J@pan Inc Newsletter<br><p>
The 'JIN' J@pan Inc Newsletter<br>
A weekly opinion piece on social, economic and political trends in Japan.<br>
Issue No. 521 Monday, March 29, 2010, Tokyo</p>
<p>China's Alibaba Group is on the verge of launching a joint online
commerce venture with Softbank, Baidu this month announced plans to
launch a business-to-consumer online site with Rakuten, and U.S. auto
giant Ford Motors just sold one of its crown jewels of safety and
customer loyalty, Volvo, to the China-based Zhejiang Geely Holding
Group for $1.8 billion dollars. China Inc. is knee deep in deal making
mode. But despite the aggressive international deals, recent events
surrounding IT concerns such as Google, and others, have revealed what
may be the first skirmishes in what we'll call the East West IT Cold
War. </p>
<p>Last week Google announced that it would officially shut down its
Google.cn website due to censorship concerns. The move follows Google's
previous statements leading up to the closing that featured, in
addition to a lofty entreaty against censorship, a rather vaguely
worded blog posting regarding security intrusions that never directly
accused the Chinese government of supporting/sponsoring IP theft, but
implied enough that even the most casual reader could grasp Google's
ciphered assertions—China is stealing our IP and we can no longer
operate under such conditions. </p>
<p>That Google attempted to couch the move in the very Western cloak of
"fighting for free speech" was a clever, well calculated strategy that
has convinced a large portion of Silicon Valley that the company is
engaging in yet another aspect of its "don't be evil" motto. And, in
what feels like a subtle call to the Web community for activism, the
company has even posted a page designed to update users as to which
Google services are currently available, or blocked in China (<a href="http://www.google.com/prc/report.html" title="www.google.com/prc/report.html">www.google.com/prc/report.html</a>).
Following Google's lead, the U.S.'s two largest domain name registrars,
GoDaddy and Network Solutions, also announced last week that they would
pull out of China, citing censorship concerns related to China's new
domain registration policies. </p>
<p>The new policy holds that registrants must provide a color,
head-and-shoulders photograph of themselves as well as a Chinese
business registration number and physical, signed registration forms.
Christine N. Jones, general counsel of the Go Daddy Group told the
Washington Post, "The intent of the procedures appeared, to us, to be
based on a desire by the Chinese authorities to exercise increased
control over the subject matter of domain name registrations by Chinese
nationals," adding, "We decided we didn't want to be agents of China." </p>
<p>While the issue of censorship and privacy in China is indeed ripe
for debate, there is a central problem with the moral grandstanding of
Google and company—all of these IT firms have operated in China for
years, previously adhering to the country's censorial guidelines
without public complaint. Why find a moral compass now? If Google truly
disagreed with the censorship policies of the Chinese government, why
did they even agree to adhere to them in the first place? </p>
<p>Why? The most reasonable answer is two-fold. First, it's likely that
Google thought that, after several years of plugging away at rival
local search company Baidu, it would have more than a mere 30 percent
share of China's search market. Trading dominant market share for a few
years of censorship probably seemed like a good gamble at the time.
