Update your bookmarks and your RSS readers, folks.

We've done it.

Peking Review, and it's sister blog Silicon Hutong - soon to be joined by EcoHutong - are now hosted at typepad.

• Peking Review is now at http://siliconhutong.typepad.com/peking_review/, WITH all of the archived posts (there weren't that many, embarassingly). Outside of China, http://www.pekingreview.com works, too.

• Silicon Hutong is at http://siliconhutong.typepad.com/silicon_hutong/. Outside of China, http://www.siliconhutong.com will do.

• EcoHutong is at http://siliconhutong.typepad.com/ecohutong/. Outside of China, http://www.ecohutong.com does fine.

Sorry for any inconvenience. Really, the new sites will be MUCH easier on the eyes, if nothing else, and hopefully more convenient in a lot of ways, including:

• Better Permalinks

• More information

• Easier trackbacks

• Better comment features.

Thanks again. Give me a shout if you encounter any problems. 

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." If you understand that the short old frog was not talking about the low-crawl but about logistics. He would have appreciated the more modern adage that "amateurs talk about tactics, rank amateurs about grand strategy, but professionals talk about logistics."

If you want to understand the importance of the "L" word to doing business in Asia generally and China specifically, go spend some time reading Shawn Beilfuss' Asia Logistics Wrap.

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.

Read Shawn, what he's reading, and be convinced.  

Stephen DeAngelis is an extraordinarily bright guy, working as he does with some very interesting clients to help figure out how to use well thought-out, well-packaged economic development as the principal weapon in the war on terrorism. Stephen is dedicated to making the world (and, more important, our policymakers) understand that the only way to end the river of homicide bombers is to give them all a better future to live for.

His blog posts read like lectures - not in the sense of them being esoteric and pedantic, but in terms of being so filled with insight that you want kill all the lights in the room, close the blinds, and turn off your iTunes just so DeAngelis' words go straight into your cortex. DeAngelis one more proof of the value of reading some of the better blogs out there.

Stephen has inspired me to create a list of what I will call "Graduate Level Bloggers," people who write blogs that are themselves like master classes. Read them and forget about having to go back and get your degree from Hopkins. You'll get more staying in your current job and reading these guys - and what they read.

Ind-ja!

Stephen has written an excellent post comparing and contrasting articles from recent editions of The Economist (subscription required) and BusinessWeek on the challenges India faces competing with it's trans-Himalayan neighbor and rival.

Despite a lot of sunshine that pundits have been pumping out about the sub-continent lately, the ugly truth is that India's leaders are having a hard time mustering the political cojones required to make the unpopular trade-offs that will buy India her future. Now, to an extent, I can't criticize, especially when America's leaders - in both the White House and on Capitol Hill, similarly lack the testicular fortitude to risk their own political careers in the name of vision.

America, however, does not face the same kind of challenges that India does.

We should all be rooting for India. If she succeeds in addressing the challenges that face her, it would give deep credibility to the argument that democracy can bring underdeveloped countries - and their peoples - out of destitution and into global-level prosperity.

If she fails, however, or becomes a laggard in a dynamic region, she will only give more credibility to those who say that only authoritarian regimes can assemble the necessary preconditions of national wealth.  

PWC's report on investing in the retail industry in China is, as you would expect from a free 12-page report, a bit of a 50,000 foot overview of the industry, and as an introduction to the business for someone who knows little about retail in the PRC I suppose it's adequate. It focuses on the regulatory and structural nature of retail, both of which are critical.

But an overemphasis on scale as a determinant of success over other factors suggests a very narrow analytical framework. Yes, retail in China is still in its early stages of modernization, but there is more to success than the number of stores or square feet you are managing. There are a range of factors that could produce success that the report all but ignores.

For example:

• Chinese retailers are not merchandisers, they are real estate companies. Simply introducing strong merchandising skills, from product selection and price balance to display and promotion, can give a store a leg up on its competition. Simply having relationships with suppliers is not enough.

• While the country is moving in the direction of massive chains designed to serve broad swaths of the population, there are also emerging niche opportunities to service different parts of the market.

