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Smart Cities - A $30 Billion Opportunity For Cisco, But Will Local Citizens Be Ready?
The following post is about two former colleagues – Asa from New York City and Lifen from Changsha, China. They have never met one another, but their lives are bizarrely linked together because of an emerging trend that’s being spearheaded by a US-based real estate development firm and technology giants like Cisco Systems.
About five years ago my former colleague Asa found himself caught in a dilemma about his career advancement. He had just received a job offer from an up-and-coming advertising firm in New York City. Should he keep his job at Gale International, an established international real estate development firm in the US or accept the new advertising firm’s offer? He chose the advertising firm. When I asked why, he responded, “who cares about building a city in middle-of-nowhere South Korea? There’s no way that will amount to anything – this advertising firm on the other hand, is going to launch my career.”
Since Asa switched companies the real estate project in South Korea has in fact evolved into the model smart city of the future – New Songdo City, South Korea. New Songdo is not a typical city - it is the beginning of what ambitious real estate developers like Gale International, and several multinational technology firms led by Cisco are seeking to replicate throughout emerging markets in Asia and beyond.
This is where the story of Lifen, my former Beijing-based colleague, begins. Lifen is from Changsha, the capital city of China’s Hunan province. In 2009 the Changsha Municipal Government authorized Gale International to build its next smart city right outside of Lifen’s hometown. The Meixi Lake District is one of 20 new cities Gale International plans to build across China and India alone.
The rate of urbanization is increasing in China and many other emerging markets, but are citizens ready to move into these smart cities? Out of China’s population of over 1.3 billion, only a small portion of these are considered middle-class and above. This means that most families Gale and Cisco aim to relocate into their smart cities are low-income rural families with comparatively low levels of education. The transition from a rural to an urban lifestyle is difficult enough, but from a rural lifestyle to a smart city urban lifestyle? From an economic and social standpoint, this seems like a stretch.
New Songdo City has the potential to be a great success, but the overall standard of living for average citizens in South Korea is significantly higher than that of China or India. During her last trip home, Lifen recently helped her father set up an email account. I am curious to see how she manages to teach him how to use the Cisco TelePresence in his living room to pay for his water and electricity once her parents move into Meixi Lake District.
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秒杀 Miaosha, the Chinese e-tail phenomenon
Miaosha is a Chinese online consumer phenomenon quickly becoming widespread. Translated literally as “second kill,” the term originated from online multiplayer videogames like Blizzard’s World of Warcraft. In its original context, the term refers to a situation in which a player without any other option is killed or kills his opponent in an instantaneous attack. Use of the term has expanded to take on another meaning in China’s booming online consumer market estimated at 65.8 billion RMB in Q3 2009 (iResearch).
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Beyond Google: How can foreign companies operate successfully in China’s Internet space?
When Google announced that they may exit the China market, it sent shock waves across both traditional media and new media. I’d like to highlight a few of the thoughtful posts that helped shape my perspective on this issue:
Clearing Up Confusion on Google and China
Why it’s Good that Google.cn Leaves + SEM (2)
Google Leaving China Will Not Be A Revolution, Televised Or Not
What Google is Trying to Do In China - Gambling For Free Speech and Losing
The specific case of Google raises an important broader question: where can foreign Internet companies succeed in China? With 384 million Chinese netizens and that number is set to increase, companies see the Internet as a space in which the possibility exists to make some serious cash. That said, instances such as the Google case demonstrate that even the most powerful of global Internet companies may be unable to make the Chinese government change its censorship policies. If you can’t change the law, then how can you still work within the existing framework to win?
The Chinese government’s number one priority is to maintain social order and stability. The Internet is perceived as a threat to social stability, which is why the government has implemented restrictive measures such as the Great Firewall of China.
Where is the most regulation?
The Internet companies most regulated are those that are perceived as possessing the potential to affect social stability. Internet search and Social Networks (SNS) are two such areas – thus negatively impacting foreign sites like Google, Facebook and Twitter. If you are a company that provides access to “sensitive” material or provides a communication platform for netizens to unite on “sensitive” topics, then you will continue to face pressure and restrictions from the Chinese government.
The underlying trend appears to be that in the event that the government is unable to repress Chinese netizens’ needs for a particular service, they will restrict the foreign original and support a more easily regulated domestic alternative. This can be seen both with the Google – Baidu and Facebook - RenRenWang dynamics as well as with the recent emergence of Sina’s Twitter-like micro-blogging service.
Where is there room for growth?
Companies who wish to succeed in China’s Internet space would best stick to areas that focus on job creation and economic gain that do not overlap with broader social & societal challenges. The government actively promotes the online gaming industry and is a great proponent of e-commerce companies like Alibaba Group that connect people to do business and grow the Chinese economy, rather than connect them in a way to go against the government.
