Behind The Scenes In China

July 9th, 2008

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.

Is Twitter the American QQ?

April 7th, 2008

Unless you have been living under a rock for the past six months, you have probably heard of Twitter. Developed with Ruby on Rails, it has now hit the big time, with many companies offering client versions of Twitter, so that you don’t have to keep the Twitter web page open to record your deepest thoughts, which you can share with your community/ies.

Technically speaking, there is not a whole lot of difference between Twitter and many other IM clients, including Tencent’s QQ, the immensely popular Chinese IM client. If there is any difference, it is that Twitter makes it possible for dispersed communities to keep track of each others’ activities. In contrast, the IM clients are mainly Web 1.0 tools which enable people to find and contact each other to meet offline. QQ, for instance, is a great enabler for that popular activity which we shall call “dating” in China.

The difference between Twitter and the Web 1.0 IM clients is not so much in the technology, as in the way people handle relationships. Put simply, the lines between offline and online relationships are blurring, and in many cases, more people spend more time online than they do offline. For this reason, their online communities are gaining value, and in a few cases, are assuming primary value, while their offline relationships become secondary.

This was not the case for most of the Web 1.0 IM clients.

From the business perspective, this means that businesses will have to pay even more attention to what is going on online, as I have mentioned in my previous post.

In China, many people do not have email addresses, instead they rely on QQ ID numbers to identify each other. Walk into any Chinese working area (including Starbucks and any other area which provides free Wifi) and chances are you will see that almost every screen has a QQ or Windows IM client window open.

And they are using it for business, not just personal gossip.

So, the ultimate test of whether Twitter becomes the American QQ is whether American’s use it for business, not just social chatting.

If that happens, the American Internet will suddenly look a lot more like the Chinese Internet.

Paul Graham Article on Large and Small Organizations and Happiness

March 23rd, 2008

Paul Graham has just published an excellent article called “You Weren’t Meant to Have a Boss”.

He talks about many of the same ideas I have talked about on this blog, and why it’s best to work in small organizations if that is what most appeals to you, and works for your personality. This is particularly interesting because software engineers, especially Internet networking engineers are interested in scaleability. Paul Graham makes the point that large organizations don’t scale for many people; they are happier in small groups.

WARNING: If you work for a large organization, you may not want to read this article.

Asking the Right Questions Before Diving In

March 22nd, 2008

A good way to find out how sharp a person is to listen carefully to the questions they ask. Smart people ask very sharp questions which cut right to the core of an issue, while less astute individuals kind of dance around the edges.

Smart entrepreneurs ask the sharpest questions because often the success of their own business depends on the questions they ask. Smart people who work for large organizations usually do not have to ask such sharp questions because they have an employer who tells them what they need to do, and they are usually not paid to ask questions, they are just paid to do things they are told to do, regardless of whether the tasks are smart or not.

I have long been an admirer of the folks at 37 Signals because I think that they are a small and very smart crowd of people. For me, they represent the kind of company which future entrepreneurial organizations should be like: small, smart, fast and lightweight. They are the Davids (as opposed to Goliaths) who want to continue to be small and smart, and focus on serving their customers’ needs.

One of the reasons I admire them is because they were the incubator/developer for Ruby on Rails, which I talked about earlier in this article. What is significant about the 37 Signals team is that they think of themselves more as designers than developers, which gives them a different perspective. Instead of adding features, they are focused more on making software programs easier to use. This is the thinking behind their online application suite offering which includes Basecamp, Highrise, Campfire, Backpack, Writeboard and Ta-da. After doing web development over several years, they have captured their thoughts about web application development in a downloadable PDF book called Getting Real.

A major part of their appeal is that aside from being designer/developers, they also have an appreciation of how the business world works. For this reason, I’m a frequent visitor to their website. Recently, they had a posting to their company blog called Question your work. According to this article, there are several questions which you should always ask:

  • Why are we doing this?
  • What problem are we solving?
  • Is this actually useful?
  • Are we adding value?
  • Will this change behavior
  • Is there an easier way?
  • What’s the opportunity cost?
  • Is this actually worth it?

All of the questions are very good big-picture questions which should be asked up-front before embarking on any major development project. I have seen many fairly major software development undertakings, as well as marketing projects, which did not answer these questions well, and frankly, a good deal of grief would have been saved if these questions were posed first.

So regardless of where you are, whether you are in the US, China or anywhere else, ask these questions first before you embark on a major business adventure.

How to Give Advice

March 21st, 2008

With all the different political and business agendas fighting to get heard, it is often difficult to lose sight of what the truth is. This is true of China with the rest of the world, and also very true of the business world. When this happens, it’s very difficult to step back from the respective agendas, take a deep breath and a fresh look without becoming angry or cynical.

