China Apprentice

“If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of everyone, and the receiver cannot dispossess himself of it.” - Thomas Jefferson

Photo by Fatty Tuna

China is often admired for its vibrant variety of cuisine, a long and enchanting history, delicate ceramic, silk, and other cultural arts, not to mention, a vibrant street market of cheap copied DVDs, pirated software, and fake designer clothing. The dichotomy of rich cultural heritage based in Confucian and Daoist doctrine paired with an almost flagrant neglect for characteristically “western” values for intellectual property rights (IPR) can surprise the unassuming visitor. The fakes, the poor product quality, and an apparent disregard for IPR make foreign governments and businesses unsure of China’s innovation potential. Understanding the past, present, and future of China IPR is key to successful business in China.

Foreign media consistently overwhelms the international community with impressive statistics of China’s growth. That growth is enthusiastically fueled by continual investment from the world’s multinational corporations in the new “socialist economy with Chinese characteristics.” Depending on the source, China’s GDP growth hovers at just a fraction under 10% year-on-year – a record for a country’s development by almost any standard. The so-called “gradualist-reform” inspired by Deng Xiaoping’s famous Southern Tour in 1992 and subsequent opening of the economy that led to China’s eventual inclusion in the World Trade Organization in 2001 has attracted a frenzy of foreign direct investment and an overall global rush to enter the China market. Annual factory growth, though slowing in recent months, holds steady at around 17% while export growth hovers around 20-30% . It wasn’t long before the world recognized China would become the “factory of the world”. The technical competitive advantages of companies opening facilities in China rolled in on waves of technology and intellectual property transfer. Literally millions of China’s poorest citizens were trained to operate all manner of machinery in order to manufacture anything the world ordered.

The more Gucci pocketbooks and James Bond movies China’s workers manufactured, the more local people realized they might like one or two themselves. After all, a fake Rolex from one of the original Rolex factories really didn’t seem so different from the real thing sold for thousands times the price in downtown London. Fakes and counterfeit products are good export moneymakers too. In fact piracy and counterfeiting has been consistently on the rise since China took the title from Taiwan, Russia, and Southeast Asia. The Geneva Chamber of Commerce claims that 7% of all global trade is counterfeit goods. Estimates put foreign firm’s losses at $20 billion annually with two out of five companies losing more than 20 percent of their local revenue sometimes reaching as much as $150 million annually. And this isn’t just fake CDs and DVDs. Half the motorcycles sold in the China market are imitations of Japanese Yamaha and Honda. 97% of 1300 synthetic medicines produced in China are copies. High-technology items, such as microprocessors, are knocked off as well, modified to accommodate pirated components in video game consoles or computers thereby creating a value-chain based on piracy. There’s often no way to reliably tell if a product is real or not. Of course, most people probably wouldn’t be surprised to know that the “US-based Business Software Alliance claims that 96 percent of China’s software is illegally copied.” A CD of software on the street sells for less than a dollar and legitimate stores are virtually nonexistent. The processes for mitigating the mass IPR problems are weak at best. It can take five to six years in China to successfully remove a bad-faith trademark that violates IPR. Counterfeit products take up valuable Chinese domestic market share and are also aggressively exported overseas creating a real problem for both Chinese and foreign companies trying to leverage corporate intellectual property in China. Read the rest of this entry »

Latest from a trip to Padang, Sumatra, Kerinci, Lombok, etc. Blog is still blocked in China.

We haven’t posted here in a while because the blog has been officially “harmonized” by the Chinese Great Firewall - something in here tipped off the omnipotent censors in Beijing. So it’s difficult to get access these days and our Chinese readers can’t see it anymore. Thinking about migrating everything over to a different host or domain. Not sure when we’ll get around to that. For now, here are the latest shots from a wonderful trip to India. Refresh for more or click on a photo to browse them in flickr.

