Paradox of Chinanomics

I always wanted to visit China, but thought that trip was few years away. China is world's largest nation; what it puts out is as intriguing as its massive population and land size (third largest, only behind Russia and Canada in the world). But it is also a tough nation to visit. Getting a first time visa can be a serious pain in the behind, and intentionally so. This piece of real estate have always existed for many years without contact with the outside world. The shielded Chinese are still getting used to the "free for all world", and Visas are especially restricted to a traveller from the West. But I was offered a special opportunity to visit when my business partner called about an upcoming Baltimore-Xiamen Sister Cities Trade Mission, which we could be part of; to us, this was China Beckoning. I was ready to go!

Packing my bags after a Summer Work on the Road that had taken me to Lagos, Abuja, Douala, Yaounde, Dubai, Abu Dhabi, Aberdeen, London, Orlando and Atlanta, I was just about settling back into work-life swing when China came beckoning. Armed with my broken iPhone (forgive the really back pictures on this trip), I took the trip to Michigan to connect with the Baltimore City Delegation to Shanghai.

Arriving in Shanghai, the weather was hot but not as sultry as Houston. It was a quick check-in, and then three days of dinners- bottoms-up elaborate escapades demanded by our Chinese hosts and really useful business meetings. Shanghai is an elaborate financial capital, with mega-projects feel...I think it competes more than well against Dubai for crazy-projects of the century. Massive new shiny financial district stand aside traditional urban centers of Shanghai's past, and are dwarfed by the seemingly unending rows of unoccupied skyscrapers- more on that later. This is probably the largest construction site in the world.

On Saturday, we left for Xiamen proper where the China International Fair for Investment and Trade was taking place. An annual binge of Chinese fervor and international curiosity. There we ran into the party of former Vice President Atiku Abubakar, who was busy punching away at his smart phone, 90% of the time. Xiamen is a smaller city- Chinese standard, with only 3.5 million people but much laid back with nice party city, tourism thriving and more evenly distributed economy than usual. It seats just across the Taiwanese straits, and benefits enormously from trade with the other China i.e. Taiwan. Though one generally sense a lot of animosity that Chinese has for the Japanese, I think you sense more envy than rivalry for Taiwan. Taiwanese businesses flourish on the mainland, and make regular visits irrespective of the permanent missile aimed at them, and the perpetual military exercises the Red Army uses to delay flights from the sprawling Xiamen Airport. Jokes aside, we were held on the traffic up to 3 hours at a time, flying in or out of Xiamen due to military exercises- note to self: always plan for that.

On Monday, I excused myself to visit Shenzhen from the official delegation. This took me to visit the ICT capital- or Silicon Valley of China as some call it. Shenzhen is gorgeous, as it is more open. Young people here are managers, directors and the tech spirit is alive and well. The manager of a chinese tech company that picked me up the airport, dove into politics without apologies and prompting- and had harsh words for Chinese repressive system, but also a lot of hope for his country and proud of its achievements in keeping most people out of desperate poverty- as large as the country was. Indeed, he talked about India as the alternative with large masses in poverty, and he preferred China. Here he was, only 28 and well travelled to many parts of the world doing sales for his company, and he seem to me to be China's future...not those old bureaucrats we met in Shanghai or Xiamen. The best Chinese Food by the way I had in this country was also in Shenzhen. Very tasty!

It will not be for the business or shiny new buildings I will remember China; it will be for the true personal love they showed me - a brother going around China. It was definitely not uncommon for Chinese women and teenagers- male or female to step up to me to ask for a picture during this trip. The occasional giggle, random request for autograph..it was simply out of the world! I thought loudly to myself, I need to bottle this stuff before more brothers head to China. Hey, China showed me love.

With respect to China, some key take aways...in bullet points as I remember them:

