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American tech companies in China
A question of trust
Edward Snowden is not the only cause of American firms’ Chinese troubles
Nov 30th 2013 | SAN FRANCISCO AND SHANGHAI | From the print editionWHEN Hewlett-Packard reported quarterly results on November 26th, Meg Whitman, the chief executive, noted that the performance of many of its businesses in China had weakened. HP thus joined a growing list of American technology companies which have given recent warnings of harder times for their Chinese operations. Some commentators—and the odd executive—have mused that Edward Snowden may have something to answer for. His revelations about America’s technological spying, it is thought, are leading Chinese customers to shun American gear.
Fears of a backlash had been reinforced on November 25th when Qualcomm, an American semiconductor designer, said it was under investigation by an agency responsible for enforcing China’s anti-monopoly law. Qualcomm says that it is not aware of doing anything that might break the law and that it is co-operating with the agency. Paul Jacobs, its boss, told the Wall Street Journal that “all US tech companies are seeing pressure in China” right now.
Many are, but the reasons for this are more numerous and complex than Chinese suspicion of American snooping. Take IBM. Its revenue from China plummeted by 22% in its latest quarter, compared with the same period of 2012. Big Blue admitted that internal “execution problems” were partly to blame. Less convincingly, it also cited a delay in the completion of China’s latest economic plan and hence the tech spending associated with it.
Cisco is also feeling a chill. In its latest quarter the Chinese revenues of the American maker of computer-networking equipment were 18% lower than a year before. Cisco also forecast that its worldwide sales would fall by up to 10% in the current quarter, partly because of weakness in China. Asked on an earnings conference call whether the Snowden affair was hurting business, Cisco executives said it was causing some Chinese customers to pause before making purchases.
But Cisco’s share of sales of routers and switches to internet-service providers such as China Telecom and China Unicom, and to other providers of web-based communications and internet-connectivity services, had been falling well before the spying imbroglio (see chart). David Krozier of Ovum, a research firm, says Cisco left itself vulnerable in China by failing to respond quickly enough to advances by rivals such as Alcatel-Lucent, of France, and Huawei, a Chinese company. Another American supplier, Juniper Networks, has managed to increase its share.
As for the Qualcomm investigation, it is tempting to see this as a further consequence of Mr Snowden’s mischief. But Qualcomm is not the only foreign company under the microscope. Recently others, including Danone, a French food firm, and Starbucks, an American coffee-shop chain, have been scrutinised for allegedly fixing prices or charging too much.
The Chinese government could instead be trying to send an unsubtle signal to Qualcomm. The company dominates the market for chips that let mobile devices use super-fast, 4G mobile networks, which Chinese telecoms firms are rolling out. The sudden scrutiny may thus be intended to ensure that Qualcomm asks only modest royalties of Chinese handset-makers.
All of this suggests the cost of Mr Snowden’s revelations has been modest. American firms are having difficulties in China partly because of their own missteps, but also because Chinese firms such as Huawei and ZTE have grown into powerful competitors. The American government has, however, made matters worse by seeking to deter firms in the United States from using Chinese telecoms-networking technology, on the ground that it could threaten national security. That is fuelling what Ed Maguire of CLSA, an investment bank, calls “tech mercantilism”. China had policies favouring local suppliers of tech equipment many months before Mr Snowden’s leaks. A tit-for-tat trade battle will do far more damage to American tech firms’ fortunes in China than reports of the shenanigans of their country’s spooks.
Technology Quarterly: Q4 2013
Monitor
Made in China
Technology and society: China has its own distinctive version of the maker movement, which spans electronics hobbyists and high-tech startups
Nov 30th 2013 | From the print edition
IT IS a drizzly October day in Shanghai, and beneath a few dozen bright orange tents, set up in the plaza of a shiny new innovation park, hundreds of electronics hobbyists and entrepreneurs are attending China’s second Maker Carnival. The “maker” movement, an offshoot of do-it-yourself culture whose adherents design and build their own technology products, is more established in America: the most recent Maker Faire New York, for example, held in September, boasted some 75,000 participants and over 650 stalls. But size isn’t everything, even in China.
Under those orange tents some surprisingly innovative companies that supply hobbyists and startups were strutting their stuff. There were robot-construction sets, build-it-yourself electronics kits and 3D printers galore. None of the companies that make them is a familiar name yet. But some of them could one day challenge the likes of MakerBot, an American manufacturer of 3D printers, or Arduino, an open-source microcontroller platform invented in Italy, as the darlings of the worldwide maker movement.