Giving advice and insights are a sometimes difficult skill to learn, but they are very important. I firmly believe that the world would be a better place if people knew how to give advice better. For many people, it’s very difficult to learn this important and under-utilized skill.

Giving advice is especially difficult within large organizations, where the truth may be readily apparent but where the management or leadership does not want to listen. Communications is a two-way street; someone has to speak and someone has to listen.

So what can you do to insure your chances of success and being listened to?

  • Pick the right time. Speak only when that person is ready to listen. Often, that means when that person’s idea has failed, sometimes miserably.
  • Don’t gloat over the mistake they just made, or say something like “I told you so!” That is a sure way to make sure that your message doesn’t get heard; you will not last in the organization, even though your message may be right.
  • Don’t personalize the mistake they made, even though it may have resulted in millions in losses or damage. This doesn’t help either.
  • Offer your suggestion in the form of a solution which you have given deep thought to. However, don’t go into detail to explain it unless you are asked to.
  • Keep it short. Get to the point, say it in as few words as possible, and unless you are asked to stay, walk away. Senior and executive management have little time to think about things on their own, so leave them alone so that they can think. If your suggestion is a good one, then it will stand up to scrutiny.
  • Choose a time when they are alone with you. Never bring up the advice in front of other people; if you do you run the risk of making them appear silly in front of a large group of people, which is never a good thing.
  • Don’t bring up advice in meetings; most meetings are not a good place for discussion. Too many groups have competing agendas.
  • Learn to write well. One of the most under-utilized tools in an office is the memo. Discuss the situation, lay out your case, and send it to the right people for review and discussion. The goal of a good memo is to start an intelligent discussion; keep that in mind.
  • Don’t give advice anonymously. If you believe in your advice and that it has value, stand by it and let everyone know it is yours, and that you are willing to go up or down with it.
  • Keep emotion out of it and keep the tone neutral. Use logic to make your point.
  • Keep it open-ended so that the listener can offer his/her point of view if they want to. If they do, you may have a conversation, which is a good thing.
  • Always be diplomatic.

What other ideas do you have about giving advice?

Why Many Chinese Entrepreneurs Don’t Like Lawyers

March 19th, 2008

China Law Blog is a good source of legal information about Chinese business and investment regulations and one of his comments in my previous post got me thinking about why Chinese entrepreneurs don’t like to work not just with American lawyers, but lawyers of any nationality.

Here is his comment in full:

Right idea. Wrong country. What you predict will happen, I am certain of it. I am certain of it because our German and Russian clients have over the last few weeks been calling us (here in the US) like crazy to help with this or that deal they are doing or want to do. The deals range from high tech to old line manufacturing (that’s right) to real estate. When we tell them our legal fees I can almost hear them gasp (particularly the Germans) at how low they seem for those used to paying in Euros. That’s right, step right up, the US is on sale to foreigners ….. Like it or not. BTW, no calls from Chinese and I don’t expect many either, both because they tend not to use lawyers so much and they also tend not to be big buyers of existing US companies. At least not yet.

So why is it that Chinese entrepreneurs don’t like to use lawyers and legal services, even when using them the right way, and intelligently, will help them to greatly expand their businesses?

I have a theory.

For many Chinese, “the law” is whatever the Chinese government says it is. Just because some new kind of business is done in China, does not mean it is legal, it is just tolerated. It usually means that it is so new to the slow-moving bureaucracy that it hasn’t figured out whether it should be legal or illegal, so it’s “tolerated”.

Your business may be tolerated, then the government says it is “illegal”, or it may be tolerated, then the government says it is “legal”. Then it might switch from “legal” to “illegal” and told to shutdown almost overnight. This happens, and continues to happen all the time. This is part of the price of doing business in China.

Here’s another example.

The Chinese government says that new businesses in China have to list their “business categories” and the business they are in. Think about it; does this make sense? From a business point of view, it makes little if any sense. Let’s say a consulting business needs to do a marketing survey. They may run afoul of the law because this is not allowed; they registered as a consulting business but need to do a marketing survey for a client who wants to enter the Chinese market. So while it makes perfect business sense to do this, the bureaucrats and regulators prevent it from doing so, because from their POV (the government regulators), categorizing businesses makes more sense.

Among Chinese business people, there is a large degree of frustration at these sudden changes which come out in the morning, and may change before the sun goes down. For Chinese entrepreneurs, this is the face of the law.

So, in order to succeed, they spend a huge amount of their time avoiding the regulators and getting warned, or even shut down. If the regulation comes from Beijing and they are in Hangzhou, they will go talk with Hangzhou city government officials to avoid getting crushed because local Chinese officials have the power to “interpret” the law. Sometimes this means ignoring what Beijing says, without openly confronting Beijing.

