The China Vortex

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?

Technorati Tags: Apple, applications, apps, appstore, business, corporations, developers, distribution, ecosystem, facebook, gaming, iPhone, iPod, Macintosh, productivity, sdk, stevejobs, tencent, tools

There is a whole brave new world for social marketing which is unfolding and which, so far, has caught many businesses off-guard.

A good part of the reason for this is because many corporate marketing departments are managed by people who cut their teeth when TV, radio and print were the main ways to reach audiences.

Sam Flemming, who is the founder of Shanghai-based CIC, a market research and consulting firm which covers brand buzz in China, has posted an article on how online trends will affect how agencies will think and work.

Based on my experience working in traditional media and then online in China, I think that online users are about 2-3 years ahead of online users in the US. This is because the Internet developed without the help of advertising income in its early stages, unlike in the US where advertising was a very established model. For this reason, it is much easier for Chinese consumers and advertisers to adapt. In China, there is much stronger tie-in between offline events and online promotions, instead of just relying on online advertising as in the US.

US corporations and advertisers have to “unlearn” much of what they have thought would work in the new online space.

One of the big questions is that agency account people will have to learn to become advocates for their brands and products both offline and online. Where does the agency and customer advocate line end and begin? It’s easy to see that in the very near future the best agency account people will be those who are the most passionate and eloquent advocates for a product, and can exercise good judgment quickly. Those who succeed will be the ones who can go from strategy to tactics very quickly, while keeping the client clear about overall goals and weaving through the intricacies of the online conversation.

One book which is going on my “to read” list is Jump Point, which talks about how marketing to the interconnected online crowd is going to work.

Technorati Tags: advertisers, advertising, brands, China, cic, corporations, events, iwom, marketing, media, offline, online, print, promotions, radio, samflemming, TV, US

In the west, there is a whole industry called “risk consultancy”. Basically, this industry is built around informing large- and medium-sized corporations about risk. Originally, this was built around business risk and would answer questions like “How safe is it to invest $500M in an industrial diamond mine in the Congo (formerly Zaire)?” The consulting firm would then send practice consultants to the target country, where they would study sunk costs (including bribes which were never written about in the report, regulations, who was related to the president, political opposition, major competing firms, etc.) Most of these questions were positioned as questions which any board would ask the CEOs before they would greenlight an investment.

Underlying all this is the belief, at least in west and among western corporations that “risk” is something which can be quantified and measured objectively.

One of the big topics in the west now is China’s investments in Africa. What is fascinating about China’s investments in Africa is that while the amounts of money and people who go to Africa are huge, China really doesn’t have risk consultancies, and Chinese really have not yet started thinking in terms of quantifying risk in the ways western corporations have.

So how have the Chinese judged risk so far, and will the present method change over time to something more akin to the western way of thinking? When it comes to Chinese investments in Africa, many of the early-stage investments were a part of Chinese foreign policy aimed at securing raw materials for manufacturing, and more importantly, energy sources. The typical model has been to find a country, build a new palace for the president and a new sports stadium to win over the people. This would help state-owned construction firms to gain a footing in the country, which were then quickly followed by Chinese logistics firms and wholesale distribution firms which would sell products to the local African population.

Viewing the local African population as customers were one area where Chinese viewed Africa fundamentally differently from the west. While Beijing, Shanghai and the Chinese tier one and tier two cities are relatively modern, it is very easy to forget that when it comes to pervasive poverty, China is only 10-20 years removed from the levels of African poverty. Basically, Chinese companies know how to sell to poor people because they had lots of practice in China.

When you are working from a low cost basis, there really is not a whole lot of need to measure risk because the only way to go is up. Remember, in China labor is still very cheap compared to the west, and the Chinese government is always interested in keeping people employed in the interests of social stability. On the other hand, when you have large risks but your investments are backed by the Chinese government, there is not a need to measure them either. But things get complicated when you are in the middle, and are a mid-sized Chinese company (US50M-1B) which is private and are looking at Africa, as many are now.

Right now, the path many are taking is to send executives, management and staff wholesale to Africa, and basically telling them to figure things out on the ground. This is the Chinese version of “Let’s throw spaghetti at the wall and see what sticks” approach. But what happens when you don’t really have the protection of the Chinese government and local Chinese embassy, and the Africans start complaining that Chinese companies aren’t creating enough local jobs for local Africans? Obviously, these are the sorts of questions which are very complicated, since they include a social factor, in addition to the corporate and economic equation.

