He was not a perfect person

FIrst off, and just to clear the discussion, Steve Jobs was clearly not a perfect person. He had many issues. He was a jerk a lot of the time, to a lot of people. He liberally took credit for other people’s ideas. If you hated him before, the book will not change your opinion of the man.

But he also had many strengths. He was a natural marketer and negotiator. He was diligent, and learnt through his failures to be a great manager. And of course he was a visionary, in the truest sense of the word. This discussion, however, is not about how much I admire him (or not), but what I took away as key lessons from his endeavors.

“Open” and “Closed” are both valid choices

One of the most straightforward take-aways from Jobs’ work in the past 10 years is that vertical integration remains a valid business model. Tech fans like to frame this debate as “Open” versus “Closed”, and associate all kinds of philosophical and ideological meaning with it; and clearly Jobs himself had some ideological bias towards “Closed”, but at the end of the day, they are both perfectly valid business choices.

As my favorite business school professor likes to say, no company is 100% “open”, nor is any company 100% “closed”. “Open” and “closed” are a set of strategic trade-offs, just like any strategic decision is. For Apple, “opening” up their platform, such as allowing other hardware vendors to make Mac clones (or iOS clones), clearly has major pros as well as cons. The question is does the trade-off fit with the broader set of strategic choices the company has made – in Apple’s case, “opening” its software platforms clearly contradicts with its vertical integration strategy, and causes it more harm than benefits.

Even Apple itself provides a great example of why sometimes it might make sense to go the other direction. Jobs strongly resisted porting iTunes to the Windows platform. His argument was that by bundling iPods with Macs via the iTunes software, he could lead to additional sales of Macs. This argument had some merit, but it also was clearly inhibiting the growth of iPods as an individual product category. In the end, Jobs was smart enough to be pragmatic and allow his team to develop iTunes for Windows – “hell froze over,” as he would say.

This pragmatism, and the realization of “open” and “closed” as trade-offs (rather than which is better in an absolute sense), is extremely important, as an organization would otherwise be limiting its own strategic direction. For example, we should not be at all surprised if after the Google-Motorola deal is complete that Android becomes a much more “closed” offering.

The (revised) 80/20 rule – the 20% that makes a product “insanely great” takes 80% of the time[1]

One of my main revelations from the biography was just how hard it was to get something perfect. For example, it was a ridiculous amount of work for Steve Jobs to get the music labels onboard with selling their music on the iTunes store, and this had little direct relationship with the sales of iPod hardware. But Jobs believed, correctly, that making the entire user experience with mp3s as painless as possible would reap great rewards in the long run.

It was certainly eye-opening to me to see how difficult it can be sometimes to make progress on the smallest things. To execute against a simple strategy, such as “get publishers to launch their books and magazines on the iPad,” it took Jobs and his senior team countless pitches and meetings.

As most companies don’t spend the 80% of work it takes to get that last 20% right, they often look at what Apple has been pulling off and see magic while showing disbelief. That was the industry’s reaction when Jobs pulled off the music label deals for iTunes. That was the industry’s reaction when he announced the iPhone. And clearly, almost two years after the iPad was announced, competitors are still “flummoxed” in terms of a response.

Focus is key

A corollary of the previous point is that focus is critical. (Larry Page should take the advice that Steve Jobs offered him very seriously – focus on five products.) From a management theory perspective, this is nothing new, but few organizations are as relentless as Apple is at its execution.

Apple’s entire product portfolio can be laid out on one table. It is only because of this, that Apple’s senior management can have enough time to make each one of those products great as opposed to good.

On the flip side, the inability to focus is also why incumbents give startups opportunities to establish a foothold in the market. For example, from a pure strategy perspective, there are few reasons why Facebook cannot completely own the mobile check-in space (Foursquare), or the daily deal space (Groupon), or any of the other hot social trends. Or, in the case of Google, why they cannot completely shut out Kayak, Yelp, or any other vertical search providers. Yet both Facebook and Google clearly haven’t been able to do so. Leaving aside many other factors, the 80/20 rule above is one major explanation.

If Facebook focused exclusively on check-ins, or if Google focused exclusively on one or two search verticals, there would be little that these hot startups can leverage to compete. But focus is hard because it means saying no to incremental growth opportunities and leaving money on the table. And when a company feels it is invincible it is hard to say no. It took Steve Jobs ten years in the “wilderness” and Apple 90 days from bankruptcy to realize how valuable having a focus is.

The organization is his greatest legacy

The last revelation I had from reading the book is still to be proven, but it could be the most profound. During Jobs’ second stint at Apple, he had a clear vision that went beyond building great products and making Apple the best technology company globally; he wanted to build a lasting organization.

Ironically, one of the biggest criticisms that people have for Apple is that it is a one-man show. And over the years investors have continually undervalued the stock because of this. Steve Jobs certainly didn’t help himself in this regard, due to his inclination to take credit (as the book showed, Jony Ive was at times deeply unhappy about not getting enough credit). But consequentially this may also make it all the more magical when people realize what a lasting organization he has built.

