The China Vortex

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

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

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

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

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

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

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

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

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

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

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

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

Technorati Tags: business, China, Chinese, entrepreneurs, intel, language, local, management, marketing, media, microsoft, US, western

China’s increasingly important global role means that more and more businesses are coming to China. While there has been a significant presence among multinationals for nearly 30 years, now companies are coming in at earlier stages. Now some startups are even choosing to start in China instead of Silicon Valley.

This trend has been encouraged by venture capitalists, who now give a premium valuation to companies based in China.

This raises a very interesting question: “Is it possible for a western-managed business to succeed in China?”

First of all, a few qualifications. While there are many western multinationals in China, most of them have heavily localized their staff and management. The general trend in these companies is to localize staff and management as quickly as possible without sacrificing necessary management skills in the process. So, for the most part, while they are western companies, they are largely Chinese-managed.

Since most of my work is with startups, I’ll drill down in this field. Now the trend is for more American startups to start in China, even though they may not see China as their main market. In the gaming field, for example, China has a huge pool of people with talent and experience in the gaming field. This means that there is a pool of people with talent in programming and art, and understand gaming culture. The areas where the local Chinese population are weak is in product management. Chinese tend to gravitate to managing other people; there is a serious attraction to being able to say that a manager manages x number of people. Product management is more about managing resources, and coaxing cooperation from different stakeholders in the organization. Naturally, this requires more in the area of soft skills. And soft skills are an area where most technical people feel less comfortable with, and generally do not do as well in.

And unlike in the US, product management people in China are generally expected to be much more technical. So there is a difference here.

Hence the shortage of good product management people.

Naturally, this gives an advantage to startups which have experienced product management people. One mainly western-managed startup in Beijing which is strong in this area is ECitySky.

What about other kinds of companies, and what about the market for talent?

It all depends on what you are trying to do, and what audience you are trying to reach.

One tendency in the Internet field is that as the technology tools become more mature, the technology plays second fiddle to product marketing and marketing. Since the Internet has had just as long a history in China as it has in the west, it is getting harder for an experienced technology person to differentiate himself purely on technical skills alone. Increasingly he has to bring soft skills to the table, especially team management skills, to the table to be seriously considered. This means that for most technical people in China, the opportunities are becoming fewer, especially when you consider their significantly higher costs.

On the management and marketing side, it becomes more important to know how to communicate with your main audience in China. If the audience you are trying to reach is mainland Chinese, this means you must be keenly aware of social trends, the different social groups in Chinese society, government policy, what the different groups are thinking about, and the dynamics affecting the different groups.

The only way to get a deep feel and grasp is to know the language on a native level, including speaking reading and writing Mandarin Chinese. Basically, you need to become local. Assistants, translators and PR agencies will only get you so far because they cannot provide the social context to digest and understand the raw data to make good business decisions.

And then, even if you have a native command of Mandarin, that is no guarantee of success. I sum it up this way:

• If you don’t know Chinese (spoken, reading and written) and have not lived long in China, you don’t even know what are the right questions to ask.
• If you speak, read and write Mandarin on a native level, but do not socialize with mainland Chinese except on special occasions, you may know what you don’t know. More importantly, the most capable and intelligent mainland Chinese will not join the startup, instead choosing to start their own startup, often competing with the company they just left. (I’m thinking of many American-born Chinese, Taiwan and Hong Kong Chinese-managed companies which claim to be Chinese, but do not include mainland Chinese who have grown up in China in their management ranks. For the most part, they do not trust mainland Chinese and in private meetings, it is not unusual to hear them complain about things in China. In my opinion, they are doomed from the start.)
• If you have a startup which breathes, by which I mean that management does not have an inner circle dominated by any regional group or background, and freely allows people into senior and executive management based on their creativity, communication skills and ability to execute, then your startup will have the greatest chance of success. This is because a startup depends on moving quickly, and rapidly adapting to changes and competition in the marketplace.

