Silicon Hutong

Are You Globally Competitive?

In the Hutong
Playing with the new TypePad interface
1147 hrs.

While in the United States in July, I had an opportunity to meet up with Brian Hollowaty, currently leading business development for executive education at the UCLA Anderson School of Management.

Brian is an exceptionally bright guy, has spent his share of time on factory floors in China, and has over time built his own area of expertise in what makes enterprises competitive, not just in the narrow manner most companies define the term, but in the broadest terms possible: globally.

He is early in the process of starting his Globally Competitive blog, and I promised him when we met that I wouldn't toot his horn until he was ready to go public, but I'm already finding really valuable nuggets in the blog.

In our too-short meeting at Cafe Roma next door to Anderson's fantastic building on the UCLA campus, Brian began laying out, in simple, non-jargonistic terms, where competitiveness comes from. Anyone who can bridge the factory floor with the ivory tower is a rare bird, so check out Brian's blog and encourage more posting.

Some Advice for The China-Bound Job Seeker

In the Hutong

Blogging as Work Avoidance

1051 hrs.

It is no secret that the economy-class sections of trans-Eurasian and trans-Pacific flights are increasingly filled with refugees from the global financial crisis, people intent on finding new lives and careers in the Wild East.

Aimee Barnes has written a post filled with thoughtful advice for these fortune-seekers (Falling in Love with China, and Your Career), and in the spirit of her exercise I want to add the following, posted on The Old Silicon Hutong in January 2006, but even more relevant today:

IF YOU’RE GOING TO GO EAST, YOUNG MAN, DON’T WAIT FOR SOMEONE TO BUY YOUR TICKET

It seems like every week or so I get an e-mail from a young person who is interested in finding work in China, and sends me a resume asking for my help. Nearly all of them are well-mannered, articulate, and well-informed about the region. I’m always happy to help.

But what I have discovered is that a large percentage of the class of 2005/2006 [NB: and 2009/2010] are not willing to actually come out here to seek their fortune. They would rather wait for the offer. I once thought that way, and it was the biggest mistake of my career. I’ve discovered since that the right thing to do would have been to get my ass on a plane and come out here - it would have saved me at least two years of scraping by, living in the guest room of a friend’s house, and working in jobs with limited prospects.

I want to help others avoid that, so this is the advice I gave today to one recent correspondent:

Not sure if I ever told you this, but between 1993 and 1995 I spent nearly two years trying to find a job in China from my home in California. I sent out 500 resumes, shook the guanxi tree, even published a quarterly China business newsletter. When I finally got a bite (from a newsletter subscriber), it was enough to get me over to China, but not the ideal job. Once here, however, I’ve never been unemployed for more than 60 days.

The primary reason for this is that most hiring decisions for China and Asia positions - even for multinational companies (PR, advertising, and others) - are made on the ground here in the region. If anything, this is more the case now than it was a decade ago, as most firms have so expanded their operations in the region that the Asia HR function is managed separately.

Because there are a decent number of applicants in the region, companies will only pay your airfare and expenses to come out for interviews under exceptional circumstances. Doing so is an expensive, high-risk proposition, and most companies choose not to take it. What this tends to mean is that if a company has to decide between two candidates, one in the US and one close by, the one already in the region gets picked, even if the one here is slightly less qualified.

On the other hand, executives and HR directors give high regard to someone who has come to Asia under his own steam. They tend to think that it demonstrates a commitment to the region and a high degree of personal initiative. The importance of initiative should be pretty self-evident. The importance of commitment cannot be understated. I can’t tell you the number of young people who get hired, come out to Asia, spend 2-4 years here, then decide “you know, I want to go back to the US and go to graduate school,” or “Asia is just not for me,” or “I’m afraid of being pigeon-holed as a China or Asia person, and the effect that might have on my career.” While understandable (except for the pigeon-hole case), such issues are frustrating for companies who invest heavily into the training and development of a young executive, only to see that individual pack it in and head back to the U.S. at just about the time they are starting to deliver a return on this investment. Commitment, therefore, is increasingly critical.

Trust me, I understand how difficult it can be to leave behind a secure home and 3 squares a day to do something like this. But even if you just manage to line up a couple of weeks of meetings and interviews, the price of a round-trip ticket on Air China or Northwest and a few nights hotel is well-invested. One young lady I now was finishing up at the University of Washington two years ago, and had been working as a waitress and a trainer at a national casual dining chain. She got a couple of weeks off of her job during the vacation, about a month before which she sent out a bunch of resumes, following up to line up meetings. By the time she got here, she had a full card of interviews. We didn’t quite hire her on the spot, but close. She came back, did an internship for 3 months, and we hired her. She was promoted within 18 months, and now heads the research department at B-M China.

