Why Zappos Would Fail in China

There are many ways to deal with the punishing air pollution that sometimes falls upon the big cities of China. When outside you can wear a mask and when inside an air cleaner can be used to scrub the pollutants.  When we first shopped for our first air cleaner in Shanghai it was still common practice to choose foreign brands over those that were locally designed and manufactured. A quick comparison of Japanese models and we settled on a Sharp model. A long 2 hours later we were back at home, deboxed the unit and proceeded to get on with the cleaning of our apartment air. Unfortunately that was just to be the start of our woes as a rattling noise emanated from the unit.  My first reaction was “great…another 2 hour commute to return the thing and get another one”. Fortunately this is where my assumptions went wrong. With a quick dial on the mobile phone, my wife called the manufacturer and proceeded to discuss a way to remedy the situation. And this is where I discovered that service and support takes on a very distinct meaning in China compared to the USA.  Within the next day a service person showed up to do the first level fixing and within the next week another 2nd level team had arrived to remove the unit, give us a temporary replacement and take it to their repair shop. Within a day of that the unit was returned and all was well.

This pattern of servicing defective products rather than replacing them was a pattern that I experienced repeated over and over during the next years in China.  Whereas in the USA returns are a commonplace occurrence, this is rarely the case in China. Many factors have led to this unique practice including low labor cost (it is cheaper to pay someone in China to repair something rather than return it).  Structurally there is also financial reporting friction for most manufacturers in tracking returns because of the paper based accounting methods still demanded by Chinese government tax  requirements. Finally because of the frequent fraudulent schemes that are pursued by some consumers, manufacturers are reluctant to give money back after a product is purchased.  What that means for most hard-good companies coming into China is that having a robust service team or partner that can deploy people for repair and servicing is going to be expected by the Chinese consumer. Whereas Zappos would just say “go ahead and return the product no questions asked” with any product problems in the USA, the model would definitely need to be a lot more hands-on and personal in China.

If you like this post, then please check out our other thoughts at www.impact10x.com/blog or email us at info@impact10x.com.

Your FACE is very important in China

Investments in the stock market can be a very complicated affair. Depending upon the level of rigor that is taken in looking at the business performance, understanding the management team, competitive understanding and customer value…it could be a long time to come to any conclusion to invest in any given company. Or maybe it is as simple as figuring out what your neighbor, colleague or friend is doing and just copy them.

Sitting down with an Ad Tech company based in Shanghai it was interesting to find out the profile of the Chinese investors that decided to invest in their company. It turns out most of the motivation for their Chinese investors was a reflection of their friends desire to invest. But not because of the rigorous analysis of the market opportunity that these friends had done or that they were good past investors, it was simply a reaction to the fact that these friends were of the same or lessor economic status as them. The attitude was “if that guy is investing, then we can definitely invest”.  Now this could be simplifying things but there is a very real historical and cultural importance of “face” or reputation in China.

Maintaining face and reputation is important in China and is an implicit tool that could be used to market and sell to the Chinese consumer. Here are a couple of clever examples of this:

  1. A microfinance company based in China that provides student loans and requires a family member to be a co-signer on the loan. The co-signer in this case does not necessarily have to own collateral but is mainly used as a form of social pressure to ensure payback of the loan. If the student does not payback the loan, the co-signer loses face or their own reputation.
  2. One of the more popular Restaurant Review Apps in China (similar to Yelp) is called DianPing. The people that reviews these restaurants number in the 10’s of millions. Unlike Yelp though, the reviewers are also rated by the App which motivates them to do even more reviews. An example of their rating system goes from 1 to 5. The more reviews you do the more your level goes up. A system of reputation and face for reviewers.
  3. Taobao.com which operates under the Alibaba brand has an even more complicated level system for reviewers of products that are sold on their site.  Taobao.com is the equivalent of Amazon.com in China. Their system has over 5 levels in each of the major categories going from heart, white diamond, gold diamond, white crown and then golden crown. That’s over 25 levels which are used as a sign of reputation and status for these reviewers!

Using these subtle “face” techniques can be an important part of any marketing and sales tool targeting China consumers and businesses.

If you like this post, then please check out our other thoughts at www.impact10x.com/blog or email us at info@impact10x.com.

China Innovations (and other hacks!)#1 : Finance Tech in China

10 years ago I got my first bank account in China. No problems. Fill out a couple of forms, sign a few papers and deposit a few RMB and away we go. As we were nearing the final stages of the process at the bank branch, I was expecting to see some details on my login and website details where I could do my online banking. After asking the question and a bit of scurry, the bank manager handed me a USB dongle. Hmmm I wondered what is this for?  Many many many minutes later I realized that online banking was pretty much nonexistent in China. This dongle was to be used as an encryption key when accessing my account online but only to view account details, no transactions were possible.  I also realized that banking in China was the equivalent of taking a couple of hours out your day to stand in line and push lots of paper, signatures, approvals and stamps around.  Doing anything in the archaic Chinese banking system was the equivalent of walking in molasses or really thick Canadian Maple Syrup.

