China Association of Automobile Manufacturers reported a jump of 59% in February’s vehicle sale year-over-year (yoy) to 528,100 units. Sales of “made-in-China” autos jumped 51% (yoy) to 480,000. Passenger vehicle sales popped 68% month-over-month (mom) to 763,600 units (total year to date 2006 sales). On the back of these results, we feel comfortable with our full year 2006 automotive sales estimate of 9 million units.

The auto industry in China, long an export play, is finally shaping up to be somewhat of a domestic play as well. When we first started researching this industry in 1992 it was very difficult to see where small foreign investors (ex-multinational auto manufacturers) would fit into the mix – in other words, how do we get rich from cars in China?

Of course, this was before the Internet, so what seems obvious today (“er, why don’t you just build a community site like Chinacars, or something, it’s like a proxy on the entire industry…”) wasn’t so clear back then – the only realistic opportunity that came to mind was rolling out a China version of American Automotive Association (AAA). The downside was, well, it was like, 1992/94, and regular mainlanders didn’t actually own a car (oh, and did we mention there were no street maps or tow trucks?) or that most drivers didn’t really have anywhere to go (or that motor insurance was like, well, non-existent).

What a difference a decade makes, eh? From1990 to 2004, China’s automotive market expanded by 35% per annum; there are an estimated 27 million private cars on the road in China – the ownership by location breakdown is as follows: Beijing 22%, Guangzhu 14%, and Shanghai 8% (source: AC Nielson, 4/05). Motor insurance premiums in 2005 topped US$6 billion while after-sale auto care/repair came in around US$5 billion.

On the back of this growth are gaps, massive service gaps to be precise; yet holes that a nationwide AAA sort of business would resolve very nicely, yeah?

As a kid growing up on Cape Cod it is hard not to spend at least 90% of the summer either swimming or sailing in Nantucket Sound (the remaining 10% was spent eating ice cream from Four Seas). So, yeah, I have lots of salty stories, yet one specific, very poignant flavor comes to mind whenever I feel troubled – the first time I got caught in an undertow (an undertow is a strong underwater current generated from waves crashing into the beach and water recoiling) at Sandy Neck beach in West Barnstable.

For those in the know, getting entangled (and that is what it feels like) in an undertow is frightening especially if you’re five-years old and holding onto your bathing suit with your toes as it gets ripped from your body (note to self, learn to tie a double knot). For those fortunate enough not to experience an undertow, well, just imagine being getting sucked out of an airplane at thirty thousand feet (I’m going for the vacuum effect, not the “splat” thing).

The first thing that floods into you mind is “weee” – the second thing is “crap” – the third thing is “mom” – and the fourth is “I wish I had something tethering me to the beach rather than being sucked out to sea (Regis, I’d like to use a life line).” At that moment of panic you don’t care what form the life line (or knight in white shining armor) looks like, where it comes from, or what you need to do to get it – all you want is to have it in hand.

I liken my undertow induced panic to that which some early stage start-ups experience during their early days, you know, before the model is proven and/or they’ve cobbled together a solid track record – a panic that sometimes results in the management team reaching out an advisor (or advisory team) for help. With this said, this panic isn’t reserved exclusively for start-ups, big, established companies do this too, but they call this “hiring a consultant” or “consultancy validation” (queue commercial for Bain).

Over the past year and half, I’ve seen at least five China based start-ups reach out to an advisor (or team) for help in validating the model or re-positioning of the business strategy or just to secure venture capital funding. At one point, I thought this was a great idea (and I still do); it makes lots of sense to find someone experienced and knowledgeable in the space you’re operating it – sort of like a road map or knowing the “code” for a secret gun or unlimited life in Tomb Raider (I’m old school). At the same time, being all panicky and stuff, forces bad decisions, or rather irrational decisions that make sense at the time (“dude, toss me that poison ivy vine, pull me up…”) but in hindsight you end up kicking yourself.

Recently, I learned of a Beijing based start-up (let’s call this company “Zing”) operating in a competitive space, yet with no clear market leader. Zing’s management team knew they had a solid business model, a quality team, and good momentum; even so Zing was nervous, worried that the echoes, or rumors of foreign competitors encroaching on their space would quickly materialize.

Complicating the issue was their inability to attract venture capital funding because: (1) the team’s experience only covered 50% of the knowledge investors thought they needed to make Zing a winner; and (2) while Zing had an impressive pipeline of potential, promising customers, very few heavyweights had signed up.

Queue knight in white shining armor.

