Why has Google lost its way? Mark Anderson (CEO of Strategic News Service) says the company began with a search engine, but no real business plan. Now, it needs to focus on what it can do best and not try to do everything.

Here’s what Mark predicted last December:

Google Loses Its Way, failing to answer the critical question: “What Business Am I In?” even as Android, Google Phone, and e-ditions prosper (mostly without revenues). The company will be perceived as confused and unable to develop or support long-term strategy. Is this death by a thousand profitless successes?

How would Mark answer the “what business am I in” question for Google?

Listen and find out now.

And in order to fully appreciate the importance of this subject, it may be helpful to do a quick review of the role of Intellectual Property in modern trade and economics.

Much is made of the word “innovation” in today’s world, but very few seem to know anything about it. Let’s stipulate that creativity, innovation, drives the creation of Intellectual Property, and let’s further suggest that IP is the core economic value structure in an Information Society, the civilization model most of the world enjoys today.

IP may be created and owned by individuals, nonprofits, or universities and research laboratories, but the preponderance of IP is created under, and owned by, corporations. Hundreds of billions of dollars – perhaps even trillions – are invested annually by corporations to create new IP. Shareholders demand a return on this investment.

I will note here, and come back to, a shifting level of international organization: company, country, civilization/society. We will want to pay attention to the changing role of corporate IP control vis-a-vis these other structures.

When we look at the modern mercantilist model, or what China calls the “East Asian Socialist” model, we see recent histories of strong success, and evolving models, ranging from Japan to South Korea to China. Their past histories and politics, dramatically different, matter little compared with the similarities of their economic models in the 20th and 21st centuries.

In each case, we have a relatively simple, and very successful, story: steal or appropriate IP from the countries creating it; use top-down controls to favor government-selected industries; and create an export-based economy, funded by high domestic prices and low (often WTO-illegally low) export pricing, usually supported by forex currency manipulations. Discourage or prohibit imports, particularly in targeted export industries, favor your internal “champion” companies in all deals, and ultimately create large trade imbalances with so-called trading “partners.”

In the case of China, the evolved model includes encouraging huge amounts of foreign direct investment, but generally disallowing majority ownership by foreign companies, and prioritizing market success in targeted industries (wind and solar energy, Internet search, wireless infrastructure, social networks, etc.). Government policy favors local firms, locally owned, using Chinese-owned IP (now, that’s ironic; where could it have come from?), under Chinese brands, and often – another specialty – only if the products themselves are made with Chinese equipment. In Chinese law, this is called “Indigenous Innovation.”

Can you imagine your own country (assuming it is not China) having such a publicly stated policy of preference? It is offensive to the most basic concepts of free trade.

Finally, as partner countries are gutted of jobs, targeted industry companies, and money, the mercantilist country starts moving plants inside partner borders (Japan did this with Toyota, and China has just begun with solar energy fabs) so that they are immune to tariff laws, and to the inevitable adverse World Trade Organization outcomes.

We’ll come back to this theme shortly, but first, let’s update our views on security.

» Security Until Now

In recent times, computer security has been a subject of interest by many different parties, often for similar reasons. Those reasons, stated generally, would include:

1. Avoiding spam. This problem persists today.
2. Avoiding viruses. Ditto.
3. Avoiding worms, Trojans, etc. Ditto.
4. Avoiding Personal ID Theft. Still a problem today.
5. Avoiding ID Theft of employees and customers. More a problem now than yesterday.
6. Avoiding your computer becoming part of a Botnet and wreaking havoc on others on the Net. Still a problem.
7. Avoiding other forms of malware, changing daily. Lots of new problems.
8. Experiencing Denial of Service attacks and other misbehaviors and sources for extortion and criminal behavior against corporations and groups.
9. Avoiding privacy invasion, generally the result of legal or quasi-legal malware installed without permission on systems, often for “ad-tracking” purposes. These issues are multiplying daily.
10. Avoiding the Unknown, dodging future hacks that will disable, publicly embarrass, or somehow compromise business operations in the short term, at least.

Although, as you can see, not one of these security motivations has been successfully removed from today’s CIO nightmares, they all now pale in comparison to something new. Whatever your reasons for investing in security up to now, you will have to create a new line item of expenditures for this new issue.

» IP-Based Trade Wars

Two weeks ago, I was visited by two people speaking for China, representing a new company whose job would be to – well, they described it, but it was a bit vague. During this description, we talked about IP and China, and they pointed to the new high-speed trains China is building everywhere.