• The experience of buying stuff in China still, well, sucks, and is largely undifferentiated from place to place. Simply having more bigger stores that feel like, say, Jingkelong, is not going to prove an advantage in the long term. Chinese are looking for a better experience than they have been getting for the last several decades.

So use the PWC report as a starting point, but move quickly to more in-depth analysis.
 

The PriceWaterhouse Coopers (PWC) Technology Center has been doing a series of reports on the semiconductor industry in China since 2004 and, as an apparent part of a bigger thought-leadership program has been releasing a chunk of their research on the industry to the world for free.

The most recent update, covering 2006, provides an excellent overview of the condition of the industry, and a first-level review of some of the drivers of the business. The focus is quantitative, and while the industry could use some good quantitative analysis, there are enough critical qualitative factors around the industry in China to merit an entirely separate publication. As such, the report is not a comprehensive look at the industry and its prospects.

Nonetheless, I find it invaluable, and highly recommend it.
 

One of the leading grand strategists of the day - and a lifelong Democrat - is as disgusted as I am by the kind of character assassination in US politics used by the extremists of both parties.

Read Barnett's post and the WaPo article that got it going.

While this particularly skewers the far left, the far right are no less blameless. What is worse, the lunatic fringe vocal extremes of both parties look determined to hijack their respective primaries in 2008. Why else would McCain, an avoded centrist, be pandering to the Republican Party's evangelical/neocon/big-business right, and Barack Obama be doing same with the Democratic atheist/hyperliberal/anti-business left?

What we need more of is loud voices from the strong center, people who spoke not just for the deepest of blue and the most crimson of red, but the vast, purplish middle, and people to represent us. I'd love to see a race between two opposing viewpoints of how to improve life for the average Janes and Joes, not just the loudmouthed special interests on both sides.

The only thing we have to fear in 2007 is the specter of extremism that haunts both parties, and that threatens to throw us into an election fought by two extremists.

ATTENTION ALL MODERATES: Get out there and register to vote! The strong middle is all that stands between America and more infantile politics that will get nothing done.

And remember - it's not just about nominating someone "electable." It's about nominating someone who will have the chops to actually develop and drive an agenda with the support of a majority of our elected solons on Capitol Hill.  

This is one of those books that I put on my Amazon wish list something like five years ago, ordered about two years ago, and finally got a chance to get through it thanks to some abnormally regular travel over the last couple of months. Picking up a book about the world of finance is not something I normally do, if for no other reason than I buy books to learn about stuff rather than as a homeopathic cure for insomnia.

But author Peter Bernstein, a lifelong "quant" with superb credentials, rises above both his profession and the subject matter with the grace of a historian-storyteller, and makes the history of risk and risk management so powerfully engaging I found myself searching online for the back stories of some of his characters. In fact, at one point, I told Gizmo that as a result of the book, for the first time in my life I was interested in mathematics beyond simple spreadsheet functions.

Against the Gods is that good, and a command of the meaning of "risk" is probably no more important anywhere in the world than right here in China, where we live with uncertainty every day, regardless of your profession. Reading through the book and occasionally staring out my hotel room window at Mt. Fuji in the distance late in December, I realized that in China we are so accustomed to doing business amid great uncertainty that we come to take it for granted.

Which, I guess, is fine if you're simply turning up the "squelch" knob on your mental radio to drown out the ongoing static and to keep yourself sane. Unfortunately, if you keep drowning out that static you wind up numbed to how bloody risky it is to do business of any kind here. That's not good, especially if you're putting your money into China, and arguably even more so if you've been charged to watch somebody else's. Read Tim Clissold's Mr. China, and you get what I mean.

Meantime, I've developed a taste for books about the history of the finance industry, and my order to Amazon last night included a couple of titles along those lines.  

I always worry about technology when I read about it in BusinessWeek, because I feel like this is one of those signals that a given innovation has hit its apogee on the hype meter.

In this case, however, I give the two authors credit for isolating four potential technologies that look set to significantly extend the number of things for which you can use a mobile phone. Well worth a read.

