The China Vortex

Over the past year, the tone of coverage of many China-related topics in the US has improved. For the most part, writers covering China have tried to look past the generally-accepted stereotypes, and have tried to get a deeper understanding of what is going on in China.

But occasionally something finds its way through the cracks.

This article is really exemplary; it seems like the writer has taken all the stereotypes about Apple and China, and thrown them all together in one basket. Judging from the tone of the article, and what he professes to be truth, it seems like he has never set foot in China. Otherwise, how could be believe some of the things he writes?

Let’s take a look at some of the choice statements:

Apple has less than 8 percent market share in China for media players, and far less than 1 percent of either PC or cell phone market share.

Yes, so? I wonder if the writer has walked into any cafe in Shanghai, Beijing and Shenzhen, and looked around? Or has he taken any of the subways in any of those three cities and looked around for the signature white earbuds? The question should not be the percentage market share. It should be the trend, and whether it is tracking up or down.

Apple’s second biggest hit in China, the iPhone, isn’t authorized. One Chinese analyst estimates that some 1 million Apple iPhones are currently operating on just one Chinese carrier — China Mobile — with a smaller number on other carriers. Most Apple “Authorized Resellers” in China sell black-market iPhones, and many even offer illegal cracking services — a process that reportedly takes less time than activating an iPhone 3G in California.

Apple makes money off of every iPhone sold, whether it is through authorized or unauthorized channels. Sure, Apple would like to have a carrier agreement in China, but having a group of fans, even though it is relatively small percentage-wise, which is very enthusiastic about Apple products, is a good thing. Besides, there are a lot of people in China who pay even more for more expensive feature-packed mobile phones in China. In fact, the iPhone is not the most expensive phone in the market. Ask Nokia.

Apple succeeds because customers love the products and the brand. But in China, brands mean little to most potential customers, and hardware even less. Chinese consumers prize value above all.

This quote is a true gem and qualifies as one of the most ignorant sweeping statements about China for 2008, even though we are only halfway through the year. Obviously the writer has not been to China and walked in the downtown of any major city. Here is an article about the runup to the recent opening of the Sanlitun store in Beijing and another story about Chinese youth camping out in front of the Beijing Apple store, where they were behaving just like American Apple fans.
I guess that’s why there are no Mercedes Benzes, BMWs, and Chinese women don’t care about the labels they wear? Maybe he thinks that they still wear Mao suits?

The rest of the world’s love of the Apple brand has enabled Apple to get favorable terms with carriers around the world. But this hasn’t helped much in China. Apple initially demanded a big two-digit percentage of carriers’ wireless revenue as a condition for granting its coveted exclusivity deal, according to reports (one company says Apple demanded 30%). The Chinese carriers were apparently unimpressed by the value of Apple’s brand compared with the value to Apple of access to Chinese consumers. They appear to have forced Apple to drop its demand for any share of wireless revenues.

The reason Apple has not been able to get an agreement with China Mobile is because they are both big companies with very big egos who want to control everything. I would say that Apple and the carriers have trouble reaching an agreement because they are so much alike, and don’t believe in compromise.

One-party rule in China actually affects product quality. One example is that Apple will probably be required to disable the iPhone’s Wi-Fi feature in order to comply with the Communist Party’s strict Internet control and censorship rules.

The relationship between one-party rule and product quality is an arguable point. But if it is that simple, then why are ALL of Apple’s products made in China? As for the disabling of Wi-Fi on phones sold in China, that is a China Mobile requirement, not a State Council requirement. (If you think that the rulers of China don’t have better things to worry about than whether mobile phones in China have Wi-Fi functionality, you don’t know anything about the country and how it’s ruled.) Besides, with the recent re-arrangement of the Chinese telcos, it’s not as if China Mobile is able to control Wi-Fi as much as it would like.

China is number one in intellectual property theft

Apple’s whole business model is based on creating value through exquisite design, superior branding and the sale of creative intellectual property (IP) — then defending its rights against the IP thieves, pirates and counterfeiters.

How will this formula succeed if China doesn’t enforce intellectual property laws?

The music piracy rate in China is between 90 and 99 percent, depending on whom you ask. China is the global epicenter of intellectual property theft in general, and of Apple IP theft in particular — especially iPhones and iPods.

Fake iPhones, and phones that steal Apple branding; illegal iPhone unlocking services; trade in illegal movie and music files; all appear to be tolerated and even government-protected activities in China.

Oh yes, how can we talk about China without IP violations? Seriously though, this is an issue. The best way to fight IP though, is for a country to get more prosperous. As people become wealthier, they are more willing to spend money on software, music, etc. In China, it is also very important to explain the importance of IP to various government ministries, and even be flexible about how much you charge Chinese consumers. Many Chinese think that they should not have to pay as much for music as US consumers because they have a lower income and standard of living. Does that fit into any American companies’ equations? Up until four years ago, Microsoft had a very high level of illegally installed Windows licenses in China, and constantly lobbied with the US Congress to “punish” China. When Microsoft China changed tactics and chose to engage Chinese ministries, educate them, and lower the license fees (as China’s standard of living increased), first the ministries, then the schools, then the people started buying original software from Microsoft. Now Microsoft gets more revenue from China, and the relationship with the government is much less confrontational. Piracy of Microsoft software still exists, but again it’s about the trend, which is improving.