What is magical about Apple is not its products. Its products are the output of a process, and it is that process (and the organization which embodies it) that is magical.

Wait, critics of Apple say, just wait until it has a flop – Apple is so hit-driven that all it takes is one flop. Interestingly, people said the exact same of that other Steve Jobs creation – Pixar. Pixar has defied all conventional wisdom in the film-making industry, by making hit after hit after hit after hit[2]. Pixar’s process of creating its products has already become textbook material.

Apple’s process is just as powerful. It is a process that defies conventional business thinking (“open” trumps “closed”?); it is a process that combines a passion for perfection with a relentless focus; and it is a process that goes beyond the influence of any individual[3].

Obviously, the jury is still out on this one, but I have plenty of confidence that Apple will continue to surprise and delight us, for many years to come. This will be the biggest test of Jobs, and it will be by far his biggest legacy.

First, Google, not Apple, should be very, very concerned about this development. Amazon has basically taken Google’s engineering resources / output and said “thank you for your free work, we’ll take it from here.” How many times did Amazon mention Android in the device description? Does the device look at all like an Android device? Does it offer any Google services by default? Will Google have to pay to be the default search on a tablet that was designed using Google software (think about the irony in that)?

Second, this leaves most other tablet vendors still scratching their heads about what to do, and this is the best example of asymmetrical competition. I would elaborate, but John Gruber had this excellent paragraph from his post that sums is nicely already:

Attack from a position of strength. Build on your previous successes. That’s what Apple does. That’s what Amazon is doing here. The other guys — the Samsungs, HTCs, Motorolas, RIMs — can’t match Apple’s hardware design, don’t even try to match Apple in terms of original and differentiated software, and struggle to match Apple’s prices because they don’t have the economy of scale advantages Apple does. Those guys can’t match Amazon either, because they have no content to sell. Amazon can give away the razor because they’re already in the business of selling blades. The other guys don’t even have blades to sell.

For one thing, if hardware vendors and distribution partners find consumer interest lacking, Google will have to sweeten the incentives for them to keep churning out hardware and pushing it through retail. Pogue’s review does a very good job summarizing the current issues with the offering, which will likely tank sales; the bigger question is whether Google’s philosophy and vision with Chrome can materialize in the broader ecosystem – that is, a browser as the OS paradigm of computing. This seems quaintly a very desktop centric view of the world; with all kinds of mobile devices gaining broad adoption, why should we continue to expect the browser at front and center of how consumers access the Internet?

There is no destined outcome in terms of the “native” versus. “browser” “war”; this is dependent on how the players in each camp fight for ecosystem support and consumer adoption. And that’s where Google’s own hedge against Chrome – Android – is the second major factor against Chromebook’s potential. The managers running Android and Chrome will probably characterize their respective businesses as in a “friendly competition”; however, when they are competing in anything from internal engineering resources, corporate budgets, to external hardware partners and developer support, it shouldn’t be a big surprise that outsiders will see a lot of conflicted messages, and therefore question the strategy.

Count me a skeptic.

It’s true that Google has a strategy of commoditizing adjacent markets to turn them into ad-based businesses, which falls into its sweet spot. Many of Google’s most successful products besides its core search are of this nature: email, maps etc. GIving away Android for free is certainly commoditizing the mobile handset market: of the 300k daily activation number which Google touts, people speculate a large portion are what analysts traditionally call “unbranded” or “other” phones. In general this conforms to Google’s strategy; however, the flaw here is that in my view Android is disrupting other branded manufacturers like Nokia / Samsung / Motorola far more than it is challenging Apple and iOS devices. In other words, it may appear that Android is mainly a counter to the iPhone, but in reality it is killing Apple’s main branded competitors.

Allow me to expand on this point, because it probably appears counter-intuitive. Before Android powered smartphones hit the market, Apple was certainly in a league of its own with the iPhone. While it was rapidly capturing share of device profits (the famous 5% unit volume – 40% profit share charts), the incumbent device brands – Nokia et al. – still had the comfortable mid to low end market volumes, which would give them time to develop competing OSes. Now along comes Android, which, while it gave them a quick boost in terms of time to market of credible iOS challenger devices, also opened the floodgates to a whole range of unbranded competitors. These new comers – Huawei, ZTE etc. – play the same volume game as Nokia / Samsung et al. And we know so far Samsung / Motorola have not drastically reversed their financial performance thanks to Android – so what’s the next possible scenario? Would it be possible they continue to slip in unit volume, and be weakened further at the onslaught of the Android clones?

At the same time, I think Apple is sufficiently differentiated from the unbranded players  in terms of value propositions (very different consumer segments), so the Android clones do not pose a significant threat to Apple.

