Has China Embraced An Outdated Version of Corporate Capitalism?

August 23rd, 2010

As a consultant in software product development, I have followed trends not only in software development, but in other businesses as well. Software is one of those businesses which changes fairly quickly, since its main output is code. When software engineers decide to retire code or a standard, that code is said to be deprecated. In short, it is no longer supported in the current version, though it may be in previous versions. One of the major reasons for poor performance in consumer software is the support for deprecated systems and code; this causes a performance hit.

With the rise of the Internet, more service work is easily done in remote locations and time zones. This change is most common among software developers, many who work in other locations and are never seen in any office, but continue to contribute. It is also happening in the field of writing and reporting; I write for Forbes.com The China Tracker and Business Insider; but I have never stepped inside their offices. There simply is no need to.

Michael Pettis, an economist and observer of the Chinese economy, has made the criticism that China’s party, government and technocrats have invested too much in export production capacity, while Chinese consumer spending is actually shrinking as a percentage. This is all happening at a time when the rest of the world is looking to the Chinese consumer as the last hope for the global economy. Definitely, this is not a good sign.

The intrinsic problem is that China has become too dependent on its own state-owned enterprises to maintain growth and employment at all costs following the events of September 2008. Because they were so huge and had ready access to capital from the state-owned banks, they were able to keep China’s economy growing, even while the rest of the world headed into a funk. Nearly two years later though, cracks in the dike are beginning to appear.

For one thing, China’s economy has become too dependent on the large corporate enterprise. Both the US and China have been trying to do the same thing: trying to save large corporations at a time when they should be deprecated. This article from the Wall Street Journal, The End of Management, says it best:

Corporations are bureaucracies and managers are bureaucrats. Their fundamental tendency is toward self-perpetuation. They are, almost by definition, resistant to change. They were designed and tasked, not with reinforcing market forces, but with supplanting and even resisting the market.

In the US, government has become too closely aligned with the financial industry and its interests, and in China, the party exercises dominance and control of the economy through state-owned enterprises, many of which have become dependent on real estate speculation to be profitable. The WSJ article goes on further to say:

British economist Ronald Coase laid out the basic logic of the managed corporation in his 1937 work, “The Nature of the Firm.” He argued corporations were necessary because of what he called “transaction costs.” It was simply too complicated and too costly to search for and find the right worker at the right moment for any given task, or to search for supplies, or to renegotiate prices, police performance and protect trade secrets in an open marketplace. The corporation might not be as good at allocating labor and capital as the marketplace; it made up for those weaknesses by reducing transaction costs.

Mr. Coase received his Nobel Prize in 1991—the very dawn of the Internet age. Since then, the ability of human beings on different continents and with vastly different skills and interests to work together and coordinate complex tasks has taken quantum leaps.

Most of the reasons which Coase outlined for the creation of the corporation in The Nature of the Firm no longer exist. Thanks to Google and other tools, small organizations can resolve all of these issues for almost no costs at all. Isn’t it time we start thinking and talking about deprecating large corporations?

Of course, many in the US and China would argue that only a very small and select minority would be able to work on different time zones and in remote locations with minimal supervision; I would beg to differ. For many service jobs where key personal relationships are not important, this will become the norm within 20 years. It’s just that the US and Chinese government haven’t figured it out yet.

In China’s case, this change is particularly disturbing. Most outside observers of China don’t understand that the main metric which drives China’s economic decision-makers is job creation and employment, not company profitability. Recently, I was pointed to a long article by Daniel Cloud called Ghost Money. In the article, Cloud says:

Simply endlessly printing more money is more likely to lead to catastrophic failure – devaluation, inflation, default, or all three – than to any permanent rescue of the situation. That, in an open economy with large cross-border trade and capital flows, debasing your currency is not a long term solution to any real economic problem is something we’ve known for a rather long time. A one-off devaluation is sometimes useful, but the endless abuse of segniorage has not traditionally been viewed in a very favorable light. Someone will pay in the end; now we are beginning to see who it is. Anyone who holds a lot of sovereign debt is at risk of eventually discovering that it is fairy gold, ghost money, mere joss paper that didn’t ever correspond to any pile of goods and services actually available in this world. (Imagine an endless stream of ships leaving America full of cargo and returning from China empty, as if we were paying war reparations, individual Americans making terrible personal sacrifices to make sure the debt was paid…. The scenario is just so implausible.)

