Mar 172014
 
alibaba-head-office-hangzhou

One of the questions in the online business world for the last year was were would Chinese Internet giant Alibaba decide to list – the US or Hong Kong?

Listing in Hong Kong would have been a coup for the Chinese territory and possibly marked a shift in Asian web properties away from listing in the United States.

As it turned out, Hong Kong’s listing rules were too stringent for Alibaba’s Jack Ma who wanted to retain a controlling stake in the business in a way that isn’t allowed on the HK stock market so the company is going to the US for its IPO.

Jack Ma and Ailbaba’s rise is a fascinating story partly told by Porter Erisman in his Crocodile on Yangtse who was interviewed for Decoding the New Economy last year.

Alibaba’s listing on a US exchange, the announcement isn’t clear if its the NASDAQ or NYSE, will also be a test for the valuation of Asian internet properties in Western stockmarkets.

With revenue of around a billion dollars this year, a Google like P/E of 30 would see the company  valued at around $30billion, although there could be arguments that a Facebook like valuation of 100 times earnings might be more appropriate.

Regardless of how much it is valued, Alibaba is going to be blazing a trail for Asian and, specifically, Chinese companies over the next few years.

Jan 302014
 
Pacnet-SGCS2-opening-ceremony

The first Decoding the New Economy for 2014 is an interview with Carl Grivner, CEO of Asian data center and communication company Pacnet.

Pacnet is unique in having an extensive Asian network of fibre links and data centres as well as having head offices in both Singapore and Hong Kong.

Having two head offices in cities as different as Singapore and Hong Kong presents a number of challenges along with some advantages as Carl explains.

The company’s combination of data centres and data links gives Pacnet an opportunity to offer some unique services in software defined networks, which Grivner describes as “the Pacnet Enabled Network”, that allows customers to create their own virtual networks.

What differentiates Pacnet in Grivner’s view are the company’s people – an asset essential in diverse Asian markets.

“What differentiates us are the people that we have in those locations,” says Grivner. “when you do business in Asia; doing business in Singapore versus Sydney versus Hong Kong everything is a little bit different, or a lot different for that matter.

“The physical assets are the physical assets but the people that get know how to get things done in each of those markets is what makes us unique.”

Grivner also explores the differences between Singapore and Hong Kong’s business cultures along with the diversity of the Chinese economy.

Dec 302013
 
liugong-earth-mover

After yesterday’s post on the motor industry’s relevance in the 21st Century, a related article about Chinese construction equipment appeared in The Economist.

According to CLSA – formerly Credit Lyonnais Securities Asia and itself now fully owned by Chinese investment house CITIC – the quality of Chinese construction plant is rapidly approaching that of the Japanese and US industry leaders.

The Chinese have achieved this in a short period through a combination of joint ventures and strategic takeovers and that should worry its more established competitors.

How the Chinese have moved up the value chain in construction plant is a small, but important example, of how the country is positioning itself as a higher level producer as its economy and workforce matures.

For trading partners and competitors it’s worthwhile thinking how a more affluent and higher tech China is going to affect their businesses, thinking of China as just a cheap source of low quality labour isn’t going to cut it for much longer.

Oct 052013
 
hong_kong_harbour

The Chinese government’s declaration of a Shanghai Free Trade Zone recently made headlines with speculation the region might be exempt from the nation’s internet blocks.

For Hong Kong, the Chinese government’s move is another blow to the territory’s already declining position as the main gateway to the People’s Republic.

As part of the Decoding The New Economy series of interviews, I spoke to Brian Wong of Hong Kong’s Seacliffe Partners about the challenges facing the territory and the role the former British colony will play over the next few decades.

“Hong Kong, I think, is the perfect bridge between East and West, ” says Brian. “But I think Hong Kong has been in search since the change over in 1997 as to where it really wants to focus itself.

The territory is squeezed between Singapore that has established itself Asia’s leading financial hub and now is positioning itself as a creative centre and Shanghai which has become the new ‘Gateway to China’ with its domestic financial centre and deep water port.

Despite the challenges facing the Territory, Brian sees opportunities in the city’s cultural and business environments.

