Wed - March 16, 2005
CEO Dead Pool - Which CEO is the next to get the boot?
Silicon Hutong
Plaza
Beijing
Beijing
Adelphia, AIG, Boeing, Disney, Enron,
Hewlett-Packard, Riggs Bank, Sony, Tyco, WorldCom - the list of companies
shedding their CEOs continues to
grow.
Who's next?
Send your entries to siliconhutong@mac.com.
Who's next?
Send your entries to siliconhutong@mac.com.
Posted at 03:54 PM
Mon - February 14, 2005
Catch The Village Grouch's New Blog
Bunkerbound in the
Hutong
Valentine's Day
Valentine's Day
Check out Steve Schwankert's new Village Grouch blog.
Steve is the nearest thing we have to John Dvorak in Asia, and his well deserved reputation for brilliantly articulating what is on the minds of techies and users is legend.
Welcome to the Blog Party, Grouch.
Steve is the nearest thing we have to John Dvorak in Asia, and his well deserved reputation for brilliantly articulating what is on the minds of techies and users is legend.
Welcome to the Blog Party, Grouch.
Posted at 12:23 PM
Wed - December 29, 2004
A Dragon Not Ready to Fly
The Day Care Center, Silicon Hutong
Plaza
Beijing
Beijing
As the early sales results for the Christmas
season begin to come in from the U.S., it's pretty clear that consumer
electronics (led by the iPod) was the category driving increases in sales. Eric
Taub at The New York
Times notes that consumers are shifting to digital products and flat panel TVs
in droves.
In a year where most of the world's consumer electronics manufacturers are high-fiving themselves for record-breaking results, China's largest television manufacturer, Changhong, is declaring a huge first-time loss.
The details are ugly and not fully known. What the NYT will say is:
• Changhong says it's rep owes Changhong US$468 million, an allegation rep Apex Digital president David Ji denied last year, saying they only took merchandise on consignment from Changhong and only took commissions, never owning title to the goods. Hmm.
• Changhong apparently appointed a single representative in the U.S., that only Changhong CEO Niu Runfeng was allowed to deal with. Hmmmm.
• Ji has allegedly been detained by Chinese police is Sichuan as part of an investigation.
There is a lot going on here. Changhong apparently would not invest in building TV sets with digital receivers in them as required in the U.S. of all television manufacturers. That automatically restricted the number of sets it could sell. Then they were hit by the new anti-dumping actions of the U.S. government, and Changhong sets probably got a lot less competitive with the big-box and discount retailers that were Apex/Changhong's largest customers.
This is a huge fall from grace for Changhong and Apex, which together supplied the U.S. with 90% of the televisions made in China that were sold in North America. The companies won a Best of Show award at CES last year for a game product. Now the partnership is clearly in doubt.
Clearly, the anti-dumping ruling hurt, since the companies were bringing TVs in so cheap that it was pretty clear that they were being sold at less than cost. But to what end? Japanese companies have long sacrificed profits to build market share, but it seems that Changhong has tried, but failed, to take a page from that book.
As all of this unravels, a several lessons for aspiring Chinese multinationals are becoming apparent:
• Long term success for Chinese technology and electronics manufacturers in global markets will be directly tied to their corporate governance.
• Consistent investment in technology will be essential for all industries to compete in global markets. When people are buying flat screen TVs, trying to hawk big cathode-ray-tube based boxes makes you irrelevant, not inexpensive.
• Cheap products and dumping may build market share, but they don't build mind share. Marketing, the construction of a brand, and the ability to understand and anticipate market directions in the major consuming markets worldwide will all be fundamentals, not extras. Look at BenQ.
The problem is, near-sighted approaches to globalization a la Changhong are the rule, not the exception in China. As the world's begins to expect China to conform to global standards of corporate governance and business practices, running things "the old-fashioned way" will become untenable.
In a year where most of the world's consumer electronics manufacturers are high-fiving themselves for record-breaking results, China's largest television manufacturer, Changhong, is declaring a huge first-time loss.
The details are ugly and not fully known. What the NYT will say is:
• Changhong says it's rep owes Changhong US$468 million, an allegation rep Apex Digital president David Ji denied last year, saying they only took merchandise on consignment from Changhong and only took commissions, never owning title to the goods. Hmm.
• Changhong apparently appointed a single representative in the U.S., that only Changhong CEO Niu Runfeng was allowed to deal with. Hmmmm.
• Ji has allegedly been detained by Chinese police is Sichuan as part of an investigation.
There is a lot going on here. Changhong apparently would not invest in building TV sets with digital receivers in them as required in the U.S. of all television manufacturers. That automatically restricted the number of sets it could sell. Then they were hit by the new anti-dumping actions of the U.S. government, and Changhong sets probably got a lot less competitive with the big-box and discount retailers that were Apex/Changhong's largest customers.
This is a huge fall from grace for Changhong and Apex, which together supplied the U.S. with 90% of the televisions made in China that were sold in North America. The companies won a Best of Show award at CES last year for a game product. Now the partnership is clearly in doubt.
Clearly, the anti-dumping ruling hurt, since the companies were bringing TVs in so cheap that it was pretty clear that they were being sold at less than cost. But to what end? Japanese companies have long sacrificed profits to build market share, but it seems that Changhong has tried, but failed, to take a page from that book.