So what can China do? Cloud goes on:

Export-led growth works well in a world where the price elasticity of demand for the exported goods is effectively infinite, where any decrease in costs will always lead to an expansion in sales. Even in a world like that, though, sooner or later the very development it brings about will put upward pressure on export prices. So even in a world where the first condition continues to hold indefinitely, sooner or later it will be necessary to switch to growth driven at least partly by domestic demand. But large countries like Japan and China are bound to run into another barrier as well. Eventually their exports will become so big relative to the economies they are exporting to that people in those countries will not be able to afford to continue increasing their purchases of the exports at the same rate year after year. A country the size of Singapore can afford to ignore the limits of their customers’ purchasing power. But both Japan in the ‘80’s and China in the last decade found themselves having to lend their export earnings back to the countries they were exporting to, to keep the growth in exports going.

Once you get to this point, it should be obvious to the exporter that he is never going to get paid back at today’s prices. (Where would the money come from?) The importer is likely to try to avoid bankruptcy by forcing a revaluation on the exporter, which is politically easier for him than persuading his own voters to adopt the necessary austerity measures would be. The exporter, seeing this risk, will frantically try to switch over to an economy based on domestic demand. Whether or not he can do this depends on the condition of his political system.

Basically, Cloud’s argument is the same as Pettis’, that there is way too much capacity for the Chinese consumer to absorb, and if the Chinese consumer doesn’t spend, we are all effectively screwed. According to an article in the Financial Times, Chinese retail consumers are reluctant to spend. Cloud says that the only way out is for political reform to come to China.

If that is indeed the case, then the Chinese government will continue to fund Chinese money-losing state-owned companies until it can no longer do so. The Economist has a recent article on how the Chinese government has introduced a new circular bail-out for SOEs.

Hmmm. Looks like short-term thinking to me. Short-term bailouts do not resolve long-term structural issues.

For this reason, an article by Perry Link, a long-time China authority, in the the New York Review of Books drew my attention. This article was titled “Waiting for WikiLeaks: Beijing’s Seven Secrets” goes into some detail about the seven closely guarded secrets which are closely held in the party’s archives. I won’t go into detail about those secrets here, but what grabbed my attention about the leaked story was the final paragraph:

The anonymous reporter who leaked the contents of the July 21 meeting commented on a looming atmosphere of demise at the meeting. The underlying mood, he suggested, was, We had better get control of these archives, and perhaps destroy them, before a day of reckoning is upon us.

Does this sound like the confident leadership of the world’s fastest growing major economy? You can draw your own conclusions.

At the same time, there is an article in the People’s Daily titled “Chinese leaders vow to make Party affairs public”.

Hmmm. Interesting.

There is a point which western critics of China and the Chinese government have not pointed out. To a large extent, China is where it is now because it has followed the western model of economic development for developed economies, while retaining its own political system. Critics like Cloud say that this is why China is doomed to failure; it has followed the economics, but did not follow the political model.

I don’t think that it’s that simple.

The real problem in the Chinese model is an over-reliance on state-owned enterprises and since 2008, state-created employment. In fact, what the Chinese government should do is increase lending to Chinese private companies, and allow them to compete on a level playing field with Chinese SOEs. Instead, the Chinese government has focused all its attention and capital on Chinese SOEs, while pretending that the Chinese private sector doesn’t exist. At best, the party has treated China’s own private sector as the wife’s red-haired son from her first marriage.

