Hmmm, on second thought…
UPDATE: Once upon a time, jokes were about comical situations which had a tenuous relationship with reality. Now, the jokes ARE reality.
DISCLAIMERThe above story is pure satire. Don’t take it as anything else.

One of the fun things about China, and the Chinese Internet, is that new issues can pop up very quickly, and become major issues.

This has just happened with the issue of user privacy on the Internet. With more social network sites, and more users posting real information about themselves, along with contact information, etc. this has become a real issue.

I’m not going to offer a solution to this very complex issue. Instead, I’d like to bring up another issue: “How do you have a productive discussion, where all get a chance to contribute to the debate, get heard, and then come to some kind of agreement about a solution?”

Here is the problem. This issue flared up when many SNS sites started blocking Baidu’s spiders from crawling their sites. The official reason: to protect users’ privacy.

The problem is that there has been no discussion about what user privacy is. The definition of privacy is very different for a 12 year-old girl and her 40 year-old mother and, in turn, is very different for a 22 year-old gay man.

Each of them, or their parent/s, may have very different ideas of what constitutes user privacy. The gay man may not want to reveal his sexual orientation except for his closest male partner/s, and may not want anyone else, including family, to know. The same goes for religious affiliation, etc.

These are very real issues which need to be discussed and thrashed out in the open, and people need to be able to put forth their views for discussion. This is a vital and natural part of what constitutes a civil society, which is what the Chinese government supports and advocates.

Unfortunately, there is no clear mechanism for discussing a very complex issue like user privacy in China today.

Instead, we have companies coming out with thinly-disguised excuses about privacy, when in reality it looks more like a pissing match between companies over whose spiders can crawl over whose sites. Are the two groups going to come up with different, even opposing, ideas and definitions about what constitutes user privacy, and force people to choose one or the other? If that is the case, then it’s not really about user privacy, it’s about choosing between one camp or the other, with every user forced to make a choice.

But that isn’t what the Internet is all about. The Internet is all about empowering people so that they can make their own choices. The Internet is about pushing decisions to the edge, where people make their choices, and if they don’t like them, they can change them later on.

This is what is missing in China. Without this system or mechanism, there is just endless bickering and noise, and what should be a serious discussion with a well-thought conclusion, usually ends up in a lot of noise with the loudest shouters winning.

What is an important issue, usually ends inconclusively.

Or as the Chinese say 不了了之。

Chinese Internet users deserve something better.

Then I should be truly indebted to the 37thinker website which has copied my articles in full (right down to my internal backlinks) here and here.

Now please stop copying my articles without my permission and come up with your own content!

You’re not doing China’s reputation any good.

Alibaba has announced plans to consolidate two of its subsidiaries into one company. Alimama is the company’s ad network for Chinese SMBs, and Taobao is the company’s auction platform, which is best known for dramatically driving eBay China out of the China market after eBay bought Eachnet.

This is likely a measure to counter Baidu’s plans to enter the e-commerce market. According to this report from Keso, Taobao has blocked Baidu’s spiders from crawling Alibaba. Spiders from other search engines are not blocked. It is very unusual to hear of one search engine’s spiders being singled out for blocking; I have never heard of this until now.

Can you say hardball?

Spiders are software programs used by search engines to crawl other websites; they detect changes in websites and report changes back to the mothership search engine which are used to update the search engine’s search index.

According to Keso’s report, Jack Ma of Alibaba believes that Alibaba’s SMB e-commerce platform represent the family jewels, and he already has enough users to allow him to make such a dramatic parting of way’s with Baidu. Baidu is currently China’s largest search engine player, with more than 60% market share.

For Baidu, losing the capability to crawl Alibaba’s sites represents a huge loss, and puts more pressure on their nascent e-commerce platform to succeed. Otherwise Baidu’s e-commerce search results will look very weak, just as e-commerce is showing signs of takeoff.

Now, Google China is the wild card which might benefit from the Alibaba/Baidu faceoff. Significantly, Google China’s spiders are not blocked from crawling Alibaba’s sites. Jack Ma has three options:

• Build his own search engine team which would build its own search engine to crawl Alibaba sites;
• Make Google.cn the default search engine for Alibaba and its subsidiary companys;
• Go to Google China and propose a joint venture company which would have a separate search engine to crawl Alibaba sites. Search advertising revenue would be split between the two companies.