Indeed, China has laid more high-speed rail, and plans for more of these showcase trains, than any other country in the world.

My visitors pointed to these trains as examples of how China was now developing its own IP, and not just depending on IP theft or forced disclosure from others.

Last week I learned the rest of the story: how Japan (Kawasaki Heavy Industries and others) brought this technology to China, hoping to make money, and now are watching as their IP reappears in Chinese products owned by Chinese companies, and the Japanese get little or nothing.

That’s the story of modern mercantilism, and of the so-called China Miracle. (For a more detailed description, Premium Members, see the “SNS: What Is China?” issue in the website archives, January 6, 2010).

As nations enter into predatory trade practices that lead inevitably to win/lose outcomes, the world will increasingly recognize these efforts not as free trade, but as trade wars. At the same time, those countries with the most at stake – that is, those which create the most innovation value – will be likely to show preference in trade for countries which protect IP interests.

The result is almost certainly going to be consideration of IP in the formation of future global trade alliances and policies. This is the one event that mercantilist model countries cannot tolerate or allow. Watching China implement its Indigenous Innovation national preference policies, while hounding the U.S. and Europe to maintain their open trade practices, is one case in point.

» The New Mandate: Economic Survival

This brings us to today, and to the next level of security concerns for CIOs and CEOs.

What if one country, or more, were so focused on the above model, based on IP theft, that it mounted a prolonged, concerted effort, using multiple layers of activity to obtain the “crown jewels” of all targeted companies, in all targeted industries?

These levels might include, and not be limited to: outright physical theft; industrial espionage; political, business, and trade pressures/requirements to disclose IP; espionage by state agencies; recruitment of students, grad students, tourists, and business people into the espionage effort; and cyber espionage. Levels of attack would include the Net, company networks, company employees and contractors, and the computing and storage devices (and communications) of traveling executives.

(In China, for instance, all communications contents are the property of the State. Better not call the Home Office and tell them how it’s going during a negotiations session.)

What if your industry and company were one of the targets?

Last quarter, a letter was reportedly sent from the Prime Minister’s office in the U.K., to the country’s top 300 CEOs, informing them that they should consider all of their current IP crown jewels to have been compromised.

All of them.

This brings the level of security concern to a level not yet anticipated by most executives: what if the cost of broachable security is your company’s future ability to compete and survive?

Ask Boeing, Cisco, Kawasaki, Qualcomm, 3Com, Sony, Google, General Electric, BASF, or Microsoft how they feel about all this. Most will dissemble in public, but tell you the truth offline; and many are rapidly coming clean, even in their public comments, as GE CEO Jeffrey Immelt did not long ago.

You are now CEO of a 50-year-old global corporation with, say, 60,000 employees. And the PM’s letter sits open on your desk.

You call in your CIO, close the door, show him the letter. Have we been hacked? you ask. He goes into geekspeak, describing various levels of difficulties, generally safe behavior, all seems well today, no guarantees or ways to tell.

What? You ask. There are no ways to tell if our crown jewels have been stolen by some competitor?

Here are some of the crown jewels obtained by China in the last couple of decades: the top U.S. nuclear warhead design, from Livermore Labs; wing fabrication machinery and blueprints, from Lockheed-Martin; selected Boeing airframe designs; navigation and rocket design for Intercontinental Ballistic Missiles (specifically, the Long March series), from both Boeing and Lockheed; high-speed router designs from Cisco; the source code to Windows, from Microsoft; complete car designs from Chevy and Ford; advanced chip and fab designs, from IBM; high-speed rail systems from Japan; etc.

And you think your company’s IP is somehow safe?

What we are watching, currently, is the largest theft in global history, happening in front of our own eyes. And while one group is busy exclaiming at the wonder of China (and South Korea and Japan) making all that progress and money in their turn, another group is now recognizing the mercantilist model in its third iteration.

When someone breaks into the bank and steals all the money, do you compliment him later on his brand-new car?

All of which brings us to the here and now.

Is there a way to protect your company’s crown jewels – starting now and going forward, as the British prime minister suggested at the end of his letter? I’ve been talking with people more versed in this question than I am, and I am convinced that the answer is a qualified Yes.

The first, and most important, step is to get out of denial mode. Accept that your current IP has been compromised.