As all of this unravels, a several lessons for aspiring Chinese multinationals are becoming apparent:
• Long term success for Chinese technology and electronics manufacturers in global markets will be directly tied to their corporate governance.
• Consistent investment in technology will be essential for all industries to compete in global markets. When people are buying flat screen TVs, trying to hawk big cathode-ray-tube based boxes makes you irrelevant, not inexpensive.
• Cheap products and dumping may build market share, but they don't build mind share. Marketing, the construction of a brand, and the ability to understand and anticipate market directions in the major consuming markets worldwide will all be fundamentals, not extras. Look at BenQ.
The problem is, near-sighted approaches to globalization a la Changhong are the rule, not the exception in China. As the world's begins to expect China to conform to global standards of corporate governance and business practices, running things "the old-fashioned way" will become untenable.
Posted at 02:54 PM
Mon - December 20, 2004
Wharton, Leader of Large Lemmings?
Editor's Desk, Silicon Hutong Center,
Beijing
The response of one Silicon Hutong reader to the
Wharton piece:
It's actually pretty fabulous that Wharton can promote the guanxi route to China. I wholeheartedly applaud their efforts to encourage large US corporations to spend lots of money and efforts on the guanxi route to China. How else would a small company like mine be able to kick fellow foreign a*& in such a competitive market.
It's actually pretty fabulous that Wharton can promote the guanxi route to China. I wholeheartedly applaud their efforts to encourage large US corporations to spend lots of money and efforts on the guanxi route to China. How else would a small company like mine be able to kick fellow foreign a*& in such a competitive market.
Posted at 07:07 PM
Thu - December 16, 2004
Wharton's Take on IBM-Lenovo Deal: Out of Touch
In the Hutong, Hiding from the
Snow
I like Wharton's Knowledge website. There are
some extremely smart people at Penn's B-school and they usually have something
brilliant and insightful to say about most
things.
Which is probably why their article about the Lenovo deal, The IBM/Lenovo Deal: Victory for China was such a disappointment. Some concerns:
1. Wharton Does Not Understand Public Relations: Marshall Meyer (IMHO one of the giants in organizational theory) who is touted as having "studied Chinese companies and travelled extensively in China," says "Public relations is a big component of Chinese Management and a lot of people will see [the IBM/Lenovo deal] as a victory for China." Now, either the esteemed Dr. Meyer doesn't know the difference between "face" and "public relations," or he doesn't know much about Chinese companies and the way they are run. Or both.
As someone with just a little bit of experience with Chinese companies and public relations will tell you, Chinese companies care about face. Full stop. But public relations? Most Chinese companies think P.R. stands for "press release" or "Payoff the Reporter." Chinese companies and their executives are notoriously unsophisticated when it comes to any form of corporate communications, and that's a distinction I'm genuinely shocked Dr. Meyer missed. As an organizational theorist, he should know that despite a widely accepted practice to the contrary elsewhere in the world, Chinese companies still insist on placing public relations beneath marketing and 2-3 levels removed from the C-suite.
2. Wharton Thinks Lenovo is the Only Chinese Company on the World Stage: This pains me, because I really respect the work Dr. Michael Useem has done on leadership. But when he says "It is untrodden ground for a Chinese company to make a sudden, big move to operate on the world stage," I can't let that pass. Other Chinese companies going boldly down that direction who have preceded Lenovo:
a. Haier opening a factory to build refrigerators in South Carolina.
b. Huawei and 3Com creating a joint venture to sell each other's gear around the world
c. China Netcom's purchase of Asian Global Crossing
d. The TCL/Thompson merger that brought the RCA brand to China
Not to mention the recent move by China Minmetals to purchase a major Canadian mining company. C'mon, Dr. Useem. If I were in your class and made such a blatantly inaccurate statement in a paper, you'd nail me for it, and rightfully so.
3. Wharton Thinks Guanxi is Worth Hundreds of Millions of Dollars to IBM: Dr. Useem is not finished with himself, as he goes on to note that "'government relationships are key in China. IBM sees this as an alliance. Maybe the price wasn't as good as it could have been' but IBM gets a definite payoff in the form of 'better relationships.'"
As anyone on the ground here understands clearly, IBM doesn't need to forego hundreds of millions of dollars (or tens of millions, or even a few million) in order to enhance its standing with the Chinese government. A recent study my firm conducted for an entirely different I.T. client made clear that IBM's government relations were outstanding, that no doors were closed to it, and that this had all been accomplished simply by operating in China as a good corporate citizen. If IBM knowingly left any money on the table in the name of "better relationships," I think shareholders are entitled to an explanation of why they paid for something they already had.
There is a bigger issue here, and it concerns me deeply. Dr. Useem, and many other highly respected academics, seem to be laboring under the mistaken impression that government relationships, or guanxi in the local vernacular, are critical to the success of a business. Don't get me wrong, building and maintaining good contacts with the government is important in China. But it is far, far less important than it was a decade ago, and it is certainly no determinant of success. The two generational changes in leadership that have taken place in China over the past 15 years have had a major effect on the way governments and foreign enterprises work together. Bureaucrats, regulators, and ministers are much more comfortable evaluating and working with business executives, and there are sufficient regulatory and procedural measures in place to ensure this takes place systematically enough of the time that you don't need Hu Jintao's help to get a business license.
