Monday, March 29, 2010

RioTinto, Google, China and you

The recent Chinese experiences of two huge MNCs - RioTinto and Google - can serve as cautionary tales to smaller firms looking to expand abroad. In today's globalized world, growth aspirations must be met with global aspirations. Any business can nowadays reap the benefits of a global marketplace through blurring geo-political boundaries and increased interconnectivity. While the strategy concerns that a growing and aspiring multi-national company must face are numerous, none is more important nor more difficult to accurately predict than political risk. For obvious reasons that have been briefly discussed in previous posts, China is one of, if not the most, attractive foreign market for a lot of companies. However, no country better demonstrates the hazards of political risk than China. While the Chinese example is indeed unique in many ways, it often helps to use the powers of exaggeration to prove a point.

As it has been widely reported, four RioTinto executives have been charged with and put on trail for taking bribes in China. It has been widely claimed that the trial, which concluded last week, has been highly politicized and far from transparent. While RioTinto initially stood by its employees and reprimanded the Chinese government for what it claimed was inappropriate handling of the case, its recent actions are in stark contrast to its initial reaction. RioTinto's chief executive recently attended a high level meeting with China's Prime Minister during which he outlined ways in which China and RioTinto could work more closely together. His statement coincided with an announcement that it has signed an agreement to develop a JV with Chinalco, China's state-run aluminum company, in Guinea. On the other side of the spectrum lies Google who recently followed through with its threat to pull out of the Chinese market should the government not ease its censorship laws.

While investors, customers and governments will have differing reactions to the actions of RioTinto and Google, a brief look at both companies in the context of China might shed some light on why their decisions were made. Certainly, the Chinese internet market is poised to grow at monumental speed; however, currently, in spite of being the largest domestic market in the world in terms of the number of users, it only represents a marginal percentage of Google's revenues. Even if the market doubles in size, it would still only be of limited importance. Beyond the fact that, economically speaking, the Chinese market matters little to Google, the fact is that Google matters little to China as there are a host of other players - both domestic and foreign - that offer similar services. Unlike the Google case, RioTinto and China are faced with a reality of inter-dependence: China's growth and continuing demand for its product make it a crucially important market to RioTinto while China's state-run companies require the experience of established companies like RioTinto to effectively expand across the globe. With this analysis in mind it quickly becomes apparent that while Google could afford to stand firmly by its principles, RioTinto cannot. If you are a business looking to enter the Chinese market, or any other market for that matter, you need to look at your potential position in that market and decided whether your decision to enter that given market more resembles Google's or RioTinto's and what that may mean in terms of which laws and policies you may or may not be willing to work with.

Monday, March 22, 2010

Google in China

On January 12 of this year, Google announced that it would pull out of the Chinese market unless the Chinese government eased the censorship restrictions to which Google had reluctantly agreed to when it entered what is set to become the most important internet market in the world. As has been well documented, the announcement on Google's official blog was prompted by cyber-attacks on its servers that originated in China in mid-December. While Google had for years endured Chinese policies with which it did not agree with in order to serve the search needs of millions of Chinese users, it felt that China had crossed a line by attempting to hack into the personal email accounts of Chinese human rights dissidents. After months of uncertainty as to Google's actions with respect to its presence in China, it has recently been widely reported that Google will be pulling out sooner rather than later. The Google-China issue shines new light on the issue of Corporate Social Responsibility.

The issue of Corporate Social Responsibility is a thorny one in today's business world. There are those that advocate that corporations have a responsibility towards the social good beyond what it may mean to their bottom line. There are those that argue that the social good is best served only if corporations focus entirely on increasing their profits. The practice of green-washing seems to have been accepted as a win-win solution to the issue as companies adopt socially responsible projects as a marketing technique - therefore serving the greater good and increasing profits at the same time.