Fast forward to today and China boasts over 2500 internet and App companies exploring crowdfunding. Compare that to the 150 that are based in the USA.  Finance Technology (fintech) in China is leapfrogging the western world’s traditional online banking infrastructure and coming up a whole new paradigm in mobile banking that can be arguably be the most innovative on the planet. Like African countries that never had traditional phone infrastructure and are adopting mobile phones first, starting from a clean slate without the burden of existing online banking infrastructure has many advantages in experimenting with innovations faster on the mobile platform.  Here is a sampling of some of these small innovations in the China fintech industry:

  1. A typical keyboard on a smart phone has the QWERTY format. To combat some of the issues around login security, China Construction Bank’s app has a randomized configuration of the keyboard characters. Why? So the swipe pattern of the password is never replicated the same way. If anybody is looking at your typing they wont be able to figure out your password which could be important if you are a “one password” type of gal.
  2. Wechat Pay and Alipay are the two leading mobile app platforms in China now competing for the mobile banking mindshare of the Chinese consumer. Wechat Pay has a fascinating way to interweave the very specific Chinese culture with features that resonate with the China consumer. The “Red Packet” feature is a great way to feel good about yourself by distributing small amounts money to people in your chat circle. Talk about response rate when one of these packets get sent out!
  3. M09 is a China internet company solving the credit card issuing process which has typically existed in the USA. People in China that don’t have credit cards don’t want to provide the normal credit card information to the bank. MO9 just asks for their mobile phone number and instantly approves microcredit.

Now I wouldn’t do justice to the China banking system if I didn’t comment on the clever ways that the traditional banks (like China Construction Bank) are fighting back.  Now, I could still put out my dongle and do a lot more than I did 10 years ago online with my Bank Account but there are fees associated with it.  But do this on my China Construction Bank app and there are ZERO fees and NO dongle. A good way to incentivize everybody to start adopting the App.  Kudos to that!

If you like this post, then please check out our other thoughts at www.impact10x.com/blog or email us at info@impact10x.com.

The Good, Bad and Ugly of Chinese Corporate Presentations

Would Walt Disney be rolling over in his grave at the sight of Disneyland Shanghai? When Walt created the first Disneyland theme park in California he would kneel down at various spots to understand what it would look like from a child’s perspective…he wanted to make sure that even the kids had a great view.  Disneyland Shanghai has taken that to the next level by making everything substantially larger than any other of their theme parks. The Shanghai Disney castle is now the largest actual castle in the world. Scale and bigness is everything in China.

Unlike the ever growing popularity of western style TED talks which emphasize gripping storyline and vivid visual presentations Chinese presentations tend to emphasize sterile facts and numbers. The bigger those facts and numbers that describe the company the better.  A typical presentation sequence would look like:

  1. 40 engineers with 5 PHDS and 10 Master degrees
  2. R&D floor space of 3000 m2 and factory capacity of X widgets per hour
  3. 100 product lines with X and Y performance specifications
  4. In business for 10 years

If you were to walk into the office or factory of most traditional businesses in China you could find a very very large room full of 100’s of their products lined up on their walls.  Bigness and numbers establish the message that the company has the capability to do anything that the customer requires whether it might be relevant to their business or not.

As consumers and business customers (both in China and America) get more sophisticated and have less patience to set these requirements, Chinese businesses that are winning are going from a “here is what we have” personality to “here are the problems we can solve for you” personality.  Although bigness and scale might never really go away because of its embedded meaning of credibility in Chinese culture, you can be sure even the Chinese consumer likes to save time and are looking for new products that help to solve their everyday problems.

If you like this post, then please check out our other thoughts at www.impact10x.com/blog or email us at info@impact10x.com.

Taking a Closer Look at Shanghai’s Unique Tech Approach

Shenzhen was the Chinese epicenter of a massive economic shift to manufacturing in the early 1980s and the attraction to most foreign manufacturing companies setting up there was the promise of inexpensive labor.  On a visit to Shenzhen City (near Hong Kong) a couple of years ago I was surprised to learn how much that is changed when a large US optical manufacturing customer was in the process of moving its operations to Vietnam due to the rising cost of labor in China. The shift of manufacturing from China to other countries has also signaled a shift of Chinese companies focusing more on technology and business innovation. Nowhere is that  more obvious than in Shanghai where smaller districts are all setting up innovation hubs and incubators to build the foundation for this innovation economy.