The flaw here is that Google did not limit who could use Android – a complete lack of platform control. If Google’s strategy does indeed include undermining Apple, it should have limited Android to a handful of brands, so they could compete effectively with Apple. Furthermore, I would also argue that Apple’s primary issue currently is not Android, but its own supply chain and distribution restrictions (e.g. AT&T exclusivity). The big fanfare of Android activation numbers have done little to stop iPhone stockouts all over the world – in China where the iPhone 4 is obscenely priced, supply is still tight. Admittedly I don’t have conclusive data on iPhone supply constraints – but if we take this assumption as true (and there are certainly indicators and proxies in favor of this), it would show that Android has done very little to halt Apple, and is causing far more headaches to Samsung etc.

The second fundamental flaw is that going back to the original strategy, carriers still stand in the way of Google’s profit realization, if and when the mobile devices are completely commoditized (the death of Apple and RIM). Mobile network operators have far greater influence over consumers than wireline operators – in most cases, people choose a mobile operator first before choosing a handset (Apple being the prime exception / disruption), whereas you choices over which wireline operator and which computer brand to buy are completely separate decisions. Because mobile operators “own” the consumers, market power dynamics dictate that Google cannot expect to extract substantial profits. I know this sounds abstract, but until Google can demonstrate to operators that “I can make your customers leave you for another operator”, operators could and should squeeze mobile advertising profits out of Google. Again, Google’s lack of control expedites this – Verizon can sign up Bing as the default search on its phones etc, but there also are many other ways to play this profit squeezing game.

Of course, Google could hope for a “Wintel”-like end-game, where they dominate the OS space and split the spoils with the operators; but operators can foreclose that outcome by actively playing one OS off another. I’m sure strategists at the operators are already plotting this out, and I wouldn’t be surprised if Nokia, which has long been an outsider to the US market, is called in by the operators to facilitate a bigger and better OS war.

Personally, I believe that on so many layers, this topic is really a non-topic. It provides entertainment value, no doubt, in the form of daily tech soap opera (bloggers jumping on every new data point released and typically extrapolating it beyond meaningfulness to arrive at flame-bait headlines). But from an industry analysis point of view, or a company analysis point of view (scrutinizing Apple / Google), the market share comparisons are really just one data point – it’s meaningful, but certainly not to the degree that the blogosphere claims it to be. Apple’s future is not in jeopardy if iPhone loses pole position to Android.

Over at Wired, Fred Vogelstein takes a crack at this topic. His main point is that if you sum up all the iOS devices (iPhone, iPod Touch, iPad), they are still outselling Android, by as much as 42%. While this may be encouraging to the Apple camp, there is no reason we can expect this to hold, especially when other Android powered devices (e.g. Android tablets) eventually hit the market.

I don’t have any doubt that Android devices will outsell iOS devices. If it hasn’t happened already, it will happen soon. There is no reason to believe an OS from a premium manufacturer (Apple) with an extremely limited range of SKUs can outsell, on a pure volume basis, an OS that is free to use and which is backed by some of the biggest consumer electronics companies in the world. On a dollar value basis, it might be a different story, but still not that likely. On a dollars of profit generated basis though, highly possible (Apple generates more profit than rest of mobile industry combined, with only 3% unit volume share).

That said, the main reason people are obsessed with these market share numbers seem to be the underlying assumption that iPhone and its eco-system will lose its draw to developers, and by extension to consumers, if it is relegated to a minority market share. I think there are at least a couple of counter-arguments to make here.

First of all, being the minority market share platform does not translate into a lack of quality apps, to the extent that it will hamper mass-premium consumers’ (Apple’s core segment) interest in the platform. For example, if you flip the argument over the number of apps in the Android vs. iPhone app stores on its head, you may well say that even though Android has a smaller number of apps, the eco-system is already sizable enough, so that for any functionality there will be “an app for that”. Another example would be none other than Macs – what’s the market share that Mac OS holds in all personal computers? Single digits? Do mainstream Mac users complain about the lack of quality apps (note the emphasis on mainstream – specific categories like hardcore gaming is lacking on the Mac, but even that is seeing improvement)? Holding these two examples, I would argue that with the developer community Apple has already amassed, it would be hard to foresee a drastic dying out of quality apps, even if Android floods the market.

Secondly, if you take a step back and look at the broader trend in computing, it is definitely headed in the direction of platform-agnostic. Some tech purists would even decry the whole notion of apps – everything should be realized on the browser, over the web. If you look at the desktop space, there is indeed the trend of “fat” clients (local apps) losing out to “thin” clients. Indeed, Google is perhaps one of the biggest proponents of this – its whole challenge to Microsoft is based on the browser. If we believe that the same trend will apply to mobile devices, then the apps craze we are experiencing really is just a transition phase – at some point, most of the apps you want would be delivered to you on the browser, as opposed to an app you download (again, Google’s Gmail mobile version on the browser is arguably better than Apple’s Mail app). And let’s give credit where credit is due – when Apple launched the iPhone in 2007, Steve Jobs’ initial vision was to have web apps (browser-based apps) instead of local apps. The app SDK and the app store only came out a year later, due to popular demand. (So you could say that Jobs had already envisioned an end-game where the browser was the point of delivery for apps, not the app store – his vision was perhaps just ahead of its time.)

