Why Bertelsmann failed in China

In mid-June, media transnational Bertelsmann AG announced that it would close all of its 36 bookstores across China (called Beijing 21st Century Book), by the end of July. Then at the end of June, the company further announced that it was closing down its book club business in China, administered under its Direct Group arm. Bertelsmann introduced the book club system to China in 1997 (according to the People’s Daily), whereby customers pay a flat fee for membership and discounts, and had eventually built up to a membership of 1.5 million. Despite this impressive number, the business was growing stagnant.

Why did Bertelsmann’s China business fail? Some people say it has to do with the prevalence of pirated books here. But obviously, people who hold this view have not caught on to the state of the book market in China nowadays.

I first got to know about Bertelsmann’s book club back during the 1990s from the monthly advertisements they put in “Readers” magazine. One of my classmates joined and would receive their catalog by mail every three months. Back then I was impressed by this new method of buying books by post, but more impressed by its strict requirement that it every member must buy at least one book each quarter or else a “recommended” book would be delivered instead that the member must pay for.

Several years later, the internet became more and more popular, and people started shopping online, including, of course, books. The first time I shopped for books online, I remembered Bertelsmann and visited its website. I was disappointed to find their selection much smaller than Dangdang or Joyo; moreover, the Chinese sites had more attractive discounts. Not long after that, I happened to go to Bertelsmann’s bookstore at the metro stop near me and couldn’t find any good books. After that, I pretty much stopped considering Bertelsmann altogether when shopping for books.

Bertelsmann continued opening bookstores around the country without realizing how greatly the internet would influence people’s shopping habits. People buy books on Dangdang and Joyo for its wide selection, low discounts, fast delivery, its payment-upon-receipt system, and freedom from any membership requirements like having to buy a book each month. Bertelsmann, by contrast, not only had a limited choice of books and poorer discounts, but it added another requirement last year that its platinum members had to spend RMB 299 per year or else be bumped down to a lower level. An understandable amendment, since the book club’s overhead is high, but nobody wants to be forced to spend money.

On top of all this, Bertelsmann book recommendations weren’t very good. Initially, I thought the recommendations in their catalogs were good. But in recent years, what they “recommend” in their shops and catalogs were too lowbrow – romance stories or pop stories about young people, written by young writers without any substantive thoughts and writing skills. The fans of these kinds of books are mostly students without any regular income, while the white-collar workers who are willing to spend money on books would consider them childish and cheesy.

The book club business is suffering in the US as well as China. Apparently Bertelsmann China is not the only business to get its local market wrong.

Claire Li 

Posted in Claire Li, Consumer | No Comments »

Economist speak or cluelessness

I came across this beautiful quote the other day in Michael Pettis’ Blog:

Needless to say 80% is a pretty high cost of funding, and almost certainly requires rising real estate prices in order to be economically viable. In case of an economic contraction or declining real estate prices, I would assume that a lot of these real estate developers would face severe debt-servicing difficulties. We discussed what would happen in the case of a default – besides the proverbial visit by the man with a baseball bat he suggested, with a completely straight face, it was also likely that one of your kids might be kidnapped.

This kind of collection process strikes me as a reasonably strong argument for lower default rates in the Chinese informal banking sector

I must say, I had heard Pettis and other economists talking about the “informal banking sector” several times previously, and I never put together that I should replace term “informal banking sector” with “the mob.” I’m not sure if that’s personal cluelessness (what else could it mean?) or whether other people had a similar problems.

The Economist recently had a piece on the Japanese pseudo-formal banking sector, which has recently become formalized to prevent life insurance+suicide equaling debt repayment…

God..

Posted in cib | 1 Comment »

The plastic bags are still here

It’s almost been one month since the government implemented new policies limiting the use of plastic bags, in order to reduce pollution. But as far as I can tell, it doesn’t seem to be having any effect yet.