Dumping all of these cool features into a phone might sound like a good business plan to The Boys in Espoo, but frankly, I'd be happy if the big manufacturers could come up with user interfaces that actually made the features already on the phones more usable.  

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...
 

A fascinating article suggesting that the government is allowing - if not encouraging - the growth of a student-based environmental activist movement in China.

It makes sense for two reasons. First, it's a relatively safe direction in which to channel the political discontent of China's students. Second, it becomes a boogie-man the government can use to help bring to heel local officials whom, for reasons of self interest, refuse to strictly enforce environmental regulations.

All of which sounds good, and which promises to be interesting to watch. Best case scenario would be for these kids to do some real good in raising awareness, saving a few species, serving as hard-to-corrupt watchdogs, and perhaps even solving a serious problem or two. China could use it.

But political movements, no matter how benign their roots, can take unpredictable courses. I can't help but be concerned that eventually a lot of these kids are either going to a) wind up in jail, b) wind up as tools of the government, c) wind up as pawns in a political struggle, or d) become a force of nationalism.

I hope not. I really hope this movement gets China thinking about cleaning up its environment the way the environmental activists in the U.S. managed to do during the late 1960s and the 1970s. 

In these heady days of high-speed telecommunications development in China, all eyes are looking forward.

But sometimes it's worth taking a look back.

China Dawn is a chronicle of the early days of the Internet and broadband boom in China. While there are similarities with the Boom/Bust in the west, there are distinct differences, and David Scheff covers the early days with the wide-eyed, breathless hyperbole that is almost endearing.

A friend and San Francisco area neighbor of youthful venture capitalist Bo Feng, Sheff became a fly-on-the-wall for the emergence and growth of companies like AsiaInfo, Sina.com, and China Netcom (the latter in its original incarnation) and the creation of Chengwei, a venture fund focused on China tech startups and run by Feng and partner Eric Li.

Sheff takes us on a journey that has its cast of characters bouncing back and forth between China and California so much that my biggest problem in reading this book is sympathetic jet lag. What is most striking about the book are three issues that Scheff overlooks, but that come out in the narrative.

First, it is a sad statement about China that people like Feng and Li had to live on two sides of the world to do get capital into Chinese startups. In a country with trillions of dollars in savings and hundreds of billions in foreign reserves, two guys who wanted to start a venture capital fund had to go to San Francisco, New York, New Haven, and points between to pull together a comparatively paltry $60 million. It should have been possible to tap global financial markets from Shanghai, but the minimal importance institutional investors attached to China and the PRC's lack of decent financial infrastructure made necessary a process that is maddening in its wastefulness of time and money and in the personal toll it took on investors.

Of course, less than a decade later, it's all changed - there is now so much money coming into China that your average entrepreneur trips over it.

Second, one gets the feeling that China's powers-that-be treated Edward Tian a bit shoddily. That someone like Tian with some pretty obvious business and management skills was largely sidelined when China Telecom and China Netcom were restructured confirm power, not money, drive the decisions around China's telecom sector.

Caveat investor.

Finally, raising money on China's infobahn was never quite the walkover it was in the States. Bo, Li, and many of the entrepreneurs they backed (including Tian in his AsiaInfo days) didn't just write business plans and wait for the dumb foreigners to dump cash on them. Most of the characters we meet in the course of the book were living on almost no sleep, no family life, and jetlag, all while silently praying that Wu Jichuan didn't do something to bring the whole show down on their heads. Plenty of dumb business got funded, but you can't help but feel Web 1.0 in China was far more the product of sweat and blood than its American counterpart.

The unique perspective of the fly-on-the wall that Sheff brings to this story ensures that many other important stories are not told. There was far more to the growth in the Internet in China than what Bo Feng and Eric Li dealt with. But for this book, that's almost beside the point. His point of view may deny Sheff journalistic detachment, but it provides us with the closest thing to an "I was there" viewpoint available in the English language today.  