Zing was introduced to an American based guy who had not only successfully built a similar company in the USA, but also took the company public on NASDAQ (valuation hit +US$3billion). The American advisor dazzled Zing with his domain knowledge, his track record, confidence, and most importantly marketability (“trust me, any vc in their right mind will toss you millions by having me as your advisor…oh, and by the way, I have a meeting with you competitor in 5 minutes, what do you want to?”).

Feeling the drag of the undertow, Zing’s management team signed up our American advisor, offering him flowers, camels, KTV and 3% of the company (“who’s your daddy?”). And, for a couple months after the advisory document was signed, the advisor did add value, re-shaping the business model, helping the team to refocus and avoid rookies mistakes he made, and yet, for all these operational trophies, venture capital money remained quite elusive – nine months, two week, and 5 hours after Zing brought the American on board.

So, what was the problem? Did the American advisor doop Zing? Over promised, under delivered? Pull the old fast one? No, that didn’t happen at all, in fact the American was absolutely upfront and forthright with Zing, if anything Zing fucked up; they got all hyped up, putting too much stock in this knight in white shining armor.

The fact is no one person can make your company work, not to mention attract venture capital funding. And while an advisor, especially an active advisor who has proven he/she can build companies and attract funding, adds a tremendous amount of value to a start-up, the young start-ups management must going into the relationship eyes wide open.

Here is a list of some things Zing’s management team should have thought about before handing over 3% of the company to the American advisor – and by the way, the answers to these questions should determine how much of the company the advisor should get:

1. Location: Where is the advisor based? If this person is not in China, then how often will he/she be in town? There is a lot of value in having your advisor in the same country (or 2 hours flight away) for those urgent, “dude, we have a meeting with a major client and would really like to have you on our side of the table…” If this guy isn’t in the same country then you might want to consider finding someone who is, and when this isn’t possible make sure you have an open line of communication readily accessible (Skype is great for this);

2. Activity Level: How active is he/she going to be? Are we talking 1 meeting a week, or a conference call once every quarter? Will communication be on an ad hoc basis (as need be) or will there specific times you can call on him/her (this isn’t a bad thing, sort of like “office hours”);

3. Milestones: Are there pre-determined milestone or goals that must be meet to trigger vesting rights? Maybe the Advisor receives half his compensation from at the start and the balance after the company wraps up its funding. What do you expect to accomplish from having the advisor on board? Who determines the milestones (hopefully not the advisor);

4. Resources: What does the advisor bring to the table? In the case of Zing, the advisor had a very solid network in the US (perhaps globally) but not in China; in fact, I bet Zing’s advisor overestimated his value (from an investor’s perspective). If you need a guy to come on board to help raise money, maybe it’s a good idea to meet his funding agents before you agree to an advisory relationship;

5. End Game: Outside of equity in your company, what is he/she looking for? This is very important consideration, especially in China where the market is hot and yet very few people outside of Asia have any exposure (or relationships) in China; the case might be the advisor is using your company as a beachhead to ramp up his/her China knowledge base (“…for the past 12 months I’ve been assisting a local company grow its business from ‘x’ to ‘y’…imagine what I can do for your company…”). To be honest, this isn’t a negative attribute, if the guy helps to grow the business and get your company to where you want it to be, then why shouldn’t the guy take credit for it – the point is to keep this in mind when dishing out compensation (mutually beneficial experience is cheaper than a one sided deal);

6. Investor Impression: How does it look to a potential investor that you need to bring in outside help isn’t the real issue here, however what some investors might have problems with is the amount of equity the advisor gets – make sure you can justify your advisor’s value add (this is why basing compensation on successfully reaching pre-determined milestones is so important).

7. Relevancy: So, like, dude, are you still CEO or actively involved in the company you took public or are you like, on the beach sipping apple martinis? Point being, technology moves quickly and while there is a lot of benefit in working with guys who have been their and done that, you’ll get a lot more value (network, exposure, investor attention) if your advisor is an acting, innovative CEO (or other C level manager) of a company in your space than a, well, a has been (“…like, 10 years ago, I was, like, the guy who build a stock trading engine using email based delivery system…”).

8. Life Expectancy: When does the damn advisory contract end? Is it indefinite? Is it reviewable every 6 months? You might find that you’ll get everything you need to know from your advisor after the first 6 months? However, my gut is that if this guy’s is worth his salt, he’ll continue to offer up lots of valuable insights and connections. I like to see a 1 year advisory lock (non-compete) with a 4 year extension that can be terminated by either side at the end of every quarter (allowing for quarterly vesting of equity options). The way I see, don’t be greedy or petty – fairly compensate those who do good work for you – karma thing, I guess.