And this is why many Chinese entrepreneurs avoid lawyers, because so much of the time, the government officials are the face of the law, and are not there to represent their rights, but are there to warn them, or even shut them down. So, from their perspective, the law is bad news.

When Chinese companies go overseas, they continue to act this way. They avoid relatively small up-front legal fees, thinking that they can outmaneuver them and the regulators, never thinking that the law can in fact work both ways, and can help them to gain benefits. They are guilty of thinking that they are still in China and behave as if they were still in China.

Moreover, they know that the advantage of Chinese businesses lie in their cost structure, and fear losing it if they go overseas. This means that they act very cheap when they go overseas, and acquire reputations for being cheap and micro-managing their foreign employees, trying to extract every little bit of time and value out of them.

In the long-term, this hurts the reputation of Chinese companies as a whole.

In fact, company cost structures evolve and adapt to the market and society they are a part of. No country can have the same cost structure as China, just as no country can have the same values as America does.

And there is no reason that they should.

Getting Into China for Foreign Tech, Biz Pros

February 11th, 2008

More frequently now, US-based (mostly Silicon Valley) tech and business professionals are contacting me, asking how to find work in China. The business people usually want to get paid US salary to stay in the US and do some BD work for a US or Chinese company. The technology people usually want to find work in China.

For the most part, it’s very hard to find work which requires that you stay in the US paid at US salary. I have never heard of a Chinese company hiring someone on the recommendation of a senior recruiter without first meeting senior and executive management over a period of time. I know of one VP in a gaming company who came back to China, was hired and worked in China for nearly a year, and was then sent to open up their new US west coast office. Of course, a job like this requires working with a very Chinese company, which means that you need to know Chinese. And you need to prove yourself in the home office before you will be sent to the US. So, it is not easy…

For technology pros with 10+ years’ experience, my advice is that they take a few months off to come to China, and network as much as possible. Paul Graham puts it very well in this article about web startups. Beijing is a very vibrant startup hub and its tech grads from Tsinghua University offer the cream of the crop; generally speaking people are very friendly and open about what they are doing.

Shanghai is a more western style city, and the mentalities of the people are very different from Beijing. A rough analogy would be to say that Beijing is like Silicon Valley + Washington DC, and Shanghai is like Los Angeles or New York when it comes to mainstream media.

If you are a tech pro with 10+ years working in Silicon Valley, you really should be thinking more in terms of startup than about joining a company as an employee. There is an upfront sacrifice in terms of time, but in the end you will be happier, and at least you will own a piece of a company. If you are younger, you can afford to make a few mistakes in your early startups; if you are older, you want to choose more carefully. The good thing about doing a startup is that even if it fails, you are likely to make excellent acquaintances which will help you in the future.

One reader of my previous article Is It Possible For A Western-Managed Company to Succeed In China? mentioned that I made it sound very hard for a westerner to succeed in China. Well, yes and no.

Over the weekend, I came across an interesting announcement on Danwei from Praxis Language, the parent company of Chinesepod, an online Chinese-language learning program. The company is based in Shanghai and is headed by Ken Carroll. I met Ken in 2005 at the first Chinese blogger conference, which was held in November of that year in Shanghai. I have never used Chinesepod, but I have heard many favorable comments about it from westerners who want to learn Chinese.

The announcement, which is on Ken’s blog, mentioned that the Chinese government agency in charge of the government-operated Confucius Institutes, had approached his company about partnering to create an online presence for their institutes and helping to teach Chinese to non-Chinese using the Internet.

Think about it. The Chinese government partners with a non-Chinese headed company in Shanghai which knows something about language teaching online to help them promote the teaching of Chinese online around the world.

So, if you are good in your field, of course there are opportunities for western-owned startups in China.

Business and Social Context Isn’t Important; It’s Everything

February 10th, 2008

One of the most popular cliches in the west about China is that Chinese are generally good and reasonable people, but when it comes to nationalism, they are unreasonable. On the political level, national sovereignty is not negotiable, and when it comes to business, you need to realize that nationalism is a wildcard, and can throw a monkey-wrench into your best-laid plans. Put into this context, the 2008 Beijing Olympics is all about righting past wrongs, and showing that China is now an equal, maybe even a leader, in the world stage.

Like all bad cliches, this cliche contains a kernel of truth.

In my previous article, I mentioned why it’s so important for any business to be successful in China, decisions must be made locally by local management; it cannot be micromanaged from the US or anywhere else. Established business sectors such as finance, banking, retail, and fast moving consumer goods (FMCG), all understand this very basic rule of international business.