If you sum these two arguments together, the bigger point is that iPhone will not lose its richness of apps in the face of Android capturing majority market share – it’s big enough already of a market so that there will be quality apps developed, and apps will be platform-agnostic anyway down the road. As long as Apple continue to bring innovation to its devices, it should not be overly worried about losing market share leadership – its whole strategy is founded on premium products, which implies that it won’t be market leader from a revenue / volume perspective. That’s why I wrote the headline of this post.

PS: Also, for people who continually say this will be a rerun of Apple vs. Windows in the 80s, please pause for a moment and reflect on the Mac’s continual resurgence over the last decade. This is again very indicative of the broader trend. In other words, one could almost claim that the “network effects” so famously championed by Wintel is close to becoming irrelevant, because the Internet has leveled the playing field for the small market share OSes.

PS2: And even if we are to talk of the platform wars of the 80s, we should get the facts straight. The following is my reply on a Quora question (similar topic really) awhile back:

First of all, it’s not really windows vs. mac, but PC vs. Mac. I would say by the time windows 3.0 came out, the platform war between PCs and Macs (at least the first war, not including Mac’s resurgence in recent years) was already over.

If you look at this article on Ars Technica, http://arstechnica.com/old/conte…
as early as 1986 PCs already had over 50% market share of computers, and it over-took the mac platform’s shares a few years before that. So in that sense, there never was a windows:mac war, at least not until very recently.

I think one key distinction between the platform wars of the 80s and android:iPhone is that in the 80s it was primarily driven by b2b, not b2c. IBM was late to the personal computers space, but they were the driving force behind making personal computers legitimate for business – they could go to a sales pitch with a business client with a perhaps inferior product but still sell it, and they could generate serious developer interest in developing for the PC. The killer apps of the 80s were spreadsheets and word-processors, sold to businesses. Apple could have better versions of such products on macs, but they couldn’t sell to businesses as quickly as IBM and clones like Compaq could, which is dictated by company structure and channel strategy – they are positioned as a consumer products company, and the only verticals where they made serious progress were education and publishing (where their products were clearly far far superior). That’s where the network effect kicked in and made Macs a niche.

Flash forward 25 years, and smartphone adoption is primarily driven by consumers, not businesses (blackberries being the exception). This is in Apple’s core area of expertise. It will still be challenging to fend off a group of competitors’ collective efforts (Samsung, HTC etc.), but as long as Apple retain a significant portion of the market, it will be in good shape. Apple doesn’t need to be market leader to be hugely profitable and have a sizable eco-system of 3rd party apps etc. – just look at macs today, as a general consumer you have majority of the apps you need to be happy with it (games being one major exception, which is also therefore a good business opportunity).

So back to your original question, I’d say Android:iPhone will play out very differently compared to Windows:Mac. Android might still end up with a more market share, but iPhone will have enough share and a big enough eco-system so that Apple won’t have to go through the kind of existential challenge it had back in the mid 90s.

Global media attention over Foxconn Technology Group (PINK: FXCNY | (part of Hon Hai Precision Industry Co. Ltd.) TPE: 2317) has gradually subsided, after the company aggressively raised wages and efforts at curbing the suicides have taken effect. Foxconn management hasn’t stopped adjusting their strategy though. Xinhua News Agencyreports (link in Chinese) on June 25 that Foxconn has offloaded the management of its employee dormitories in Shenzhen to two local property management companies.

According to Xinhua, Foxconn employs 450,000 people in Shenzhen, of which 220,000 live in company dormitories, and 230,000 live in rental housing near the production facilities. By exiting the management of the dormitories, Foxconn has largely relieved itself of the responsibility of any future suicides at these dormitories. Foxconn is clearly in the process of reversing its prior strategy of providing a closed environment for workers – its sites are basically self-contained towns, complete with dormitories and recreational facilities.

Another Chinese newspaper, Economic Observer, also has an interesting article (link in Chinese) on Foxconn’s two wage hikes. The article claims that the first hike, raising Foxconn’s mainland China employees’ wages from RMB 900 (US$132) to RMB 1,200 (US$177) per month, was largely planned to match the anticipated minimum wage increase of the Shenzhen government – in other words, this hike had been in planning for some time, and it was not originally in response to the suicides, but Foxconn made the most of it PR-wise.

