China's Fractured Internet - Part I - Internet-driven business collides with China

Within the last few weeks a growing chorus of blogs and journals have given play to how the blocking of several of the key U nolvadex.S temovate. social media sites (Facebook, Twitter, YouTube, etc tadacip.) will make trade and business across the Great Firewall more difficult. When ChinaSolved's China's Fractured Internet series first got my attention a few weeks ago, I began to consider these issues in greater depth.

This post examines how the recent explosion in Web 2.0 in particular social networking sites has radically changed the culture of the Internet.

Subsequent posts will explore Beijing's uneasy relationship with the Internet and how policies are impeding Internet-driven business on both sides of the Great Firewall. Later posts will examine the permanence of these policies, and whether or not this has the potential of escalating into a divisive trade issue. The final post(s) of the series will seek solutions for international business people on both sides of the wall.

So how has the Internet changed us?

Business now totally dependent on the Internet
We are a lot more reliant on the Internet than we were 20 years ago, when browsers were just coming out, hypertext was the big thing, and the web was dominated by computer scientists, system administrators, professors, and gear heads.

Today if any hacker disrupts a popular social media site for only a few hours by denying us access to potentially critical information, the newspapers write about the event for at least a week, and our workflow grinds to a standstill. Hackers (and even governments) can also knock web sites offline, including web sites vital to conduct business in our daily lives. The Internet has become integral component of our existence, and it has become a challenge to list the many ways it influences us.

Fundamentally the Internet is "extremely augmented communication and information".

One to one conversations, one to many, and many to many; all of them are augmented by these tubes we use to communicate now.

An enlightened citizen, focusing on the positive attributes, would say the Internet:

• Provides a source of income to many.
• Contains most of the entire accumulated knowledge of the planet - all information that is important personally and as a civilization.
• Supports an eternal argument about every topic, constantly increasing online knowledge.
  
• Debunks myths - destroying hearsay, worry and fear.
• Provides an education and cultural lifeline to those living in disadvantaged locations.
  

But some institutions and governments find the transparency of the Internet a threat to their dominance or even their survival.


The Internet - now more critical than the telephone
Communication and information is essential for business. The "extremely augmented communication" afforded by the Internet helps to increase productivity and efficiency. The Internet has replaced many routine tasks and eliminated many jobs. It has even enabled a lot of back office work to be transferred to low-cost countries.

Email usage has become as commonplace as telephone. VoIP now dominates international audio communications. Professionals frequently refer to the web for technical data, financial information, sales data, marketing materials, and news. We use online dictionaries, translators, encyclopedias, search engines, Wikis, blogs, online journals, and a host of other platforms to either find information, understand it and to collaborate and communicate with others.

Internet Web 2.0 trends in business
Business worldwide will increasingly leverage the powers of Web 2.0 for social networking. The Internet will increasingly serve as a global sales and marketing platform, which leverages increased connectivity and mobile technologies to target markets more accurately. We will also see a further consolidation of social media power in the hands of a few influential companies. The social media web will also power a re-imagination machine which will aid us in collectively reorganizing society for different outcomes.

Social networking
As the global village becomes ever more complex social networking (social media) allows individuals to accomplish tasks that they never could have independently.

Over the next few years social networking technologies are tipped to become as commonplace in large organisations as e-mail and the telephone. In the current economic climate, there is increasing focus on enabling employees to maximise their potential and generate results for the business – Enterprises introducing social technologies in the workplace are certainly not pandering to the demands of the technology-savvy employee.

Advocates of social networking point to these technologies as solving one of the biggest challenges faced by large organisations; namely, how do you make the knowledge and expertise that exists within an organisation available to everyone whenever they need it? It’s all about networking.

For example, Blogs and Wikis improve efficiency and productivity by making people and knowledge more available.

The Internet as a sales and marketing platform for physical products
Even though the analog market is declining, and consumers will not buy creative content online, since too much of it is free, the Internet need not spell doom for "creative artists and high cultural organizations".

The strange thing is that, while the "commodification of content" ruins the value of the copy, it actually increases the value of physical events. Take, for example, the music industry.

