Silicon Hutong

The Huiyuan Test

Starbucks Houshayu village

Socialist networking

1037 hrs.

As the rest of the world (and China's banks) obsess on the unfolding saga of Fannie Mae and Freddie Mac, here in China Coca-Cola's announced intention to purchase Chinese beverage maker Huiyuan Juice Company is about to force the government to make a very hard choice.

An excellent acquisition...

You don't need a Ph.D. to see the business value of the combination. Huiyuan, a company that produces a quality product with a better-than-average reputation, lacks the marketing and distribution to turn itself into the leading brand in China in its sector, or to expand beyond the mainland. Coca-Cola desperately wants an acquisition that will allow it to expand its hold in the non-fizzy soft drink category. Coke's distribution network and marketing prowess are a perfect fit for Huiyuan.

I am not a big fan of mergers or acquisitions, but at the ground level in China, this one makes huge sense for both brands.

The only possible fly in the ointment is a fairly large one: how will the Chinese government react to Coke's offer?

...at an "interesting" time.

Steve Dickinson at the law firm of Harris and Moure, pllc posted an extended analysis of China's new Anti-Monopoly Law a few weeks ago on China Law Blog. In that context, he took the time to lay out what he sees as the government's policy and regulatory approach to foreign direct investment:

"• Foreigners are free to invest in China through WFOEs [wholly-foreign-owned enterprises] or JVs [joint ventures] in the areas of investment classified as permitted or encouraged in the current Catalog for Guiding Foreign Investment.

• Foreigners are permitted to purchase small established Chinese companies where the government is too busy to be concerned with management of the small company

• Foreigners are permitted to purchase large established Chinese companies suffering from financial problems, provided the foreign purchaser will restructure the company and assume the company's obligations to workers and creditors.

• Foreigners are permitted to acquire a minority interest in large and successful Chinese companies, provided such investment will provide collateral benefits in the form of technology transfer or access to new markets.

• Foreigners are not permitted under any circumstances to purchase a majority interest in a large and successful established Chinese company."

In addition, the government may look at the transaction in the light of the new anti-monopoly law. While I doubt Coke would pass a pedestrian definition as a monopolist in China's highly fragmented beverage market (even after the Huiyuan purchase), any acquisition by a foreign market leader would invite scrutiny.

So since this deal involves the purchase of a large, healthy Chinese company by a major foreign player, we are almost assured that the matter is being discussed at high levels of the Chinese government.

Communications will decide

On the surface, all of the above seems to spell trouble for the deal. At the very least there is likely to be a formal review, and there is the possibility that the government might attempt to block the transaction, or force a revision of the terms.

(Ostensibly, the government should have no direct say in this matter, as it appears that what is being purchased are shares listed in Hong Kong. Yet while Hong Kong is a special administrative region of China and thus possesses considerable autonomy, if the Chinese government is concerned about the precedent the transaction will set, they will almost certainly step in.)

All of this depends on how closely the government wants to adhere to its explicit and implicit policy regarding foreign direct investment. And to a great extent, that depends on how carefully Coke and Huiyuan have laid the groundwork with the government in advance of announcing the deal.

Because if there is anyone in the beverage industry in China who decides that such an acquisition would damage them, or if there is someone who just wants to play the spoiler as a means of keeping Huiyuan from turning into a killer competitor, a campaign to derail this deal may be in the offing. Such opposition stopped Carlyle's effort to purchase a major stake in construction equipment maker Xugong. Given the current policy climate, a similar campaign could have a devastating effect on the Coke/Huiyuan deal.

Whether this deal succeeds, then, has less to do with its considerable business merits or with the law itself. It has much more to do with how well Coke handles the government debates and public discussion on the deal's merit.

Hopefully, Coke has learned from Carlyle's experience, and has prepared a case that will convince the nation's leaders to make an exception to policy and will gain the support of consumers and influential public voices in China.

FDI is not just for foreigners anymore

What makes this interesting, of course, has nothing to do with Coke or Huiyuan, but the future of foreign direct investment in China and the role Chinese business will play on the world stage.

