August 13, 2006

New Ymer logo

Filed under: Design,Ymer News — Administrator @ 2:04 pm

I unintentionally overlooked thanking Jacqueline and her colleagues at Sukamishi, the US based design firm responsible for designing Ymer’s fresh new logo.

Aside from designing logos, Sukamishi also does a lot of very cool multi-media work – including a recent TV spot for Pepsi Cola produced for the China market.

So, for the record, thanks for doing a wonderful job!

August 1, 2006

SciFi Channel’s: “Who wants to be a superhero?”

Filed under: Video/Film,Web 2.0 — Administrator @ 9:36 am

Okay, this has nothing to do with China (directly) but I can’t stop myself – it just too good – you’ve got to go to itune’s TV Show channel and download the pilot episode of the SciFi Channel’s new reality show “Who wants to be a superhero“.

Each contestant begins with an original idea for a superhero, a self-made costume, and their best superhero mojo. Over the course of the series, they will test their mettle, try to overcome their limitations, and do what it takes to prove that they truly are super. The finalists will leave their former lives behind and become their brainchild heroes, all under Stan Lee’s watchful eye.

I’m still trying to work out which superhero is my favorite but Fat Momma is definitely a leading contender – check out FM’s profile:

Superpowers: Can grow to five times her normal size when she gets angry.

Vulnerbility: Needs doughnuts to fuel her super-powers. Diet foods weaken her and shrink her to five inches in height.

Catch Phrase: “Saving the world, one doughnut at a time!”

July 28, 2006

North Korean “Mass Games” and the curious shortage of girls

Filed under: Gaming,Retail — Administrator @ 4:10 pm

In the late 90s, I was an equity analyst with a bank in Hong Kong – my job was to cover listed companies in Southeast Asia – it was an interesting and tragic time thanks in large part to the Asia financial crisis and surging interest in technology/Internet related start-ups.

Around that time, famed global macro (hedge fund) trader Jim Rogers and his fiancée Paige set out on a three year 245,000 kilometer track around the world – aptly named The Millennium Adventure – Rogers & Co traversed the globe in search of blossoming macro trends and investment opportunities.

While mirroring Rogers’ keen investment sense has proven, well, very challenging, I’ve been fortune enough to retrace numerous segments of his Millennium Adventure – yet, of all the places I’ve been to, one locale has continued to elude me – Korea – specifically, Democratic Peoples Republic of Korea (loving known as North Korea). That was until this June when several of my friends from Hong Kong, Taiwan and Shanghai decided it was time to visit the boys in the North – the plan was to heading into DPRK first week in September 2006.

But, that was before last night, when we got word from Pyongyang that the 2006 Arirang performance (Mass Games) had been cancelled due to the recent large scale flooding (evidently, the flooding is considerably more serious than the outside world has been led to believe – humanitarian aid might be needed). The connection between this massive propaganda event and our visit is tied to our visa window – US citizens are allowed entry in to North Korea under the umbrella of attending the Mass Games – now that there is no more Mass Games there is no more visa. Drat!

This is totally disappointing – one of my favorite articles written by Rogers during his Millienium Adventure told of his observations in Korea – the article titled “The Curious Shortage of Girls” was written in June 1999. I am completely curious to see how his predictions have played out (and while much of what he has to say pertained to South Korea, Rogers seems convinced South and North shared very similar characteristics – viewing the two as a single entity). Below are some excerpts:

Women constitute nearly 40 percent of the labor force, about a third of whom work on family farms. The rest work in services, health care, and textile and electronics manufacture, whose work force is 70-90 percent female. What has most bowled over Paige and I about Korea is the shortage of girls.

This demographic shortfall is true all over Asia, in Japan, Taiwan, and other countries, the first time these civilizations have faced this particular problem. In Korea in 1993 there were 115.6 boys born for each 100 girl babies. In 1995 only 47.9% of primary school children were female, which meant an extra 200,000 6-to-11-year-old boys. Local sources estimate that by 2010 there will be 128 men to every 100 women in the 27-to-30 year cohort.

This presents a serious demographic problem. Oddly enough, a similar situation occurred in Europe just before the year 1000, when for similar reasons girl babies were killed. As a result, back then it wasn’t the bride’s father who paid a dowry, but the husband who paid the bride’s father to obtain his new wife.

Rogers goes on to conclude that not only will this shortage of females mean an Asian imbalance, but it will also mean more and more women would delay getting hitched, opting to remain in the work force longer and longer – translating into growing demand from everything a young woman might desire to set up her own household (e.g. kitchen appliances, furniture) to frozen food and other easy-to-prepare meals.

How is this playing out in China today?

In February 2006, China’s State Bureau of Statistics reported that China’s population grew by 8.1 million people in 2005 to 1.307 billion – whereby there were 119 boys born for each 100 girls (source: Family Planning Commission of China) – in practical terms, this translates into about 40 million Chinese mainland men who won’t be able to find spouses by 2020.

If you walk around the supermarkets, talk to “independent women” or just plain old “people watch” (no peeping tom here) you’ll find that more and more women are getting hitched later in life, and that, yes, in fact, frozen food and ready made meals are gaining in popularity. Furthermore, the number of fitness centers and spas catering (and offering exclusive services) to women have grown exponentially over the past couple of years – and, although the make-up of the clientele at my local gym, Fitness First, breaks evenly across the male-female line (about 51% to 49% according to Fitness First in Shanghai) – the trend is favoring a larger number new female members over new male members.

Where do we go from here?

Already, several foreign companies have picked up on this trend – thanks to data mining – and thus are truly marketing themselves to women (e.g. snack food/ice cream retailer Diary Queen’s core clientele are young women between age 15 and 35). However, the vast majority are still scratching their heads – trying to figure out what to do with a growing number of independent women actively engaged in the work force – that I ex-ladies social hour at the tea house segment.

But, maybe we need to take a step back – maybe we’re getting too far ahead of ourselves – perhaps we need to resolve the macro picture first before trucking down the segmentation highway – my general view is that Chinese companies/organizations/government bodies are still trying to figure out how to deal with needs of the overall population (talk about full circle)…

Here is what I’m talking about. This week, Chinese airlines reported first half 2006 (H106) combined loss of US$321 million on the back of what regulators from General Administration of Civil Aviation of China said where “higher fuel costs”. Okay, well, that makes sense – or does it? Not really – there has to be more to it than just fuel costs – especially, during the same period a vast majority of US based airlines that have reported earnings have posted profits –- some that were double Wall Street’s expectations.

Anyone who has flown in China (particularly between Beijing – Shanghai – Hong Kong over the past 12-months) will tell you that delays have not just skyrocketed, but are seemingly out of control. The number of people traveling in H106 ratcheted higher by 18% to 74.3 million people – a pace which is on track to reach analyst forecasts of over 100 million passengers by first quarter 2007.

I don’t see the profitability issue at all related to fuel costs – the problem (big picture) is all about efficiency – or rather the lack of efficiency and proper logistics in China’s airline industry – demand is stretching the limits of existing infrastructure and personnel – well beyond capacity. And, short of banning the number of air travelers, there really is no solution in sight…

China is unique to any other country I’ve ever visited – there are so many business opportunities and niches to exploit that an investor/entrepreneur could spend a lifetime in the trenches – and yet China is still trying to figure out how to connect the dots on some of the most basic services.

