Here are articles I have written on Forbes.com and Business Insider this week:
Forbes.com:
Business Insider:
If you are interested in learning about China blogs in English, please listen to this week’s Sinica podcast, you can listen to it here. I am mentioned in it.
As location-aware applications become more core for mobile services, especially with the launch of the new iPhone 4, location and mapping services become ever more important.
The Chinese government has made clear that non-Chinese owned mapping companies will not be able to provide basic mapping services and AutoNavi is filing for an IPO. Will be interesting to see if AutoNavi tries to get its products/services into mobile phones.
In the meantime, Apple is getting more aggressive about protecting and using the data it collects on iOS 4, and this has caught the attention of US legislators.
In the short term, this will give Hong Kong an advantage for developing these applications, because it is relatively restriction-free, as I mentioned in this article for Forbes.com The China Tracker.
The issues are complicated, and will converge in a way most people are not yet aware of. Will write more about this subject later.
There are clouds on the horizon for foreign shareholders in Chinese Internet companies involved in offering domestic payment solutions according to this Financial Times story.
Earlier on, I wrote an article for Forbes.com The China Tracker about some issues with the search advertising field in China. If you want to do a deep dive into some of the Baidu issues, this article from china/divide’s Kai Pan is useful.
Following on the government’s white paper on the Internet, the government’s Ministry of Culture is coming out with a slew of regulations aimed at regulating the Internet, including requiring game players to use real-name registration, and limiting use and circulation of virtual currencies.
For my take on the role of games in Chinese society, see this article. As for the new rules affecting virtual currencies, it will be interesting to see how Tencent, which issues Q-Coins will deal with the issue.
If there is one thing which most western companies coming into China miss out on is the idea of “trial spots”, or as they are called in Chinese ่ฏ็นใ
So what is it? Basically, it’s a city, place, province or region which is used to try out something experimental which has not been tried before. When China first opened up, Shenzhen was a trial spot for opening up the economy to foreign manufacturing investment. When the experiment succeeded, it was pushed out to the other parts of China. Shanghai and Beijing were opened as tier one cities to foreign companies and employers, mostly in the service sector. When these experiments worked, the opening up gradually started. In most cases, the trial spots were selected by the central, provincial or municipal governments.
Now, there is another little secret. Large SOEs (state-owned enterprises) also often have their own trial spots. Most of the time, these are used to put some of the rising senior-level managers in to try new management practices. They are usually given a city, and a long leash, and are encouraged to try new ways of management. Often these managers are people who have made it to a certain level in a state-owned enterprise, but will not or cannot rise higher because they are somewhat non-conformist, and shall we say, less interested in politics. (Remember that in SOEs, the party also has a say in the selection of candidates for senior positions.)
Frequently, the Chinese way of handling these non-conformists is to give them a “trial spot” where they can experiment in a city or provincial division on their own. If something goes wrong with their experiment, then the damage is limited to their immediate market. If, on the other hand, the experiment was successful and includes practices which can be used on a larger scale, then that person may be promoted to a higher position with greater responsibility. This is how the current leadership of China has been groomed, just to cite an example.
The interesting thing is that many western companies, even consultants, are completely unaware of these practices. They look at their choice of investment areas in western terms, which usually means that which is clear, and out there, in the open.
They don’t study the people.
Instead, they should ask where the different “trial spots” are, and the backgrounds of the people they are dealing with. The right questions to ask for SOEs are:
If it sounds like questions an intelligence agency would ask when examining the new leadership of a country, then it does because it is just like that. I call this “due diligence with Chinese characteristics”.
And how do you get this information? I find the best way is walk in and ask (In Chinese, of course. Speak English and you only get the official line.)
For the most part, you will never find these people in Beijing or Shanghai unless they have been very successful. These are two highly conformist politically-charged cities, and the only way they make it to these cities is if they are in very senior positions, and their views have been vindicated.
Generally speaking, Chinese, even including the party, are more tolerant of non-conformists. Just don’t look for them in Beijing and Shanghai. Deng Xiaoping, the architect of China’s reforms, was for many years considered a non-conformist and was punished repeatedly for his views. Eventually, his policies became the mainstream.
So, how will the recent economic problems affect things? Basically, we are going through the collapse of an old world order, and nothing new to replace it has come up yet. The Chinese government, the party and Chinese SOEs will be looking for answers on what comes next to restore order, growth and stability. After all, this is what Chinese social stability depends on.
For Chinese government and party officials, it will be a good time to be something of a maverick. But these mavericks will only survive and prosper if they can come up with the right answers to some very tough questions.