Even if IBM didn't have the kind of relationships that it has built over the years, it would not need to spend millions to build those relations. I've helped much smaller companies do very well for a lot less, and the cost is dropping all the time because the process is getting so much more straightforward.
3. Wharton Doesn't Understand the Value of Brand: Professor Christian Terwiesch, a professor of operations management, can't understand why Lenovo paid so much for "the number three company in the PC market." Apparently Dr. Terwiesch is having a hard time comprehending that perhaps Lenovo (whose brand name, let's face it, sounds more like a French economy car than a computer) saw some very real value in the IBM and Thinkpad brands. Certainly BusinessWeek and Interbrand recognize that the IBM brand alone is probably worth something on the order of $53 billion. For the privilege of using that brand for 5 years, Lenovo pays about $350 million a year. Some would call that a bargain, but only if they understood the value of a great brand to a company that lacks one.
There are other mistakes, mainly small ones (spelling the name of the infamous techno-gadfly Fang Xingdong as Fang Zingdong, etc), but what really jumps out is how much better the insights and analysis are when they come from Gartner and the Chinese, and how unplugged Wharton comes across when it comes to both China and Technology.
If I were a trustee or an alumnus at Wharton, I'd be very worried. This is a clear sign that Wharton is in deep danger of losing whatever relevance it has outside of the Boston-Washington corridor.
Which is probably why their article about the Lenovo deal, The IBM/Lenovo Deal: Victory for China was such a disappointment. Some concerns:
1. Wharton Does Not Understand Public Relations: Marshall Meyer (IMHO one of the giants in organizational theory) who is touted as having "studied Chinese companies and travelled extensively in China," says "Public relations is a big component of Chinese Management and a lot of people will see [the IBM/Lenovo deal] as a victory for China." Now, either the esteemed Dr. Meyer doesn't know the difference between "face" and "public relations," or he doesn't know much about Chinese companies and the way they are run. Or both.
As someone with just a little bit of experience with Chinese companies and public relations will tell you, Chinese companies care about face. Full stop. But public relations? Most Chinese companies think P.R. stands for "press release" or "Payoff the Reporter." Chinese companies and their executives are notoriously unsophisticated when it comes to any form of corporate communications, and that's a distinction I'm genuinely shocked Dr. Meyer missed. As an organizational theorist, he should know that despite a widely accepted practice to the contrary elsewhere in the world, Chinese companies still insist on placing public relations beneath marketing and 2-3 levels removed from the C-suite.
2. Wharton Thinks Lenovo is the Only Chinese Company on the World Stage: This pains me, because I really respect the work Dr. Michael Useem has done on leadership. But when he says "It is untrodden ground for a Chinese company to make a sudden, big move to operate on the world stage," I can't let that pass. Other Chinese companies going boldly down that direction who have preceded Lenovo:
a. Haier opening a factory to build refrigerators in South Carolina.
b. Huawei and 3Com creating a joint venture to sell each other's gear around the world
c. China Netcom's purchase of Asian Global Crossing
d. The TCL/Thompson merger that brought the RCA brand to China
Not to mention the recent move by China Minmetals to purchase a major Canadian mining company. C'mon, Dr. Useem. If I were in your class and made such a blatantly inaccurate statement in a paper, you'd nail me for it, and rightfully so.
3. Wharton Thinks Guanxi is Worth Hundreds of Millions of Dollars to IBM: Dr. Useem is not finished with himself, as he goes on to note that "'government relationships are key in China. IBM sees this as an alliance. Maybe the price wasn't as good as it could have been' but IBM gets a definite payoff in the form of 'better relationships.'"
As anyone on the ground here understands clearly, IBM doesn't need to forego hundreds of millions of dollars (or tens of millions, or even a few million) in order to enhance its standing with the Chinese government. A recent study my firm conducted for an entirely different I.T. client made clear that IBM's government relations were outstanding, that no doors were closed to it, and that this had all been accomplished simply by operating in China as a good corporate citizen. If IBM knowingly left any money on the table in the name of "better relationships," I think shareholders are entitled to an explanation of why they paid for something they already had.
There is a bigger issue here, and it concerns me deeply. Dr. Useem, and many other highly respected academics, seem to be laboring under the mistaken impression that government relationships, or guanxi in the local vernacular, are critical to the success of a business. Don't get me wrong, building and maintaining good contacts with the government is important in China. But it is far, far less important than it was a decade ago, and it is certainly no determinant of success. The two generational changes in leadership that have taken place in China over the past 15 years have had a major effect on the way governments and foreign enterprises work together. Bureaucrats, regulators, and ministers are much more comfortable evaluating and working with business executives, and there are sufficient regulatory and procedural measures in place to ensure this takes place systematically enough of the time that you don't need Hu Jintao's help to get a business license.
Even if IBM didn't have the kind of relationships that it has built over the years, it would not need to spend millions to build those relations. I've helped much smaller companies do very well for a lot less, and the cost is dropping all the time because the process is getting so much more straightforward.