Steps Two and beyond have to do with physically isolating your next generation of Intellectual Property, restricting employee access all over again by new and more stringent policies. Don’t take company laptops overseas, but instead use reserved, cleaned machines just for this purpose. Assume all communications with any office overseas is completely compromised. Do not count on encoding or encrypting.

Ultimately, you will be heading your firm toward increased spending on a brand-new level of mandated security, not much different from that of the Pentagon. The Department of Defense’s job, which they take very seriously, is to survive the thousands of cyber attacks they experience every single day. As of now, that is your job, too.

Finally, a comment is in order here regarding the hierarchy of corporations, country allegiance, and civilization and society. In past generations, “what was good for GM was good for America” – i.e., corporations were national assets. While this remains true when they are state-owned (part of GM, all of France Telecom, and most Chinese companies), it is not true of modern capitalist and socialist country companies.

These firms have been guilty of trading IP across borders, and into the hands of their competitors, making the (provably incorrect) assumption that access to sales inside China would justify this forced disclosure. (It turns out that only a small percentage of foreign firms operating in China have made a profit, perhaps in the 5%-20% range.)

Here is the real deal, after more than a decade of effort: if you lose your company’s crown jewels, you lose your shareholders’ money, too.

If the sustained ability to invest in – and get a return on – IP is the cornerstone of modern civilization, then corporations have unwittingly compromised society’s well-being.

We live today in an Information Society, whose future is driven by innovation and Intellectual Property. Those of us creating it have an obligation, to our shareholders and to the system itself, to protect that investment. If the value of IP is repeatedly degraded or destroyed, we’ll enter a world that no one – not even the mercantilists – desires.

After all, those Somali pirates drive pretty nice cars these days.

Your comments are always welcome.

Mark Anderson

1. The Smartphone Market Breaks in Two: Secure / enterprise, vs. consumer / entertainment.
   • Android dominates – and balkanizes – the consumer Smartphone Market, with Apple close behind offering its Monolithic Operations.
   • RIM and XX dominate the Enterprise. XX should be Microsoft, but Apple gets it.
2. Carriers Grab Power: Google has interrupted a transition of power from Pipes to Boxes. Android gives carriers power, while the iOS takes it away. Whose walled garden do you prefer? Pray for Apple, if you are a user.
3. iTunes Seeds Its Own Competition: More real distribution competitors grow and prosper. Consumers want choice. This is a major business opportunity, on a global scale.
4. The Micro-App Ecosphere Hits a Money Wall: Prices quickly escalate, and suddenly there are two types of micro apps companies: big ones that charge and survive, and cute little ones that don’t.
5. Google Loses Its Way, failing to answer the critical question: “What Business Am I In?” even as Android, Google Phone, and e-ditions prosper (mostly without revenues). The company will be perceived as confused and unable to develop or support long-term strategy. Is this death by a thousand profitless successes?
6. The Year of the Electric Car, Part II: Real Production Numbers, Real Sales Numbers, Real Charging Stations Popping Up Like Weeds. Cars regain technology interest as a technology platform, fueled by burgeoning global sales growth, new nationalist entries, and all-electric models.
7. SNS CarryAlongs Remain the Fastest-Growing Segment in Computer Sales: We will see LOTS of new (9” x 7”) pads this year.
8. Data Matters: Oracle, the world’s largest database company, Takes Off, and emerges as a global platform. Competitor SAP suffers. The Larry Ellison/Mark Hurd team becomes as legendary as Gates and Shirley once were, and for the same reason: the ideal match of tech visionary with operating maven.
9. NetTV Is In, Cable Is Out: Penetration of IPTV use in the U.S. reaches 40%+. This marks a revolution in mass media. Cable and satellite suffer, and are wrong about customers not “cutting the cord.” Netflix benefits, and dominates the IPTV space, creating a breakout play for an already-amazing storybook company. Carriers (and countries) not providing real broadband suffer competitively. Old content players realize it is Dominate or Die in the new IP distribution world. New channels, and definitions of channels, abound.
10. E-books Go Mainstream: While paper book sales remain healthy, e-book fractional share of all book sales goes ballistic. E-reading becomes as common as eating with a spoon. U.S. wholesale e-book sales should meet or exceed $160MM per quarter during 2011. Compound Annual Growth Rates will remain over 140%.

Read more detail on these and other predictions for 2011
(SNS Subscriber login required)

Also, from KPLU Radio and NPR:

Strategic News Service publisher Mark Anderson shares his New Year’s predictions with KPLU’s Dave Meyer.