Again, my goal is not to lecture, but to help set your expectations and to provide you with how I think you might best go about landing a job here. You may well be successful getting hired from where you sit, but I can say that the percentage of young, non-Chinese entry-level managers who get hired from the U.S. is small compared to those who are hired from here.

I’m not sure how he’ll take that, but I’m hopeful. Because I get a call or email every ten days or so from a friend or acquaintance who is looking to hire people like this.

Seven Reasons for the Coke-Huiyuan Epic Fail

In The Hutong

Having a Coke and a smile

1911 hrs.

Just after the Ministry of Commerce announced that it had rejected Coca-Cola's bid for Chinese juice-maker Huiyuan, I got a message from a very astute friend of mine who noted "that deal was dead the minute it made the headlines in the South China Morning Post."

We are going to hear a lot of hindsight-laden "I knew it was going to be rejected" statements in the coming days. So let me start by stating for the record that this will at first sound like one of those posts, but the that what I really want to do is explore (with the full benefit of hindsight) why this deal may have been killed, in the fervent hope we can learn something at Coke's expense.

It Sounded Like a Hard Sell at the Time

A momentary slide into the "I told you so" zone.

Not long after this deal was announced, I noted in this post that this was going to be a rough sell for Coke in Beijing. Apart from the threat of the deal falling afoul of China's shiny, new, and not-yet-tested anti-monopoly law, I said that Beijing has over the years actually made its current policy on FDI rather clear. Looking at that policy, it was fairly clear that the deal would have a difficult time passing muster with the government. and that Beijing might relish an opportunity to say "no."

Rather than suggesting the deal was DOA, however, I noted that Coke had best kick a communications program into gear to start building support for the deal, because doing so would be their only hope in getting past the barriers they faced.

"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."

Coke, in short, needed to manage the public debate, because regardless of the reason given by the Ministry of Commerce for rejecting the deal, there was actually a lot more stacked against Coke in its bid for Huiyuan. I count at least seven.

Reason One: One Man's Market Leadership...

The first reason is the one the government gave, that the deal would violate the spirit of section 23 of the Anti-Monopoly Law, which is appears to be designed to ensure that a single player does not become so dominant as to be able to dictate market terms. As the Ministry of Commerce noted, their concern was that the deal would hurt small local players, drive up the consumer price of juice, and limited consumer choices.

Market share figures are painful to discern in most markets, and in China, where data flows like concrete doesn't, the numbers are much harder to pin down. As best as we can tell, Huiyuan as market leader holds a bit over a third and possibly as much as 42% of China's estimated $10 billion market in juices and nectars. That's a pretty dominant position in a fragmented market.

Coke, for its part, is number two with about 10% of the market. If we use those figures, Coke would have owned somewhere around half of an otherwise fragmented $10 billion market. Does this count as a "monopoly" in the classic economic sense? Probably not.

But without other strong players to act as a counter (if Coke was #2 with 9.7%, the next biggest player would have held much less than 10%), you can see that the government was concerned about allowing the creation of a company that would have the brand, manufacturing, and distribution muscle to dictate market terms.

Would that concern have been enough by itself to derail the deal? Maybe. But there were other factors involved as well.

Reason Two: Not Our Kind of FDI

China's foreign direct investment policy since the country began its "reform and opening" process three decades ago has been to create laws and administrative regulations to channel the investment into the sectors and vehicles where China needed it most. The policy has not changed, but the means of the channeling - and the government's general attitude toward FDI - have.

As Steve Dickinson of Harris & Moure noted in an article unrelated to the deal a week before it was announced, the policy may be implicit, but it is clear:

"• 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."

I can't speak to the first issue, but it seems fairly clear that the Coke-Huiyuan deal failed to qualify under the other four.

This might have actually been the deal-killer, but since none of this is written down anyplace, it was easier to cite the Anti-Monopoly law.

But wait. There's more.

Reason Three: Hands Off the Brands, Boys

An unwritten goal of China's industrial policy is the creation of leading brands that will not only lead to a healthy, stable market at home, but also form the basis of a bevy of global Chinese brands. Even though candidates arise from time to time, China's enterprises are still in the early stages of creating international markets.

