Category: China

Borrowing the east wind

Around 200 BC Chinese strategist Zhuge Liang first used a sales trick still re purposed by consultants and lawyers today.

Zhuge Liang was an amateur meteorologist, and he used this fact to convince people that he could control the weather. His knowledge of meteorology was very basic, something any farmer who paid attention would have known. Nonetheless his enemies didn’t have this knowledge. So it was easy to bamboozle them.

During one battle , he realized that the wind was likely to switch direction in a manner that was highly favorable for his army.

He made sure the enemy saw him do an elaborate ceremony that looked like black magic. He kept at it until the wind changed direction. As a result his reputation as a fearsome indispensable strategist grew massively.

This was featured in the historical fiction Romance of the Three Kingdoms  . The phrase “Borrow the East Wind (借东风) refers to this story.  Its sometimes used to described taking advantage of a situation.

A bit of dancing, drumming and smoke. Zhuge Liang took basic observation skills and sold them as black magic.

Modern knowledge work

I think of this anytime I see a knowledge worker selling their work makes it look more complex than it really is.

Jargon, chartporn and powerpoint replaces dancing drumming and smoke. Or alternatively with legal and compliance work, fear of regulatory risk leads to a company paying high fees to avoid problems. Even if all that is needed is filing a simple form at the right time.

There is a risk of a similar phenomenon in any business where there is a huge knowledge gap between seller and customer.  Will the seller take advantage of that gap in a way that harms the buyer?

Honest selling

It may seem like there is one fundamental problem with this comparison: Zhuge Liang was a diplomat/military strategist. A sales call isn’t a war. Its not supposed to be adversarial!

That might actually be the problem. An honest sales process is about helping the client see the value. The battle is against any misperception not against the client. A dishonest sales process is about taking as much from the client as possible.

Zhuge Liang’s life was on the line. And warfare (against sentient opponents) is all about deception. Deceiving competitors is justifiable. But deceiving customers is not. Some businesses may feel their life is on the line, but I bet they could make a good living by reducing complexity rather than playing it up.  I know I’m willing to pay up for reduced complexity!

Meta-Game

Dealing with this issue has proved to be a major challenge in dealing with lawyers, compliance consultants and technology contractors. I’ll ask around and get quoted absurdly large price ranges for the same set of work.

I’m getting better at asking the right questions in order to see what services are really worth.

I place great value on lawyers, consultants and developers who can cut through the bullshit.

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Jack Ma’s Iron Triangle

I was cleaning out some files and came across notes from Alibaba: The House that Jack Ma Built. 

The Iron Triangle

According to this book, Ali Baba’s rise has been the result of a combination of three strengths : E-commerce, logistics and finance. The author refers to these as the “Iron Triangle”
E-commerce, logistics, finance.

Ali Bababa’s e-commerce sites offer an unparalleled variety of goods to consumers. Its logistics offering ensures those goods are delivered quickly and reliably. Finance subsidiary ensures that Alibaba can get paid via a process is easy and worry free.

One can’t help but notice that there are many companies that have one or two parts of the iron triangle, but few that have all three. Of course there were several unique characteristics of China that Jack Ma has profitably exploited. It will be interesting to see if he succeeds in bringing this model abroad to other emerging markets, and to developed markets.

E-Commerce

China’s retail market is highly fragmented and inefficient.

“Key factor in success of e-commerce in China is the burden of real estate on traditional retailers. Land is expensive in China because it is a crucial source of income for the government. Land sales account for one-quarter of the government’s fiscal revenues. At the local government level they account for more than one-third. A prominent e-commerce executive summed it up “ because of the way our economy is structured, the government has a lot of resources. The Government decides the price of land…. The government relies too heavily on the taxes and fees associated with selling land. That almost destroyed the retail business in China, and pushed a lot of demand online. They deprived offline retailers of the opportunity to benefit from rising consumer demand- which they effectively channeled to e-commerce players. “

As a consequence, there has been far less investment in marketing, customer service, human resources or logistics in China’s traditional retail sector in the West. The result? China’s retail market is highly fragmented and inefficient. In the United States, the top 3 grocery chains account for 37% of all sales, In China they account for just 7 percent.

Despite all the shopping malls, offline retail penetration is quite low. In China there is six square feet of retail space per person, less than ¼ the amount in the US. Nature abhors a vacuum, and online retail filled in the gap left by inefficiencies.

“China’s e commerce market differs in important ways from the US and other western economies, the legacy of decades of state planning and important role played by state-owned enterprises. Alibaba has sought out and exploited inefficiencies these have creates, first in e-commerce, now in media and finance. “

Yiwu wholesale market was the template for first e-commerce operations. E commerce had started out with non-standardized products for mom and pop businesses.Lack of national supply chains removed barriers to entry that exist in west, making it possible for individuals to make a money.

Now China has greater e-commerce penetration than the US. Its always fascinating to see the leapfrogging phenomenon in action.

Logistics

China post laughed at Jack Ma’s attempt to enter logistics.

Zhejiang, where Ali Baba is headquartered is now home to most of China’s largst curior companies: Shentong(STO Express), Tuantong (YTO Express), Zhongtong ZTO Express, Yunda. This small cluster, referred to as the “Tonglu Gang” delivers 50% of all packages

Note that Wells Fargo had its own parcel delivery service in California gold rush.

Finance

Having its own financial services arm, Alipay diffuses trust throughout e-commerce empire. The rise of the smartphone was huge for Ali Baba’s financial services segment. Many financial innovations happened in nearby Wenzhou.

Ali Baba exploited inefficiencies in the financial services market, just like it did with online retail. State owned banks paid little heed to needs of individuals and small businesses. Alibaba has access to entire trading history of business customers, much better position to assess credit risk than traditional banks.