Listen here

]]> http://www.tapsns.com/blog/index.php/2010/12/sns-predictions-for-2011/feed/ 0 http://www.tapsns.com/blog/index.php/2010/07/the-untold-story-of-google-in-china/ http://www.tapsns.com/blog/index.php/2010/07/the-untold-story-of-google-in-china/#comments Sun, 11 Jul 2010 02:05:13 +0000 Mark http://www.tapsns.com/blog/?p=1092 A great deal is being made of Google’s just-received renewal of its Chinese internet content license, which allows the company to continue to operate (until further notice) without censoring its searches, if I understand properly and am being given accurate information by Google, by offering a “choice” splash page at the Chinese Google homepage. 

Chinese nationals who go to this page are faced with a search box, and a choice below it, allowing them to jump to Google : Hong Kong, which is not (one hopes) censored.

This, on the face of it, is good.  Everyone feels good.  I do.  You do. I bet the ruling Party folks in Beijing do, too.

There is just one problem: China has two separate agendas here, and only one of them has been addressed in literally all of the writing on this subject.  Yes, the Chinese Communist Party insists on mind control over the Chinese people, preventing them from searching on any subjects it considers not in their interest, with Tiananmen Square being Exhibit A.

But there is another agenda item: China only wants its own Internet companies to prosper.  Time after time, it has put barriers, speed bumps and road blocks in the way of non-Chinese companies trying to get somewhere in the Chinese market.  In Google’s case, smart folks will remember when Google first came along, it was the clear choice for search, worldwide. 

Google’s first problems with the government were not about censorship, they were about the government intentionally delaying Google search results, in order to give Baidu a speed advantage.  Many studies have been done on this question, and inserting just a small – say a portion of a second – delay into server /search response, will tilt the competitive plain away from the slow site.

Because no one can complain about China and continue to do business there, Google very quietly complained about this treatment in the U.S. , and no one picked up on it.  Google did server checks inside and outside China at the time, and concluded that their internal searches were being delayed by the government.

Can you imagine the U.S. government – or the German, French or Australian governments – intentionally harming the performance of a non – domestic company’s online operations, as a policy matter?

Think about it.

Even today, China proudly points to how Baidu has a larger search market fraction than Google, as though this is Google’s fault, and so they somehow matter less.  Is this because Baidu is such an amazing engine?  Or is it thanks to a government that, as GE’s CEO Jeff Immelt said in Italy last week, “doesn’t want us to win.”

While the rest of the world is celebrating Google getting its silly little content license, let’s ask a much better question.  Are the smart guys behind the curtain in China happy to have this solution, knowing that adding another three to five seconds (vs. a fraction of a second previously)  to every search will accelerate their prior program of delaying Google search results, and thereby handing market share even more quickly to Baidu?

The answer, in my opinion, is “Yes.”  This way, it looks like capitalism and markets at work, with the Chinese champion winning, and without the embarrassment the country would have suffered if Google had just picked up and walked because of censorship.  Now, Google loses, Baidu wins, and everything is perfect.

Unless you want the truth in China.  Or unless you want to compete there fairly

I would be interested in informed comments, and please give your name when you comment.

If you think your computer is safe because you’ve installed anti-virus software, you’re wrong. If hackers can break into computers at the Pentagon or Google, they can also sneak into your laptop. Strategic News Service publisher Mark Anderson believes the world is at war and the battlefield is in cyberspace. He spoke with KPLU’s Dave Meyer.

Listen Here

This issue is retroactively dedicated to my friend Sergey Brin of Google, for having the courage to say No to Chinese censorship.

» What Is China?

 Most people probably assume that the reason for China’s enormous economic growth rates is simply size: anything powered by 1.2B people is bound to make a big splash. But India, with the self-proclaimed “oldest democracy in the world,” is about to exceed China’s population.

 What makes China so different?

 Westerners remember China’s turn toward “socialist market economics” under Deng Xiaoping (Teng Hsiao-ping). Deng was a political adept who outmaneuvered Mao’s hand-picked successor, Hua Guofeng, and often ruled without a specific single title of power. (See our “Takeout Window” for more biographical data.)

 Deng once said: [chinese characters]

 Translation: “It does not matter whether the cat is black or white; as long as it catches the mouse, it is a good cat” (commenting on the whether China should turn to capitalism or remain strictly in adherence with the economic ideologies of communism). Westerners assumed this meant that Deng, the pragmatist, was turning China toward free markets.