• China is truly the Far East. For far too long being sterile, it is best imagined as one giant realestate
• Classical economics does not make sense in China unless the entire country is viewed as one giant corporation with 1.5 billion workers, and 7 member management board - the Politburo's Standing Committee
• I cannot see how the classical external investor can win in this "market". It is more of a competitor company for every little organization that flies in; no you can't- you will get crushed.
• Better positioned to make this large organization work with you, or work with one of its many micro-units (Chinese Company) to leverage their low cost and productivity - to win outside.
• The Chinese Government is the world's largest business incubator- with deep pockets. Like incubators, they will back new ideas, old ideas wrapped in new clothing, and stolen ones too. So be careful with your innovation. You still have to deal with the Chinese government, just be careful.
• The Chinese person, is both curiously timid as they're confident; equally argumentative as they're docile; imaginative as they're lacking in ingenuity. Go Figure.
• These proud people have managed to survive 5,000 years and more; I will bet they'll be around for another 5,000. Get used to it.
• Ability to adapt to many years of changes, will probably see China last longer than most typical world number twos. This is not Russia, a perennial wannabe or India- a perpetual disorganized backwater if you ask me. This is China.
• The greatest challenge to govern such a sprawling country, was to unite it behind a leader; that is what the "development for freedom" strategy experiments of the Chinese Communist Party has figured. The day China stops developing is bad news for the party.
• The prospects for China is scary as it is wonderful for America and the rest of the world. America will win provided it can be that place Chinese middle class can escape to, from the repression that it bargained for in their country.
• Back to the last point, the USA EB-5 business visa/Green card for investment program is hugely popular here. When I asked the Chinese why they do it, and not put the $1million in China, they tell me if they invest in China their kids may lose it or the investment say in real estate reverts back to government in 70 years. If China figures out personal property rights, then this may change. America's free lunch is immigration, wonder why she keeps screwing that up.
• While the China sceptic will perennially talk about lack of innovation, don't believe it. China may not be innovating for Americans, but is innovating for 1.5 billion people and the developing world. I used a curious wifi making invention in my hotel room..well, that is innovation. Remember BYD?
• China's greatest strength is her cohesion and order that translates to true National Pride. This natural pride in country is something I don't see every too often around the world even in rich countries. Leaders can't pay for that, and China got it- and it is not forced; it is genuine.
• China can still blow it; if it gets sucked in by regional rivalries and territorial disputes in Taiwan, Tibet, with Japan..among others, then the success of her experiment will be very short lived.

Let me end by discussing one paradox; the never unending sights of empty skyscrapers in Chinese cities. Many can't help but ask how the developers remain in business. Well, it is simple- those buildings are owned by China Corp. Looking at 500 million people moving from rural areas to the cities in the next 30 years, the country has figured how to create a developer class that build empty ghost cities. The government lend money to banks, who back this buildings, who then buy them back. The government loan is securitized, but it originates from surpluses generated by China Corp as the world's largest factory. Alternative investment? Well, they do that too. But they figured providing for the oncoming population onslaught is much better deal- and heck, those future dwellers may either be working and paying for this at some inflated value to the future, or they will earn the right to live there by working for China Corp. This paragraph if it is confusing to you, is just because you believe that demand-supply crap too much: this is China.

In Conclusion, this is a world set apart and is somewhat insular. While China may not have ambition to dominate the world actively, its soft cultural ambition are formidable. Bullish on Chinanomics, doubtful it can lead a political and diverse world.

It is the Infrastructure Stupid!

What is the difference between a country on the path to greatness, and one permanently stuck in the underdevelopment trap? Well, I say it is the infrastructure stupid. Let me say, a visit UAE (Abu Dhabi and Dubai particularly) will convince you. Flying in from any direction, UAE is an amazing constructor's dream compared to Africa, and it was all but a swath of desert land few decades ago: an often forgotten desert backwater where nomads wandered and poverty was rife. In 2013, it is a descent into Lagos from overseas that looks like peering into a massive village with very little visible planning, network of roads and infrastructure  Compared to other African countries indeed, Lagos is like London. Flying into Lome or Contonu will remind one of a war zone even though no battle have been fought in either in any recent memory.

Infrastructure does four amazing things for Nation's stuck in underdeveloped state, for one it creates direct jobs. Building massive highways around a large country, airports as well as power stations, public water works, ports and rail require massive physical manpower that range from skilled to semi skilled and unskilled. Aside from direct jobs created, the families of employed laborers create more jobs, and demands of construction result in the rise of related industries if properly executed with in-country expertise. Speaking of expertise, infrastructure also cause technology and knowledge transfer. Potentially transforming big consumers to cheap manufacturers in the process of building. A combination of jobs and knowledge also often mean a rapid reduction in security challenges for any country. 

The last two advantages of infrastructure are experienced once the infrastructure is in place. Because it amounts to a massive tax cut on business as the cost of the lack of infrastructure is far greater to the aggregate of the individual players in the economy than it is when funded by the collective, it reduces the cost of doing business and reinvigorates the economy. Indeed, this is the definition of infrastructure. Whereas the infrastructure conceived for a country is beyond ordinary and bold, and it encourages business by reducing the cost of doing the industry of Tourism naturally develops wrapped around a revitalized back-bone; as the Brits will tell you- this is the only free money about town. Tourism money is free money and herein, is where Africa is really missing out! 