However areas such as Internet search, Social Networks and other online communication platforms will continue to be heavily monitored, regulated and even thwarted by the Chinese government due to the potential impacts such tools have on social interaction and unification.
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You Stole My Vegetables! Toucai – The Latest Addictive Game Application on China’s Social Networks
“你今天偷菜了吗？” “Have you stolen vegetables today?” From middle school students, to white collar workers, and even retirees – Chinese netizens of all ages are obsessed with 偷菜 toucai, the latest online gaming application sprouting up all across China’s social network sites (SNS). Players own a virtual farm where they plant fruits and vegetables. They purchase supplies like seeds, pesticide and fertilizer at a virtual market. Players can even buy guard dogs to protect their crops while they are away from the farm. While part of the game is about growing and protecting your own harvest, the real fun is sneaking into your friends’ farms to steal their vegetables. The simple, yet addictive game brings together a diverse audience to partake in this sneaky pleasure.
五分钟 Five Minutes
Xu Cheng, Five Minutes Founder & COO
It took much longer than five minutes for Xu Cheng, founder of 五分钟 (Five Minutes) to create Kaixin Nongchang also known as the Toucai game. Xu Cheng’s Shanghai-based team first released the game as an application on Xiaonei (now known as Ren Ren Wang), a leading Chinese social network whose user base is comprised primarily of college students and recent graduates. The two companies have a profit sharing partnership in which Ren Ren Wang and Five Minutes split each month’s earnings now totaling approximately one million renminbi per month. Five Minutes has the option to end the partnership at any point as it sees fit. Five Minutes shares similar partnerships with other Chinese SNS operators; however, Tencent took full control of rights to the game for its QQZone platform through a one-time multimillion renminbi payment to Five Minutes.
Virtual Interactions, Real World Emotions
Why is toucai so popular? How is it able to appeal to the young, the old and everyone in between? For my Chinese speaking readership I highly recommend taking a look at this article produced by iResearch entitled 三个“菜农”的故事 The Story of Three “Farmers.” The author interviews participants representing three distinct age groups: a 14 year-old middle school student, a 25 year-old white collar worker and a 49 year-old mother. Each of the three respondents provides a different explanation for why he or she enjoys playing toucai, but I feel there is a common rationale that links their responses. Their main source of pleasure and enjoyment is not from direct entertainment while playing the game, but rather it is indirect real world benefits.
The middle school student brags:
I’m class president; my toucai farm level is also the highest!
The white-collar worker excitedly recounts a recent toucai encounter:
“有一次更牛，我一个初中同学到我的农场来偷菜，我才发现, 居然因为种菜又联系上了”
There was one time that was even more awesome, I found an old middle school classmate on my farm who came to steal my vegetables, surprisingly because of this game we had a chance to reconnect.
Toucai is 49 year-old Mrs. Wu’s favorite hobby. She doesn’t care how many vegetables she harvests, or who steals from her – the main reason why she enjoys playing toucai is because it is an alternative way for her to interact with her son while he is away from home.
Xu Cheng, 5 Minutes’ founder, seems to have achieved his goal to make KaiXin NongChang a true Social Game. People may spend countless hours playing online, they may even spend excessive amounts of renminbi to purchase additional seeds and guard dogs, but when all is said and done, the true attraction of the toucai obsession is not the virtual world farming, but the real world interpersonal connections.
To edit the “Toucai” Wikipedia entry click here
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Huawei Technologies: The Exception, Not the Rule
My friend in New York sent me an email last week asking for information about a Beijing-based financial firm that just offered him a job at their newly established international headquarters in New York. It made me recall a China Tech News article I read earlier this month about Huawei Technologies signing a letter of intent to invest EUR20 million to set up an innovation center in Dusseldorf, Germany. Like the Chinese investment firm in New York, Huawei is looking to hire plenty of locals – 200 local engineers to be exact – in addition to the 400 employees in their European headquarters. The innovation center will be far from Huawei’s first global investment – Huawei has been expanding globally for the past 20 years, and it is one of the few Chinese firms to do so successfully.
What does Huawei Technologies do?
Huawei Technologies is a Shenzhen-based privately held high-tech enterprise that specializes in R&D, production and marketing of communications equipment. It also provides customized network solutions for telecom carriers. Take a look at the image below for a more detailed breakdown of Huawei’s product portfolio.
