Commentary

Henry Blodget Does China

Tech Market WatchBy Perry Wu
Henry Blodget, the infamous tech analyst of the Dot-Com era, is now a columnist for the online magazine Slate. He has written recently about business and investment in China.

He recently asked for stories about people's business experiences in China, and so I would like to send Henry a letter.

Dear Henry,

So you wanted to know about doing business in China. After many years of observing foreigners and foreign companies pouring into China, I think I can offer some perspective.

First, most foreign companies in China fail. That begs the question: why do they still keep on coming? The standard answer is that with a population of 1.3 billion, you can't afford to ignore China. It is too big, too important, has too much potential to ignore. That might be true, but I think there is a different reason. You read all the time about multinational companies, venture capitalists and small businessmen pouring into China. But I think their rationale is largely suspect. I don't think they are taking into account the hard economic realities.

The reason has much in common, Henry, with why people poured money into Internet companies in the late '90s. I think you know something about that era so I don't need to go over that history. Let's just call it a bandwagon mentality. There is also a certain glamour, an excitement, about going to some place so far away. Remember when cool people opened websites and looked down on bricks-and-mortar companies as staid and doomed to be obsolete? It's a little like many foreigners trying to do business in China.

Tell your friends you are opening a tavern in your hometown in Columbus, Ohio and it's no big deal. Tell them you are going to open a bar in Qingdao, China and you're suddenly a cosmopolitan man-of-the-world.

If you're a CEO of a large multinational, you probably won't make the front section of the Wall Street Journal if you announce a new distribution center in Fargo, North Dakota. But if you announce a distribution center in China, you'll definitely make the news pages.

But that is the wrong way to do things. Money should only be invested after a hard, sober look at potential for economic gain, not on the basis of doing something exotic, or doing something because it is what other companies are doing.

You see, Henry, at the end of the day, many foreign investors in China forget, just like tech investors did, that a business has to generate positive cash flow over time to be successful. Period. If you ignore that, you ignore everything. Just as the laws of physics are said to be non-local, so are the laws of commerce.

This past month I watched the China Central Television (CCTV-9) English-speaking Competition where Chinese university students compete to see whose English is best. There were six contestants left in the finals. Of those six, one came from China's Xinjiang Autonomous Region and another came from the Macao Special Administrative Region. One of the tasks was for each contestant to translate spoken English into spoken Mandarin. Four of the contestants had little trouble, because they were raised in Mandarin-speaking environments. But the Xinjiang and Macao contestants had great trouble because the former grew up speaking Uighur, the latter speaking Cantonese. After the Cantonese speaker stumbled through her task, the host of the show apologetically told the television audience that perhaps Mandarin was not the contestant's primary language and therefore she could not perform as well as the other four. Henry, the central Chinese government has done a great job integrating Mandarin into all corners of the country, but you are still dealing with very different cultures and growth rates throughout the land. Even urban centers are very different–spend six months in Beijing and then move to Shanghai for six months and you will witness different values, foods, and dialects. When a company wants to "conquer the Chinese market," the company should be reminded that even China Mobile has different services, prices, and business plans for each of China's provinces. Add to that, China Mobile only recently was able to standardize wireless short messaging services (SMS) among most of its provincial outposts. Now if China Mobile can't localize and standardize in each province after a couple years, no foreigner should expect to be able to do anything similar in less than an annum multiple of ten.

Anthony Lok, managing director at Bank of China International in Hong Kong, said a few days ago: "Everyone sees 1.3 billion people buying things online, but it turns out that 800 million of them are sitting on the farm." This sums it all up for you. I chuckle as I am reminded of a buddy a few years ago who was working on a well-funded website targeted at the 800-950 million Chinese living in rural areas. Did those investors not understand that a farmer in China is not like a farmer in Iowa? The rural website company stopped operations after a year of spending close to US$8 million. Wow.

Investing in one of China's many website portals is an example of investing in most other industries in the Middle Kingdom. Pretend you are an emperor whose concubines are a group of quintuplet sisters (true, a small group for an emperor like yourself) and you want one to bear you a son. This is the type of crapshoot you have as you wager on which portal will be China's Yahoo. Though these companies have billion-dollar valuations, that there are so many identical (Sohu.com, Sina.com, Netease.com, Tom.com, et al.) offerings for users and advertisers should make you shudder. How can such identical companies exist online? I too have racked my brain and asked my friends. Is it because the market is still not saturated? Is it because operating costs are so low? Is it because the current high stock prices give them more breathing space? Is it cultural? Maybe it is a quintessential Chinese marketplace: when you visit any fruit market anywhere in China you will see a line of stalls all selling the same wares for the same prices. How can this continue to exist? Why do other sectors in China's business world accomodate so many identical business models selling to identical consumers?

There are many business successes in China, Henry. But like elsewhere they take patience, time, money, creativity, people, and lots of luck. Bottom line: if you have a product that people in China want to buy and your business is backed by a sound money-making plan, you can usually overcome the obstacles. A mountain stream will always find its way to the sea.

I could write many books to answer your questions, and I have posed some of my own. Libraries are filled with some good, and some poor, writings on what it takes to do business in China. But just as Oscar Wilde described marriage as the "triumph of imagination over intelligence," I think many foreigners in China have fallen in love with a fantasyland.

Sincerely,
Perry Wu

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.

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