From a technology perspective, search engines are more challenging to build. Specifically, they need to continuously update their search index, although if the search engine is only pointed at the Alibaba community, it would not be as difficult. Search engines need to be continuously updated and modified to get accurate search results, although optimization on organic and paid search are very different in how they are updated and modified.

From the SMB users’ perspective, the key to success is providing a smooth and transparent transition between search advertising and online business transactions. Bad user experience has led to the downfall of many a business, most recently eBay in the US, which has continuously raised fees on its auction platform, driving away its originally fanatical loyal user base, and forcing it into a retail model which competes on unfavorable terms with Amazon, the online retail ecommerce leader in the US.

Things are getting interesting…

The story of western social network sites losing out to local Chinese competitors continues; this time MySpace China joins the list as its CEO Luo Chuan makes it official that he is going to leave to join a local online video startup.

Although it is a well-known fact that local management teams need to be empowered to compete successfully in the Chinese market, western tech companies continue to make the same mistakes over and over again. I believe that the reasons for this are:

• While there is much talk about diversity, there is the firm belief that “brands” must be protected with a unified set of features and look all over the world;
• Most VPs of marketing are not fluent in other languages and cultures, and try to dictate from headquarters. When they visit the local office, they appear sympathetic, but when they return to HQ, everything learned from visits to local subsidiaries is quickly forgotten;
• Local Chinese competitors are unrestricted by these considerations; they just do what they need in order to win users. There is very little if any discussion of “brand” and “look and feel”. These are the horses VCs like to bet on;

When you come right down to it, there is little a global brand can bring to the table in China. Most add a burden of a faraway headquarters without empowering the local management team to be more competitive. This is not a problem which is unique to China, it is also happening in the social networking market in Japan.

My conclusion: The problem does not lie with China, but instead lies with the reluctance of western social networking sites to empower their local management to do whatever they need to win users and market share. By trying to force common features, standards and branding too early from their headquarters way before the market is mature, they cripple their local companies’ chances of success, and cede the market to the local competitors.

That is why the successful local competitors get such high valuations; they make ideal acquisition candidates and give their founders a good exit strategy.

Ask Meg Whitman, former CEO of eBay.

One of the recurring themes of China’s reforms and opening up over the past thirty years has been the expansion of China’s private sector, usually at the expense of the public sector, or government-invested industries. This is a theme which has been often overlooked in the west, even by westerners in China, as they are more focused on the relationship with western companies, specifically Western Foreign-Owned Enterprises (WFOEs). There are three important components in the Chinese economy: state-owned enterprises, private companies and WFOEs. For the most part, the WFOEs are only allowed to play a peripheral role with all kinds of restrictions placed on them from time to time. It is highly unlikely that the Chinese government will allow them to play major roles in any sector.

The most important and vibrant part of the economy are the Chinese private sector. In spite of being out of power politically, occasionally suppressed, lack of capital and resources, it has managed to the point where it now employs more people than the public sector.

Let’s take a closer look at the media industry, just to cite an example. All official media, including newspapers, magazines, books, television and radio are owned, in one way or another, by the government. These might be the central government, provincial government or municipal governments. The performance and careers of these government officials are often measured by how these media perform: if they perform, the careers of these officials go up, if they perform less than well, then it goes into their performance evaluation, and has an effect on their careers.

The challenge for the official media in China now is that they are, generally speaking, losing audience to smarter and more creative challengers from the private sector in fields like online gaming. When this happens, and audience and circulation go down, these officials have to think of ways to address the situation. If that doesn’t work, they cover up the bad numbers.

Virtually all of the challengers in the Internet media field are private companies which are venture capital funded. In short, they are all private sector. When the audience moves to the private sector companies, public sector media companies tend to lose first audience, then revenue.

Many westerners look at the media ownership issue in China too much from a political and social oppression angle.

Actually, there is a lot more to it than that. It’s about what industries will still stay in Chinese state ownership, and how they will remain competitive in the hyper-challenging Chinese market. The official media has tried to counter-balance this trend by showing women in bikinis and other devices, but the trend to the private sector media (or user-generated media) is continuing. This is what Chinese ministries are thinking about all the time.

After all, if there are no longer competitive industries in the state’s company portfolio, how will it get revenue?