3. Wharton Doesn't Understand the Value of Brand: Professor Christian Terwiesch, a professor of operations management, can't understand why Lenovo paid so much for "the number three company in the PC market." Apparently Dr. Terwiesch is having a hard time comprehending that perhaps Lenovo (whose brand name, let's face it, sounds more like a French economy car than a computer) saw some very real value in the IBM and Thinkpad brands. Certainly BusinessWeek and Interbrand recognize that the IBM brand alone is probably worth something on the order of $53 billion. For the privilege of using that brand for 5 years, Lenovo pays about $350 million a year. Some would call that a bargain, but only if they understood the value of a great brand to a company that lacks one.
There are other mistakes, mainly small ones (spelling the name of the infamous techno-gadfly Fang Xingdong as Fang Zingdong, etc), but what really jumps out is how much better the insights and analysis are when they come from Gartner and the Chinese, and how unplugged Wharton comes across when it comes to both China and Technology.
If I were a trustee or an alumnus at Wharton, I'd be very worried. This is a clear sign that Wharton is in deep danger of losing whatever relevance it has outside of the Boston-Washington corridor.
Posted at 01:17 PM
Mon - December 6, 2004
UPS Success Depends on Ending Customs/China Post Axis
Somewhere on Second Ring Road
East
Kudos to UPS for making the decision to buy out
Sinotrans' share of their joint venture. Sinotrans is living proof that you
can't have multiple, competitive joint ventures with the same local partner and
expect all of them to be equally successful. DHL was first into China and first
in with Sinotrans, and as a result got the best people and most attention. Add
that to DHL's tightly focused and very aggressive push into the market, and you
get a formula for success.
Just as an aside, TNT is another company in UPS' position. They too have a Sinotrans JV that has been going nowhere. TNT needs to swap out of its partnership as well if it plans to be competitive.
None of this suggests that UPS' troubles are over in the market. Now they will have Sinotrans as an enemy rather than a lead weight, which might redound to DHL's favor. The other problem is the one they all face: China Post is allegedly in cahoots with the Customs Service to delay clearance of all non-document express parcels coming into China using anything but Express Mail in a fairly brazen attempt to damage the prospects of UPS, DHL, TNT, and FedEx. Until they can get over this workaround, UPS will be unable to compete effectively in China. Without a strong local partner, UPS needs to build a powerful constituency in China and ally themselves with their rivals to end the customs nonsense, or they will find their business in the PRC unsustainable. Remember where you heard it first.
Just as an aside, TNT is another company in UPS' position. They too have a Sinotrans JV that has been going nowhere. TNT needs to swap out of its partnership as well if it plans to be competitive.
None of this suggests that UPS' troubles are over in the market. Now they will have Sinotrans as an enemy rather than a lead weight, which might redound to DHL's favor. The other problem is the one they all face: China Post is allegedly in cahoots with the Customs Service to delay clearance of all non-document express parcels coming into China using anything but Express Mail in a fairly brazen attempt to damage the prospects of UPS, DHL, TNT, and FedEx. Until they can get over this workaround, UPS will be unable to compete effectively in China. Without a strong local partner, UPS needs to build a powerful constituency in China and ally themselves with their rivals to end the customs nonsense, or they will find their business in the PRC unsustainable. Remember where you heard it first.
Posted at 10:45 AM
Tue - October 26, 2004
Third Ring Road from the Silicon Hutong Suite, China World Tower 2
Not a bad day, really. One day, China World Tower 3 - 78 stories - will sit on the site of the building in the foreground, and in the background next to the grey tower on the right behind the freeway and on that big plot of open land will be CCTV's new Miracle of Architecture. Nice view, while I had it. Now, of course, the Silicon Hutong Suite is right where all great tech businesses get started...in the Garage.
Posted at 11:37 PM
More Capital: Just What China's Securities Markets Don't Need
The Garage in the
Hutong
China's insurance companies, loaded with capital that needs to be invested someplace that offers either some security, relatively decent returns, or both, have now been authorized by the government to start pouring their capital into China's A-share market.
Certainly, adding institutional investors into a market of largely unsophisticated punters could bring some much-needed stability into the markets, and would also create a class of investor theoretically able to compel better governance and transparence among listed PRC firms.
Apart from the macro-economic benefits, however, one has to wonder whether Chinese insurers as businesses are likely to benefit from the new regulation. Remember, these firms make the investments in order to secure their premiums and make a healthy profit from their investment. The abnormally high P/E valuations of Chinese issues, combined with a low level of transparency and governance, tends to argue that - in the short term at least - putting a significant portion of their capital into the A-share market will put that capital at risk. And putting too little capital in would fail to stabilize the market sufficiently to raise A-shares to investment grade.
Additionally, the government looks likely to retain controlling ownership of nearly all of the issues in the near- to medium-term, thus reducing whatever leverage the insurers would have over the companies and their governance. The government could essentially vote its shares and overrule the insurers.
