US investment bank Goldman Sachs recently revised its forecast of inflation in China from 4.5% to 6.8%. They further predicted that inflation could actually hit double digits in the coming months. This comes on the heels of China's Central Bank predicting the same, citing increased prices of food, which makes up 1/3 of China's CPI as the root cause.
This couldn't come at a worse time as Chinese stock market analysts are predicting a burst in China's stock market bubble. Investors are cashing in on the government's perceived unwillingness to step in to control the market before the 2008 Olympics. Many expect the government to begin regulating the market immediately after the Olympics and are planning to cash out just before that happens. A mass exodus from the market would cause a correspondingly large correction. Further, in a market without rules or regulatory agencies to speak of, that correction could have a devastating affect on Chinese businesses and the investments of those that will not be able to find buyers for their shares.
It will be interesting to watch this play out. As the US and Chinese economies have become increasingly intertwined, the domestic economies of each country are having a larger and larger affect on the global economy. The US Federal Reserve is desperately trying to fight off a recession in the wake of the "Mortgage Meltdown". China has played a major role in keeping the US economy moving by pegging the Yuan to the Dollar and financing the US national debt by buying US Dollars. An economic slowdown in China could have a dramatic effect to the US economy, which in turn would amplify the problems China is facing.
Harsh Winter in China
During a recent informational interview, I had the opportunity to discuss the impact of this winter in China with a local Chinese business man. We haven't heard much about it here in the US, but the severe weather in China has had a devastating impact on the middle kingdom. Farmers are reporting massive crop losses, and according to this video, the extreme cold is having an enormous impact on the Chinese power grid.
Chinese Market Information
Here's an interesting market research PowerPoint prepared by Ogilvy. It's got some very compelling information about the market in China.
Microsoft’s Purchase of Yahoo: An Effort to Remain Relevant
My takeaway from business strategy class was that even the best planned mergers and acquisitions usually fail. Redundancy or resources, overlap of product, and personnel/culture clashes are usually key to the failure of any M&A, and this deal has an abundance of each issue. I think Microsoft’s bid to purchase Yahoo! is not well planned at all, and is almost guaranteed to fail, but not for the same reasons many other critics think.
This deal signals desperation in the management of both Yahoo and Microsoft. Yahoo has been steadily losing market share to rival Google. And with continued innovative services and the G-phone looming in the future, the death rattle of Yahoo is only a matter of time. Microsoft is probably the only company with the assets to bail Yahoo out. But just because you can do something doesn’t necessarily mean you should.
From the Microsoft perspective, Yahoo’s misfortune is a gift from heaven. Microsoft management has apparently been looking at the global marketplace through the rose-colored glasses of its own marketing machine and completely lost track of reality. Focusing heavily on its software suite, Microsoft has missed the continued evolution of the internet and the convergence of technologies it is creating. Microsoft products are not stable, are not reliable, and consume massive amounts or processing. Add to this exorbitant licensing fees and a licensing strategy that has been compared to “entrapment” by some foreign courts (Taiwan, for example), consumers have been searching for alternative products.
Open source software has been a popular option for much of the world outside the US. But Google became a threat to Microsoft’s “cash cow” of software sales when it began to offer a free online alternative to some of Microsoft’s most popular products: Outlook, Word, Excel, etc.
The truth is, Microsoft got lazy and now it is struggling to remain relevant. Microsoft did not pay attention to its online business (MSN), allowing Google to run circles around it. Dominating the online world and understanding (or spearheading) the move to “Web 2.0″ Google is now threatening Microsoft in a way that they can’t really respond to. This isn’t a battle over price… it’s a battle over the hearts and minds of the consumers. Microsoft is grasping at straws in its bid to take over Yahoo, trying to erode Google’s revenue base. I believe they are too late. At this point, Microsoft has so much more to lose than Google. Going toe-to-toe, Microsoft will at best get hurt more than it can hurt Google.
This deal signals desperation in the management of both Yahoo and Microsoft. Yahoo has been steadily losing market share to rival Google. And with continued innovative services and the G-phone looming in the future, the death rattle of Yahoo is only a matter of time. Microsoft is probably the only company with the assets to bail Yahoo out. But just because you can do something doesn’t necessarily mean you should.
From the Microsoft perspective, Yahoo’s misfortune is a gift from heaven. Microsoft management has apparently been looking at the global marketplace through the rose-colored glasses of its own marketing machine and completely lost track of reality. Focusing heavily on its software suite, Microsoft has missed the continued evolution of the internet and the convergence of technologies it is creating. Microsoft products are not stable, are not reliable, and consume massive amounts or processing. Add to this exorbitant licensing fees and a licensing strategy that has been compared to “entrapment” by some foreign courts (Taiwan, for example), consumers have been searching for alternative products.
