00:00:05
the type the title is motivated by the
00:00:07
directionality
00:00:10
the idea
00:00:11
that
00:00:12
by
00:00:14
going
00:00:14
into otherwise inaccessible regions of
00:00:18
country you can capture
00:00:20
revenues from abroad
00:00:24
that's the unusual idea
00:00:28
for companies
00:00:30
the paper poses
00:00:32
both opportunities and challenges the
00:00:35
opportunity in china is this you too
00:00:39
can rent the higher channel
00:00:41
and it might be a very efficient thing
00:00:43
to do
00:00:44
rather than to try to establish
00:00:46
independent
00:00:48
distribution networks
00:00:50
their costs
00:00:53
and their risks
00:00:54
but it's an option
00:00:59
for those
00:01:01
seeking
00:01:02
to emulate
00:01:03
higher in china
00:01:05
it's a real challenge because first
00:01:08
mover advantages are dramatic
00:01:13
and
00:01:14
hires
00:01:16
market share in the countryside is very
00:01:18
high
00:01:21
for companies
00:01:23
seeking to emulate
00:01:25
higher outside of china
00:01:28
that's where the ball game becomes very
00:01:30
interesting
00:01:31
who will be the first for example to do
00:01:33
the same let's go back into you
00:01:36
who will be the first to do the same in
00:01:38
other regions
00:01:41
will this also be a chinese export
00:01:44
or will
00:01:45
domestic companies given
00:01:47
the home team advantage
00:01:49
figure out the path to the countryside
00:01:52
and rent it out to others
00:01:54
as higher as done in china
00:01:56
only time will tell
00:02:02
the
00:02:04
idea
00:02:06
came
00:02:07
from meeting
00:02:09
the team
00:02:11
that designed the rural distribution
00:02:14
system
00:02:16
for the higher group
00:02:17
i think i met them in qingdao
00:02:21
in july 2010
00:02:25
had i known this question were coming i
00:02:27
might have brought a picture of the team
00:02:30
but for their leader they were all
00:02:31
youngsters in their 20s
00:02:35
and they described to me
00:02:37
how very powerful
00:02:39
team incentives part of the higher
00:02:41
management system
00:02:43
motivated them to rethink entirely
00:02:47
rural distribution in china
00:02:50
and they asked
00:02:51
what in retrospect are the obvious
00:02:53
questions
00:02:55
what are we doing
00:02:57
why are we doing it
00:03:01
which
00:03:02
almost no one had asked because the
00:03:04
traditional 5000 year old system
00:03:06
had hardly changed
00:03:09
what are the alternatives to it
00:03:12
and what they discovered through very
00:03:14
careful analysis
00:03:16
was that at a certain scale
00:03:19
it became much more efficient to
00:03:21
substitute
00:03:23
a circular for a radial distribution
00:03:26
system
00:03:27
and once they had that idea the rest was
00:03:30
easy
00:03:31
implementation of course was not easy
00:03:32
but conceptually the redesign was easy
00:03:35
so i was totally taken with this and i
00:03:38
put it in my
00:03:39
back pocket then
00:03:42
the idea
00:03:44
came to fruition however
00:03:47
um
00:03:48
when i went back
00:03:51
re-read and re-thought
00:03:54
the 2008 paper with max wazeau
00:03:58
that's uh mentioned here
00:04:00
um
00:04:01
and i did so um
00:04:03
sadly
00:04:04
in the context of uh writing a chapter
00:04:08
for a book
00:04:09
in memory of max
00:04:11
max passed away a few years ago
00:04:14
and his friends colleagues
00:04:16
decided to put together
00:04:18
a volume
00:04:21
to honor his enormous contribution in
00:04:24
many fields
00:04:25
and
00:04:27
that forced me to rethink the earlier
00:04:30
paper
00:04:31
and the rethink
00:04:34
is there out loud
00:04:36
in the manuscript you've got in front of
00:04:38
you so it's a combination of two things
00:04:40
one is meeting the team very very
00:04:42
important understanding their process
00:04:45
and then second
00:04:46
being asked to rethink a paper published
00:04:49
in 2008 really written in 2006
00:04:52
and
00:04:54
that rethinking then brought the
00:04:55
conclusions you see
00:05:01
well
00:05:02
they're they're kind of two methods
00:05:05
method number one is boots on the ground
00:05:09
quite apart from
00:05:11
interviewing the team
00:05:13
i went out into the countryside of china
00:05:18
and
00:05:18
watched the distribution system
00:05:21
watch these teams at work
00:05:25
and i've done so
00:05:27
as
00:05:28
recently as march
00:05:31
whenever i get to china whenever there's
00:05:33
the opportunity
00:05:35