While consumers won’t pay for copies of the work of their favorite bands, they will pay for the privilege of seeing them live. What we seeing here is a paradigmatic shift from the 20th century industrial economy to what economist Will Hutton describes as the 21st century “experiental” one.

Business models in the creative fields will change from selling products to selling experiences.

In the old industrial economy, artists played concerts to sell recordings; in the digital economy, artists gives away recordings in order to sell concert tickets.

The same is true for professional writers and journalists. [...] As with musicians, [writers will give] away the copy in exchange for being paid to perform in person.

Ironically, for all the insurrectionary rhetoric of the digital revolutionaries, the Internet is actually emerging as nothing more (or less) than a sales and marketing platform for physical products – a medium to create demand for concerts, readings, speeches and seminars.

Increasing connectivity and mobile marketing
Patrick Schwerdtfeger, an author of a book on Internet marketing, who regularly speaks at conferences and holds workshops focused on social media, believes the future lies in increasing connectivity.

In the social network marketplace," mobile marketing is the new craze," he said. "Every major platform and countless companies are developing applications for mobile devices and ensuring data can easily flow through to traditional Web-based platforms."

Therefore, it is important to leverage multiple platforms, said Schwerdtfeger. Some of the options include video on YouTube, pictures on Flickr, news updates on Twitter, community interaction on Facebook and professional biographies on LinkedIn.

"Once all these necessary components have been established, they can each be connected into a social media superstructure," Schwerdtfeger said. Social networking strategies like this generally have a blog at the center with links to each platform.

"Everyone uses the Internet differently, and any effective social media marketing plan needs to reach out to as many different platforms as possible," Schwerdtfeger said.

Increasing Concentration of Social Media Muscle: The Fearsome 4 (aka 'The Rebel Empire')
Hupert of ChinaSolved offers his prediction for the Internet.

The Fearsome 4 (Google, You Tube, Facebook and Twitter) are going to power the part of the internet that counts – the business side. [....] They will be the medium-sized pipes of the internet that bring video, messages, communication, news, and transactions into and out of your world. ..

Hupert and Schwerdtfeger basically agree: effective social media use for business requires multiple platforms, for different types of communications and transactions.

The Re-imagination Machine
The social web is a Re-imagination Machine. This network persuades us to imagine how things could be different. At a deeper level, re-conceiving the world transforms "the frameworks through which we make sense of reality". Through "mass collaboration, creativity and self-organisation":

social technologies enable us to organize differently, outside the choke hold of established institutions.

The ability to formulate how things could be different is critical for creativity in all forms, including technical innovation, artistic creation, product development and even entrepreneurship. It could even be used to imagine a new world order, where we plan for ways to live a non-carbon, zero-energy lifestyle.

Considerations and Feedback

What are your thoughts?

Why do you think Beijing has been blocking the major social media websites? Are they just now starting to control the web the same way that they control print and television, because they have just acquired the necessary technology to do so? Or does the emergent phenomena of the social technologies, like the "Re-imagination Machine", pose a more immediate irritation to them?

Have the blockages negatively influenced your workflow in doing business across the Great Firewall? If so, how?

Next: China's Fractured Internet - Part II - Beijing and the Chinese Internet

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Are Manufacturers Coming Home?

On Monday, 24 August 2009, the Wall Street Journal published an article featuring the story of Mr. Farouk, an appliance maker, who decided to pull his production out of China to produce in Texas.

What are the reasons he cited for his decision to move production out of a low-cost country?

• better control over manufacturing and distribution
• better control of quality and inventory
• easier to fight fakes
• higher profit margins -- due to better quality and a better image

"I think you're starting to see more manufacturers rethinking outsourcing," says Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a public policy and research group based in Arlington, Va., calling a June speech by General Electric Co. CEO Jeffrey Immelt, where he said that overseas outsourcing had gone too far and that U.S. companies needed to expand domestic production, a "bellwether of what's happening in manufacturing."

Besides GE's efforts to manufacture more within the U.S., other companies such as St. Louis-based electrical-equipment maker Emerson has shifted some production of items such as appliance motors from Asia to Mexico and the U.S., in part to be closer to customers in North America.