So, in my opinion, when you get past the government regulatory issues, which are slanted to favor Chinese-owned companies in some sectors (especially media, where foreign companies are not allowed), it really is not any harder in China than many other parts of the world.

The biggest barrier for many startups is to get the management right so that it does breathe. Management needs to set the right tone from day one.

The best management hires the best people, empowers them, and let’s them go. At that point, it’s no longer a western- or Chinese-managed company; it’s just well-managed.

Get that right and China’s your oyster.

Technorati Tags: , Beijing, China, Chinese, entrepreneurs, internet, language, management, Mandarin, marketing, product, siliconvalley, skills, staff, startups, talent, technology

Cory Doctorow, open-source advocate and publisher of the Boingboing blog, spoke in Beijing yesterday on Sept. 12. The Boingboing blog was one of the first blogs on the Internet, and now reportedly has more than 600K subscribers. The venue for the event was the Beijing Bookworm bookclub/bookstore in Sanlitun. Many members of Beijing’s English-blogging digerati were there including Jeremy Goldkorn of danwei.org who served as host, William Moss of ImageThief and Kaiser Kuo of Ogilvy China Digital Watch.

Cory opened his talk by reading a short story he had written. The story was set in 2027, where a VC was trying to talk a woman into letting him invest 600K in her company, which created customized mobile devices from junk, which she would then sell to customers. It was a perfect case of mass customization; this time, the VC had become commoditized, he was now part of a venture capital franchise and was looking for places to put his money. Trouble was, he had more cash to invest than what he knew to do with. The woman complained saying that she had tried to get money from Sand Hill Road in 1999, but she was blown off because her business did not, as the VCs put it then, scale. Now the tables were turned, and the woman was able to buy her raw materials for very cheap prices, and taking advantage of new technology design software and equipment, was able to design unique devices very quickly. At the end of the story, the poor VC was reduced to asking if he could work a shift on her assembly line so that he could have one of the devices.

After the reading of the story, Cory proceeded to talk about the issue of DRM (digital rights management) and copyright. He related the story of how Google had recently stopped selling videos from Google Video, disabling the ability of people who had paid for downloads to watch videos they had already paid money to buy. For this reason, many had turned to the Google search engine to find unauthorized downloads of those same videos which they did not have to pay money to buy, and which they could play anytime they wanted. This was a perfect example of how screwed up the whole copyright issue had become; it encouraged unlawful behavior by punishing those who acted lawfully, but now changes forced people to adopt and use products which were not “lawful”.

He then proceeded to talk about the DMCA (Digital Millenium Copyright Act) takedown request, which was used to remove content from Internet websites. He recounted the experience of one publisher, the Science Fiction Writers Society, of which Cory is a member, which asked that all references to Isaac Asimov be removed from a document publishing website. As a result, even high school reading lists had to be removed.

All this was done without any need for proof of ownership to be submitted to a court, or seeking of an injunction. His point was that the copyright laws are much more strict on the Internet, and do not need “proof”. In a twisted way, this has encouraged the proliferation of online piracy because the laws are unreasonable and unenforceable.

He then talked about how changes in technology had helped the publishing industry as a whole. Whereas before, major book hits needed to sell 50,000 copies, now many books became profitable by selling only 3,000 books. Technology has lowered the threshold of costs and profitability for small niche publishers, which are now able to reach a wider audience through the Internet, and later through mobile search and applications.

When the US was founded, for the first hundred years of its history, the US pirated all books written by English authors, and refused to honor British copyright laws. Cory added that the American founding fathers knew what they were doing; they were not prepared to have US dollars go into the pockets of the English treasury. It was only Mark Twain, an American author, became famous, did Americans become interested in copyright laws.

Now, Cory noted, China wants to become an accepted member of WTO and the international business community, and is seeking to honor international copyright laws. He warned that it is important for China to think through what its own interests are so that the country’s own best interests are not sacrificed to globalization.

Cory made it very clear that he believes that the current copyright laws are formulated to favor current copyright owners, at the expense of consumers. He noted that the current US copyright law, introduced some thirty years ago, has gone through eleven revisions, and that literally no one, including judges, lawyers and politicians understands it completely.

