This is China! blog

The possibility that Google employees were involved in facilitating the cyber-attack on their own company brings up serious questions about the security of companies overall that operate in China. Is your company safe from your own employees?

With the dissolution of Communist ideology in a profane society, most Chinese have taken on the mantle of nationalism to fill a collective existential void. The basis of this form of nationalism is the wrong that other countries have done China in the past. That includes the Opium Wars;the 21 powers that entered Beijing’s gates after the Boxer Rebellion in 1900;  plus Japan, with the  the atrocities its soldiers committed during its War of Aggression. Daily and nightly television programming and state-run papers in China rabbit on about the incursions as though they had happened just yesterday; meanwhile, most of the rest of the world has moved on to other challenges and to creating new chapters of history. Still, the leadership drones on in Cultural-Revolution fashion about building a strong, self-sufficient nation – even if it is at the expense of the trust other countries place in the Chinese experiment.

Companies in highly sensitive industries – especially those in which technology development has an abiding relationship with their home-country’s national interests – perhaps should be concerned with vetting employees a little more closely than in the past, and with creating monitoring systems and internal controls that act as firewalls against complete enterprise compromise.

It seems Western brands of open-ness and sense of “fair play” may not fit snugly in China’s chip on its shoulder.

Further reading: Reuters, CNET

Tom Friedman recently wrote an Op-Ed piece in the New York Times in which he believed that James Chanos, the man who short-sold Enron and made a bundle, is wrong to bet against the bubbles that are developing in China. Friedman gives a litany of reasons why he believes China is a sure bet, including: a government that has the will and the resources to tackle any problem that comes society’s way; millions of gear-heads in colleges and universities; sea turtles educated abroad who are returning to China to lay their eggs; and the expansiveness of China geographically, allowing it to maintain its manufacturing base indefinitely.

I think I understand, though, why Chanos is willing to short-sell China – and attempt to make another bundle: the fundamentals on hand about China’s economy do not add up.

Malcolm Gladwell wrote an article in The New Yorker some years ago about how Enron was able to fool American regulators, customers, its own middle managers and employees that it was a sound, viable albeit hugely successful company, right up until the day before the whole thing collapsed (bringing down Arthur Anderson, the audit giant, as well).

Gladwell wrote:

“If things go wrong with a puzzle, identifying the culprit is easy: it’s the person who withheld information. Mysteries, though, are a lot murkier: sometimes the information we’ve been given is inadequate, and sometimes we aren’t very smart about making sense of what we’ve been given, and sometimes the question itself cannot be answered. Puzzles come to satisfying conclusions. Mysteries often don’t.”

Most economists and investors approach China as if it was a puzzle to be solved. Those of us who have lived and worked here long enough understand China is a mystery. Though auditors and regulators were flooded for years with information from and about Enron, they all got it wrong, because Enron was essentially opaque – a mystery. But because Enron had a lot of gear heads running and working in it, everyone thought it could do no wrong.

China’s leadership increasingly thinks the same of itself. Investors shouldn’t buy the propaganda.

One of the charms of modernization that has caught hold of China is internet addiction. A recent FT article tells the story of a 17-year old boy who poisoned his parents for keeping him from the local internet cafe. Internet cafes are a major location for socializing and plugging into cyberspace – no matter if it is China’s internet is increasingly curving in on itself. McKinseyconsultant Yuval Atsmon, based in Shanghai, attributes the hold the internet is gaining on China’s youth to overnight, full-on access to instant messaging, video streaming, online gaming and interactive media. Fully 34% of China’s more than 330 million netizens are under the ageof 19 years, according to China Internet Network Information Centre. They don’t have much disposable income, and internet cafe’s costs pennies for hours of ir-reality.

But are Chinese youths necessarily more susceptible to the endorphin rush of internet addiction than those of other countries? Yes and No. “Internet Addiction in Asia: Reality or Myth,” a paper by Ma. Regina M. Hechanova and Jennifer Czincz International Research Development Center indicates that on average Chinese youths are less prone than their Asian neighbors to internet addiction. Hong Kong kids have very serious addiction rates, according to their survey of surveys.

chart from “Internet Addiction in Asia: Reality or Myth”

Meanwhile, a paper in the Journal of Cyberpsychology and Behavior cites Chinese youth as more addicted to the internet than American youths, with 14% of the study’s sampling of Chinese heavily addicted compared with 4% of American youths.

Nevertheless, internet addiction is a phenomenon that afflicts every wired nation.

Further reading: FT, “A Comparative Study of Internet Addiction between China and the United States”

With the spreadsheet application in Google Docs blocked for the past week here in China, it’s clear China is using Google’s apparent infringement of Chinese writer’s copyrights as an excuse to whittle the competition down a bit further. So, one of history’s greatest IPR violators of foreign designs, processes and technologies finally gets hold of the other end of the stick with which the West has been beating it.