What gives these young Chinese firms a potential edge is their close connections with the so-called shanzhai production networks centred on Shenzhen, China’s high-tech manufacturing hub. The term shanzhai is often used pejoratively to refer to Chinese copycat producers of mobile phones and other electronic devices, based on copied designs and knock-off brand names. But its literal meaning is “mountain village”, and it refers to bandits who opposed corrupt rulers and hid in the countryside—much like Robin Hood in English folklore. David Li, co-founder of XinCheJian, Shanghai’s first “maker space” (essentially, an open-access workshop), says the Robin Hood spirit is inspiring legitimate and often quite innovative products, as the socially progressive maker movement teams up with hard-nosed manufacturers.
Seeed Studio, a startup based in Shenzhen, is a good example. The company specialises in open-source hardware, which means the design of the hardware and the software code that goes with it are both freely shared. As the success of Arduino has demonstrated, open-source hardware is ideal for quick prototyping and small-scale production runs of digital devices. But Seeed goes one step further, supporting a whole ecosystem of open-source production. People pitch ideas on its website, and if they garner enough community support, Seeed will manufacture them. More than 70,000 people are participating on its site, and over 130 projects were crowdsourced this way in 2012. Those numbers are expected to more than double in 2013.
Eric Pan, the founder of Seeed Studio, exemplifies a new breed of Chinese entrepreneur. He quit his tech-industry job in 2008 to start making hardware with a friend, based in his apartment (the urban Chinese equivalent of a garage). Now his company employs more than 100 people, and the unassuming Mr Pan is a rock-star among young Chinese geeks. Even so, he is quick to admit that not all Seeed Studio products are hits, and humble about the challenge of surviving as a business in an open-source world, where copying good ideas is not merely allowed but encouraged. Yet he is also bullish about the future: his firm is expanding its range of kit to include wearable electronics and new kinds of sensors.
Proximity to shanzhai manufacturers could make it easier for Chinese makers to turn prototypes into mass-produced products. At the same time, the maker community could boost innovation among shanzhai firms, which are in fact more inventive than is often assumed. Silvia Lindtner, an ethnographer at University of California, Irvine and Shanghai’s Fudan University, notes that shanzhai producers have long adapted mobile phones to the needs of people in the developing world. For example, unlike mainstream manufacturers, they championed mobile phones with dual SIM slots, ideal for Africa and India where users often switch networks to reduce costs.
For their part, Chinese government officials are taking an interest in the maker movement because of its economic and educational potential. Shanghai’s municipal government has backed a plan to build 100 maker spaces throughout the city. Four of these new spaces are already up and running, with several more to be completed by the end of the year. Each will have a 3D printer, and will also teach traditional crafts such as woodworking.
One of the attractions of maker spaces like XinCheJian, however, is that they operate independently of the state, supported by users’ monthly membership fees. Although expats played a big role in initiating XinCheJian, more recent maker spaces such as Beijing’s Maxpace and Shenzhen’s Chaihuo were entirely home-grown. China’s distinctive take on the maker movement—makers with Chinese characteristics, to paraphrase Deng Xiaoping—is worth keeping an eye on.
From the print edition: Technology Quarterly
http://www.economist.com/news/business/21590906-grocery-has-so-far-resisted-rise-online-shopping-may-be-about-change-raw-and/print
Retailing
The raw and the clicked
Grocery has so far resisted the rise of online shopping. That may be about to change
Nov 30th 2013 | LONDON AND NEW YORK | From the print editionTHERE is “a huge difference between being late and being too late,” said Dalton Philips, the boss of Morrisons, on November 21st, as he announced the launch of the British grocer’s online-shopping service. Morrisons’ competitors have been selling broccoli and baby food via the internet for more than a decade. Britain’s fourth-largest grocery chain had shunned e-commerce as a profit-sapping distraction. It paid with falling market share and the defection of some of its best customers to Tesco, the country’s biggest grocer, and Ocado, an online-only supermarket.
Morrisons’ change of heart will be noticed beyond Britain. Grocery is the biggest category in retailing but the most resistant to the advance of online shopping. Even in Britain, where it has gone furthest, it may account for just 5% of sales this year. But it is growing fast everywhere (see chart). The Boston Consulting Group (BCG) expects the global market to grow from $36 billion this year to $100 billion by 2018.