Open source software has been a popular option for much of the world outside the US. But Google became a threat to Microsoft’s “cash cow” of software sales when it began to offer a free online alternative to some of Microsoft’s most popular products: Outlook, Word, Excel, etc.
The truth is, Microsoft got lazy and now it is struggling to remain relevant. Microsoft did not pay attention to its online business (MSN), allowing Google to run circles around it. Dominating the online world and understanding (or spearheading) the move to “Web 2.0″ Google is now threatening Microsoft in a way that they can’t really respond to. This isn’t a battle over price… it’s a battle over the hearts and minds of the consumers. Microsoft is grasping at straws in its bid to take over Yahoo, trying to erode Google’s revenue base. I believe they are too late. At this point, Microsoft has so much more to lose than Google. Going toe-to-toe, Microsoft will at best get hurt more than it can hurt Google.
Differentiating Chinese Culture
I was reading the China Law Blog, and one of Dan Harris' articles caught my attention; "Chinese Cultural Awareness Simplified: Don't Be An Asshole". Mr. Harris makes a very good point in his post and brings up something I should certainly clarify on my own blog. After reading his blog, I completely agree with Mr. Harris while at the same time disagree with him at least in part.
The importance of culture in China really depends on whether the western firm is buying or selling in China. For businesses that intend to sell in China, culture is everything. From a marketing and business development perspective, understanding Chinese culture is imperative to gaining market share. I've thrown out examples of how Starbucks, Dell, etc. have gone into China without cultural understanding and have lost money in the process. China has a complex culture, and brands that embrace that culture will be embraced by consumers there. Firms that don't understand Chinese culture will certainly struggle.
For businesses that intend to source from China, the culture as described above is fairly meaningless. Chinese manufacturers are capitalists as well as realists. Perhaps making up for American cultural insensitivity, I found the Chinese to be very gracious to foreigners. They are more than willing to overlook poor manners or general ignorance of local customs and practices, especially if you are spending money there. However, there is a side to Chinese culture - "business culture" - that is extremely important to western firms wishing to source from China. This is purely a matter of semantics as Mr. Harris would consider this a matter of "Chinese business pitfalls" instead. Dr. Bill Conerly interviewed Dan Harris for his blog, businomics.com and Mr. Harris touched on some of these business issues.
In my humble opinion the pitfalls Mr. Harris describes during his interview (as well as other pitfalls I've seen) have a root cause in "business culture" (as opposed to general Chinese culture). I would argue that cases of corruption in China are also a matter of culture as 60 years of communist rule have made corruption a necessity for doing business. In fact, I think that lack of intellectual property protection in China and Taiwan are rooted in culture. Further, the Chinese legal system's tendency to favor Chinese in litigation is certainly based on culture and cultural prejudices. In fact, that's a regional phenomena as Japanese courts have the same tendencies.
I would argue that there are two "cultures" in China that must be studied. For businesses penetrating the Chinese market, what typically comes to mind when one thinks of "culture" is of utmost importance. This is an issue of marketing. For businesses sourcing in China, the "pitfalls" of doing business in China (the negative side of Chinese culture) are of far greater relevance, and these are issues best suited for an attorney specializing in international law and China.
The importance of culture in China really depends on whether the western firm is buying or selling in China. For businesses that intend to sell in China, culture is everything. From a marketing and business development perspective, understanding Chinese culture is imperative to gaining market share. I've thrown out examples of how Starbucks, Dell, etc. have gone into China without cultural understanding and have lost money in the process. China has a complex culture, and brands that embrace that culture will be embraced by consumers there. Firms that don't understand Chinese culture will certainly struggle.
For businesses that intend to source from China, the culture as described above is fairly meaningless. Chinese manufacturers are capitalists as well as realists. Perhaps making up for American cultural insensitivity, I found the Chinese to be very gracious to foreigners. They are more than willing to overlook poor manners or general ignorance of local customs and practices, especially if you are spending money there. However, there is a side to Chinese culture - "business culture" - that is extremely important to western firms wishing to source from China. This is purely a matter of semantics as Mr. Harris would consider this a matter of "Chinese business pitfalls" instead. Dr. Bill Conerly interviewed Dan Harris for his blog, businomics.com and Mr. Harris touched on some of these business issues.