 Deng did not turn China into a market economy; far from it. Here is a quick description of early Deng achievements, from The Hutchinson Encyclopedia:

 “By December 1978, although nominally a CCP vice chair, state vice premier, and Chief of Staff to the PLA, Deng was the controlling force in China. His policy of ‘socialism with Chinese characteristics,’ misinterpreted in the West as a drift to capitalism, had success in rural areas.

 “His reputation, both at home and in the West, was tarnished by his sanctioning of the army’s massacre of more than 2,000 pro-democracy demonstrators in Tiananmen Square, Beijing, in June 1989.”

 In summary: the fellow who brought market economics to China, really didn’t. Instead, he helped install an economic model designed to gut its trading partners, described in detail below.

 Too often, today, sloppy thinkers and Western optimists assume that China is just a Big America, or a Big Vietnam, or a Fast India – or their Next Big Business Partner.

 Wrong. At a time when the world thinks the communist model has been proved obsolete, China remains a communist country. In fact, under the current leader, Hu Jintao, human rights in China have recently suffered and are now in serious decline, according to Amnesty International-USA, the Committee to Protect Journalists, Human Rights Watch, and others.

 China has tens of thousands, perhaps hundreds of thousands, of human censors monitoring citizen clicks and comments on the China government–controlled Internet. When my friend’s teenage daughter (a U.S. citizen) taught English there last year, police came to her apartment and grilled her about specific computer entries she had made. When one of Australia’s top mining firms, Rio Tinto, refused to allow China’s Chinalco to double its ownership interest last year (to 18%), China arrested local CEO (and Australian citizen) Stern Hu and three managers, who remain in jail today, under espionage charges. China denies any connection. In politics, thought, and business, China remains a police state.

 We all refer to China as “China” now, as though it’s just One of the Gang, like “Ohio” or “Denmark”; after all, it’s a member of the G7, right? Just another market economy finding its way in the global river of events —

 No, it’s not. And it isn’t in the G7. In fact, it isn’t even part of the G8, which includes Russia.

 So now ask yourself: When is the last time you called Communist China, Communist China?

 You’d better get used to it. There is no indication that the Chinese Communist Party has any intention of giving up any power at all, or of changing its power structure. In fact, discussion of anything political is basically off limits inside China; it is not done. Ah, you heard that there were some small moves toward shadow property rights in China? Sorry, that move has recently been reversed.

 Wait, you say – what about the spread of democracy, at least in town and provincial elections? Didn’t Hu Jintao just give a speech praising democracy? Well, that turns out to have been another false start: today, democracy seems to be declining rather than growing, and it never reached the national stage. In fact, these days Hu is insisting on a new policy of “no debate” on government decisions, even (and especially) at the highest levels.

 It is time to look at China, not for what it says, but for what it does, and to judge it accordingly. It is time to tell the truth about what Nobelist Paul Krugman calls “a misbehaving superpower,” rather than letting misplaced greed dictate the conversation. China is not what we hope it could be. China is what it is.

 Those who take this new tack will have a differing view, in general, from the global media – and a much more accurate one.

 ___

What Is China?

 Most of our readers are more interested in the economic aspects of this question than in issues of human rights, media control and censorship, military buildup, or the country’s increasingly interesting international political alliances. All of these areas are worth study, and, in general, all veer from the view generally portrayed in Western media. The story of an increasingly aggressive Chinese navy, about to become a Blue Sea (open water) force with its own carrier fleet, buttressed by continued additions of attack nuclear-armed submarines, is not much told, although I can’t see why not.

 The successful Chinese shoot-down of a satellite by a land-based missile got media attention, for a week. But it should be taken on a much more serious level, as a direct threat expression against any nation intending to use satellites in war.

 The now-documented cyber attacks by Chinese-sourced computers against Western economic and military targets, suddenly ramping up on a straight line for the last two to three years, deserve more public conversation. Recent estimates are that 80% of such global attacks on U.S. economic, infrastructure, and military targets come directly or indirectly from the Chinese government and military.

 And China’s continued shipping of weapons and parts to Iran, and general violation of U.N. sanctions against North Korea and other dangerous nuclear wannabe states, is disconcerting at best.

 But in this discussion we will focus on economics, both because it is in SNS members’ near-term interests and because the successful implementation of Chinese economic policy enables all of these other programs.

 What Is the Chinese Economic Model?