9. Responsibility: End of the day, it is the management team’s responsibility to engage the advisor. Often, a team will sign-up an advisor and forget to actually use the person, or rather doesn’t understand how they want to use the advisor. I’ve seen this happen in two China based start-ups in the past month – and when things don’t go as the team expected (“We’re rich! We’re rich!”) the blame games starts – and the loser is the guy with furthest from the ball, the advisor, when in fact its not really his/her fault but the CEOs. Smack! The truths gotta hurt, dawg!

Anyhow, these are just a few things to consider when hooking up with an advisor. I’m sure there are variations to these nine points (and some might not even be applicable to your current situation) but I guess the point is, if you have to remember just one thing, well, it would have that not matter how powerful the undertow is it eventually subsides once it hits the surf line. Shaka Brah!

Michael Jackson in Shanghai

No one likes to leave comments but they sure like emailing us. For example, the blog about Shanghai not having much international culture got us some flame mail.

Our bad, we overlooked that fact that Michael Jackson has been seen slumming it in Shanghai…

“…trust me…”

We’ve talked a lot about direct marketing, specifically the benefits of RSS and permission based networks. One development we’ve been following in the US is the growing popularity of two companies, Return Path and Goodmail.

Essentially, what these companies are proposing is a “sort of FedEx for e-mail…for a penny or less per message, the sender gets guaranteed delivery for mail and the promise that it will stand out in the user’s mailbox” writes Esther Dyson in an op-ed piece she wrote in today’s NY Times about Goodmail. Esther continues,

Goodmail, in my eyes, does not raise moral issues. It simply wants to make the Internet a better place — and yes, make a little money along the way

We understand that Goodmail’s solution is meant to help filter out the bad e-mails from the good e-mails by labeling e-mail with a “certified e-mail” icon and thus making the Internet a safer place but we don’t believe this model is going to work as it is intended or promises. Truth be told, the only way to absolutely filter out bad e-mail is to build a closed network where individuals need to be individually certified by the person they are looking to contact (Linkedin.com, anyone?)

So, if Goodmail isn’t the solultion, what is? Could the answer be a permission based marketing (i.e. “I give Yahoo! permission to only e-mail me marketing info about green spotted frogs”) model? We don’t think so as permission based marketing (“PBM”) is about filtering out unwanted/random e-mail spam; the promise of permission based e-mails is to provide marketers exceptional measurable results while rewarding customers for playing.

You might be thinking, “so what the heck is your point, get on with it already” or “all this yelping about PBM and yet you fail to realize you’re comparing apples [Googmail] to pears [PBM]…”

Here’s our point: We believe Goodmail (and Return Path) further pollute the direct marketing environment by incentivizing corporates to turn up the volume on unwanted spam under the guise of safe, certified e-mail (“truuust me, dear customer, you’ll love this spam mail…”).

We truly believe this is the worst possible path for direct marketing to take as it approaches the problem of “spam” not from the end-users pain point (“dude, stop the spam”), but rather from the corporate/aggregator/ISP’s (e.g. AOL, Yahoo!, etc) monetization pain point (“man, I wish I could earn US$0.01 for ever time some joker used my network to send spam, a network of users that is costing me some bucks to maintain and support”).

We look at the issue of paid e-mail from the inside out, in other words, we’re advocates on not only rewarding the corporates (i.e. measurable results), but also rewarding those consumers who want to be contacted by advertisers (all the while leaving those consumers uninterested in “spam” alone).

In trading, when a guy has a strong opinion of the market’s direction we say “he’s talking his position” which mean he’s positioned to make money if the market plays out that way. And in this sense, with regards to permission based marketing and loyalty rewards, we are talking our position, however when you’re right, you’re right. Yeah?

“Show me the money!”

Last Tuesday, Stuart Biggs and Michael Logan published an article in the South China Morning Post titled “China awash with venture capital” which quotes Vincent Chan, chairman of the Hong Kong Venture Capital and Private Equity Association and vice-president of Jafco Investment, as saying:

“…an influx of US venture capital firms was pushing up valuations.

The pot is getting bigger. [Valuations have] gone up even higher. United States VCs are setting up new offices in Beijing and Shanghai every month,” he said.

But much of the focus was concentrated on mid- to late-stage investments. “There are still some VCs willing to invest in the early stage or pre-revenue stage,” he said. “However, many former small fund managers have been able to raise much larger funds [this year and last].

