Google; not in China

All large companies that target a broad spectrum of consumers and are active around the world need to be present in China. With a potential consumer base of 1.36 billion, this is an opportunity that no company can avoid. Not Google. Here is the story of what happened.

Created in 1998 by two students from Stanford University (California), Google is the leader in the search engine market with Google Search. It is the most widely used search engine in the US with a market share of 60%. Across the Western world, it has a similar market share.

In 2005, it established a fully owned subsidiary in China. In Jan. 2006, Google launched its China-based google.cn search engine, with results subject to censorship by the Chinese government.

google-china
Source: Google

By early 2009, its market share in China was 78%, with Baidu trailing at 18%. It was well positioned to capitalize on the Chinese market.

In March 2009 China blocked access to Google’s YouTube site due to footage showing violent images in Tibet. Access to other Google online services was also denied to users.

In January 2010 Google announced that, in response to a Chinese-originated hacking attack on them and other US technology companies, they were no longer willing to censor searches in China and would pull out of the country completely if necessary.

By April 2010, searching via all Google search sites in all languages was temporarily banned in mainland China, without affecting Google Map or Google Mail.

baiduBaidu is the Chinese market leader in search engine. Source: http://www.baidu.com

In November 2012, China had blocked access to Google. All Google domains, including Google search, Gmail, Google Maps, YouTube, etc., became inaccessible.

By 2014, in response to a series of terrorist attacks, China tightened its Internet censorship.

Google’s Gmail, Chrome, Map, YouTube and Google-based search inquiries have not been available to mainland China users since 2014. However, Google has maintained that it would continue with the research and development offices in China along with the sales offices for other Google products such as Android smartphone software.

youkuYouku online video service. Source: www.youku.com

By mid-2015, Baidu dominated the market of search engines with a share of 55%, followed by Haosou at 26% and Suogo at 10%. No western company had any meaningful market share in the search engine market in China. The same happened with online videos, where YouTube was replaced by iQiyi and Youku, which are key players in this market.

Pierre

Metro, subway, underground, et al.

A key characteristic of a modern, well managed city is the presence of a subway system. Currently in China, 26 cities have a subway system. Some are fairly small as in Fuzhou with 1 line and 9 stations over 10 km. For 6 cities, the subway system has more than 100 stations stretching over 100 km.

For these 26 cities, a total of 2,116 stations are operational over a distance of 3,283 km. These are amazing numbers.

shanghai-metro-mapShanghai Metro map. Source: Shanghai Metro

The Shanghai and Beijing metro systems have more than 300 stations covering over 500 km each, with stations having up to 21 different exits.

On a world basis, both cities are a match to Paris (303 stations and 214 km), London (270, 400 km), New York (504, 420 km) and Tokyo (293, 312 km).

Only 3 cities compete in annual ridership above 3 billion: Shanghai at 3.1, Beijing at 3.3 and Tokyo at 3.5. These are gargantuan numbers that can only be understood by riding the subway in these cities. To keep up with the number of customers, in Tokyo, individuals were hired to “gently” push passengers into the subway cars. Shanghai has started doing the same in the last year as ridership has continued to increase.

peak-time-in-shanghai-metroPeak time in Shanghai Metro. Source: Unknown

What is the future of subway systems looking like in Chinese cities? Currently, there are 12 cities that are building a new subway system. In addition, the 26 cities that currently have a system, are adding more stations and lines. For example, Shanghai is planning to add a further 114 stations covering a distance of 226 km by 2020 (i.e. within 4 years). The plans for Beijing are even more grandiose as they plan to add 192 stations covering 368 km also by 2020.

Subways in China have become a tool for engineering a society that uses public transport. Governments (central, provincial and local) realised early on that with a population of 1.36 billion, it is impossible to have the level of car ownership that exists in the West. A high quality public transit system needed to be built to discourage car ownership.

What has compounded the challenges for the municipal governments has been the migration of hundreds of millions of people from rural areas to the cities. In China, the level of people living in cities (i.e. urbanization) has only recently reached 50%, which is low compared to an average of 78% in the West. So it is reasonable to anticipate further growth in Chinese cities, therefore more subways.