So, rather than coming up with yet another virtual wallet or video search engine maybe we should be focusing on the basics – like, entertaining people waiting in a long line or sitting in an airport lounge.

Interestingly enough the boys over at Mr. Softy (Microsoft) are catching on to this as well. Last Thursday, MS CEO Steve Ballmer said “…we’re trying to grow two new cores, one online and one in [digital] entertainment services…which should help…bore deeply into the emerging markets…”

Companies, such as MS (assuming they can pull it off) that offer services that address the needs of regular people – providing them with products/services (and there a lot more out there than simply casual gaming) that they can participate in through the places that already touch their lives – places they are familiar with, such as airport lounges – are going to be winners.

Of the winners, however, there will be a select few who rise to the top – these are the guys who are not just first to establish basic (comprehensive) services but also have the ability to rapidly scale/offer more specialized services/products – addressing the needs of, say, independent women…

July 20, 2006

How Failure Breeds Success

Filed under: Podcasting,Start-up First Aid — Administrator @ 10:47 am

Businessweek’s July 10, 2006, cover story “How Failure Breeds Success” by Jena McGregor is a must read for anyone striving for excellence in business – entrepreneurs and corporate soldiers alike.

There is a real nice quote by Scott Anthony, managing director at consulting firm Innosight where he discusses encouraging intelligent failures:

”Figuring out how to master this process of failing fast and failing cheap and fumbling toward success is probably the most important thing companies have to get good at.”

Anthony goes on to explain that “getting good” at failure doesn’t meaning creating anarchy out of organization but rather it means leaders need to create an environment safe for taking risks, and then reflect on those mistakes.

You can listen to McGregor provide some behind the story nuggets by listening to her podcast.

You might also want to listen to “Innovation Champions” a podcast with Michele Conlin where she talks about the new breed of managers and their radical cultures.

And, while you’re at it why not checkout how RSS champion, Feedburner, encourages innovation – Hackathon.

July 13, 2006

Used Cars in China: Part 3 – What do you get when you mix sake and baijiu?

Filed under: Automotive — Administrator @ 2:45 pm

The winning used car model in China is going to be a combination of an online/offline offering – this, I think, we all know. The question is who is going to be the first player to make this happen? The key to unlocking this secret is in fact not a key at all but rather an Apple.

No, not a Steve Jobs’ Apple but a Japanese Apple – namely Apple International Company Limited. Apple, one of Japan’s largest secondhand automotive dealers, not only operates over 290 nationwide franchised used car outlets but also exports secondhand automobiles to overseas markets, principally to Southeast Asian countries.

Back in September 2005, Apple Auto Network, a subsidiary of Apple International, teamed up with Beijing-based Yafei Cars and a leading Japanese conglomerate, Sojitz Company, to establish Beijing Taizhi Zixun Company. Aipu, as the joint venture has been come to be called, will purchase and sell used cars through a franchise network in China – Aipu looks to have 500 stores by year-end 2007 and 3,500 branches by 2010 (a bit ambitious, aren’t we?).

The last bit of public information I’ve been able to find on this relationship was from an April 2006 report in China Daily announcing the opening of Aipu’s flagship store in Beijing’s Changping district.

Right. So, how dominating is this venture going to be? I think the answer hovers somewhere between absolute domination to competitive (oh, yeah to complete bust, but let’s be glass is half-full people for just once).

And here is why – the core players (Apple and Yafei each own 40% of the JV) bring to the table three core attributes: (1) automotive related franchise experience in both domestic and international markets; (2) ability to readily source, control, replenish used car inventory; and (3) in-house technology expertise (e.g. infrastructure, auction, and sales management).

Apple International Company Limited

Apple International entered China in 2003 when it established A.I. Holdings in Hong Kong. Over the past three years, A.I. Holdings has established several subsidiaries and joint ventures in China and Hong Kong – and thus amassing the following four business line: (1) international car trading – buying/selling new and used cars; (2) car rental and leasing; (3) operates China-based automotive dealerships, selling both domestic (Jinbei, Dadi, Wuling, Hangtian, and Soyat) and foreign (Mercedes, Renault, Hyundai, Chrysler, Jeep and Mitsubishi) brands; and (4) global/regional exporter of Chinese made cars via its subsidiary China Automobile Exports.

The “amassing” kicked off in March 2004, when Apple International established a new joint venture in Hong Kong called Prime On Corporation which would focus on establishing a nationwide (China) chain of Mercedes dealerships. This was followed a couple months later, May 2004, with the creation of Yunnan Kubo Auto Trading Limited, an entity 90% owned by A.I. Automobile (China) used to purchase Xinglong Motor Group. Xinglong maintain franchise rights to sell Renault, Hyundai, Chuka, Chrysler and Jeep.

In April 2005, Apple entered the Shanghai market by establishing, China Automobile Exports (CAE). With showrooms in Shanghai, CAE has exclusive global distribution of Shenyang Jinbei (pick-up trucks and SUV), SAIC GM Wuling (mini-trucks and mini vans), and Wuxi Yuejin (sedans); CAE has exclusive regional (Africa, Australia, and part of Asia and Middle East) distribution rights of Baoding Dadi (pick-up trucks and SUV) and Shanghai Zhunti (min-bus).

Back in Japan, Apple was equally as active on the technology front. In February 2004, Apple International purchased 16% of Autobytel Japan. The Alliance was intended to build a web based auto marketing platform to serve customers in Japan, China and Southeast Asia to support Apple’s dealerships in China and Thailand – essentially, Apple wanted to develop Internet sales network to cover Asia Pacific region, leveraging Autobytel’s platform.

About a year later, January 2006, Apple liquidated its stake in Autobytel. I spoke with some individuals from Apple and from what I gather there are two key reasons for this liquidation: (1) public response – Apple had a shift in direction; and (2) internal response – there wasn’t enough demand for a web based platform outside of Japan (i.e. market immature).

Anyhow, back to 2004, specifically September 2004, Apple Auto Network (a subsidiary of Apple International) formed an alliance with i-Auc (a web based subsidiary of Aucnet, one of Japan’s largest used car auction networks) and established Apple Auction. The platform Apple Auction – based of i-Auc’s internet auction bidding service – is used nationwide by Apple Auto Networks’ 300 franchised used car outlets – Apple’s end game is to introduce the platform to China.

Yafei Qiche (Automotive) Chain Store

Founded in 1994, Yafei is one of China’s largest nationwide chain stores with 500 outlets in 240 cities across China – of which about 270 outlets have links with local banks and insurance companies to provide loans. Yafei also has ties to Century Automotive Club, an automotive rental/leasing company with a nationwide network consisting of about 50 branches.

Early in 2000, Yafei looked to leverage the Internet by signing a deal with Sina.com in June 2000, to develop an online car sales and rental platform. The deal would later include provisions for an online auto lease lead generation platform.

Actually, Yafei was one of the earliest players in the auto leasing segment – this largely came as result of Chinese banks looking to spread their risk among several institutions. For example, Yafei formed a joint venture with department store chain Parkson and Shanghai Automobile Industry Sales Corporation to guarantee car loans. Unfortunately, this and other such relationships lead to a 2003 investigation by People’s Bank of China (central bank) into Yafei’s automotive finance business.