In the venture capital field in China, there has been a large influx of companies and partnerships which have opened offices and partnerships in Beijing and Shanghai. These companies understand that good investment decisions must, for the most part, be made in China where the local partners can understand the business environment, the competition and perform the due diligence to make the right decisions. Smart decisions cannot be made outside China.

And even that is not necessarily enough. Now more companies are going into the Chinese tier 2 and 3 cities and they are realizing that Beijing and Shanghai have more in common with New York, London or Tokyo than with other Chinese cities.

So why do so many US technology companies continue to try to second-guess and micromanage their China local management?

This is a mystery to me, and I continue to be befuddled by it. How can intelligent people continue to make and repeat over and over again mistakes which others have made before?

And then, when the Chinese local management complains that they are not empowered, sometimes they dismiss it as the Chinese “going nationalistic”. Never mind that the people questioning the Chinese management in the US do not speak, read or write Chinese; never mind that the people coming into China spend only a few days on the ground in China and think that they have China “all figured out”, yet they continue to do this over and over again.

Does this make sense? Any sense at all? And should there be any surprise that leading US companies including Yahoo!, eBay and AOL have failed in China?

And yet, these people control the budget and resource allocation for China. Should there be any surprise at all that US Internet companies have not been able to be successful in China?

What value do these people contribute to the success of the business in China? I can’t see any. Then when the company fails, it isn’t because headquarters slowed down the decision loop; it’s because of “poor performance by local management”!

They have set up Chinese local management to be the fall guy even before they started!

If this thinking were only confined to Internet companies and startups in China, it would be bad, but in the overall economic picture, it wouldn’t be that important.

The problem for the west is that it isn’t.

It has affected the west’s popularity in Africa because China offers aid without strings attached. In the mainstream media in the west, this is depicted as a cynical attempt by the Chinese to curry favor with regimes which behave badly.

But could there be more to it than meets the eye?

Could it be that the Africans don’t like to have someone dictate loan and development terms from Washington DC, London or Paris, and setting performance benchmarks for them without understanding the context of development in their own countries and region?

And could it be that the real reason for the popularity of the Chinese is that for better or for worse, they have gone local, setting up their own businesses and factories in Africa instead of trying to dictate terms from Beijing?

Definitely this is something worth pondering…

There Are Chinese, Then There Are Chinese

February 10th, 2008

crowd.jpeg

For many westerners and western companies, it’s hard to figure out why some Chinese have gone to the US for their graduate degrees, worked at name technology companies such as Intel and Microsoft, then come back to China, their homeland, start their own businesses, and fall flat on their faces.

How is this possible? They had everything going for them; they had the best education the US had to offer, worked in a great company, were smart and entrepreneurial, know the language, have connections, and they failed.

More often than not, these people have been away from China for a long time. Over time, they have become used to the American way of life, and while they keep up with what is going on in China, their knowledge and understanding of the country has gone stale. Gradually, they are more at home in America than in China. They jump on the China bandwagon because it is in the media all the time, and they hope to strike it rich.

Then they return to China and discover a country which is not the China which they grew up in. Compared to when they left, the role of the government is much smaller, the country has become more market-oriented in most sectors, and they may have lost many of their former connections. Worst of all, they look at the country through American-tinted glasses and use American society as a point of reference, something which does not work in China at all.

For any business or individual to succeed in China, you must understand China on Chinese terms.

This failure to understand China on Chinese terms is, in my opinion, why so many western Internet companies have failed in China. Moreover, the constant need of local management to report to headquarters outside of China, and to report every purchase they make, and more often, to explain what they are doing, puts a fatal hindrance on the decision-making process because the management is constantly tied up in knots educating someone in headquarters about China.

This makes for another very important point: No successful company in China can be successfully run from outside China; the key decisions and decision-makers must live, breathe, work and sweat in China every single day to make it work.

The single most important bad decision western companies make in China is to force the local China management to consult with headquarters about every matter; this makes the local management look weak in the eyes of their own staff. After all, what is the point in staying with a company if they do not have the power to make decisions even if they are sitting in the corner office?

It all comes down to how empowered people are to make their own decisions, and to be held responsible and accountable for them.

It makes much more sense for them to break out and start their own company, often taking the idea the western company had, but was not able to implement in China because they were constrained by headquarters’ indecision. In the Internet sector, where change is happening so fast, it makes no sense to sue and countersue; that would only make the lawyers happy and not solve the basic issues.

This just scratches the surface of why being Chinese is no guarantee of success in today’s China. Put simply, the society has changed too much too fast, and unless outsiders live here and deal with local Chinese who have never been outside China and speak only Chinese on a daily basis, they will fail.

In business, success cannot be guaranteed, but failure can…

This is a joke, right?

February 8th, 2008

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

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

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

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

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

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

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

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