Open Web Asia is a new organization founded by Gang Lu, publisher of Mobinode. Today they are bringing together some of the leading western players in China, Asia, Europe and the US to talk about web trends in Asia, and especially the trend for US and European companies to come to Asia. The venue for this event is in Korea, and brings together experienced marketers from Europe who have successfully made the transition to marketing in China and Asia, such as Web2Asia, which is based in Shanghai.
As part of the event, Open Web Asia is putting together a web survey on what companies in the west are considering coming to Asia to start companies. The survey is about the challenges western companies face when coming to Asia, including cultural, economic, and other issues. The survey starts today (Oct. 14) and will be open for two weeks.
If you are interested in China, business, economics, the Internet and technology, then I highly recommend that you take this survey. All you need to do is click on the button below.
The results of the survey will be announced on November 14, when Robert Scoble, Shel Israel and others come to China as part of the China Web 2.0 tour which is put together by the China Business Network.
I’m sure that the results will be interesting, and I look forward to seeing them.
Victor Koo, CEO of Youku, recently wrote an article, Internet Measurement in China: How to Get Out of the Dark Ages, where he highlighted the major challenge for Internet companies in China: the lack of reliable metrics for performance measurement.
In the article he talks about how even some VCs in China still rely on Alexa for very basic measurement stats, when in fact, Alexa is not considered reliable.
Many American service providers do not measure audiences from Internet cafes, which as I have pointed out, are a major source of traffic from China. Since American software companies are not familiar with the audience profiles of what is now the largest national audience in the world, they do not break out Internet cafes into a separate category, which underlines how American software providers are out of touch with this very important market. (This Internet cafe trend may change as broadband becomes more available in households, but it definitely should be counted as a major separate category in any report which claims to cover the Chinese market.)
The situation is not helped by government-supported “big picture” reports by CNNIC which give too broad numbers on a national basis and support a government agenda, but do not provide any business insights. They are great grist for press releases and the politically-charged Chinese and western media, but that is about the only value they have.
What Victor Koo does not mention is that the lack of reliable independent statistics has a very real debilitating effect on the healthy growth of the Internet as a sector in China, and the revenue outlook for Internet startups. This is because independent metrics, statistics, standards and definitions are requirements for the global media business. In order for media buyers to make good media buys for their advertising clients, they need standard definitions and metrics on the quantitative side so that they can make better overall qualitative recommendations and decisions.
It’s a testament to the robustness and attraction of China’s economy that the Internet has been able to grow as fast and as far as it has without these independent numbers and stats, but it is also a tragedy that many dollars have not made it to China because of the comparative opacity of the market.
If this systemic bottleneck problem can be addressed, the volume of ad money which would go to Chinese online publishers would go up dramatically.
Several months ago I wrote about how Apple’s opening of the iPhone SDK and its App Store would create a whole new business ecosystem for application developers for that platform. Apple offers globally accessible hosting and payment clearance in return for a 30% cut of the app’s sales price.
Now, there are early signs that the strategy is paying off for some early application developers who have developed popular apps for the iPhone and iPod touch (which uses the same SDK as the iPhone) users. Eliza Block, who developed 2 Across, a word game for the iPhone platform, has reportedly cleared in the area of $2,000 a day according to this article.
The App Store is a new updated version of the shareware movement which took hold in the early 80s with the launch of the Apple Macintosh 128K. In those days, homebrew developers would develop games, apps and productivity tools which were distributed on floppy disks. (Remember those? If you do, you’re showing your age.) More often than not, these came with a message which went something like “If you liked this app, please show your appreciation by sending a contribution to this address.” More often than not, people just used the apps without sending money, although there were a few kind and generous souls who did.
Now, Apple has become the doorkeeper for these independent developers. There is no more reliance on the kindness of strangers; Apple takes care of global distribution and payment for new apps in return for 30% of the app’s sales price. For devs, the App Store is the perfect barometer for what’s hot and what’s not.
In contrast, Facebook and others have not been able to find the magic balance point between independent developers and their own corporate needs for revenue. When Facebook opened its platform to developers, it ended up enabling app developers to spam the FB audience, driving many away from Facebook. Now, with Facebook Connect, FB is trying to find that balance point.
Chinese social media companies are no better at finding the right balance between independent devs and their own need for revenue. While there has been talk about open systems in China, all of the competing business models in fact, are not open. Apple’s system is certainly not open. it’s just that Apple is willing to share in order to grow the pie.
