Chinese Box

Apple Computers is now basically the Chinese Government

There's a delightfully oddly written story on Apple Insider about the hubbub surrounding China's iPhone, and the fact that Apple tends to remove negative news from its message boards. Or as a Chinese person might put it, the news that Consumer Reports has not recommended iPhone 4 has been harmonized.

Apple has been straight-forward lying about the issue, and trying to maintain the lie in face of the fact that everyone everywhere has an iPhone and can recreate the problem. And Apple Insider is being wonderfully sycophantic by titling stories about Consumer Reports negative review "Consumer Reports ranks iPhone 4 best smartphone available". But doublespeak and censorship aren't the only places where Apple is taking lessons from China.

First of all there is the app store. Anyone and everyone can develop an app, but why would we allow the free flow of goods an information when we can censor anything that we deem unappealing to our brand image? Like for instance obscene literature, or political commentary, or competition. (In China pornography is banned, political statements must be carefully worded, competition is not allowed in certain market segments such as TELECOMS)

Second, When it comes to Apple's own goods, it doesn't believe in the market. This can be seen in any of its "closed systems" but in no case more so than its decision to force all iPhone users to use a subpar telecoms service. China telecom, the national mobile monopoly (less of a monopoly these days, but still controls around 70% of the market) is considered to have the worst service of any company in China.

Third, When people go against it, its not against using overwhelming force.

I suggest a test. Someone design an app that would anger the Chinese government. If we can make it popular enough and it gets pulled so as to not ruin Apple's China blitz, then we'll know that something is really wrong over there.

China Stocks: Censorship is a problem for China's tech stocks

Every week in this space I will be writing a little something on Chinese stocks, with the goal less to provide sound short and long term investment advice, and more to provide analysis of various Chinese companies and how they stand in a global market. If anyone happens to make money off it, good wishes to them.

I visited Vanceinfo about a month ago, one of a growing pool of IT outsourcing companies in China, and the only one that is listed on a foreign stock market (NYSE). All-in-all the company is quite impressive. They've been near doubling their workforce every year since the company was founded, which, with about 15% of their employees leaving the company every year, implies hiring about 20 people a day. According to some reports which they eagerly gave me (from a Stanford study) they've been growing faster than their competitors, and are now the third largest such company in China. That said, I left clueless as to what their competitive advantage was, and struck by how China's internet policies are holding the industry back. 

The way it was laid out to me was that most China-based IT outsourcing companies serve Japanese and Korean clients where knowledge of English is less important and Indians are linguistically unable to compete, but Vanceinfo, with its fancy US listing, has primarily targeted the Western market, and claim to be the top in the field there (though a few other companies are showing similar revenue numbers from Europe/US). So they dominate the market for China-based companies serving Western IT clients. 

What I couldn't understand though was why a Western client would care if the company was based in China or India. It seems the biggest factor is that a lot more foreign multinationals are based in China than India, but that doesn't seem to me like it would provide enough of a competitive advantage. That said, the company is tiny compared to Infosys, so speedy growth for the next 5-10 years is quite likely for that reason alone.

Moving information

What really struck me though is how much the Chinese government's internet policies are an inherent risk to the company. A lot of what the company does involves accessing content that is banned on the Chinese internet (testing hardware, a small part of the company, requires accessing Facebook with each device). This is a fairly small problem as they run everything through a Virtual Proxy Network (VPN) for security reasons, but still, it means that their fundamental business plan requires breaking Chinese law. 

Of more concern is that they eventually want to get into cloud computing. This is a big thing in the Chinese internet space, because with the blatant disregard of copyright running things over the internet is the only reasonable way to make money off of software, but could computing services have the annoying tendency of occasionally being blocked. Google Docs isn't properly working in China, and even game companies - currently the major cloud service - occasionally get shut down. I find it hard to believe a company would trust their operation to the cloud when there are such built in risks. 

Short-term

So over the long term I think this company might have some problems, though over the short term this is still a solid stock, and one that I don't think has performed up to its capacity. It'll probably continue dropping for a while as the stock market goes into its second dip, after which one could easily pick up a few dollars on it.

Censorship can never win against naked Japanese girls

This makes me really happy:

 On April 11, famous Japanese AV star Sora Aoi (苍井空) created huge buzz in the Chinese Twitter community, both girls and boys are twitting about her. Since the news about Sora Aoi registered her twitter account @aoi_sola broke out,  many Chinese netizens on Sina Micro blog “climbed over the wall” in order to follow her. (Twitter is blocked in China) The number of her followers on twitter was growing at the rate of 37 per minute. As for now, she has over 30,193 followers and her first tweet message was posted on March 30.

AV stars like Sora Aoi are very popular amongst the Chinese adolescents and even seen as “the great sexual enlightenment.” Just like what Hecaitou said “Aoi teacher, thank you for many years of hard work, we should present certificates of appreciation to her.” He said “so many years, finally get to meet AV stars on twitter, for the first time I feel the internet is real.”