What was really surprising though, was the second wage hike just a few days later, from RMB 1,200 (US$177) to RMB 2,000 (US$295), this time specifically for Shenzhen employees. According to the reporters’ sources, this decision was made by Chairman Terry Gou individually, and had not gone through senior management discussion. The thinking behind the move is threefold:

1. First of all, Gou does indeed plan to move production away from Shenzhen and to cheaper locations inland – it is rumored that he will only keep the Apple production site (employing less than 100,000 people) in Shenzhen, and move the whole production of mobile handsets (non-Apple brands) elsewhere. Therefore, the impact of the hike is much more limited compared to if Foxconn would maintain its current scale in Shenzhen.
2. Secondly, Foxconn is trying to maximize its short-term opportunity to re-negotiate contracts / pricing with its clients, thanks to the high profile suicides which is putting pressure on these high profile global brands. The second wage hike would therefore serve as an additional bargaining chip at the table, again from a PR perspective.
3. Third and perhaps most importantly, the hike is an aggressive strike at Foxconn’s major competitors. Foxconn has the financial muscle and the scale to quickly relocate, but many of its competitors are concentrated in the Pearl River Delta region. Foxconn’s second wage hike has started a chain reaction where workers are demanding higher wages, thereby dealing a heavy blow to competitors. As we’ve already discussed in a previous post, economists are speculating whether the end of the Pearl River Delta’s traditional growth engine – low cost labor – is here. Foxconn is in a position to accelerate this macroeconomic shift, to its own benefit.

Still, the second wage hike is a bold gamble. It’s clear that Terry Gou is aggressively reassessing his firm’s strategy to maintain its leadership position in electronics manufacturing. Perhaps an even bigger question is, should Foxconn try to move up the value chain, and try building its own end-customer brand, the same way HTC has reshaped its corporate strategy? Otherwise the company seems likely to always face the issue of razor-thin margins, which would prompt it to try to squeeze its labor force as much as possible – this is perhaps the root of its struggle.

I think when people talk about Amazon Kindle’s competitive position in the market, they usually compare it to two distinct set of competitors:

1. “Direct” competitors, such as Barnes & Noble’s Nook, the upcoming Borders Kobo, Sony’s eReaders etc. The device play is a single-purpose device, hence directly competing with Kindle hardware.
2. “In-direct” competitors, such as Apple’s iPad, and other future tablet devices. These competitors are in some sense “in-direct”, in that reading is just one of many key features, and Amazon can utilize them by providing Kindle apps, which to a large extent nullifies their threat and turns them into distribution channels.

If I may, Amazon’s competitive advantages against these competitors are usually seen as follows, in no particular order:

• Brand power and experience in online retail.
• First mover in driving e-books adoption, and hence enjoys higher market awareness as well as being further along on the learning curve compared to competitors.
• Specifically against the iPad and iBooks, a much better book selection.
• Again perhaps specifically against iBooks, cross-platform availability – PCs, Macs, other mobile devices. Or as some people say, Amazon gets it that it’s not about selling devices, but selling books.

I think people often discard brick and mortar players straight away (“what do they know about digital?”, “they are late to the game”), and then only focus on comparing Amazon and Apple. Probably most people in tech would see iPad as the Kindle’s biggest threat, and in that comparison, Amazon’s “it’s about selling books, not selling devices” mentality clearly gives people confidence in picking them as winners.

Frankly, my biggest concern with Apple in the e-book wars is how much organizational will they have in competing. How serious are they about it? After all, it is just one of many functions. If they are dead serious about it, they can do the following:

• They will probably catch up in the size of the catalog;
• they can definitely make a better user experience, by merit of tight hardware / software integration and far superior application experience;
• They can also try to catch up in making iBooks available cross-platform, which is actually quite straightforward technology-wise since they use the ePub book format, so if the publishers allow it your books purchased in iBooks should be able to be viewed on any ePub reader on any platform – obviously this is the ideal world and there will be plenty of challenges;
• And they can probably make “shady” moves like what they are doing with iAds – block Amazon as it is not an “independent” retailer, in the same way they are attempting to block AdMob because it’s not an “independent” ad network. I’m not suggesting I agree with this last tactic, but if they do something like that it becomes an aggressive device versus device play, which at the current sales rate, the iPad would have a far bigger installed base.

So it seems there’s plenty of strategies and tactics for Apple. Again, my biggest doubt is whether they have the bandwidth and the interest to compete with Amazon.

What about the brick and mortar guys? Well, interestingly there’s plenty of options here too, upon doing some research (frankly, I’ve ignored the Nook completely since its launch). I’ll focus specifically on Barnes & Noble, since in terms of market awareness they seem to be the most serious competitor to Amazon from the physical retail side. What are its competitive advantages, if any?