The spreadsheet block comes on the heels of the powers that be blocking YouTube for domestic consumption, and also blocking links to identity-sensitive online content. Google has also been beat for links to “yellow” (read: porn) content, while its domestic rivals have merely had raps on their (blistered) hands for the same titillating links. Of course, Chinese online services likeTom365.com and Youku.com continue to allow any user to stream content directly to their computer for real-time viewing; that includes some of the latest American TV shows and Hollywood films, replete with Chinese subtitles.

It seems sanctioned copyright infringement is actually ok – just as long as its the Chinese doing infringing.

The November issue of Eurobiz Magazine has an excellent article on the state of the software development industry in China. Essentially, the Chinese government is encouraging an insular business culture whose engineers are not learning international standards for writing, testing and implementing code to become more ingrown. Most of the software development companies in China are job shops of between a dozen and a hundred people, for whom small, low-margin projects are the norm – which suits low-margin service- and manufacturing-clients who have little experience with software projects just fine. The “good-enough” approach fits in just fine with centra-l and provincial-government requirements to control the growth and direction of industries, and to restrict the flow of information. Governments dole out huge subsidies in a short-sighted strategy to grow an industry that is already stunted and will remain fragmented as long as it remains protected.

The Green Dam software is a perfect case in point: the Chinese government had insisted during the summer of 2009 that all computers sold in China have the internet-filtering software on them. Green Dam, though ostensibly private, was heavily subsidized by the central government. A couple graduate students in the States posted an investigation of the software that showed Green Dam was full of security holes and could actually be used to turn the computers that hosted the software into slaves. The American company Solid Oak accused Green Dam of copying programming code from Solid Oak’s own software – and copying it badly, to boot.

China’s trend toward software industry insularity does not bode well for foreign companies invested in China who will have to go the extra expense of using Western branded software with Western-level customization, development, testing, implementation and training costs. The trend also implies a services outsourcing industry that will remain far behind India’s for the coming decade in terms of technical prowess and customer service levels.

Further reading: FT

The Financial Times cited last week that the international body that regulates internet addresses will support countries that want to use their own letters and characters in internet addresses. That means that internet users in China’s countryside will gain access to a whole new world without having to struggle with an unfamilar English alphabet. Small Chinese companies will become more accessible to native Chinese language users who do not know English characters, since the small businesses are typically outbid in the English-keyword search results lists the larger domestic companies buy out. The new standard also means the central government will have to be more creative in plugging the holes in the GFW that will appear due to the richness and flexibility of the Chinese language, holes dissidents love to poke. And then there is the sheer number of new Chinese users that will no longer feel hindered exploring cyberspace that censors will feel incumbent to control.

In 2010 – when the new standard comes in use – expect an inflection point in the number of new users in China that log on. And expect an inflection point in the blood pressure of Chinese censors, too.

The Green Dam incident underscored the notion that the powers that be cannot unilaterally dictate the terms of internet usage in China. Nearly everyday I walk the streets of this fast-paced country I marvel (and sometimes, squirm; and at other times, become annoyed) at how nearly every interaction in China is a negotiation: whether it’s crossing a busy street; vying for space while riding a bicycle in a bike lane; or buying vegetables from a street vendor. The more fractious an issue, the more each negotiation becomes a scrum. A scrum in rugby involves members of opposing teams going shoulder-against-shoulder against each other to kick the ball back to a player on their side. From the outside, scrums look like utter, violent chaos. And yet, deep within the mound of heaving bodies and grinding collar bones is a negotiation of sorts, to get the ball to the players who will push for a score for their team.

In the Chinese internet, though, there is more than one team at play on the field of the internet at any given time. And because of the vastness of the arena of the Web, there are many scrums going on simultaneously that sometimes coalesce into violent melee, like those found in Human Flesh Search Engines, or complete black outs of entire provinces during mass protests.

Online scrums in China as a means to negotiate platforms, domains, rights, limitations and penalties in cyberspace are creating a web space separate from the World Wide Web as the West has come to know and cultivate it. The Fractured Web, as Andrew Hupert calls the dislocation of a portion of the World Wide Web, is the new reality. Andrew is a professor of sales and negotiation at New York University’s campus in Shanghai. He told me over a cup of coffee in a trendy Shanghai cafe a couple weeks back, “No one cares that the central government has blocked Twitter or Facebook or Youtube. Chinese don’t seem upset in the least about it.” After all, he continued, they already have their Chinese equivalents of the social networking sites, and the the Chinese companies are overjoyed that the international competition is off their necks. In other words, Chinese politics and business are sometimes on the same side of the scrum, bundling away access and technologies from Chinese users, with the permission of the netizens themselves. Over the past two months Andrew has written on his blog, China Solved,

Usually industrial and national security policies are at odds with one another. This time they dovetail beautifully. This must have been a no-brainer for Beijing. Suppress potentially disruptive voices and protect key industries at the same time — in one fell swoop. Everyone from the Party leadership to the business community loves the idea.

