The China Vortex

One of the great challenges in any relationship is about establishing the right tone of dialogue. Should it be friendly, adversarial, competitive, or something else? Can the two parties be constructively critical, or will they just be critical? Can they listen to each other without becoming overly offensive and/or defensive?

Just about the only thing more difficult than setting the right tone of dialogue, is setting a new tone for a new conversation when the old tone of dialogue no longer works, if only because the underlying dynamics has changed. If there was one thing which came clear through my article criticizing the Economist’s Angry Chinese article, it was that this was something which needed to be examined more closely and discussed more openly, if only because the article attracted a large number of readers and comments (34 at the time of writing).

At the heart of the problem is how to break through outdated stereotypes about China. I, for one, believe that its time to get past criticizing “China” and to start being critical about China. Many western media experts and journalists tend to think that Chinese need to be separated from the Chinese government, and become more outspoken about the shortcomings of the Chinese government, believing that only when this happens, will China become a more open society. If they speak out in support of Chinese government policy over Tibet for example, they are quickly dismissed as government-supported actions, or being not aware of Chinese government-sanctioned policies in Tibet. In fact, it is far more likely that the positions of most of the Chinese population will harden in the face of criticism from the west and the western media. Instead of making it easier to reach a compromise, it actually makes it more difficult.

The fact is that the official Chinese media, even though it is state-controlled and monitored, frequently is very open in its criticisms of some government policies. There is a huge number of magazines and newspapers, and all of them now have to attract readers in order to justify their existence as businesses. If you are not reading it already, you should read Danwei just to get an idea of how much Chinese society has changed. Just keep in mind that what Danwei is able to cover is just a small snapshot of what is happening in modern Chinese society.

This is not to say you can say anything in the Chinese press. There are limits, and the Chinese frequently talk about “stepping on the red line” for violating government ground rules. Part of the role of those working in the media is to know exactly where that red line is, because it sometimes moves.

A very interesting development is the rise of the Chinese Internet, as increasingly large portions of the population depend on it for information, trusting it more than the traditional media. Sometimes this means that some of the wildest rumors spread much faster in China than in the west. It is possible to make the case that there is free speech in China, and that it exists in parts of the Internet. But often this free speech is closer to the analogy of the man who falsely shouts “fire” in a packed movie theater. This kind of free speech is unfortunately, more than unproductive, and is sometimes used to whip people into a frenzy. This happened with recent coverage of western media coverage of the Tibetan situation. When the Chinese became angry, many in the western media were taken aback at the scale of the reaction.

Part of this can be ascribed to the power of the Internet and mobile networks in spreading information and rumors.

Welcome to the power of the Chinese Internet.

The problem many western editors make is that they seem to want Chinese to cross the red line, then when it happens, they can use hold it high as an example of how authoritarian China is. This is an overly simplistic view of Chinese society which tries to reduce everything to black and white terms. In an increasingly complicated world, it’s not enough to reduce important relationships to overly simplistic terms, this will only make things worse and set the stage for future misunderstandings which may have tragic consequences for everyone.

Fortunately, there is some dialogue going on, and there are some very smart people who are devoting themselves to discussing these very real and important issues, and are setting the groundwork for a new and more constructive dialogue.

On the English-language side, some of the more interesting websites are:

• EastSouthWestNorth
• Danwei(for coverage of the contemporary Chinese media scene, complete with constant updates on moving red lines)
• The China Business Network(mainly covers business but also includes cultural issues
• James Fallows (I also enjoy his coverage of technology
• The Washington Note(This website proves that something intelligent can come from the global capital of spin

If you want to keep on top of developments in China, these sites will keep you informed.

And of course, there is the China Vortex. You are always welcome here.

Technorati Tags: China, Chinese, culture, government, internet, media, news, Tibet

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

One of the frequent questions I run into in China is how western Internet companies coming into China should position themselves for growth in China.

Should they try to be western, or should they try in the shortest possible time, try to become Chinese, hiring Chinese for their local staff and management? Under what circumstances is it best to be western, and under what circumstances is it best to be Chinese? And what if a company has been in Taiwan, Hong Kong and/or the US; how should they position themselves for future growth in the Chinese market?

Their positions are made more complicated because it is now hard to find good management people they can trust locally in China; as an organization becomes larger the camaraderie and culture which forms in the management team becomes increasingly important. Over time, this builds into trust, especially if they need to deal with problems and challenges which need to be overcome on a daily basis. This comes face to face with another China reality: it simply is not easy to find people you can trust in China. Backgrounds can be fudged, headhunters want to push their candidates; the list goes on and on.