I go to the supermarket almost every day and have noticed that most people still aren’t bringing their own shopping bag to the supermarket. While those who have only bought one or two items just carry their purchases by hand or put them into their handbags, those who have bought a lot seem perfectly happy to pay three to five jiao for a plastic bag. And since the supermarkets and shops can set the prices of plastic bags on their own, this policy seems suspect as it offers the shops a way to make some extra profit.

Plus, most people use the plastic bags they get from supermarkets as garbage bags. Now, they still use just as many garbage bags, only they have to pay for them now. What’s the point of that?

Asking consumers to start paying for plastic bags can’t really solve the pollution problem. Maybe it would be better to start using recycled paper bags. A garbage treatment scheme, too, would work better to help reduce pollution.

Claire Li 

Posted in Claire Li, Consumer, environment | 1 Comment »

I want to punch the American media in the face

I’ve never been able to understand why American newspapers can’t get decent journalists covering China. Though I suspect sometimes that the problem is with the editors. Either way a recent joke of an article from the New York Times is a textbook example of how American papers can’t seem to mull up decent journalism from their China bureaus.

The basic gist of the article, is that when China has legitimate trade grievances with America, those grievances are in fact clashes of economic systems, because the Chinese are spooky Communists. Though the word “Communist” is never used the term is not too deeply coded:

The Americans scolded the Chinese on mismanaging their economy, from state subsidies to foreign investment regulations to the valuation of their currency. Your economic system, the Americans strongly implied, should look a lot more like ours.But in recent weeks, the fingers have been wagging in the other direction. Senior Chinese officials are publicly and loudly rebuking the Americans on their handling of the economy and defending their own more assertive style of regulation. (my italics)  

Their argument though about this clash of economies seems to hinge on selective quoting, and bad interpretation of official statements. The most hilarious example of selective quoting being:

Song Hongbing, author of “The Currency War,” a best-selling if conspiratorial book  

essentially admitting that he was a bad choice for quoting. The second example is a bit more nuanced:

Some economists say it has improved its state-owned banking system by writing off bad debt and overhauling management even as it rejected American pressure to privatize banks and allow unfettered competition in the financial sector. Its financial system is more tightly regulated and less dynamic than the American one, but also more stable, Chinese economists argue. (my italics)  

Tragically, these anonymous Chinese economists tricked both the New York Times and the Economist, into thinking they speak for the entirety of the Chinese economists… I talk to a lot of economists, Chinese and Western, and I have yet to run across one who thought that the Chinese financial system is stable. The Chinese financial system is rather too unstable to liberalize quickly. Meaning that if I were writing this article

Its financial system is more tightly regulated and less dynamic than the American one, but also more stable, Chinese economists argue.  

would be replaced with

 Its financial system is more tightly regulated and less dynamic than the American one, but it must liberalize slowly in order to remain stable, economists argue.  

Towards the end of the article they quote a few people who dismiss the entire angle of their article as hogwash, and say that Chinese statements about America are just airing of grievances between trading partners… these quotes are from such people as the Secretary of the Treasury

“We’ve had a relationship where both sides have been pretty frank privately and pretty frank publicly,” Mr. Paulson said in a telephone interview in Washington. He said China’s criticism of American policies grew out of its rise as an economic power, with greater voice in global discussions on trade, currency and the flow of capital.Nicholas R. Lardy, a China expert at the Peterson Institute for International Economics in Washington, said in an interview that “the Chinese are reacting adversely, and I think with some justification.”  

Only to end the article with a small point about the maintenance of American hegemony, as though trade were about gigantic power struggles, and not about just making money.Lou Dobbs also recently had a show about China… but I doubt that’s even worth my time.Bradley Gardner

Posted in Finance, economy, Bradley Gardner | 2 Comments »

Kevin Rudd believes he’s superman

Kevin Rudd is trying to seriously organize a pan-Asian free trade/security agreement (the word EU is bandied around quite a bit in the article), which would include such assorted groups as ASEAN, Japan, India, Indonesia, China, and… the US??? The organization look like it would be more focused on security than the economy, and in that way is a lovely counter to John Howard and Shinzo Abe’s “encirclement” plan, which was seriously idiotic. But in my opinion the chance of having serious co-governmental cooperation between these countries is lower than the chance of Obama having tea with the KKK (it’s hard to think of a good kooky metaphor for international political situations).