Due primarily to the fallout of the global economic crisis, but increasingly due to antagonistic policies between China and the U.S. and China and other foreign nations, Andrew Hupert of ChinaSolved writes, "[t]he sun is setting on China as a manufacturing center." And if they are fortunate, "China’s millions of unemployed grads are more likely to end up at a workstation in an office building than on a production line in a factory." Let us not forget that technology, namely the increasing cost effectiveness of industrial automation, also plays a constant role in reducing the size of the manufacturing workforce worldwide.

Last week I had lunch with Umesh Tiwari of Utopia Fashions. After we ordered, Umesh began to talk about sourcing. He has been manufacturing in China for about 5 years and had overseen several factories in Indonesia for eight years prior. He knows the textile industry and Southeast Asia well.

He emphasized that for his industry an ideal sourcing country should have the following characteristics:

1. raw materials,
2. space for factories,
3. a sizable labor supply,
4. strict governance,
5. political stability,
6. excellent infrastructure and logistics, including a highway system, a railway system, airports, ocean ports, and
   
7. electricity generation and distribution networks.

Given these criteria, China still outperforms the Southeast Asian nations, even after the global economic crisis. In response to the crisis, he has pushed the low-end production lines out of China to Vietnam, Malaysia, Bangladesh, and kept the higher-end products for critical customers in China, local to his operation, to control oversight.

The WSJ article did not clarify where Mr. Farouk was based, the U.S. or China. Perhaps he was not able to control his China-based manufacturing operation because he was not living in Shenzhen, or had not hired a trusted manager to run the enterprise on his behalf. This piece of information would be critical in determining whether or not his story is a bellwether for China manufacturing.

Nonetheless debates are arising within the Qingdao business community regarding the rationale of continuing to manufacture in China. These are not coming from some non-U.S. foreign members who are benefiting indirectly from the Chinese stimulus package which is aimed largely at improving infrastructure, for example, the high speed rail system, but from U.S. members who are concerned about antagonistic policies coming from China and the U.S., regarding taxes and savings. The information is still unclear, but it appears that some policy makers on both sides would like to reverse the current outsourcing model.

What do you think? Does this story foretell the pulling out of manufacturers from low-cost countries? Or will each individual industry and company find a unique solution? What are your thoughts on the related policies being put forward by both the U.S. and China, or other foreign countries and China?

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China's Top 200 Importers and Exporters in 2008

Only two days ago, The China Sourcing Blog cited a recently published China Customs report on the Top 200 Exporters and Importers in China in 2008.

Report highlights:
The total export value of China's 200 leading exporters: USD 367.53 billion, an increase of 21.3% on 2007. The leading 200 exporters accounted for 25.7% of the total export value.

The total import value of China's 200 leading importers was USD 448.98 billion in 2008, an increase of 30.1% compared to 2007. These 200 importers accounted for 39.6% of total import value in 2008.

The top 10 exporters - unchanged from 2007 (Rank, Enterprise, Export Value in USD million):

1. Shenzhen Hongfujin Precision Industry Co., Ltd., 26218
2. Dongguan External Processing & Assembling Service Co., 15514
3. Dagong (Shanghai) Electric Appliance Co., Ltd., 15040
4. Nokia Corporation, 8576
5. Helian Yongshuo Computer (Suzhou) Co., Ltd., 7849
6. Shenzhen Baoan Foreign Economic Development Co., Ltd., 7371
7. Tech-Front (Shanghai) Computer Co., Ltd., 6668
8. Huawei Technologies Co., Ltd., 6531
9. Inventec Science & Technology Co., Ltd., 5989
10. Renbao Information Industry (Kunshan) Co., Ltd., 5232

The minimum import scale of the top 10 was USD 5.23 billion, while that of 2007 was USD 4.66 billion.