• Perhaps surprisingly, more innovative features, such as the ability to lend a book to your friends (though severely limited, most likely due to publishers), and free in-store reading, to name a few. Obviously these aren’t killer features – yet – but they suggest that at least the Nook team is trying new ideas and not just playing catch up.
• Physical retail presence. On the one hand, Kindle’s adoption has been severely limited by its lack of physical retail presence (which Amazon is finally addressing by moving into Target); on the other hand, B&N can seriously leverage its retail stores to sell Nooks – directly to the device’s target consumers. This is something that Amazon cannot easily match, and if done right, is a huge marketing vehicle – the obvious case study is how Apple uses retail.
• Supporting the open ePub format. A huge fuss was made over this at the Nook’s initial launch – and while it might not matter that much yet (and plenty of proprietary formats have market dominance – e.g. Microsoft Office, or Adobe Flash), it is at least ammunition for marketing, and in the long run, the format wars may actually mean something (more on this later).
• E-book retail experience through the Fictionwise acquisition. Fictionwise has probably been in the e-books business longer than Amazon, and prior to their acquisition was one of the largest independent e-book retailers. The Fictionwise team at least inspires some confidence in B&N’s capabilities in software and all things technology, and may bring them even deeper insight in the market landscape than competitors. And of course, Fictionwise understands how to support multiple platforms and have done so for a long time (much longer than Amazon in this regard? Since the Kindle for Mac app only came out recently) – it seems B&N needs to market this point a lot more.
• Brand recognition. Sure, Amazon is one of the top brand in mind when it comes to online retail, but for book lovers B&N probably means a lot too – especially for mass-market to late stage adopters.

So I would say that from these points, B&N is at least a legitimate contender. Sure, they are playing catch up, and they are currently stumbling on execution somewhat (just from what I’ve casually read), but I wouldn’t discard them that easily. Two minor data points for consideration: the first is the somewhat suspect report from DigiTimes that Nook shipped more units than Kindle in March (via Crunchgear); and the second is the fact that they have released four firmware updates in roughly half a year – of course it means patching up lots of bugs, but you can also read it as the team being snappy and energetic about refining the user experience and adding features. Amazon on the other hand has been somewhat slow (at least in my personal feeling) in rolling out cross platform applications (Kindle for Mac seemed to take forever) and updating the device with new software features – of course, this is just based on my anecdotal experience.

Fundamentally, my problem with claiming “Amazon will eventually win” is that e-books are really just going through early adoption (and perhaps reaching the first stage of mass adoption), and there are still plenty of big problems that nobody has figured out yet. For example:

• Technology wise, how do you address the use case of lending books? How can I lend you the book I bought on iBooks to your Nook? And it’s not just personal to personal lending, but even more importantly, how do libraries shift to e-books – how do they manage their database and support myriad devices? Would the format wars have a huge implication here? I’ve read somewhere someone comparing Amazon’s azw format to Betamax and ePub to VHS – I don’t think it necessarily holds, but it does highlight potential issues.
• Business wise, what are the differentiating factors for e-book retailing, besides price and availability (catalog size and cross-platform support)? If we compare this to the evolution of physical retail, obviously we are at a very early stage: right now players are mainly competing on price and availability, which is perhaps similar to the early days of retail, where the player that had better distribution won – simply because its consumers could access its products. Surely there is vast unexplored space in how to create differentiated shopping experiences.
• What is the function of current physical retail space, when more and more books are consumed digitally? Will players like B&N simply close its shops, or is there room for transforming the stores of physical bookshelves into socialized book shopping hubs (tied to the previous point)? Are there any other functions they could play?
• Also, from an industry value chain perspective, are there alternative models with potential to disrupt? For example, currently players pursue a hardware + software strategy; would we see the rise of independent device makers that can support any e-book retailer (not just multi-purpose devices through apps)? Would we see specialist application developers that support multiple retailers and offer a superior user experience?
• Moving further up the value chain, how do e-books dis-intermediate publishers? Amazon and Apple already support self publishing; it’s not too far-fetched to see them as replacing traditional publishers completely in future. If that happens, we would see a lot more exclusives – e.g. one author’s books are only available on Kindle, another one only on iBooks. And combining this with the previous point, can we envision specialist device makers as the new “retailers” and the Amazon et al as the new “publishers”? Conversely, the existing traditional publishers can obviously step into this role themselves and retain their position in the value chain – if Amazon, Apple and B&N all become cross-platform, it ironically opens up the door for exclusive deals, since the consumers can still get the books they want on their devices, just from different retailers for different books. This is just one of many potential ways retailers can differentiate.

Looking at these open questions, I think it’s safe to say that this market still has a long, long way to go. I do not challenge that Amazon is the leader in this space currently, but I dare say the market is still up for grabs, and different competitors bring different competitive advantages to the table. Amazon is certainly well positioned – hence the conservative title of this post – but to say it’s game over and Amazon will definitely be victorious, well, is premature. And really, critics do it all the time – remember how many doubters of the iPad there were in January? And another one of my favorites – techies talking down Hulu when it was first announced back in 2007. Do people even remember the other online video startup that the whole tech world was going crazy over back then?

After Doug’s piece reviewing the year’s events atFoxconn Technology Group (PINK: FXCNY | (part of Hon Hai Precision Industry Co. Ltd.) TPE: 2317), I wanted to comment on some of the broader implications for the Chinese economy and the Chinese worker.