In my humble opinion the pitfalls Mr. Harris describes during his interview (as well as other pitfalls I've seen) have a root cause in "business culture" (as opposed to general Chinese culture). I would argue that cases of corruption in China are also a matter of culture as 60 years of communist rule have made corruption a necessity for doing business. In fact, I think that lack of intellectual property protection in China and Taiwan are rooted in culture. Further, the Chinese legal system's tendency to favor Chinese in litigation is certainly based on culture and cultural prejudices. In fact, that's a regional phenomena as Japanese courts have the same tendencies.
I would argue that there are two "cultures" in China that must be studied. For businesses penetrating the Chinese market, what typically comes to mind when one thinks of "culture" is of utmost importance. This is an issue of marketing. For businesses sourcing in China, the "pitfalls" of doing business in China (the negative side of Chinese culture) are of far greater relevance, and these are issues best suited for an attorney specializing in international law and China.
The Results of Globalization
I ran across this video that really illustrates the results - and complexities - of globalization. It’s about 6 minutes long, but well worth the time to watch.
My Website is Up!
Well, mostly anyway. I'm still working on it, but let me know what you think: http://www.apdaniels.com
Branding the Dragon
I've written a few posts about how a lack of cultural competency has affected US firms trying to do business in China, but cultural mis-communication is a two-way street. This morning I had the opportunity to meet with Wayne Cozad, owner of Cube Management. During the course of our discussion the topic of culture as it relates to business came up. Mr. Cozad told me about lectures he conducted in China about branding, and how his Chinese audience audience just couldn't grasp the concept.
An example he used was a Chinese shoe manufacturer who can produce "Nike quality" shoes for $2/pair. She'd been trying to penetrate the US market, confident that Americans would see the value of her product. However, she could not find a US distributor that was interested. Mr. Cozad tried to explain to her the concept of branding and US consumers' perception of value based on price. However, as hard as he tried she just didn't get it.
Made in China
This conversation brought up an interesting point: the "Made in China" brand is a weak one. Both American and Chinese consumers tend to associate Chinese made goods as being cheaply made and of inferior quality. However, consider for a moment the high-quality brands that source from China. Brands like Think Pad (computers), Cummins (diesel engines), and Nike (sport shoes) have stellar reputations for quality, and all source at least part of their product lines in China. These brand identities override the lesser respected "China brand", earning customer respect and brand loyalty. Obviously Chinese made goods can be of superior quality. Perhaps we (Americans) are responsible for the the Chinese brand identity due to our historic focus on price over quality?
Re-branding China
I believe the next step in China's economic development (and the next big industry) in China will be the the re-branding of the "Made in China" brand. I spoke of this in a previous post about China's economic cycle. As the cost of labor continues to rise, Chinese exports will shift from price-based to quality-based. Haier (appliances) is ahead of the curve as they are already penetrating US markets with quality appliances. Japan made this same transition. Immediately after WWII, Japan flooded the US market with cheaply made goods in an effort to generate capital to rebuild its infrastructure, earning it a reputation as a source of low-quality manufacturing. Once the Japanese economy started to pick up, so did the quality. Today Japan is known for sophisticated, high-quality exports. Why would China be any different?
In order to successfully make this shift, China will have to re-brand itself as a source of quality goods. However, unlike post-WWII Japan, China has a severe shortage of managers and less experience in dealing directly with western markets and business models. Entrepreneurs in China poised to educated Chinese manufacturers about branding and western perceptions of quality based on pricing will be instrumental in facilitating this shift, and be rewarded dearly for their efforts.
An example he used was a Chinese shoe manufacturer who can produce "Nike quality" shoes for $2/pair. She'd been trying to penetrate the US market, confident that Americans would see the value of her product. However, she could not find a US distributor that was interested. Mr. Cozad tried to explain to her the concept of branding and US consumers' perception of value based on price. However, as hard as he tried she just didn't get it.
Made in China
This conversation brought up an interesting point: the "Made in China" brand is a weak one. Both American and Chinese consumers tend to associate Chinese made goods as being cheaply made and of inferior quality. However, consider for a moment the high-quality brands that source from China. Brands like Think Pad (computers), Cummins (diesel engines), and Nike (sport shoes) have stellar reputations for quality, and all source at least part of their product lines in China. These brand identities override the lesser respected "China brand", earning customer respect and brand loyalty. Obviously Chinese made goods can be of superior quality. Perhaps we (Americans) are responsible for the the Chinese brand identity due to our historic focus on price over quality?