Pierre

Time-over for the West to dominate

A few years ago, I saw in The Economist a diagram that illustrated how the relative economic power, and therefore, political power of regions in the world had evolved over the last 1,000 years.

It was clear that Asia had led the world in the share of economic might, up to the 1820’s. This was based on the greater number of people in Asia compared to the rest of the world, as all countries had approximately the same capabilities to generate economic wealth per capita.

gdp-realignment

Source: The Economist

Then, something happened in Europe. First came the Age of Enlightenment, then the Industrial Revolution. By the late 18th century, the European societies had changed the ways in which their wealth was generated. New technologies were introduced that allowed the more advanced societies in Europe to generate wealth at a faster rate with fewer resources.

This new wealth based on innovative ways on how societies work, allowed England, then France to establish a strong industrial base, political system and finally military power to project their new found capabilities.

The development of powerful navies would allow European countries, particularly England after the defeat of Napoleon in 1815 to embark on dominating the world. In parallel, the USA had begun developing their own economy in the early 1820’s, but would remain self-centered until the later part of the 19th century.

british-fleetBritish fleet offshore. Source: National Maritime Museum, Greenwich, London

England, with its view of a world free of political constraints, would force free trade on countries that were not willing to cooperate. At times, England simply took over the control of a country to get its ways. This was the high period of imperialism, which lasted till after World War II.

The graph from The Economist clearly illustrates the increased relative power of the West at the expense of Asia. At its peak in the 1950’s, the West generated more than 50% of the world economic wealth, from a population base of approximately 25% of the world. Asia, with a population base of 50%, was generating less than 20% of the world wealth, down from 60% before the Industrial Revolution. Therefore, a person in Asia was 5 times poorer than a Westerner.

By the 1950’s, when the shackles of colonialism had been removed in Asia, the realignment began. Asia began importing technologies (i.e. finally benefiting from the fruits of the Industrial Revolution) and changing the ways their societies were operating. China took the lead with this realignment, particularly since the 1980’s.

Over the coming decades, we will see the relative economic might of Asia continue to grow. It will probably not reach the 60 to 70% it had historically been before the 1820’s, but might very well reach the 50% mark. This will create a greater wealth per person in Asia, and a standard of living progressively approaching the one experienced in the West.

One question remains: how will each country in Asia organize their society, as it is the structure of their institutions and the characteristics of their culture that determine the level at which an economy will plateau.

Ref.: “The balance of economic power – East or famine”, The Economist, Feb. 25, 2010.

Pierre

“Don’t draw. Write!”

A few days ago, I was sharing with my students the limited progress I had made in understanding Chinese characters. I had started my learning through observations (like all visual learners do); adverts, subway signs, product instructions, etc. I was progressively seeing recurring patterns.

I began exploring some of the few basic patterns I had seen: man (人), wood (木), day/heavens (天) and rice (米); mouth (口), sun/day (日), moon/month (月) and eye (目).

After drawing the above characters on the blackboard in front of the class, I had no response. I suspected the students were thinking on how best to respond to my efforts. I also noticed that I was not getting through in conveying the beginnings of my understanding of Chinese characters.

chinese-caligraphySource: Hao Xian Tang

After a brief exchange, a student from the front row said “Don’t draw. Write!” This said so much to me, in so few words.

What at first had appeared to me as a series of straight or curbed lines must not be drawn randomly. My hand movements were wrong. I needed to follow a series of sequential steps in generating the Chinese character.

In English writing, we all have our own ways of scribbling a letter. Yes, in school we might have learnt the proper ways of forming it, but this is generally abandoned over the years to reflect our ease or preference in tracing a letter or a word. And everyone is okay with that individual approach.

english-writingSource: www.writtenchinese.com

What I learnt that day, was that I needed to learn the proper way of writing a character, with each component drawn in the proper sequence, and in the proper direction. Then and only then, would I learn how to write Chinese. The free flow and creativity of English writing would have to disappear, and I would have to conform to a set of rules.

chinese-character-writingSource: www.archchinese.com

What I saw at that moment is the way the Chinese brain is formatted from an early age in their ways of thinking, particularly in their need to have order in the assembly of a complex system. I also read into the manner in which a Chinese character is written is the need for a system where the whole society conforms to a method of generating a character. One should NOT change the order in which a character is formed. Unlike English where we can deviate from the “suggested” way of writing.

