NOW they tell us!

Earlier this month, GE CEO Jeff Immelt expressed disappointment that the Chinese government is not all that interested in buying Western imports. As Gomer Pyle would say, “surprise, surprise, surprise!”

One man who’s not surprised is former LA Times China correspondent Jim Mann. Since leaving journalism, Mann seems to have made a career of writing books telling Americans that what they see in China is just their imagination.

Writing in The New Republic, Mann shreds the naïveté represented by Immelt and all the others business moguls that hoped that China would some day import in proportion to their exports:

Over the past two decades, the business community has been more upbeat about China than any other constituency in American society. Business leaders led the charge in loosening trade restrictions with China. …

However, over the past year or two, and to their evident surprise, their earlier assurances were revealed to have gotten things exactly backward. Immelt was merely the latest representative of corporate America to ring the alarm about restrictions on business operations in China, taking his cue from the leaders of Google and other major companies. …

American and European companies have vied for centuries, through all of China's upheavals, to dominate what used to be called "the China market." Now, increasingly, China wants to keep that market for itself.

The entire blog entry is worth reading in its entirety.

While I agree with Mann, I’m not clear why business leaders are surprised. China’s industrial policy is utterly predictable who studied US/Japan or US/Korea trade relations over the past 50 years — let alone anyone who understands the brief interruption in China’s role as the dominant Middle Kingdom.

I began my academic career studying the Japanese technology industries. After researching Japanese non-tariff trade barriers — particularly Mark Mason’s account of Texas Instruments and Marie Anchordoguy’s report of what happened to IBM — more than a decade ago I was completely puzzled as to why American and Western executives thought they would ever establish a large and durable market position in China. My two colleagues, Ken Kramer and Jason Dedrick of UCI, also wrote about this sentiment 9 years ago.

Mann himself also captured this in his book Beijing Jeep, chronicling how Jeep transferred technology to Chinese manufacturers to allow them to improve their export capabilities while providing Jeep (at best) temporary access to the Chinese market.

At the risk of mixing my metaphors even more: “When will they ever learn? When will they ever learn?"

Red iPhone Rising?

The chairman and CEO of China Mobile demonstrated Thursday that even the world’s largest mobile phone company is not immune from iPhone envy.

At the same time CM announced that it had reached 522 million subscribers, CEO Wang Jianzhou said that he hoped the company could land the iPhone. As AFP reported:

"We're hoping we'll come to an agreement (with Apple) on the iPhone as soon as possible," he told a news conference in Hong Kong to release the company's 2009 results.


"We will continue to express our interest in the iPhone. But not just the iPhone, also the iPad."

CM hopes to build on its success obtaining promise of a BlackBerry for its non-standard 3G network. As Reuters (via the FT) reported, Jianzhou said “including TD-SCDMA is not that hard to do – RIM is doing it.” Analysts speculate that CM needs a proven handset to drive 3G data demand — as the iPhone has done elsewhere in the world.

The problem is that despite its size CM is the only carrier in the world using the homebrew TD-SCDMA. China Unicom is using W-CDMA, while China Telecom has been growing rapidly (from a small base) using cdma2000.

Last time I checked, major chip suppliers like Broadcom and Qualcomm were not providing multi-mode (or single-mode) TD-SCDMA chips (despite rumors to the contrary). Among Western suppliers, the chips are available from ST-Ericsson, the joint venture of Ericsson and STMicro, but I’ve seen no evidence of a relationship between Apple and the vendor. (However, STMicro may want to sue Apple for the iPad trademark).

The idea of the iPhone on China’s dominant carrier has been long-rumored. However, beyond the technical issues, there is the business model issue. Apple wants a premium price for its premium product, but China Mobile has been reluctant to transfer wealth to handset suppliers.

FT and the WSJ say CM’s handset subsidies will go up 30% this year — a good sign for Apple and other premium suppliers — while MarketWatch says they’re going down. An increase would suggest that CM has decided it needs to switch to the handset-centric model used by Western carriers to promote 3G adoption, a rare example of convergence between the Middle Kingdom and the Rest of the World.

Balance of power in China

The Financial Times reports this morning that both Android and the iPhone are expected to officially arrive in China Real Soon Now:

Google’s Android mobile phone operating system is set to make its legal debut in China in June when China Mobile launches specially adapted handsets.

The Taiwan-based handset manufacturer HTC said China Mobile would start selling a customised version of the HTC Magic, a handset based on Google’s Android operating system, through its stores.