Second, Google didn't anticipate the piracy of its intellectual
property. Reports from security experts indicate that Google's recent
security breach included the loss of IP, the very heart of Google's
product value. Making the determination that, like other IT firms
before it, Google's code would slowly be siphoned off by Chinese
hackers and possibly woven into the competing products co-owned by the
Chinese government, it's reasonable for the company to conclude that
there is really no hope of ever gaining significant market share over
local, state-sponsored competitors. In my estimation, these two points
represent a more honest (albeit, somewhat cynical) view of why Google
gave up on mainland China. </p>
<p>Indeed, even the wildly popular Twitter microblogging service has
largely been replaced (rapidly) by a nearly identical, Chinese version
of the service called Weibo (<a href="http://t.sina.com.cn/" title="http://t.sina.com.cn">http://t.sina.com.cn</a>),
a service created by Sina, China's most popular Web concern with over
94.8 million registered users. The heavily censored Weibo platform not
only functions exactly as Twitter does, but the service even copied the
now iconic sky blue branding of the often blocked Twitter, an aesthetic
point probably designed to make the switch go down easier with Chinese
users. </p>
<p>Because of various sensitivities and complicated business
relationships, a surprisingly large amount of Western businesspeople
often avoid the topic of doing business "China-style." Perhaps the most
frank comment I've read in recent months came from business veteran and
Beijing-based expat Bill Bishop who recently blogged (<a href="http://digicha.com/" title="http://digicha.com">http://digicha.com</a>)
his market entry advice for Facebook and Twitter: "Don’t bother trying
to come into China directly. Your services are far too subversive to be
approved in the current environment. Even if you were allowed into the
country, you would be chewed apart by large, scrappy local competitors
like Oak Pacific, Kaixin001, Sina and Tencent. And the ethical and
public relations minefields would be too great a distraction for your
young companies. Instead, provide free VPN and other filter-bypassing
services…"</p>
<p>Bishop, an American who started working in China back in 1989,
offers a frank nostrum that would force Chinese consumers of certain
Western IT products to either become soft-hackers, or simply accept the
censored, Chinese versions of these services. While there are sure to
be a large number of internationally curious and activism-oriented
individuals in China inspired to use VPNs to access prohibited Western
services, based on the history of the Web in China, it's far more
likely that the local IT products will continue to dominate with their
censored versions. </p>
<p>Although it is true that some Western IT concerns are reconsidering
their fortunes in China in the wake of Google's bold move, if Google
and company think the rest of the West's business community will follow
their move, driven by moral imperatives, or that China is about to
change it's policy simply because some Western IT firms won't play
censorship ball, they are sadly mistaken. In fact, a quick review of
the U.S. pavilion website for the upcoming Shanghai Expo 2010 reveals
that Microsoft, Intel, and Dell are all listed as enthusiastic sponsors
of the China-based business event. The credo "when in Rome…" has never
been more apt than when talking about doing IT business in Asia. Anyone
acquainted with the numerous failed attempts of American IT brands
hoping to penetrate Japan's unique market are aware of this. </p>
<p>Responding to the recent censorship uproar in China, Microsoft
co-founder Bill Gates opined, "You've got to decide: do you want to
obey the laws of the countries you're in or not? If not, you may not
end up doing business there." It should be noted that, despite Gates'
lack of impassioned moral outrage, Windows OS is one of the most
pirated products in China, with illegal copies selling for just $1 on
the street. </p>
<p>In an interview with the UK Guardian, Google co-founder Sergey Brin
responded to Gates' statement by saying, "I'm very disappointed for
them in particular… As I understand, they have effectively no market
share [in China] – so they essentially spoke against freedom of speech
and human rights simply in order to contradict Google." Does Gates want
his rival search engine Bing to beat Google in China? Sure. But making
the issue a moral discussion rather than a measured business analysis
is where Brin's credibility falls short. Gates is correct. In the end,
you follow a country's laws or you don't do business in that country,
it's as simple as that. If Brin had a serious moral problem with
China's policies, Google never would have set up shop in China in the
first place. </p>
<p>As for the future of Western business in China, and Asia in general,
we can look to a couple of factors for guidance. Let us first recognize
that in midst of all this talk about Google leaving China, few, if any,
Western firms engaged in using Chinese labor to manufacture durable
goods (computers, apparel, etc.) have announced solidarity with
Google's approach. It's business as usual for most Western durable
goods concerns. Due to the cheap labor and an established system of
efficiency, this relationship is unlikely to change in the near future.
</p>
<p>The margins of this Cold War will likely be restricted to the area
of intellectual property, discreet and unique code, and ideas that can
programmed and distributed. In short, the question of whether to/how to
do business in China, and Asia in general, is most relevant in the
short term to IT businesses. Learning the local color, the unspoken
nuances, and the agreed upon business practices (fair or unfair to
one's Western point-of-view) cannot be avoided. To attempt to shoehorn
Western business ethics and SOPs into China and Japan is an effort that
is doomed to fail, and only arrogance and/or ignorance will push such
efforts forward. </p>
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<p>Topic:<br>
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