 Although the politics of China remains communist, the economics might be called Advanced Mercantilist. China has taken the lessons of Japan and South Korea in dealing with the West and modified them with “Chinese characteristics.”

 Here are the basic tenets of the Chinese Model:

 1. Steal Intellectual Property. IP represents the crown jewels of the global economy; they are the peak achievement of Western civilization, and of all of China’s competitors. China steals IP daily, in every possible way: through force, through simple copying, through reverse engineering, through industrial and government espionage, through common theft. China also has a national policy which prevents non-Chinese firms from selling in China unless companies transfer their most valuable IP to China as the price of market access. The clueless ones obey; just ask Boeing.

2. Use Slave Labor Rates to Become the Low-Cost Producer of All Goods and Services. If you are building a downtown tower in Shanghai (and there are a lot of them, many empty), you may not have to pay some of your workers for six months to a year. Or you fire them just before that: free labor! It doesn’t work that way in Chicago or Paris, does it? With 800MM country folk in line for coastal jobs, there is perhaps a 30-year supply of poverty-level wage earners happy to make export goods at below global cost. The rest of the world’s workers are paying, with their own jobs, for this unhappy result of near-term Chinese economic history, and of the past actions of the Communist Party.

3.Sell Stolen IP Back As Global Exports. Japan opened this model, but China has perfected it. In addition to the usual pirating of IP, for domestic markets and for export, there is a new twist that further harms the global marketplace. It isn’t enough to find Windows – or a foreign film on DVD – for sale for $1 in Hong Kong these days. How about in Nebraska, California, or Texas? No global market is secure from pirated IP.

4. Industrial Policy: Subsidize Key Industries. Japan also started this idea, but China takes it much further. Originally, the government (or the People’s Liberation Army) owned virtually all large enterprises, but even today, it retains  strong interests in most key export companies, which makes government assistance less transparent. Many outsiders assume they are dealing with “real” companies, when they are actually dealing indirectly with the Chinese government. Examples of subsidization and export dumping would include tires and, more recently, steel exports (sound like Japanese history?), now being tariffed by the E.U. and the U.S.

Look at the big sales of wireless 4G LTE gear in Europe for the last six months, and ask the local competitors (Nokia Siemens, Alcatel) why they can’t match price, and have been losing out to Huawei and no-brand upstarts from China? Or why the final (China) bid price is sometimes as little as 10% of the European group bid price average? Does this sound a bit like Japan in the U.S. TV market back in the ’60s and ’70s?

Here is a rather fascinating question: Given China’s model, is it possible that ALL exports in government-selected industries represent poverty labor and subsidies, and therefore the practice of dumping?

5. Prevent (or Restrict) Unwanted Imports. Use structural rules to prevent any real competition in your domestic market in any areas targeted by industrial policy. (Example: wind power equipment sold today into China must be made using Chinese manufacturing tools, and must fit a non-standard Chinese watt figure.) China has chosen the original path of allowing two kinds of imports: food and raw materials – the latter for making things to be value-added and exported back to the seller – and industries such as cars and planes, in which IP needs to be stolen domestically before the local industry can be created.

Members will note that both the auto and aerospace industries are just making this turning point during 2010, and China will soon be an exporter in both markets.

6. Use Currency Manipulation to provide artificial aid to your export companies. Why play fair? The Japanese perfected this through currency market (forex) intervention, but the Chinese did them a step better, by locking into the (U.S.) market they wanted to parasitize. This “dollar peg” recently has had the added benefit of devaluing the yuan vs. virtually all other Asian and emerging-nation currencies as the dollar dropped, giving China a further global competitive edge and enraging past trading partners, from Brazil to Indonesia.

7. Price for Export, Suppress Domestic Consumption, and use domestic savings to drive the above policies. While everyone is talking about how wealthy the new Chinese coastal middle class has become, they forget that there are another 800MM+ Chinese still waiting inland on the farm for anything good to happen to them. Despite the latest boom, the Chinese people are still among the top global savers. China seems to be allowing faster wage growth, and is encouraging domestic consumption, more than Japan has.

China has further modified this Japanese model by building domestic investment pools through imbalance of trade accounts, the direct result of the policies described here. China is no longer a poor country; it now holds the largest currency reserves in the world. This leads to a big public relations issue for the country, as the rest of the world asks anew: What is China?