Whatever action the Chinese government takes - or does not take - in this case will serve to further define what is seen as acceptable foreign investment, and what is unwelcome. To accept the deal would be an acknowledgement that China remains open to investment, but that it does not regard every single Chinese company of a certain size as a "national champion."

To block the deal - or to force its significant revision, will send a message that China will not have its brands acquired just as they are building equity. It will put the nation on record as saying that from now on, it will be China doing the buying, thank you, except when somebody else can help us clean up an inconvenient mess.

In other words, if China blocks Coke, it will be a statement that China wants to approach foreign direct investment in a manner not terribly different than the way governments in developed worlds do.

China's policy makers would not shrink from making such a statement - on the contrary, it would have incredible emotional appeal.

But for the sake of Coke and Huiyuan, let us hope that they can wait a while to do so.

Olympics: Whither the Great Venues?

In the Hutong

Productivity = no TV in office

1917 hrs

We are still over a month away from the opening ceremonies, and I am already hearing of reporters filing stories on the "Olympic Legacy." Yeah, I know, it seems a bit early for that kind of speculation, but especially for those of us who will remain behind when all of the athletes, officials, and visitors have left, it is a matter of real concern.

From the point of view of the people here in the Hutong, the infrastructure improvements alone are worth the hassle of the games coming to town. We are being left with: a beautiful (huge) new airport terminal with an extra runway on the side; the beginnings of a rapid transit system worthy of the name; a whole lot of new buildings; wider streets; and vast belts of green where once was concrete.

Quiet Giants

Oh, yes - we're also getting some brand new sports venues, and all the rest are getting facelifts.

It does not take a futurist to know what will happen to these magnificent venues after the Paralympics closes in September. Some, like the beach volleyball arena, will come down instantly. Others will see their seating removed. A few - most notably Arup's iconic National Aquatics Center, or The Water Cube (that's [H20]^3 for my fellow geeks) have been designed with a post-Games life in mind.

But many, I'm afraid, will stand silent for much of every year.

There are two issues, separate but somewhat related.

Promoters must Promote

First is the dismal state of the live events business here in China. I do not put myself out as an expert in this field, but I've been working along the edges of the business for long enough to know that the problem here is neither the number of people who would attend a concert, nor the cost of a ticket, nor of a lack of bands, symphonies, stage plays, artists and the like who would be willing to come to Beijing.

The problem is with the promotions side of the business. Live event promotion is for all intents and purposes a state monopoly. With all due respect to the hard-working people in that monopoly, it is too often fair to say that events are poorly promoted, badly managed, and sometimes not fun at all. And that's just from the consumer point of view. I can only imagine how it must drive sponsors and tour managers nuts to deal with promotors who do not appear to be interested in helping to put on a killer event.

Just to take promotions: I read the weekly entertainment giveaways as closely as the next guy, and I find myself learning about events, plays, concerts, and the like either the day of or a week after the fact so regularly that it is infuriating. I can more readily find out about who is playing the Greek Theatre in Los Angeles next season than I can find out about a concert in Beijing a month from now. Frankly, unless I see an ad two weeks in advance in The Beijinger or I'm regularly checking the Emma website, I may never find out.

Unfortunately, I doubt major improvement - a stage where tour organizers and event sponsors are all talking about how easy and enjoyable it is to take a show through China - is in the offing anytime soon. That would require genuine competition in the live events promotion space, maybe opening it up to other state-owned media organizations like China International Television Corporation, Shanghai Media Group, China Radio International, or even the Phoenix Satellite folks. That is just not in the cards right now.

We need a new ball game

The second issue is the state of professional sports in China. There is more to creating a successful (dare I say "world-class") sports league that slapping some spiffy kit on a bunch of healthy young males.

If you want an idea of how far professional sports have progressed in China, take a look at professional soccer. There is a league. It has its hard-core of followers. But it is by no means the popular sensation here that it is even in Japan, much less anywhere in Europe.