Some concluding thoughts

Offline, Aipu looks fairly well positioned to be a major threat in the used car space – the key is to observe how they plan to leverage the Internet. On one front, Apple is coming off a one year partnership with Autobytel while continuing to maintain its relationship i-Auc’s Internet based auction network – so, yeah, there is knowledge that can be transferred. On the other front, Yafei has shown they too are “somewhat” web savvy having forged a partnership, albeit unsuccessful one, with Sina five years ago (my guess is it was less about the offering and more about timing). It seems reasonable to assume Aipu has Internet opposable thumbs and therefore won’t completely muck up an Internet offering.

Yet in spite of this neither Apple nor Yafei has an existing footprint in China’s Internet space – and to be honest, if you want to hit the market hard and fast, you’re gonna need this footprint from day one (queue Conan the Barbarian: Crush your enemies. See them driven before you…).

And so, this seems like an excellent opportunity for a China based auto related Internet portal with zero resources to address the offline opportunity and start chatting Aipu up with the idea of owning Aipu’s online presence (perhaps, drawing some lessons learnt from Ebay’s hook-up with Manheim and AutoTrader).

As Sox fans say…cowboy up!

July 10, 2006

Three-part PBS series draws portrait of Warren Buffett

Filed under: Start-up First Aid — Administrator @ 7:20 pm

USA Today journalist Bruce Horovitz notes American based Public Broadcasting Service’s (PBS) Charlie Rose begins a three-part series about Warren Buffett that looks at all aspects of one of the world’s wealthiest men.

Says Rose, in a phone interview about the Buffett series:

“This is a man who has a passion for his work as deep as anyone I’ve ever seen. He is a living testament to the fact that the happiest among us are those who shape their lives in a way that satisfies their own values and passions.”

Those of us living in Asia and unable to access US public TV we’ll have to wait for someone to post the program on the web…

UPDATE (7/13/06)

You can view the Buffett interviews by clicking to Charlie Rose’s website but, again, for those of us living in Asia (China) you wil not be able to access the video clips as they are hosted on Google Videao and Google Video isn’t available to us:

Thanks for your interest in Google Video.
Currently, the playback feature of Google Video isn’t available in your country.
We hope to make this feature available more widely in the future, and we really appreciate your patience.

July 6, 2006

Dairy Queen stoking China’s franchise boom one blizzard at a time

Filed under: Automotive,Retail — Administrator @ 5:01 pm


Dairy Queen outlet – XuJiaHui, Shanghai

Earlier this week, I was playing rugby next to Shanghai stadium, contemplating why New Zealanders are so much better at this game than Americans, when out of the corner of my eye I spotted heaven on earth – Dairy Queen. For those in the know, DQ makes up a quarter of what we in America call our cultural soul (the remaining three quarters include, American Idol, any credit card, and Oprah).

After downing two Monster Cookie Blizzards, braving the associated (and excruciatingly painful) “brain freeze”, and finally, marveling at my new found little piece of haven, I headed off to do a little research on DQ in China.

And what I found was very interesting – DQ is a US$3 billion ice cream retailer based out of Minnesota and owned by Warren Buffets’ Berkshire-Hathaway – 99% of DQ’s revenues are generated via franchising. DQ has a franchisee in Beijing responsible for 41 outlets, a second deal with Shanghai-based RCS Group Co Ltd, and a third agreement with Guangdong Foison to open 14 DQ locations in China – DQ expects China to become its largest market in five years.

I haven’t looked at franchising plays in a long time – I think it was back in 1993 while I was a student at Nankai University in Tianjin that I first decided I wanted to rollout Subway outlets in China (Beijing’s railroad administration bested me in a franchisee battle royale) – maybe it is time to start reconsidering this model again?!

According to the U.S.-China Consulting Group in Beijing, China now has about 1,500 franchise companies – local and foreign concepts – with 70,000 franchisees. In 2003, sales from franchised stores increased 44% from the previous year, but franchising still makes up only 2% of all retail sales.

Compare China’s 2% to that of the United States where over 33% of all retail sales are from franchised stores – this US figure could climb as high as 50% by 2010, according to Naisbitt Group’s The Future of Franchising – we could be just a the beginning of something beautiful – this of course assumes Chinese consumers are as much interested in consumption as their American friends across the pound – anyhow, with the right blend of product, brand, and customer service we could see some spectacular growth from of this sector in the coming years.

For example, franchised used car dealerships…

July 4, 2006

China’s “Capitlist Roaders” go global – “Bandit, this is Snowman, what’s your twenty?”

Filed under: Automotive — Administrator @ 3:43 pm

Over the weekend, the New York Times weekend magazine ran an article written by Ted Conover titled “Capitalist Roaders“. (You’ll need to register online with the New York Times but it is free and worth the extra two minutes it takes to fill in your digits.)

Capitalist Roaders is not only a “docu-article” detailing Ted’s seven day “self-driving tour” with Beijing Target Auto Club but is also a glimpse at how an American might view China’s expanding/growing domestic automotive culture.

Some insights are accurate, for example:

But of course the story is not only about construction and production; car culture is taking root in China, and in many ways it looks like ours. City drivers, stuck in ever-growing jams, listen to traffic radio. They buy auto magazines with titles like The King of Cars, AutoStyle, China Auto Pictorial, Friends of Cars, Whaam (“The Car — The Street — The Travel — The Racing”). Two dozen titles now compete for space in kiosks. The McDonald’s Corporation said last month that it expects half of its new outlets in China to be drive-throughs. Whole zones of major cities, like the Asian Games Village area in Beijing, have been given over to car lots and showrooms.

Some insights are totally (sorry) off the mark, such as:

The astronomic growth of China’s car-manufacturing industry will soon hit home for Americans and Europeans as dirt-cheap Chinese automobiles start showing up for sale here over the next two or three years.

Raise your hand if you think US consumers will settle for dirt-cheap, unattractive, old-skool combustion engine Chinese made cars when they can have low cost, fuel efficient, stylish Japanese products instead? The answer is right in front of your face – U.S. sales fell for all three big American automakers in June, led by a 26 percent drop at General Motors Corp. (GM), while Japan’s Toyota Motor Corp. surged – this is on the back of US manufacturers virtually giving cars away for free.

But our hero, Ted, ultimately concludes his opus on a glorious note, accurately stating:

And, in heavy traffic at the end of a tiring trip, it was easy to worry that the Chinese, rather than charting an innovative, alternate route into the automotive era, were on their way down a road that looks a little too familiar.

I wonder how long it’s gonna take until China’s government bans all pure combustion engines (i.e. non-hybrid) from the market (for domestic sale)? I’d bet my little red book we’ll start seeing hints of new regulations within the next five years.

So what does this all mean, if anything?

Initially, I faded Ted’s article as yet another “I went to China and learned this” story. But something funny happened – over the past three days, I started getting a boat load of email from all these Americans, all well traveled, college educated, and completely ignorant to investing in China (i.e. no exposure to China) – sparking a thought, what does it mean that these guys are asking me whether or not they should consider investing in China’s automotive sector when these same guys never thought of lifting a figure to buy Baidu or Sina?

And moreover, what does it say about the interests of the notoriously fickle, often overly demanding NYT readers that seduced the magazine’s editor(s) to run an article about China’s car culture? Maybe it’s a desire to see fuzzy dice and CB radios make a comeback (…but I hope not).

Maybe we’re seeing the early signs of the next big big investment play out of China…and then again, maybe I’m just projecting…

June 29, 2006

Real life Simpsons introduction – why only a couple global hosting sites will do

Filed under: Video/Film,Web 2.0 — Administrator @ 12:43 am

I was playing around on YouTube a couple days ago and came across this real life adaptation of the cartoon The Simpsons.