Impact10x had a recent opportunity to speak at one technology park called Keiji50 in the Jiading area of Shanghai. The main focus of this park was  IOT/wearable devices and housed probably 10-20 companies on its campus.  Companies building versions of Google glass, Smart Mirrors and even Smart Coffee machines adorned its demonstration room. Especially interesting was the fact that the center also did China based VC investments through a quasi-government funded organization. We had an opportunity to talk to their Partners to find out a little more about how their VC investments worked in China. It seems most investments were made after a working prototype had been demonstrated and with maximum investments of 3M RMB (approximately $500K USD).  Seed capital financing did not seem to be something that they were particularly comfortable with as some of the frameworks/tools they used to evaluate innovations were based on mass appeal to a broad consumer audience. Most true breakthroughs start with a small core of leading edge customers which then lead to growth.

Another piece of their investment approach was the emphasis on patents or other more basic scientific intellectual property which could be a competitive barrier to entry.  Although this has traditionally made sense 5-10 years ago, with the massive shift to more open source platforms, crowd sourcing and any new innovation being circulated around the planet at light-speed…basing your competitive advantage solely on protection of information is quickly being eroded. As Bill Gates recently said “intellectual property has the shelf life of a banana”.

Stay tuned for the next couple of blog posts as we will be posting some more of our discoveries on China and Shanghai based incubators and technology parks.

 

China Invents the “Lean Startup” for Countries 40 years Ago

The enormous transformation of China from the starving Chinese farmers of the 1960’s to having skylines full of gleaming skyscrapers in 2016 is a testamount to the incredible power of perseverance and experimentation. Deng Xiaoping who rose to lead in China in 1978 is generally accepted as a key figure who lead and drove this transformation. His philosophy was a simple one “to experiment, to take risks, and to not be afraid of making mistakes; when you make them, just correct them”. In Ezra Vogel’s biography of the leader “Deng Xiaoping and the Transformation of China”, the word “experiment” happens no less than 78 times throughout the book.  This book was recently promoted by Bill Gates as one of the best books to read on China.

The Impact10x team had an opportunity to share our views on innovation to China tech entrepreneurs and engineers on invitation from IC CAFE, a technology incubator and china venture capital fund located in the east part of Shanghai.  The best known innovators of our time like Steve Jobs and Elon Musk were the standard part of our discussion but Deng Xiaoping took a special place as an example of a leader who emphasized execution over guessing.  It maybe the hottest thing now in Silicon Valley to be a “lean startup” but lets not forget that this idea of experimentation and fail fast was what started the incredible transformation of China over 30 years ago.

Thanks to Xiaoming, Sean and Yixin from the Impact10x team in joining and supporting the seminar!

If you like this post, please check out some others at Venture Capital in China or contact us at info@impact10x.com. 

Impact10x Talks at Massive Tech Incubator in Alibaba.com Hometown

Shanghai literally means “On the sea” (shang: on, hai:sea) which shows up in its very distinctive flat coastal landscape. In fact, the highest hills you will see are the roads that lead up to massive bridges in the city. But go about 2 hours driving west to a city called “Hangzhou” and you get to see some of the greener more mountainous areas of China.  Known for its tourism and lake district this city is now getting known for its new innovative technology companies including the global giant Alibaba which has its headquarters there.

The Chines government recently built a massive technology incubator there under the “High Tech Zone Plan-5050” initiative which is to create even more tech companies.   The incubator finances IOT, Internet and software tech companies through competitions and local china based venture capital. The young companies that we met were impressive doing innovative App services to companies serving the up-and-coming DIY generation of Makers.

What was clear on our visit is the government still seems be the main actor in most financing and promotion activities but that there is definitely a generational reversal going on between older workers concerned about money, health, emotion and entertainment (in that order) and the younger generation being more concerned about entertainment, emotion, health and money (in that order). Those innovative tech companies that can satisfy these emerging Chinese needs have the potential to be the next big winners.

Ghost Tech Parks Attracting Some Beijing Attention

China is facing the largest migration in human history of 400 million people moving from rural to urban areas in the next 10 years. Urban areas especially along the coastal areas promise higher wages and a better standard of living as compared to the interior of China. To manage this mass migration, the Chinese government has made a high priority the development of cities interior to China to stem the flow to coastal areas. In some cases, this accelerated thinking has led to interior cities which are heavily built out with shining apartments and office buildings but has a feel of a ghost town.

On an invited visit to a Technology Park in the Yixing area of China (a city 1 hour west of Shanghai) some of this was painfully obvious. Wide streets, massive buildings, large beautiful courtyards, tree lined gardens but with a scattering of people walking around. This particular Technology Park was recently recognized as a National Research Park  by the Government in which only a handful have been given this honor.  The officials who ran the Park enthusiastically welcomed our conversation around bringing internet and IOT technology into the Park.

As the government continues to invest heavily into building out these innovation parks the question for this strategy is whether these gleaming towers will attract and grow the right innovative companies or whether its just putting some lipstick on a pig. What is for sure is that the approach being taken in investment models, company management and technology development is uniquely Chinese with no shortage of ambition to build out this next phase of China’s growth.