“One of the great things about Hong Kong still is its international community and its accessibility for creative types,” Brian says. “I think Hong Kong is starting to recognise this advantage.”

“You have a large base of Chinese based manufacturers looking to beyond just low cost OEM manufacturing, what they need is creative design and innovation. If Hong Kong can be one of the big suppliers of that then they have a really good opportunity.”

One area Brian sees Hong Kong has an advantage is in its developing a hardware hackers culture that fits in with the massive manufacturing hubs surrounding the territory along the southern Chinese coast.

“I went to a talk where there was a fellow from Mountain View, California who does a lot of product invention,” Brian tells. “He’s set up a lab in Hong Kong to do product innovation because although he recognises China has a low cost manufacturing base, he doesn’t want to live in Shenzhen.”

The challenge for Hong Kong is to encourage a more entrepreneurial mindset, Brian believes. He also sees Hong Kong having an opportunity in being a conduit for the Chinese diaspora looking at investing into the PRC.

Probably the biggest advantage Brian sees Hong Kong having are in its mature legal and capital markets that Shanghai and other Chinese centres lack – “these are world class,” he asserts.

Ultimately though it may be that Shanghai, Beijing, Taipei or Singapore aren’t threats to Hong Kong at all as each city becomes the centre of certain aspects of a diverse Chinese and East Asian economy.

“I think much like in the United States there is not just one financial centre – you’ve got Chicago, New York and you’ve got different roles for different cities, LA for media and San Francisco as the gateway into the United States.”

“There’s room for more than just one. The question is what does Hong Kong want to be and how does it want to be most valuable to the China story.”

Oct 032013
 
alibaba-head-office-hangzhou

“eBay is a shark in ocean, Alibaba is a crocodile in the Yangtze” film maker Porter Erisman quotes the founder of Alibaba, Jack Ma, in comparing the two online trading sites.

In promoting his film Crocodile in the Yangtze, Porter spoke to Decoding the New Economy about the rise of the global Chinese internet giant.

A key part in Alibaba’s success is taking on eBay on it’s own turf, “if you’re David fighting Goliath you can’t play by the big guy’s rules,” Porter says.

This is exactly what the Chinese company did when eBay entered their market and today Alibaba and it’s subsidiary Taobao have sales exceeding eBay’s and Amazon’s.

“Back in about 2003 Jack Ma came to me and told me about a secret project to overtake eBay,” Porter says. “When we looked at them they looked like a Goliath, they’d never really been beaten in a market they’d entered first and they had a huge war chest with a $150 million committed to the China market.”

It turned out that eBay weren’t as powerful as they appeared, something other entrepreneurs have discovered when giants like Google have entered their markets.

The Chinese Leapfrog

Like many rapidly developing countries, China is leapfrogging various stages of development that Western economies went through with the retail industry and e-commerce being two examples.

“Some people say cellphones will leapfrog landlines, actually the same is due with entire systems,” says Porter. “In China coming from so many years of a command economy there wasn’t a very developed retail culture or even a consumer culture.”

“Taobao came along at a time when all of that was still in the early phases of development and the company basically leapfrogged that whole phase of building out shopfronts and building logistics.”

“E-commerce in China is revolutionary while in the US, or Australia, it is evolutionary.” Porter says.

Porter quotes Jack Ma as saying “e-commerce in the US would be a dessert, in China it is the main course.”

China’s Global Challenge

As companies like Lenovo computers, Hauwei telecommunications or Haier whitegoods have discovered, Chinese businesses face challenges when expanding overseas. Porter sees this as a matter of time and scale.

“Like Japan in the 1970s and 80s there’s a whole wave of companies that have started going global. China’s such a big market that there’s a lot of companies that get big and develop scale before going international.”

“I’d say the biggest challenge in the beginning is cultural,” states Porter. “China’s at a disadvantage because information and the media are so controlled that’s sometimes a rude awaking when a company goes global like a Hauwei and then faces a bunch of political issues it doesn’t understand.”