Will the Chinese companies turn to the western risk consultancies? Not likely. First of all, they are too expensive by Chinese standards; Chinese management is still very price-sensitive and is not likely to be willing to spend the large amounts which these companies charge. Also, they are not likely to entrust this kind of sensitive information to an outside firm which may recirculate some of the data for a competitor. Most Chinese companies are very tightly held, and risk is whatever the CEO thinks it is at that moment in time.

For western corporations which work from a high-cost basis, risk consulting is an item on “research” for executives, even though it may easily run into the millions of dollars.

For the Chinese, that’s way too much…

Technorati Tags: africa, China, consulting, corporations, culture, investment, management, risk, western

In an article for the Oct. 29 issue of Caijing, writer Xu Shanda (许善达) claims that Chinese corporate earnings are inflated. In the Chinese language article, Xu claims that there is an earnings bubble. The article summary says this (my translation):

The government should no longer listen to Chinese enterprises’ requests to turn their costs to social costs. It can no longer listen to their efforts to infringe on the rights of all citizens to suit only their own unreasonable and illegal corporate earnings requirements. In real terms, this means that the government must step up its own efforts to build a social welfare system, an environmental welfare system, strengthen legal enforcement, and at the same time, create a new market system for the trading of resources so that a pricing system which more realistically reflects market realities can take root.

In the article, Xu claims that corporate earnings for many Chinese companies have continued to go up because they have not had to pay for social security and environmental costs. With such low operating costs, of course they would have high corporate earnings.

Now here is where it gets interesting. Xu Shanda is not an outsider; he serves as an independent director of ICBC, one of China’s state-owned banks, and was the former vice director of the National Tax Bureau.

In effect, Xu is arguing for a social security system to protect the poor, and for increased taxes to clean up the environment during China’s high-growth phase. High-growth was a top priority during the last years of Deng Xiaoping and during the Jiang Zemin years. In contrast, the administration of Hu Jintao is recognizing the high costs of the environmental damage created by reckless growth. The person now leading the charge re environmental affairs is Wen Jiabao, who is reviewing many major engineering projects.

For many Europeans, Xu sounds like a social democrat, or what is called in US politics, a liberal.As a an American, it is very ironic to see a Chinese government official argue for the kinds of things which the Bush administration is so keen on dismantling in the US, even though US public opinion largely believes that there are serious environmental issues which need to be addressed.

For the Chinese government, the current situation is about finding the right balancing point for China. If China adopts a social welfare system like western Europe’s, they are afraid that costs will go up and so will unemployment. Chinese goods will be less competitive on the global market. However, if they do not raise them, the destruction of the environment in China will continue, and many businesses will not be held accountable. It would become like the US, where the system favors large corporations while offering lip service to the little guy. (It was not always this way in the US, but it has markedly changed because of recent US changes to the US Supreme Court and recent court rulings.)

There are early signs that the Hu administration is taking steps to bring market realities to resource pricing; yesterday the Chinese government raised oil prices by nearly 10%.

So, there is strong internal pressure in China to make corporations more accountable, just while the US is privatizing more public sector services and is making them less accountable.

For those in the US who believe that privatization is the answer to all of the country’s problems, they would do well to come to China and look at some of the effects. A lot of this damage is done by a combination of corruption, cronyism and privatization.

Ironic, isn’t it?

UPDATEIf you are interested in how the Bush administration’s proposed tort reform would largely take away from US citizens the right to sue corporations for environmental and product violations, please visit the Wikipedia entry on tort reforms. This is the kind of legislation China needs to curb corporate excesses, although the Chinese are very conscious that they want to limit misuses and abuses of the system as have occurred in the US. What the Bush administration is proposing though, is not a reform, but more or less turning the clock back and making consumers rely on the “goodwill” of large corporations to protect them. Since I am not an attorney, this may be an area Dan Harris, publisher of China Law Blog, may want to shed some light.

Richard Spencer also has an article which suggests that the western interest in China’s conditions and policies may be more tied to China’s rise as an economic power than to a true interest in those issues.

Hmmm…That’s good food for thought.

Technorati Tags: China, corporations, corruption, cronyism, environment, law, legal, security, social, US, welfare