Actually, it is only a real life adaptation of the show’s introduction but it is still quite fun to watch. Anyhow, this Simpsons sketch got me thinking about how innovation allows real life to imitate art, in this case a cartoon.

It would be very cool to see a real life version of the Simpsons introduction acted out by people from various non-Western countries; for example, I wonder how someone in Iran or DPRK (North Korea) would not only interpret the introduction but also get access to Nuclear power plant footage?

I guess they might rip footage/photo from the web, perhaps from Flickr or Amazon?! The point I’m getting at has nothing to do with greater cultural understanding, but rather how Web2.0 innovations (or innovations leading up to Web2.0) have slashed open regional boarders, truly making the sharing of information a global reality.

The question is, do we really need localized content sites? Or maybe it is, can a venture like YouTube service the entire world? These are important questions especially in light of the increasing popularity of community centric sites, such as Craigslist; important because, at least in China, we are seeing countless numbers of “me-YouTube-too” type of sites (i.e. US/EU hatched, China transplanted). Perhaps the answer is localization is good for something, like personal advertisement, and bad for other things, such as video hosting (where the volume, quality and scale rule the roost).

I’ve heard the arguments that some people want to have servers based locally (why?), or foreign companies just don’t get local culture (hello, I thought we were in age of user generated content? ever heard of tagging?) but I’m not convinced, I’m fading this line of reasoning big time.

Not to be overly harsh but at this point in China’s investment/development cycle I just don’t see any upside gained from investing in a country specific (e.g. China) video/blog hosting venture(s) – so hold onto your business plans for a more sympathetic ear…

Doh!

May 28, 2006

Used Cars in China: Part 2 – It’s going to take more than TurtleWax to make used car portals shine in China

Filed under: Automotive — Administrator @ 8:44 pm

Last week’s note titled “America’s experience with interest rates, leasing, and auctions” discussed the history of used cars in the United States, concluding that the main driver of used car proliferation in America was interest rates; and until China experiences a similar shift in rates/consumer demand the used car industry will remain uninspiring.

This week, we’re shifting gears from drivers to models, specifically Internet related models. Before I get too far ahead of myself, I wanted to warn you, I’m not all that jazzed up about the prospects of the online used car space in China. I used to be full throttle psyched (like 3 months ago) but now the deeper I dig the more I’m convinced that the numbers/demand can’t support a web-based used car offering in China.

Don’t get me wrong, I want to believe in this used car dream more than anyone (I have a storage room filled with bumper stickers in Chinese reading “honk if you’ve been used”); but sometimes reality bites, and in this case, well, I’m looking for Winona Ryder. What concerns me is that there seems to be a tsunami of euphoria flooding China, touting the riches to be gained in this business. And, I can understand why, or rather where it comes from (queue Meg Whitman’s entrance, spot light on eBay Motors). To the causal observer (yes, I am one of those) eBay Motors’ numbers are staggering – the preverbal “smoking gun” of comparable business models…or are they?!

So, let’s get on with it – show me revenues:

According to Solomon Smith Barney, eBay Motors accounted for about 30% of eBay’s total gross merchandise sales (GMS) in 2003 (up from 12% in 2001); incredible still is the fact that eBay Motors went live around 2000. And talk about potential, eBay Motors estimated penetration rate is about 1.8% of the total US$350bn addressable market (or a GMS run rate of about US$6.5bn). Casually flashing these figures around a boardroom would stimulate the bluest of the blue bloods to roll up their pants and River Dance around the room.

“Cool. We’re going into the used car business,” yelps the bean counter in the corner holding his tortoiseshell rimmed glasses (by the way, I wear tortoiseshell glasses) in one hand and a Texas Instruments BA II Plus calculator in the other, “let’s buy some more servers…”

Kansas City Sidestep (KCS) anyone? Yeah, well, for all the gloss, in some ways, eBay Motors is a KCS. No need to make this complicated with loads of details but there are some downers dulling eBay Motors fine turtle wax finish.

An obvious one is eBay’s so called “take Rate”, or rather the percentage of money eBay makes off merchandise (GMS) transactions – essentially, revenue. According to eBay’s 2003 annual report, the average non-motor GMS take rate is about 8.5%, or more than two times eBay’s estimated 3.5% take rate from motor related GMS. If we make some adjustment to eBay Motors’ GMS, taking into account its lower take rate, Motors contribution to eBay’s total transaction based revenue drops from about 30% to about 11%.

But let’s not be too harsh – an 11% revenue contribution from any one category (or product) is solid, yet this is only 11% of total transaction related revenue, eBay also has payment related revenue (and this is a point I’m hijacking from Solomon Smith Barney as I overlooked it, too). Payments in 2003 accounted for 22% to 23% of eBay’s total revenue whereas auction related transactions accounted for the balance, 78% to 77% – following this line of reasoning and adjusting for payments, it seems like eBay Motors contributed less than 10% to eBay’s consolidated revenues.

Oh, silly me, I forgot to mention, 20% of eBay Motors GMS comes from non-auto related auctions, such as motorcycles and recreational vehicles (RVs); yeah, you got it, further eroding Motors contribution. Ouch! Does anyone have a flashlight? It’s getting a little dark in here…

…perhaps, a little too dark, a little too hardcore on the rev erosion front for my liking. And, yeah, I know it is hard to argue with the numbers but I’m comfortable believing motor related revenues account for somewhere between 11% and 15% of eBay’s total consolidated revenue.

And margins? Well, even at 50% I think the river dancing in the boardroom has stopped, but if you insist we can use the cocktail napkin approach to come up with something – eBay doesn’t report margins on individual categories so we need to get a little creative by pulling some numbers from comparable companies: (1) eBay reported a 2003 Earning Before Tax (EBT) margin of 30.6% – very healthy (queue river dancing) – yet it would be unreasonable to assume eBay Motors generated anything close to these margins as eBay Motors’ pricing scheme is fixed; (2) on average franchised and independent car dealers earn margins of around 5.5% to 11.6% on new and used cars (source: NADA 2006); (3) China based job listing site 51jobs.com generated margins 13% to 21% between 2003 and 2005; and (4) auction houses, such as Manheim, report margin anywhere between 4.5% to 7.0% (by our best estimates from available data).

Back of the napkin estimate – I think it might be safe to assume EBT margins come in between 5% and 10% (though, Solomon guesstimates eBay Motors contributes to less than 5% of eBay’s net profit). Okay, not supermarket margins, but not eBay margins either; and certainly not enough to sustain a China-based start-up where the market is desperately underdeveloped. And what’s more, margins would be seemingly lower than eBay Motors as, most likely, the China venture would be a listing service (or classified service) rather than an auction platform where a business can demand a listing fee and a percentage of the money generated from the auction.

Show me infrastructure and inventory…

Putting margins and revenues aside, and turning our focus to infrastructure expenditure, the picture for our start-up friends (or even those a bit more entrenched) doesn’t improve much. Imagine, if you will, the amount of cash required to build-out a platform similar to that of eBay’s (circa 2000) – even in China, it would be massive. How so?

First, eBay Motors had the luxury of leveraging (arguably) the best web-based auction platform in the world – a tweak here, a tweak there, plug this into that thing over there and you are ready to go. Second, eBay has an installed registered user base of 10 million people. Third, mucho brand value and substantial marketing dollars. Fourth, tried and trusted features, such as proxy bidding, the Feedback Forum, “SafeHarbor” trust and safety services, to name a few. And finally, perhaps most importantly, strategic partnerships and acquisitions which not only provided inventory and traffic, but installed eBay Motors securely aloft the competition.