The top 10 importers (Rank, Enterprise, Export Value in USD million):

1. China International United Petroleum & Chemical Co., Ltd., 76463
2. PetroChina International Co Ltd., 24840
3. Shenzhen Hongfujin Precision Industry Co., Ltd., 21072
4. Sinochem Group, 12576
5. Dongguan External Processing & Assembling Service Co., 11633
6. Zhuhai Zhen Rong Company, 7755
7. BAX Global Shanghai 6471
8. Baosteel Group Corporation, 5613
9. West Pacific Petrochemical Company Co., Ltd. Dalian, 5453
10. AU Optronics Corporation, 4742

Diana, posting for The China Sourcing Blog, picked out some interesting facts from the report:

• All the enterprises ranked exporters in the report are distributed through 19 provinces in China
  
• 185 exporters of the top 200 are located in the eastern coastal regions
  
• The total trade value of 2008 was USD 2561.6 billion, an increase of 17.8% compared to 2007
  
• The total value of exports was USD 1428.55 billion, an increase of 17.2% compared to 2007, and the value of imports reached USD 1133.08 billion, an increase of 18.5%

Beyond the significant increases in trade and exports, what struck me as most noteworthy was the export dominance of enterprises in the electronics, telecommunications, computer and information industries on the one hand and the import demands of petrochemical and steel companies, often state-owned, on the other.

What are your thoughts?

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Building the first zero-energy super yacht in China

2009 August 12, Qingdao. On this hot summer afternoon, I introduced Shinji Tanaka, managing director of the China TSS Group, to Preben Kristensen, founder and general manager of the Dragon Project.

FULL DISCLOSURE: I am friends with both Shinji and Preben, and I currently provide business development services to the China TSS Group.

This has been my third visit to observe the progress of the Dragon Project at the Qingdao Shipyard. The Manufacturing Committee of a Qingdao business group, comprised primarily of foreign businesspeople, had arranged the first meeting over a year ago. And at the end of June 2009, the group went on the second annual tour.

During this more informal meeting Shinji and I met Preben in his office/apartment adjacent to the shipyard itself. Unlike many of the foreign businessmen in town, Preben has chosen to live not in the city center and commute to and from the factory, but in the western section of the city, the old town. During the German colonial concession period from 1898 to 1914, the Germans controlled Jiaozhou Bay, the sea gulf located in Qingdao Prefecture. This old city center still has many examples of German architecture including the original Tsingtao Brewery, associated now with the world famous brand.

After introductions, Preben offered us green tea, and put some Tsingtao Beers in the freezer for later. He asked Shinji about his operation in town. And Shinji responded that the China TSS Group was the evolution and extension of a factory automation company which his grandfather started in Japan in 1960. In 2001 his father, the current president of the company, decided to open a factory in Qingdao to supply the Japan TSS Group with favorably priced machined components for their automated manufacturing solutions. By 2004 China was not only providing machined parts and subassemblies to Japan but was also supplying semi-automated assembly jigs and simple automated machines to customers in China.

As Shinji began to ask questions, Preben pulled out a single page brochure which displayed an artistic rendering of the Dragon Yacht at the top, several technical drawings of the ship in the center, and about a dozen small photos at the bottom showing the boat at different stages of construction.

It is important to get a sense of the scale of this project. Preben has been dreaming about building a zero-energy super yacht for over twenty years. He sailed during his youth in Denmark, and refurbished a steel hull sailboat with a deck length of over 30 meters as an adult. After having experienced rough seas all over the world, after having learned how unwell racing sailboats fare in severe storms, and after having traveled to Antarctica as a photojournalist with a Russian science expedition, he wished to develop a highly seaworthy extreme expedition super yacht, or what he likes to refer to as the 4 X 4 of the sea. In addition to seaworthiness, expeditions require energy independence. Removing the reliance on fossil fuels eliminates the environmental footprint of ownership. It is therefore only natural that he will seek to present Dragon 1 as "a show boat and research vessel for alternative energy systems afloat."

He based the architecture on what are considered to be the most seaworthy yachts in the world. And then spent years researching the critical alternative energy systems which would make a boat such as this, energy independent under all conditions. Here are just some of the most critical energy independent features.

• 24v/8800ah battery bank
  
• 40m² of the latest generation of marine quality solar voltaic panels provides extra battery charging power –max. 4kw.
• Two wind turbines which provide a maximum output of 4kW. Chosen for their silent operation and tolerance of turbulent wind conditions. They can both survive wind speeds in excess of 200km/h.
• A hybrid diesel-electric propulsion system with a direct drive, controllable pitch propeller. The 300kW electric motor has a very high linear torque from under 50rpm. When under sail, the propeller blades can be adjusted to turn the motor and generate substantial electricity with only a very small reduction in boat speed. This is used to charge the batteries.