No wonder it is far easier for me to mark handwritten exams in China than it ever has been in the West as Chinese students will write the English letters and words the same way. They are applying the method in generating a Chinese character to their English writing.

Will the way the brain has been formatted by learning to write Chinese characters impede their creative thinking? Good question for which I do not know the answer, but it is important if you relate it to the economic future of China.

Pierre

Problem resolution in China

Often, when Westerners deal with Chinese people, we hear them commenting about the challenges of jointly analyzing a problem and arriving at a solution. Westerners don’t understand why Chinese people don’t see what is obvious to them. Westerners find that the search for a solution simply takes too long. The level of frustration mounts on both sides.

In a book published by Taschen in 2015, a Chinese artist who has lived in Germany for the last 26 years created a series of illustrations that convey some of the differences between the Western and Chinese approaches in dealing with a problem.

Let us build on some of these illustrations to convey the stress a multicultural group might face.

  1. On how the situation is discussed

taschen-opinionLet’s get to the point” is often heard in Western meetings. Participants will directly discuss the issues that are key. That is not always the path used by Chinese people as they reflect on the environment and the context in which the issues are to be discussed. This hesitancy might result in comments such as “Stop beating around the bush”.

  1. On company hierarchy

teachen-bossIn the West, when discussing a topic, we generally regard our boss as a person with whom we can be frank and share our thoughts openly. Chinese people will be careful not to contradict or steal the limelight from their supervisor. Authority must be respected and deferred to.

  1. On speaking one’s mind

taschen-telling-the-truthWesterner will generally speak openly about their thoughts, while Chinese people will ensure that they communicate their thoughts in a manner that will not clash with the people they are working with. If this means that they need to adjust their comments, they will do so in order to preserve group harmony.

The above points represent some of the cultural challenges that need to be addressed if we are to bridge the gap with China. Major progress has been accomplished over the last 2 or 3 decades to train people in understanding the cultural differences and the resulting gap. More education needs to be done as China will play a greater role in the world. Unlike Japan, which did not engage the world in the 80’s and 90’s when its economic might could have allowed it, China wants to play that role. If the West is to succeed at working constructively with China with the goal of developing win-win situations, we must bridge this cultural gap. A clash would raise some nasty prospects.

Various models have been designed to illustrate how culture varies from country to country. One of the most popular models is from Dutch psychologist Geert Hofstede, who is a professor at Maastricht University in the Netherlands. His model is based on 6 cultural dimensions. If you are interested in exploring his findings, visit his website at www.geert-hofstede.com. You can even evaluate the cultural distance between two nations.

Pierre

Reference:  Liu, Yang. East meets West. Taschen, 2015.

The kids want to learn

A few weeks ago, my wife and I were in Xi’an, exploring this old city. One night we got lost in the Muslim quarter. We tried asking directions for the hotel we were staying at. In spite of having the hotel card, we were not succeeding. Then, a girl from a group of 3 friends asked us if she could help. We were surprised with her willingness to assist us and her abilities in English.

She used her cellular phone to call the hotel, and got the directions. We now knew the way back through the small lanes. We thanked them and proceeded on our way. They insisted that they wanted to make sure we would find our way back properly. On the way there, we talked further. They were finishing junior high school. They wanted to practice their English with foreigners. They explained that by doing well in English, it would increase their chance of getting into a better university. We were impressed with their keenest and absence of reserve in trying their English.

xian-muslin-quartersXian Muslim quarter. Source: J. Kenji Lopez-Alt

The next day, we were back in the Muslin quarter as my wife was aiming to bring a small gift for one of her students. As we wondered around, a student approached us asking if he could help. My wife asked for his opinion. It turn out that he was in a group of 5 students from one of Xi’an’s universities. They were walking around the area aiming to meet people with whom they could practice their English. After his assistance, we had a pleasant discussion in the middle of the lane where we had met them. They wanted to know where we came from, what we were doing in China, where we were living, and so on. Questions were coming furiously as they were competing to ask them. When we told them that we were teaching at universities in Shanghai, their excitement increased. They had even more questions. By the time the discussion ended, we had talked for 30 minutes or so. It was obvious that they wanted to make the most out of this opportunity.