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I’m excited to take part in this year’s Lingnan Sun Yat-sen INDUSTRAT competition. Though the course may be an elective and I’ve already taken the required number of MBA elective courses (actually well over the required three), I was compelled to sign up. I’m interested to see what a “capstone” course for an MBA could be all about. I’m also a little scared to think that this intense four-day simulation could test all the things we’ve learned in this MBA over the past year and a half. A guest professor in from Hong Kong coupled with a famous simulation program developed by the great minds at one of the world’s best business schools, INSEAD, makes me more than a little curious about the 2007 Business Strategy Simulation.

I remember it was a mad rush to register for the class when it came available. A new online registration system at Lingnan like any new online system, didn’t work when it was supposed to let us sign up for the course. With suspense building, when the course finally was released to the Lingnan masses, it was a swift dash to find an open cable port for the student’s laptops and log in to the system. I slipped in the course just two people from the course limit.

And I’m glad I made it. It was enough to pique my interest when I first received the preparatory course materials for this course – 孙子兵法 or The Art of War by Sun Tzu (full text translation). A longtime enthusiast of Chinese philosophical thought, I was delighted to learn this strategy course wouldn’t be all about western ideas but would focus on possible the father of all strategic thought, Sun Tzu.

I’ve advocated before that I think Lingnan should focus more on some of the decidedly Chinese contributions to management theory and practice. The emphasis these days in MBA programs is so much focused on the ideas of a bunch of gray-haired white guys. The world is waking up slowly to the fact that China has a lot more to offer to the greater education community. This course is just one example.

The professor, 赵越 Oliver Yue, got me interested the minute he walked in the room and started to introduce himself. I was particularly inspired by what he claims is a theme in his life stemming from the repetition of a particular Chinese radical in his name, 走 which means to go or walk or otherwise indicate movement. Whether inherited from birth or motivated by the aspirations of his parents, Dr. Yue, makes a point to live his life reflecting a common Chinese proverb, 读万卷书，行万里路 or read 10,000 books, travel 10,000 miles. I don’t know about the books (though a PhD probably gets close), but he’s certainly made his round of travels. He’s been to all seven continents and snapped some fantastic photos along the way. Now, a man who lives by such mantra, enjoys the art of photography AND studies the application of ancient Chinese philosophy to modern business is a man of interest in my book.

In fact, not only do a frequently quote the same Chinese proverb and take gazillions of travel photos, but it was just yesterday that I gave a very similar final presentation in my Strategic Management class on the management interpretation of The Art of War. I was surprised to learn that the Dr. Yue’s lesson preparing us for the first day of simulation drew some very familiar connections in strategy with Sun Tzu.

In many ways I agree that a war’s battlefield can be much like the business environment （孙子管理思想？）. Perhaps Sun Tzu’s most famous line 知彼知已者，百战不殆 epitomizes the importance of having valuable information both about your own company and your competitors (to include customers, users, key actors, suppliers, etc.). To evaluate yourself, your enemy and the environment, Sun Tzu tells us凡此五者，将莫不闻，知之者胜，不知者不胜.

There is no general who has not heard of these five factors. Yet it is he who masters them that wins and he who does not that loses. When assessing the outcome of a war, compare the two sides in terms of these factors and appraise the situation accordingly.

The five factors he refers to are now often quoted in business strategy texts. 故经之以五事，校之以计而索其情：一曰道 – The Way, 二曰天 – Heaven, 三曰地 – Earth, 四曰将 – Command, and 五曰法 – Doctrine.

Modern theorists (relatively modern that is compared to 300 BC) have developed strategy frameworks that conveniently match some of The Art of War’s basic ideas. 天者，阴阳，寒暑，时制也. Dr. Yue highlights the relationship between Master Sun’s factor of “heaven” and David Baron’s market and non-market environment summarized in the acronym PEST – political, economic, social, technological not to mention the public and the media. Not only do these aspects affect the “business climate” represented by the heaven factor but we can also consider Michael Porter’s 5 Forces - Suppliers, Buyers, New entrants, Substitute Products, and Competition.