Robert Holleyman, president and CEO of the Business Software Alliance, appears to be trying to give his Global IPR Stormtroopers a kinder, gentler face by doing a survey about how Chinese people feel about China. The survey chose to go deep with a group of influential respondents rather than a wide survey of the nation's sentiment (a wise approach - YOU try doing a statistically significant sampling of China's heterogeneous population.)

I give Holleyman an "A" for effort - I know what surveys like this cost (anywhere from $500 to $1,000 per respondent, if done well) and it could not have been easy for Holleyman to talk his members out of that kind of wampum when all they want the BSA to do is work for stronger IPR regulation and vigorous rights enforcement.

But based on what the BSA is telling us, I have to give him a "B-" for insight and a "D" for actionable intelligence.

What did the BSA find?

> Chinese elites feel that the rest of the world misunderstands China. This is only a story to people who do not deal with China regularly, and I think most of us would fess up to being limited in our understanding of the Middle Kingdom - even those of us who live and work here. What would have been a far more interesting issue to probe is the extent to which these elites understand (or misunderstand) the rest of the world.

> China sees India as more of a competitor than the U.S. This needs to be probed - do they feel this way because they see the U.S. and Japan as being so far out ahead - or because they see the U.S. and Japan as declining in their global economic and political power? Or because they have a different perception of competition for inputs and markets?

> Chinese have a "sober appreciation" of the challenges that face them. That's good. The bigger question is "what are they doing about those challenges, and what do they see are the barriers keeping them from addressing them?"

All interesting, none of it earth-shattering, and none of it likely to get the BSA pegged as a thought leader.

Now, I haven't seen the report, only Holleyman's op-ed on CNET. I checked the BSA website, and apparently the report is not public. That's a shame, because I have to believe there is more to all of this than what the BSA has chosen to tell us. But I also suspect the juicy bits are being held back for the members. I also suspect that one of the real motivations for this survey was to have a pretext to engage opinion leaders in China on a topic that was less confrontational than the BSA's normal desk-banging focus on getting China to enforce its IPR laws.

All pretty disappointing. Whatever BSA garnered for its members in this process, it has done little to advance the public debate about China's rise and shed light on issues critical to those of us doing business here. 

When I was a kid, a large consumer products company ran a TV ad campaign for it's line of detergents, likening the effect of the product to a white tornado, a great whirlwind that would sweep in and clean anything, erasing even the most embedded filth. Perhaps it is this kind of marketing that contributes to an apparent belief among foreigners, particularly Americans, that adding something clean to something filthy makes everything clean.

I call this belief The Great White Tornado Theory.

The Great White Tornado Theory is used most often in China by advocates of foreign participation in China's financial industry. Listening to the tales of embezzlement, corruption, and malfeasance among China's banks, securities brokerages, and other sectors, executives of international firms shake their heads, tut-tut sadly, and remind media, policymakers, and each other that if ethically managed (read "foreign") companies were allowed to fully participate in the market, by competitive force and dint of example they would help eliminate unsavory practices.

It's an attractive theory, and as an advocate of greater competitiveness in China, I want to agree. A lot of my friends do, as do many people whom I respect deeply.

But both the theory and those who expound it have some credibility problems with Chinese audiences and impartial observers.


What're We Doing Here?

Let's say for a moment China were to allow open foreign participation in, say, the securities brokerage sector. Once we get past the rhetoric and the high-minded ideals, foreign firms are not coming to China to clean the place up - they're coming to make money. After making investments in staff, high-priced offices, and years of lobbying, headquarters in New York, London, or Tokyo are not going to be telling their China teams "okay, guys, go out there and help build an ethical market." No, the word from HQ is going to be "get out there and start making us a mint, or we'll fire you and find somebody who will."

The pressure to perform will be intense, and the competition - intensified by the arrival of foreigners - will make performing extremely difficult. The pressure to engage in common but unsavory practices to get business and drive results will be intense. In such a cauldron, the question of making the ethical choice and the profitable one will not come down to the name on the door or the pedigree of the firm - it will come down to the character of the individuals making those choices, and to how willing firms will be to sacrifice profits for ethics.