“There is a general tendency for them to work on bigger deals. Some have changed focus from venture into growth capital and compete with the traditional expansion capital investors.

“I believe there is a funding gap between early stage and late stage.”

This is absolutely the case…

Guangdong Zhu, or in English “Guangdong Boil”, might be the most popular snack food in Shanghai, if not in China, and can be found in almost every single convenience store in Shanghai. Essentially, Guangdong Zhu is a bucket of boiling liquid filled with skewers of tofu, fish balls and vegetable like substances.

From a foreigner’s perspective (non-Asian) I wanted to know not only what made Guangdong Zhu such an attractive snack food, but also if there was a big difference in quality from store to store. And so, today, I decided to interview three receptionists in my office and ask them to tell me a little bit about Guangdong Zhu.

“So, what do you think of Guangdong Zhu?” I asked Vicky, my office receptionist.

“I like it very much…” Vicky responded “…I eat it every day for a snack…”

“And, sometimes Vicky eats it for breakfast, too, tee-hee…” interrupted Carrie, the other receptionist.

“Vicky, if you had a choice between potato chips, cookies or fish balls on a stick, which one would you go for? I asked.

“…I feel potato chips and cookies are not healthy…I would pick fish balls on a stick…” she replied.

“But what about all the oil they cook the fish balls in? Or the fact that it doesn’t look so clean…I mean there is no cover on the Guangdong Zhu and it sits next to the open door…what if someone sneezes in it…” this time I was asking Carrie who had been nodding in agreement.

Carrie replied, “…sometime we eat dirtier food…this is clean…and it isn’t oil in the Guangdong Zhu, it is just water…”

“In Hong Kong, we bake cookies at home for a snack, would you make Guangdong Zhu at home for a snack? Or is it just something you eat on the street…” I asked snatching my head.

“…no, just on the street” both girls agreed.

Turning to Selina, the third and final receptionist, I asked “which convenience store has the best Guangdong Zhu?”

“Lawson’s, Lawson’s has best Guangdong Zhu…everyone knows this in Shanghai…the food seems healthier,” said Selina

I met this American, Thomas, from Mooers, New York the other night while waiting for the bank manager at Pudong Development Bank to open the ATM that just eaten our bank cards. It turns out he has been in China for, get this, over 20 years as a marketing director and country manager for some of the largest consumer goods manufacturers on this planet, such as Coke Cola, Nestle, and P&G.

He started talking about what Shanghai looked like in 1982, where to get the best straight razor shave, and of course, his adventures in marketing. The last bit about marketing in China was the most interesting.

According to Thomas, branding in China isn’t about branding at all, it is all about logistics, price points and samples. From his experience he believes that before you can even build/develop a brand you’ve got to get the products into the hands and mouths of the Chinese consumer. And thus, “flashy advertising gimmicks” take a back seat to “cold hard logistical planning.” I’ll try and paraphrase what he told me:

“…not only are you building a proprietary distribution network (well oiled distribution channels are a serious competitive advantage) but also you’re dealing with suppliers unaccustomed to Western standards of quality and time constraints. That fact that consumers can see and physically touch your product might be the best, most effective marketing tool multinationals have at their disposal…

The fact is most China based marketing teams look at the branding approach the wrong way, they come at it from the direction of building short-term demand rather than building a sustainable presence. As a marketer you need to understand how the goods get to market, where products are placed, and at what price people are willing to pay for them. In China, I believe some of the best marketers are also brilliant engineers; most people disagree with this assessment…

It took Dove candy bar almost 8 years to understand this. They came into China with a large Western size candy bar, yet it was too expensive for average Chinese to afford; furthermore, they were not accustom to the rich chocolate taste. The solution was to sell sample size (or bite size) bars but this meant reengineering the entire production and distribution network, not to mention positioning and pricing.”

Well, I’m not sure I completely agree with Thomas on all of this as China’s consumers have gotten a bit more sophisticated; and yet how can you argue with someone who has been in the business about as long as I’ve been alive? I do think he makes a very interesting point about the power of samples and the importance of logistics in branding.

Anyhow, after that conversation I wanted to find out how wide spread sampling was in Shanghai, so I went into a Lawson’s, looked around, and was like, cool, lots of Western brands do in fact use sample size packaging. And, then I thought, gosh, sampling must be really expensive, at what point will manufacturers stop sampling and just go back to exclusively selling regular size products? And the I thought, in the States we are crazy about super sizing, getting biggest bang for our buck, but in China people are kind just figuring out what they like and don’t like…interesting, huh?