Google will forego nearly 600 millions US dollars in revenue in 2010 by pulling out of the Chinese market and will lose its current 35% share of that market. While Chinese revenues currently only represent 3% of Google's total Global revenues, there is no doubt in anybody's mind that the importance of China within the Global online market is headed upwards. By pulling out of the Chinese market, Google is not only giving up on current revenues, it is also giving up on its market presence and its ability to reap future rewards from the market as well as its ability to sell Chinese advertising space to foreign companies as the Chinese domestic market becomes more important.

In spite of the monetary consequences of its decision to pull out of China, Google seems intent on standing firmly behind its believes. Investors, giving their opinions with their wallets seem to disagree with Google's decision as its stock price drops, it's loyal base of users, wanting to believe that Google's "do no evil" philosophy is more than a marketing slogan are happy that Google is actually standing on the side of human rights. What effect Google's decision will have on its current and future profits, on China's human rights policies (joint Google-US government demands that China ease its online censorship policies) and on its brand perception remains to be seen - the outcomes of these uncertainties will determine the wiseness of Google's decision. However, what is certain, is that Google's decision goes beyond green-washing as they have been made irrespective of the direct consequences on current and future revenues.

Monday, March 15, 2010

China's bubble?

Last week we discussed whether Toyota has responsibilities regarding its quality, beyond what it may mean to its bottom line. As an interesting follow up, a blog on discusses one possible explanation for Toyota's recent massive recalls. The blog blames the company's current state primarily on its leadership, stating that its current leadership placed less importance on quality than on growth and that the company suffered accordingly. As China grabs headlines for higher than expected inflation, high export and retail sales growth, it might be interesting to parallel its situation with Toyota's.

While the specific technical causes of Toyota's recalls are still being debated, everyone seems to agree that it is undoubtedly a result of its rapid growth and the changing prioritization that came along with that growth. In early 2008, Toyota surpassed General Motors as the largest automaker in the world in terms of total vehicles sold. Between 1998 and 2008, GM's average annual rate of growth was roughly 1.5%, Toyota's was five times larger. Beyond gaining in market share and growing at a faster pace, Toyota also led the pack in terms of profitability per vehicle. In spite of its stellar performance across all metrics, including brand perception and customer satisfaction, for many years, Toyota has suddenly found itself in a deep turmoil from which it still remains to be seen if it will recover from. From our current stand-point, we can perhaps begin to conclude that Toyota's
hunger for market share may have come at the expense of its traditionally strict quality standards, even though there were no obvious warning signs that this was the case.

Much like Toyota once did, China now stands out amongst its peers. China rebounded more swiftly from the global downturn than any other big economy, growing by more than 10% in 2009. As its exports and domestic retail sales continue to grow and millions of Chinese continue to ascend into the middle class each year, China stands at what many consider to be a cross-road. Pundits and economists alike seem to be divided into two equal camps - those who believe that China is poised to over-take the United-States as the biggest economy in the world and those that claim that China's spectacular growth is based on
a bubble that will eventually explode. For example, in January, the Economist's online edition had a thoughtful article, which outlined the reasons why China's growth is sustainable.

Regardless of the arguments that each camp makes, Toyota's recent experiences should come as a cautionary tale: No matter the fundamentals of your current performance, during periods of rapid growth, there will always be variables that are ignored that may come back to hurt you - everything's fine, until it isn't.

Tuesday, March 9, 2010

Toyota and its Responsibilities

In recent months, one event has overwhelmingly claimed headlines around the world - Toyota, which has become the largest automaker in the world, has had to recall more than 8.5 million vehicles worldwide due to unintended acceleration and breaking problems in various models. Clearly, the events of recent months will have an effect on the Toyota brand. There are several questions that arise from this episode, the two that I want to tackle here are (a) how badly will the Toyota brand be tarnished? and (b) do Toyota's responsibilities end once it's brand name's reputation is restored?