For Africa's teeming population with brawns it is time to tap into this muscle power to rebuild the continent. Africa's government have for far too long been high on promises and low on delivery - all attributable to lack of vision, corruption and poor planning. Infrastructure projects have to be prioritized for highest cost to job creation ratio, and sustainable impact. On the surface, transportation projects by far deliver on this metric more than power, public water and social infrastructure. But those can be equally expensive, and can take far too long to implement with no measurable multiplier effect as much as Power. 

While funding may be said to be a challenge, it is on record that trust and vision is actually the biggest impediment to the rise of Africa's infrastructure. Africans need to believe their leaders once again, and infrastructure is as much a social contract as it is a technical endeavor. The Three Gorges Dam Project as much as the Hoover Dam revitalized the hopes of China and American people respectively in their leaders and in themselves. Herein, lies the opportunity. Africa needs few good men of vision, comitted to changing the continent from a reputation of a basket case, with leaders dipping their hands in the basket for the funding to truly be secured. 

That process can begin by committing to transparently spend by consensus the resource revenues of our governments on infrastructure and do away with large security spending and big civil service that are payoff for the boys and spend where it is needed. For a population willing to sustain the current level of recurrent expenditure, such should only be funded with tax monies. Only when this effective link between the governed and the governors is restored will the core leakage of corruption be sealed: once and for all- helping the push for infrastructure. Once in place, private monies - concessions and PPP arrangements including BOOT (Build, Own, Operate and Transfer) or its variants will fund the much needed infrastructure for a continent badly in need of one!

Hence, the time is ripe for the right thinking generation of leaders. There is lot of free money out there- including the just announced Power Initiative by the United States to restart the engine of economic growth in Africa by investing proactively in infrastructure without siphoning millions into the pockets of kleptomaniac leaders. But can this generation be trusted? 

7 Market Entry Pointers for Starts-Ups : Why Better Place Failed & Tesla Succeeded

Last week, the inevitable happened- the famed Israeli company- Better Place, often touted as a symbol of the ingenuity and resilience of the nation (read, Start-Up Nation) failed. Touted at its beginning as a home grown solution to hydrocarbon fueled economy, after many years of support and nearly a billion dollars invested it will be closing shop and liquidating. This is a blow in many respect to the world of green technology and above all futuristic automobiles- or not?. In many ways however, it is also a big lessons learned- to the next big dreamer out there. Better Place cellphone business model to car making, was to sell specially co-branded vehicles that came with batteries that is swapped out by consumers at charge stations on depletion just like refueling. The idea? Pure electric vehicle without the distance/refueling fright! And cheaper, since consumers don't own the batteries outright!

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Dreams as big as remaking two gigantic industries- automobile and petroleum - by itself are big; but they become dumb when braggadacio is not well thought out and the innovator fails to understand first the status quo it seeks to supplant - especially its consumer (or "would-be" consumer). The story of Better Place stand anachronistically diametric to that of Tesla Motors, started by the Billionaire African - Mr. Elon Musk and who seem to have pursued this the right way and are now in the black for the first time ever- selling cars and driver trains! I will contrast both companies in the next few, and identify few reasons why some start-ups succeed while others fail even with $850 million!

1. Know your stuff: Anyone that knows the journey of Elon Musk with electric vehicles will realize he was never a Shai Agassi driven by pure idealistic underpinnings in a summer camp for future entrepreneurs. For one, Elon understood the art of the impossible when it comes to breaking boundaries and building machines. Granted he made his money from software- founding Paypal; formerly x.com, just like Agassi was a former SAP Executive; but he also built Space X- the first private sector answer to NASA. Imagine that, the man has remade the way we buy stuff online, how we go to space and now how we drive. He understood machines and disruption. Reading the book Start-Up Nation, it was clear Agassi didn't even understand car making! He just understood how hydrocarbon hurt the world (environmentally, geopolotically), and was convinced electric vehicles were the future; well, so do I. But I shouldn't be building cars verily! So coding is not enough to start an online ticketing platform; do you even know the event creation and event management world?