I can’t recommend highly enough reading Andrew’s blog thread The Fractured Web. There’s important thinking there for businesses and individuals in China who depend on the international internet for their well-being.

And when you’ve got the ball in China, run like hell.

Devott, a services outsourcing consultancy based in Tianjin, recently published its research report on China’s Software & Information Service Outsourcing Industry.

The list of the top 10 outsourcing parks has no great revelations, other than it is the first report I am aware of that tries at the economic development zone level to determine the strongest players in the Chinese services outsourcing field.

Sometimes, the absence of a thing can be as strong a determinant as the presence of another. In this case, the Suzhou Industrial Park (SIP) was nowhere to be found on the list (yeah, yeah, so it’s where I make my home). Sure, there was the Suzhou New District (SND) which, to my surprise and with no intended slight to my friends in SND, was a bit of a surprise, especially since I think some parks in the Nanjing area are far ahead of SND in pulling out all stops to become services outsourcing platforms.

So I sent a gentle email to Devott asking why the exclusion of SIP. Their kind response was that SIP hadn’t returned the survey Devott had mailed out to SIP administrators. SO GET ON THE TRAIN AND CHECK OUT THE PLACE! was my unspoken response. You’re already in China, a stone’s throw away from most of these places. For crying out loud, when are businesses going to remember you have to eyeball everything in China – especially if any level of government is involved in the results. Put feet on the ground. Use a little elbow grease, as my mama used to say. Unfortunately, the profiles of each of the Top 10 in the list also read like government brochures.

Let’s hope the next consultancy to put out such a list gives its staff a bit of budget to work with when they put together a survey like this one.

It’ll pay off: at least, they won’t have a cranky blogger crabbing at them.

An American friend has been interviewing developers of embedded software. Embedded software typically goes inside devices like mobile phones, game consoles, even washing machines now.

“These developers are easily the most capable, the most professional of any supplier I’ve ever met in China.” He’s been living and working in China eight years now. He was very excited at the find.

Of course, not all the developers were equally capable.

“The sales guys of one company had as the first point in their presentation to me that their company had just been bought and they were in the middle of restructuring the business.” My friend shrugged his shoulders in disbelief. “Can you imagine: these guys were actually proud of being in the middle of restructuring and wanted customers to know.” Apparently, the owner of the company was also proud of the fact. My friend told me the owner has several companies he has bought and sold the past ten years. The owner is so proud of the fact, he makes sure that’s included in the slide presentation, as well.

“And then they sent me a 700-word long email with all these technical questions. They were show-off questions; had nothing to do with the RFQ I had sent out.”

“But then there was one vendor that just towered above the rest: the owner personally drove here from Nanjing, spoke English beautifully. Delivered a professional and polished presentation. Had just a few questions for clarification. Then within two days sent a beautiful presentation.”

My friend passed the report on to the engineers back in headquarters, in Europe. “They were really impressed, too.” The proposal included the approach the company would take, the names of the engineers, summaries of the engineers’ backgrounds, the salaries of the engineers, references and more.

“The vendor is planning to open offices in Japan, Europe and America soon.”

Sounds like they’ve got a winning formula.

Brian Schwartz has a well-researched article in the March 2009 issue of China International Business Magazine on the development of China’s IT services outsourcing industry. He asked me some of my thoughts on the topic for the article, one of which involves the relationship between the Indian outsourcing platform and the Chinese. I responded in the article by saying:

The Indian government is continually having difficulty rationalizing a business sector capable of capitalizing on the outsourcing services in its own backyard…

Certainly, two things I’ve been struck by in the global financial downturn is the sheer number of Chinese IT service providers that keep on keeping on: they have made it plain they are not going to close shop any time soon. Though far smaller than their Indian counterparts, they are eagerly moving up the customer-service learning curve while keeping costs low.

The other interesting point is the very reason behind the staying power of Chinese IT-service vendors: they have a domestic market that is increasingly becoming rationalized. Rationalized in this context means that local regulations, transportation and information infrastructures, staffing levels and more are well enough mature in China that IT services companies can actually get to and support customers in a somewhat timely and effective manner.

Until India has this kind of domestic customer base, it will always be at the mercy of the international markets that have caused massive layoffs of staff at their outsourcing facilities, salary deflation and customer flight to competing countries – like China.

Email me… your name, company name, industry and country in which you are working to get a PDF copy of the article.