Your enemy won’t do you no harm Cause you’ll know where he’s coming from Don’t let the handshake and the smile fool ya Take my advice I’m only try’ to school ya. ”Smiling Faces,” by the Undisputed Truth
Must-read article out today in the Pittsburgh Tribune-Review. The article is entitled, “Apple tries to avoid Motorola’s mistakes in China” and it is about how Apple is trying to avoid letting Chinese companies get its secrets. I say it hardly needs to worry and that is one of the reasons I have had a disproportionate amount of my investment assets with Apple for many years.
I will first discuss the article and then explain why Apple, more than perhaps any other computer/gadget company, need not worry too much about China.
The article does an excellent job describing how Motorola allowed its technology to be compromised in China. I have no idea if the Motorola history set forth in the article is accurate, but it certainly sounds like it is and it certainly fits what I have personally “observed” happen to other companies. The article seeks to explain how Motorola has gone from being the largest foreign company in China (in 2001) to being an also-ran. The following are two absolutely classic quotes from the article:
- “In China, Motorola thought it found a loyal friend. But clearly, this demanding friend held a different idea of loyalty.”
- “We had the majority (ownership) of those ventures. We didn’t see it was a problem,” Younts [of Motorola] said. “We were probably a little naive.”
But the key takeaway of this article (and the reason for the song quote above) is that it is your employees and those closest to you of whom you must be most cautious. The article nicely highlights this:
“Motorola was used as a training ground for all the competitors in China,” Roberson said. “A person might work for you for six months or a year, then go over to a Chinese competitor. …
Roberson said the Chinese gained valuable intellectual property because the government insisted Motorola shift more R&D to China. A Chinese engineer would work at Motorola as long as it took to learn the technology, he said, and then would quit to work for a competitor.
“Though the Chinese wanted to be trained by Motorola, they wanted to work for Chinese companies,” he said. “Most were small at first, but there were a dozen of them. Then they started to get muscle. And the Chinese government gave them support that the government didn’t give Motorola.”
* * * *
Chris Jones, principal analyst at Canalys, a high-tech consulting firm, said Motorola “got squeezed. … Companies that used to be Motorola suppliers are now competitors.”
The article then describes the various Chinese companies that have been built with Motorola employees and technology.
Apple is playing it cool. Apple is doing things right in China and I said this back in 2009, in a post entitled, “Apple In China (Again) And Why SMEs Usually Do Better Faster,“ back when it was getting all kinds of criticism for moving “too slow” there:
Yesterday I did a post on Apple’s alleged iPhone failure in China, entitled, “The iPhone In China: Ain’t No Mountain High Enough.” I say “alleged,” because though iPhone sales have not soared in China, I remain confident Apple will do just fine there.
After I ran that post, I received a couple emails with “inside knowledge” of how Apple is messing up in China, largely because it is trying to do things “its way” in China, rather than the “Chinese way.” I also received a fairly large number of comments saying pretty much the same thing, all of which I accidentally deleted (sorry!).
And though those who emailed and commented are probably right to say that Apple has so far not done as well as expected in China, I, even as a shareholder, say (in the largest font I can muster), SO WHAT.
Then in early 2010, I posited that Apple was now doing so well in China because it had refused to bend its core principles for China:
Here’s my own, more concise explanation. Apple stuck to its knitting. Let me explain. Just about whenever I speak on China or am on a China panel, and am asked what it takes to succeed in business in China, I emphasize the need to stick to your business’s already established principles. To me the key explanations from Paul’s post are how Apple refused to go into China with its iPhone unless it would be free to make it a real iPhone in China, just like everywhere else and on how China waited until China’s consumers could afford its products, rather than giving them a cheap substitute in the meantime.
Google has come in for a lot of criticism of late from Monday morning quarterbacks (including from the just released book, In the Plex: How Google Thinks, Works, and Shapes Our Lives, but I view these things very differently. I applaud Google and Apple for emphasizing the big picture and for refusing to bend for just one massive country. By not bending, these companies gain respect worldwide, from both consumers and, perhaps more importantly, from their employees. Without naming names, I can tell you that I know of a ton of people from a Google rival who have left that rival for Google or who talk of doing so because they simply do not like working for a company that they see as being willing to make peace with immorality. I even heard that at one point this employee dissatisfaction on this score had reached such a level that there was a committee formed to deal with this one issue.
I see the criticisms of Google as a buy signal.
I also see Apple as nearly untouchable by China because I do not see any Chinese company as being even close to being able to duplicate Apple. Sure, there are Chinese companies that can duplicate much of what Apple has already achieved by way of technology, but I do not see any Chinese company as being able to stay upp with Apple when it comes to new technology. Apple snarfs up market share not because its technology is so eye-popping, but because it is exactly what the consumer wants. I do not believe there will be a Chinese company even within ten years that will be so good at understanding consumers. I also do not believe there will be a Chinese company within ten years that will be so good at serving consumers or marketing to consumers. And what Apple lover is going to switch from Apple to a Chinese company’s rival product? Come on.
Sure, there have been and will continue to be Chinese companies that make excellent product that people will buy instead of Apple product. And sure, those companies are competing with Apple and if they did not exist Apple would sell even more product. But they are not a worry and they are not going to have much impact on Apple’s sales growth going forward.
A couple more things to note about some of the issues raised by this article.
The first is somewhat paradoxical and that is that even if you are going to get your technology stolen, it usually still makes sense to go into China. First off, you can get your technology stolen from anywhere and the Chinese can steal it from the Internet or from the United States as well. So you might as well make as much money off of it as you can in the meantime, while also always trying to stay ahead. I wrote more on this in a post entitled, “China’s Lack Of IP Protection: Overrated. Overrated” and in an article entitled, “In China, Piracy is no Excuse,” [go to the bottom of your screen for my article] in which I argue that China’s lack of IP protection is usually not a good excuse for not going into China.
The second is that you are at risk from your employees everywhere, not just in China and not just from your Chinese employees. I have seen probably one hundred times where employees have started rival businesses while still working for my clients or done so right after leaving by using information they garnered from their old employer, but less than a handful of these involved China or Chinese employees.
There are IP risks to doing business everywhere in the world and those risks vary depending on all sorts of factors. The smart business accounts for these risks and acts accordingly, just as it always has.
What do you think?