Re-branding China
I believe the next step in China's economic development (and the next big industry) in China will be the the re-branding of the "Made in China" brand. I spoke of this in a previous post about China's economic cycle. As the cost of labor continues to rise, Chinese exports will shift from price-based to quality-based. Haier (appliances) is ahead of the curve as they are already penetrating US markets with quality appliances. Japan made this same transition. Immediately after WWII, Japan flooded the US market with cheaply made goods in an effort to generate capital to rebuild its infrastructure, earning it a reputation as a source of low-quality manufacturing. Once the Japanese economy started to pick up, so did the quality. Today Japan is known for sophisticated, high-quality exports. Why would China be any different?
In order to successfully make this shift, China will have to re-brand itself as a source of quality goods. However, unlike post-WWII Japan, China has a severe shortage of managers and less experience in dealing directly with western markets and business models. Entrepreneurs in China poised to educated Chinese manufacturers about branding and western perceptions of quality based on pricing will be instrumental in facilitating this shift, and be rewarded dearly for their efforts.
The Culture of Business or the Business of Culture?
I recently chimed in with my own two cents regarding this question on LinkedIn:
"Does cultural sensitivity and awareness deliver better business results when it comes to doing business in China?"
I've written about cultural issues in business before and cited examples of cultural incompetence which created business problems in China for both Dell and Starbucks. The author of that question responded by posting a link to an article in "China Business Services" titled "China Mobile Eats Apple for (i)Breakfast"
We can now add Apple to the list of Western companies behaving poorly in China. For those that haven't been watching, Apple approached China Mobile with a deal similar to the one it offers AT&T. Following Apples long tradition of price skimming (selling new products for a premium), Apple sold its new iPhone through AT&T at an inflated price AND demanded what is reported to be 50% of the service fees AT&T charges for the phone.
China Mobile was an ideal partner for Apple in China. Enjoying 70% market share in the Middle Kingdom, China Mobile is widely recognized and has the infrastructure to support rapid market penetration of the iPhone. However, China Mobile is much different from AT&T in one important respect: China Mobile sells cellular service, not handsets. After all, this is the country where they are made. Handsets are readily available in more variety and cheaper than China Mobile could offer them.
By offering to support iPhone sales in China, China Mobile would have been offering Apple a service, not the the other way around. Apple's response was a demand for up to 30% of the service fees charged by China Mobile for iPhones. Can you say "slap on the face"?
According to the article, China Mobile is already at work spinning the issue with the Chinese consumer. This has now become an issue of nationalistic pride. Mr. Gao Nianshu, general manager of China Mobile's date department presented lessons learned to a local group of MBA students:
Apple really blew it on this deal. If they can't get China Mobile back to the table, they will face an uphill battle for market share in China. In fact, they may miss the huge opportunity they saw in China altogether.
"Does cultural sensitivity and awareness deliver better business results when it comes to doing business in China?"
I've written about cultural issues in business before and cited examples of cultural incompetence which created business problems in China for both Dell and Starbucks. The author of that question responded by posting a link to an article in "China Business Services" titled "China Mobile Eats Apple for (i)Breakfast"
We can now add Apple to the list of Western companies behaving poorly in China. For those that haven't been watching, Apple approached China Mobile with a deal similar to the one it offers AT&T. Following Apples long tradition of price skimming (selling new products for a premium), Apple sold its new iPhone through AT&T at an inflated price AND demanded what is reported to be 50% of the service fees AT&T charges for the phone.
China Mobile was an ideal partner for Apple in China. Enjoying 70% market share in the Middle Kingdom, China Mobile is widely recognized and has the infrastructure to support rapid market penetration of the iPhone. However, China Mobile is much different from AT&T in one important respect: China Mobile sells cellular service, not handsets. After all, this is the country where they are made. Handsets are readily available in more variety and cheaper than China Mobile could offer them.
By offering to support iPhone sales in China, China Mobile would have been offering Apple a service, not the the other way around. Apple's response was a demand for up to 30% of the service fees charged by China Mobile for iPhones. Can you say "slap on the face"?
According to the article, China Mobile is already at work spinning the issue with the Chinese consumer. This has now become an issue of nationalistic pride. Mr. Gao Nianshu, general manager of China Mobile's date department presented lessons learned to a local group of MBA students:
- Understand the increasing power of local players and technologies (and decreasing power of foreign ones);
- Note that business drivers and perceived benefits may be different for a local firm (especially a dominant one - or even a less dominant one, such as China Unicom, that suddenly becomes partner of last resort!);
- Keep discussions private, but be ready to play the consumer PR game;
- Appoint, use, and listen to local managers who know the local market;
- Have a “Plan B”!
Apple really blew it on this deal. If they can't get China Mobile back to the table, they will face an uphill battle for market share in China. In fact, they may miss the huge opportunity they saw in China altogether.
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