What makes much more sense is to take steps to compel local securities markets to be more competitive, and give them the wherewithal to do so. Increasing the percentage of state-owned enterprises traded on the bourses, raising the limits for equity investment by insurers, and implementing (and enforcing) the highest international standards of governance (to be phased-in over a 3 year period) would do much to address the fundamental issues in the market. In the meantime, pouring institutional capital into an overpriced market with shareholders restricted to trading 30% the outstanding shares of 1,500 questionably-governed companies on a bourse that behaves more like The Las Vegas Strip than Wall Street is simply throwing good capital after bad.
China's insurance companies, loaded with capital that needs to be invested someplace that offers either some security, relatively decent returns, or both, have now been authorized by the government to start pouring their capital into China's A-share market.
Certainly, adding institutional investors into a market of largely unsophisticated punters could bring some much-needed stability into the markets, and would also create a class of investor theoretically able to compel better governance and transparence among listed PRC firms.
Apart from the macro-economic benefits, however, one has to wonder whether Chinese insurers as businesses are likely to benefit from the new regulation. Remember, these firms make the investments in order to secure their premiums and make a healthy profit from their investment. The abnormally high P/E valuations of Chinese issues, combined with a low level of transparency and governance, tends to argue that - in the short term at least - putting a significant portion of their capital into the A-share market will put that capital at risk. And putting too little capital in would fail to stabilize the market sufficiently to raise A-shares to investment grade.
Additionally, the government looks likely to retain controlling ownership of nearly all of the issues in the near- to medium-term, thus reducing whatever leverage the insurers would have over the companies and their governance. The government could essentially vote its shares and overrule the insurers.
What makes much more sense is to take steps to compel local securities markets to be more competitive, and give them the wherewithal to do so. Increasing the percentage of state-owned enterprises traded on the bourses, raising the limits for equity investment by insurers, and implementing (and enforcing) the highest international standards of governance (to be phased-in over a 3 year period) would do much to address the fundamental issues in the market. In the meantime, pouring institutional capital into an overpriced market with shareholders restricted to trading 30% the outstanding shares of 1,500 questionably-governed companies on a bourse that behaves more like The Las Vegas Strip than Wall Street is simply throwing good capital after bad.
Posted at 11:03 PM
Thu - September 30, 2004
Big Oil Can say "No" to China
Yesterday, Shell and Unocal announced that they were pulling out of a
project to explore and develop a natural gas project in the Xihu trough in China
"for commercial reasons." In isolation this is not a small matter. However,
coming as it does one month after a consortium led by Shell pulled out of
China's critical West to East pipeline project, the announcement
suggests that the rules of the game are beginning to change in
China.
No More Business As Usual
Far too many companies come to China convinced that they must be here - and be seen to be a player in China - at any cost. Implicit in this approach is the deep faith that somehow at some time in the future the investment required to be a player will pay off (what author Joe Studwell calls The China Dream), and that failure to be a player in China will relegate one's company to a second- or third-tier status globally in one's industry (what should thus be termed "The China Nightmare.")
The corporate casualties - in destroyed careers, wasted money, and deeply damaged companies - that came from this misguided thinking is such a matter of public record as to stretch credulity and to call into question the competence of the legion of otherwise very smart executives who have ignored it. And yet, in so many industries - autos, real estate, steel, beer, telecommunications, and an untold host of others - continue to behave as if business logic is suspended at the border and that in China it is sufficient "just to be here."
So you will forgive me for hoping that the Shell and Unocal announcements are the beginning of a trend.
Something tells me that they do. The statement that they are bailing on the deal for "commercial reasons," despite the considerable investments that both Shell and Unocal have made in reaching this point, are a clear signal to the folks on the other side of the table that the deal had better make sense, and that the days of paying just to be here are over.
Uh-oh. Now What?
Before we all get comfortable with the "self-high-fives," there is a serious downside to consider here for China. Sinopec and CNOOC (Sea-nook), the two Chinese partners in the project who were (by third-party accounts) making the commercial terms for Xihu so unpalatable, are now left having to go it alone. Likewise Sinopec is left holding the bag for the West-to-East natural gas pipeline project.
This comes at a very bad time for China, and for the world. China's growth is starting to draw in energy resources from around the globe at a rate that is exacerbating both perceived shortages and the increasing expense of bringing those resources to market. Given that China is still fairly early in its curve of energy usage per-capita, that demand will continue to grow. The country is trying to wean itself off of its huge dependence on coal (the country burns nearly a ton of coal per person per year) and imports of petroleum, and natural gas would help meet the growing demand coming from industry and housing.
In short, anything that slows China's move toward dependence on cleaner fuels will simply increase the damage to its environment, and anything that raises China's dependence on energy imports will drive inflation in China, will hurt the country's competitiveness globally, and threatens an oil shock that will slow growth in many of China's key markets.
Bleeding the Foreigners Doesn't Look So Clever Anymore, Does It?
This is by no means a condemnation of Shell and Unocal - they did what they had to do, and they should be applauded for making smart decisions. Rather, this should be a warning to China - unless the government and industry in China suppress the desire to sop every possible penny from the foreigners, they will lose critical opportunities for genuine partnerships that will not only speed development, but will also avoid some unpleasant issues along the way.