If there was a theme to his discussion, it is that the Internet has opened up a whole new world for those who are savvy enough to use it intelligently, and use it to reach niche audiences and interest groups all over the world, without being restricted by geography and language.

It’s great to know that we are all tied into our own interest groups through the power of the Internet. If we are willing to reach out, we can find people with similiar interests without any restrictions at all.

It’s all in our hands now.

Andrew Lih has posted a photo of the event on his blog and Frank Yu has posted photos of the event on Flickr. Search for “cory doctorow beijing”

Updated 9/15/07: Danwei has posted a video of Cory’s talk.

Technorati Tags: Beijing, boingboing, bookworm, business, China, copyright, cory, digital, dmca, doctorow, global, google, language, management, open-source, rights, sanlitun, software, US, video, world, wto

Yesterday I participated in Barcamp Beijing 2007, which was held at the France Telecom Research and Development Building in Haidian district in Beijing. There were more than 100 participants with some 24 sessions held in three different languages.

It is hard to describe the firehose of information from Barcamp, but I will try to offer some of the highlights.

Michael Sikorsky, CEO of Cambrian House, first spoke about how to raise financing for startups. Based in Calgary Canada, Cambrian House offers a business platform for service providers, and Michael has successfully transitioned from being a tech person to a business person. I was immediately impressed by his praise of Paul Graham, founder of the Y Combinator seed-funding group. Paul Graham is the smartest tech guy who has transitioned to business, and Michael showed how Y Combinator has introduced a new VC business model of seeding startups by mentoring them through the startup process.

I have spoken frequently with Frank Yu about the need to bring something similiar to the Y Combinator seed capital model to Beijing. Chinese startups badly need mentoring, especially in their early phases because most of the founders do not know how to build teams. This is something Paul Graham’s Y Combinator organization has been able to address very well, teaching business smarts to founders from tech backgrounds.

The other main takeaway from Michael’s talk was that it was important for new companies to be “investor-centric” as opposed to “founder-centric”. If a company is set up to be friendly to investors up-front, then it is much easier for it to scale.

Andrew Lih, who is now living in Beijing, spoke about the Wikipedia movement. Andrew is a researcher in new media, and is now working on a book on Wikipedia due for publication sometime next year.

In the afternoon sessions, Karl Mattson, president of Medium Cool based in San Francisco, talked about what kinds of people were needed to build a good company. He put special emphasis on need for background diversity. When most Americans hear the word “diversity”, then tend to think in terms of racial, religious and sexual diversity. What Karl was talking about was the need to get people from different parts of the world, social and educational backgrounds so that they can exchange views by looking at a business proposition from different angles. Failure to do so meant that companies would often have “blind spots” and result in “group-think”, where the same group of people have a narrower and narrower vision.

I have noticed this tendency even in very large and successful US companies such as Microsoft and Google, where the definition of a smart person fits very closely with the founders’ definition of smart. This has resulted in a form of inbreeding, where the companies’ blind spots get bigger and bigger, creating opportunities for new challengers and startups.

Following his talk, Robert Scales, founder and CEO of Raincity Studios, talked about his company’s experience working with Drupal, the open-source community web framework. Robert talked about how Drupal has matured into an excellent solution for all kinds of businesses, with new modules being added on a regular basis. Previously, companies had been wary of using open-source as a solution because of security cares, but now he found that they had gone past those issues and had come to embrace it as a development platform. The best part for his 12-person team based in Vancouver was that because the software is regularly updated, his company only has to concentrate on basic functionality, design and configuration issues for his clients. And if his company cannot perform the work, design and feature requests can just as easily be addressed by another team which is familiar with Drupal. Now, his company is so busy that he has come to China to look for designers and coders to augment his Vancouver team; he mentioned that he is so busy that he has had to turn away business.

In reply to a question from me, Robert mentioned that the average billing amount and timeframe for a project is 3-6 months and 50-100k (Canadian dollars) per project.

