The China Vortex

I just came across this Ogilvy Mindshare report on Chinese consumer behavior which goes beyond the normal reports which cover exclusively the Tier 1 cities.

This one also covers the tier two and three cities, which are becoming increasingly important for marketers. According to the report, consumers are still frugal, and are reluctant to go into debt.

How old-fashioned can they get? And I’ll be that they think savings are a good thing…

Sheeesh…

Technorati Tags: advertising, business, China, market, marketing, ogilvy, spending

In my previous post, I talked about the dark side of China’s Internet cafes. I was surprised at how quickly I got responses to the posting; there were more than six comments in less than two hours.

Now, I would like to talk about a business opportunity in China’s Internet cafes. One of the biggest problems with Internet cafes is the uneven quality of the management; most are terribly managed, some are managed pretty well. Overall, the well-managed cafes suffer from the poor image problem associated with the whole industry. In a comment following my post, Fons Tuinstra says that the numbers of people going to Internet cafes are falling sharply, citing CNNIC figures. I suspect that this is because of a combination of factors:

• Educated Chinese families don’t like them because of their bad reputation
• With laptop computer prices coming down to 7,000-8,000 yuan for a fully equipped notebook, prices are coming with the range of most urban Chinese
• With monthly DSL prices between 100-200 yuan; broadband access is now affordable

In spite of all this, the Internet cafe still has attraction as a social and recreation area for young people who are looking for places to meet which don’t cost too much.

So why hasn’t someone come in with a roll-up strategy, buying up the good Internet cafes, offering professional management and a franchise package, and turning the whole thing into a franchise like Starbucks, McDonald’s or KFC? After all, that is how Ray Kroc started with McDonald’s in the 50s in the US.

These Internet cafes should offer clean well-lit areas which are frequently cleaned, fresh food and drink, clean bathrooms and a good overall experience. Just think of what could be done if a Chinese Internet cafe experience could be as good as an Apple store! Yes, prices would be higher but it would attract a much better demographic group. And a better demographic would make for a better advertising market.

Events could be planned for the stores educating people about online buying and selling, and to demo new products and services. Game contests could be held in a much better environment than are available now.

If I were an advertiser, I would really love to reach this demographic group. They would be upwardly mobile, not like the permanent urban underclass we now see in so many Internet cafes.

In short, make the Internet cafe a place where Chinese parents would not be ashamed of letting their child go to, and a place where the child could tell his parents he is at, without having to lie or admit to shamefully.

This would help to clean up the image of an industry which badly needs to improve its image. It would even make sense for an advertising company to get into it, as the advertising opportunities in a wholesome Internet cafe franchise are huge. I can think of several companies which should seriously consider doing an Internet cafe franchise in China:

• Focus Media
• Baidu
• Tencent
• Google
• Starbucks
• McDonald’s
• KFC

And now, here’s the company I’d really like to see do a Internet cafe franchise in China because it really knows about making cool stuff and it understands lifestyle marketing. If they did it, and did it right, they would own the Chinese Internet cafe experience.

Now wouldn’t that be something! You saw it here first.

I can always wish…

Technorati Tags: advertising, Apple, baidu, business, cafes, China, Chinese, data, demographic, game, google, internet, management, market, marketing, mobile, online, tencent, US, usa, yuan

On Sept. 18, Christine Lu of the China Business Network interviewed me about “Getting Past the China Marketing Hype”.

If you would like to listen to the podcast, you can download it here.

Technorati Tags: business, China, denlinger, hype, market, network, paul, podcast

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

If there is one thing which never ceases to amaze me, it’s the sheer number of overseas investors seeking entry to China, who have a hard time seeing past the most basic facts and figures about the size of the Chinese market.

Most of these firms are American, which are, generally speaking, more addicted to numeric data than their European and Japanese counterparts. Some statements they frequently quote are:

• The number of mobile phone subscribers in China is now greater than the US;
• China is now the world’s second largest auto market, trailing only the US;
• China’s demand for oil imports has far-reaching influence far outside its borders;

Looking at China’s economic statistics in these terms, it is very easy for executives who have little or no experience selling products outside their own home markets to think that the potential of the Chinese market is something which will fund their own retirement nest eggs.

The great danger is that more often than not, they are unable to see past these initial assumptions about the Chinese market on the board and senior management level. In fact, as many learn to their own dismay, the Chinese market is complicated, filled with traps to capture uninformed executives who fail to grasp the difficult realities of China’s markets.

Let’s take a look at some of these wrong assumptions, followed by the facts:

• “The size of the Chinese consumer market is huge.” (True, but for the most part, there is no single national market and no way to distribute nationally; you need to negotiate deals city by city and province by province. Every city and every province wants its own unique distribution deal in order to have uniqueness in the marketplace. The main problem is not high costs, but the amount of time it takes to roll out. While the customer numbers may be huge, revenue per customer/user are usually in fact very low in the beginning for most sectors compared to other more developed markets.)
• “If I partner with a company with national distribution, then my job will be easier.” (True, but the companies which take on partners are usually the ones who are in trouble. Many of these are state-owned enterprises which lack business marketing skills, and are trying to translate their monopoly charters into revenue with the foreign partner’s help.)
• “Our product is so good that it will market itself”. (If you believe your own PR in this regard, your company deserves to fail.)

For the most part, the most successful companies in China’s emergent consumer market economy are firms like Suning (in consumer electronics), Shanda (in online gaming and entertainment) and Suntech (in solar energy).

What do these companies have in common? They are new, and while they did have some government backing and connections in their very early stages, they have now transformed themselves into privately-owned businesses with their own management team and CEO. For the most part, these companies are very centrally managed by their founder/entrepreneur. Unless a foreign company is able to present a very strong case for partnering with them, they will prefer to build and distribute on their own. Why should they share their profits and revenues with another company, and help to build another brand which may become a future competitor? After all, that’s how they became dominant in their own sectors; they’re not about to make the same mistake themselves.

As China’s economy becomes more market-oriented, China’s state-owned enterprises are struggling to define their roles in this new economy. It is not enough to have a government-granted monopoly charter; they need to become profitable. This pressure for profit usually comes from the Chinese government’s State Council, which is China’s cabinet.

Their preferred solution is to set up a joint venture with a foreign company, which injects startup capital since the Chinese government, as a matter of policy, does not inject capital into joint ventures, instead offering other fuzzy stuff like “markets” and “connections” into the joint venture.

Most of these joint ventures fail because the two sides fail to do the hard work to insure that there is a complete alignment of interests and accountability for their investment in the JV. Most of the time, I blame the foreign partner’s inability to see past the market hype and think and discuss the whole project through with the Chinese government partner and clearly defining which partner has responsibility to perform what needs to be done.

The endless procession of foreign companies who come to China and throw good business sense to the winds without performing proper due diligence in order to secure a footing in the “China market” never ceases to amaze me. Why is it they seemingly only do this in China? Do they think that the Chinese will throw them out of the country for asking good legitimate business questions?

Chinese SOEs are in particular need of modern management skills, especially in the areas of marketing, sales and cost accounting. Foreign JV partners would in fact be helping the Chinese companies reform by holding them accountable to reach specific business goals. The SOEs have strong connections and resources in a potentially large market.

It is only when both sides are honest about their goals and expectations that they can succeed.

Technorati Tags: autos, board, business, China, Chinese, data, diligence, due, economic, economy, facts, global, interest, investment, investors, joint-venture, management, market, oil, phones, Shanda, SOE, Suning, Suntech, US