The following day as we were walking through the Muslim quarter again, this time on our way to a temple, we were approached by another group of university students. They were from a distant province, visiting Xi’an for a few days. This group of 4 students also wanted to practice their English. As we talked one of the students was filming me, probably to replay the video in a setting that would allow them to get more out of the conversation. They were part of the English Club at their university. After 20 minutes or so, the student who was filming asked me to give advice on how best to expand their abilities in English. So I shared some ideas that were recorded. While I was talking to two of the students, the other two had focused on my wife, firing questions at her.

xian-shoppingA stall in the Muslim quarter in Xi’an. Source: Xi’an Tourist Office.

Wow! Quite an experience of keenness from students who wanted to perfect their abilities. There was no shyness, only a desire to communicate and capitalize on an opportunity. This shows the drive that inhabits many students in their desire to succeed in this highly competitive environment.

Pierre

Procter & Gamble messes up in China

Procter & Gamble (P&G) is known as a well-managed corporation. In marketing circles, it is recognized as an organization that manages it product portfolio in a most effective manner.

The darling of marketing business cases has dropped the ball in a major way in China. It has totally misread the market and the buying behaviour of consumers. It has made a series of mistakes that will take decades to correct.

From a start in the early 1990’s, P&G positioned itself well in China. It introduced products ahead of competitors and created a strong brand image. This served P&G well as China became the largest market by revenues outside the United States.

P&G has a strong presence in China with its Pampers disposable diapers, Ariel liquid detergents, Tide washing powder/liquid and various brands of toothpaste.

diapersA shopper inspects baby diapers at a supermarket in Fujian province. Source: SCMP Pictures

Unfortunately for P&G, it assumed that Chinese consumers would look for value-buying in purchasing disposable diapers. This approach was not validated by customers who elected to splurge on a little luxury for their children and chose higher quality diapers. As the P&G CEO stated last month “We’re stuck in the middle of the market. We went down, the consumer went up.” For P&G to make such a mistake is surprising. To address this situation, P&G introduced high-end diapers, which are imported from Japan.

The source of the challenge for P&G is that the market has moved towards premium products in spite of the economic expansion slowing down. That is a surprise for many western consumer goods companies that expected Chinese consumers to move down-market with the slowing economy. One more lesson for western companies that often assume that Chinese behaviour will mirror how westerners react.

The other challenge that P&G is facing in on-line shopping. Chinese shoppers have taken on-line shopping with a fury. It all started a few years ago when Alibaba created a site for consumers (www.taobao.com) that is similar to what it offers for businesses. Now, you only need to talk to people to realize the changes that have happened within the last 3 years. China has gone way past the Amazon.com business model. Their shopping habits have changed so drastically that multistory shopping malls had to transfer their top floors into restaurants, so high was the vacancies created by retailers that had to close.

on-line-shoppingOn-line shopping experience with http://www.360buy.com. Source: 360.com

Now you can purchase any product on-line at a cost that generally beats the price offered at retailers by 15 to 20%. P&G was late at recognizing this change, and only now has begun restructuring its distribution network to adjust to this new reality.

Again, many western companies were slow to understand the changing behaviour pattern of the Chinese buyer who is always pressed for time, and is surrounded with probably the most developed computer network in the world supporting advanced on-line services.

Pierre

The size and complexity of China

Often in the West, when China is a topic of discussion, often individuals do not realize its size and complexity. People generally know that China is the most populous country in the world (1.37 billion). They know that the economy is large and growing. But few know the extent of the challenges that the political leadership is forced to deal with.

China is divided in 34 political entities: provinces (23), autonomous regions (5), autonomous cities (4) and special administrative regions (2).

political-structureSource: http://www.wikipedia.com

Of these 34 entities, a total of 18 provinces have a population greater than Canada (35.4 million). If the Guangdong province with a population of 107 million were an independent country, it would be the 13th largest nation in the world!