The first three are obvious and need little explanation, but the fourth (trusted features) and fifth (partnerships & acquisitions) are worth a bit more discussion:

Number Four: Trusted Features

eBay’s reputation as a “SafeHarbor” was widely accepted by its users, but vehicles (with their high sticker prices) were entirely different beasts all together – users needed sophisticated tools to protect themselves against fraud. Okay, so now you are scratching your head, thinking, isn’t this guy a bit hypocritical? Hasn’t he compared certification with a Kansas City Shuffle? Well, I’m not changing my tune – in fact, the following further supports my “certification is a hoax” campaign. (Where’s that damn soapbox? Ah, found it…)

In 2001, eBay formed a partnership with Saturn Motors (a subsidiary of General Motors targeted at women) whereby an eBay member selling a car could bring the vehicle to one of four hundred Saturn dealerships across America and get the damn thing “Certified” for a US$99 fee. It was a good attempt at resolving the trust problem (and a move I would have totally championed if I was heading up eBay Motors back in 2000) but very few people got their cars certified. In fact, the service really should have targeted those out-of-state buyers (people who could not physically inspect the car). I’ve spoken with several eBay Motors employees and asked for the number of cars “Certified” – each time I get same response, a hand-full (shuffle, shuffle, shuffle…).

And then, in 2002, eBay got smart and said “gosh, certification as a concept is a good idea, but members aren’t buying into it, we need to do more.” Enter eBay’s Assurance Program for Vehicles – the Program provided coverage to buyers and sellers alike and consisted of four main features: Limited Warranty (coverage for 1month or 1000 miles), Purchase Insurance (up to US$20,000), Payment Protection (Fast Deposit and Escrow.com) and Mobile Vehicle Inspection (in 2004, eBay canceled the Saturn partnership and hooked up with SGS Automotive Service, who could perform inspections a member’s home or office).

A solid four point protection program that covered pre and post-transaction services; and thus distinguishing eBay from the crowd. Furthermore, eBay Motors, as the market leader, had the leverage and wallet to cobbled together this Assurance Program. And while relatively easy for eBay to do this in America, a China base operator would have one hell of a time replicated these services for any number of reasons, but specifically because the necessary service providers don’t quite exist (or rather, those that do exist are either too expensive, not web-enabled, or restricted by regulations).

Number Five: Partnerships and Acquisitions

I’m seriously feeling this flavor (partnerships and acquisitions) big time – meaning that this was perhaps one of the most important steps eBay Motors took in establishing itself as a leader in online used car market. To recap, we know eBay Motors had access to premium IT and a unique/active membership base (eBay was a marketplace, true as the north star) but what eBay Motors didn’t have was vehicle inventory and established relationships with the largest group of used car buyers, franchised and independent car dealers (NADA reported that 76% of all used car sales involved dealers in 2005).

Here is a timeline detailing what eBay did to fill their inventory/partnership gap:

In 1999, Kruse International was acquired for about US$17m. Kruse companies conduct auctions, perform appraisal services and auctioneering training for classic car auctions in various locations in the United States and internationally.

In 2000, eBay entered into a marketing and services agreement with and purchased a less than 5% equity interest in AutoTrader (an automotive related web portal backed by Cox Enterprises, Manheim Auctions, and Trader Publishing Company). Under the terms of the marketing and services agreement, eBay developed the co-branded eBay Motors site and AutoTrader referred customers desiring an auction pricing format to the co-branded site in exchange for a referral fee. Also, eBay committed to incur $US32mn in marketing and promotion of the service and additional related services offered by AutoTrader over the 3.5-year term of the agreement (source: eBay annual report, 2001).

The significant of this relationship can not be overstated as it connected eBay’s trading community of 10mn buyers and sellers with AutoTrader’s 5mn unique monthly visitors and more than 40,000 participating auto dealers and 250,000 private sellers that provide the 1.5mn used vehicles offered for sale on AutoTrader.

In 2003, eBay acquired certain assets of Texas-based CARad, a leader in online auction management services for car dealers. CARad’s technology gave car dealers a simplified way to list and manage more vehicle auctions on eBay Motors. That same year, eBay Motors also forged a strategic relationship with Kelley Blue Book to become its exclusive auction-style partner.

Gosh, what does this all mean?

I guess it all depends on your risk appetite, right? Do you like investing in sure things, making intelligent high risk/reward bets, or simply blowing out your brains with a piss poor investment! Because at the end of the day, we all know the truth, eBay Motors (or some business model derivative) can not be independently replicated in China (given the existing environment) without the support of a sugar daddy. But if you disagree, well, here is a water gun (this is a family site)…

What eBay Motors demonstrates is that it is possible to make this model work if you bring to the table enough scale, traffic, technical support, comprehensive Assurance Program, and quality inventory. Though would we expect anything less from a US$50bn global Internet company? And yet, is eBay Motors a leader or rather a loss leader for eBay?

I don’t get the feeling eBay Motors would be a viable entity in its own right without the support (economies of scale) of eBay’s other categories. Or rather, I don’t expect eBay Motors, as a separate, independent entity, would be able to command anywhere near eBay’s un-adjusted FY06 PE of 45x (eBay is priced a little richer than the industry average PE of 41x – source Morningstar).

And, if you buy into this thought process (I’m intentionally excluding potential advertising revenue), then you’re sure to agree that there is no way on this green earth that a China-base used car web portal has the resources or traction to scale/survive independent of a cash-rich parent company with an existing inventory of quality used cars which are not only regularly replenished but also locally available.

To be continued…

May 20, 2006

Used Cars in China: Part 1 – America’s experience with interest rates, leases, and auctions

Filed under: Automotive — Administrator @ 4:55 pm

Today, it is raining in Shanghai. I sort of like these crappy days because it gives my mind a chance to drift away and think about stuff in ways I wouldn’t normally consider (perhaps, alcoholics might call this “a moment of clarity”); regardless, some of my best ideas/insights come to me when I’m most distracted or day dreaming (MTV generation, thank you very much).

Like, for example, I’m now at peace with how I see China’s used car industry playing out over the next decade; and in case you are wondering, this revelation happened somewhere in between a public bus’ side mirror nicking my umbrella out of my hands (classic case of standing too close to the curb) and almost getting hit by a taxi.

The revelation: “Kansas City Shuffle”.

A Kansas City Shuffle is when “…everyone looks right…and you go left.” I guess it isn’t something people hear a lot about as it falls on deaf ears mostly; essentially, the people (or businesses) involved are connected only by the slightest of events – only at a Shuffle’s Tipping Point is the plot truly revealed, but by then the damage has been done.

What the hell does a Kansas City Shuffle and used cars in China have in common? That is a good question – let me explain with another question – ask anyone what the core driver leading up to the proliferation of used cars in the United States and 9 out of 10 people will say “transparency” or “certification” (answers courtesy of the hypnotic multi-million dollar advertising campaigns by both online and office auto dealers and manufacturers); so, yeah, if you side with this camp I believe you’ve just walking into the middle of a Kansas City Shuffle.

Interest rates – that is the answer you should be mulling over in your head – not certification.