Apple and Steve Jobs have successfully put themselves at the juncture of technology, business and hardware, and are willing to share a larger cut in order to drive up sales of a very attractive new hardware platform. With growing earnings from hardware sales, Apple can afford to be generous with devs, and is effectively subsidizing a new business ecosystem. By making some independent developers financially successful with App Store and getting that word out, they do something none of their competition have been able to do yet.
The question for Chinese companies such as Tencent is whether they are willing to use their high corporate earnings to subsidize their own independent developers’ business ecosystem as Apple has, and share some of the revenue in order to grow the pie for everyone? Or do they still think that they can own the whole pie? Tangos Chan says that they still believe that they can own the whole pie.
But Tangos believes that this will change in the future. In the meantime, more independent devs will gravitate to developing for the iPhone platform. It’s better to open up sooner while there is still interest in their platform because opening up later means that they will have to be that much more generous in order to attract developers away from Apple’s platform.
After all, that’s where the money is. And I’m sure that Steve loves how his competitors’ moves help his platform.
What more could he ask for?
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.
Yesterday I had the opportunity to watch Part 1 of Ted Koppel’s documentary series The People’s Republic of Capitalism on the Discovery Channel. Instead of going to Beijing and Shanghai, the normal stops for most first-time visitors to China, Koppel went to Chongqing, a city I have visited and written about.
The documentary is very intelligent and well-done, Koppel covers companies in the US who relocate their manufacturing to Chongqing, and the effect on the lives of the American workers who lose their jobs in the US, as well as the Chinese workers in the factory in Chongqing. He also compares how differently WalMart is viewed in China and the US. Koppel does a very good job of providing context about the effects of globalization, which mix good as well as bad for everyone.
Part of the reason the documentary format is appealing is because:
Koppel is fortunate because he had an excellent record on his nightly news program, Nightline, which he hosted for nearly 20 years. And now, he is able to make the kinds of programs he likes, without having to worry about time and budget considerations. It would be nice if there were more journalists who could make documentaries the way Ted Koppel is able to.
The series is a four-part series showing on four consecutive nights. If you are outside the US, you will most likely be able to buy the series from iTunes, because Discovery regularly sells their documentaries in the Apple iTunes Store.
Just a quick note about what I see happening behind the scenes in China.
The administration of Hu Jintao has made a recent effort to push for transparency and accountability in China, especially related to disbursement of funds related to the Sichuan earthquake, and then acting quickly against corrupt local officials in Wengan in Guizhou province.
The center in Beijing is responding to a popular demand for greater accountability and transparency, and is using this as an opportunity clean house within the ruling party. The message from Beijing to the local party officials is simple: Shape up or be removed from your position.
When Deng Xiaoping introduced his reforms beginning in 1978, he gave local officials wide leeway as to how investment was brought in. The reason for this was simple: Beijing had no money; it was bankrupt. The side effect of this policy has been rampant local corruption. All kinds of games have been played in the name of making the numbers reported back to Beijing. Many of these corrupt officials have escaped China, and are living in the US in multi-million dollar mansions paid for in cash. Behind the scenes, the Hu administration has been quietly working with the US’s Justice Department to bring these officials back to China for prosecution.
As the amounts of the corruption have grown, so has popular resentment. Beijing knows that it must act to clean house. The failure of local governments and party organizations to act forcefully and clean up their own houses have handed Beijing an excellent excuse to act forcefully, and handed multiple PR victories to the center. Chinese bloggers who highlight local corruption have become the eyes and ears of Beijing on the local level. When the decision is made that local corruption needs to be escalated to the national level, then Xinhua mobilizes its formidable machine to shape public opinion on the national level. Then Beijing comes in and acts forcefully, removing the corrupt officials, and making them an example to local government and party organizations all over China.
If you believe that this is simply about accountability and transparency though, you would be naive. It is also about money and how investment decisions are made in China.
Beijing is seeking to recover many of the financial and investment decision making powers which Deng handed over to the provinces and local party officials. In the context of this drive against local corruption, the local administrations and organizations are in a weak position to resist Beijing’s efforts to recover investment-making decisions. China needs higher value-added, higher technology industries which rely more on research, development and IP. Provincial governments and party organizations have not acted quickly enough to upgrade from inefficient, dirty industries which rely on cheap labor. This means that now the investment decisions need to be made from the center in Beijing, with the support of public opinion, of course.
While the Chinese government does not understand PR in a western context, it knows exactly what it’s doing in a Chinese context.