I once had a long, drink-sodden discussion in a karaoke bar with one of China's senior soccer coaches. He blamed China's lack of soccer prowess on a whole range of issues: lack of endurance, lack of speed, inadequate diets as children, whatever. And he may have been right.

When you look around the world at some of the leading sports leagues, though, you start to see a pattern emerge. When a country is a global leader in a given sport - any sport - it is because of a system.

Take English soccer. Sure, there are plenty of foreign players in the Premier League. But English soccer got where it was because of the Football Association. With clubs in nearly every city, suburb, village, and hamlet across England, all ranked in over a dozen tiered leagues based on performance, you have a system designed to screen, identify, and develop talent from the largest possible pool over the longest possible time.

Take American baseball. The kids start with t-ball, then move on to little league, then high school, then college. At each level, only the best stay with it as they grow. Then there are seven levels of professional minor-leagues as development programs for the major leagues - last time I counted, there were over 329 teams in five countries all developing professional baseball players for the 30 major league teams.

American basketball and football rely much more heavily on high schools and universities to develop players, but given that these two sports are arguably the most successful and lucrative sports at the collegiate level, they do a fine job screening, recruiting, training, and preparing athletes. (I'm not in favor of this approach, personally. The Village Grouch and I both advocate either a minor-league system like baseball or an association system like English soccer. But that's not happening anytime soon.)

Japanese baseball, Canadian hockey, and Australian rugby all follow similar systems.

The formula for developing exciting professional team sports, therefore, is simple: create a system that by enabling broad participation at the earliest practical age ends up casting the widest possible net talent, opening the door for each player to get the the best opportunity for development, and you wind up with a huge pool of talented team players rather than a few stars surrounded by second- and third-rate players who are just no fun to watch.

China needs to find a way to duplicate the essence of systems like those of the Football Association and Major League Baseball in a way that is locally appropriate. Of course, the scale of such an undertaking means that it will take at least a generation to produce professional sports of a high caliber. But now is as good a time as any to start.

Wanted: motivated bureaucrats

If any of the above is to change, it will require some severe motivation from someplace very high in the government. More than just about creating sports leagues, holding concerts, or filling expensive venues, this is about creating industries of entertainment, ways to identify, nurture, showcase, and reward talented Chinese people as well as bring them the greatest talent from around the world.

If the hearts of the nation's policymakers are not stirred into passionate pursuit of robust live entertainment and sports industries by the prospect of the economic development and opportunities they would bring, perhaps the sight of these giant venues - national treasures - sitting empty and quiet will do the trick.

I think it will happen. China's leaders detest waste and love an opportunity.

Now if someone would just make the suggestion.

Selling Hong Kong

In the Hutong
Lactose Intolerance is my Cross
0832 hrs.

BusinessWeek reprints Gareth Powell's China Economic Review piece documenting how Shenzhen is about to overtake Hong Kong as the world's third-busiest cargo port.

On trah what?

Hong Kong began and grew as a trade entrepot, and for many years after 1949 was a busy center for manufacturing as well. Reforming and opening of the mainland have sucked most of the manufacturing upriver and inland, and (as today's story underscores) Hong Kong's importance as a center of transshipment declines as its picturesque harbor is pinched by reclamation and development - not to mention rising property values, growing pollution restrictions, and the climbing cost of labor.

In spite of all of this, Hong Kong's port will continue to prosper for a time. But to rely on the port for growth or economic vitality is growing less practical. Even the city's major port operators are betting on investments in faraway quays and harbors for their long term prosperity. Clearly, physical logistics is not the basis on which the SAR's leaders can or should build a vision for the future.

(Nor, for that matter, is some well-intentioned belief that the city is a great place to build online businesses - many of those industries are highly labor, power, and real-estate intensive, and the back rooms of Shenzhen, Hangzhou, Beijing, and Dalian are arguably better suited to become multimedia centers.)

More than Ports and Property

As many readers know, I hardly qualify as a Hong Kong booster: I think many of its people (Chinese and foreign) believe themselves far more expert in mainland affairs than they truly are, and I believe that the city clung to its role as a gateway to China long after that ceased being either true or necessary.

