Daily Archives: April 15, 2010

China’s Evolution: From Sweatshops to Innovation

Two stories relating to technology and China prompted some dark thoughts, not that I need much help on that front.

First, I read the story about the deplorable working conditions and objectionable treatment of workers who manufacture peripherals and other PC hardware for Microsoft, HP, and other technology mainstays. That item tells us a lot about the China of today, the China whose contract manufacturers have attracted Western patronage with low costs predicated on cheap labor and a lax regulatory regime.

It’s unconscionable that such manufacturers treat their employees so abysmally, but, as Paul Thurrott writes, nothing is likely to change. Microsoft HP, and others will continue to manufacture in China, occasionally dealing with dubious contract-manufacturing partners, as long as the cost of producing goods in China remains low and helps to fatten profit margins.

Corporations are abstract entities, not individual human beings. A corporation, especially one on the public markets, doesn’t think, breathe, feel, or have a conscience. It functions as an amoral business entity, for the purposes of growing revenue, boosting profits, and producing a return on investment for shareholders. As they say in the mob movies, it’s nothing personal, it’s just business.

But the thing is, China won’t always be the place it is today, which brings me to the other story I read, online at the Wall Street Journal. In that piece, John Deng, chairman of Nasdaq-listed Vimicro, makes a convoluted and unconvincing argument that regulatory and other barriers to foreign firms operating in China will somehow be beneficial to worldwide innovation.

I’m not sure I follow his sashaying, weaving logic, but he makes other points that are less disputable. He points out, for instance, that innovation in China heretofore has been done “through collaboration,” in which Chinese companies (like the aforementioned contract manufacturers) have adhered to U.S. and international standards and built business models on the modest foundation of low labor and environmental costs rather than on the elevated pedestal of high-value innovation.

Citing Huawei and Lenovo as examples, he says the situation is changing. Just as Japan and South Korea outgrew their humble manufacturing origins and became innovation powerhouses, Deng sees a similar but even bigger evolution for China. Unlike those countries, China can leverage unique attributes (namely its size, power, and influence) to set its own technological standards. Deng believes it should do just that to encourage the development and growth of indigenous technology companies.

He’d also like to see China get better at commercializing university research and development. He also would like the country to develop improved legal protections for intellectual property.

In China’s earlier (still current) stage of industrial development, the defense of intellectual property wasn’t a priority for the country’s leaders. With most of the innovation being brought into the country by foreign companies — and technology transfer, from Western to Chinese companies, being the strategic imperative — China and Chinese companies weren’t as concerned with the unassailable integrity of intellectual property.

As China innovates, and develops competitive differentiation and business value from those efforts, Chinese companies and authorities will have a newfound appreciation for intellectual property. At that point, China will enact legal and regulatory reforms that will strengthen protections for intellectual property. By then, though, China will have more to protect, and more to lose.

If one views the evolution of China in this context, the country looks like the ultimate honey trap for Western technology concerns. Western companies could not resist what the country offered — low-cost manufacturing operations and a vast market for commodities and consumer goods. Even though these foreign companies knew that doing business in China entailed significant risks, including the loss of valuable intellectual property, they took the plunge because their greed outweighed their fear, the temptation was too great.

In the future, we probably won’t see many stories about execrable working conditions at Chinese contract manufacturers. At some point, low-cost manufacturing sweatshops will move elsewhere, and the bad news coming from China will be on a different scale entirely.

Microsoft’s Consumer Groundhog Day

In so many respects, Microsoft has become its worst enemy. Just consider what’s happening with its overlapping, somewhat contradictory moves with Kin and Windows Phone 7 Series (WP7S).

The two efforts overlap because they both are targeted at consumer demographics. They conflict because they’re built on different platforms. For observers, and presumably consumers, the result is cognitive dissonance, particularly as it pertains to understanding what Microsoft thinks consumers should buy.

Should Microsoft be playing to its weakness, tackling Apple and the iPhone on its own consumer-cool turf? It doesn’t seem wise, does it? Microsoft’s consumer brand isn’t exactly imposing. Very few people not employed directly or indirectly by the company could argue, with a straight face, that Microsoft has an intrinsic feel for the consumer zeitgeist.

Microsoft doesn’t suffer only from an errant appreciation of consumer sensibilities, though that problem is irrefutable. It also is afflicted by a lack of corporate self-awareness: It doesn’t know that it doesn’t know about consumers.

As Microsoft’s executives took to the stage and to the airwaves to tout Kin, I was alternately amused and appalled at how maladroit they seemed in attempting to connect with the social-networking youth market that they perceive as Kin’s sweet spot. Microsoft seemed an aging, leering, out-of-touch lothario hitting a dance club for the first time in decades, trying too hard to sell itself to an audience with which it does not have a natural affinity.

Maybe I’m wrong, and maybe the Kin will find a niche, one big enough to satisfy its corporate masters. But Microsoft’s past performance and initial portents aren’t auspicious.

Meanwhile, I wonder, as do others, about whether Microsoft’s fixation on getting back in the good graces of mobile consumers might cost it whatever patronage it retains in the mobile enterprise. That’s a market segment Microsoft ought to understand, one in which it can leverage assets and strengths many of its competitors don’t possess. But the company’s commitment has wavered, it has failed to execute too many times with diminishing returns from successive iterations of Microsoft Windows Mobile, and now the focus seems completely lost.

That can only be good news for RIM, which, like Microsoft, has a difficult time figuring out the mobile-consumer space and how the younger generation swings. Unlike Microsoft, though, RIM is disinclined to surrender a mobile bird in the hand for one in the bush.

There’s also a good chance that Google is watching intently as Microsoft’s middle-age crisis plays out. Google has enterprise ambitions that encompass mobility and smartphones, and it has a growing ecosystem that can help it exploit chinks in the Microsoft armor.

With the Kin and Windows Phone 7 Series moves, Microsoft might think it has arrested its chronic mobile decline.

But what are they thinking? I realize past performance isn’t a guarantee of future results, but what has changed at Microsoft to lead its executive team (or us) to believe that somehow this time, in this particular foray into the consumer realm, it will be different?

Juniper’s Prudent Ankeena Play

A few commentators have opined that Juniper’s recently announced acquisition of Ankeena Networks was a me-too play, a means for the company to catch up with Cisco Systems in video-delivery infrastructure for mobile and wireline networks.

There’s an element of truth to that assessment, but that’s why I like the deal, said to be valued at less than $100 million. This wasn’t a speculative, damn-the-torpedos, high-risk acquisition, pursued by a vainglorious executive team intoxicated by delusions of grandeur.

To the contrary, this deal fills an identifiable gap in Juniper’s solution portfolio, provides software-based value that enhances the JUNOS profile, and responds to actual customer requirements relating to cost-effective, reliable, scalable, and high-quality video delivery. What’s more, the companies had a prior JUNOS-based technology partnership, giving Juniper added confidence that the deal would work.

Finally, the price was right. Juniper could derive considerable long-term benefits from ownership of Ankeena’s video-delivery software, and the price it’s paying for that opportunity is not prohibitive. The downside to the deal, presuming post-acquisition integration sputters and Juniper fails to leverage what Ankeena offers, is not debilitating, though Juniper is motivated to make this deal work.

This transaction looks like a tuck-in acquisition for Juniper. Risks have been mitigated, and the upside is promising.