Analysts believe that a successful launch of a high-end handset for China Mobile subscribers could help remove hurdles to the entry of similar handsets such as Apple’s iPhone into the country, the world’s largest mobile market.

Apple has negotiated for months with China Unicom, China Mobile’s smaller rival, to introduce the iPhone to China, but industry executives say regulators have sought to hold back an agreement until China Mobile has a device that will allow it to compete for 3G customers.

Of course, as the FT reports, grey market Android and iPhone models are available in China already.

The FT notes that the three major carriers — China Mobile, China Unicom and China Telecom — are being played against each other to maximize competition. It makes sense that the government wants China Mobile to go first: it is the world’s largest mobile phone carrier, but forced to deploy China’s home-grown (and China-only) TD-SCDMA technology.

The timing seems right for both the Magic and iPhone. The HTC Magic was released by Vodafone in Europe earlier this month. It is coming to the US (in June?) as the T-Mobile myTouch 3G. It’s also coming to Japan and Canada. In Japan, the Magic (there the HT-03A) would be sold by NTT DoCoMo, which already sells two other smartphone platforms — MOAP-S (Symbian) and MOAP-L (Linux). The Canada intro is via Rogers Wireless, which is also rumored to be selling the iPhone this summer.

Meanwhile, China Unicom’s iPhone launch is conditioned on the availability of the iPhone 3.0 model(s) next month. (Presumably if Apple releases more than one model, China will pick the more affordable one). Pundits argue whether the iPhone will or won’t be announced at WWDC in 13 days. I lean towards the “will announce” camp, because Apple needs to show developers the new device and demonstrate its features. Educating developers is the whole point of WWDC, and this year’s WWDC is more iPhone centric than ever.

China Unicom is also getting an Alcatel-branded Windows Mobile 6.1 handset next month.

The laggard appears to be China Telecom. I haven’t seen any reports of a 3G smartphone for its rapidly deploying cdma2000 network, which it got from China Unicom last year in the grand reorganization orchestrated by the Ministry of Industry and Information that is enabling the huge 3G rollout by all three operators. Thus far, China Unicom has denied persistent rumors of its own BlackBerry. Its main foreign handset suppliers are Samsung and LG, which sell Windows Mobile and Symbian handsets. (I’m guessing the first Symbian CDMA handset will come from Samsung or one of the Chinese makers early next year).

The only other major CDMA smartphone handset vendor — Palm — is introducing the Pre in the US June 6, but the only overseas plans I’ve seen are with Bell Mobility (Canada’s #2 carrier) and with Telefonica in the UK (O2), Spain and Latin America. Since there will not be enough Pre handsets to go around, there’s no rush on introducing the phone to the world’s largest market.

Monitoring Google's self-regulation

The converse side of Google providing targeting information for foreign terrorists (or militaries) is the question of Google censoring information that’s politically objectionable to host governments, rather than have its search (or YouTube) banned nationwide.

Today law professor Jeffrey Rosen has a long (5200 word) article in the New York Times Magazine entitled “Google’s Gatekeepers.” (Yes, I know, “long” is redundant in this context). Both Frank Pasquale and Mike Madison commented on the article in the Madisonian blog, which is where I saw it. 

Rosen highlighs government objections from China, Turkey, Thailand, France, Indian, Pakistan and Saudi Arabia. The crux of the issues is summed up in these two paragraphs from Rosen’s article:

Voluntary self-regulation means that, for the foreseeable future, [Google associate counsel] Wong and her colleagues will continue to exercise extraordinary power over global speech online. Which raises a perennial but increasingly urgent question: Can we trust a corporation to be good — even a corporation whose informal motto is “Don’t be evil”?

“To love Google, you have to be a little bit of a monarchist, you have to have faith in the way people traditionally felt about the king,” Tim Wu, a Columbia law professor and a former scholar in residence at Google, told me recently. “One reason they’re good at the moment is they live and die on trust, and as soon as you lose trust in Google, it’s over for them.” Google’s claim on our trust is a fragile thing. After all, it’s hard to be a company whose mission is to give people all the information they want and to insist at the same time on deciding what information they get.

This reminds me of what Prof. Randy Stross said during his Sept 30 talk at SJSU about his book Planet Google. From the transcript:

The only time I am going to be most worried about what Google is doing is when they offer bland reassurances. [I’m not worried] when they agonize publicly — here are the issues for us, here [is why we] are agonizing — which is what they did when they confronted the question about what to do with the Chinese government’s demand that they censor results for certain search terms.
…
As long as they do that, I think they can hold to “don’t be evil” but if they revert to standard corporate speak with the rote reassurances, this is a company that as I fear will know more about us than any entity — private or public — in the world. I don’t want to hear reassurances; I want to see them worry about my worries.