Modern theory coincides even more with Sun Tzu’s famous work. Henry Mintzberg’s Five P’s, Perspective, Position, Ploy, Pattern, and Plan match almost perfectly with Sun’s 5 factors, respectively. 道者，令民与上同意也。故可以与之死，可以之生，而不畏危. The Way can be compared to modern corporations’ core competencies and social responsibility. 地者，远近，险易，广狭，死生也. The idea of Earth representing distance, terrain, land, and place can be related to the company through internal analysis of resources, labor, capital, transportation, etc. Jay Barney uses such a resourced-based view to evaluate a firm’s financial, physical, human, and organizational capital thereby helping companies capitalize on resources with value, rarity, imitability, and organization. 将者，智，信，仁，勇，严也. Command, on the other hand, is the ability of the company leadership to implement strategy using the five characteristics of a general that also apply to any organization’s leaders:

Wisdom – recognize changing circumstances, active involvement in planning process
Sincerity – towards employees for soliciting their feedback and input
Benevolence – incentive system
Courage – no hesitation to make decisions which capitalize on an opportunity
Strictness – discipline for self and others

法者，曲制，官道，主用也. The last of the five factors, doctrine, is modifying the structure of the organization to facilitate strategy. This must happen at all levels of the organization: corporate, business, and functional. Though Sun likely didn’t have common business-level strategies in mind when he penned his words, concepts of specialization, diversification, integration, outsourcing, and strategic alliance are found in cryptic form throughout the text. Gary Hamel’s idea of Business Concept Innovation (BCI) is but one way to create a unique strategy that creates competitive advantage over competitors.

Sun Tzu tells Generals to evaluate the competition with the five factors by asking a series of questions. These questions can be directly related to key business strategy concepts:

Vision/Core competencies - Which sovereign possesses more moral influence?
Leadership - Which general is more capable?
Market/Resources - Which side has the advantages of heaven and earth?
Organization/Structure - Which army is better disciplined?
Competitive advantage/training - Whose troops are better armed and trained?
Incentives/Vision - Which command is more impartial to meting out rewards and punishments?

Even though we may evaluate our company today based on these questions and factors and then create an ideal strategy, tomorrow the environment could change. 夫兵形象水. 水因地而制流，兵因故变化而取胜. As the water changes its course in accordance with the contours of the terrain, so a warrior changes his tactics in accordance with the enemy’s changing situation. A business must have similar flexibility to realize strategy is fluid and ever-changing.

It’s amazing a text from over 2000 years ago still holds such significance in world affairs. The interpretations and applications of this little book are very practical for any business, small, medium, or large. I look forward to analyzing this simulation more and finding inspiration in this ancient wisdom.

Where to start a business in China - PRD or YRD

In most foreigner’s eyes, the subject of this article is hardly even a consideration. For most westerners not familiar with China, there are only two cities in which to do business – Shanghai and Beijing. In fact, outside of these two internationally well-known metropolises, few would be pressed to name other big cities in China. But rising real estate prices and a quest for even cheaper Chinese labor, has led some western investors looking elsewhere in the vast Middle Kingdom to start business. Shanghai has long been known as the financial center of China with a blossoming skyline of modern skyscrapers with bars and restaurants to rival New York City. But what most foreigners may not realize is that Shanghai has not always been known as a business capital.

Geographically and often quite politically isolated from the northern powerhouses, Guangzhou was actually the first city in China reputed for business. Without going into too much history (admittedly I’m no expert), Guangzhou was one of the first cities in China to open to the outside world in the 1600s where it was designated one of the only trading cities where foreigners could come onshore and conduct business. The silk, porcelain, and opium trade led to the war with the British that eventually conceded the territory of Hong Kong to the imperialists. This official foreign port only gave the business-minded Cantonese an excellent means to continue doing what they do best – making money.

Today, the people of Guangdong province have a reputation in China identifying them as the most skilled business people. The people of Chaozhou, a city north of Guangzhou are actually referred to in an ancient proverb as the “Jews of China” (in a good sense - meaning throughout China they are most skilled at business). While Shanghai has succeeded in recent years in attracting big foreign investment, Guangzhou has always been a place of entrepreneurs and opportunity.