No More Business As Usual
Far too many companies come to China convinced that they must be here - and be seen to be a player in China - at any cost. Implicit in this approach is the deep faith that somehow at some time in the future the investment required to be a player will pay off (what author Joe Studwell calls The China Dream), and that failure to be a player in China will relegate one's company to a second- or third-tier status globally in one's industry (what should thus be termed "The China Nightmare.")
The corporate casualties - in destroyed careers, wasted money, and deeply damaged companies - that came from this misguided thinking is such a matter of public record as to stretch credulity and to call into question the competence of the legion of otherwise very smart executives who have ignored it. And yet, in so many industries - autos, real estate, steel, beer, telecommunications, and an untold host of others - continue to behave as if business logic is suspended at the border and that in China it is sufficient "just to be here."
So you will forgive me for hoping that the Shell and Unocal announcements are the beginning of a trend.
Something tells me that they do. The statement that they are bailing on the deal for "commercial reasons," despite the considerable investments that both Shell and Unocal have made in reaching this point, are a clear signal to the folks on the other side of the table that the deal had better make sense, and that the days of paying just to be here are over.
Uh-oh. Now What?
Before we all get comfortable with the "self-high-fives," there is a serious downside to consider here for China. Sinopec and CNOOC (Sea-nook), the two Chinese partners in the project who were (by third-party accounts) making the commercial terms for Xihu so unpalatable, are now left having to go it alone. Likewise Sinopec is left holding the bag for the West-to-East natural gas pipeline project.
This comes at a very bad time for China, and for the world. China's growth is starting to draw in energy resources from around the globe at a rate that is exacerbating both perceived shortages and the increasing expense of bringing those resources to market. Given that China is still fairly early in its curve of energy usage per-capita, that demand will continue to grow. The country is trying to wean itself off of its huge dependence on coal (the country burns nearly a ton of coal per person per year) and imports of petroleum, and natural gas would help meet the growing demand coming from industry and housing.
In short, anything that slows China's move toward dependence on cleaner fuels will simply increase the damage to its environment, and anything that raises China's dependence on energy imports will drive inflation in China, will hurt the country's competitiveness globally, and threatens an oil shock that will slow growth in many of China's key markets.
Bleeding the Foreigners Doesn't Look So Clever Anymore, Does It?
This is by no means a condemnation of Shell and Unocal - they did what they had to do, and they should be applauded for making smart decisions. Rather, this should be a warning to China - unless the government and industry in China suppress the desire to sop every possible penny from the foreigners, they will lose critical opportunities for genuine partnerships that will not only speed development, but will also avoid some unpleasant issues along the way.
Posted at 11:03 AM
Fri - July 16, 2004
Jiang, Taiwan, and the World
All this brouhaha about Taiwan - is it real, or
is it a crimson anchovy?
Joseph Kahn at the
New York
Times makes a good case
to suggest that Jiang Zemin remains firmly in control of security policy in
China. Not terribly surprising given Jiang's role as chairman of the Central
Military Commission
(junwei).
Some observers question how Jiang, virtually the creator and chief guardian of "the middle road" between conservatives and reformists in Zhongnanhai, could possibly have become a leading voice in government for "the slow road" to reform. There are a range of possible explanations, but the most likely is that he has used his new position to solidify his credentials as a hawk and conservative so that Hu Jintao could afford to play the reformist card. Not exactly "good cop/bad cop," more like "black cat/white cat."
What continues to cook my noodle is exactly how concerned junwei remains about Taiwan. The more one looks into the issue of Taiwan and its place in the military doctrine of China, the more one begins to realize that this is likely the reddest of red herrings. This is not to suggest that the possibility of Taiwan going it's own way doesn't concern China's leaders greatly. Rather, that Taiwan is a convenient target on which China could appear to focus its attentions, thus making the world assume that China is focusing its attentions on Taiwan. Clearly, the PLA has to be worried about a broad range of security issues, of which Taiwan is just one. In the land of Sun Tzu, the birthplace the art of strategic distraction, how far could this be from the truth? Regardless, if I were Chen Shui-bian, I would studiously avoid believing my own rhetoric and cool it a bit. The last thing this region needs right now is a tinpot politician with delusions of greatness ready to sacrifice peace in some grand, futile, and horribly costly gesture.
Potential Chinese Geopolitical Security Concerns:
1. A rogue North Korea (not just because of what Kim could do, but because of an expanded U.S. presence in the region.)
2. A re-armed Japan driven by neo-Keynsian thinking ("tired of building bridges nobody uses and roads to nowhere? Hey! I've got it! Let's rebuild our military! Banzai!")
3. An unstable Russia
4. The growing influence of would-be muslim theocrats in Central Asia
5. Growing American "adventurism" in Southwest Asia
6. A fluid leadership situation in Pakistan leading to instability in the Subcontinent.
Some observers question how Jiang, virtually the creator and chief guardian of "the middle road" between conservatives and reformists in Zhongnanhai, could possibly have become a leading voice in government for "the slow road" to reform. There are a range of possible explanations, but the most likely is that he has used his new position to solidify his credentials as a hawk and conservative so that Hu Jintao could afford to play the reformist card. Not exactly "good cop/bad cop," more like "black cat/white cat."