The Beginnings

Jack Ma’s story is quite inspiring for entrepreneurs.

In 1978, only 728 foreign tourists visit Hangzhou. Jack Ma went to the one hotel where foreigners went and read an English book, starting at 5 am. Every . Single. Day. He’d give free tours of West Lake to foreign tourists in exchange for English practice . He did this day for 9 years.

Long before Ali Baba, Jack Ma had an online directory business called China Pages. When he launched China Pages hardly any one in China had the internet.

Instead Jack came up with an alternative approach. First, he spread the word through friends and contact about what the Internet could do for their business. He then asked those interested to send him marketing materials to introduce their companies and products.

Then he mailed them to Seattle, had a company put them online. Then he printed out screenshots of websites and mailed them to friends.

People treated him like a con man, because he would get people to pay him $2,400(in RMB at the the then exchange rate), to design and host a website, even though the clientele couldn’t see the internet. That was a lot of money in China back then. He must have been a great salesman if he could get customers to pay that much for something they couldn’t see

Key lessons from Jack Ma’s early internet businesses

“It is difficult for an elephant to trample an ant to death as long as you can dodge well. “

More tech entrepreneurs began to emerge as China invested in telecom infrastructure. But internet bubble came and went. How did Jack Ma navigate this?

“ for Jack, the bursting of the bubble represented a great opportunity for Alibaba “ I made a call to our Hangzhou team and said “Have you heard the exciting news about the Nasdaq? … I’d like to have had a champagne on hand. This is healthy for the market, healthy for companies like us

He felt confident that now the IPO gate had closed, venture capital would stop funding Alibaba’s competitors. “In the next three months, more than sixty percent of the internet companies in China will close their doors, he said, adding that Alibaba had spent only $5 million of the $25 million it had raised. “ We haven’t touched our second round funding. “ We have lots of gasoline in our tank.”

Once the bubble burst, Alibaba started using the cash it had built up. Jack started hiring foreign talent and travelling around to tradeshows.

Tao Bao’s Iron Triangle Crushes E-Bay

Two key lessons from Ebay’s failure in China:

Ebay in China was led by foreigners and foreign educated with little knowledge of local amret. They tried to force feed American website standards.

Ebay’s arrogant disaster in China is a valuable business lesson. They continued to represent to investors that they were winning in China, but they lost disastrously. Alibaba had a faster product development cycle(ie OODA loop), and it adapted more quickly to local needs than eBay. eBay burned a lot of money. In the process, E Bay made everything look great on powerpoints and conference calls , but at odds with situation on ground.

Corporate headquarters demoralized local talent, (they ran a site called EachNet in China)

“This gap was reflected in the design of the two rivals’ websites. eBay moved quickly to align the EachNet site with its global site, revamping how products were categorized and altering the design and functionality of the website. This not not only confused customers, but also alienated a number of important merchants who saw their previously valuable China account names had been deleted. This invalidated their trading history and forced them to reapply for new names on an unfamiliar global platform. Worse still, the Chinese websites lacked a customer service telephone number. Ebay’s China site, modeled closely on eBay in the States looked foreign to local users, who found it “empty” when compared to local sites.

In website design, culture matters.

Taobao structured like local bazaar. Edge in e-commerce(see iron triangle above). Better understanding of country’s merchants. Let them do initial listings for free. Eachnet gave into short term shareholder pressure to charge for simply listing products online.

“Ebay just wouldn’t take Alibaba seriously, questioning the reliability of mounting data that showed Taobao was selling more goods than eBay in China. Taobao now had more listings, but eBay convinced itself that because these listings were free, they must be inferior. Jack vigorously rejected that thesis: “The survival and growth of Taobao are not because of the free service. 1Pao[the joint venture of Yahoo and Sina] is also free but it is nowhere close to Taobaol. Taobao is more eBay than eBay China [because] Taobao pays more attention to user experiences.”

Sensing it was over Alan Tien concluded, “Taobao’s product development cycle is much faster. Jack Ma’s right. We cannot fight on his terms.”

Jack Ma’s Iron Triangle had won.

Freedom Corridor vs. Belt and Road

India’s opposition to One Belt One Road makes sense given the whole Kashmir issue, and general geopolitical competition.  Indian think tanks have therefore been warning about risk to both China and target countries(ie this article makes some good points but is a bit cliched and hyperbolic)

Making things more interesting,  India and Japan this month launched their own similar(albeit geographically narrower)  initiative: The Asia Africa Growth Corridor(AAGC), aka the Freedom Corridor.   Right now its still in the  development bank and think tank press release phase,   but India and Japan have strong incentive to follow up with real money pretty quickly.  India and Africa have a deep history of mercantile and maritime connections.  India’s Exim bank has already funded $8 billion in credit in Africa, according to Modi’s speech during an African Development Bank meeting, which was held in India last week.  Port infrastructure in East Africa and the Indian Ocean are likely to be the first priorities, along with agriculture and electricity.  Incidentally,  India and Japan are also  building a LNG terminal in Sri Lanka, a country that is heavily in debt to China as a result of controversial infrastructure projects.

There is a Chinese aphorism,  “When the sandpiper and the clam grapple, it is the fisherman who profits” (鹬蚌相争渔翁得利).  If China and India really end up competing by spending money around East Africa, companies involved in building or benefiting from improved infrastructure could reap a decent reward.    Will the benefits accrue to any outside minority investors in publicly listed companies?  Too soon to tell, but it will be interesting to watch. The usual caveats about EM corruption and waste apply to AAGC as much as they do to OBOR, but the financial media is likely to oversimplify.  India and Japan’s now official strategy could impact select companies listed in India and Japan, in addition to companies in the less developed capital markets of East Africa and Sri Lanka.