Tuesday, August 2, 2016

China: you cannot have free and fair trade with a totalitarian regime

The Humbling of American Tech Giants in China

Uber's decision to throw in the towel in China holds lessons for Facebook, Apple and others still craving success in the world's biggest technology market.

Not so long ago, American tech giants viewed China as theirs for the taking: 1.4 billion people, a growing middle class, an affinity for American pop culture from Titanic andFriends to Michael Jackson. And, apparently, a tendency to see U.S. goods and services as attractive or superior.
That triumphal script was again rewritten as Uber conceded defeat in its no-holds-barred dust-up with Didi Chuxing. After a costly battle in which both sides shelled out billions subsidizing rides, Chief Executive Travis Kalanick decided to call off the war, agreeing to a deal in which the local champion acquires Uber’s China operations in return for a seat on Didi’s board and a slice of the Chinese company. The move came only a year after the famously brash Uber impresario declared China, the world’s largest ride-hailing market, his most important target. 
In other words, Kalanick came, he saw, he most certainly didn’t conquer.
“Uber’s approach to markets around the world has been fairly arrogant,” from flouting local taxi regulations to threatening to sabotage media critics by digging up personal dirt, says Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia. “But arrogance is a very difficult attitude to have to be successful in China.”
The particular twists and turns of Uber’s battle for market share in China are distinct – it went up against a nimble competitor backed by deep-pocketed internet standard-bearers Alibaba Group Holding Ltd. and Tencent Holdings Ltd. But its ordeal reflects a changing reality for Silicon Valley stalwarts like Amazon.com Inc. or Apple Inc. that may view China as a gold mine, but wind up floored by formidable competition and shifting consumer tastes. As Kalanick said in announcing Uber's withdrawal, "U.S. technology companies struggle to crack the code."
 “The days of simply entering China with something new" – a soda brand or a novel smartphone – “are gone," said Tom Birtwhistle, a senior manager at PricewaterhouseCoopers in Hong Kong. "Now if you’re entering China, you’re having to compete with lots of companies already there.”
Moreover, it’s no longer the case that Chinese consumers and companies are “happy with crappy,” as one China hand explained to The Atlantic Monthly in 2007.  Observe how Huawei, Xiaomi and Oppo have taken a big bite out of Apple, a series of successes stemming from savvy marketing and homegrown tech wizardry.
“The local competition has improved dramatically. Look at smartphones: the Chinese smartphone manufacturers used to offer phones that were cheap and crappy, but now they’re both affordable and very good,” Birtwhistle said. “There also used to be a challenge around branding," he said. "But today, a lot of the newer companies are doing brand and marketing as well as western brands. Now they can offer high specs, low price-tags, and world-class branding – that’s hard to beat.”
Silicon Valley grew cocky after successes in Europe, where Google’s runaway dominance, for instance, has seen it defending against anti-trust accusations. But perhaps Europe is the exception, suggests analyst Duncan Clark, author of Alibaba: The House that Jack Ma Built. 
“In a market the size of China, there should be a ‘home court advantage,’ driven as much by culture and language as by government diktat or influence," he said. “Many U.S. companies had got used to the fact that they could succeed overseas through their dominance in Europe. But China is different; it has a ready supply of entrepreneurs and capital, and a government that if anything prizes dominance over competition.”
The deal Uber finally accepted – retreating from direct competition in China, in exchange for shares in a Chinese champion – echoes a similar arrangement struck between Yahoo and Alibaba in 2005. Ebay saw its early promise in China eclipsed when Alibaba found better ways to attract consumers in a low-trust environment: using escrow, instead of up-front fees for goods. Google chose to pull its search engine in 2010, rather than accept Beijing’s censorship terms (and following discoveries of hacking, it said).
To be sure, the Middle Kingdom doesn’t always tease, and leave suitors empty-handed. Apple iPhones have sold handily in China as both tech gadgets and luxury objects, although with the smartphone market increasingly saturated and competitive, Apple’s future prospects are now less certain. Its market share in China has eroded over the past year, driving down earnings. But the company has displayed smarts in China in the past, winning consumers over with a hardware-software-apps ecosystem that's proven tough to replicate. Its reliance on Foxconn and other manufacturers with factories in China creates hundreds of thousands of jobs -- winning points with Beijing.
There're still sectors where foreign companies have the edge, especially where product safety and cutting-edge technology hold sway -- think infant formula, computer processors, automobiles,  passenger aircraft and engines.
While Google, Yahoo, Ebay, and now Uber have retreated from China or settled for a narrow market position, some like Microsoft, Qualcomm and Apple are still slugging it out. Meanwhile, one Silicon Valley behemoth, currently blocked from China, is gunning for its chance.
Facebook was briefly allowed in China, before being blocked in 2009. In recent years, founder Mark Zuckerberg has made clear his intention to bring the platform to China. To win favor, much to the amusement of Chinese netizens, he's handed out copies of Xi’s tome, The Governance of China, to Facebook employees; showed off his Mandarin skills; and posted photos of himself jogging through hazardous Beijing smog. It remains to be seen whether that multi-faceted courtship will be effective.
Chinese President Xi Jinping, left, talks with Facebook Chief Executive Mark Zuckerberg, right, during a gathering of CEOs and other executives at Microsoft's main campus September 23, 2015 in Redmond, Washington.
Chinese President Xi Jinping, left, talks with Facebook Chief Executive Mark Zuckerberg, right, during a gathering of CEOs and other executives at Microsoft's main campus September 23, 2015 in Redmond, Washington.
Ted S. Warren-Pool/Getty Images
“All the kowtowing and meeting the leadership maybe won’t matter so much if Facebook won’t agree to allow some level of censorship, or allow the Chinese government access to data on the site, in exchange for market access,” Kapron said. LinkedIn Corp. operates in China, but only by agreeing to abide by content restrictions. “Otherwise, he’s just hitting his head against the wall.”
More fundamentally, in the age of WeChat, do Chinese consumers still need Facebook? Tencent's ubiquitous service has a virtual lock on mobile social media, while dozens of other niche services cater to all sorts of needs.
“Globally, maybe 7 or 8 years ago, when social networks went mainstream, the general consensus was that there will be one social network to rule them all. We’d all join one, and it would be dominant,” says PwC’s Birtwhistle. “But what we’re actually seeing is a huge proliferation of a variety of social networks."

The rise of Chinese tech powerhouses isn’t exactly new, even if it’s recent headlines – the pounding of Uber, the faltering of Apple – that have caught readers’ attention overseas. “What a lot of western policy makers and institutional investors have not recognized … they’ve been focused on how the outside world is going to change China. What many people have missed is actually how China is going to change the world,” says Andy Mok, managing director at Red Pagoda Resources in Beijing. He cited how Chinese audiences are now influencing Hollywood casting decisions. “The more and more the Chinese middle class becomes a driving force globally of product decisions, that’s becoming more apparent.”
Elliot Ng, now director of product management at Google, returned to California in 2015 after four years in China leading development projects for the company. He thinks that tech companies in Silicon Valley may have to settle for changing half the world, counter to the industry's mantra.
“China demands total focus and optimization in order to win … and practically speaking, most companies have to choose whether to accept those terms, or instead focus on the 40, or 70, or 190 countries and markets that global companies would define as the world ex-China.”
Indeed, while Uber’s Kalanick may have mis-gauged his company’s prospects in China, one prediction he made about the country could turn out to be true. At a “Geekpark” conference in Beijing in January, he told reporters: “In the next five years, there will be more innovation, more invention, more entrepreneurship happening in China, happening in Beijing, than in Silicon Valley.”
This week, he was proven right.

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