The China Vortex

China is a nation of entrepreneurs, and according to statistics, has 85 million businesses compared to the US’s 25 million. Considering that China has about four times the population of the US, the proportion is about right. These numbers reveal that China is in fact, not a socialist nation, but is instead one which has a very capitalist heart. Or as the Chinese government would say, has “market characteristics”.

There are many Chinese university graduates who when choosing a job, prefer to go to a western company over a Chinese company. For many, American companies are the most preferred. Why is this?

For many of them, it is because that they will get good training, learn management, and work within large organizations about how to get a job done. They get a chance to work with people from many different cultures and countries.

These are significant advantages which most Chinese companies, which have not yet gone global, are not yet able to offer. But I believe that there is another perhaps more important reason.

That is, they know that they will be judged more on performance and merit than on personal relationships with the founder and/or CEO. When it comes to relationships, Chinese founders and CEOs are still very reluctant to trust people outside their own inner circle, and it is very difficult, if not impossible, for anyone outside to make it into this inner circle, no matter how good they are. I’m convinced that this attitude has put a natural ceiling or limit on how successful Chinese companies will be in globalizing. When people discover that no matter how smart they are or how hard they work, that they will not make it into the inner circle, they will either move to a company where they know that they are respected, or they will start their own company.

In contrast, Americans and American companies have a different approach. They put value on developing management talent, especially local management talent in a major market like China. They identify rising stars and put them on a management training track soon. Most importantly, they promote them without regard to who they know or are related to.

Most Chinese companies do not do this. This gives American companies human talent scaleability when going global which Chinese companies do not have. Successful American and western companies which have gone global tend to be meritocracies, while Chinese companies are still stuck at the plutocracy stage.

In his book Managing the Dragon, Jack Perkowski stresses how his company ASIMCO is a Chinese company. Technically and legally it is. The important thing is that he was pragmatic about bringing in the best people in their fields as senior and executive management, without regard to who they were related to. This is a very American characteristic, and in China, it works. Ironically, if there is an outsider advantage in China, this is it.

The Chinese government and the management of most Chinese companies have figured this out, but have not been able to apply this lesson to their own organizations yet. This is one of those things which cannot be solved by a government order or administrative guidelines, which the Chinese government likes to use to solve complex problems.

If Chinese companies successfully resolve this problem, there will be no limit to their growth.

The Chinese government has done much to encourage the development of China’s west, particularly Sichuan province, which is the home to some 100 million people, making it larger in population than any single western European country, including Britain, France and even Germany.

From a business and consumers’ point of view, the region holds tremendous promise. Many large western companies, including Intel, Wal-Mart, MacDonald’s and KFC have all moved into the region in the hope of capturing some of the yuan which locals have to spend. From a consumer marketing point of view, and also from the manufacturing point of view, the region holds great promise.

However, this is still not enough. Compared to the east coast region’s of China, it is still far behind.

So what is holding the region behind in development?

In two words, it’s human talent. “Interesting places attract interesting people” is one of my favorite mantras. When I go to a place, I like to find interesting people, regardless of their profession, and listen to what they have to say. I look for different angles and insights from individuals which I cannot easily find elsewhere. Most of the time, I think of these people as very smart generalists.

My experience is that Shanghai and Beijing is full of interesting intelligent and very talented people, which is why I’m attracted to these two cities in China. They are evolving rapidly, which means that these cities have not yet congealed around certain professions in the way American or European cities, or even Hong Kong, have. They are full of surprises, and most of the time, these are pleasant surprises.

My theory is that these two cities draw the best Chinese talent away from the rest of China, leaving the other cities to struggle with the people they can convince to stay there, who usually are not as smart and talented. So, when Chinese or expats talk about Tier 1 cities (Beijing and Shanghai), they could just as easily be talking about quality human talent.

This creates a problem for western China: they have the consumers, and they can have good manufacturing up to the middle of the value-added chain, but they cannot catch up with Beijing and Shanghai at the top of the value chain.