I've always said that censoring pornography is pretty much a guaranteed way to make young males break the law. What's so cute about this story is the combination of  complete disregard for censorship regulations (twitter, porn, all blocked), the very different nature of China's internet community and netizens ("we should present certificates of appreciation to her" is such a cute thing to say to a porn star), and the fact that I wasn't aware up until reading this how big of a deal Japanese porn is in China.

I want to end this post by associating Vaclav Havel's comments about ordinary actions under a totalitarian regime with a picture of a breasty girl in a cowboy hat and a bikini:

People who live in the post-totalitarian system know only too well that the question of whether one or several political parties are in power, and how these parties define and label themselves, is of far less importance than the question of whether or not it is possible to live like a human being.

-Vaclav Havel, The Power of the powerless

 

Sora Aoi
 

Baidu is an even worse company now that Google is gone

Marc Van Der Chijs (the founder of Chinese video sharing sight Tudou) has a blog post up about Baidu's paid search problems.

One big difference between Baidu and Google is how the paid results are mixed with organic search results. Both sites insert paid results, but Google gives them a yellow background so that it’s clear that they are different from the normal search results. Baidu does not do that, they look exactly the same as normal results, except for the characters 推广（tui guang) after the ad. Normal results have 白度快照 (Baidu kuai zhao). Of course the average Chinese netizen probably does not know this.

This is nothing new, they have done this for a long time already. But what changed over the past few weeks, is that they now don’t sell 2 or 3 paid positions, but for some keywords up to 10 positions!

I made the point a week or two ago about how Baidu has an incompetent management staff, and this mostly backs up my point. They've responded to Google's move just by reasserting the point that they aren't a responsible company. Van Der Chijs also makes the lovely point that their primary competitive advantage is a disregard for international copyright law, which seems to me right on target.

We're commissioning a story from one of our freelancers about "what's going to happen to google users," which I'm looking forward to reading. The hearsay is that Baidu isn't picking up market share, which sounds pretty unbelievable to me, but when you think about it, there really isn't anything preventing Chinese people from using Google.hk... It works about as well as Google.cn, and much much much better than Baidu.

CIB did a profile of Van Der Chijs a while back. He's an interesting fellow with a weird backstory. 

The trouble with infotech behind the great firewall

A friend of mine who works for an IT outsourcing company in China, told me that the whole company's network has to work on a VPN. A lot of what they are doing involves testing the usability of phones on heavily used websites like Facebook and Twitter, which of course are blocked in China. The use of VPNs makes the job doable in China, but you have to wonder at what cost to their bottom line. 

Why Google should have stayed

Yasheng Huang is a writer I like. A high point from his article on the google affair (you should read all of it):

China's market for ideas is enormous. Last month, the Chinese premier, Wen Jiabao, went online and personally answered netizens' questions, even some that, by Chinese standards, were rather blunt. (One answer Wen gave on the real estate market prompted a blogger in China to post all the past statements Wen had made on controlling real estate prices -- alongside an index of rising prices.)

Baidu is just a bad company

I have to comment more about the whole Google event. Mainly I want to succinctly lay out why Baidu is a bad company that doesn't deserve the money they are getting off Google's withdrawal from China.

 I've published two separate stories on Baidu's screw-ups. First, in January 2009, I published a story on Baidu's attempt to recover from a series of scandals in 2008 (The linked story is a compilation, my piece is under the headline "Robin Li" Baidu's CEO). Among said scandals were:

1. Allegations that they were censoring news related to the poison milk scandal, in order to protect one of the companies.

2. An expose about their advertising practice which doesn't differentiate paid search results from real search results, which had the unseen consequences of promoting doctors that weren't real doctors, and other scam artists.

Both were especially damaging because a search engine is essentially about presenting users with authoritative content. Google had been rapidly eating away at Baidu's market share, and would continue throughout 2009 (Google's market share jumped from 22% to 30% between January and December). 

In December 2009, I suggested investors sell the stock based on the fact that: 

1. Google was rapidly eating away their market share.

2. Investment was obviously more speculative than fundamental at that point

3. Their new advertising system was still being tested

If I had known that google would do what it did I would have of course not published said story, but since then I have become less confident in their business plan and management.

Part of that is based on the fact that the management seems to lack confidence in the management. Baidu is losing top managers day after day. 

They are also venturing into content areas where it is nearly impossible to make a profit in China (video), or where their competitors have proved more competent (games). Their expansion over the past 2 years has proved breakneck and pointless. Baidu's attempt to expand in Japan is also proving to be a complete failure, dismantling their argument that they are better with Asian language search results.

I don't doubt that Baidu will benefit of Google's departure, nor do I doubt that they could prove to make their shareholders very very rich for a very long time. I just think its a bad company, that deserves to fail.

Update: This post has been picked up by the twittersphere, which is quite lovely, though its gotten a lot of comments a long the lines that its "short on argument." I wanted to clarify that I'm not arguing that Baidu deserves to fail because its running a poor service, which I think is what it sounds like from the tone (I had slept 4 hrs when I wrote it). You can argue that from the 2008 scandals, though overall I'd say the company's core service is at least on the level of Bing. I'm more trying to make the point that its poorly managed, and was in the process of imploding, when Google, to everyone's surprise, hit the self-destruct button. Baidu is going to plug on for decades now, but I'm fully convinced that if Google hadn't left it would have been the dominant browser by 2013.