My session was on the topic of “Building Management Teams” for startups. I focused on some of the problems which I found most Chinese startups to have:

• Founders fall in love with their own ideas too much, take criticism personally. This makes companies too slow to ditch old bad ideas.
• Chinese companies tend to be “founder-centric” instead of “investor-centric”, which means it is very difficult for a company to grow past US5B market cap in size (with the exceptions being Chinese state-owned enterprises or SOEs).
• Healthy startups have a technology founder, product founder and a bizdev founder, forming a tripod. Most startups in China do not have this setup; instead relying on one person to drive growth and vision. This model does not scale well, and feeds the founder’s ego too much. This puts a cap on future growth.
• There are too few original ideas; companies tend to copy each other.
• China has a high-competition, low-trust society. This also puts a cap on Chinese companies’ growth. If someone can successfully address the issue of how to build trust in the online/offline world, they will have something very interesting.

Many photos were taken, including many by Kris Krug, president of Bryght, one of the event sponsors. You can find the list of sponsors from my previous pre-event posting. If you would like to see photos from the event, you can find them on Flickr.

Many participants will be going to Shanghai where Barcamp Shanghai 2007 will be held at the offices of Tudou on Sept 8.

Barcamp Beijing 2007 was a very interesting and exciting event for those interested in technology. It provided an excellent opportunity to meet some of the participants and drivers in open-source and Web 2.0, and gave those from outside China a chance to learn about the Chinese market, and a chance for Chinese to mix with outsiders.

All in all, an excellent experience.

Technorati Tags: barcamp, barcampbeijing, barcampshanghai, Beijing, business, China, Chinese, dollar, google, HR, information, investors, language, management, market, microsoft, open-source, research, SOE, software, US

The consulting industry in China is flourishing. After all, it is the largest potential single market in the world, and everyone is flocking to it. New companies need information and advice about how to tackle the unique challenges of this market. For any MBA who is fluent in Chinese, or who has grown up in China, and is familiar with the tools of the trade, such as financial modeling, business negotiations and company valuations, China represents an “iron rice bowl” which will make their careers for years to come.

Or is it? My experience is that there are errors which are repeated over and over again. It gets like being condemned to watch a single Broadway show, over and over again, where the only things which change are the sets and the actors; the lines are the same.

I have covered one of the major fallacies in a previous posting, Getting Past the China Market Hype, which covered their initial reasons for entering China. This posting will cover some of the reasons for failing post-entry.

Since most of my experience has been with technology/media/startups from the US, I am naturally biased towards those companies in my evaluation. There have been many success stories from the financial sectors, engineering and consumer goods. These areas, unlike hi-tech, have had decades, and in some cases even more than a century of experience, building their China presence, and understanding the challenges involved. They have the money, and have built up a knowledge base of experience which they can draw from, and because of the large scale of their businesses, even if they cannot draw from in-house experience, they know how and where to get it when needed.

Some of the US technology companies which have come to China and have failed to succeed in the Chinese market are eBay, which basically had to hand over its operations in China after running into the strong local player, Taobao.com, in the auction field. Yahoo! had to basically pay a China partner, Alibaba.com, US1B to take over its China operations. More recently, Google, the US search advertising firm, has had to fight an uphill battle against the largest Chinese search firm, Baidu.com. Online gaming is a new area which does not exist in nearly as large a form as the US, with Shanda being the granddaddy in China, while newer players such as Perfect World (PWRD) have sprung up with new and different business models, and successfully going public on the Nasdaq. In instant messaging, Tencent’s QQ has been able to rack up 600M registered users, and unlike any US IM clients, become profitable.

Because most US startups come from technology backgrounds, they tend to believe that their business is scalable. The word “scalability” is in itself, an engineering term, which means that an architecture can go from 1 user to one billion (or infinite) users, or across national borders and into different languages and markets, without any major architectural hiccups. For this reason, they tend to play down distribution and cultural differences in their most initial stages. Most of the time, they have people on staff or in management who know something about the local market; more often than not, they are not in senior decision-making roles.