For a long time in the US, private companies have been the main engine of growth and job creation. But unfortunately, Americans are not as good at entrepreneurship after they have been in the US for several generations. In the US, the best entrepreneurs have historically been the immigrants who have opened restaurants, groceries, laundries and other small businesses. They would then save money, sending their children to the best schools, so that they could become managers, doctors and lawyers. This has been true of every immigrant wave to the US, and is why the US is so dependent on new immigrants. Then, when their kids go into the mainstream, they become the new white-collar class of doctors, lawyers and managers. The problem now for blue collar workers, is that they look for jobs at corporations, and when they can’t find any, they go on welfare. But the problem is that the system is broken, and most state governments are broke.

Compared to the US, China is more fortunate. It has always had a large population of entrepreneurs. But many have had trouble finding capital to start their own businesses, or feel discriminated against by the government, which is why so many continue to emigrate to Australia, New Zealand, Canada and the US even though they have been able to achieve some degree of success in China. The end result is that many of the best remaining entrepreneurs are government bureaucrats, who abuse their privilege to become wealthy. Then the Chinese government goes after some of those, putting them on trial for corruption, and serving them up to the people as examples of how the government is helping them.

But doesn’t it make much more sense to help China’s own private sector by providing them needed capital for growth at critical moments? Why should China’s own private sector continue to be treated as the red-haired stepson by the government?

The best way for China to stimulate real consumer growth and spending is to remove the barriers to growth for the Chinese private sector, so that they obtain needed capital to grow at home in China. This will work much better than any slogans about Chinese global brands, innovation and creativity for large Chinese SOEs.

Most likely, these new businesses will start small. At the beginning of this article, I talked about how there is less need for large numbers of people and large corporate organizations anymore. This is what Schumpeter’s creative destruction thesis was all about.

Through its control of the financial sector, the Chinese government and party has the basic tools to help China regenerate itself more, much more, than it has up until now. It has long been my view that China is a nation of small business people, farmers and engineers. The problem in today’s China is that there is not a good balance: the engineers have too much power and influence on policy, and the small business people and farmers have suffered at their expense. The engineers are good at producing, but are less good at profitability. This has led to severe imbalances in China’s economy and society.

The Chinese government has, within its own hands, the power to unleash China’s small business sector and private entrepreneurs not only as a force for change inside China, but as a force which can change the world for the better. So far, it has not given them that power.

Historically, China has had major social disruptions when the rural and urban gap widened too much, and the rural population felt that they were ignored by the central government. The Chinese Communist Party came to power in 1949 based on widespread rural support for what was seen as a largely corrupt urban Kuomintang leadership. Yet this is what is happening now in China; except this time, the gap is widening at a much faster pace. The leak from the party archives meeting shows that the party is aware of this imminent danger at its most senior levels, yet has no way to deal with it.

Now, the Chinese government is trying to build an urban middle class while retaining a dominant public sector. This has never been done before, and the leak from the party archives meeting suggests that even the government leadership has its doubts about whether it will succeed. It is time to rebalance Chinese society so that the private business sector and farmers have a greater say in China’s future. This is all the more reason for China to build a REAL urban middle class; one which is based like Taiwan’s, Hong Kong’s and Singapore’s, on a vibrant, healthy and growing private business sector.

It is time to let a hundred flowers bloom in China’s private sector.

ChinaVortex Interview with Handel Jones, Author of Chinamerica: The Uneasy Relationship That Will Change the World

August 10th, 2010

I recently conducted a phone interview with Handel Jones, the author of Chinamerica: The Uneasy Partnership That Will Change the World which is published by McGrawHill.

You have worked as a consultant for many years in China and the west. What motivated you to write this book?

Many Americans don’t know much about how China works, except for those who are in the business sector. Now that China has become economically powerful, it is important for more people to understand how the Chinese government and people see themselves, and their role in the world.