Huawei’s Global Operations
In 2008, 75% of Huawei’s contract sales came from international markets. Much of its original success abroad was due to the fact that it was uniquely positioned to take advantage of growth in developing nations. First, because Huawei began designing products and services for the Chinese market, it developed a product portfolio specifically catered to the needs of developing nations. Huawei’s solutions were more suitable for other developing nations with limited existing infrastructure to work around or build upon. According to this Bloomberg article the engineering costs for Huawei are between 15-16% lower than competitors like Nokia Siemens Networks or Ericsson, an instrumental factor in its global expansion success thus far.
Second, as a Chinese company, it is able to enter developing markets in the Middle East and Africa that may be politically unstable. This is an advantage compared with Western multinationals who are unable to enter such markets due to international and domestic pressures and legal restrictions.
However, developing nations are not the sole source of Huawei’s success outside the Middle Kingdom; Europe has quickly become an important market for the company as well. In less than ten years, Huawei now supplies all of Europe’s major operators including Vodafone, Deutsche Telekom, France Telecom and Telefonica, with European sales reported at around 3 billion USD. According to its corporate website Huawei has established 14 R&D centers around the world from Stockholm to Moscow to Bangalore. Huawei has also partnered in joint ventures with other leading global firms such as Siemens and Symantec.
The Exception Not the Rule – But Worth Keeping an Eye On
I hope for my friend’s sake that the Beijing-based investment firm in New York is able to follow Huawei’s success in their international expansion strategy. In my opinion, Huawei is the exception, not the rule when it comes to Chinese companies’ overseas expansion success. Other Chinese companies will try to mirror Huawei’s achievements in overseas markets, but at present the vast majority of these firms are likely to fail. Nevertheless, as Chinese companies experiment and develop winning formulas – and as they become more transparent in their business practices – there will be a group of companies that will become true global players. I do not know exactly when this time will come, but like you, I will be observing closely.
Recommended read: Silicon Hutong - Brand Reality Check
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Female Consumer Culture in China | Iron Girls to Luxury Shoppers
I just read an old blog post on The China Beat Blog by Hongmei Li, entitled “From Iron Girls to Oriental Beauties.” Li does an excellent job of documenting the evolution of the perception of women in Chinese society from the post Mao era through the present day. Li writes, “During the three decades that followed the 1949 founding of the PRC, one goal promoted in official discourse was that of erasing gender differences and promoting gender sameness. This was linked to achieving a broader agenda: the elimination of class and socioeconomic differences. The underlying assumption was that women and men had the same fundamental responsibility: serving collective units, above the nation.”
This prompted attempts to advance the perception of women and men as equals with widespread images like the ones below:
By contrast , Li argues that over the past 30 years there has been a significant change in how women are viewed. “The image of Chinese women has dramatically shifted and women’s bodies have been closely associated with pleasure and the rise of consumer culture. In the 1980s, feminized women were said to represent progress and the iron girls were ridiculed.” She uses Chinese movie stars Zhang Ziyi and Gongli to illustrate her point:
Tom Doctoroff, in his book “Billions: Selling To The New Chinese Consumer” writes that the conflicting pressures of Confucianism, Maoism and modern day society have left contemporary Chinese women confused – they are “pulled between coexisting mandates of soft subservience and aggressive productivity.”
What are female consumers looking for in China?
According to this Shaun Rein article women under the age of 35 were one of the main reasons for China’s 15% increase in retail sales during the first half of 2009. The following are his thoughts on what drives the contemporary Chinese female consumer:
“Chinese women are emerging as one of the most confident bodies of consumers in the world. And they have the money to keep on spending. To be successful selling to them, you have to cater to their emotions and concerns more than ever before, even when selling products that men traditionally buy. As Chinese women work harder, raise children at the same time, and pay for their parents, they want to spoil themselves and relax a little. They are willing to pay a premium for safe and healthy quality products that let them do so.”
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World’s Largest Internet Population in Asia-Pacific – China Leads the Way
The Asia-Pacific Internet population, particularly in China, continues to grow at a rapid pace. comScore recently held a webinar on Internet population growth in the region.
Here are a few key highlights:
· China has the world’s largest Internet population with 220.8 million users
· China is also the world’s fastest growing Internet market (31% growth year-on-year)
· The Asia-Pacific region represents 41% of the global Internet audience
· There are 484 million Internet users in the Asia-Pacific region as of September 2009
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Xunbao: Searching for Treasure in Taipei – Mobile Photo Hunt Urban Gaming
The advertisements start chasing me from the second I step into my apartment elevator in the morning. Posters along each wall surround me coercing me to use their medicine to cure my cold or drink their soy milk to make my skin whiter. On the subway ride to work flat panel screens flash advertisements for Oil of Olay beauty cream. While I wait for the lift at work LCD panels replay the latest Motorola mobile phone handset commercial. Even when I log into my computer MSN pop-up ads try to convince me to buy something else I don’t want.