One thing I found comforting in the NYT article is that search engine censorship is being reported. Today, it’s to ChillingEffects.com, a website run by the EFF and various law schools. Under the proposed Global Online Freedom Act, it would also be to the US government. (Rosen makes it clear that Google et al want to change some of the provisions).

It’s wrong to have the EFF or DOJ (or other USG) tell Google what they can and cannot censor to keep Google legal in China or Turkey or Thailand or France. But government (or voluntary agreement) can absolutely play a role in assuring full disclosure, so that the public can see how Google (or Microsoft or Yahoo) are balancing the trade-offs that rightly worry Prof. Rosen and Prof. Stross.

Skype spyware

Some clever Canadian C.S. researchers noticed that the version of Skype recommended for use in China is actually spyware for the Chinese government. If certain words are typed into the IM client, an encrypted message is sent to a server, which (due to lousy security) displays logs of all the messages intercepted.

It’s not clear why the story broke this week, given that the researchers posted it back in June 2006, and was mentioned in the Financial Times back then. The NY Times version is what is stirring up this week’s attention.

However, the NYT discussion of the political angles obscures the context of the joint venture between Skype (owned by eBay) and Chinese online service provider TOM. One of the researchers involved explains what’s up

What is TOM-Skype and what is the difference between it and Skype?

If you go to www.skype.com from China, you are redirected to skype.tom.com — so that’s version most Chinese people will use.

In 2004 Skype developed a relationship with TOM Online, a leading wireless provider in China, and announced a joint venture in 2005. Skype and TOM Online produced a special version of the Skype software, known as TOM-Skype, for use in China.

China is not the only government that wants to monitor communications within its borders, but it appears to be the only one that appears to have won a custom version of Skype that includes a ContentFilter.exe spyware program.

When asked about the spyware, eBay seemed more concerned about the ability of the CS researchers to see the spyware logs than explaining why it is spying on its customers.

Cheap commodities can kill you

The pharamaceutical heparin has been killing a small number of its users, as USA Today and others reported Thursday

In a finding eerily similar to the contamination of pet food last year, the Food and Drug Administration said Wednesday that a counterfeit chemical has been detected in recalled supplies of the blood thinner heparin.

From 5% to 20% of the active pharmaceutical ingredients in some heparin supplied by Chinese companies to Baxter (BAX) Healthcare is a similar, but different, chemical that mimics the blood thinner in commonly used tests.

Nineteen people have died since Jan. 1, 2007, from allergic reactions that appear to be associated with contaminated heparin, says Janet Woodcock, acting director of the FDA's Center for Drug Evaluation and Research. The death toll had been four.

So, let’s summarize what this says:

• Baxter bought ingredients cheap in China
• Chinese suppliers cut corners in a way that they knew would not be detected in normal testing
• The difference killed 19 people.

Yes, Baxter’s 2007 COGS is a whopping 51% (leaving a gross margin of only 49%). If Baxter is like industry norms, some of that is the fully amortized cost of the manufacturing facility. However, much (most?) is an expensive distribution channel with lots of incentives for an inefficient sales force and buyer incentives, as Gwen Olsen talks about in her book.

Very little of that is for raw materials: which raises the question of (when human safety is involved) why cut corners with unproven and under-regulated suppliers.

Regular readers know I’m a flaming capitalist, but this is just begging for further regulation — if not by grandstanding politicians, then by greedy trial lawyers (the latter being an extremely inefficient form of regulation).

If the Chinese government doesn’t like the US blocking the buyout of a failing US IT company on national security grounds, it’s going to hate blocking use of dubious pharmaceutical inputs on safety grounds. I will be curious to see if other developed countries follow suit, or if they decide they’d rather risk lives on lax Chinese health regulations rather than risk trade tension with China.

What is the Chinese word for “kabuki"?

Tuesday, US and Chinese authorities announced seizure of a half-billion bucks worth of counterfeit US software. This is not like bootleg tapes from the back of a pickup at a U.S. swap meet. The NYT reported:

The F.B.I. and the Chinese identified criminal organizations producing and distributing counterfeit software in both Shanghai and Shenzhen. …

Microsoft’s 75-member antipiracy team had been tracking a Chinese syndicate since May 2001, when counterfeit discs of the Windows Millennium operating system were found in Southern California. Since the investigation began, Microsoft investigators have found 55,000 discs.