In your book, you mention that China needs and respects a powerful US, but if the US becomes weaker, then the relationship would become unstable and even dangerous. Why?
China has looked up to the US for a long time as a world leader, and setting the rhetoric aside, continues to have a deep respect for many things which the US has done. For example, in the area of graduate university education, Chinese continue to choose the US as their most popular destination.

In your book, you express some frustrations at recent US government policies. What are they?
Domestically, with the change in administration, we were expecting more support in the business sector. However, for small businesses, there has been more regulation and more taxation. This has hurt the overall competitiveness of US businesses. This is in comparison to the Chinese government’s policies, which have been to support Chinese businesses and exports, especially state-owned enterprises.

What is your feeling about the competitiveness of US businesses?
I believe that US management practices, generally speaking, are the best in the world. It also has the best business managers in the world. This is why the US has world leaders and brands such as HP, Apple, Boeing, just to name a few. However, there is little understanding on the government policy level as to how to leverage these American strengths as most US politicians are too absorbed with domestic issues so that they can win the next election.

How is this different from the Chinese government’s worldview and their policies?
When China’s reforms started thirty years ago, China worked from a very weak base. Just about the only thing it had a was a large pool of unskilled labor and some smart leaders. They leveraged this base to obtain key technologies and become a manufacturer and exporter, while giving away as little as possible. To this day, it is virtually impossible for any non-Chinese company to gain access to the Chinese market without being forced to give access to key technologies, which often find their way to Chinese competitors. This is a source of frustration to virtually all non-Chinese companies.

Many US and western policymakers say that China needs to revalue the yuan upwards. What do you think?
Instead of putting pressure on China to revalue the yuan, it’s more important to put pressure on China to open up its markets to foreign-made goods, so that they are treated the same as goods made domestically in China. Non-Chinese manufacturers should not be pressured to hand over their technology to gain access to the Chinese market.

What does the US need to do to become competitive again?
Over the past few decades, US government policy has become more short-sighted, and Wall St. has reacted by creating debt instruments which were speculative in nature, instead of being investment-oriented. However, the US still has strengths in areas such as medical research, energy technology, and other leading areas. China and the US need to work together in developing these new fields of research and manufacture.

How do you see leverage between China and the US changing over the next decade?
If the US government does not wake up and change its policies to support the US business sector and investment, it will continue to lose leverage to China. This is not good for either country. This is why I wrote the book; I want Americans and the west to wake up to this real challenge, and understand the importance of our changing our own policies so that our relationship with China will become more complementary instead of potentially antagonistic. China is looking to the US for enlightened leadership, and it is time that the US government delivered, not only for its own good, but for world stability.

What hidden threats do you see to China’s leadership?
Chinese state-owned enterprises may become too powerful and greedy, leaving too little for others. This may lead to the abuse of power, which would lead to instability. So far, the Chinese government has done well at keeping these abuses in check.

In conclusion, how would you say China has performed over the past thirty years?
The Chinese government has been very smart in the way it has utilized resources to gain benefit for China. It has shown that it is not a pushover like Japan was in the late 80s. It thinks in big terms, and has a clear strategy for what it wants to do, but it is willing to be flexible in what tactics it uses to achieve those goals. I plan to write more about this in my next book on Chinese strategems.

How US Investment Banking Excesses Helped China’s State Sector

April 25th, 2010

When the banking crisis broke in September 2008, the global economy went into shock and nearly collapsed. The Chinese government was widely seen as being the most proactive in reacting to the crisis, injecting more than US$570 billion into the Chinese economy.

Because China’s four leading banks are all state-owned, all of this money quickly reached Chinese state-owned companies. This stood in stark contrast to the US, where the banks were bailed out, but the money did not make it to companies and individuals, largely because the banks sat on the cash received, mainly to cover their own capital losses, and in many cases, to pay out bonuses to management.

