In the Hutong
Fruit or Toast
Sebastian Cohen examines both the wisdom and madness of China's online empire builders in a quick read in this month's China International Business (the one with JP Morgan's Jing Ulrich on the cover.)
My take on China's online giants expanding their reach is mixed, and Sebastian quotes me to that effect:
'Baidu, China's search engine giant, has been as active as anyone else in the quest for new businesses. March appears to have been a busy month for the company as it contemplated the acquisition of B2B e-commerce site Netsun Toocle while simultaneously planning to start a new e-book publishing venture which would offer a wide range of licensed content. David Wolf, of Wolf Group Asia, sees Baidu as having one of the more questionable expansion policies. "They continue to expand into unprofitable or complex businesses like online video or e-commerce even before fixing the fundamental issues in their core business; which is selling search ads," he says. "Normally there would be nothing wrong with that, but at a time when the company is hemorrhaging management talent and the largest competitor appears poised to leave the market, is this the time to take your eyes off the ball?"'
China's companies have a long and undistinguished record when it comes to diversification, even when moving into similar industries, and even under the best possible circumstances. Baidu in particular faces some major challenges and opportunities in the coming months.
But I don't mean to pick on poor old Baidu. It is hubris season around here since Google packed off to Hong Kong, and it would be very easy for a brilliant Chinese Internet entrepreneur to decide that the time has come to turn his business into an online conglomerate, or to make an ambitious play to globalize.
Focus, guys. The real opportunities are right here. There will be plenty of time to play diversification and M&A games when growth in China settles down a bit.
As it was with Japan and the Yen throughout the 1980's, the RMB exchange rate is going to be a persistent foreign policy priority for the next decade. If history is a guide, it would be an issue even if China floated the RMB.
There is no magic bullet to solve the problem. Instead, the United States needs to be prepared to place constant pressure on The Chinese central government to adjust its currency in order to offset (at least partially) the unrelenting domestic pushback to hold down the value of the RMB.
In order to do this, the United States needs to expand the range of tools it can use to apply that pressure. The hammer of Congressional backlash and the sword of putative tariffs have their place, but they are insufficient.
To compliment those cherished approaches, the United States needs to be actively influencing the domestic debate surrounding currency and economic policy within China. It needs to find local, not just international, allies to help make the case that despite the record of the past three decades, dependence on exports as the primary economic engine is unsustainable.
A long-term, multi-level and multifaceted public diplomacy campaign will be a core part of that effort. Unfortunately, it is unclear whether any part of the US government is capable of planning, coordinating, leading, or executing such a campaign.
It is not too late, but it is now urgent. Secetaries Geithner and Clinton need to pool resources and, working with the President get a plan together on this issue. Failure to do so will leave the US once again unable to employ its vaunted soft power on the nation's - and the world's - behalf.
In the Hutong
Waiting for the Weekend
Ever since the crash following the dotcom boom, pundits in Northern California have been speculating about what industry would replace chips, software, and Internet services in Silicon Valley. The question is more than a matter of civic boosterism: the south San Francisco Bay area is home to an educational, financial, and entrepreneurial ecosystem that for the past seven decades has midwifed some of the most important technological innovations in recent human history. The very idea that so much cash, talent, and vision would lay fallow seemed inconceivable, yet the much-vaunted bio-tech and green-tech booms seem to be stalled on the cusp of takeoff.
Then, in the middle of a Twitter deep-dive with with Paul Denlinger about the warming battle between Apple and Google to dominate the handheld computing space, it became clear. Over the past 18 months, the focal point of the mobile phone industry has moved from Espoo, Finland to a point equidistant between the GooglePlex in Mountain View and Apple's Infinite Loop compound in Cupertino.
In racing to own the future of the mobile Internet, these two giants may well make Silicon Valley the center of an industry that takes the Internet out of computer and puts it into our lives, that meshes communications, information, and entertainment into a single contiguous experience.
You can bet on Silicon Valley going greentech, and that might happen. My money is on Silicon Valley going handheld, at least in the coming 30 months.
In the Hutong
Please, Not Another Crisis
John Pomfret notes in this recent article in The Washington Post:
"The Chinese people are no longer embarrassed about being Chinese," said Wang Xiaodong, a leading nationalist writer who has co-authored a series of popular books with titles such as "China Is Unhappy," which capitalized on the growing anti-Western trend. "The time when China worshipped the West is over. We have a rightful sense of superiority."
There is nothing wrong with a sense of national self-confidence. It is, after all, long past the time for China and the Chinese people to take deserved pride in the positive things the nation and the culture have accomplished. Unfortunately, we appear to have moved well past that.
China has swung from one extreme to another. It has gone from worshipping the west and deprecating it's own culture to believing in the innate superiority of things Chinese and a dismissing the value of all things western.
In truth, neither position is correct. Sadly, the nation has spent most of its modern history lurching between these extremes of xenophilia and xenophobia. And it has to end.
China will reach maturity not when returns the the hubristic self-audulation of The Qing emperors, but when it learns to walk a middle path in its approach to things foreign, assigning value to ideas, innovations, systems and people based not on their origin, but on their intrinsic merits. The country could once afford to forego this middle path, but today it is at odds with everything China seeks to accomplish in a global economy, polity, and society.
At the bottom of an otherwise interesting article in The Washington Times (Cyber-attack on U.S. firms, Google traced to Chinese) was this little tidbit:
Investigators suspect in the case of Google that China was seeking access to the company’s unique search engine and data-mining technology that could be applied to China’s rival government-controlled search engine known as Baidu.
Industrial espionage this may have been, but if Baidu is government controlled to a greater degree than any other local enterprise operating in China, somebody call Robin Li and let him know. It certainly doesn't square with public ownership information. Is the local Baidu entity at all government-owned?
In the Hutong
I mean, it's a holiday, right?
In his interview with Ratuken chairman and CEO Hiroshi Mikitani, Geoffrey Fowler of the Wall Street Journal touches on how cultural differences have taken an Internet business down a much different path than its U.S. counterparts:
WSJ: What makes your approach to the Japanese market different from the approach Amazon and eBay have taken here in the U.S.?
Mr. Mikitani: The merchant—meaning the "shop operator" or "shop master"—is very important for us. We allow our merchants to own a store in a mall.
For example, the Amazon marketplace doesn't allow the merchants the ability to interact with the end customer. In the U.S. with Amazon, the business goes merchant, Amazon and then user. We go Rakuten, merchant and then end user.
Sometimes it's a little bit noisy for some people. Some people might like the more straightforward Wal-Mart type—the big general store. We are like the marketplace in Europe and Japan with many, many stores. They are live and edit every day and want to communicate with their customer.
We believe that comparison shopping and convenience is important. But if you just keep competing on price, nobody is going to win.
Mikitani doesn't suggest at any point that Ratuken's approach is somehow superior to Amazon's or to eBay's. To do so would have been decidely un-Japanese.
Yet the first two-thirds of the interview provoke thought. Shopping may be a nearly universal activity, but no shopping experience can be a one-size-fits-all proposition. The way we each prefer to respond to our inner hunter-gatherer varies by culture, person, and sometimes by the merchandise we seek.
All of which underscores that one of the reasons for e-commerce's more modest initial success in China was that the prototypical Amazon/Wal-Mart/eBay experience was lacking one or more ingredients important for China's shoppers. Despite the success of Taobao and Joyo, I think the industry is getting closer, but it is not quite there yet.
It will be interesting to watch the Baidu-Ratuken tie-up. Will they get closer to the winning formula?