Today, we received Piper Jaffary’s latest China Analyst research note titled, “Music in China – Monetization Through Mobile Platform.” While we don’t have any major issues with their thesis that “several new developments [in China music industry] suggest that monetization of music, through mobile services, is beginning,” we do want to call them out on how profitable music will be for content providers, distributors and intermediaries.

First, here are some key findings on China’s mobile music market (source: Piper Jaffary 3/06):

We estimate the Chinese mobile music market size to be approximately $200-$400 million in 2006 consisting primarily of ringtone and caller ring back tone sales.

Yet, in both the U.S. and in China, young people who will almost never pay to buy a CD or download legal copies, happily pay $5-$20 per month in the U.S and $1-$4 in China.

What [kids] are telling us and the industry is that they are willing to pay for music, but only on their terms.

Good stuff, yeah? Sure, but wrong conclusion! Kids/adults in China (and everywhere else in the world) aren’t paying for ringtones because they want to, and surely not “happily” – they pay because they have no alternative; the mobile companies control the mobile pipe, the gateway, and without paying for that mobile connectivity kids/adults would be, well, they would have talk to each other a lot more. Come on Piper, get with the game – you guys sound a bit, well, a bit square (“Gee, Beav, I don’t know?”).

This gets us to our point, finally, that content is going to be free, all content that is, the music industry as a content provider will need to own that pipe if they hope to profit from mobile sales; and the reason, moving forward, is one acronym: 3G.

What makes people believe that they can control file sharing through mobile phones anymore then they control it now on PCs? Widespread use of 3G (medium – high end users) in China is a couple years off, maybe 3 years, however we are already witnessing the proliferation of WiFi enabled phones (Dopod 818pro in the house!) and WiFi hotspots in China; we believe this makes any hope of earning a sustainable profit from music in China a pipedream (ex-our carrier friends – love that growing ARPU). And, we haven’t even touch upon “off-line” mobile P2P sharing but that’s out there, too.

For the record, so Piper doesn’t cut us off, we think the guys at Piper do a great job, it is just we don’t agree with them on the medium to long term picture of music in China.

I think I’m becoming an expert at decoding embedded meanings in “first looks” which are really two second glances from people I meet for the first time.

For example, yesterday, I flew in from Hong Kong to meet with a bunch of Beijing based companies; at one of the start-ups, I was introduced to a new member of the team (a returnee). After we exchanged name cards and got the pleasantries out of the way, I noticed he glanced down at my shoes, grimaced, and returned his eyes to his colleague who was gabbing on about something.

I regarded his first look for a moment and realized it wasn’t the typical glance I’m accustom to (“he looks a lot like Tom Cruise”); in fact, this was the holy grail of first looks, it was the illusive “shoe first look” – that quick calculation used to measure an individual’s worth by the shoes he wears.

Moments later, as we were walking into the meeting room, I snuck a peak of his shoes and realized he was gliding down the hall in a pair of expensive fine Italian leather jobs – very fashionable, very European.

This brought me back to a conversation my ex-girlfriend had with me one day while in b-school, “…the world judges a man on two things, his watch and his shoes…” She is bright lady, so I took her advice and bought some nice business shoes; the problem was, by the time I actually had a reason to wear them, I was back in Asia; and as a rule I refuse to wear nice leather business shoes when I’m out in the streets in China.

I know I sound crazy but there is a very valuable lesson (and reason) that I learned dating back to my first job in Hong Kong; and thus, I beg a little patience as I fumble my way through this explanation.

It was 1995/96, and Asia was, well, rocking financially; I was 22 years old, a Hong Kong rookie, having just relocated from Tianjin, PRC, and over the moon about landing my first banking position as an equity analyst/sales-trader. About a week into my job, my British boss came to me, grinning, and said:

Boss: “Congratulations! We are sending you down to Thailand for two months to learn about the market…”

Me: “Where is Thailand?”

Boss: “…Americans. Right, lace up your wingtips, dry clean your suit, and get on that plane…”

Me: “Seriously, Tom, where is Thailand…”

Forty-eight hours later, I’m zooming through the streets of Bangkok, in the blazing heat, in the back of a tuk-tuk, a three wheeled motorcycle with a passenger carriage, wearing a nicely tailored, professionally dry cleaned, charcoal grey suit and shining black Italian leather shoes. I was looking good, feeling great, and ready for my first company visit with Siam Cement.

Calculator in one hand, note book in the other, I stepped out of the tuk-tuk and into a puddle of mud. Ah, crap! Mud was everywhere – outside my shoes, inside my shoes, and on my face (it was a big puddle). I think my level of embarrassment was up there with unknowingly walking into a meeting with bird shit your head.