Only recently have the Obama administration and congress started tentative investigations into the investment banking practices which brought the world economy so close to the brink. Since the US economy is now largely based on FIRe (finance, insurance and real estate), and because the financial lobby is the most powerful and well-funded lobby in Washington DC, changes and reforms have been slow in coming. In spite of this, even in the early days of the investigation, there are signs that there was more to it than just investment bankers flogging poorly understood derivatives to unknowing corporate clients, there was deliberate fraud at the heart of it.

Today, the Chinese government and economy have come out of the crisis smelling like a rose. Certain indicators, such as auto sales in China, show China overtaking the US as global leader, and unlikely to relinquish it back to the US. Compared to the US and EU, China seems positively great, and the government has made all the right moves, investing in infrastructure and keeping Chinese consumers happy and spending. Optimists believe that now Chinese consumers and its middle class have stepped in and filled the gap left by the weakening of the US consumer.

Looking a little deeper though, while the Chinese government has succeeded in the short-term, their moves raise long-term questions. Here are some of the problems:

  • Most of the money found its way to Chinese state-owned enterprises (SOEs), many of which are in commodity imports and heavy manufacturing such as autos.
  • China’s economic development is following the US economic development of the 1950s; which is oil-based transport. Imports of coal and oil have dramatically increased in the past year in spite of government efforts to diversify to nuclear, wind and solar.
  • As the Chinese government funnels more money through its state-owned banks into SOEs, the party and the government ironically have less control over them. Recently, the Chinese government has used administrative measures, such as ordering 73 companies out of the real estate sector and, in some cases, dismissing executives on corruption charges, but these are not a long-term solution to a systemic problem.
  • More Chinese university graduates look for jobs in SOEs instead of the private sector, seeking job stability instead of looking for better job opportunities, or a chance to start their own business as in previous years.
  • For the most part, Chinese SOEs are over-staffed and inefficient. But because of the crisis, and the overall makeup of China’s economy, they seemed destined to take up a bigger part of China’s GDP.
  • China’s seemingly unquenchable demand for commodities and raw materials, is in large part, driven by a lack of faith in derivatives. This is directly related to Wall St. investment banking practices which ran wild and unchecked under the Bush administration.

The flip side is that China’s private sector is in its most precarious position since China’s reforms began in 1979. While it has always been difficult for small businesses without strong government connections to raise capital, the situation has become worse recently. Yasheng Huang, in his book Capitalism with Chinese Characteristics: Entrepreneurship and the State touched on many of these issues.

In the internet field, I have noticed, for example, that many of the entrepreneurs and innovators in the field are choosing to emigrate from China instead of starting their businesses in China. China has a thriving Internet sector, but the successes are those which already have venture capital funding, or have successfully gone public. For practical purposes, the early stage innovation part of the pipeline has gone dry.

It is hard to say if this is true for many sectors in China at this stage, but if there is one truth now, it’s that innovation and entrepreneurship are a vital part of every economy. In today’s China, innovation and entrepreneurship are too dependent on government connections for success. For this reason, these relationships are open to exploitation, corruption and abuse.

The Chinese government for its part has been very ambivalent about the private sector. Both the president and premier have made occasional statements about the importance of helping and protecting private enterprise businesses, but disappointingly, few of these statements have turned into tangible policies and measures. Since the Chinese government has been pressing other governments to recognize China’s market as a market economy, why don’t other governments press the Chinese government for clearer policies for China’s own private sector? Some of these questions may be:

  • Do Chinese private companies have equal and open access to raising capital as SOEs?
  • Are their products and services distributed and marketed equally in the domestic market?
  • If they are subject to any kind of unfair competition, then what channels do they have to appeal to?
  • If the answer to any of the above questions is no, then what policy commitments is the Chinese government prepared to make to remedy the situation?

    • While the Chinese government and SOEs are powerful and cash-rich now, the real heroes of China’s reforms are China’s entrepreneurs and innovators, and the hard-working and industrious people. It’s time they got some recognition and fair treatment both inside and outside China.