Steve Jobs is an exemplary business and marketing genius. But when it comes to learning about other markets, he is lazy. He would like nothing better than to set prices for all media products sold through iTunes himself, and he would like it to be the same all over the world. China is a major kink in his vision.

How many times has Bill Gates been to China? How many times has Steve Jobs been to China?

I rest my case.

Technorati Tags: American, americans, Apple, Beijing, billgates, brand, brands, business, cafe, China, Chinese, congress, consumers, design, globalization, internet, iPhone, iPod, itunes, microsoft, Nokia, shanghai, Shenzhen, stevejobs, telcos, trends, windows

“If I were to wait until the Chinese government said I could do something, I’d never be able to make money.”

This is a line I have heard on many occasions from different Chinese entrepreneurs.

In China, there are many areas which are not strictly illegal, but they’re not legal either. Most of the time, these involve fields which are too new for the government to regulate. Any government is a slow-moving giant; they are not renowned for their quickness and being smart. In this business ecosystem, the advantage lies with the fast-moving entrepreneur who can identify a need and move in quickly.

By the time the government has figured out the industry and begins to regulate it, the major players are already established. This is how the online gaming industry started in China with Shanda, and how Giant Interactive became successful with its pay-for-play online gaming model.

When Americans and Europeans go to China, they go out of their way to make sure that every “i” is dotted and every “t” is crossed in all their legal arrangements with the Chinese government. Each executive is effectively protecting himself from litigation and any bad news from the Chinese government.

This is like going to church and asking the priest if you will get eternal salvation by going to church every Sunday and donating one million dollars every year.

In doing so, they are basically asking for Chinese government regulation. Now, do you think the Chinese government is going to favor a foreign competitor or local Chinese company, even one which pushed the boundaries of government regulation in China?

This is one of the great ironies in China.

It’s a little like being a parent; who do you love more, the loyal son who does everything you say but is not creative and imaginative, or the smart son who sometimes frustrates you by coming home late, but is brimming with all kinds of insights and creative ideas and dates all the smart beautiful girls?

If you asked the Chinese government, or at least watch what they do on the policy level, they like the smart and sometimes naughty son.

Unless he gets too smart for his own good, in which case they smack him down.

Technorati Tags: , americans, China, Chinese, entrepreneurs, europeans, giantinteractive, government, lawyers, legal, litigation, regulation, Shanda

Last night I had dinner with five individuals in Beijing. Except for me, all of them had real hands-on experience in the gaming industry in China. (My experience in gaming is limited to the business side; not programming and production.) All of them were Americans, or had extensive experience in the US.

Long story short: China has become a boomtown for gaming companies doing development. There are several reasons for this:

• A large Chinese gaming population
• Smart programmers and artists
• A large cheap labor pool which is eager to work, and more importantly, learn

Significantly, most of the group had started, or were starting, their own companies in China. The president of one company, Gage Galinger, had been working in stealth mode for three years, quietly hiring and developing its own title for his company, Possibility Space.

Most of them were former Microsoft employees.

Gage was from Texas, and had come to Beijing to start his own game development studio. He is not Chinese, or Chinese-American, but Caucasian. I always admire someone who is not of Chinese extraction, and is willing just to jump on a plane to Beijing or Shanghai, learn, and start a company. More than anything else, that is what starting a business is all about in this age of globalization. This is the mark of a true entrepreneur.

After arriving in Beijing, he started hiring for his own studio where he is lead programmer and president.

I’m sure many of my readers may be wondering how someone who does not know Chinese could possibly function in an environment where many people do not speak a common language. How could he add value?

This is where his background at Microsoft came in handy, and the American style of collaboration for game development really shines. In Chinese gaming companies, the artists and programmers are just worker bees, performing repetitive tasks. They are not asked, and do not offer their opinions about the games they are developing; they are told what to do, and just do it. In his company, employees are required to show their day’s work to everyone else in the company, and others are encouraged to critique the work. Of course, most Chinese are reluctant to say bad things about other peoples’ work, afraid that it will hurt their colleagues’ feelings. For Americans, it is more natural to critique other peoples’ work because Americans are able to separate the work from the person.

Most of the time anyway.

Gage said that the path was not entirely smooth; he had to fire people who did not fit. But all in all, he was encouraged by the experience, and he had a very clear idea about how he added value to his company. He was very optimistic about his experience, and said that for him, living in China was about realizing the American dream of having his own company and making his own title, and launching it worldwide.

The economics of the gaming industry in the US is broken; developments costs are high, and game developers are always in debt and losing their IP to investors. But development costs in China are low, and Gage claims that his developers in China are better than any team he has worked with in the US by an exponential factor, or anywhere else.

He said that he has tried to get other game developers to come to China to partner with him, but while they have expressed interest, none have made the move. He has just opened an office in Austin, Texas.

If America had more entrepreneurs like Gage, who don’t overthink, overplan, have a solid core skill, and just get on a plane to China and start their company, and are humble and willing to learn, the US would be in a much better place.

America used to be a much more entrepreneurial country, now it is overly regulated, overly expensive, overly specialized, overly structured and overly corporate. In order to be competitive again, the entire society and culture will have to make major adjustments. The road will not be a smooth one.

That is why the smart entrepreneurs, like Gage, start their businesses in China.

In this new globalized world, China has become what America used to be.

Technorati Tags: americans, artist, Beijing, boomtown, China, development, economics, entrepreneur, gage, galinger, game, microsoft, possibilityspace, programmers, programming, shanghai, texas, usa