After the meeting, the MD of Siam Cement took me out for drinks. As we were walking out the door, heading to the bar, I noticed he was wearing working business shoes which are not boots, but not dress shoes either, perhaps Doc Martens are the best description of them. I didn’t say anything but remember thinking, “dude, this guy is MD of Siam Cement and is wearing a suit with Doc Martens, what is up with that?”

A couple drinks into the session I got up enough courage to ask him, “Why aren’t you wearing nice shoes” (I was young, a little tipsy, and working for a British firm, it was a fair question). He regarded me for a minute, looked at my shoes, and grimaced (same same look as I note above). The MD took a sip of his drink, turned to me and said,

“Why would you want to destroy a nice pair of shoes walking around in that crap outside in the streets just to look professional? Real life, success in business, isn’t about nice Italian leather it is about taking stock in your surroundings and adapting to those surroundings. My employees earn a couple dollars a day, what impression do I give off if I walk around the office or project site in shoes worth more money then their annual salary? It is a mindset, I want to remind myself I’m not finished, I’m not retired, I still have work to do. By the way, nice shoes but mud isn’t your color…”

I thought that made a lot sense and shared his insights with my boss, who in turn “recommended” I clean up my shoes, dry clean the suit and prepare for my next meeting; which I dutifully did, however I never forgot what that MD from Siam Cement said.

Now, when I’m doing my due diligence on new investees, when I remember, I try and check-out (not a “first look” though) their shoes to see if they are “style shoes” or “working shoes”. I like to see start-up guys wearing working shoes. I like the symbolism, that gritty, scrappy working shoe mindset. And, this is why I wear my working business shoes in China.

One of the nice bits about traveling in China is that the airlines actually cut the price of their tickets closer to the date of departure – rather than the other way around, as it is just about everywhere else in the world.

For example, a one-way economy ticket from Shanghai to Beijing might cost RMB1,110 a week prior to take-off, yet drop to RMB580 the day before departure.

This pricing policy, according to a good friend who is CEO of a major Hong Kong airline, is one reason, the core reason, discount airlines will never make it in China.

Er, that was then (two weeks ago) and this is now. We were shocked, just flat out shocked, to learn yesterday that both e-long and ctrip no longer discount tickets closer to the departure date. In fact, according to our favorite e-long agent, at least in Shanghai, the maximum discount the agent can offer four days prior to the departure date is 20%, not the 40 – 60% we’re accustom to.

Everyday, we see little signs that China’s business environment is evolving, maturing, and this is great to see, even it if it means we need to consider taking the overnight train more often to Beijing than we would like.

USAToday ran a short note on a recent Time magazine e-commerce poll, it reads:

An overwhelming majority, 95%, of affluent Americans have made an online purchase in the past year, according to the latest Time online poll, featured…the most popular items bought online were clothing, accessories and books; 68% of respondents made such purchases in the past year.

This is interesting from the perspective that in China (we imagine this trend holds true for other Asian countries) e-commerce is not only powered by the 18 – 25 year old segment, but also over 80% of these kids are actively engaged in some form of e-commerce.

And thus, compared to the USA (and Europe?), e-ecommerce demographics are completely different here in China as these 18 – 25 year old guys/gals are not all that affluent – basically, spending their time gaming online rather than purchasing electronics online. If we use USA/Time e-commerce poll as a proxy for China’s e-commerce timeline, well, I guess we better dig-in as it is going to be a long wait.

One thing is for sure, we are glad we are not heavily invested in the e-payment space…

As far as weeks go, this past week was definitely challenging – riddled with conflicts and misunderstandings across the board. In hindsight, we can sort of make out where we stumbled – the question is, how do we prevent this from happening in the future?

Perhaps more than anywhere else in the world, in China, the importance of face/self-worth/ego are paramount – more so in the major cities, such as Shanghai, were people (both Chinese and Westerners) tend to take themselves more seriously (i.e. “…I’m educated, and thus you must respect me…”). We understand this very well but it isn’t enough to simply understand how the game is played you’ve gotta practice it 24/7 – truth be told, it gets exhausting.

One solution we are thinking about is phasing out our “asynchronous communication”, or rather:

…communication that does not require that all parties involved in the communication need to be present and available at the same time. Examples of this include e-mail, discussion boards, which allow conversations to evolve and community to develop over a period of time, and text messaging over cell phones.