Professor Jiang Lin 林江 at the Lingnan IMBA program at Sun Yat-sen University in Guangzhou recently gave a seminar detailing the differences in culture between Guangzhou and Shanghai that give Guangzhou it’s edge in entrepreneurial business. Prof Lin has done vast research on Chinese politics and the interaction with business. He currently teaches a course titled “Critical Issues” at Lingnan where he explores these interactions. Prof Lin was the official translator for Yuan Geng, one of the key figures credited with giving rise to Shenzhen SEZ – the first special economic zone in China that contributed to the recent economic boom. Prof Lin regularly consults leading foreign companies in Guangzhou such as Honda and Toyota on their business strategy in China. He was also the consultant to the key Dongguan investor in China Digital TV, a corporation that after listing on the NASDAQ exchange increased by over a factor of ten in value. His experience and expertise well qualifies him to compare the advantages and disadvantages of incorporating a business in Guangzhou or Shanghai.

Below are some of the main characteristics of Guangzhou’s business culture. First and foremost, Guangzhou is a city that support and encourages entrepreneurs and small businesses. Foreign companies or just those with a good idea may like to consider Guangzhou as a possible location.

- Local Guangzhou people have learned from Hong Kong how to do business – this is a classic case of the chicken or the egg – did the Cantonese learn from Hong Kong or were the Cantonese always just so good - the most efficient port in the world has given Guangdong a wealth of international business experience – while Hong Kong has morphed into more of a regional financial center, Guangzhou remains the mitochondria power supply behind the Pearl River Delta. Guangdong has the highest GDP of any province in China and was the first to surpass the 10,000 USD mark a couple years ago.

- Guangzhou has long-established relationships between business professionals and government officials – separated from Beijing, Guangdong government is intertwined with local business. Being so far from the national government, Guangzhou officials rarely have much opportunity for promotion beyond the provincial level. And they like it that way. Entrepreneurial ventures throughout the city guarantee the government officials have a great opportunity to make money themselves – far supplementing their modest government salaries.

- Shanghai government emphasizes support of state-owned businesses – most of the financial services in the city go toward these largely inefficient enterprises. While Louis Vuiton and Rolex may be common storefronts in Shanghai, the city harbors few local Chinese brands that are now gaining international recognition.

- The PRD contains the most Small and Medium Enterprises (SME) of any other province and financial institutions are used to lending to these entrepreneurial outfits.

- Guangdong people are well-traveled – the majority of Chinatowns around the world speak Cantonese. Why? Because Cantonese people have a reputation for chasing opportunities and going where money can be made. Many of those people return – many do not – this creates a network of Chinese all over the world that contributes to the business success back home.

- Guangzhou is a city of immigrants – like any land of opportunity, Guangzhou attracts people from all over – most of which are from neighboring provinces. People travel to Guangzhou from within China to seek opportunities in the big city. This creates a culture of diversity, tolerance, openness, and pragmatism. No one speaks perfect Mandarin and rarely do visitors encounter a snobby elitism sometimes characteristic of Beijing natives.

- Basic infrastructure is some of the best in China – perhaps due to the proximity to Hong Kong, Guangzhou boasts the fastest subway line in the world, some of the world’s tallest buildings, and a modern, efficient transportation network.

- A mild climate keeps Guangzhou natives and outsiders coming back (the summer heat also keeps people away!)

On the other hand, there are three main points about Shanghai culture that give it advantages over Guangzhou.

- Traditionally known for its “haipai wenhua”

- Shanghai blends the best of northern and southern business culture – while Guangzhou may specialize in entrepreneurship, Shanghai takes the best of Beijing’s talent for long-range planning and patience and balances this with a southern drive for quick returns and high profits. Guangdong tends to attract 3-year-or-less investments less inclined to make long-term high-tech investments.

- Strong central government connections – In China, guanxi can be everything - Shanghai officials and businesses maintain many high-level relationships with Beijing authorities – this allows for easier granting of national certifications and business permissions. Over 4000 central government officials hail from Shandong province and therefore have roots in Shanghai.

- Though Guangzhou attracts much immigrant labor, Shanghai is a national source of talent. Guangzhou’s entrepreneur culture puts less emphasis on education and more on practical skills and vocational studies. Guangzhou youth are born to parents who made their success through hard work and clever business savvy. Shanghai students excel in engineering and sciences.