What continues to cook my noodle is exactly how concerned junwei remains about Taiwan. The more one looks into the issue of Taiwan and its place in the military doctrine of China, the more one begins to realize that this is likely the reddest of red herrings. This is not to suggest that the possibility of Taiwan going it's own way doesn't concern China's leaders greatly. Rather, that Taiwan is a convenient target on which China could appear to focus its attentions, thus making the world assume that China is focusing its attentions on Taiwan. Clearly, the PLA has to be worried about a broad range of security issues, of which Taiwan is just one. In the land of Sun Tzu, the birthplace the art of strategic distraction, how far could this be from the truth? Regardless, if I were Chen Shui-bian, I would studiously avoid believing my own rhetoric and cool it a bit. The last thing this region needs right now is a tinpot politician with delusions of greatness ready to sacrifice peace in some grand, futile, and horribly costly gesture.
Potential Chinese Geopolitical Security Concerns:
1. A rogue North Korea (not just because of what Kim could do, but because of an expanded U.S. presence in the region.)
2. A re-armed Japan driven by neo-Keynsian thinking ("tired of building bridges nobody uses and roads to nowhere? Hey! I've got it! Let's rebuild our military! Banzai!")
3. An unstable Russia
4. The growing influence of would-be muslim theocrats in Central Asia
5. Growing American "adventurism" in Southwest Asia
6. A fluid leadership situation in Pakistan leading to instability in the Subcontinent.
Posted at 05:01 PM
Tue - July 13, 2004
China and the Pentagon's New Map
Tom Barnett's thinking is beginning to gain
credibility in Chinese circles. And that's a good thing.
U.S. security policy thought-leader Thomas P.M.
Barnett's work The
Pentagon's New Map has been reviewed
by the Nanfang Daily. There is apparently a growing school of thought within the
Chinese military that sees an opportunity to adapt Barnett's worldview as valid
and to integrate it with Chinese defense policy and doctrine, and vice versa.
That's a heartening thought.
It would, however, be a fundamental break from the neo-Maoist thinking that has continued to dominate the nation's approach to defense. A summary of a 1998 speech by PLA General Chi Haotian summarizes Chinese defense doctrine nicely.
Clearly thinking in that monster of a building next to the PLA Museum on Fuxingmenwai needs to change as much as it needs to change in that other monster building on the Virginia side of the Potomac. Chinese defense thinking and doctrine is no longer relevant to a country that is actively engaged with - and interdependent with - a multipolar world. Defense policy needs to be more focused on engaging threats creatively before they become threats than on building a modern wall against the outside world.
It would, however, be a fundamental break from the neo-Maoist thinking that has continued to dominate the nation's approach to defense. A summary of a 1998 speech by PLA General Chi Haotian summarizes Chinese defense doctrine nicely.
Clearly thinking in that monster of a building next to the PLA Museum on Fuxingmenwai needs to change as much as it needs to change in that other monster building on the Virginia side of the Potomac. Chinese defense thinking and doctrine is no longer relevant to a country that is actively engaged with - and interdependent with - a multipolar world. Defense policy needs to be more focused on engaging threats creatively before they become threats than on building a modern wall against the outside world.
Posted at 12:10 PM
Sat - July 10, 2004
Shrimp Joins Steel as a Sino-U.S. Irritant
One week after the U.S. gets all steamed about
the revocation of Pfizer's Viagra patent in China, sending China's critics into
a media tizzy, the United States government masterfully demonstrates its
possession of the free-trade moral high ground by slapping 100% duties on
Chinese shrimp, then turning around and passing that money directly to American
shrimpin' boat captains (thanks to the Byrd
Amendment, which the U.S. has been ordered by the WTO
to revoke and which even
Forbes
excoriated on its passage) This largesse for
America's fishermen comes on top of state subsidies they receive. BusinessWeek
suggests that this will raise the cost of shrimp to the American consumer by
44%.
Notwithstanding whatever case there may be to offset hardships felt by U.S. fisherman and China's fairly mild initial reaction , the move is the latest in a series of rulings likely to complicate the job for U.S. trade negotiators seeking to protect a broad range of industries by opening the door for trade in China, and will likely raise the tit-for-tat battle for mutual market access with the PRC.
While the case for an industrial policy is still weak in the U.S. (given that to many Americans such an approach would reek of favoritism, which is ostensibly un-American,) the U.S. is going to have to begin making unpleasant choices. A world of free trade does not permit a nation to demand open access for some of its industries and protect others. Somewhere, somehow, something is going to have to give, whether it is textiles, cotton, steel -- or shrimp -- in the name of access for automobiles, aircraft, high-technology, and a host of other industries.
Interesting reading on this is Robert Lawrence's seminal debunking of the hollow-America myth in his 1984 work Can America Compete . I'm not normally a fan of Brookings Institute authors, but this little gem is a rare and worthy exception, and Lawrence (currently a senior faculty at the Center for Business and Government at Harvard's Kennedy School) defies the liberal bents of his institutional affiliations as one of academe's leading free trade advocates. He quite nearly makes a convincing case for an industrial policy, and this was at a time when there weren't very many major U.S. industries to favor -- in 1984, IT was a tiny fraction of its current size and Microsoft wasn't even a public company.