The Chinese syndicate thought to have been involved had 30 production lines. Based on its examination of the discs, Microsoft said a conservative estimate of the value of the software sold by the criminal group was $2 billion.

This reminded me of a (perhaps apocryphal) story I heard many years ago about a friend of a friend. My friend said his friend was the China representative of the BSA, the “anti-piracy” trade association for Microsoft and the other big software vendors. The BSA rep was supposed to be stamping out software piracy in China, but lived in Hong Kong and only went to China when the government staged seizures for publicity purposes. When he wasn’t in the presence of the police, he feared physical retaliation from the Chinese syndicates.

Of course, many people have argued for years that Microsoft is better off having its software stolen than have customer adopt (and thus develop switching costs for) competing software. I understand the arguments, and while I still am skeptical, they don’t seem as implausible as when I first heard them (from a marketing professor) more than a decade ago.

Technorati Tags: China, copyright infringement

Helping derail total world domination

I often make fun of Google’s claim of “do no evil” while on a path towards total world domination. But at least if they achieve it, no shots will be fired and no lives lost.

This month’s oddest story about Google is the (minor) role it’s playing in helping to undercut China’s real attempt at total world domination by through the big stick of its ever-increasing nuclear missile program. A blog at the Federation of American Scientists (the anti-nuke weapons group) used a Google public satellite image to confirm the existence of China’s new Jin-class ballistic missile submarine (SSBN). The US has speculated that 5 such submarines are under construction.

Of course, any armchair general who reads Tom Clancy or Dale Brown (let alone real generals) knows that you don’t have a secret military weapon out in the open during the day unless you want a satellite to take a picture. So either the People’s Liberation Army Navy wants the world to see their new toy, or someone got incredibly sloppy.

Still, IDG news service speculates that in response to this military embarrassment, the Chinese government will curtail Google’s efforts to crack the Chinese market.

I doubt this will matter one iota. On the one hand, China has already been mad at Google for other infractions. On the other hand, the 4,000-year-old “middle kingdom” is not interested in sharing total world domination with anyone, and thus will do what it can to help Sohu or Baidu colonize the world.

Technorati Tags: China, Google

Addicting the starving masses

One of the things I recalled from my childhood was grownups (especially my parents) talking about helping the “starving people in India” or the “starving masses of China.”

Of course, the story has changed considerably in intervening 40 years. Particularly in the past two decades, elements of both Indian and Chinese society have enjoyed rapid economic growth and (in some cases) a developed country standard of living, driven in varying degrees by exports of software and electronics, respectively. Still, with billions in rural poverty between the two countries, the mean GDP in both countries remains low ($3,700 & $7,600) relative to more developed countries (e.g. $24,200 in Korea or $30,900 for Singapore).

One of the problems for Western (particularly US) firms has been the high level of IP piracy: people are consuming the information goods (software, movies, music) of more advanced companies, but they’re not paying for them. The issues are complex (as I discussed in a 1995 article). There is also the prospect of change: Japan has dropped from 67% in 1994 to 27% in 2006.

Still (potentially biased) industry estimates place “business” software piracy rates as 82% in China and 70% in India. As with teenagers and music, the motivations boil down to two. One is they can’t pay (or don’t want to). The other is that they don’t have to, because free, copyright-defying alternatives are available.

One response has been to try to export US-based tactics, like seizing bootleg CDs and DVDs. While this may work in Silicon Valley or Los Angeles, developing country enforcement officials haven’t made it a priority. After China joined the WTO in 2001, the hope was that the TRIPS agreement would be enough to force cooperation from WTO countries. And at one point I heard (second hand) that an industry executive working in piracy in China did not feel safe living in China, but instead lived in Hong Kong and only visited China when the authorities were willing to conduct a showy seizure.

Microsoft in particular faces a difficult set of choices. As elsewhere in the world, they want people to get used to using their software, both to create switching costs/lock-in and also a supply of complements (software, books, training, etc.). On the one hand, using the software without paying gets consumers (as with Napsterized US college students) accustomed to never paying; on the other hand, saying “pay or else” could create millions or billions of Linux users.

The problem is particularly severe in China, where Linux is being promoted by Red Flag Linux (a local champion) and widely used for embedded products. In India, there are many companies servicing the global IT industry, and for these companies ignoring Windows is not an option.