A quick and dirty look at the vertical integration of an industry leader

In 1979, 20 young entrepreneurs with only 20,000 RMB in capital established the ”Youth Garment Factory” and created the origin of Youngor. 25 years later, Youngor grew into a leading company in the Chinese garment industry eventually becoming a listed company, Youngor Group Co., Ltd., with approximately 40 other subsidiaries. Today Youngor Group has developed an operational standard based on fabric and garment production with real estate and foreign trade as supplements.

As Li Rucheng, President of Youngor Group, confidently states, Youngor aims to “popularize the brand-the bigger the market , the longer the industry chain.” He emphasizes that the chain of Youngor “should be as long as it can be.” But professionals within the same industry don’t entirely agree with what Youngor claims is the secret to the garment industry in China. They claim that the vertical investment makes the chain too long, creating a whole string of risks that the head company will struggle to manage. However, Youngor persists in its own way and continues to expand its manufacturing scale. It currently faces several challenges in realizing efficiency of its vertically integrated company structure. Proper leveraging of these advantages will make the difference between failure and success for the Youngor Dragon.

I. Advantages of Youngor’s vertical integration
- Investment in high-tech solutions through high-tech fabric manufacturing base – textile industrial city – large investments in pattern design
- In-house cloth production eliminates added costs of purchasing and transporting supplier’s cloth – also eliminates delays in delivery
- Set up a software company to create an IT solution for increasing the transparency among different parts of the industry chain
- Strategic similarities among all links of the industry chain – should be able to realize efficiencies by owning all parts of the product cycle
- Owns the largest garment manufacturing base in Asia – biggest garment producer in China
- National network of sales centers with a common face to the customer - stable and multi-leveled sales network with over 2000 business sites – “whoever is closest to the market gains the initiative
- Textile production chain segment is an advanced operation – cooperates with world’s leading textile companies, recruits talented people, uses advanced industry equipment – investment of 100 million USD

II. Main issues facing Youngor
- How to turn the company into a sales-oriented enterprise from production-oriented
- Increasing efficiency throughout the extended industry chain
- Concept to product cycle currently too long – 70 days – products are missing the high season – currently producing five for every one piece needed
- Keeping pace with the season’s changing fashions and demand
- Surplus inventory – discount liquidations at 100 million RMB/year
- Cost of increasing number of B2C specialty shops – corporate vision
- Increasing transparency - companies are no longer glass houses - they are “glass plates under a microscope”
- Record growth figures make investors nervous Youngor is a “typical blue chip” stock

III. Possible Solutions
- Increase transparency using IT – the company should realize efficiencies in design-to-distribution cycle – follow example of American Apparel and Zara

- Compress product cycles to the point where customers expect the latest fashion from Youngor – give customers a reason to make fast purchasing decisions and return to the store frequently
- Hire a team of market specialists with international expertise – these experts closely monitor the market trends and forecast where Youngor fashion should go – need to strive to be a market leader who has a pulse on the latest fashion and is first to make it available to the everyday consumer
- At the beginning of each product cycle and at intervals periodically throughout the cycle, key members from each critical point in the industry chain meet (either virtually or in-person) to discuss the product development and make minor adjustments where necessary to meet the market demand/production restraints – develop an informal intranetwork that helps facilitate this communication
- Fine-tune the distribution network by only shipping small orders every two weeks to the sales outlets – each outlet submits order once every two weeks

- Use e-commerce to sell customized products directly to customer

- Develop website that gives customers multiple size and style options
- Allow customer to make clothing custom design decisions with in-store kiosks

- Increase sales channels through direct marketing

- Establish reliable IT communication network among branches and with headquarters
- Follow model of new high-performance sportswear company, NAU

- Create a unique shopping experience at the stores – create a Youngor “experience” modeled after Starbucks

- Design standardized store layouts, storefronts, displays, color schemes
- At the beginning of each season, produce in small numbers and only send new designs to key stores where customer reaction can be gauged and production adjusted based on demand