CHANGING ECONOMY – CHANGING WORKFORCE

I want to call attention to a series of recent articles in Chinese media. The first comes from economist Andy Xie’s latest column (link in English) on Caing.com, the hard-hitting Chinese economic news outlet. Mr. Xie’s basic argument is that the Foxconn suicides, and the Honda worker strikes, signify that the new generation of Chinese migrant workers – unlike previous generations – are no longer content with income levels that cannot sustain an urban way of life. While their fathers’ generation were culturally willing to accept low wages to support their families back home, the new generation is more individualistic in their dreams and aspirations. In turn, Mr. Xie argues that the wage increases that have occurred en masse in recent years will drive the collapse of the growth model of the last two decades in the Pearl River Delta region – economic growth fueled by aggressively suppressing labor costs.

The logical question, if we accept Mr. Xie’s point of view, is what’s next? The new cover story (link in Chinese) of New Century weekly, the publication under Caing.com, is on this very topic. The lengthy article first argues that unlike its smaller counterparts, Foxconn is actually relatively well-positioned, in that it has turned the incidents and the wage hikes into a bargaining chip to renegotiate with its clients. In the face of the huge media scrutiny, it would be really hard for a western company to say “we won’t accept your modest price increases, which were caused by the wage hikes to prevent employees from killing themselves.” In the case of the smaller manufacturers, they have lower profits (due to smaller scale), and less bargaining power.

TRANSFORMATION: FROM LABORERS TO INNOVATORS

The much talked about shift of production to inland areas or to cheaper countries such as Vietnam is not exactly feasible either, at least in the short run. While western and central China have much cheaper labor costs, they are geographically far from both the suppliers and the markets (in the case of electronics, the export ports). That means extra costs and time to ship components and finished goods around. While in the long run the whole industry value chain will be migrating to lower labor cost areas, that transition takes time. This is why it’s not entirely surprising that Foxconn has told the Wall Street Journal that it “will expand ‘extensively’ in China, both at its existing locations and in new ones, dismissing recent media reports the firm might pull out of the country.” (Perhaps not exactly contradictorily, the above New Century article states that there is a temporary hiring freeze for Foxconn in Shenzhen, since May 29.)

The New Century article ends with a discussion on how manufacturing in the Pearl River Delta region will undergo transformation. Similar to Mr. Xie’s viewpoint, it forecasts the end of the current business model, and sees analogies to the past growth transitions of other Asian economies such as South Korea and Taiwan. Essentially, China will have to move up the value chain, competing on innovation as opposed to cheap labor.

Personally, I feel that while these articles offer interesting analyses and insightful takeaways, the actual development will be painful. It does seem that China is at a very precarious stage of growth – on the one hand, it has strong incentives to keep doing what has made it successful in the past few decades, especially in light of the global recession; on the other hand, it is clear that the old model is getting out of date and perhaps creating more problems than wealth for society.  Add to this the myriad political complexities (central and regional governments have different interests, for example, which stifle the implementation of a national policy), the social grievances, the lack of welfare and the host of other issues, and suddenly it’s really hard to be bullish about China’s near-term prospects. The next decade will be an incredibly important and tough transition for China, and perhaps in future history books, the Foxconn suicides will be one of the signature events that mark the end of an era and the beginning of a more prosperous future.

Related Digital East Asia posts include:

• FOXCONN SUMMARY: Chinese Authorities Seek to Quell Rampant Speculation on Suicides – June 14th, 2010
• Foxconn Suicides May Impact the Bottom Line; Company Suspends Stock Trading as it Announces Wage Increases – June 8th, 2010
• The Chinese Internet Rumor Mill is in Full Swing as Stories of More Deaths at Foxconn Spread– May 28th, 2010
• Foxconn Suicides: A Solemn Timeline – May 28th, 2010
• A Solemn Count Goes Up Again – 11th Suicide Jump at Foxconn Warrants More Questions – May 25th, 2010
• 10th Suicide in 2010 at Foxconn; Incidents Finally Begin to Gain Wider Media Coverage – May 22nd, 2010
• An All Too Familiar Story: 9th Suicide Jump at Foxconn this Year – May 16th, 2010
• Suicide Jump Number 8 at Foxconn This Year – May 12th, 2010
• Another Death at Foxconn; That Makes Five in Just 4 Months – May 8th, 2010
• Third Death at Foxconn in 3 Months; Should Apple, Sony, Nokia and Others Be Concerned? – March 30th, 2010

Just hours after Terry Gou, the CEO of troubled manufacturer Foxconn Technology Group (PINK: FXCNY | (part of Hon Hai Precision Industry Co. Ltd.) TPE: 2317), concluded a large PR crisis management effort which included a tour of their Shenzhen plant for close to 300 journalists on May 26, Xinhua news agency reported that there had been another death.  This piece of news has already been widely covered in the media globally, such as this WSJ opinion piece.  Furthermore,news has spread of another (unsuccessful) suicide attempt, in which an employee had cut his wrist.

Read more about our timeline of the suicides at Foxconn so far this year.