Unless cities like Chongqing can figure out a way to keep the best human talent in Chongqing, the wealth and knowledge gap between the western part of China and the Tier 1 cities will continue to widen. Instead of climbing to the top, they will peak out around the middle and won’t make it into the ranks of world-class cities.

What the Chinese government, and most other governments, fail to understand is that it is not buildings, boulevards and museums which make cities world-class, it is very literally human talent. In spite of China’s huge population, I have only seen two cities, Beijing and Shanghai, which have the potential to make them world-class.

While some Chinese may take this as a slight, it’s worth remembering that the US, which has only 1/4 the population of China, but has a longer history as an economic superpower, has only three cities which can be classified as “Tier One”: New York, Los Angeles and Chicago.

There must be some undiscovered rule which makes this the case.

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.

I have just published a new white paper called “Why Indian Software Outsourcing Companies Are Outsourcing to China”.

The white papers covers the reasons why the Indian companies are coming to China, which mostly have to do with how tapped out the infrastructure in India is, the shortage of human talent, and lack of hardware infrastructure in India and how long it takes to set up in India.

China has good educational institutions in the tier two and three cities, which is why multinationals are expanding to those cities. I have not even heard anyone talk about India’s tier two and tier three cities.

Have you?

This means that India’s technology centers are highly concentrated, and because of severe competition from the leading IT service providers such as IBM, Accenture and EDS, they are under severe pressure to find talent.

Increasingly, the place they are going to find this talent is in China.

You can download this free PDF after registration here.

With all the talk about globalization, as well as what is working and what isn’t about it, it’s time to drill down and find out what businesses are global by nature, and what businesses are local by nature.

For companies who are entering China, or are planning to go from China into international markets, this is a very important issue. There are some businesses which by their nature are global and others which are more local.

There are several businesses which by their nature are global. They are:

• Raw materials and commodities
• Transport, logisitics and distribution
• Manufacturing
• Commoditized services such as back-office operations and software outsourcing
• Finance, especially wholesale banking
• New technology development and research

Then there are other businesses which are more local/national in nature:

• Retail and brand marketing
• Most legal services
• Internet services
• Accounting services
• Foods and food-related services

My experience is that the businesses which are more wholesale in nature tend to cross national borders and become more global in nature, while those which are closer to end consumers tend to be more local and national.

If there is an irony, it is that the least sexy businesses are the most global in nature, while the more sexy brands and Internet businesses are in fact, local. I believe that there are several reasons for this:

Some of you may be surprised to note that I include Internet services in local businesses. If fact, they are. The struggle between Baidu and Google is largely a struggle over who has the larger local language search advertising market, Google, which gets most of its revenue from its home US market in English, or Baidu, whose services are almost entirely in Chinese. Even though China has four times the population of the US, the time when Baidu will overtake Google in terms of advertising revenue is still far far away.

One of my pet peeves is the amount of hype first-time visitors to China swallow, thinking that they can plan their retirement on a “China strategy” without in fact coming and living in China and making an effort to understand the people and culture and building relationships on the ground. More often than not, the people who have dollar (or yuan) signs in their eyes come from the services sectors, which are in fact, more local in nature. The ones who are making the money in China are the big wholesalers, but they have enough presence of mind to keep their mouths shut.

Lately, Dan Harris of China Law Blog has been talking about the opportunities opening up in the Chinese services sector because of policy changes. Most likely these changes will be led by another wave of service entrepreneurs coming into the country, or as is more likely, a new batch of local Chinese entrepreneurs offering services to China’s urban middle class. After all, they know the language, have the opportunities and can make the fast move.

For businesses which are local by nature, and are mostly in retail, the challenges come in several forms. The costs of crossing national boundaries to establish a name presence are always huge. This is an area global ad agencies are designed to address, even though their market has undergone huge changes.

The other huge challenge is human talent. How do you find the human talent who understand the needs of the parent company, and at the same time, can build relationships in a new market and understand what consumers want?

This is the real challenge of globalization.

I have been spending a lot of time recently with game developers in China. Didn’t plan it this way, but it has been interesting.