Notwithstanding whatever case there may be to offset hardships felt by U.S. fisherman and China's fairly mild initial reaction , the move is the latest in a series of rulings likely to complicate the job for U.S. trade negotiators seeking to protect a broad range of industries by opening the door for trade in China, and will likely raise the tit-for-tat battle for mutual market access with the PRC.
While the case for an industrial policy is still weak in the U.S. (given that to many Americans such an approach would reek of favoritism, which is ostensibly un-American,) the U.S. is going to have to begin making unpleasant choices. A world of free trade does not permit a nation to demand open access for some of its industries and protect others. Somewhere, somehow, something is going to have to give, whether it is textiles, cotton, steel -- or shrimp -- in the name of access for automobiles, aircraft, high-technology, and a host of other industries.
Interesting reading on this is Robert Lawrence's seminal debunking of the hollow-America myth in his 1984 work Can America Compete . I'm not normally a fan of Brookings Institute authors, but this little gem is a rare and worthy exception, and Lawrence (currently a senior faculty at the Center for Business and Government at Harvard's Kennedy School) defies the liberal bents of his institutional affiliations as one of academe's leading free trade advocates. He quite nearly makes a convincing case for an industrial policy, and this was at a time when there weren't very many major U.S. industries to favor -- in 1984, IT was a tiny fraction of its current size and Microsoft wasn't even a public company.
Posted at 10:31 PM
Tue - July 6, 2004
The Best Thing to Come Out of the Pentagon Since John Boyd
His new book The Pentagon's New Map: War and
Peace in the Twenty-First Century has been out a month and is already a
must-read inside the beltway and by security analysts around the
world.
It is a delight to know that somebody who lives
within commuting distance of the Capital of the Free World and the Headquarters
of the Global War on Terrorism has both an compelling framework through which to
view the world and the manhood to pack it all into a compelling format and
challenge the prevailing wisdom at the Pentagon. People like Thomas
P.M. Barnett come along once in a generation, and whether you agree
totally with his viewpoints or not, I can guarantee you his thinking will be
required material for any serious student of international affairs within
months. His new book The Pentagon's New Map: War and Peace in the Twenty-First
Century has been out a month and is already a must-read inside the
beltway and by security analysts around the world. Read his article from
Esquire
from last year to get a taste, and a more
recent open letter to George Bush from the same
publication.
Brains and balls. The world, and indeed America, could use more people like Thomas Barnett.
Brains and balls. The world, and indeed America, could use more people like Thomas Barnett.
Posted at 04:43 PM
Sun - March 7, 2004
Political Correctness Be Damned: Ten Things You Aren't Supposed to Say
About China
Ten truisms about China that usually upset my
fellow Americans...and others.
1. China is not a democracy because the Chinese
don't want one. Not yet.
2. The human
rights situation in China is steadily
improving.
3. The Falun Gong is a
genuinely dangerous fringe group and should be controlled, even
supressed.
4. Tibet is better off a part
of China than independent.
5. The
Communist Party is China's best shot at this
time.
6. Most foreign companies who fail
in China do so more from incompetence than anything
else.
7. The Sino-Foreign joint venture in
its classical form is the worst business structure imaginable from a management
point of view. Just because some very bright people have made it work does not
make this point less valid.
8. What we
think China's real problems are, and what they think they are, are different.
Neither side is completely right.
9. IPR
issues in China cannot be solved by legal processes alone, or even as a primary
focus of effort.
10. Localization is a
good thing as long as you dont take it too far. There are some things foreigners
still do better than locals.
Posted at 03:07 PM
Political Correctness Be Damned: Ten Things You Aren't Supposed to Say About China
Ten truisms about China that usually upset my
fellow Americans...and others.
1. China is not a democracy because the Chinese
don't want one. Not yet.
2. The human rights situation in China is steadily improving.
3. The Falun Gong is a genuinely dangerous fringe group and should be controlled, even supressed.
4. Tibet is better off a part of China than independent.
5. The Communist Party is China's best shot at this time.
6. Most foreign companies who fail in China do so more from incompetence than anything else.
7. The Sino-Foreign joint venture in its classical form is the worst business structure imaginable from a management point of view. Just because some very bright people have made it work does not make this point less valid.
8. What we think China's real problems are, and what they think they are, are different. Neither side is completely right.
9. IPR issues in China cannot be solved by legal processes alone, or even as a primary focus of effort.
10. Localization is a good thing as long as you dont take it too far. There are some things foreigners still do better than locals.
2. The human rights situation in China is steadily improving.
3. The Falun Gong is a genuinely dangerous fringe group and should be controlled, even supressed.
4. Tibet is better off a part of China than independent.
5. The Communist Party is China's best shot at this time.
6. Most foreign companies who fail in China do so more from incompetence than anything else.
7. The Sino-Foreign joint venture in its classical form is the worst business structure imaginable from a management point of view. Just because some very bright people have made it work does not make this point less valid.
8. What we think China's real problems are, and what they think they are, are different. Neither side is completely right.
9. IPR issues in China cannot be solved by legal processes alone, or even as a primary focus of effort.
10. Localization is a good thing as long as you dont take it too far. There are some things foreigners still do better than locals.
Posted at 03:07 PM
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Published On: Mar 16, 2005 03:54 PM
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