But I believe in Hong Kong, and feel that if the SAR could understand what it offers - and what it doesn't - it need not decline to become a lesser light than Shanghai and Singapore, a path it appears to be treading.

Where Hong Kong excels is in services. It remains perhaps the easiest city in all of Asia to get a lot of stuff done in a very little time. Every time I go to Hong Kong I am amazed at how many things I can knock off my list in the space of a morning or a single day. My company is domiciled there. My lawyers, travel agent, and accountant are all there, as are my bank, my tailor, my computer store, and my dive shop. What is more, I can get to every single one of those places in a single day, with time left over for lunch and some random shopping.

It remains the best place in the region to hold meetings, attend conventions, or run training programs. Setting up - and operating - a company there is about as easy as it gets. It is simpler and faster in Hong Kong than Singapore, Beijing, Shanghai, or Tokyo to do my banking, send a parcel (or myself) anywhere on the planet, buy a mobile phone, shop for just about anything, get a suit made, watch a movie, find a wi-fi hotspot, eat a meal, rent an office, buy a CD, or find a Moleskine notebook.

Where else is there a higher density of every business craft or profession? Law firms, accounting firms, advertising agencies, investment banks, venture capitalists, and head hunters abound in such profusion that you could probably get your needs met in any given office tower in Central.

(The Village Grouch and I frequently swap Hong Kong stories, each trying to outdo the other on how fast we got from the gate to the train at the airport, how much we got done in a morning or an afternoon, or comparing notes on our latest "Hong Kong hack." Yes, I know, it's a pathetic hobby, but it is mine.)

It's the Services, Guys

If I were doing a marketing campaign for Hong Kong, I wouldn't be pushing it as a "city of light" or "Asia's world city." Both campaigns are fine for people who have never been to the city and are looking to spend a few days in a conveniently compact Asian metropolis. They will not, however, bring people - and their investment dollars - back.

If I were doing a campaign for Hong Kong, the tagline would be simple:

Hong Kong. At Your Service.

Forget real estate and shipping. If I were Donald Tsang or any of his staff, I would be giving a lot of thought to how to shift the SAR's industrial policy and external marketing toward highlighting - and growing - Hong Kong's role as the service entrepot of - if not Asia - certainly of Greater China.

Getting Serious about Service

To make that happen, the SAR government needs to get itself a laser-focus on becoming the place where stuff that is unnecessarily difficult to do elsewhere is utterly simple to do in Hong Kong.

That means a marketing campaign aimed at three separate audiences - tourists, business people, and corporations - that all emphasize how Hong Kong is a critical part of Asia for them because Hong Kong will help them a) get stuff done, and b) make getting stuff done elsewhere in the region simpler.

That means an effort to attract and retain major personal and business service companies from around the world.

That means an education policy that prepares Hong Kong's children to be leaders in service based industries, including a commitment to restoring Hong Kong's leadership in English language instruction.

That means a policy focus aimed at encouraging - even subsidizing - companies who are genuine innovators in services. You have a better way to do something for people? This is where you want to be.

The great part of all of this is that Hong Kong is already half way there. Services dominate the economy. Hong Kong's major brands - Cathay Pacific, HSBC, A.S. Watson, Hutchinson, Shangri-La - are almost all service brands.

The greatest problem is one of positioning: Hong Kong has never articulated these strengths well. That needs to change. Now.

Otherwise the city is doomed to become a sad provincial shadow of itself, a narrow stretch of water surrounded by expensive real estate and the effluent of the Pear River estuary.

Cross-post: Cars? Check. Booth? Check? Hotties? Check. PR and Marketing? Uh-oh...

In the Hutong 
Teaching my son about books 
1949 hrs.

Reporting from the Detroit International Auto Show, the L.A. Times' Ken Bensinger gives us a glimpse at the impact Chinese automakers are making at Motown's home-town trade show.

