Rethinking Hong Kong

October 26th, 2008

I’m in Hong Kong on business, and have had the opportunity to participate in the activities related to the launch of the Creative Commons Hong Kong. Rebecca MacKinnon has done an excellent job, along with some other faculty members from Hong Kong University, in making this a very informative and interesting event. At the event, I met with Angus Lau, who is another twitterer, and has done a lot to keep the Internet a lively topic in the SAR. Most recently, Angus has been active in organizing the recent Open Web Asia event in Korea.

Creative Commons Hong Kong

Creative Commons Hong Kong

My takeaway from the Creative Commons Hong Kong event is that Hong Kong is in an excellent position to promote CC in Asia. It’s press is relatively open and free, and it really should be an excellent publishing center, especially for those connecting China and the west. In my opinion, it has not yet realized its full potential. Surprisingly, there are relatively few bridge people, who understand both the west and China as one would think. People fall into their own groups of Hong Kong people, who are interested in local gossip, westerners working for multinationals, and some Chinese from China. To a large extent, they don’t mix with each other as much as they could. This is unfortunate.

In spite of this, there are things I like about Hong Kong:

  • Clean safe food
  • Clean public toilets
  • Real broadband of at least 200K up and down
  • MOS Burger

The first three things, I’m sure you can understand.

But, what’s MOS Burger? Put simply, it’s a Japanese hamburger chain. Its hamburgers are delicious, and in true Japanese fashion, they have an eye to detail, taste and preparation which is better than McDonalds. It has stores in Hong Kong, but none in China.

If you are a computer nerd (if you read this blog regularly, you probably are more or less), then MOS burgers are to MacDonalds what Macintosh is to Windows. It’s just better, and it costs more. And I mean tastier, and sits more comfortable on your stomach after eating.

If you order a set meal, you can get a garden fresh salad as part of the C meal. (Maybe that’s why they don’t have the chain in China. Garden fresh salad in China? Ummm, I don’t know…) So, when I get to Hong Kong and after I have had my meetings, my job is to find out where the nearest MOS Burger outlet is.

BTW, if you don’t believe that it tastes better than MacDonald’s, I’d be happy to take you for a taste test.

Event: Your Digital Day in Hong Kong

October 15th, 2008

ADMA (Asian Digital Marketing Association) is hosting an event on Thursday October 16 at Hong Kong’s Cyberport called Your Digital Day.

I will be participating in a panel talking about advertising trends and standards in China and Asia, and how they are developing. The moderator of the panel will be David Ketchum. The panel will start at 4:45PM.

If you are in Hong Kong and can make it to the event, please stop by and say hello to me. I look forward to seeing you.

This is a joke, right?

February 8th, 2008

venetian.jpg

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?

Understanding the Chinese Hockey Stick

February 3rd, 2008

baidu.jpeg

One of the things past experience has taught me that while it is possible to guess that some business will take off in China, it is almost impossible to tell when. The most common scenario is that for many years, a western business will devote its people and resources to making its business popular with Chinese, it will not show results. Frustrated, it will depart China with nothing to show for its hard work and investment. (This happened frequently in the eighties and nineties; now it is much more rare.)

This rule does not just apply to business; it even applies to Chinese government policy. For years, the Chinese government actively urged the Chinese people to travel more; it even increased the number of public holidays, creating the Golden Week holiday around the May Day holiday in the late 90s to get Chinese to travel more, and spend some of their savings. For years, the policy yielded no solid results.

But later it worked, and beginning this year, the May Golden Week holiday will be abolished. Put simply, it’s no longer needed. Chinese now travel freely, are willing to spend their savings, and the incentive is now no longer needed.

The same phenomenon occurred in the auto industry. For years, local Chinese automakers were unable to get Chinese to spend money on automobiles; most of their production went to taxis and to Chinese government ministries and officials. These habits changed suddenly with the SARS crisis in 2003. All of a sudden, Chinese were afraid to take public transport and started buying cars. And unlike in the west, they paid for their cars in cash.

This trend, which started in 2003, has continued to this day. Now, if a young man in China’s cities wants to get married, more and more young brides are expecting an apartment and car to go with their husband-to-be. Today, in Beijing, 1,000 new cars are being added daily to the city’s traffic woes.

This creates a phenomenon which I call the “Chinese hockey stick”. In simple terms, this means that “It is likely that a new business/service/product will take off in China, but it is hard to say when.” This can be endlessly frustrating for businesses which need to plan their expenditures on an annual or quarterly basis. When are they going to see some of their investment money come back? Country heads need to tell their head offices when the hockey stick will finally take off, and more often than not, it is very hard, if not impossible, to tell.

Part of my rationale for the Chinese hockey stick is that Chinese consumer spending patterns will track more closely to the spending habits of their Asian neighbors in South Korea, Japan, Hong Kong and Taiwan, than to the west, as Chinese society becomes more prosperous. If you want to understand how Chinese spending habits are likely to develop, take a close look at these places. You will learn a lot. In culture and language, these places are closer to how Chinese think, act and behave than the societies of North American and the EU.