But to make matters even more worse, Chinese “netizens” are spreading stories on Chinese microblogs, bulletin board systems and other forums of “14th”, “15th” and “16th” attempts.  As Chinasmack, a popular China blog, reports, the current rumor is that the “14th” and “15th” had jumped together; and that the “16th” was in a standoff on the roof (with a blurry photo attached as evidence).  As of now these rumors have not been validated by any major media outlet.

Foxconn has taken drastic measures as of late to control the “suicide cluster”.  It got into a bit of a PR firestorm with its alleged “non-suicide pact” with employees (full translation of the documentavailable at Shanghaiist).  It was also reported that they were erecting 2 meter (6 feet 6) high walls on top of buildings and installing safety nets; one twitter post claimed that insiders were saying windows were being locked down (only able to open about 10 centimeters, or 4 inches).  And employees were being urgently organized into small groups.  There were also reports (link in Chinese) that Foxconn was considering 20% wage increases, which they claim had nothing to do with the recent suicides.

On another note, noted Chinese intellect and blogger Hu Yong urged in a blog post (link in Chinese) for the public to stop using “xx consecutive jumps” to discuss the incidents.  He said this was inhumane and also as if people were expecting “records to be broken”.  Leading Chinese blogger / writer Han Han, who came in 2nd on the Time 100 poll last month, also wrote a new blog post (link in Chinese) on Foxconn.  Han’s main point seems to be (if I may summarize) that for the “ordinary people“ of China, who can’t afford the ever-increasing housing prices and barely make a living on their meager incomes, there isn’t hope for a better future.  They are the “low cost” that fuels China’s growth, and it’s not really surprising that when they see no hope they see suicide as a way out.

Reuters and many international media are reporting the latest death in the string of suicide jumps at Foxconn Technology Group (PINK: FXCNY).  The incident occurred on the morning of May 25, and a 19 year-old employee fell from a building in Foxconn’s Shenzhen base.  While police have not ruled out the incident being an accident, Xinhua news agency reports that there was a suicide letter in which he apologized to his father.  The employee was reported to have only been working at Foxconn for one and a half months.  He came from Central China and graduated from a vocational school.

There are not a lot more details about this most recent incident in Chinese media, although I noticed two news articles of interest.  The first article (link in Chinese) describes a group of Chinese “netizens” teaming up to do their own undercover investigation of Foxconn’s labor conditions.  The netizens started the effort via postings on the popular BBS (bulletin board system, discussion forums hugely popular in China) Tianya.  According to the lead organizer, over 100 people phoned him, and 8 traveled to Shenzhen.  They met up with 4 Foxconn employees to form a group of 12, all of which are migrant workers.  In terms of profession, 2 worked in human resources, 5 were ordinary workers, 2 were in legal, 1 was a teacher, and 2 were “other”.  The average age was 28.

The 8 external netizens all applied to Foxconn, and 3 were hired.  The 5 un-hired did interviews around the production base, while the 3 hired worked for 3 days.  They self-published a report on the Internet of their findings (attached in the article linked above).  In sum, they found Foxconn toprovide good facilities for its employees and observed most Chinese labor regulations (insurance etc.), and paid wages on time (delayed payment is a huge issue for Chinese migrant workers).  They also highlighted several issues that had been pointed out by other commentators previously – Foxconn employees routinely worked more than the 36 hours of maximum monthly over-time mandated by the law (though Foxconn claims employees worked over-time voluntarily, and signed such a contract as proof); Foxconn enforces a “semi-military” management style in which supervisors often verbally (or even physically) abused employees; the lack of a union to protect employee rights; Foxconn’s use of its shady security force (which assaulted a Reuters journalistearlier this year).

The second article, reprinted by QQ Tech, reveals that there had been two other deaths at another Foxconn plant earlier this year.  The incidents happened in Foxconn’s Langfang (in northern China, quite close to Beijing) plant.  The first death was on January 8, and Mr. Rong Bo fell from dormitory building A06; one and a half months later, Ms. Wang Lingyan was found dead in her dormitory bed.  In the case of Ms. Wang, at the time of death she was only 16, so by Chinese law she had been working under-age.  She had used another person’s (Ms. Wang Lingfeng, 22 years old, presumably a cousin or other relative) ID card to apply for the job.  If I read the article correctly, Ms. Wang had only been at Foxconn for a few days and hadn’t even started work before her sudden death (doctors declared her to have suffered a heart failure).

According to the article, Foxconn had communicated with the local government to “control the news”, which is quite common in China.  They settled with Ms. Wang’s family, for a sum of RMB 110,000 (US$16,109), which roughly equates to 5 years of salary at RMB 2,000 per month (US$ 293), although Foxconn tactfully termed the payment a “donation” instead of “compensation”.

I think these reports confirm that while Foxconn might be mostly complying with Chinese labor law, it is not enough due to the scale of their operations; and in some cases, there are some questionable practices and at least a lack of proper oversight.  I hope as these reports continue Foxconn and other companies in China can drastically improve their labor conditions.