- Use franchising to share some of the risk of opening many sales outlets with franchise owners

- Make investments in brand development through creative marketing

- Sponsor high-level events where Youngor clothing is worn by all the participants
- Make clothing for actor/actress to wear at award ceremony/promotion activity
- Expand the brand internationally by developing flagship stores in major global cities

- Capitalize on advantages of owning the entire production process – offer customization options and flexibility to meet customer demand – start to realize efficiencies by making custom changes to product lines

- Improve SCM – purchase professional ERP software package (SAP, Oracle, etc.) or hire individuals with experience in successful SCM software companies

- Expand the investment in cloth to selling to and trading with companies – creates a competitive environment where the first stage of the industry chain creates another profit opportunity

- Create stronger performance incentives by developing a “shared service organization” where corporate services such as IT, training, etc. must compete with external suppliers of the same services to serve internal operating divisions

- Focus on the “visible hand” of the corporation – coordination through active planning – create a “virtual corporation” that monitors and controls all segments of the industry chain

谐音成语

Originally uploaded by chenta.

This is me when I don’t do my homework - REALLY! My handwriting isn’t nearly so perfect as Bart’s though.

I’m suspicious but here’s one site’s list. Some seem a little too “creative” to be modern Chinese. Even ancient tortoise shell characters 甲骨文 didn’t look much like some of these. Can anyone confirm the validity of any of this?

I’m at Starbucks just across the street from my house right now (trying to avoid the distractions of sitting at home doing work) and I can’t help but jot down a few words (and waste some more time). At the table next to me are a pair of Buddhist monks done up in traditional drab orange tunics sipping lattes. I’m intrigued. I want so badly to take a photo. What contrast! What irony! What a perfect advertisement for Starbucks (as though they need any more brand recognition). I’m puzzled because these are Chinese champions of moral religious ideals prescribing to a “middle way” that abstains from all hedonist consumption and generally live very simple lives. And here they are consuming possibly one of the most expensive beverages in China (in yuan/drop) at a decidedly non-Chinese institution, a symbol of all that is conspicuous over-the-top consumption in western culture.

And then I realize there is more to this scene than immediately obvious.

There’s a young monk paired with an older monk. All of a sudden, a fellow Starbucks patron (Chinese) approaches and asks a question I cannot hear. He then goes to move back to his seat and the younger monk motions for him to sit down. They have an unintelligible conversation. The Chinese man puts his hands together, mumbles, and bows countless times to the monk’s words. The monk pulls out his “wallet” (I didn’t know they had those) and hands the man a little gold card. I’ve seen them before and believe it to be a small inscribed tablet with some holy words on it. Or it could be a VIP card for the Bank of Monks. The man bows profusely again and then leaves.

Several minutes later, one of the employees approaches the monks. She indicates that they must leave. They argue quietly with her. The younger monk insists that she sit down and chat. She ignores them and scurries to a back room. The younger monk jumps up and pursues her going through the employee-only door. He returns empty-handed. Both monks get up and leave.

I’m bummed I never got a picture!

Then I start to think about what may have happened. In the big cities like Guangzhou, you rarely see the monks outside of their temple domain. Very rarely do you see them roaming the downtown streets. And never have I spotted one in Starbucks. The Chinese have utmost respect for these men who devote their lives to a not-so-easy Buddhist way of life. If they do see them, Chinese are quick to give them some spare change. This case must have been no different. Except the change was converted to a 40 yuan latte. One of the employees must have “given” these monks a coffee. After all, what would you do if Buddha’s own pious disciples walked into your store looking for a little get-up-and-go?!

These monks were at Starbucks in the name of prophesizing Buddha’s teachings to the unsuspecting affluence that gathers in such places. Such was the story with the man and the card. The manager soon caught on and chased the religious men out. Gotta hand it to them for their ingenuity! Not to mention the free cup o’ joe! Maybe tonight I’ll see them at the city’s local watering hole throwing back a Guinness?

Then I remember I may have seen these monks before. I saw some in the supermarket. AMD says she’s seen them taking the elevator in our apartment building! I wonder what’s really going on here?!