i don't have to go very far inland but
00:05:37
i'll go out into the
00:05:40
rural counties of qingdao
00:05:43
into the rural counties in
00:05:46
southern jiangsu province
00:05:50
even the rural counties around beijing
00:05:52
which can be very very poor by the way
00:05:56
and
00:05:57
observe
00:05:59
how
00:06:00
the goods are distributed
00:06:02
how they're sold
00:06:05
it's the combination
00:06:06
of these
00:06:07
direct
00:06:09
observations and repeated observations i
00:06:11
typically go back to the same sites
00:06:14
uh to judge change over time
00:06:18
uh the combination of repeated field
00:06:20
observation
00:06:22
with uh meeting the teams
00:06:25
then with
00:06:26
introspection with thinking about it
00:06:28
that
00:06:29
produces this result
00:06:31
now i'm going to use your question as a
00:06:34
lever for telling you some of the
00:06:36
developments that have happened
00:06:38
and
00:06:39
i want to tell you about
00:06:42
one merchant
00:06:45
in
00:06:48
rural qingdao
00:06:50
about an hour away from the metropolitan
00:06:53
area
00:06:55
whom i visited now three or four times
00:06:58
because it's convenient
00:07:00
his name is huang there are lots of
00:07:02
people nippong in china
00:07:05
um
00:07:06
he's
00:07:08
from the villages of china a village
00:07:11
near qingdao
00:07:12
um and he's a very plain man
00:07:17
even today in the summertime at least he
00:07:20
still wears sandals not shoes
00:07:23
he started
00:07:25
a small business with an investment
00:07:28
maybe
00:07:29
sixty thousand rmb
00:07:33
less than ten thousand dollars at the
00:07:35
time
00:07:36
it was a
00:07:37
town level store
00:07:40
um where
00:07:42
he
00:07:43
made
00:07:45
large appliances even small electronics
00:07:48
available to local residents
00:07:52
and he's gained enormously
00:07:54
from this distribution system because he
00:07:57
doesn't have to keep much inventory
00:07:58
doesn't have to tie up money and
00:08:00
inventory and doesn't have to tie up
00:08:02
time as mentioned in the paper
00:08:04
in going to the county level city
00:08:07
to make the purchases but here's the
00:08:09
part
00:08:10
that i found so interesting
00:08:12
first of all
00:08:13
doesn't compete on price
00:08:16
i've watched customers come and go
00:08:19
and i've watched him refuse to drop
00:08:21
prices all maybe some small
00:08:25
you know gift he would add in but
00:08:27
no major drop in prices
00:08:29
he does compete on service
00:08:32
usually the deal is
00:08:35
tell you what
00:08:37
if you're able to make this purchase
00:08:38
today it's a refrigerator sometimes it
00:08:40
could be two one for mother-in-law
00:08:45
i'll put them on the back of my truck
00:08:47
right now
00:08:49
we'll take them to your house and you'll
00:08:50
get a free ride home
00:08:53
and that often clinches the deal
00:08:57
but beyond this
00:08:59
he's developed a network of
00:09:02
representatives of coordinators in the
00:09:04
small villages
00:09:06
and so the villagers only 10 minutes
00:09:09
away or so but they'll collectively make
00:09:10
a trip
00:09:12
to town
00:09:14
to visit his store
00:09:16
and that business has grown to the point
00:09:18
where now he has opened
00:09:21
outlets in the villages and last time i
00:09:24
got to see the first of them
00:09:27
about the size of this room not much
00:09:29
larger oh maybe twice the size of the
00:09:30
roof not huge very plain very plain
00:09:34
merchandise
00:09:35
but there you have it he's created a
00:09:37
second business will create a third
00:09:39
business
00:09:40
and his business has grown dramatically
00:09:44
as the result of the distribution
00:09:46
information systems
00:09:48
described in the paper
00:09:54
a complicated question there are a
00:09:55
couple of answers
00:09:57
one is just arithmetic
00:10:00
if you have a first mover advantage
00:10:03
as higher has in china's rural markets
00:10:07
then
00:10:10
you can
00:10:12
rent the highway the higher highway
00:10:15
out to other firms including your direct
00:10:17
competitors
00:10:18
and you can extract not only highway
00:10:21
tolls
00:10:22
but
00:10:23
you can
00:10:24
gain further revenues
00:10:27
through providing service that again
00:10:30
the foreign competitors aren't able uh
00:10:33
to uh provide
00:10:35
so
00:10:36
uh what you're doing is you're capturing
00:10:40
uh at least one end of what is it called
00:10:42
the smile curve from stanchia
00:10:45