Most frequently, the businesses which are able to time the rise of the hockey stick are local Chinese entrepreneurs. Unlike western companies which try to sell their foreign-designed products in China; these Chinese entrepreneurs stand in the wings, just waiting to swoop in at just the right moment. Unlike western corporations, these companies do not have the big budgets of western companies, but their knowledge of their countrymen’s thinking and spending habits more than compensates for this. This is why many leading Chinese Internet companies such as Tencent, Baidu and Sohu have been able to prosper, while their much larger and richer western competitors have been unable to gain traction.

With the dramatic growth of the Chinese consumer market in the past five years, you would think that western observers would learn to be quiet instead of sticking their necks out and betting against the spending power of Chinese consumers.

Apparently not.

David Wolf’s Silicon Hutong has pointed to an article by Donald dePalma in which he claims that China’s buyers account for only 1.1% of what he calls “online GDP”. Unfortunately, he does not explain his methodology as to how he gathered his numbers.

In the west, the Internet led to the creation of some whole new businesses, with Amazon and Google being the best examples. In China, many Internet companies are front-ends for established brick and mortar businesses. For many Chinese consumers, the Internet is like a shop window; when they buy, they still prefer to buy from a person in a store.

These fundamental differences in consumer spending habits make me question the value of even measuring something like “online GDP”. And as David Wolf alludes to, the eGDP is a static number; it does not capture or reflect trends. It is like trying to understand a movie storyline from a still photo.

That’s why I’ll stick with my analogy for the Chinese hockey stick, at least for the time being.

Chinese Face, Chinese Heart Part I

January 24th, 2008

Zhengtu gaming title

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.

Visiting Shenzhen

October 20th, 2007

I have been visiting Shenzhen for the past few days. The last time I was in Shenzhen was in 1999-2001, when the Internet bubble peaked.

This time around, the city has changed considerably since the last time I spent time here. Parts of the city are not recognizable, all in the good sense. There are many more skyscrapers than before, but somehow the city seems more refined and green than Shanghai and Beijing. When I was last here, the city had a grimy, grungy feel about it; no more. It takes pride in being the garden city of China, and in large parts, it is. The downtown area is clean, there are new and very modern shopping malls, and the people seem happy.

I have ridden several times on the Shenzhen Metro, it is very clean and modern. There is one line which roughly runs east-west; another line is under construction. Before, when I lived in Shenzhen, I would cross to Hong Kong every weekend. Now, I feel no need to do so; I can get everything I need in the city. Last night, I went out with a friend to a very nice and clean Japanese restaurant, owned by a Japanese, which had excellent fresh sashimi.

Real estate is still substantially cheaper, and many Hong Kong residents now keep their homes in Shenzhen, crossing the border every day when they go to work. Their children also go to Hong Kong schools, so when crossing customs in the morning and afternoon, there are often large groups of schoolchildren.

I went to a Starbucks once (there are many in Shenzhen; they first opened in the city in 2002), and in section of the cafe, I counted 25 persons and eight notebook computers in use. (In China, Starbucks offers free Wifi service.) If you work out the ratio, that means there were nearly three persons to every notebook computer in use, which is a very high ratio. I have not seen ratios this high in Shanghai, Beijing, or for that matter, in the US which is increasingly falling behind in many Internet usage statistics.

I have not checked any of the Internet cafes here, nor do I plan to. My own guess is that most Beijingers access the Internet from their offices, and the poor or 民工 access the Internet from Beijing’s low-priced Internet cafes since they cannot afford it at home. People in Shenzhen, for the most part, are comparatively well off since the city, which now has a population of 7-14 million mainly comes from other regions of China. (Over the years, the hukou system of individual registration has fallen into disuse, which is why the city government is no longer able to keep track of population.) If their usage of notebook computers in Starbucks is any indicator, they are also much more mobile.

Shenzhen is surrounded with factory satellite towns which employ many workers; most of these factories also supply food, housing and entertainment facilities to their employees. I’m sure that many of these factory workers now have broadband Internet access from their dormitory facilities.

Just to give you some indication of how common broadband is now, I am staying in a Home Inn (a Chinese chain of moderately-priced motels) which charge about US$25 a night. Broadband access is provided free of charge.

Shenzhen now has a very large and modern port and container facility which rivals Hong Kong in capacity.

I cannot help being impressed with Shenzhen’s and China’s development as a whole. In the late 70s, just when China’s reforms were starting and Shenzhen was just a fishing village, many refugees would try to swim across Mirs Bay to seek freedom in Hong Kong. Many of them drowned, and their bodies were washed up on the shores of Hong Kong, or Hong Kong held offshore islands.

Those days are gone.

The women in Shenzhen are fashionably dressed and wear makeup, and are more conscious of their looks than Beijingers. They also smile more readily, and look less self-conscious when they do. There is a lot of truth in the saying 天高皇帝远 (“The skies are higher when the emperor is far away”)

Definitely China is making progress. If the expressions on peoples’ faces are any indicator, China has come a long way.