And, replacing asynchronous communication with “synchronous communication”, or rather:

…communication where all parties involved in the communication are present at the same time (an event) is a form of direct communication. Examples include a telephone conversation, a company board meeting, a chat room event and instant messaging.

True, this seems a bit extreme (and perhaps not very practical in this day and age), but there is some merit to it – should a conflict arise during the “synchronous” conversation all the parties involve can stop, circle back, resolve the conflict, and hopefully move on rather than stew on something for x number of hours (as is the case with “asynchronous” conversation).

It is a little late to enter but I just learned of a cool short film competition that is currently underway in Shanghai called “Contest 2.0” — the group organizing the contest is MeiWenTi Productions.

According to the contest’s guidelines there are a number of specific elements or situations that must be included in the film:

a bobble head
a flight of birds
an animal
a hidden secret that is revealed in the last 45 seconds of the film
the heart of Shanghai
the line “that’s so cool, can you do that again”
a pair of shoes
some eggs
an accusation and a violent reaction

We have an Indian friend who has entered this competition, his group’s film is titled, “Life as a Shanghai expat” and it promises to be very entertaining. When we get our hands on it we’ll convert it into an mpeg and post on this site.

China use to cycle 5 to 7 years behind the West, in terms of technology/Internet business models, however with the introduction of business models leveraging “Web2.0” (this words is so overused and generic) technologies this cycle lag has dramatically narrowed; we’d argue China is only 2 to 3 years behind the West (while Japan and Korea might actually be trailblazing thanks to the proliferation of broadband).

As a result, local entrepreneurs looking to break into this Web2.0 space don’t necessarily have the cushion they once had – “hey, the train is leaving the station and you’re still trying to figure out how to buy your ticket…” – with Web1.0 business models. Furthermore, the very nature of Web2.0 ventures, being all user generated content and stuff, are significantly more global friendly (i.e. localization is bottom up, not top down) – for example, Flickr is as relevant to Xiao Wang in Xi’an,PRC as it is to Redneck Bob in New Hampshire, USA.

Not solely for this reason, but perhaps the above comment is a main driver of our belief that China based blogging communities are not financially viable over the long term (ex-advertising revenue model), for example, a recent survey revealed that over 40% of China professionals use MS Spaces, which is free and not a Chinese homegrown product. We think this certainly holds true for video storage/sharing sites as well.

Heather Green from Business Week fundamentally shares our view on blogs/podcasts/vblogs but “we thinks” Heather is overlooking one specific opportunity – Web2.0’s “killer app” – here is what Heather has to say:

But I believe the general notion here is that there isn’t a huge amount of money to be made just on podcasts and that the disruptive nature of podcasts lie in the fact that most people will be doing them for themselves and their friends and families.

So, what is the killer app (or business model) in the Web2.0 space? To Heather’s point, how are we as investors (and you as entrepreneurs) going to profit from this disruptive force – free content and storage? Well, after months (not years, mind you) of hard core research and analysis we’ve identified the perfect killer Web2.0 app/business model: Education.

We liken the Web2.0 education model (language/test prep) to online dating, but not match.com, more like Jdate.com – a dating site targeting the global Jewish community. Jdate can charge up to US$34 per month for their service because they have a captivated audience (Jews) looking for a specific payoff (a date/marriage) and are willing to pay for this (users trust the content/service).

To preempt any inflow of dating b-plans, for the record, we don’t see dating as a very good Web2.0 business.

Education is perhaps one of the only services/categories that not only leverages the benefits of community, RSS, podcasting, etc to vastly improve the user’s experience (“making learning fun”), but also does so inexpensively and, if you get the content and usability right, profitably. Furthermore, the market remains wide open (perfect environment for China based entrepreneurs) with only a handful of start-ups attacking this space (and no clear leader).

And, within the education space, we believe language and test preparation are the most exciting segments – largely because it combines both the foundation of a captivated audience (“I need to pass my GMAT to get into b-school or it’s back to the countryside for me”) and specific content (language is, well, language) with established/popular/free distribution channels (podcast, RSS) and the support of community/network (user generated content). In other words, consumers will pay for your content, while your costs associated with distribution are relatively low.

We especially like what the boys over at Shanghai-based OnDemand Training are doing with Chinesepod.com and Englishpod.com

We’ve been meaning to write a post about the impact of cultural dynamics on branding in Asia/China – last week (2/27), Stuart Biggs, a journalist from Hong Kong’s South China Morning Post, interviewed Miles Young, Chairman of Ogilvy & Mather Asia Pacific, discussing this very topic – the article is titled, “Advertising chief spins culture into the branding mix”.