Grocers have held back for good reasons. Like many bricks-and-mortar merchants they fret that online commerce will shrivel sales in stores but not the costs associated with them. Grocery, with its tiny profit margins, adds complications. Virtual shopping-carts contain dozens of low-value items, which must be stored at different temperatures. Retailers can either get in-store staff to pick them off the shelves, which becomes disruptive as volumes rise, or build dedicated warehouses, which is costly. So are home deliveries: even in thickly settled Britain each one costs grocers around £10 ($16), but shoppers typically pay little more than £3.
Consumers are also wary. Many want to examine fresh produce before they buy it. They recoil when online grocers deliver “substitutions” instead of what they ordered. Many shoppers try grocery websites but “get discouraged”, says David Shukri of the Institute of Grocery Distribution in London.
Among pioneers there have been spectacular wipeouts. California’s Webvan expanded at breakneck speed, pampered customers with services like home delivery within half-hour slots, lost control of costs and collapsed in 2001. Its demise deterred imitators. In Britain Ocado has yet to make much money after more than a decade. Tesco claims its online operation, with nearly half the British market, is profitable. But it uses “murky” accounting for the cost of stores, where much of the produce is picked, says Andrew Gwynn of Exane BNP Paribas, an investment bank.
Yet to shun online is to risk losing grocers’ best customers, prosperous families and those with children. “It really is a prisoner’s dilemma and you can’t afford not to play,” says Chris Biggs of BCG.
Guess who’s delivering dinner
In America, today’s Webvans look sturdier. Peapod, the biggest American online grocer, acts as the internet arm of the Giant and Stop & Shop chains; all are part of Ahold, a Dutch giant. It has shown a flair for innovation: Peapod’s customers can buy by scanning images of products on delivery lorries and coffee cups with their mobile phones. Lazy Manhattanites have been ordering Thanksgiving feasts from FreshDirect, the second-largest online grocer, which is partly owned by Morrisons. Both ventures prosper because they cater to well-off families, largely in cities.
American behemoths are unlikely to leave the field to specialists. Amazon began fresh-food deliveries in Seattle in 2007 and in Los Angeles last year. It is expected to add maybe 20 cities in 2014, some abroad. Traditional grocery chains will respond. “They are determined not to repeat the mistakes other sorts of retailers made at the turn of the century, when they were too afraid of Amazon,” says Robert Hetu of Gartner, a technology-research firm.
Safeway, the second-largest supermarket chain in North America, is the only one besides Ahold with a substantial online operation. Walmart, the world’s biggest retailer, remains hesitant. Neil Ashe, its head of e-commerce, has questioned whether the chain’s budget-minded customers want groceries (as opposed to bigger items) delivered. But this may be changing. A pilot project in San Francisco and San Jose is being extended to Denver. Walmart Labs in Silicon Valley has imported many of the people who developed the online-grocery business at Asda, its British subsidiary. On November 25th Walmart said that its new chief executive would be Doug McMillon, who as head of the international operation is responsible for Asda. He may speed Walmart’s halting American effort.
If a big American retailer plunges in, “others will take it seriously” and the market will expand rapidly, says Mr Biggs. With luck, the newcomers will avoid the mistakes of earlier stumblers. Where internet grocery is still immature, supermarkets can encourage shoppers to “click and collect” from stores rather than spoil them with home delivery. A likelier model for sprawling, car-crazy America is France, where shoppers pick up groceries from drive-through supermarkets. As volumes rise, picking will shift to shopperless “dark stores” and to automated, super-efficient “fulfilment centres” like Ocado’s.
BCG reckons that shoppers who become online converts spend 30% more. Another boon is that distribution centres on cheap land consume less capital than urban stores. Online grocers can thus earn a decent return on capital even with thin operating margins, Mr Gwynn says. He expects Ocado, which will share its second fulfilment centre with Morrisons, to achieve its first “proper” profit (before interest and tax) next year. But as more consumers do their bulk buying online, and grocers start shutting their bigger urban stores, there will be a lot of large retail properties looking for new tenants.
Morrisons does not have the luxury of starting slowly. It hopes to make up for its late start by entrancing shoppers. It will post frank ratings of its produce to build trust, a trick learnt from FreshDirect. If a customer doesn’t like the look of the fresh food delivered to her door, she can send it back and claim a voucher.
Isn’t this the sort of coddling that wrecked Webvan? No, says Mr Philips, for three reasons: Morrisons will exploit its buying power, its emphasis on fresh food brings relatively high margins and it will piggyback on Ocado’s operations. The latecomer will beguile shoppers. It may be harder to charm shareholders.
From the print edition: Business
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