you're capturing distribution and
00:10:47
service revenues and profits which can
00:10:49
actually be much greater than
00:10:51
manufacturing profits and in this sense
00:10:53
you're taking money
00:10:55
uh
00:10:56
away from
00:10:58
your foreign competitors it's not
00:11:00
acquiring revenue abroad but it's
00:11:02
acquiring
00:11:04
revenue domestically that might
00:11:06
otherwise go to foreign competitors
00:11:09
now the larger question and it's a
00:11:11
trickier question
00:11:13
is whether the capability the rural
00:11:16
distribution capability
00:11:18
at home is transferable abroad
00:11:21
and quite frankly
00:11:23
i don't yet know the answer to that
00:11:26
question and why is that
00:11:29
it's because
00:11:31
china is unusual
00:11:32
any country that size china india going
00:11:36
to be unusual have unique
00:11:37
characteristics but
00:11:39
in china's case and i think a little bit
00:11:40
in contrast to india
00:11:43
the physical infrastructure is fairly
00:11:45
well developed
00:11:47
and so
00:11:48
it's easy
00:11:50
to
00:11:51
roll the trucks
00:11:53
in a way
00:11:55
that is
00:11:57
or it seems easy i should say to roll
00:11:59
the trucks in a way that is
00:12:02
efficient
00:12:04
um
00:12:05
in fact in china as it noted the paper
00:12:08
in the paper very few chinese firms have
00:12:10
taken advantage of these potential
00:12:13
efficiencies
00:12:15
um it's simply the result of tradition
00:12:18
it's the result of having small and
00:12:20
fragmented markets
00:12:22
and
00:12:23
it's
00:12:24
you know it it just takes a while before
00:12:27
there's break breakthrough thinking uh
00:12:29
about distribution in china but once the
00:12:32
breakthrough thinking occurs
00:12:35
then it's possible
00:12:36
to actually implement this thinking
00:12:38
given that the asphalt's all in place
00:12:41
and large efficient
00:12:44
trucks
00:12:45
can be
00:12:46
moved around with a day's worth of
00:12:48
distribution for many many outlets
00:12:51
you know china could be different i mean
00:12:53
india i'm sorry could be different
00:12:55
uh and that's because it's my sense that
00:12:58
the
00:12:59
the highway system is not as well
00:13:01
developed
00:13:03
and so implementation of
00:13:05
a similar platform
00:13:08
in india may prove difficult
00:13:10
that said the success in china
00:13:13
i think might motivate haier or hires
00:13:16
competitors in india
00:13:18
to try to do the same somehow
00:13:25
it's it's incredibly relevant for
00:13:27
alibaba
00:13:28
um
00:13:31
you've probably read
00:13:33
that
00:13:35
alibaba
00:13:36
new technology
00:13:39
has just made
00:13:40
a 360 million dollar investment
00:13:44
in a joint venture with higher
00:13:46
hull technology
00:13:50
the new requires the old
00:13:53
to move the goods
00:13:55
and so
00:13:57
the intent of the joint venture
00:14:00
is to open distribution for all large
00:14:04
goods including furniture
00:14:06
sold over taobao timal
00:14:09
by alibaba uh into the countryside of
00:14:13
china the joint ventures in its early
00:14:15
stages
00:14:17
who can guess what the success will be
00:14:19
but uh it's yes it's it's it's very very
00:14:23
relevant
00:14:28
it will be really interesting to see
00:14:33
i'm not expert really on other countries
00:14:37
so it's hard for me to sit here and say
00:14:40
what the rural distribution issues
00:14:44
in india
00:14:46
in
00:14:48
latin america
00:14:49
in sub-saharan africa
00:14:52
alike
00:14:55
my guess is that the economies
00:15:00
especially sub-saharan africa
00:15:04
look not only a lot like china but maybe
00:15:07
an exaggerated version of china where
00:15:10
you have prosperity in the port cities
00:15:13
and
00:15:14
much less development in the hinterlands
00:15:18
and the question is the role of physical
00:15:20
infrastructure
00:15:22
in opening distribution there
00:15:25
circumvent the problems of physical
00:15:27
infrastructure or correct those problems
00:15:30
and then yes
00:15:32
the higher model has enormous
00:15:34
applicability
00:15:36
outside
00:15:38
of the chinese context and so
00:15:41
that turns then to the question of hires
00:15:44
strategy
00:15:47
is there strategy to make more
00:15:48
refrigerators
00:15:50
at a time when manufacturing is becoming
00:15:52
something of a commodity
00:15:54
and becomes very portable
00:15:56
or is the strategy again
00:15:59
to hit the two ends of the smile kerf