Google is gone

Image by keso via Flickr

My attempt to write a post about Google ironically led to a collapse of my browser right as I was about to finish. (It was due to a glitch in Google's chrome browser for extra irony).

I don't have the energy to repost my full thoughts on the general fucked-uppedness of the event. Its made my online life much better because it inspired me to pay the money for a VPN, helping me discover twitter and thereby double my blog traffic. And I think it'll make the job of a China journalist a bit easier as the China netizens migrates to VPNs and foreign social networks. But its a serious blow to the education networks of common Chinese people. Which is important. Google and the Chinese government can both shrug this off, but China and the Chinese people will have some troubles with it.

I suggest James Fallows' recent interview with David Drummond for a good run down of the stuff that hasn't been widely reported already.

Tech deflation: the big story of the next 10 years

April issue is now going to the printers, and so I have some more time to write a longer post about a story, or a chain of stories that I want to write over the next few months. It's about tech deflation, and how China might change the world (for the better).

 The story first came to my attention when I was talking to a cantankerous medical industry analyst from Montana (he lied about not having a business card when he heard I was a journalist, and then searched for one when he found out I was a journalist he read on a regular basis). I asked him what he thought of Mindray Medical, to which he straightforwardly replied "Mindray Medical is going to change the world."

His argument, though new to me at the time, was one that I was later able to identify in a number of sectors: Chinese tech manufacturers are capable of producing 80% solutions at 40% the price, which puts them well in the price range of rural hospitals and developing nations which have thus far been unable to afford the 100% solutions of GE and their ilk.

The deflationary power of Chinese manufacturing is well recorded, and there is a few reasons to expect China to move out of low-investment sectors (tube-socks, lighters, children's toys), and into tech sectors, that could contribute a much larger net benefit to developing economies.

1. Wages are quickly rising in the coastal areas, which is pricing Guangdong, Zhejiang and Jiangsu (China's biggest manufacturing bases) out of the market for low priced goods. - my upcoming Wenzhou article touches on this.

2. Low-tech jobs are being poached by south asia, and the non-coastal provinces of China. - upcoming story on Bangladesh in our magazine (which makes me think I should also look at logistics companies)

3. Its already happening. Cheap Chinese cellphones and cars already flood the markets in Africa, Latin America and the Middle-east. It is only going to grow to other sectors. Not to mention China is used as a manufacturing base for most foreign electronics products which is easing the technology transfer.

4. The Chinese government's push for commodities in developing countries has widely opened up these markets to Chinese merchants, as well as produced new wealth in the areas to be used to buy Chinese goods. - the book China Safari deals with this well

Besides medical devices, electronics and autos, every greentech person I've spoken too has said that China is going to inevitably take a part in bringing down the cost of clean technologies, or "scaling up" said technologies, though such a movement has thus far been held back due to concerns about IP protection. I still hold on to my firm belief in agritech, which in china benefits from the government's concern about food safety, and a general lack of intellectual property enforcement.

The good prediction: Over the next 10 years, medical technology, communication infrastructure, green technology, and bio-engineered foodstuff will drastically reduce in price, bringing large net benefits for developing markets which are building their communication, medical, energy, and food infrastructure.

The bad prediction: Car ownership will skyrocket in developing markets, possibly contributing more problems than green tech contributes solutions (unless something exciting happens with electric cars, which is a possibility). China starts competing more directly with Western core-competencies, creating a tense trade atmosphere. Trampling of intellectual property laws will contribute a lot to this.

I'm betting that's the story of the next decade.

Why I might buy the iPad

I want an iPad. I'm not proud of it. I know as well as anyone that its a flawed product at best, but I want one. Here are the main reasons:

1. The number one reason is I take a lot of notes, which seems to be what tablets are made for. I somewhat dislike the lack of handwriting recognition (though I hear that can be fixed through apps). But in general the easyish access to a calendar program, a notepad, a word-processor and the internet would be a godsend to me. If it had a voice recorder it would be even better.

2. I want an eReader as well. I don't think this will be the best option for an eReader. I'm not sure if I'll be able to scribble on things, which would be fairly useful to me, and why I'm leaning towards getting a Chinese eReader. I also dislike the "closed" system, but that will be ok if I can buy books from companies other than Apple and use them on the iPad... I'm not sure if I can for new books, but I'm betting project gutenberg could be used, as well as PDF files (I read a lot of research reports).

3. It'll be cheaper than an iPhone in China (if bought in HK), and I don't really think I need 3G anything (though i kind of want to play with Foursquare). 

4. If its comfortable enough to type on, then I could leave my computer at home when I go to coffee shops.

The problems are all well known though. I am getting a regularly enlarging supply of gadgets that I need to drag around with me, and this would just add to the problem (unless I could leave behind the computer). I'm tempted to drop the idea and just get an Android... but I definitely think there is potential here in the future.

I need to learn how to program apps.

Update: I completely forgot about Pleco. Which is close to the biggest reason.