Huiyuan, however, was a better-than-average candidate, with a leading position at home, smart marketing, and an brand that consumers associated with quality and purity. To have a potential champion gobbled up by a foreign company before it even had a chance to go abroad was probably too much for China's leaders to stomach.

Which is probably the reasoning underlying China's restriction on purchasing a majority interest in a "large and successful established" Chinese company.

Reason Four: What We Have Here is a Failure to Communicate

As my former colleague and frequent lunch companion Imagethief noted, public sentiment was probably not too terribly in favor of the deal to begin with, and things went from bad to worse as allegations came out that Coke's people were trying to quash criticism of the deal.

A core rule of public relations is that you don't try to stop journalists or others from trying to criticize your company because that effort then becomes a story, and you lose all credibility. Now, this rule is often ignored in China, in particular by Chinese companies, who use all kinds of creative and interesting tactics ranging from calling the government, to placing (or withholding) advertising dollars, to outright paying the reporter in order to try to keep negative stories about their company out of the press. Some foreign firms, sadly, have decided that the best thing to do in Rome is wear a toga, and so have picked up the practice.

Whether or not Coke actually did any of these things is not the point - the perception is that they did. That perception was built atop public sentiment that appeared to be skewing neutral to negative on an issue where what Coke needed was widespread support.

Coke failed to realize that it is now a truism that foreign companies cannot hope to successfully test the limits of government policy unless that effort appears to have widespread support - not just among China's elites, but increasingly among the broader public as well.

Few companies will remember that, I'm sure, but the wiser heads among M&A advisors - investment banks, attorneys, and accountants - will realize they need to make room at the table for someone who understands how to win in the court of public opinion.

Reason Five: Morning After Syndrome

Speculation has been rampant of late that Coke may well have been looking for a way out of the Huiyuan deal long before it was dealt its regulatory death blow. Coke, for its part, denied the rumors, and we may never know the truth.

But less than two weeks after the announcement, the U.S. government decided not to rescue the beleaguered Lehman brothers, setting off a chain of events that immediately altered the priorities of companies around the world. Certainly if I were sitting at Coke headquarters in Atlanta, I'd be worried about whether I could afford to part with $2.4 billion in cash right as world credit markets were drying up and consumers were rethinking their spending habits.

Even if Coke lost a little of its ardor for the deal, that might have been enough for the company to give less than its full effort in trying to gain approval.

Or, indeed, it might have been enough for the company to become completely ambivalent about it. Given the challenges they faced, that might have been enough to weaken Coke's chances.

Reason Six: Kindergarten Dynamics

There is a school of thought that Coke's bid was sabotaged before it happened, not by either company or the Chinese government, but by the U.S. government when it blocked the acquisition of Unocal by CNOOC, or when it blocked the purchase of 3Com by a group led by Huawei. The belief is that this rejection was a tit-for-tat, China treating a U.S. company in a manner to which Chinese companies have become accustomed in America.

This is not unlikely. China is a big fan of reciprocal behavior in its international relations, even raising visa charges for citizens of countries that have raised the cost of a visa for Chinese travelers.

Certainly there must have been a bit of that sentiment in the smoky room in Beijing where this matter was decided. How much of a role it played we will never know.

Reason Seven: The Global FDI Problem

Last June the Council on Foreign Relations published a special report, Global FDI Policy: Correcting a Protectionist Drift, in which the authors quantify a decided chill in the past several years by a number of countries toward foreign direct investment. While the authors (a Carlyle executive and a distinguished academic) might well have turned the report into a China-spank, the report is remarkably data-focused and even handed.

What they quantified - before the world lurched into its current state - was a decided tendency by nearly all of the world's major polities to restrict foreign direct investment. The biggest culprit in the report was the United States, but the authors note that there is evidence of this trend worldwide.

The problem is that unlike trade, there is no global policy protocol around cross-border direct investment and acquisitions, kind of like the situation we had with international trade prior to World War II. And frankly, this is no time for countries to be turning off the tap, especially (as the authors note) local affiliates of foreign firms on average deliver greater economic benefit to host countries than local firms.  

The Coke-Huiyuan deal was taking place in an global FDI policy environment that is starting to sour, and may come to be emblematic of the need to raise the matter of FDI to a global intergovernmental level - once the banks are sorted out, of course.

The lesson here is that the problem of FDI policy to an extent transcends Coke, Huiyuan, China, and the United States, and that those issues probably played some role here.

Making it Better

The above list is by no means balanced in terms of the relative importance of the factors, and it is by no means complete. Taken together, though, they underscore that Coke had to climb a cliff on this deal, and they will not be the last who face such a political escarpment.