While it is too early to fully understand the effects that recalling 8.5 million cars will have on the Toyota brand, there are varying degrees of expectations. According to U.S. sales figures released on March 2, nearly all the major auto companies reported double-digit year-on-year percentage sales growth in February, except for Toyota, whose sales declined by almost 9 percent. These figures clearly show that Toyota has taken a major hit due to ongoing safety concerns. However, on the other side of the coin, there are also signs that Toyota's drop in sales will be short-lived - initial reports suggest that chat about Toyota on the social web is positive, relative to its competitors, implying that perhaps there indeed is no such thing as bad publicity. Furthermore, Toyota seems to feel that all it needs to do to lure consumers back is to lower its prices.

It may be too early to begin to assess the full impact of the recalls on Toyota's image but it is not too early to begin to discuss what Toyota's responsibilities are (if any) once it has restored its image and sales figures. The question is, does Toyota only have to worry about restoring its image or does it have a greater responsibility towards ensuring the safety of its cars, beyond what consumers may think they know. The common assumption is that the level of consumer confidence will reflect the perceived safety of the cars, implying that the only way to regain a positive image would be to comprehensively deal with the safety issue. What is often ignored is that it is the perceived safety of its cars that matters to Toyota's bottom line rather than their actual safety. So long as there is no difference between the two, there is nothing to debate. However, in this particular case, in which there are claims and counter-claims about the root cause of the safety issue while cars are still being sold (albeit at a decreased pace), it is evident that what matters most to Toyota is to maintain a positive image as possible rather than ensuring that all of its cars are safe. This case raises the larger issue of corporate social responsibility at large - are companies only responsible for their bottom line (a.k.a ensuring consumer satisfaction) or is there a greater good that they must seek to satisfy?

Wednesday, March 3, 2010

Collaboration or Anarchy?

Not too long ago, the Wikipedia model of almost anarchy-like collaboration resulting in a polished, usable product was dismissed as unrealistic. Nowadays, Wikipedia is regarded as a credible source of information, able to compete with traditional encyclopedias - matching the likes of Britannica for quality and vastly surpassing it in terms of quantity. While it may be easy to dismiss the success of Wikipedia by saying that it is based primarily on the specific characteristics of the particular need that it attempts to meet, to do so would be to ignore the potential of collaboration across myriad industries as a new business model that can potentially deal with a lot of the issues that organizations will face going forward in these still uncertain times.

A perfect example of another industry that has begun to take advantage of the potential for volunteer collaboration is the mapping industry. On the one hand, there are the traditional mapping companies (which are the main suppliers of the maps on personal GPS devices) and on the other are the giants of the online and software world. It seems that the traditional mapping players seem convinced that they will be able to produce better and better maps by simply improving the things that they have always done. Want to make the image on your GPS device more realistic? Instead of only programming major 3D landmarks onto a map, program entire city-scapes in 3D. Need more Points of Interest (POIs)? Buy more POI databases. What would the alternative be? Skip the programming of 3D landmarks altogether and take real-life pictures of the streets that people will navigate through - a la Google maps. Or even better, take pictures of streets AND rely on public images taken by others and collected from sources like Flickr and compile the two to enhance the detail of the images - a la Bing maps. If you want a more complete POI database, allow users to add POIs directly onto the map, for all users to see.

The question that is clearly being posed is whether a collaborative method is better than a proprietary one. Taking a look at the success of companies like Apple and Amazon, which are becoming increasingly proprietary, it would be foolish to suggest that collaboration always trumps the alternative. However, it would be equally foolish for companies in ANY industry to simply ignore the potential of collaborative trends (or any other trends for that matter) simply because of a prior bias, especially if it presents an opportunity improve a product or service. As businesses begin to slowly grow after a terrible few years, they should be careful not to fall into the same traps that they once did. Business should focus on their core offerings, on maintaining profitability and should be careful about pushing too hard for growth too quickly. Therefore, if social collaboration, for example, allows you to offer a better product, at higher margins, with a smaller workforce, then it should be considered.