You might be asking yourself, why should I care about the catalyst of America’s used car industry and how it may or may not relate to China? The truth is, this blog is a bit specialized, for sure, but the forces that shaped America’s auto industry had a dramatic impact on the very fabric of American society – social, financial, and cultural; why would it be any different in China? From a socio-economic perspective – it’s very relevant to anyone involved in China. From a business perspective – specifically, I’m speaking to investors and entrepreneurs in the automotive space – it is critical to accurately identify the spark responsible for the explosion in America’s second hand car market – and from there determine whether or not China will follow a similar path – for if you don’t your business model will simply be wrong.

The best way to understand what I’m brewing about is to follow me on a trip down memory lane and then, back to the future – your mission, should you accept it is not to become a Scientologist, but rather to better understand how the used car industry in the United States’ developed and how China might track to this. This is going to take a couple days to play out so I’ve broken the blog down into a couple parts (I’m just not sure how many part just yet).

Part 1: A brief history of America’s used car industry – interest rates, leases, and auctions

1918 & Les Kelley: This guy, Les, is credited as one of the first people to truly institutionalize the used car industry. Until the 1950s/1960s, Les’ company, Kelley Kar Company (Los Angeles, CA), was one of the largest used car dealerships, worldwide; but Les is remembered more for his little blue book, Kelly’s Blue Book, a publication listing recommended wholesale values for basically every car manufactured/sold in the US/worldwide, than his dealerships.

Kelley’s efforts aside, the used car business in the US remained nascent until the late 1980s when the automotive tectonic plates dramatically shifted – the profile of used cars changed (younger cars) on the back of favorable financing terms (leasing) and thus a surge in consumer demand (buyer’s market – mucho inventory).

Early to mid 1970s: New car dealers still made solid margins on new cars – there was no need to go downstream and sell used cars – new car prices and interest rates were very reasonable, affordable, and the Japanese (automotive manufacturers) had yet to become a major pain the American automotive manufacturers’ license plate. In fact, the environment was so healthy that consumers were buying a new car every year (this was the norm, not the exception). And, unlike in the 1990s, manufacturers (or OEMs) went out of their way to discourage their dealers from selling used cars since OEMs only made money when dealers sold new cars.

Late 1970s to mid 1980s: The United States saw interest rates spiraling higher and higher (along side fuel) – inflationary pressures forced the price of American made vehicles through the roof, sometimes ratcheting higher 2, 3 or 4 times per year – essentially, the floor fell from under the feet of American automotive industry, or did it? The Japanese automotive OEMs were loving life (thanks to favorable exchange rates and their fuel efficient vehicles) – of course, at the expense of gas guzzling American vehicles.

For example, on Cape Cod, specifically during George Washington’s Birthday (Washington’s Birthday is somehow associated with car sales) the main shopping mall, Cape Cod Mall, opened its doors (literally) to local dealers and hosted a 3 day auto show – during these 3 days, my father, a Nissan/Fiat/Peugeot dealer, repeatedly outsold his American counterparts, selling no less than a month’s worth of cars (the record being 21 in one day) – or about four Japanese cars for every one American car sold.

In spite of inflation, higher rates, and fuel prices, Americans were still buying new cars, just not the same brand of new cars they did a decade or so earlier. The knock on effect, as far as the used car industry was concerned, was absolutely zero – largely because the majority of used cars were expensive and of poor quality (i.e. the market consisted of American made gas guzzling monsters – relative to the new Japanese products the Americans couldn’t compete).

The mid-1980s to the early/mid-1990s:American consumers dramatically changed they purchasing habits – essentially, they stopped buying new cars – full stop. Sure, higher prices were retarding sales, but this was already a factor years before; no the reason new car sales fell off a cliff had everything to do with high interest rates and the negative impact these rates had on significantly elevating car payments (the old practice of paying cash for cars had been sidelined by the popularity of financing). With an American economy less than inspired, rate moving higher, and consumer confidence dropping monthly, the last thing anyone wanted to do was pull the trigger on a new car. But, people still needed cars, and if they couldn’t see themselves in a new car, they could see themselves in a used car, especially at discounts of 30% to 50% below the average new car’s sticker price.

In no small measure, high interest rates forced America into second hand cars, gladly accepting lower monthly car payments along the way. Rather ironically, dealers soon (more so by the 1990s – as you’ll read shortly) realized they were sitting on a gold mine as margins on used cars were (potentially) heaps higher than on new cars. How could that be? Well, in plain English, consumers had no way of knowing how much the dealer paid for the used car as there was no factory invoice or Manufacture Suggested Retail Price (MSRP).

For example, a new car might net a dealer US$500 profit, whereas a used car might pull in four times that. In fact, it got to a point where dealers lost money when they sold a new car, and thus their only source of revenue came from sales of used cars (revenue excludes back-end revenue pools, such as parts and repair services which could account for up to 50% of a dealer’s revs).

As a result, new car dealers started consolidating used car dealerships (used car business is all about scale/inventory, much more so than new car business) and formed super stores specializing in used cars, such as Carmax and Lithia Motors.

Maybe we should take a step back, get our bearings – we’ve come a long way in a short period of time. It took nearly a century to get Americans into used cars; albeit they came grudgingly, they did come and for no other reason than to alleviate financial pain resulting from higher interest rates (car payments). So, now, consumers were happy (they could afford a car), dealers were happy (making money hand over fist), but automotive OEMs were unhappy (on the back of dramatic declines in new car sales) – it was obvious something was going to have to change as OEMs would not allow this environment to persist.

Welcome to the age of automotive lease (circa 1990): What promised to be the fix, or answer to sagging new car sales, actually, did as much for the proliferation of the American used car industry as high interest rates did in shifting consumer purchasing preferences. In no small measure, the “lease car revolution” made it possible for used cars to become a viable business. Essentially, previously leased cars made up the bulk of used cars sold in the United States during the 1990s and 2000s – available inventory (or a wide selection) is the life force of any used car business (on average a customer buying a used car will spend four to five times as long examining models/brands than a customer buying a new car) without inventory your customer would walk (whereas when buying a new car they would be willing to wait several weeks/months for the color/model they desired).

To understand why leasing was a smashing success in the US, we need to understand how the terms of a lease are calculated (this is just for review, so skip down to next paragraph if you want) – unlike taking out a bank loan to finance the entire value of a vehicle, a lease allows the consumer to finance only a portion of the car’s value, at a fixed rate, over a 36 month period. The manufacturer (not the dealer) calculates this portion by subtracted the specific car’s price by the residual (or, the expected value of the car at the end of the 36 month leasing period). For example, if you lease a $35,000 luxury car for 36 months and it has a residual value of 70%, it is worth $24,500 at the end of the lease. It has only lost $10,500 of its value, and you will have paid $291 a month (plus interest, tax and related fees). As a rule of thumb, monthly lease payments were about 30% to 40% lower than monthly payment resulting from an automotive loan from a bank – naturally, lower monthly payments was a major driver in accelerating the popularity of leasing.

Leasing, for a while, brought a relative clam to the auto industry (all was cool in skool) – OEMs were selling heaps of new cars, dealers were making money, and anyone who could afford a marginal down payment could own (lease) a car – yet, this was no more than a façade, structurally speaking the industry was a mess – and about to getting a whole lot messier.