But as China extends its policy fence around those companies and industries it wants to keep in Chinese hands, there are some lessons to be drawn from the above.

1. We need to begin with a clearer idea for how China defines a "monopoly," so that we either avoid deals that test that definition, or we recognize the risk and seek to mitigate it intelligently yet aggressively. That definition will change on a case-by-case basis, based on the industry, the intended target, the buyer, and who is asking the questions.

2. The FDI policies that matter may not be written down, but they exist, they evolve, and they are ignored at one's peril.

3. Healthy companies that may one day become global Chinese brands are not good targets. Sickly companies that could blossom under better management, with capital injections, and with a global owner are much safer. Of course, they bring their own problems, but China's government wants value-add from foreign investors, not just a fat check.

4. Any acquisition of a local firm by a foreign company demands a communications effort directed at both the general public and the policy making elite that makes a logical, intelligent, and sensitive case for the purchase. The bigger the buy, the better you need to be at the communications.

5. Don't ever let up or appear to hesitate.

6. International relations matter in business, and especially with M&A. Companies need to lobby their home governments to be as open with FDI as they are with trade, because the alternative is a deteriorating global FDI environment with companies caught in the middle.

A Final Note

As I said in my September post, I am no fan of mergers and acquisitions. I think they burn management attention and corporate capital, they are often used as a substitute for innovative strategy, and they rarely deliver the benefits promised. But I also recognize I am spitting in the wind - there is going to be a lot more of this activity in the coming years, particularly as Chinese companies step abroad.

The best we can do is work to reduce the friction of the process. As more about these events comes to light in the coming weeks, It is incumbent on those of us whose work touches M&A in China to learn whatever lessons we can. The next one will probably not be any easier.

China 2.0 Tour: It Doesn't Get Much Better

Jingshun Road, Inbound

Adjusting to a more social life offline

1745 hrs.

If you haven't been following the China 2.0 Tour online via Twitter (#china20), you should really check out the site and the linked blogs of all of the participants. They are leaving Beijing tonight and heading for Shanghai to continue their tour.

I have had the opportunity to both run and to take part in many immersion programs seeking to help executives and others learn about China from the ground up. This one was ambitions in both scope and participants: audiences do not get much tougher than a roomful of high-profile bloggers.

But this program went off so well I told The China Business Network's Christine Lu that they need to make programs like this a regular offering to organizations, individuals, and businesses who really want a crash course in the China you do not see on CNN or read about in the papers.

I'm not accustomed to doing plugs here, but if they ever get around to offering such immersion programs, they would be well worth looking into. The kinds of people you meet, the range of perspectives you get, and most important the insights you take away are phenomenal. I fancy myself something of a China specialist and was participating as such, but I probably learned almost as much as the China "n00bs" on the tour.

Stat of the Week: China Internet User Update

The floor of the CASBAA Dome, West Kowloon, Hong Kong

Waiting for the Asian Pay-TV Panel

1426 hrs.

The statistic of the week came out of my panel this morning at CASBAA. According to Li Danyang, senior Vice President of Beijing Gehua Cultural Development Group, China's Internet has now surpassed 280 million users.

The country loves numbers, so I'm betting that the CNNIC January report puts us right around 300 million users.

So update your fact sheets, and prepare to update them again in two months.

By the way, If I hear the word "monetize" one more time, I am going to have a myocardial infarction.

Olympics: Selling Phelps in China

In the Hutong

Going a bit bonkers buying stuff on iTunes

2017 hrs.

Maybe it was because I'm in China and did not get the chance to see the NBC coverage, but I have to admit to being surprised to hear some marketers I respect suggesting that Michael Phelps was going to get rich doing product endorsements in China after the games.

Whatever happens to VISA and Speedo's efforts to turn spin the über-swimmer's eight medals into marketing gold, it ain't gonna happen in China. Here's why, from my piece in AdAge.

iTunes Unblocked and The Corporation as Social Change Agent (Long)

Starbucks Pinnacle Plaza, Shunyi

Another fabulous post-thunderstorm fall day

1113 hrs

The Olympics have ended. The athletes are heading home. Songs for Tibet is off of the iTunes main page, but it is apparently still available for sale. The iTunes music store is once again accessible from China.

Maths over at Music2dot0 did us all a real service by expanding my Bipolar Apple post into a broader discussion. BTW, apart from excellent coverage of the realities and the posturing of all sides as the music industry evolves, Maths has the additional upside of having a very international view of the related issues. A superb blog and well worth a regular read if you follow the music business, and not just because he agrees with me.