As many of you already know, there are areas where the development of the Internet in South Korea has been influential in China, especially online gaming, which was really born there. Compared to China today though, the Internet in South Korea has much deeper penetration and is much more pervasive than in China. For most South Koreans, it would be unthinkable to live without the Internet and their mobile phones. Penetration across generations is much higher than in China.

Part of this is because the South Korean government in the late nineties decided to open up a huge amount of bandwidth and make it available to all South Koreans. Compare that to the US, China and most other countries, where the amount of bandwidth is much lower.

When this started in the late nineties, the Internet was still considered a young person’s thing, and most adult South Koreans still did not trust it for content, advertising and information. This is no longer the case.

I am looking for information on:

• What changes made the South Korean go from not trusting the Internet to gradually trusting the Internet? Were they laws, applications or events?
• Were there certain laws, applications or events which made the attitudes of certain generations of South Koreans change? What were they?
• Would any of these changes have been possible if the South Korean government did not open up bandwidth?
• How has the Internet and cheap, high-availability broadband fundamentally changed the society?

Look forward to hearing from you.

Thank you.

I am a fan of Apple’s products. I believe that the hardware is well-designed, and so is the software. In particular, I believe that the design philosophy behind Objective-C and Cocoa frameworks are the best thought-out and implemented tools for any developer looking for a strong and robust environment for object-oriented programming.

Like other Apple fans, I get excited at the new hardware the company puts out on a regular basis. I have reconciled myself to the fact that the top-of-the-line Macbook Pro I now use will shortly be replaced by a newly refreshed iteration of this line, and I will soon torment myself when I see others with their newer computers. The sames goes for my iPod touch.

I am also a fan of Steve Jobs; he shows what can be done by a very smart guy who has fallen down a few times in life who now has a good plan, and who just focuses on implementing his plan. The guy knows exactly what he wants, and doesn’t let anyone or anything get in the way of his plans. He is the poster boy for a smart authoritarian and autocratic management in an organization. I’m convinced that without a firm grasp of the challenges the company faced in 1997, Apple would have quickly gone into bankruptcy.

Steve Jobs saved Apple.

This is why I get upset with the company’s policies towards China. I mean, for Apple to criticize the Chinese government for not being open and nice to minorities is just completely wide of the mark.

With this in mind, let me show you how the Chinese government, in comparison to Apple’s management, is in fact much more open and democratic:

• China now has a group leadership on the national level. Who is in the group leadership at Apple? And how much do you see others besides Steve Jobs talking about “different directions” at Apple?
• Who is going to be the successor to President Hu Jintao. I can name several candidates including Xi Jinping, Bo Xilai, Zhou Yongkang, just to name a few. Who is going to succeed Steve Jobs? I can’t name any.
• Leaking any information about any new products which have not yet been announced at Apple are grounds for immediate dismissal. Same goes for China.
• Apple employees are not allowed to publish unofficial blogs without company permission. Doing so may be grounds for dismissal. China has 100 million blogs; all of them are unofficial.
• In private meetings with Steve Jobs and Apple senior and executive management, the senior and executive management turn and look to Steve Jobs for permission to speak before speaking, even when they are addressed directly. The Chinese national government leadership is more relaxed than Steve about other senior officials speaking about national affairs.
• For many Apple employees, the most dreaded moment is sharing the same elevator ride with Steve. If he talks to them and he asks what they do, and they go not give a good response, he just might terminate them.

Basically, Apple (the company) is an extension and implementation of one man’s (Steve Jobs) vision of what the consumer electronics and computing industry should look like. And ironically, laws in the US permit Steve Jobs to run his company in a very autocratic fashion. I have not yet heard of people being “dismissed” from China because they were not productive according to one ruler’s definition. On the contrary, the Chinese government goes out of its way to keep the Chinese economy on a growth track, creating more jobs. (I must admit that I think many of these jobs are of questionable value, but that’s another discussion.)

And yet, Apple doesn’t like things the Chinese government does because they are less than democratic and are autocratic? How many current Apple employees do you see protesting at the way the company is run? I’ll tell you how many there are.

Zero, nada, zilch.

Sure, Steve Jobs is running a company and the Chinese government is running a country, but is there anything to suggest that Steve would act any differently and suddenly become open and democratic if he were running a country?

Come on Steve, look in the mirror. When it comes to autocracy, the Chinese government can’t hold a candle to you.

I’m really trying to wrap my mind around this and am trying very very hard to understand Apple’s criticisms of China. If anyone can explain this to me, I’m all ears.