Nevertheless, its a call to move in the right direction, and it backs up my general feeling that Kevin Rudd is rather visionary towards Asian issues. I’ve heard bad things about his domestic economic policies, but I’m not Australian so I really couldn’t give a damn about that.

BG

Posted in economy, Bradley Gardner, politics | No Comments »

Vodka and illegal currency

I just discovered that the little shop I go to right outside the Russian embassy for cheap vodka and Western food is also an illegal currency exchange shop. Now I’m not saying that I did anything illegal, but I will say that they give fairly good rates (7 to the dollar, against a current mid-range trading price of 6.94), and you can get Japanese beer for only 6 kuai.

BG

Posted in Finance, Bradley Gardner | No Comments »

Ready your Portfolio

the China International Business: Portfolio website should be launching tomorrow. A subset of the magazine that will be first online, concentrating on breaking stock market news and analysis.

It’s my modest effort to make Chinese companies think about something like accountability.

Check tomorrow for more updates.

BG

Posted in Bradley Gardner, cib | No Comments »

Hucksters, Snake oil salesmen, and general forms of hornswaggling…

I was at the China International Capital Market Forum last Saturday, an about 75% very interesting conference, with many speakers who I’ve wanted to hear speak for a long time (I thought I liked Louis Kuijs, the head economist for the World Bank in Beijing, the best, but then I found out how much better Tarhan Feyzioglu, the resident representative for the IMF in Beijing, was!). Anyways, the final presentation, by a Mr. Joe DiNapoli, made me wonder if just sounding like a huckster means that you actually are a huckster.

Joe DiNapoli was described on the program as

“a veteran trader with over 40 years of solid market trading experience. Joe’s exhaustive investigations into displaced moving averages, his creation of the proprietary Oscillator Predictor and MACD predictor, and in particular, his practical and unique method of applying Fibonacci ratios to the price axis, makes him one of today’s most sought after experts… Joe continues to develop and deploy ‘high accuracy’ trading methods, using a combination of leading and lagging indicators in unique and innovative ways.”

So its obvious what he does, right? Oh… that’s not obvious at all is it… well let me translate it out of financial speak for you. After his presentation, I learned that what the program meant to say was:

Joe DiNapoli knows magic!

The guy is an expert on technical analysis, an investment strategy that claims to be able to tell the future direction of the market based on past prices. The problem with this theory is that it contradicts the “efficient market hypothesis” (past performance is no indication of future performance), which also happens to be the basis of modern economics. I refer you to wikipedia:

Technical analysis is widely used among traders and financial professionals, but is considered in academia to be pseudoscience^[2] or “voodoo finance;” it receives little or no direct support from academic sources and is considered akin to “astrology.”^[3] Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the generally-accepted efficient market hypothesis.^[4][5] Economist Burton Malkiel argues, “Technical analysis is an anathema to the academic world.” He further argues that under the weak form of the efficient market hypothesis, “…you cannot predict future stock prices from past stock prices.”^[6]

Now to be fair to Mr. DiNapoli, he did mention that technical analysis is controversial, but that it’s common practice (which implies, if all traders trade on similar principles, then there is something of a self fulfilling prophesy to some of these numbers). And he did also mention that 75% of technical analysis is total nonsense, while 15% is partial nonsense (I’m assuming though that his work is in the other 10%). But his hair definitely reinforced my belief that the man is a huckster…

Big hair, pony-tail, trades from Bangkok for chrissake. Talked heavily like he was trying to sell something, and the Chinese guy who worked for his company that was in a roundtable discussion later, would never directly answer a question, but just start predicting the stock market years in advance.