Paul Resinkoff makes some wise noises at Digital Music News. He walks the line between two points of view: he urges Apple to weigh its response carefully.

Eliot Van Buskirk over at Wired, on the other hand, represents the "common wisdom" on the issue. He thinks I am urging Apple to "censor" their content in order to appease the Chinese government. He takes me to task for suggesting that Apple become a censor on behalf of the Chinese. He misreads my point, and misses the larger picture around this particular incident.

What Really Happened

One of the reasons I usually hesitate to post on something right as it is happening is that it is impossible under such circumstances to have the benefit of perspective. As it turns out, I should have waited on posting on this - not because it would have changed my point, but because I got my psychological terminology wrong and, mor important because the post would have been made stronger had I included some important chunks of information.

I won't recount what all of those chunks were, but do take a look at Joe MacDonald's piece for the Associated Press here.

A read through the story makes it clear that this was not a simple matter of Apple-carries-album-Chinese-slam-door.

The salient points:

- The album was featured on the front page of the site - a choice I would wager was made by Apple, not by the activist organization that produced the album;

- The album went live in the days leading up to the Olympics;

- Pro-Tibetan activists have been attempting to leverage Beijing's hosting of the Olympics to draw attention to their cause;

- The activists told the Associated Press that they had contacted athletes directly and provided free downloads to the athletes and urged them to play it in Beijing as an act of solidarity.

- The activists then issued a press release telling the world that this was, in effect, a protest, and that at least 40 athletes in the village had downloaded the tunes.

- The site was then blocked, fifteen days after the album went up.

- The Games ended, the athletes went home, and the site was unblocked.

- The album is available for purchase here in Beijing under the same conditions as everything else on iTunes - got a foreign credit card that bills to a foreign address, and the songs are yours.

If this were a simple matter of censorship because of some content, access to the site and the album would not have been restored. It seems clear that the content itself was not a problem - what set the Chinese government off was the concern over a potential protest in the Olympic Village. Apple was a target only to the extent that it was seen by the Chinese authorities as aiding that protest.

The implicit message the the government seems to be delivering is this: carry objectionable content in your overseas sites if you must, but use those sites as a springboard for protests within China, and they will be blocked.

Regardless of your stance on the rightness or wisdom of Chinese regulators taking this stance, as a businessperson you have to take notice where China seems to draw a line over which it does not want to see companies cross.

What you do with that information is another matter entirely.

To Cave or Not to Cave is Not the Question

The moral quandaries many companies face in doing business in China, whether they come from the hearts of the managers and employees or from the voices of their customers and home governments, are a part of doing business here. They vary from company to company, but they exist and cannot be ignored.

For example, many foreign-operated websites operating in China collect and retain information that could identify the individuals who come onto their sites. After the experiences of Yahoo!, Google, and MSN, any company seeking to operate a site that collects such information had better deal with the issue of what to do when the government issues a warrant for that information in advance, not after the door opens and the PSB is standing there.

Or something else happens that calls into question the morality of doing business in China.

(Or, for that matter, what to do when somebody from some government agency makes it known that your company registration problems can disappear in return for some cash, a computer, a car, or a college education. Or when a reporter tells your PR manager that he's happy to run a story on your press conference - for the reasonable sum of RMB1,000.)

But many companies do ignore these issues. A frustrating number of executives, activists, pundits, and others attempt to portray doing business here as a choice: either you check your morals at the airport when you arrive, holding your nose and hoping a some congressional committee, journalist, or activist doesn't find out; you do business in China your way and risk getting thrown out; or you stay out of the market completely.

There is considerable debate as to whether Apple played an active role in assisting the efforts of the pro-Tibet activists, or the activists simply gamed the iTunes system, duping Apple into playing a role it would rather have not played. It almost does not matter.

If this was an effort to throw a sneaky punch at China, Apple risked its business in China without the upside of brownie points from its fans and others elsewhere because it never owned up to its role.

On the other hand, if this was a case of Apple's systems being gamed by activists who used the company as an unwilling accomplice, Apple looks foolish, and risks its business in China, and calls into question whether this will happen again, all while getting no credit for it.

What is worse, none of the above affected any kind of measurable change. It was a net negative for Apple. As such, it needs to ensure that something of this nature does not happen again.

But that does not mean giving in to perceived, implied, or overt demands that go against the nature of Apple, its executives, or the people around the world who use its machines and want very badly to see the company as an unalloyed force for good.