8. Create the Appearance of Free and Fair Trade, Without the Fact. By making certain promises for the future, and by pointing to talk vs. the action inherent in the  above policies, the global community somehow allowed China to join the World Trade Organization, although, in fact, China  has not signed off on all of the WTO requirements, which might surprise less-informed members, and it regularly loses cases before the WTO. Even so, China achieved its primary goal: market access around the world, which is key to its own mercantilist model working properly. The results have been spectacular: on Wednesday morning, the Wall Street Journal declared China the new leader in global exports, beating out Germany and the U.S.

9. Encourage Foreign Direct Investment – But Don’t Allow Controlling Ownership. We’ll take your cash, the message is, but you don’t get anything for it. Sure, outsiders can invest; but we’ll hold all the poker chips. This is China’s improvement over the Japanese and SK models, and it is a meaningful one. Japan has since become the largest source of FDI in China. But the Japanese are smart: they build assembly plants, not design and production plants, and leave their IP at home.

Does this combined policy set sound anything like free markets, or free trade? Not at all. China has made use of markets only on the most limited basis. If you doubt it, take a close look at Chinese banks.

I have found myself increasingly frustrated by the gap between what the media seem to think about the Chinese model vs. what it appears to me to be. At our recent SNS Annual Predictions Dinner in New York, I mentioned the uneasy relationship between reality and the public Chinese GDP figures. When they were publishing 11%, I was figuring 11%-15%. Then publicly announced rates dropped to 6.5%, at which point the government spent about 3X more than the U.S. on stimulus (on a GDP basis, but there you go again) and brought it right back up to its pre-announced, politically required sweet spot: 7.5%-8%.

This is not a market, it’s a lever. Want a different number? No worries.

 Earlier, while speaking to the Orange Wireless CIO Forum in Hampshire, England, I read the audience a quote from the Financial Times which perfectly described the problem, and which I will paraphrase here:

 “The top two Chinese banks announced record profits this quarter, although note must be made that, in this case, the definition of costs and revenues, and therefore profits, are dictated by the government. Their stocks subsequently rose in Hong Kong.”

This is not a joke; it’s the FT. Revenues and costs are decided by the Party, so profits are decided by the Party, then “free market” equity trades occur on the Hong Kong stock exchange as a result. Are you kidding?

Chinese banks are not banks; they are cash distribution pipelines, generally controlled or heavily influenced by the government. Selective industries are fed loans, based on the flavor of the week, on terms dictated from above. When the pipelines are empty (as they are now), the government just inserts more money into the other end.

(Yes, in the days of the TARP, one is forced to make the comparison to recent U.S. and U.K. behaviors; but these are a “bailout,” and the Chinese banks have operated like this for years. Unlike their Western cousins, they are supposed to operate like this.)

What can one say about an economy in which numbers are not numbers and banks are not banks?

So, before the world continues on in its near-breathless wonder at the Chinese Miracle, let’s reassess:

It pays to steal IP, to use slave labor wages, to lie about trade practices, to ship pirated goods into foreign markets, to force IP disclosure in return for limited market access, to subsidize exports, and to manipulate currencies. Is there any part of this that is legal in international terms, or that should be applauded by the world community?

Not that I can determine.

Remember how China dealt with 3G – at the time, the most important (patented) technology in wireless communications in the world? Instead of letting out contracts to foreign firms, as all other countries did, China stole the IP from Qualcomm, with some help from Siemens and perhaps local firm Datang. It took years to reverse-engineer and then differentiate the tech into TD-SCDMA, now coming to China’s consumers about five to seven years late.

When will the world catch up to this kind of charade? The answer just might be: now.

I think there have been two turning points, and we have just recently passed both. First, China’s “friends” suddenly find themselves equally the victims of China’s model, their currencies undercut by 30%+ per year, and their trade balances going deeply into the red. Surprise! Suddenly they, too, can see how the model works, and the U.S. doesn’t look quite so stupid anymore.

And second: Copenhagen.

China appears to have gone to the December Copenhagen meeting on climate change with the intention of blocking a major agreement while scoring political points against the U.S. In practice, perhaps thanks to some quick moves by President Obama, the opposite seems to have happened. (See “Quotes of the Week.”) By sending a lackey in Wen Jiabao’s place to leadership meetings, and then blocking agreements, while Obama came up with a global financial solution to the rich/poor debate, the tables were turned on China.

There is even some talk that Obama and Secretary of State Hillary Clinton were tipped to a secret “blocker’s meeting” being held between China, Venezuela, Brazil, and a few other countries, which they literally “crashed” (walked in on, uninvited) and turned to their advantage, bringing Brazil back to the table.