“One of the reasons I made the film,” Porter says. “I wanted entrepreneurs in China to see it and understand these are the issues Alibaba faced when they went global and hopefully you can learn from some of those successes and mistakes.”

Going to China

Porter’s advice to westerners going into China is to shut up, listen and learn, “don’t assume that just because things are done a certain way in the US or Australia that it’s superior.” The country’s culture and ways of doing business are different to those of North America, Europe or Australia.

“If you look at the way traffic moves in Shanghai it looks crazy. If you drove like that in Sydney it would be a disaster but there’s just different ways of through traffic, getting point A to B.”

“It’s better not to judge, but just step back.”

Regardless of our judgements, China’s move up the value chain means we will see more PRC founded companies going global.

Over the next decade we’re going to see the globalised economy start to take on some recognisably Chinese characteristics.

Sep 252013
 
fax-machine

The South China Morning Post reports the Chinese government is allowing access to otherwise restricted sites like Facebook to those in the Shanghai free trade zone.

In many ways this parallels the original Special Economic Zones set up by the People’s Republic of China at the beginning of the 1980s – these areas’ separate legal, immigration and economic status attracted foreign investment and trigged the economic boom that’s seen China become one of the world’s biggest economic powers.

Just as manufactured goods were the key to the nation’s development 30 years ago, today it’s information as the PRC leadership works on moving China up the global value chain.

For a nation of knowledge workers to succeed, the workers have to have access to knowledge.

It’s claimed the humble fax machine was responsible for the fall of the Soviet Union, how true that is open to debate but an open flow of information is never good for those who rule without the support of their citizens.

With the explosion of Chinese social networking sites, it’s become harder for the government to control the flow of information between citizens and the opening of the internet in parts of Shanghai is another small change.

How the Chinese Communist Party manages to keep the support of its increasingly affluent and better informed citizens will define the course of 21st Century history.

As China shifts from being a low cost manufactured goods supplier to a more sophisticated, diverse and expensive economy the government has no choice to face these challenges.

Beijing’s cadres would be hoping our children aren’t talking about Facebook in 2012 Shanghai in the same way that we talk of fax machines in 1982 Leningrad.

Image of a fax machine courtesy of Kix through sxc.hu

Jul 202013
 
Ordos chinese ghost town

This week bought news that that two cities, one in China and one in the US, had fallen into deep financial trouble.

While the bankruptcy of Detroit is very different to the developers of the Ordos new city failing, there is a strange symmetry between the two stories.

Detroit is the biggest US city ever to enter bankruptcy with an estimated $20 billion in debts, dwarfing the previous record of Alabama’s Jefferson Country’s $4 billion default in 2011.

The fall of Detroit wasn’t unexpected as the New York Times tells.

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

Like most industrial hubs, Detroit grew became the centre of the US motor industry due to geographic and commercial advantages along with a few historical accidents but as the economy changed, the city’s importance faded.

It’s sad for the people of Detroit but it isn’t the first industrial hub to fade away; Ironbridge, once the cradle of the English industrial revolution, is today an open air museum and a charming rural spot.

Ordos on the other hand is an example of 21st Century government planning with the Inner Mongolian provincial leaders building the city of the basis of build it and they will come.

They haven’t.

The collapse of Ordos is going to be an interesting test of the Chinese economic model. Many of the country’s local and provincial governments – like Australia’s – have become dependent on the revenues from property sales. Now the market is  drying up, local councils are having trouble paying their bills as Bloomberg reports.

Some Ordos district governments had to borrow money from companies to pay municipal employees’ salaries, Economy & Nation Weekly, published by the official Xinhua News Agency, said in a July 5 report on its website.

So while Detroit illustrates the stresses in the US system, so too does Ordos tell us about the problems facing Chinese governments.

The tale of these two cities also shows the difference between the US’ industrialisation of the early Twentieth Century and today’s economic development in the PRC and reminds why the results of ‘Capitalism With Chinese Characteristics’ may be very different to the modern American consumerist economy.

For Detroit, at least there’s good news as one US city manages to works its way out of bankruptcy. For the developers of Ordos though, things must be looking very grim.

Ordos image courtesy of Bert van Dijk through Flickr.