The Middle Road

I am an idealist.

I believe - I know - that it is possible for companies to make money in China and be agents of positive social change. Doing so, however, demands corporate resolve, transparency, superb communications skills, and and a healthy understanding of Chinese politics and culture.

I believe those two goals are not contradictory but rather are mutually supporting, and that in playing that positive role you will win points in China with the government, the people, your shareholders, and your customers elsewhere.

But companies can best affect change when they are trusted and thoroughly integrated into the fabric of Chinese economy and society. Not only does that give you access, it also ensures that when you behave in a way that could be interpreted as anti-China, you are given the benefit of the doubt by both the people and by policy makers.

That influence is built over time - not necessarily a long time, but it doesn't happen in a week or a month - and in a systematic fashion.

Unfortunately, most companies miss this. The process of gaining the access alters them, defeats their resolve, makes them pliant.

Apple need not follow that route to ensure its success here.

Apple is already deeply embedded in the Chinese economy, but because it is mostly through manufacturing intermediaries, Apple has been largely invisible to policy makers and the people. That began to change with the popularity of the iPod and the growing number of Apple resellers around China, but the Apple Stores are really going to drive home not only that Apple has cool stuff, but that it is making that cools stuff right here in China.

If Apple can do that, all while proving that it is a responsible employer, pays its taxes, turns its back on corruption, and does good in the community, it will have more than adequate foundation to become a driver for social change without endangering - and indeed enhancing - its bottom line.

The one no-go place is publicly embarrassing, threatening, or insulting the country. You go there, and you damage your ability to drive real progress.

Nota Bene

There will always be people who question the value or the morality of doing business in China. When their arguments are sincere, intelligent, and thought-provoking they form a critical check on the often unbridled enthusiasm about China. Whether those voices come from within the company or without, they deserve their due and balanced consideration not just in the PR department, but in the rooms where major decisions are made about a company's future.

Woe to the company that ignores them. They deserve sincere, intelligent, and thought-through answers, regardless of what the decision may be.

As Paul Resinkoff suggests, Apple, for its part, would do well to consider those voices now. And if your company has not yet, it should as well.

Resources for China Beginners

In the Hutong

Looking for my MS Office Master DVD

2337 hrs.

During my interview late last week with Christine Lu at China Business Network, we got to talking about a challenge so many of us face in the service industries in China: helping clients and others who are unfamiliar with China get up the learning curve quickly enough. 

As a part of that process, I find myself frequently providing - or being asked to provide - reading lists for people who want to learn as much as they can from websites, books, magazines and whatever before actually coming here or starting their China-related position. 

So rather than have to keep rewriting that email, I'm providing my lists (with some explanations) as a part of Silicon Hutong. If you look over to your left, at the top of the left-hand column you will find an area marked "Hutong Resources." Under that you will find a link to "China 101," and eventually to "China 102" and "China 103." These are links to a suggested basic library of history- and business-heavy reading that I have found helpful for myself.

Those of you out there with some reading and China experience under your belts, shoot me your thoughts as well. Let me know what helped you in your learning process and why, and I might add that to one of the lists. 

UPDATED: Why Krispy Kreme is Doomed in Mainland China

In the Hutong
Breathing those little airborne cotton balls
2056 hrs.

Via Danwei, China Economic Review is quoting Krispy Kreme's HK CEO explaining why the confection pushers are planning to start their invasion of the People's Republic of China in Shenzhen.

"Shenzhen is a migrant city, many are from the north, and the people are more receptive to fried products."

Krispy Kreme is doomed in China.

Write it off.

It's going the way of Jack-in-the-Box. Or Wendy's.

You Don't Really Want to Be Here, Do You?

First, any company that would stoop to concocting such a nonsense justification for locating a high-value franchise somewhere is engaged in some high-level self-delusion. I would bet that real reason they're going to do Shenzhen first is that the HK CEO is getting stuck with the job on the mainland, probably likes his mid-levels flat, and doesn't want to be flying to Beijing or Shanghai all the time. Shenzhen, on the other hand, is 45 minutes from Central by car.

Second, if Krispy Kreme was really serious about China, they wouldn't hand the responsibility to a guy in Hong Kong. They would do their research and put a guy on the ground in Shanghai, Beijing, or somewhere else in China to act as representative, get to know the local government, and find local franchisees. Behaving like you need to enter China from Hong Kong, then Shenzhen, is a modus operandi far more appropriate to China's circumstances circa 1990.