The man seems to have people listening to him, and seem to have some credibility, even if its credibility in a pseudo-science. But he talked and looked like a used-car salesman, with the following of a cult leader.

And he was talking to some of the most important financial people in China…

Sigh…

Bradley Gardner

Posted in Finance, Bradley Gardner | 4 Comments »

Earthquake public relations

While I’m usually quite favorable towards the Economist’s editorial position on China, a “former China journalist” working on their Europe blog seems to have a bad sense of the nuances of 30,000 people dying.

If China had a free domestic press, and something approaching a political opposition, might this not be closer to China’s Hurricane Katrina? True, the government reacted swiftly, but why did so many buildings fall down? Why is so much infrastructure in such a bad way, especially in ethnic minority areas of Sichuan? This is a country that sends men into space, and is preparing to host a show-off Olympics. Yet incompetence, corruption, or cut corners mean that building codes are ignored across China’s hinterland.

The reason why China is getting good coverage, even in international not censored press, is because 30,000 people are dead, and the Chinese government has mobilized every possible resource to prevent the body count from rising. In these situations to start placing blame for something before all the people are pulled from the rubble makes you sound petty and political. The difference with Hurricane Katrina is that Bush ignored a rising body count and then preceded to play politics with the issue, the exact opposite of what China is doing.

As the urgency of the rescue efforts begins to cool down more and more news is coming out about how the problem was drastically multiplied by corruption and cutting corners. That we know of so far three high level officials have lost their careers over this, and one could imagine more drastic things in the near future.

China has finally learned two strong principle of Western PR, the more you talk to the press the better press coverage you get, and that strong positive responses leave little room for criticism.

Bradley Gardner

Posted in PR, Bradley Gardner | No Comments »

Adventures in oriental finance

The economist has an excellent article this week that touches on the myriad problems in the Chinese financial sector:

Hank Paulson, America’s treasury secretary, was not just talking America’s book when he said that opening the Chinese financial system is “absolutely necessary” for China’s own long-term economic success. It would not only provide greater equilibrium to global capital flows, but would also bring more efficiency to China’s industry. Already, manufacturing firms in southern China are struggling to cope with the rising yuan, because there is no currency-futures market for hedging.

Similarly, Chinese firms are forced into inefficient financing arrangements. They can borrow from state-controlled banks at rising rates that may have little to do with their own creditworthiness, let alone what they plan to do with the money. Alternatively, they can join a long, bureaucratic queue to issue shares. Even the largest ones still rely on the state for permission to raise capital: Ping An, the second-largest insurer, recently pulled a vast secondary share offering after what was believed to be a quiet word from the authorities.

A state-driven financial market means state firms tend to do best. Financing for start-ups remains largely informal—loans from friends outside the financial (and tax) system—which stifles entrepreneurship. Worst of all, today’s system provides a truly rotten deal for Chinese citizens trying to put away money for retirement, for their children’s education or other personal needs. They are given a bleak choice of subsidising the financial system through deposits yielding less than inflation or speculating on highly volatile shares.

The only major disagreement I have with the article is its backing of Paulson’s stance on the currency. Paulson puts the opening of the capital account fairly high up on the “to do list” of Chinese financial reforms, whereas it seems to me that that jolts linked with moving to a freely convertible currency would wreak havoc on what is already a weak financial system.

While I’m personally very concerned that the current muck will slow reforms to a standstill, assuming things pick up again I still am guessing 10-15 years before there is direct trading of the RMB. The government would have to have a little more of a stomach for risk, which I think would require a turn around in demographics (less excess labor, which is happening right now), full-to-majority privatization of major banks (particularly ICBC and CCB, I’m not at all optimistic about ABC), and the full development of the capital markets (short selling needs to be introduced as soon as possible).

None of those things will happen any time soon.

Bradley Gardner

Posted in Finance, Bradley Gardner | 1 Comment »