He quotes a batch of American and Japanese executives who are admittedly concerned about China's ability to crank out a modestly-priced automobile, and even grants that quality and safety might be at or approaching U.S. standards. Unfortunately, Chinese automakers are still struggling with marketing:

Changfeng Chairman Li Jianxin, who doesn't speak English, insisted on reading a speech in phonetically rendered English -- a painful experience for reporters covering the event. An accompanying news release bore last-minute redactions made with black marker -- apparently in an effort to conceal the fact that one Changfeng model relies heavily on Mitsubishi Motors technology. But journalists could easily read the text beneath the black ink. Oops.

He continues:

But perhaps the most entertaining offerings were three electric vehicles made by the Li Shi Guang Ming Automobile Design Co. They looked like oversize bath toys, painted bright yellow and bearing nameplates such as "The Book of Songs," "A Piece of Cloud" and the amphibious "Detroit Fish." Two of the models could go on sale in China this year, the company says. Depending on the type of battery, the cost is $5,200 to $9,200.

The money quote came from the man who has just contracted to import 600,000 Chinese vehicles and sell them in the U.S.

"Chinese manufacturers are good at production," Chamco's [William] Pollack said. "But their expertise is clearly not in marketing."

When, oh when, will large Chinese enterprises learn to value marketing?

Cross-post: Bricklin's Waterloo

ARTICLE: "Death of a Salesman" by Todd Lassa, Motor Trend, November 2005, p. 80

(Okay, I'll admit, this is an 8 month old article, but in my defense I just got it a couple of weeks ago via my mail forwarding service, since I'm too cheap to pay for airmail, and I only read it last weekend. Nonetheless, it's a superb feature and worth the read.)

I read Motor Trend because it manages to cover the car business from the horsepower-and-torque all the way up to the executive suite all without forgetting something that almost every other business publication probably never figured out: the automobile is as much recreation as transportation, and the business of designing, making, and selling cars belongs more squarely in the entertainment industry than lumped in along steel and other heavy industries. Also, unlike most of the other gearhead rags, Motor Trend occasionally remembers that there is, in fact, a whole big world out there south of Florida, east of Maine, north of Montana, and west of Hawaii.

Detroit editor Todd Lassa's interview with serial car entrepreneur Malcolm Bricklin did not disappoint. For those of you just joining us, Malcolm Bricklin is the gentleman who: built and crashed the Handyman Hardware chain just as the do-it-yourself craze was hitting a high point in suburban America; built and crashed a sports car company in the middle of the cocaine-fueled 1970s; and managed to build and bankrupt the infamous Yugo car company in the late 1980s.

So it is with a bit of skepticism that Lassa approaches his subject, but he gives Bricklin a more than adequate opportunity to hype his newest venture, Visionary Vehicles. You see, Bricklin believes that by working with Wuhu-based Chery Automobile Company he can import and sell Lexus-class vehicles for about half of a Lexus price. Which Chery is happy to do, providing Mr. Bricklin first hands over US$200 million in cash.

Is it me, or are there are so many interesting ways this train could wreck that you're not sure who to warn about whom?

• Do you warn Bricklin, who is about to spend his sunset years, a lot of investor money, and the livelihoods of his dealers doing the hard work to build a market for Chery in the U.S. that Chery could crush at will as soon as they figure out they don't need a middleman?

• Do you warn Chery president Yin Tongyao about how Mr. Bricklin has walked away from a procession of broken enterprises in the past, and that he may not be the safest guy upon whom to wager the company's future market in China?

• Or do you just sit back and watch as Mr. Bricklin gets squeezed between his investors, his dealers, his consumers, and Chery in a mashup that seems bound to go wrong?

Something about this tells me that somebody is going to get taken for a ride in this situation, and it's pretty clear Mr. Lassa, our writer, gets that, and he manages to inject just the right amount of skepticism at every turn. And it's pretty clear he's more worried about the Chinese than about ol' Malcolm, who always seems to land on his feet.

Frankly, I'm more worried about the little guys in this process - the investors putting up the $200 million serious-money, the dealers who will put their lives and their savings into Visionary Vehicles, and the American families who will put their hard-earned dollars into a VV because that's all they can afford.

Caveat emptor, y'all.

Originally posted 3 July 2006