Third, if Krispy Kreme really understood the way into China, they would start someplace where there are a lot of people who already like donuts, can't get them, and will form long, slavering lines outside their door each morning. If you're afraid of Shanghai, go with Beijing. Call me crazy, but tens of thousands of American and Canadian businesspeople, students, diplomats, and families seem like a built-in market for a store or ten, better (especially initially) than a million or two migrant workers and their factory bosses.

Alas, Krispy Kreme appears content to sit in Hong Kong and wait for the franchisees to come to them, and then invade the market slowly.

Watch the Other Guy Feel the Stones

Time to study the tactics of companies like Starbucks, McDonalds, KFC, Pizza Hut, Dominos, and Papa John's. They knew where their ready markets were, started with those places, put people on the ground in the mainland separate from Hong Kong, and have insanely thriving businesses today because of it.

And, as The Village Grouch correctly points out, Krispy Kreme can also build on the experience - and failure - of Dunkin Donuts in Beijing. In the late 1990s, Dunkin rolled out about 10 stores very quickly, many located in the same space as their Allied-Domecq sister company, Baskin-Robbins.

However, they did little or no consumer education, and when faced with the choice between something they knew and liked - ice cream - and the cakey things they found too sweet for their palates, the uneducated consumer went with what they knew.

Beijing is without a franchised donut store today. But that has as much to do with timing as anything, and it could be argued that the timing is far better today than it was a decade ago.

Where Giants Have Trod

American-born, Thai-based billionaire Bill Heinecke helped to bring Pizza Hut to China in the early 1990s. (If you ate at Pizza Hut in Beijing back then, thank Bill.) However, the going was slow, the joint venture arrangement difficult (as they are), and Heinecke's group sold their shares after a few years and went back to selling pizza in Thailand, which they did quite well.

After a spat with Yum Brands, the parent company of Pizza Hut, Heinecke founded his own pizza chain, The Pizza Company. Seen any of those popping up in the Hutong lately? Right.

Now, after Pizza Hut, Domino's and Papa John's (not to mention the superior product at Kro's Nest) have all established a foothold, The Pizza Company comes to a market where it must fight for a crust, rather than cut itself a large slice of the pie.

So heads up, Krispy Kreme. You have neither the money nor time to burn on timid, ill-conceived strategies in China.

A Last Word

The above said, I must add the caveat below.

Many of us still remember the days when "experts," Chinese and foreign, were saying that pizza would never sell in China because Chinese lack the enzyme required to digest cheese and other milk products. The aforementioned chains give lie to that.

Beware of people who give you reasons why something will work someplace and won't work another. There is no substitute for ignoring all of the naysayers and getting in there and trying.

Fortune in China usually tends to favor the brave and the wise. Be both.

Cross-Post: Graduate Level Bloggers - Shawn Beilfuss

Asia Logistics Wrap News and Commentary from Tokyo on Logistics in Asia

Does the very word "logistics" threaten to put you to sleep?

It used to bore the hell out of me.

It doesn't anymore.

Everyone has heard Napoleon's quote to the effect that "an army moves on its stomach." The short old frog would have appreciated the more modern adage that "amateurs talk about tactics, rank amateurs about grand strategy, but professionals talk about logistics."

Mercifully, Shawn Beilfuss' blog doesn't obsess on the minutae of moving stuff from one part of the world to another. Instead, he takes a broad look at logistics, putting it into the context of "everything else."

Reading Asia Logistics Wrap (ALR) is an eye opener. We all like to toss around big words like "infrastructure" in our conversations as shorthand for the dirty stuff that makes Asia (and the world) actually work, but ALR is a reminder that very serious issues - logistics issues - silently threaten to derail some carfully laid plans in China specifically and Asia generally.

Like any good strategist with a focus, he reaches well beyond his specialty to put it into a broader context. Just reading his posts about "space logistics" was worth it for me. His posts about the growing importance of China's railways - in a day and age when other developing nations are shunning the iron rail for airports, superhighways, and container ports - are a reminder that transportation - for cargo and for people - in China is going to be very different than it is in Japan, Europe, or North America.

Read Shawn, and read what he's reading.

Originally posted 27 March 2007

Cross-post: Improving my writing through humor

"Plain Language Humor: How to Write Good," at PlainLanguage.gov

This site provides what is probably the finest one-page reference to basic rules of good writing I've ever come across.

Now, if I could only remember to use them all...

