Commerce in China

There was an article in today’s New York Times that gives a good overview of the economic boom and the success of entrepreneurs in China. It is clear to any visitor (or anyone who reads the news) that there has been a lot of wealth created in a very short time. What is less clear is if the boom in exports, the stock market, and the real estate and construction boom will burst and crash in the near future. Other uncertainties are whether intellectual property protections will improve significantly, or whether the education system and Confucian values hinder the creative and independent thinking that is vital for success in scientific innovation and entrepreneurialism.

I happened to download a video podcast the other day that was about a similar subject. It is a lecture given at Carnegie Mellon University by a Google employee in China.

The theme of the talk was how China is a very different market from the U.S. market. One obvious difference is the lack of a free media in China. While there are plenty of censor-free media sources in the U.S., there are none outside of the Internet in China. Other than a several weeklong period after the Tibet riots, Google News is available in China.

Some other revealing statistics (United States compared with China):

Average age of an Internet user: 45 years old versus 25 years old

Number of Internet users who go online from Internet cafes:
<1% versus 33%

Software piracy rate: 21% versus 96% (19 out of 20 software programs in China are pirated copies!)

Number of credit cards per person: 2/person versus 0.02/person (credit cards are 100 times more common in the U.S.)

Number of mobile phones: 190 million versus 510 million

The implications: Internet users are much younger, which means a larger emphasis on games, multimedia, and entertainment. Far fewer people access the Internet on personal computers. Instead, many users go online primarily via their mobile phones or computers in Internet cafes. The prevalence of pirated software means the Chinese market is more open to free software like Google’s Office suite, while fee-based software companies, not to mention music labels and movie studios have a really hard time. The lack of credit cards means e-commerce is local since transactions are done in person – the buyer and seller on an auction site similar to eBay meet in person, or a purchase from an Amazon-style online retailer is delivered to your door. By the way, all kinds of things can be delivered – when I need a new jug of drinking water for my water cooler, after a quick phone call, one is delivered to my apartment by bicycle. I’ve also had someone at school order a train ticket for me that is delivered later that day.

Anyway, it’s interesting to learn about how all the little differences in culture and technology have a huge impact on how goods are marketed, bought, and sold. Foreign retailers face a similar challenge. For example, Wal-Mart’s stores in South Korea underperformed and eventually were all closed because they were built and run in virtually the same way as their American stores. Wal-Mart learned from that failure and their stores in China are better adapted to Chinese shoppers. There are no greeters (young female workers smiling and greeting shoppers isn’t socially appropriate), while there are employees shouting out discounts and giving product demonstrations using microphones, music is played loudly, fresh and hot food is served, and there is a sizable horde of workers to help you with anything (or simply follow you around). I'll be sure to visit the new Apple store in Beijing this summer, the first in China, and see what's different.

Shanghai and Beijing are home to a number of R&D centers established by foreign corporations in addition to numerous start-ups and young Chinese entrepreneurs. The friend of Andy's coworker who we had dinner with in Beijing worked for a private equity firm and it was interesting to talk to him about his work. To me, this is fascinating stuff to learn about and witness up close.

[UPDATE] Another good article in a series by Joe Nocera, who authored the article I linked to above, describes the Chinese way of management and guanxi (personal and business relationships). Finally, another article by Nocera describes how Chinese companies are also adopting the marketing and brand management strategies of western companies because of an unavoidable reality: Chinese consumers adore western brands and snap them up as status symbols while they think that Chinese brands are cheap and less desirable. The challenging process of integrating east and west is happening in so many different places.