Advertisements can be intrusive and an annoyance, but what if instead of running away from them, we started actively chasing them? What if instead of having a negative association with a brand due to intrusive advertising, we had a positive association based on a pleasant memorable experience in which we physically engaged the brand?
These questions began popping into my head after an old friend and entrepreneur whom I met in Beijing, introduced me to Xunbao 寻宝 (“Treasure Hunt”) right as I was about to begin my Fulbright fellowship in Taiwan.
He sent me the link for iSpott.com, which at the time was a growing social network/mobile scavenger hunt game. iSpott users take mobile photos of an assigned object or idea, upload the photo to the website, then users vote for whose photo best satisfies the hunt using a 5 star rating system.
Initially, I didn’t think much about it, but then I saw an example of an interactive advertising campaign that iSpott created for Sprite, heard about Pacmanhattan, read this book on Smart Mobs, became a regular reader of this blog, and started researching this group among others. After going back and forth with him for a few months, I decided to go for it. We set out to make a Chinese version of iSpott, but we called it Xunbao.
The plan: my partner would work with web designers in Beijing to build a site and I would create a way to test it upon completion in Taiwan prior to releasing it on the mainland.
For the “test” I came up with the idea of The Blue Line Challenge a.k.a. 蓝线大挑战, an urban game and mobile scavenger hunt in which participants take photos with their mobile phone to satisfy a list of challenges. I thought this would be the best way to test the site’s core functionalities - mobile photo upload and photo rating - and also leave room to test the effectiveness of ad placement by having participants take photos alongside brands like McDonalds, 7-11 and Nokia.
For four months I spent my weeks calling and emailing prospective participants and partnering organizations, and my weekends running around Taipei passing out marketing material to strangers. In the end I was able to secure sponsorships, newspaper articles, and recruit 300 participants.
What did 300 people running around the streets of Taipei participating in The Blue Line Challenge look like?
Take a look for yourself HERE.
The Blue Line Challenge was a complete success. Given that I’m sure your next questions are: why aren’t white-collar 20-somethings running around Greater China “Xunbaoing” on the weekends today? Why didn’t you go on to open a location-based mobile marketing firm? These are questions that we can talk about the next time you come visit me in Singapore over a tall cup of coffee.
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Reverse Innovation: Made in China - For China
A few years back I remember hearing about Sara Bongiorni’s book entitled “A Year Without “Made in China”: One Family’s True Life Adventure in the Global Economy.” As the title implies, Bongiorni convinced her family to spend a year without purchasing any products with a “Made in China” stamp/label. But in reality it’s no longer simply about “Made in China.” Emerging markets like China can no longer be leveraged solely as manufacturing bases - China is where innovation needs to happen, with products designed specifically for Chinese consumers. Once perfected, these locally designed products can then be adapted for and exported to the “developed countries”. The process I just described is what Vijay Govindarajan, director of the Center for Global Leadership at the Tuck School of Business describes as “reverse innovation.”
In his October 2009 Harvard Business Review article co-authored with GE CEO Jeffery Immelt, “How GE Is Disrupting Itself” Govindarajan discusses the transition from “glocalization” to “reverse innovation” and the organizational transformation companies must undergo to position themselves to capitalize on this trend.
“Glocalization” vs. “Reverse Innovation”
Glocalization is a combination of “globalization” and “localization” and is the traditional approach adopted by multinationals. Initially for US companies “going global” meant developing products in the US and localizing them for European and Japanese markets where local consumers have similar purchasing power. Govindarajan argues that the consumer markets of emerging economies like China and India are fundamentally different from those of developed countries. He questions “How can you take a product that was originally designed for a US consumer with a median income of $50,000 and profitably adapt it for a middle-class consumer in China whose earnings are significantly less?”
(http://www.vijaygovindarajan.com/2009/10/what_is_reverse_innovation.htm)
What if you developed a product for the Chinese mass market first, and then adapted it for the US mass market?
That is the question “reverse innovation” seeks to answer, and the reason why Govindarajan feels all companies will ultimately have to adapt in the future. He sees development of products like GE’s $15,000 portable ultrasound machine, originally developed for rural China and later adapted for the US market, as the norm for innovation in the future.
In the context of China, I think we can use Jack Perkowski’s recent post on Geely in China to frame the distinction between glocalization and reverse innovation for what he considers China’s two markets.
While glocalization might get you your piece of the consumer market of 400 million, reverse innovation can get you the other 900 million. If this is the case, then can you come up with a way to effectively implement a combined approach and get the full 1.3 billion?
UPDATE: Read the China Law Blog’s addition to this post HERE
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