Originally posted 3 January 2007

Cross-post: Why China is growing and GM is shrinking

"The Risk Pool" by Malcolm Gladwell in The New Yorker, August 28, 2006

Every now and then an article or book comes along that gently but insistently challenges your assumptions. Malcolm Gladwell, whose thinking and work has been much maligned by the buzzwordification of his brilliant book The Tipping Point, pops up with this little beauty of an article in last week's The New Yorker, thankfully made available online.

(NB - Speaking very late last night to The Village Grouch, we both agree that between The New Yorker, The Economist, Harvard Business Review and a handful of similarly insightful publications, we'd have to give up our jobs just to keep up with our reading. We also agreed, however, that it would be a worthy sacrifice.)

Gladwell uses the article to zoom in on a single demographic statistic called "the dependency ratio," which is essentially the ratio of people who aren't of working age (children and retirees) and those who are. Citing a range of examples, both national (Ireland, China, India and Japan) and corporate (GM and Bethlehem Steel, and Google), he convincingly makes the case that comparative advantage is in no small part dependent on demographics.

Clearly demographics are not the only issue - if dependency ratios told all, Africa would be an emerging economic superpower capable or rivaling Asia. Gladwell's point, however, does have broader implications:

• For U.S. companies, who in the face of GM's long slow meltdown must see pension and medical benefits as a time bomb;

• For the U.S. government and electorate, who now need to reassess the wisdom of allowing corporations to handle social benefits programs;

• For European and Japanese governments who now must revaluate the sustainability of their immigration and social policies; and

• For China, who needs to look beyond the current 11th Five Year Plan Guidelines and see that beginning in about 20 years they're going to have an immense mass or retirees to support.

Chewy stuff.

Originally posted 5 September 2006

Cross-post: It's the people, stupid

"Power not socialism is today's Chinese ideology," by Richard McGregor, The Financial Times, July 25, 2006

Going back through the archives (going on vacation with the family can be murder on your reading,) I picked up an article written by Richard McGregor in the FT on July 25 in which he cogently argues that China is about power, not about socialism.

By itself, that’s no stunning revelation - if anything China’s cadres, bureaucrats, and even soldiers seem daily to give greater credence to the belief that you needn’t scratch any Chinese very hard to find a capitalist. Richard’s suggestion is the suggestion that ideology in China is (cynically) little more than a convenient fig leaf to protect those in power is, similarly, an acknowledged truism.

Government v. Business?

But what really tickled my frontal lobes was his use of the recent rejection of the draft property law as an example of the kinds of decisions made to keep the party in power as opposed to keeping the economy moving forward.

The issue Richard really wants us to understand is this: the increasingly powerful economic forces in China, represented by Big Money (the global financial establishment, including the mandarins at the People’s Bank in China) and Big Enterprise (the leaders of the reformed SOEs and medium-large local and foreign companies whose success is driving the economy,) are not the constituency to whom the Party and the government play.

As befitting a publication like the FT, McGregor portrays this as a growing conflict between single-party rule and growing private interests in the PRC. That’s one way to look at it, certainly, especially if (as McGregor does) you reject the idea that any Marxist concepts have pervaded the thinking of the Party.

Power of the Pitchforks

I don’t see it in the same way. I think the point is that the implicit forces driving decision making in Beijing remain a concern for the perceptions of those who wield the latent power to end the Party’s rule - the workers, farmers, cadres, bureaucrats, taxi drivers and shopkeepers who make up what we all affectionately know as the lao bai xing.

And they should be afraid. Take a nation where popular upheaval to is a time-honored means of governmental transition, and add in an incomplete economic development process with mind-boggling and growing inequality, and things start to look very touchy indeed.

Strong, stable, pluralist societies are built on a foundation of ubiquitous property ownership - when your life is invested in an asset you cannot move, you have a pretty powerful compulsion to safeguard the system that assures its value.

But when you have a society in transition, where there remain tens of millions of people in abject poverty with little to lose in following mystics and demagogues, even the appearance of playing to Big Money and Big Enterprise is a dangerous proposition.

This is not about the Party vs. The Money. This is about recognizing that an ironic way, the power of China’s leaders actually does come from the people. Business and finance interests will have limited say in China until such a time as nearly everyone in the PRC is vested in the success of the system.

For Big Money and Big Enterprise in China - and for any group borne of commercial concerns - this means that when your agenda operates in opposition to the improvement of the lot of the Chinese people, your agenda has no hope, and that the best way to get your way in China is to make improving the lives of “the masses” an implicit part of what you do here.

Originally posted 7 September 2006