Miles To Go.

Ok, let's discuss this

Media mogul and best buddy Scott Carlin was in town this week and we went for all things Asian- dinner and discussion. I’ve been working on a JV in China for some time now, and as it winds its way near completion, my friends keep pointing out the cultural differences I’ll have to deal with. I’ve written about them before, but this week’s news certainly makes it worth level setting again.

So, for those that didn’t know it, one of Yahoo’s biggest assets on its book is AliPay. Which isn’t so interesting until someone from AliBaba says “by the way, you don’t own this anymore, and it happened a long time ago, but we can talk about it if you want… ok”?.

Looks like that just happened…

Yahoo, owner of the biggest U.S. Web portal, this week said it wasn’t informed until March 31 about an August 2010 transfer of Alipay equity to a vehicle outside of Alibaba in order to comply with restrictions on foreign ownership of payment services in China, which prompted the reorganization of Alipay, the nation’s biggest online payment service. For his part, Chairman Ma (seriously) said “the spinoff of the Alipay online payment business is “lawful” and “transparent,” after biggest shareholder Yahoo! Inc. claimed it wasn’t consulted on the transfer. “We are always committed to ensure our operations are 100 percent lawful,” Ma said today in Hong Kong. “The matter of Alipay is not settled yet” amid ongoing negotiations with Yahoo and Softbank Corp, Alibaba’s second-biggest shareholder, on the post-transfer commercial arrangements, Ma said. (Source: Bloomberg)

Yeah, I hope not.

Gone are the days of gunboat mercantilism, when British ships rings the harbors in defense of Jardine’s Opium trading. But Silicon Valley has weapons of their own now, not the least of which are direct flights to Hong Kong. I’m surprised Yahoo CEO Carol Bartz was not on a rocket to China the moment she heard the news. Rule of law in the US would have the transaction rescinded in an instant, and shareholder’s pallor cured shortly after. This one is going to play out a little longer, but the leverage is with Chairman Ma for the moment. CEO Bartz doesn’t look so good.

So what’s it mean. Well, China has some interesting ownership laws for one. And China has some fresh new perspectives on business leverage, ethics, and rule of law. But the economy is booming and the price of entry is to figure out ways to deal with a different culture. Really different. The dot.com bubble was similar in some ways. Hey, at least we’re fighting over technology these days, rather than water pipes.

Progress! Now you chan chime in with a poll..

What do you do when someone to whom you owe a zillion dollars does stuff you don’t like?  Survey says: “shut up and pretend it doesn’t bother you.”  That, and quit borrowing or we’ll all see this video come true before 2030!

It was China Week in the US.  Obama hosted Hu Jintao on a state visit, and pressed him on human rights. Oh, please. Pressed him with what, precisely?  China only cooperates when someone has something they want. The rest is noise. Here’s how I see it:

China’s GDP growth has been unprecedented in the past 10 years (try 10% GDP growth on for size), but that comes as part of a social pact with their 1.7 billion people.  It goes something like this: “You were (are) poor. We give you food, shelter, and a chance to occasionally buy purses and perfume with luxury branding. You, in turn, have no freedom of speech, no chance to elect government, and no say in how we do things. Deal?”

And so, the importance of China’s growth boils down to the ruling elite preserving power by feeding the growing appetites of a few billion mouths. That makes for a busy kitchen to feed that fire.  Raw materials must be secured, and how they procure those key supplies reveals a major stylistic difference from the U.S.

China’s trading philosophy  is both politely predatory and mercilessly mercantilist. Got aluminium? Send it our way and we’ll build highways, railroads and schools. Oil? Great, heres a bomber. Cobalt? We’ll take it, and build your stadiums and hospitals. Running short of cash? We’ll buy the Treasury bills. People looking for consumer goods in their stores? No problem –our merchants will flood the market with the dross pumped out by our growing capacity to produce more stuff. (My opinion is informed by Stefan Halper, author of Beijing Consensus and from the ensuing discussions at a recent breakfast at The Roosevelt Institute hosted by Bo Cutter)

And unlike the US, there are no requirements to qualify for Chinese support. No need to move toward democracy, no pesky voter’s rights, no freedom of speech. If you’re an oligarch or autocrat sitting atop any natural resource or strategic landmass that China wants, you’re good. We may be outraged by the crassness of it all, but meanwhile, deals are being cut all around us — moral equivalencies be damned. Seriously, the Chinese laugh every time we wag a finger about Tibet or freedom of the press when we don’t have a  hard trade to back it up.  Last time that happened, Obama was in Beijing.

So what can an angel or an entrepreneur take away from this scenario?

Well,  investing in China as an angel is the devils work. I don’t know how it can be done successfully, and if successful, how do you extract the cash after an exit?  So scratch that idea. But for entrepreneurs thinking about doing business with China,  one big rule applies: stay in between your Chinese counterparts and something they really want.  Additionally, keep improving the product so that it’s nothing they can thank you for later, after developing their own. Respect their customs and point of view, no matter how different it might seem. Bottom line? It’s all about the supply of key ingredients and helping them feed their giant — so check your moral indignation at the door.