China came out of Copenhagen appearing to have played a saboteur’s role, and no one in the world (except Venezuela’s Hugo Chavez) is happy about it.

 Who’s Counting?

Without accurate or standardized accounting, even China’s equity markets are intrinsically dangerous, insofar as there, too, the numbers are essentially made up, or are arbitrary at best. And without the rule of law, specifically as regards theft of intellectual property, there is literally no way of the nation getting from where it is now to where the civilized world is now, without decades of work on judicial and legal infrastructure.

And then there is the issue of a command economy in the modern world. One recent study on Chinese pricing found the equity market vs. real estate market pricing with a 7X larger gap than was found in Japan, just before its own real-estate bubble collapse decades ago. Clearly, there are asset bubbles inside China: real estate is overpriced while apartments and offices lie vacant in huge numbers in the cities. China-made steel has gone from under- to over-supply, and is now going begging on the global markets.

Indeed, the global outcome of a fast-growing command economy has been the government-determined explosion of asset bubbles all over the world – not because China is growing, the cause assumed by most economists, but because the government is buying resources (and their future options) on the global market, forward for 5-20 years. The result: instant commodity asset bubbles, worldwide, and further destabilization for non-Chinese consumers of these commodities. Of course, if the Chinese play the bubbles wrong, they will lose even more as prices collapse.

Could the Chinese create a global catastrophe by commanding all of this leverage into the wrong assets at the wrong time, by deflating the value of high-IP goods, by forcing global competition against unsustainable cost bases, and destroying non-Chinese business infrastructure? Sure. In fact, this is almost a “when,” and not an “if,” question. What could possibly be more dangerous to the world than a command economic system run on a global scale?

(One good answer: five evil traders on the 7th floor at Goldman Sachs.)

In summary, China should not be treated as though it were just another fast-growing free-market nation, with inevitable road bumps making things a bit uncomfortable; it isn’t. China is a top-down, completely controlled system, running on a zero-sum economic model made to produce one winner, and many losers.

 So What Is China?

There is nothing like it. It is a communist country that has fooled the West out of its money, and the West has been only too willing to go along for the ride. Now, as China’s other trading partners come in for the same rough treatment, it is becoming a global pariah, and its excuses and delays are increasingly falling on deaf ears.

What can its trading partners do to help bring China into compliance with global economic practice? Insist on actions, not words. Use tariffs when dumping, subsidies, or internal structural market blocs are the issues. Insist on justice where IP is involved. Do not disclose IP to China, under any circumstances. Stand up for your own rights and property; refuse to be bullied. If you can’t trade there, trade elsewhere. Make sure that goods made in China do not use slave labor, in one form or another. Make your goods somewhere else.

Instead of rewarding outrageous behavior, condemn it, in public.

Ask politicians and leaders espousing free-trade bills whether they have thought through the result of free trade in a rigged game, in which all of the cheapest goods and services are made by China? Stop shopping at Wal-Mart, a wholly-supplied Chinese distribution system.

Do not be shy about tariffs: it is the one thing that can go wrong for the Chinese economic model described here. If China stops buying our goods, what happens? Boeing takes a hit. (This was coming anyway.) If we stop buying Chinese goods, what happens? It would be the end of the Chinese model, and the Communist Party knows it.

Require fair trade; refuse extortion. Tell the truth about China’s tactics. Become an economic locovore, not just eating local food, but buying local goods and services.

Write, or share, letters like this one.

Mark Anderson predicts the year’s coming developments, from expanded home entertainment to voice recognition to new, lightweight netbooks

Read the article and watch the video.

I reminded Richard that the guys who run Google had not come up with the first big thing, i.e., they had not included online advertising in their first business plan, or in their original search technology.  Google was just the next in a long line of search engines.

So why would one expect them to come up with the next ? 

2. Yahoo stars, ditto.

3. MS disses Yahoo, calls off bid; Yahoo stock first ever to achieve negative numbers.

4. MS stock doubles.

5. Yahoo, now linked at the hip to Google and with a valueless stock, drifts aimlessly through the Saragasso Sea of No Strategy.

6. MS buys Google.  Gets Yahoo online revenues by contract as part of the deal for free .  Kevin Martin intervenes with the FTC and Justice Dept, insisting that no competition is good competition.

7.  Ballmer re-reads note from investment bank lawyer, “what about Google?”, wondering if he misinterpreted the message.