Doesn't that sound like it's 1999 all over again?
There is certainly enough buzz around the last few weeks' investments in Chinese internet companies to make it sound that way. I was determined to sit this one out for a bit and let the dust settle. But my conviction not to chase ambulances just because I can now that I have a blog, sort of got blown out of the water today when Yahoo announced a billion dollar cash investment in Alibaba, a Chinese ecommerce company with revenues of 68 million dollars in 2004. And of course there was the IPO of Baidu -- whose stock finished its first day of trading at something like 2000 times earnings?
The media is all over this stuff, as it should be. There are two obvious reasons why these things are happening. (But first, recognize that IT, Internet, etc. companies based in America have been making huge investments in China for a long time. Baidu and Alibaba are not new phenomena, they just feel more salient in some ways because of the increased attention to the US china relationship.)
The two obvious reasons are obvious. First, just as thieves rob banks because 'that's where the money is', growth companies need to be in the China market because that's where the growth is. As my former colleague Eric Best, now at Morgan Stanley, once said, a (very) simple version of China in the world is simply this: pick a number, any number-- multiply by 1.3 billiion -- what do you have? a very big number. that's obvious
Second, it's another demonstration of just how 'un-flat' the world really is. Globalization is real as a process of increased mobility across borders, yes, but are we anywhere near something like a global market where borders don't mean anything? Not even close. The rules of doing business in China are different, very different, at almost a fractally complex set of levels, from doing business in the United States or in France. By rules I mean both the official rules (remember, it's taken the internet companies some time to figure out who they need to talk to in Washington DC to influence the official rule making and regulatory process there in ways that aid their strategies -- it would take a bit more work (!) to figure out the same in Beijing) and the unofficial, behavioral rules (what do consumers want? how do they make purchasing decisions? do they 'trust' payment systems and delivery systems? etc etc) So, if you want to do business in China, you need to learn a lot about the playing field, and Chinese companies know a lot more than you do -- because the world is not flat. that's also obvious.
So what is non-obvious? A third piece of the strategy, which is about hedging against a train-wreck in Sino-American relations. I'm not imputing this directly to Yahoo or anyone else -- I have no idea if this is implicit, explicit, or anything else in their decision making. But their behavior is consistent with a hedge against the possibility that 'defensive localization' will be an important way of managing trade, currency, and content restrictions that could be in our de-globalizing future.
The historical analogy: in the 1980s, the Japanese began to get serious about building auto factories in the United States. They did not do this to save on shipping costs for cars, anymore than Yahoo needs to be 'present' in China to save on 'shipping costs' for bits. They did it to get closer to the market, to learn about American rules, but most significantly to hedge against currency fluctuations, trade restrictions, and political barriers to, well, globalization.
I see the same kind of hedge happening today in Sino-American internet business. And it makes sense. If you think it plausible that barriers will go up -- whether they be taxes, or local content regulation, or censorship rules, or standards battles that end up placing sand in the gears of the 'global' internet protocols -- don't you want to have a way to be 'inside' the walls of even a partially private garden, if there are 1.3 billion people in that garden?
I'm not saying this is a bad thing, anymore than the Japanese auto factories in the United States were a bad thing -- for Japan or for the United States. I'm just pointing out what I think is part of the game here that I believe we should go into eyes open.