 

2. Patience Is a Virtue: After knowing your stuff, patience and how that impacts your strategy (fundraising, market entry or otherwise) is particularly germane to the success of a start-up. Victories don't come over night; they come in bits and pieces. While Better Place's Agassi was all about landing that big government support, buzz and investor dollar, Mr. Musk labored away to sell 120 pieces of the first version of Tesla Roadster to the high end. He also knew the idea will need some mini-testing and pilot. He wasn't rushing to expand; from 120 cars, it is now selling 4,800 and power trains to its auto maker partners. Hey, it couldn't land BMW without earning some respect and credibility as a man that knows his stuff! I always tell our entrepreneurs at Wennovation, they will go from prototype, to working prototype, to commercial pilot to market ready products; you can shorten the period between each stage but that natural evolution cannot be skipped; do so, at your own peril!

 

3. Right Capital, Right Sense: He knew this was a long game; as a result he didn't go about raising investor money to back just an idea/ideal; he first used his own money and sweat equity to prove the idea! Entrepreneurs? Learn anything? Don't come to the pitch without a commercial pilot; investment raised to incubate an idea is a dangerous one because it comes with lots of risk. Ask Better Place. Of course, Elan Musk raised the right capital when it took government grant over investor money prior to its latest IPO and payback. Taxpayers were backers of Tesla, we're just never gonna get the upside!  Investor money is not for learning (see 1 above) or experimenting! If need be when still pre-commercial pilot: go for grant money, FFF Network, small angels- those folks will understand when you lose their money experimenting. Even if you get a large VC, tread with caution.

 

4. Under Promise, Over Deliver: If anything, this is the secret of Elon Musk. Always working away unapologetically away from the kleiglights, he was the master of the UPOD strategy. His products (at Paypal, Tesla or SpaceX) were nearly always unveiled once the hard work of R&D, fixing the bugs and knowing the market was done. When he releases a pre-market product like early versions of Telsa Roadster- you found them in New Orleans Jackson square being used by the NO Police, and just stationed in the sunlight to the admiration of passersby. He didn't take them to the race course! Smart guy. Better Place on the other hand, could never wait to deploy to Denmark, Los Angeles and these other places even when still figuring out how to swap batteries and parotting to the media with the help of President Shimon Peres. And by the way, Agassi promised 52 minutes  to swap batteries when Better Place started; he was able to deliver 6 minutes at best according to many users! Entrepreneurs can learn that friendly media is not always friendly; talk less, deliver more!

 

5. Diversify the Revenue Stream: Especially if you're planning to disrupt two giant industries! Heck, you have targets on your back, so you better be making money in more ways than one. Just imagine what the $850 million Better Place raised can be used for. It can cure malaria, fix schools, develop an oil field whose revenue can be used to fund climate change research (lol), and heck, fund a million other start-ups like a crap shot with better chances of success! In restrospect of course. Tesla makes money not just from selling cars, but also selling power trains. Agassi's singular revenue plan, the direct to consumer battery plans were his ultimate undoing. Only 800 or so customers, when he promised 100,000 - four years later. Lessons to would be entrepreneurs out there- make money from everything. Thou shall not come to me with a single revenue stream plan!

 

6. Understand the Status Quo: Lesson number 6 is as connected to Number 1 as jam is to bread. Better Place ultimate undoing was that it ignored its number one barrier to business: the consumer. Lets for a minute ignore the refuelling fright consumers are likely to experience with this new technology, do you seriously think an Audi addicted buyer will buy a Renault simply to go all electric? I doubt it. Car buying is about brands and brand loyalty. Tesla got it; they started from the high end. They curated the customer. They grew that loyal base and can backward integrate in the future by creating a lower end line from a high end maker just like BMW and Mercedes Benz. They did not delude themselves to thinking consumers will buy high performance vehicle from just any partner, so they went about learning how to build vehicles themselves. This was a fundamental flaw in Better Place's business model. It may have been better off in fact partnering with a company like Tesla to design that battery swap technology, and offering the station like a car wash. Now that is a better use of $800 million! Lessons for Entrepreneurs- know your customers!

 

7. Right Market Entry Strategies: The combination of one through six can be summarized in a solid market entry strategy. Market Entry Strategy encompasses how you plan your product development, fundraising to support it, customer group(s) to target out of the door, business vertical to focus on and even how you manage your PR Coverage (UPOD?) and Branding Strategy. Start-Ups are fond of screwing this up, hence 8 out of 10 are bound to fail. Tesla is not resting on its oars; it is going about changing the way consumers buy cars. Direct online, bypassing the middle man! This again is necessary for it as an upstart to survive. Just imagine, an automaker without inventory and a car that is always customized to your taste after you test drive in a local display center! This is Just In Time turned on its head with Afro-American; I mean South African bravado!

Michael Oluwagbemi is Co-Founder of Lagos Based Start-Up Incubator- the Wennovation Hub