I have a few thoughts about the industry based on my observations. Most of them apply to both gaming and animation. So far, the biggest takeaway I have had so far is that the vast majority of companies, and certainly the Chinese government, have no understanding of human talent and the creative process. If they find it, they destroy it through sheer ignorance and bad policies. Why would a talented person want to work with any government anywhere? There is surprisingly little imagination for such a big country. And when someone does hit on a successful idea, it gets rehashed over and over and over again. Many Americans complain about how bad Hollywood is at coming out with new original ideas; it’s still better than China.

Give you an example. The Chinese government wants to create an animation industry, so what do they do? They ask American, Japanese and European companies to set up schools to train animators in huge numbers. They limit the hours of foreign-made animation which can be broadcast on Chinese TV.

There’s just one problem.

There aren’t any good Chinese story writers and artists. Or at least any that I know of.

So you have all these armies of animators who have nothing to do, so what do you do? Get them to do outsourcing for foreign animation companies who are looking for relatively cheap labor.

But then they want to build a Chinese animation industry, so what do they do? They try to partner with non-Chinese producers and writers to create stories. But then the stories aren’t Chinese, right? No, because they partner with a Chinese animation company, they can then get their production to be considered Chinese and maybe broadcast on Chinese television, where if they are smart, they can get a good deal.

It just underlines one thing. There is _no_ understanding of the creative process in China. It is all very top-down, and screwed-up.

To be creative, all you need is one person who is good at conceptualizing plausible worlds. They can use words or they can use illustrations. That is my definition of fantasy.

One of my pet peeves of the Chinese gaming industry is that everyone rehashes the same old genres for their titles. It is all Sanguo, the Monkey King or some other derivative from Chinese folk history. There is nothing new, nothing original. Once one title in a genre succeeds, everybody jumps on the bandwagon and works it to death, turning out a lot of garbage in the “me too” development process.

I find this very interesting. Why? Because all the talk is about China’s peaceful rise, its bright future, etc. etc. But when it comes to stories, it looks to the past. This doesn’t make sense to me. If a country and people are optimistic about the future, they look to the future and try to visualize it. If Chinese are indeed optimistic about the future, then why aren’t they writing and developing game titles which are about some future/near future China which captures all their hopes, aspirations and fears and is plausible to those of us living in the present?

OK, you’ve got a peaceful rise, tell me how it’s going to look.

The whole world wants to know. Sell me China’s version of the future. And don’t talk to me about the 2008 Beijing Olympics; that is only a sporting event.

What would that world be like? What would the technologies be? How would people interact with each other? What challenges would they face? Would the world be at peace or at war? Would people continue to fight with each other, or would they face challenges together? How would they resolve their differences? What international institutions would there be and how would they work? Would people interact with other intelligent civilizations? How would they do it? How would nations and ethnic groups interact with each other and solve their problems? How would they treat each other and would they overcome racism? How would they handle ideologies?

And could a Chinese writer and artist team create a plausible world which answers these questions? If it was TV, they could make a program out of it, and if it was a game, how would players interact in it? What would the rules be?

In a recent conversation with a production company owner, I asked him what differentiated his company. His answer: technology. Technology cannot sell a good story; a bad story is a bad story, even if you tie a red ribbon (technology) on it. On the other hand, a good story can hold people in captivation for a long time; technology is largely irrelevant.

Why is it that the Chinese government seems so intent on developing the part of the value chain which has the least value added, the junior animators, while the concept and idea people, artists like Ang Lee have to go the US to make it big on a global stage?

If China doesn’t answer these questions and answer them soon, it will be a big market but only a second-tier player.

The future is not entirely dark. There are movies like Crazy Stone which show the sparks of some original thought. But it’s entertainment, not fantasy, and it doesn’t show me a new plausibl world. I hope to see more. As far as I’m concerned, it can’t come soon enough. I am looking for new, creative products in the fields of animation, gaming and movies.

If you know of something interesting which has a fresh different angle and fits into the fields I have described, please post about it in comments.

I’ll follow up, and if it plays out, I’ll write about it in a following article.

And please, no Chinese penguins.