Internet businesses are especially complicated; most founders come from technology backgrounds, even today, and they have very little understanding of marketing, company positioning, and yes, national and corporate culture. Many still have dreams of serving the world from one virtual data center in Redmond, Mountain View, Beijing, Hong Kong or elsewhere, and letting more junior management deal with the soft and fuzzy stuff like “culture” and “marketing”. Even relying on ethnic Chinese management from Taiwan or Hong Kong has not really worked, as China is littered with Internet startup failures led by Taiwan and Hong Kong management teams who really did not understand the dynamics of the market in China. There have been many western executives who have said “How was I supposed to know that they didn’t understand China; they told me that they were from Hong Kong/Taiwan?”

For anyone from established business service sectors, such as banking, these ideas seem silly, even foolish. And they are. A simple reality of the Internet is that it is going to come under more national jurisdictions and regulations as it becomes a more important part of peoples’ lives. Just as it is inconceivable that banking would not be government regulated (unless you count the ongoing subprime mortgage crisis as a failure of the government’s regulatory system), it is becoming inconceivable that the Chinese, US or other governments would not want to have a say in how the Internet is run.

These established sectors know only too well how important it is to somehow find a way to live with government regulatory bodies. In China, successful new startups have almost always come from new areas which the Chinese government has not figured out regulations about and does not yet know how to regulate.

The perfect example is the online gaming industry. This industry was basically an import from South Korea, and took root in China because gaming consoles are technically illegal. (Sony PS2 and 3, Nintendo Wii and xBox360 are all freely sold; that law is seldom enforced, and all of the games sold are cracked versions.) The Chinese government’s rationale for that law was because way back in the nineties, the Chinese government saw PCs as a valuable educational tool, but considered gaming consoles to be expensive frivolous tools for kids to waste their time. At a time when the Chinese had much less buying power than they do today, it seemed like a good idea to ban gaming consoles.

This created an opportunity for Shanda, which was the first company to launch online games (almost all from South Korea) in the Chinese market. This idea caught fire with many younger Chinese and spawned the Internet cafe industry, where many younger Chinese choose to spend/waste their time and has also popularized QQ, the ultimate social networking application if there ever was one, and which for many Chinese, is the Internet.

This industry has swiftly matured, and with success has come regulation. Online gaming companies have tried to adapt, some have adapted (or tried to adapt) by moving into the online game publishing business from online game distribution. The transition from online game distribution to online game publishing has been a rocky road for companies like Shanda. The company has in the past acquired studios and titles, but many of the creative pros have left post-acquisition. A new wave of game publishers with strong titles have come up, led by Perfect World and the highly-contentious Giant Interactive.

On the regulatory and marketing fronts, the online game publishing company has become a victim of its own success: the huge amount of revenue it generates has created something the government and other regulators call a “social problem”, and it has fallen into a rut on the creative side, adding more titles in what are basically the same genre with very little to differentiate each other. The result: titles with diminishing shelf lives and ROI. People who are not addicted to games (i.e. people who have lives) have an increasingly bad view of the industry and game titles.

Unless you have some way to break out of your core audience, which is exactly what Nintendo did with the Wii. The greatest contribution of the Wii is that it has forced people to take a second look at gaming, as something other than just frivolous entertainment which wastes a lot of time and is anti-social for people who do not play games. (Heavy game players would argue that game players are social; they are just online.)

So the Nintendo Wii is halfway there; it has offered a new paradigm for games and gaming.

Now, if gaming is going to really succeed, it will have to get non-gamers to think that they are not playing a game. Then we are talking breakout.

And the game publishers (creative people) will have to learn how to get along and work with the marketing pros, and will have to understand that there is much more to marketing than press releases, press conferences, paying off the media to pick up their stories, planting stories and fake planted conversations on Chinese BBSes, etc.

To really go big, they will rely on a new class of professional and and a new kind of strike force.

We’re not there yet, and we’re not moving fast enough. But there is a way.

I believe in the value of history, but I also believe that there are times when we have to stop referencing the past for what we do in the future.

This is one of those times.

Technorati Tags: , banking, BBS, cafe, China, Chinese, culture, distribution, gaming, government, Hongkong, internet, management, marketing, microsoft, online, publishing, regulation, service, Shanda, sony, taiwan, western, xbox