Earlier this month, Microsoft introduced its latest strategy, a license for XP and Office in developing countries that goes for $3. (Of course, as Infoworld notes, Google apps are free, and Microsoft has a few conditions).

This particular initiative seems designed to pre-empt any official government endorsement for competing operating systems. One impetus is the One Laptop Per Child announcement last week that its $176 computer is due later this year — and appears to now run Windows. OCPLC is a big deal, because if millions of young kids get hooked on some alternative (like Linux), that’s millions that won’t be hooked on Microsoft product.

Back in the 19th century, other Westerners wanted to get the Chinese addicted to their exports, and the result was two wars. (I’ll admit, the parallel is a stretch). Many scholars of Chinese history would argue that in the past 150 years, the top goal of the Chinese government has been to become independent of such foreign control or influence. Microsoft’s prices are attractive, and they have the WTO on their side, but they clearly are swimming upstream.

Technorati Tags: China, Microsoft, platforms, Windows

Low barriers = high competition = looming shakeout

I read an article today online that I just can’t close, I don’t know why. David Wolf writes on Seeking Alpha about how the PRC’s state planning agency has approved four consumer electronics firms to start making mobile handsets, added to approximately 80 firms already in the Chinese market.

Wolf detects signs of capitalism among the central planners:

I see something very positive in the NDRC's move. The senior economists and policy makers at the NDRC are not stupid - they know that China's mobile handset market - no matter how big it is - cannot hope to support nearly a hundred companies in the business. Frankly, I doubt the entire world, with a billion handsets made each year, could support a hundred handset makers.

The message that the NDRC is sending in this move is that rather than select champions to support and force the rest out of business, they are letting the market decide who will survive. Will this mean cannibalistic hypercompetition among manufacturers? Absolutely. But the thinking is that the companies that DO survive will be better suited to compete both locally and globally than they would if the winners were selected by the bureaucrats.

Wolf predicts the survivors will be Nokia and Motorola from the West, Sony-Ericsson and Sanyo (Sanyo?) from Japan, LG and Samsung from Korea and two Chinese firms, Ningbo Bird and ZTE. A few ODMs might survive (probably not including BenQ, which made a failed effort to become a branded firm with its Siemens acquisition.

Wolf goes on to make an even stronger prediction:

Here is the ultimate result, and I'd wager this is what the NDRC is betting on: China will be the global center of the mobile handset industry, not just in manufacture and consumption, but in research, design and development as well.

I don’t know if I completely agree, but this is a provocative article rather than just more of the same.

Technorati Tags: China, mobile phones

IP this ’n that

This morning’s newspaper had a lot of IPR business news. While I realize by now most of it is 24 hours old, still the juxtaposition was very interesting:

• The Qualcomm-Nokia patent license witching hour came Tuesday and went without any news. I analyze the fight on the Qualcomm blog.

• Apple’s iPod brand, market position and business model have yet another challenger.
  • This time it’s a new $250 model of Sansa player (from the #2 MP3 player maker Sandisk holding a 9% share) that connects wirelessly to the Yahoo music service. The Yahoo service is interesting because it’s a monthly (unlimited) rental revenue model rather than the buy-to-own of the better established iTunes Store.
    
  
  • Also interesting (unmentioned in all the breathless coverage of the next “iPod killer”) is that Sandisk is offering a similar product partnering with Rhapsody, Yahoo’s most direct competitor for unlimited downloads.
  • Meanwhile, Apple Monday announced that is has sold 100 million iPods since November 2001: good for an MP3 player, but Nokia sells 3x that many cell phones every year (increasingly with embedded MP3 players).
• Google’s China IPR problem. Google admitted it used the Pinyin front-end processor (FEP) character entry technology belonging to rival Sohu, and Sohu is ready to sue. Finally Google has an IPR problem not related to GooTube.
• US complaining about Chinese “piracy,” now in a formal complaint to the WTO. Predictably, the US Trade Representative is wringing her hands while the Chinese threatened (implicitly) US access to Chinese markets if the US seeks to enforce its IPR rights.

Somehow I find the last one the most amusing. I wonder if it’s in the USTR job description to issue press releases about trade deficits being caused by “unfair trade,” specifically our Asian trading partners not following Anglo-American law. Other than Hong Kong before 1997 or (maybe) Singapore, did any of them ever promise to follow Anglo-American law?

I liked it better when USTR Charlene Barshefsky was kvetching about Japan, on the assumption that at least she recognized Grand Kabuki when she saw it.

Technorati Tags: business models, China, Google, intellectual property, iPod