From the office we drove less than 5 minutes for a tour of of the mast manufacturing facility, a cavernous hanger which easily housed the two half-football field length masts and two booms which were supported horizontally at waist level for the workmen to complete the fabrication. The workmen were in various stages of tap welding supports onto the aluminum extruded masts to support the rigging hardware. Prior to having the masts manufactured in China, Preben sought quotes from abroad. He realized that he could have them made in China, in Shandong Province, for a fraction of the cost. After striking a deal with some mast experts from abroad to oversee production, his yacht building company found itself founding a side business in mast fabrication. Often pioneering acts have knockoff effects.

We then drove to the open hangar which covered the the initial super yacht under construction. At first sight Shinji was amazed at the size of the craft. Three flights of stairs were required to reach the deck. The depth of the hull was considerable, enough to contain a 5 or 7 double cabin lay-out, depending on the dimension of the central salon.

While still in the office Shinji, amazed at the undertaking of designing and building a cutting-edge super yacht, asked, "Was this designed in China?". Preben had used the services of a naval architecture firm in Shanghai during the design phase and then retained the services of the chief architect and his small team to oversee the construction. "Was it completely designed in China?" he continued to press. "Not completely," Preben responded, "The overall concept comes from a smaller wooden ship designed and built by Colin Archer, and I checked yacht experts in Europe to verify that this concept would work for a larger steel hulled version."

"How have you been able to ensure that your quality standards are met?" Shinji posed. Preben cited several factors.

1. Constant oversight of all aspects of design and construction. The proximity of his office to the shipyard affords him the ability to visit the shipyard at least three times a day.
   
2. Personal selection and negotiation with suppliers. In addition Shinji had asked how Preben dealt with the possibility of kickbacks among his staff, which is relatively common in China. By personally vetting and selecting the suppliers, Preben believes that he has reduced the possibility significantly.
   
3. Being well prepared and having lots of good subject matter experts/contacts all over the world. Having an almost thorough knowledge of all aspects of steel hull construction, as well as the alternative technologies, helps him to keep everyone honest.
   
4. Drafting solid contracts, either with the assistance of a lawyer or by oneself, so as to have the contract work to the benefit of your business. Preben emphasized the importance of writing a solid contract with the shipyard in particular. During the drafting of this contract, he attended a seminar in Shanghai given by lawyers based in China with experience in writing shipyard contracts, and also sought advice from worldwide experts. His well crafted contract has been critical to keeping costs down and quality levels high.
   
5. Deciding to have the boat design and construction and certified to the rigorous RINA certifications (Genoa). First, few sailing yachts of this size in the world are formally certified by RINA, even though others claim to follow the standards. Second, the certification requirements provide a stringent, well-documented standard which his team must meet. Third, the certification will serve to offset any negative perceptions of Chinese manufacturing quality.

We boarded the deck and walked toward the bow, passing the exterior steering area, the spacious control center, the area which would be covered with the solar panels. We then returned to the stern and after Preben switched on some lights we descended into the belly of the ship. Two large cabins in the rear with individual toilets and showers, the central hallway with two larger cabins on either side, and then entering into the high ceilinged salon, and then finally into the large captain's quarters. Visible through some access holes we could see the keel and the lower deck where the batteries and the drive propulsion systems will be.

Back on deck Preben brought our attention to the bow and stern sprits. Dragon One is equipped with a 4.5m bow sprit and a 3m stern sprit in order to increase sail area. Few vessels have both a bow and stern sprit and he believes that his signature design will mark owners as being green just as much as the signature profile of the Toyota Prius. The sprits are also useful as observation platforms in shallow waters and when boarding or leaving the vessel.

We then drove back to the apartment in the Chevrolet station wagon, had one more drink, and then arranged to have dinner at a Japanese restaurant later that evening. And Shinji and Preben talked about their individual experiences in Italy, Germany, Denmark and Sweden, and started to become friends themselves.

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