Then, when they get to China, they try to do what they did in the US, and quickly discover that the rules in China are very different. Whereas labor is very expensive in the US, with each hire drawing the attention of different company committees, in China it is one of the single cheapest expenses. (Except for senior and executive management, where highly qualified individuals cost just as much, if not more, than in the US.)

The most common failing comes in the area of product management, when the US insists on controlling the product development and launch schedule, with local product launches coming only after the US is ready. In smaller markets, that’s fine, but in fast-moving large markets, especially one as large as China’s, it’s a killer. (Even in fast-moving small markets it’s a dubious strategy; in South Korea, Google has been consistently beaten by Naver, a highly successful Korean company.)

This puts the China office in a continuous battle with the US headquarters for resources; the Chinese local competitor has no such restrictions on what it can do, and the Chinese company surges ahead in capturing market share, and eventually, revenue. The American company then organizes what can best be called a “strategic withdrawal”, as did eBay.

In more mature industries where there is some kind of brand equity, product lines are already fairly mature, and headquarters makes resources available to country managers as needed. Because of the fast-changing nature and relative immaturity of hi-tech, this has not yet happened.

When the American companies fail, the blame is usually assigned to some form of Chinese government protectionism, and favoritism to the local companies. Of course, this explanation is more palatable to Congress members seeking re-election and US TV talk-show hosts, but more often than not, it is a vast over-simplification of a complicated issue.

Technorati Tags: advertising, baidu, business, China, Chinese, google, HR, information, language, management, market, qq, resources, Shanda, trade, US, yahoo

Until very recently, Chinese language qualifications were not considered a deal-breaker for senior positions in China. For the most part, US and European employers assumed that a person of Chinese extraction had some degree of fluency in Chinese, and could communicate with other Chinese in China.

This all changed when Goldman Sach’s proposed appointment for China co-head, Richard Ong, was disqualified from his proposed position because he failed to pass the language requirements for the position which were passed by the China Banking Regulatory Commission. Ong was a Malaysian Chinese who had been mostly educated in English in the west.

The test which Ong failed to pass was the HSK or Hanyu Shuiping Kaoshi. The test is given in three levels: basic, intermediate and advanced. The most basic level of Chinese language fluency is level 1; the most advanced is level 11. Those who reach level 11 Chinese language fluency are deemed to be able to work in a Chinese-language work environment. The HSK is the only government-sanctioned test given to non-Chinese whose results are recognized by the Chinese government.

Previously, the HSK was considered important only for those who were interested in the Chinese language for research and academic purposes; now, it is quickly evolving into an important job requirement qualification for those who want to work in China.

The test information and registration website includes full information about the process and tests, with test dates and places. Registration for the tests can be done online, as well as payment. All the candidate then needs to do is print out his form and photo, and present himself on the date of the test.

Test preparation books and materials are widely available in foreign-language bookstores in China, as well as in online stores.

As China becomes more important and influential on the international business scene, the need for senior executives who are fluent in written, spoken and in reading Chinese will become more important. Now, because of CBRC regulations, the sectors most affected are the sensitive financial sector; it is likely that as western companies become educated about the difference between being ethnically Chinese and fluent in Mandarin, they will ask for HSK test scores to get a handle on the Chinese language fluency of their staff and management, and prospective candidates. It is likely that it will soon evolve into a requirement for those in marketing in China, and in operations. Already, among executive search firms, there is a serious shortage of senior-level staff and management positions where candidates with Chinese-language fluency and overseas work experience are sought. For those who are serious about working in China, it would be wise to take the HSK and have their scores ready for their meeting with the human resources department.

Among China consultants, the HSK has already become a hot topic for discussion.

For those who are interested in learning more from others, and in sharing their knowledge, there is a discussion group for the HSK on Facebook.

Technorati Tags: business, career, China, Chinese, fluency, goldman, HR, human, information, interest, job, language, management, market, marketing, ong, online, preparation, qualifications, requirement, research, resources, richard, sachs, US