If the situation in other industries and places is anything to go by, the prognosis is not good.


Doing Like the Romans

The experience of other industries in China suggests the path that foreign securities firms might take.

There are those who believe that only a very limited number of foreign firms engage in unethical practices in China, and there are others who have confided with me that they believe it impossible to make a profit in China without bending your morality a bit - the system is simply rigged against that. In reality, China can be extremely hard on ethical corporate practices. As Peter Goodman wrote in The Washington Post last August:

"American business leaders often describe their China operations idealistically, suggesting that their presence here will compel Chinese competitors to adopt more ethical business practices. But in one key regard, the dynamic operates in reverse, with U.S. companies adopting Chinese-style tactics to secure sales, as they compete in a market in which Communist Party officials routinely control businesses, and purchasing agents consider kickbacks part of their salary.

Managers of U.S. companies say they are caught in a dilemna: They are answerable to shareholders on Wall Street and home offices that demand a piece of an increasingly lucrative Chinese market. Yet they are also held to account at home by the Department of Justice and the SEC."

In short, when in Rome, companies are not acting like the Greeks. Foreign firms in the telecommunications, medical equipment, airport security, software, and computer hardware industries have all been accused of, have admitted, and/or have been fined for practices that are not only unethical but are indeed illegal in the U.S.

For the finance industry, is there anything to suggest that the record would be different?


The Record Elsewhere

A scan over the checkered history of the financial industries in the U.S. over the past two decades does nothing to suggest that there is something about an international institution that inhibits impropriety. The savings-and-loan scandal from the late 1980s, the insider-trading convictions of people like Ivan Boesky, the tainting of research by investment bankers, the growing options pricing scandal, boiler rooms, pump-and-dump schemes...all evidence drawn from the front pages of America's largest newspapers, all representing ethical lapses in finance, and all taking place under the aegis of the toughest regulatory system in the world.

Taking the show on the road hasn't helped. Failures in ethics and systemic controls at places like Morgan Stanley Japan Securities and Goldman Sachs Japan make clear that financial firms are not above rolling around in the mud with the locals like Mitsubishi Securities and the Murakami Fund in the name of profits. Indeed, if Japan is any model, one could argue that it is not foreigners who will clean up a market, but local regulators with sufficient political air cover to do the right thing.

So again, I ask - if foreign financial firms can find themselves in hot water at home for not doing the right thing, what evidence is there that they will have a cleansing effect on China.


Right Impulse. Wrong Reason.

Foreign participation in China's financial sectors will be a good thing for a lot of reasons - it will increase competition, diversify services, and force everyone to work harder for the customer's business. The institutional capital and investment mentality the foreigners bring with them should do much to stabilize the punter-driven technically-based markets, and possibly even bring some accountability to bear on listed companies.

Creating a cleaner market, however, is not one of those reasons.

The government knows all of this - there is a growing understanding among regulators that a well managed market requires an independent third-party overseer with prosecutorial powers in addition to whatever self-regulation can be put into place. (That's not radical, anti-free market thinking, by the way - that's the Securities Exchange Act of 1934.)

For that reason, anyone who suggests to a government official in China that foreign participation will have a cleansing effect on China's financial industry is merely flushing his own credibility down the toilet. Drop the argument already - it weakens a case that is strong enough on its own merits.

Nota Bene

The fact that The Great White Tornado Theory is specious and a lousy argument for open financial markets does not release financial institutions from the implicit obligation to do well and do good. Do not come to Rome and do as the Romans - come to Beijing with the full cognizance that the ability to know right from wrong - and to act on that knowledge - is a long-term competitive advantage.

Chinese companies and individuals are not going to be comfortable with placing their financial futures in the hands of institutions who engage in nefarious practices. All a foreign firm can offer today that a Chinese firm cannot is trust, the comfort that a customer is putting his faith in a professional whose ethics are above question. Lose that, and the Chinese financial industry will be a rat race and the foreign firms will be the first targets when the regulators grow new teeth.  

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. 

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.