One might say that ethnically, China has a relatively uniform ethnic structure with 92% of the population being of Han origin. But one must consider that 55 ethnic minorities are recognized by the government, with their own rights (e.g. not subjected to the previous one-child family limit, combined with additional advantages).

Linguistically, the situation is even more challenging. One might state that Mandarin is the official language of the country and that the written language is the same across China. But the challenges come from the fact that the verbal language can vary substantially from region to region where people are totally unable to understand each other. If we go back to the Guangdong province, the common language is Cantonese spoken by 70 million people. These people would not understand much from a Mandarin speaker. China has 270 living languages (i.e. with a sufficient number of people to carry on being spoken). This challenge is illustrated by the subtitles shown in all Chinese movies so that people of other languages spoken in China can follow the story.

When it comes to religion, the situation is also diverse. Officially, China is a non-religious state, as advocated by communist precepts. In spite of this approach, religions have always and continue to play an important role in China. The main religions are Taoism, Confucianism, Buddhism (6%), Islam (2%) and various Christian denominations (2%). Approximately, 40% of the population practices a religion.

religion

Buddhist ceremony. Source: Unknown

Cultural differences are also felt across the country. One can easily hear comments from a Shanghainese about the “laissez-faire” attitude of the southerners in Hainan. In the north or the west, they will criticize Shanghainese for their aggressiveness. People from Beijing will be perceived as snobbish since they live in the nation’s capital. People in parts of the country will prefer to work for State Owned Enterprises that are much more predictable, while in other parts of the country, their entrepreneurial spirit will lead them to start their own business.

Finally, the economic disparities compound the above diversities. The first level of differences is between the rural areas and cities, where the cities are much richer than rural areas. This results in service (education, health, etc.) in rural areas being at a lower level than in cities. Secondly, between provinces, where the spread between the lowest and the highest is in a ratio of 4 times (GDP of $30,000 per person compared to $7,500). This will draw residents in poor provinces and rural areas into richer provinces or cities, in spite of the strong effort of the government to curtail this movement.

All these represent potential centrifugal forces that the central government needs to address on a continuous basis. How can it succeed, is an important question for the economic stability of the rest of the world.

Pierre

Trying to do business in China

A week ago, I met a German Swiss businessman. He had already been in China three times with the goal of securing an order for an innovative product that would lead to energy savings. In addition, the product was compatible with Chinese efforts in solar and wind energy.

This product should have generated substantial interest in China, particularly since the technology was ideal for the weather conditions. Unfortunately, he was heading back to Switzerland without a contract. He felt he could not trust his potential client and they probably did not understand him. He stated a series of issues that were “deal-breakers”.

renewable-energy-sourcesChina is by far the largest producer of renewable energy. Source: www.green-blog.org

What I heard from the businessperson was: “I do not understand what they want”, “I need an order to validate their seriousness”, and “this is taking too long”. I often read such comments from western business people looking to get a deal signed, hoping to head back home to implement the contract all within a short period of time. It is clear that business in China does not work the same way as in the West.

For the Swiss business person, he believed that the Chinese should have beaten a path to his door as he was providing the latest know-how in energy storage. He assumed that they would understand the technology he was presenting as all engineers in the West understood the concept and advantages of “latent heat”. He assumed that the Chinese company would trust him as he was representing a well-respected organization. He believed that China needed his help because the energy requirements are massive and the environment pressure keeps increasing. He did not see any reason to delay the signing of an agreement and proceeding with the implementation.

For the Chinese business people, they probably believed that the foreigner ought to be patient as there are many opportunities in China, and he would have to take a number. They needed to remain flexible and keep their options opened to adjust to opportunities and rapidly changing conditions. There was no need to rush anything until they better understood the technology, the company and its representative.

china-businessSource: Duke University – Corporate Education

Obviously the gap between the two parties had not been bridged after three visits, in spite of the last one lasting one week. According to the Swiss person, there had been too many dinners and not enough detailed business talks. He doubted that he would come back and meet this company again. He would be looking for another potential Chinese partner who might show the willingness to proceed with the business opportunity.

It is probable that neither of the parties understood each other. Will his efforts with a different company be fruitful or will he face the same challenges?

Pierre