When Bureaucracy Gets Politicized

September 25th, 2008

There has been a lot of concern about the tainted milk scandal in China, and with each passing day, the scope of the scandal gets bigger. How did this happen, why was it covered up, and what needs to be done about it?

My answer is simple: this is the kind of thing which happens when the bureaucracy becomes politicized, and government appointments are made for political instead of professional reasons.

For more than 2,000 years, when China was ruled by an imperial bureaucracy, China had a complex system of imperial exams to insure that anyone who passed could enter the government bureaucracy. This bureaucracy was largely apolitical, except for the most senior appointments in the imperial court or on the provincial level. Most were just professional officials, and would serve their masters, whoever they were.

With the overthrow of the Qing dynasty, and with the foundation of new China in 1949, the party organization affected all levels of the bureaucracy. Endless political movements until 1978 politicized the whole society, not just the bureaucracy. Appointments were made for political reasons instead of professional capabilities. Sometimes, professional qualifications were completely ignored.

The tainted milk scandal is an example of what happens when political considerations override business, health and even ethical concerns. This is what happens when government officials are judged by how much investment they attract and how many jobs they create. Then there is a natural tendency to cover up any information which draws a conflicting picture. What should be a health and ethical issue instead becomes a political issue.

The problem now in China is that there is a severe shortage of people who are apolitical professionals, not politicians. How do they fit in, even survive, in a completely politicized bureaucracy? Does the government have the energy and will to depoliticize the bureaucracy, and create a professional bureaucracy which will fulfill the needs of modern Chinese society?

That is the question for the next stage of Chinese reforms.

News Galore!

September 19th, 2008

Just in case you had any doubts that the world was going to hell in a handbasket, and that the inmates were running the asylum, you just might have had some of those doubts removed in the past week. And those doubts were removed in a very dramatic fashion, as in frontal lobotomy fashion.

“George Carlin, why did you have to die so soon, just before all the fireworks started? Did you actually think that the world was becoming so ludicrous that you couldn’t take it anymore, or think that you would run out of material?”

Let’s look at some of the fun things which happened this week:

  • Sanlu’s dairy products were found to have killed three babies, and caused injury to several thousand others (at least)
  • Baidu was accused of offering to help cover up the scandal by not showing the scope of the scandal in its search results. I wonder what genius came up with the idea that they could cover up a scandal of such immense proportions for a miserable 3M yuan? And who was the genius on the management side who approved such a deal? This would have taken at least two people who had frontal lobotomies. Most of the time, people who come up with dumb ideas like this are only employed in government (Most notably the US government, where they usually run smear campaigns for politicians during elections.) As for Baidu/Alibaba, now Baidu is threatening to sue Alibaba for spreading the Sanlu story. (Isn’t China becoming more like the US every day? At this rate China will be run by lawyers in five years. A sure sign of national dementia.) Are these initial signs that the Americans’ efforts to package and sell stupidity to the Chinese are showing signs of success?
  • Lehman Bros., a US investment bank, declared bankruptcy, and Merrill Lynch sold itself to Bank of America for $50B. I have the utmost admiration for John Thain: Imagine taking a company which was rapidly going down the tubes, whose assets were unclear, and whose non-performing CDOs were increasing by the hour, and he SOLD it for $50B, finding a buyer in BA? Wow, that’s neat! How’d he do that? These bankers are amazing. None of that piddly million here, million there kindergarten dotcom stuff for these guys, we’re talking real money here (even though it’s US dollars).
  • Is it just me, or am I thinking that Imagethief‘s time has come in China? I keep on fantasizing what his first lessons for new official clients might be like. How about this:

    “First of all, let’s get it clear that lies, coverups and people getting poisoned are a necessary part of any nation’s path to greatness. There is no need to deny or cover it up; we must celebrate each event as achieving yet another milestone to greatness! Let’s celebrate it! Let’s roll in it! And let’s become more and more like America with each passing moment! Look at how the Americans don’t discriminate against the mentally handicapped anymore; instead they make them their leaders! If America can do that, then why can’t China! Our goal must be to pollute the global financial system on an even greater scale than the Americans have: this will show the world China’s power!”