Miles concludes that Japan, as a result of zaibatsu legacy, is less accepting of single product branding (e.g. Bluebird), instead Japanese managers seek to promote the branding of the corporation (e.g. Nissan) – whereas in China, there is a “religious” acceptance to the concept of branding largely because Chinese manufacturers see branding as a defense against foreign product penetration.

We’ve transcribed a section of the article below (the article is password protected on SCMP website):

Until recently, the zaibatsu legacy – giant corporations such as Mitsubishi founded with political patronage in the late 19th century to industrialize Japan – had overshadowed more – western concepts of product branding.

“It didn’t matter what industry you were in as long as you were large and the brand was therefore the same as the corporation…separate product brands underneath that corporate umbrella were very difficult for them to grasp.”

The same is not the case in China, where Ogilvy has benefited from the “religious” acceptance of the concept of branding.

“What has driven the belief in China is that the market has opened up, so branding is seen as a defense against foreign products coming in. It is connected with how to defend market share and you certainly don’t just want to do that on price.”

Ogilvy’s clients have developed from state-owned enterprises insecure about working with foreign agencies 10-year ago, to more progressive companies such as China Mobile – “as dynamic and marketing savvy as any of its international peers”

Definitely some useful commentary from the front lines, and while we do not pretend to know more than Miles on this subject, we bid Miles a “beg-your-pardon” on the China front – branding in China is definitely not as widely accepted as we are let to believe in the interview.

Well, if you consider hypnotic messaging (e.g. Focus Media 10 sec spots repeated 1,000 times a day) or tent shows in large shopping plazas brand building, then yes, it is widely accepted, but we don’t (from a cost-benefit-measurability standpoint).

While it is true to a couple major brands turn to branding to protect their turf from foreign competitors, the fact of the matter is, until very recently, local Chinese neither had access to nor could afford foreign brands; furthermore most foreign companies entered China as joint ventures, often branding under the local’s brand, for example Gillette purchased Shanghai based Eagle razors.

More to the point, joint ventures between foreign and local manufacturers always had support of the local government and/or a state owned enterprise (SOE) – automobiles, electronics — and thus it has always been in the interest to promote the branding of these joint ventures (yes, in many cases locals “borrowed” technology and went off and did their own thing).

The real brand battle isn’t so much foreign v. local, but rather it is local v. local. If someone can afford a foreign brand, they will buy it because the quality/service is better, not because they recognize the brand, per se. Until Chinese products and services (at least higher end goods/services, we aren’t talking about soap or socks) met or exceed that of foreign offerings, branding will never be an issue.

Last week, China’s Ministry of Commerce gave Avon Products the thumbs up to resume door-to-door direct sales in China. In 1998, Beijing outlawed direct sales after a rash of “pyramid schemes” surfaced. This move paves the way for other companies to resume direct marketing operations.

Victor Mallet, a Financial Times reporter, published an article on Tuesday titled, “The flight to Asian cities needs managing not curbing” suggests:

…there will be an additional 300m to 500m people, equivalent to the entire population of western Europe, are expected to move to towns and cities from the countryside by 2020…

At last count, Avon had a global sales force of five million independent reps; Avon expects the addition of new China based reps will ratchet this number significantly higher over the next decade.

In some bizarre twist of fate (and this might be a stretch, but here goes) the resumption of direct marketing in China might not only elevate entrepreneurial spirit but also (in some small measure) help stem the flow of x number of migrants running to the cities for employment – it reasons that the sheer number of direct marketers needed to serve a nation of 1.3 billion people must number in the millions – mass hirings by direct marketers (e.g. Avon) in the larger towns/villages might keep a portion of these migrants at bay (i.e. “I have a regular client base near my family…”) or at the very least, increase the number of traveling salespeople constantly on the go (i.e. “have sample bag…will travel”).

We dislike being predictable, but since we don’t have a creative bone among us (queue popular Chinese proverb) :

“Give a man a fish, and you’ll feed him for a day. Teach a man to fish and he’ll sit in a boat and drink beer all day…”

Woops, wrong Chinese proverb…try this one:

“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime…”

In other words, Beijing has either found an interesting tool to reduce the number of urban migrants or just created a nation of fast food eating, Motel 6 sleeping, traveling salespeople…

With all of the above noted, what happens to this sales force with the proliferation (er, what proliferation?) of ecommerce? It may not be an issue today but 5 to 10 years down the line it might just very well be…gosh, predicting future trends in China is so confusing…