Thanks to new fangled leasing regimes, more and more new cars were being sold than ever before – and, not surprisingly, competition amongst automotive OEMs mirrored this growth – resulting in lower and lower MSRP – in short, OEMs were sacrificing long-term profitability for short-term gains. Rather than touch the sticker price, manufacturers increased residuals, and thus reducing a consumer’s monthly auto payments. Yet, in order to increase residuals, manufacturers had to assume the car would hold a higher resale value at the end of the lease term. And there inlayed the problem – higher post-lease resale valuations all but ensured a glut in supply as consumers had zero incentive to purchase a three year old car that would cost them seemingly more that leasing a new car.

But what had become an awful situation for manufacturers was a dream for dealers, especially new car dealers. Before we move on it is important to note that during this period automotive auction houses, such as Manheim Auctions and Kruse International (which was eventually bought by Ebay in 1999), experienced dramatic growth (in profits and popularity) – thanks in large part to the surplus in previously owned leased cars. Manufacturers needed an outlet to sell their inventory of leased cars – and as they could not directly pawn the cars off on their established sales channels (new car dealerships) they hooked up with auction houses – the caveat being, that only authorized new car dealers could attend these auctions.

By engaging auctions, manufacturers set in motion events which ushered in the greatest vehicle yard sale of the twentieth century. And what is more, these previously leased cars usually sold for US$4,000 to US$5,000 below the manufacturer’s valuation estimates (to put some spin on this, American automotive OEMs’ profit margins on new cars were already in the red, even before the car hit the auction podium). And, to add insult to injury, a vast majority of these cars were still covered under manufacturer’s warranty, and thus buyers (dealers) effectively transferred any possible risk (defect, etc) to the manufacturers (dealers were given a free put option). Essentially, this lease-auction relationship gave dealers a reliable (semi-exclusive) source of quality (relatively inexpensive) inventory – and keep in mind, consumers had no way of knowing how much dealers paid for these cars – needless to say margins were, well, impressive.

I think it’s now crystal clear the role OEMs played in this saga, but what we haven’t touched upon is the role American rental car agencies, such as Avis and Budget, played. Put simply, these guys at the rental agencies were either leasing away like crazy or purchasing car directly from a manufacturer at just about cost – so, after a year or so, where do you think these agencies dumped their inventory – three guesses but you’ll only need one – auctions. Yup. More inventory. More competition. More price pressure. Just more of everything…supersize me, will yah?

Eventually, manufactures realized they had to put an end to this blood letting and introduced zero percent financing, but by then the damage had been done.

You’ll notice that certification (the Kansas City Shuffle) never once came up in this conversation – the reason is simple – dealers never fell for the certification trap (i.e. a manufacturer charged the dealer between US$300 to US$800 to certify a car) – as we’ve already mentioned above, a majority of the car purchased at auctions still fell under the manufacturer’s warranty – and yet, consumers did fall for the certification trap, refusing (or rather strongly preferring) to purchase a used car from anywhere other than a dealer selling “manufacturer certified” used cars. On average, dealers certified less than 10% of their used cars, and those that were certified were either getting delivered a customer across country or sat on the lot so the dealer could point to a couple cars and say, “yeah, we sell certified cars…”

Given what we know of China’s automotive industry and financial infrastructure – do you think the used car business is primed to explode or do we have a couple more years of pump priming before the market (and inventory) is deep enough to support single (multiple) player(s) offline? Let’s hold-off answering this question for now…however…I don’t think it is unreasonable to assume that, at this point, a viable online entity focused on the used car related market is anything more than a happy fantasy…

(Acknowledgment: I know this isn’t book but I need to send a shout-out to my dad for adding some color to this blog – valuable insights gained by being a leading figure in the US automotive industry since the late 1960s. )

May 11, 2006

George Washington – a model CEO?!

Filed under: Start-up First Aid — Administrator @ 4:08 pm

About a year ago, it occurred to me (better late than never, I guess) that there are several core personality traits shared between the most highly effective/impactful CEOs and (gulp, dear I say) politicians; in fact, you could say their personalities/insights are damn near identical…

To this point (or rather to add some meat to this argument), I’ve been reading several books dedicated to global business moguls and international political icons – since February (hey, I’m a slow reader) I’ve been focusing all of my attention on George Washington – I know, I know, what new insights can we possible learn from the most celebrated forefather in American history?

Surprisingly, heaps and heaps of insights. Exploring George Washington’s inner psyche – basically, learning what makes the guy tick – has been fascinating and inspiring – without question, Washington is one of the best examples of a model CEO (past, present, and perhaps future).

One particularly insightful (and witty, no joke) bit of non-fiction comes from Joseph Ellis titled “His Excellency: George Washington.” It is less than 300 pages long – not your typical, yawn of a history book – and a must read for anyone interested in business (and, no, I don’t believe I’m being Fonzie from Happy Days by “jumping the shark” with this blog).

Anyhow, just below I’ve listed some general characteristics that I have found common among most premium/successful CEOs – I’ve then gone and backstopped these points with related passages from Ellis’ book describing Washington’s personality – hopefully this adds some color to a seemingly “tired” topic – What makes good CEO?

1. Forward Thinking and Opportunistic – you’ve got to be ahead of the curve, just enough to be flirting with notion/idea that you’re a contrarian!

Background: Good old George, at the ripe age of 20 (circa 1753), looked west to the land beyond the Alleghenies (Pennsylvania) and saw seismic opportunity; this is impressive given that he was from Virginia where all major agrarian commerce (e.g. tobacco) depended exclusively on sales Europe, specifically the Briton.

Here is what Ellis writes about Washington’s obsession with the west:

“If I was a young man, just preparing to begin the world,” Washington told a friend, “I know of no country where I would rather find my habitation than in some part of that region.”

…in the first renovation of Mont Vernon, completed in 1759, the main entrance was switched from the east to the west side of the mansion. There were architectural and landscaping reasons for the change, to be sure, but the symbolism of the switch, from an eastward to a westward facing, accurately expressed one of Washington’s deepest convictions; namely, that the future lay in those wild and wooded lands of the Ohio Country that he had explored and fought over as a young man.

…When John Posey, one of his fox hunting companions, complained about the impoverished condition of hi own debt-ridden plantation, Washington urged him to abandon his eastern prejudices and make a fresh start. Washington said, “there is a large Field before you, and opening prospect in the back Country for Adventurers…where an enterprising Man with very little money may lay the foundation of a Noble Estate in the New Settlements upon Monongahela for himself and posterity.”

We also see evidence of Washington’s forward thinking with regards to commerce, specifically the agriculture he (okay, his slaves) cultivated on his plantation. Starting in 1766, he abandoned tobacco as his cash crop at Mount Vernon, one of the first of the major Virginia planters to make the change. From now on he would grow wheat, construct his own mill to grind it into flour, and sell the flour in Alexandria and Norfolk. In doing so, Washington was on the road to recover his own financial independence from mercantile noose around his neck (i.e. dependency on British merchants).

2. Selecting Complementary Investors – picking an investor is like a marriage, hopefully, your mindset is that you’re entering this relationship for good (not quite perpetuity, but close), and thus you need to select the investor most complementary to (most of) needs/goals (and not just near-term, you must look a several years down the road).

Background: After the French and Indian War (circa 1758), Washington was looking to settle down, find himself a wife – he was absolutely craving Sally Fairfax, yet went with Martha Dandridge Custis because, as a package (I know this sounds a little cold but in China people still operate until similar assumptions), dear old Martha has the goods (e.g. money) Washington needed to be all he could be.