    • Hmmm, on second thought…
    UPDATE: Once upon a time, jokes were about comical situations which had a tenuous relationship with reality. Now, the jokes ARE reality.
    DISCLAIMERThe above story is pure satire. Don’t take it as anything else.

How To Discuss User Privacy In China?

September 16th, 2008

One of the fun things about China, and the Chinese Internet, is that new issues can pop up very quickly, and become major issues.

This has just happened with the issue of user privacy on the Internet. With more social network sites, and more users posting real information about themselves, along with contact information, etc. this has become a real issue.

I’m not going to offer a solution to this very complex issue. Instead, I’d like to bring up another issue: “How do you have a productive discussion, where all get a chance to contribute to the debate, get heard, and then come to some kind of agreement about a solution?”

Here is the problem. This issue flared up when many SNS sites started blocking Baidu’s spiders from crawling their sites. The official reason: to protect users’ privacy.

The problem is that there has been no discussion about what user privacy is. The definition of privacy is very different for a 12 year-old girl and her 40 year-old mother and, in turn, is very different for a 22 year-old gay man.

Each of them, or their parent/s, may have very different ideas of what constitutes user privacy. The gay man may not want to reveal his sexual orientation except for his closest male partner/s, and may not want anyone else, including family, to know. The same goes for religious affiliation, etc.

These are very real issues which need to be discussed and thrashed out in the open, and people need to be able to put forth their views for discussion. This is a vital and natural part of what constitutes a civil society, which is what the Chinese government supports and advocates.

Unfortunately, there is no clear mechanism for discussing a very complex issue like user privacy in China today.

Instead, we have companies coming out with thinly-disguised excuses about privacy, when in reality it looks more like a pissing match between companies over whose spiders can crawl over whose sites. Are the two groups going to come up with different, even opposing, ideas and definitions about what constitutes user privacy, and force people to choose one or the other? If that is the case, then it’s not really about user privacy, it’s about choosing between one camp or the other, with every user forced to make a choice.

But that isn’t what the Internet is all about. The Internet is all about empowering people so that they can make their own choices. The Internet is about pushing decisions to the edge, where people make their choices, and if they don’t like them, they can change them later on.

This is what is missing in China. Without this system or mechanism, there is just endless bickering and noise, and what should be a serious discussion with a well-thought conclusion, usually ends up in a lot of noise with the loudest shouters winning.

What is an important issue, usually ends inconclusively.

Or as the Chinese say 不了了之。

Chinese Internet users deserve something better.

China’s Public Sector On The Defensive

September 4th, 2008

One of the recurring themes of China’s reforms and opening up over the past thirty years has been the expansion of China’s private sector, usually at the expense of the public sector, or government-invested industries. This is a theme which has been often overlooked in the west, even by westerners in China, as they are more focused on the relationship with western companies, specifically Western Foreign-Owned Enterprises (WFOEs). There are three important components in the Chinese economy: state-owned enterprises, private companies and WFOEs. For the most part, the WFOEs are only allowed to play a peripheral role with all kinds of restrictions placed on them from time to time. It is highly unlikely that the Chinese government will allow them to play major roles in any sector.

The most important and vibrant part of the economy are the Chinese private sector. In spite of being out of power politically, occasionally suppressed, lack of capital and resources, it has managed to the point where it now employs more people than the public sector.

Let’s take a closer look at the media industry, just to cite an example. All official media, including newspapers, magazines, books, television and radio are owned, in one way or another, by the government. These might be the central government, provincial government or municipal governments. The performance and careers of these government officials are often measured by how these media perform: if they perform, the careers of these officials go up, if they perform less than well, then it goes into their performance evaluation, and has an effect on their careers.