Here is what Ellis has to write about Washington’s idea of marriage (investors):

…whatever he felt toward Sally Fairfax, she was a forbidden temptation who could not be made to fit into the domestic picture he had formed in his head; memories of her had to therefore be safely buried deep in his heart, where they could not interfere with his careful management of his ascending prospects…

..whatever he felt toward Martha Dandridge Custis, she did fit, indeed fit perfectly. They were married on January 6, 1759. Writing from Mont Vernon later that spring, he described his new vision: “I have quit a Military Life; and shortly shall be fix’d at this place with an agreeable Partner, and then shall be able to conduct my own business with more punctuality than theretofore as it will pass under my own immediate supervision…

3. Conserving Cash – to the point of being obnoxious about limiting extraneous cost (overhead); essentially, religiously monitoring the bottom line (but careful not to under fund business initiatives).

Background: Washington was excessively and conspicuously assiduous in the defense of his own interests, especially when he suspected he was being cheated out of money or land; perhaps this is the underlying reason why Jefferson and so many other Virginia planters would die in debt, and Washington would die a very wealthy man.

Here is what Ellis has to write about Washington’s understanding of cash preservation:

“…when he hired a friend, Valentine Crawford, to assist in the management of his western lands, he drafted the following instructions: As you are now receiving my Money, your time is not your own; and that every day or misapplied, is a loss to me, do not therefore under a belief that, as a friendship has long subsisted between us, many things may be overlooked in you…I shall consider you in no other light than as a Man who has engaged his time and Service to conduct and manage my Interest…and shall seek redress if you do not, just as soon from you as an entire stranger…

4. Hiring Core Team Members with lots of Potential – the ability to not only hire the best and brightest, but also have the foresight (nose, if you will) to recognize talent before it fully blossoms; furthermore, not only delegating responsibility but also championing individual accomplishments/contributions – if your team has no freedom to operate, er, yeah, why have a team at all?

Background: Aware of his own limited formal education, Washington selected college graduate who were “Pen-men” as aides, whose facility with language assured that the grammar and syntax of his correspondence was worth of his station. Furthermore, Washington recruited military talent wherever he could find it, and he had a knack for discovering ability in unlikely places and then allowing it to ride the same historical wave he was riding into the American pantheon.

Here is what Ellis has to write about Washington’s feelings toward team:

During Washington’s presidency he surrounded himself with the most intellectually sophisticated collection of statesman in American presidential history: James Madison; Thomas Jefferson; John Adams; and Alexander Hamilton.

Washington’s success as commander and chief depended upon two acquired skills he had developed over his lengthy career: (1) Identifying and recruiting talented and ambitious young men, usually possessing superior formal education to his own, then trusting them with considerable responsibility and treating them as surrogate sons in his official family; (2) Knowing when to remain the hedgehog who keeps his distance and when to become the fox who dives into the details.

5. Taking Risks – gosh, I don’t know, being an entrepreneur means you’re inherently taking risks, rolling the dice, so, I guess the point is not to forget you’ve got to continue taking risks, pushing the envelope; as one of my b-school professors use to say when asked if he has any advice for young entrepreneurs, “ready, fire, aim!”

Background: Washington fully recognized that by accepting the appointment as commander in chief he was making a personal pledge before anyone else. And if he failed in the high-stakes gamble, his Mount Vernon estate would be confiscated, his name would become a slur throughout the land, and his own neck would almost surely be stretched.

6. Getting Lucky – yeah, this has something to do with success (but you didn’t hear that from me)!

Background: Washington often said that a central lesson of his life was “you survive and you shall succeed.” It doesn’t get any clearer than that.

7. Giving up the Reins – handing in the keys to company car, removing the CEO next to your name and replacing it simply with “Founder” or “Director” – stepping down to allow someone more qualified (hopefully – paging Steve Jobs, paging Steve Jobs) to take over as CEO of the company you’ve birth might be one of the most difficult challenges (yet, 9 out 10 times inevitable) an entrepreneur will face – embrace it, just go with it!

Background: At the conclusion of the American Rev0luti0n, to call Washington omnipotent would be an understatement, he was a King in every sense of the word – in short, it was within his power to remain as head of state, uncontested. And, whereas Cromwell [English Rev0luti0n] and later Napoleon [French Rev0luti0n] made themselves synonymous with the Rev0luti0n in order to justify the assumptions of dictat0rial power, Washington made himself synonymous with the American Rev0luti0n in order to declare that it was incompatible with dictat0rial power.

Here is what Ellis has to write about Washington’s feelings toward giving up the reins:

…Washington saw himself as a mere steward for a historical experiment larger than any single person, larger than himself; an experiment in which all leaders, no matter how indispensable, were disposable…

…Washington responded with a stern lecture to “banish these thoughts from your Mind” and denounced the scheme as “big with the greatest mischief that can befall my Country”

When word of Washington’s response leaked out to the world , no less an expert on the subject than King George III was heard to say that, if Washington resisted the monarchical mantel and retired, as he always said he would, he would be “the greatest man in the world.”

April 30, 2006

Organized chaos & the certification myth in China’s used car industry

Filed under: Automotive — Administrator @ 4:14 pm

One of the greatest fallacies in the used car industry is that “certification” (i.e. certified used car) is the key to a successful business, specifically a web-based marketplace. Investors/entrepreneurs who look to certification as the holly grail are not only naïve but also setting themselves up for glorious failure.

In truth, certification is more of a marketing stunt than anything else whereas interest rates and inventory are two ingredients, when successfully harnessed/understood, will ensure a business has at least a fighting chance.

Over the course of the next several days, we’ll explore this subject in a bit more detail – this coming on the back of a month that saw China’s used car market go from an industry highly fragmented to somewhat more organized (at least, potentially).

This somewhat organized chaos is the result of two significant announcements from Manheim (US) and Quinland (Japan).

Companies such as Manheim (and the dozen or so other auto related online/offline platforms) who have either formed partnerships or have existing brand recognition have, perhaps, positioned themselves to completely monopolize the industry for the foreseeable future (at least, phase one). Given the depth (and diversity) of the competition — several of which have recently received funding — it is highly unlikely a start-up can claw its way into the forefront of this business (that is without specializing vertically) let alone look for a public exit…

Gentleman, start your engines…

March 22, 2006

Is China ready for a nationwide auto club (AAA)? Me thinks it is…

Filed under: Automotive — Administrator @ 8:02 pm

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?

March 21, 2006

Picking an advisor: How to make sure your knight in white shining armor is riding a real horse and not a sawhorse….

Filed under: Start-up First Aid,Web 2.0 — Administrator @ 10:58 am

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!

March 20, 2006

Okay, Shanghai does have hints of global culture…

Filed under: Marketing — Administrator @ 10:58 am


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…

March 18, 2006

Esther why must you be such a pushover? Goodmail isn’t making the Internet a safer place, they’re just confusing the issue

Filed under: Direct Marketing,Loyalty,Web 2.0 — Administrator @ 12:58 pm


“…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?

March 17, 2006

China awash with venture capital…Duh?!

Filed under: Start-up First Aid — Administrator @ 3:42 pm


“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

March 14, 2006

Consumer Behavior: The belly of snacking is only a skewer away

Filed under: Marketing — Administrator @ 4:39 pm

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

March 11, 2006

Chronicles of a China brand marketer: When branding isn’t about “branding”

Filed under: Direct Marketing,Marketing,Web 2.0 — Administrator @ 10:48 am

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?

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