The challenge for the official media in China now is that they are, generally speaking, losing audience to smarter and more creative challengers from the private sector in fields like online gaming. When this happens, and audience and circulation go down, these officials have to think of ways to address the situation. If that doesn’t work, they cover up the bad numbers.

Virtually all of the challengers in the Internet media field are private companies which are venture capital funded. In short, they are all private sector. When the audience moves to the private sector companies, public sector media companies tend to lose first audience, then revenue.

Many westerners look at the media ownership issue in China too much from a political and social oppression angle.

Actually, there is a lot more to it than that. It’s about what industries will still stay in Chinese state ownership, and how they will remain competitive in the hyper-challenging Chinese market. The official media has tried to counter-balance this trend by showing women in bikinis and other devices, but the trend to the private sector media (or user-generated media) is continuing. This is what Chinese ministries are thinking about all the time.

After all, if there are no longer competitive industries in the state’s company portfolio, how will it get revenue?

China Telecom Shapes Up As Leading China Mobile Competitor

August 31st, 2008

In an earlier article, I talked about my take on the telecom shakeup in China in May. Three months after, it looks more like China Mobile is being slapped down by the State Council for growing too big too fast and being overly aggressive and dominant in the growing Chinese mobile market, which is now the single largest national mobile market in the world.

For this transgression, China Mobile is:

  • Saddled with China’s own 3G mobile standard, TD-SCDMA, which by China Mobile’s own admission is behind the competing western-developed standards;
  • Facing new marketing rulings which stand to help China Mobile’s competitors, especially the newly resurgent China Telecom;
  • Even considering partnering with Apple to distribute the iPhone in China. The only way this would make sense for both parties is if Apple agrees to build China iPhone3Gs with the TD-SCDMA chipset, since TD-SCDMA is not currently supported by the iPhone3G.

The greatest beneficiary of the great China Mobile slapdown is China Telecom, which has shrewdly positioned itself as an underdog to the China Mobile bully. With its recent rulings, the State Council is cheering on the underdog.

China Telecom, for a long time, was the odd man out, until the May telecom ruling allowed it to introduce 3G mobile services in direct competition with China Mobile and China Unicom.

Obviously, the Chinese government feels that there is a lot of room for pruning back on China Mobile’s dominant position in the mobile market.

The Value of Independent Statistics for Online Media in China

August 8th, 2008

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.

My Wish List For The CNNIC Report

July 26th, 2008

The biannual China Internet Network Information Center (CNNIC) report covering the first half of 2008 has been released (in Chinese) and is now available. The Ogilvy China Digital Watch website has provided an excellent job of capturing the main points in English. The most salient point of the report is that China now has 253 million Internet users, pushing China into first place worldwide, surpassing the US.

The CNNIC is the main official source of information for the state of the Internet in China, and is the most frequently quoted report on China Internet statistics. For more detailed information, especially ecommerce numbers, etc., there are a number of market research firms in China which provide services, including custom reports for paying clients.

I would like see some changes and improvement to the CNNIC report. Here are some of them:

  1. Outline the methodology used. Explain how the data is collected and by what authorities. Also explain how the audience is chosen. Make the whole process transparent as possible.
  2. Show the questionnaire used, and let people provide feedback about what questions are used so that they can be improved in future versions of the report.
  3. Use the same questionnaire nationwide so that there is a level basis for comparison.
  4. Current data is weighed too much towards national and tier one cities in China. This information is too broad and not granular enough. Break out the information by province.
  5. Provide the names of the government officials who collect the data on the national, municipal and provincial levels along with their email contact information so that we know who is responsible for collecting what data on what level.
  6. Provide a forum so that these same people can answer questions about the CNNIC report and reply to suggestions. Engage the audience in a continuous dialogue to improve the CNNIC report.
  7. Keep the primary data in a data warehouse, and consider making it accessible to researchers so that they can write their own queries and generate reports for a one-time fee or on a long-term basis for a subscription fee.