00:16:03
one side design
00:16:05
the other side distribution and service
00:16:07
where the money is
00:16:09
and if so
00:16:11
will they decide
00:16:14
to roll up their sleeves
00:16:16
and try to do in other countries what
00:16:18
they've done in china
00:16:20
i don't know the answer to that i've
00:16:23
raised the question with them
00:16:25
and
00:16:26
quite frankly
00:16:27
the senior managers when they hear the
00:16:30
question at first
00:16:33
almost
00:16:34
almost
00:16:35
don't grasp it
00:16:39
and
00:16:42
because
00:16:44
they have so focused of course
00:16:47
on china as
00:16:49
the base of their operations
00:16:53
my bet however
00:16:55
um is that they'll try
00:16:57
my bet is
00:16:59
that they'll do so in a small country i
00:17:02
can't name a country
00:17:04
and
00:17:05
they'll do so
00:17:07
following their general model of
00:17:09
internationalization remember the
00:17:12
history
00:17:13
they were they were offered they almost
00:17:15
had the right of first refusal on maytag
00:17:18
in the united states they wouldn't do it
00:17:22
for many reasons
00:17:25
in part it was at the time in the
00:17:26
history when they were less confident
00:17:28
than they are now they were smaller they
00:17:30
were less confident but there are other
00:17:31
reasons as well
00:17:35
one of their key
00:17:36
western acquisitions
00:17:38
has been fisher and pakel new
00:17:40
zealand-based high-end appliance company
00:17:42
great brand
00:17:44
okay
00:17:45
but
00:17:46
they're acquiring it in part for the
00:17:48
technology they have advanced technology
00:17:51
they're inquiring it in part
00:17:54
because new zealand's a small country
00:17:56
it's a great country but it's a small
00:17:58
country and
00:18:00
it may be a very good place
00:18:03
for hire to learn a lot more about
00:18:06
western markets at lower cost
00:18:09
than a larger country like the us
00:18:13
so my guess would be
00:18:16
if they try to port their system their
00:18:18
distribution system outside of china
00:18:21
likely sub-saharan africa like likely a
00:18:24
smaller country
00:18:26
and likely a learning experience for
00:18:28
them how it will come out
00:18:30
who can guess at this time
00:18:35
the most surprising piece here
00:18:40
um
00:18:42
um
00:18:43
for a person
00:18:45
brought up in this culture
00:18:48
is
00:18:49
the speed with which
00:18:52
organizational innovation takes place
00:18:56
it's almost as if
00:18:58
the org chart changes every saturday
00:19:01
morning when the senior management meets
00:19:06
i attempt to learn something i try to
00:19:07
grasp it i try to get the details
00:19:11
the ink is dry on paper almost
00:19:14
and there's version two version three
00:19:16
version four
00:19:20
that's the nature of the management
00:19:22
process in china
00:19:26
and
00:19:29
it makes
00:19:31
research
00:19:32
as
00:19:33
we know it
00:19:34
as western scholars know it a little bit
00:19:36
challenging because we want to get data
00:19:39
we want to get quote hard data
00:19:41
nail down the facts
00:19:45
in china
00:19:46
those facts are always shifting on you
00:19:49
because everything's experimental
00:19:53
it's a highly decentralized system
00:19:57
and
00:19:59
if you're lucky you'll get a first
00:20:01
approximation
00:20:03
so
00:20:04
this paper for example
00:20:06
i can't guarantee it's accuracy at the
00:20:09
time it's printed
00:20:12
it may have all changed by then
00:20:16
maybe that should be an asterisk at the
00:20:18
very beginning i don't know
00:20:21
but
00:20:22
that that's
00:20:23
that's the biggest surprise over the
00:20:25
last
00:20:26
five or six years
00:20:31
there are a couple things possible
00:20:34
i think
00:20:36
the
00:20:38
immediate piece of research
00:20:41
will be
00:20:43
more microscopic
00:20:46
to go into the teams
00:20:50
to observe the teams even more closely
00:20:54
and
00:20:55
to ask
00:20:58
a question that's
00:21:00
a little different than the question
00:21:02
posed
00:21:03
in this paper
00:21:05
in the paper you got
00:21:08
mucho
00:21:10
the proposition
00:21:11
is that
00:21:13
a firm may effectively internationalize
00:21:15
by developing
00:21:18
otherwise
00:21:19
impenetrable domestic markets opening
00:21:21
access to those markets to foreign
00:21:24
companies
00:21:26
we can certainly observe
00:21:28
the progress of the system the
00:21:29
sustainability of this system
00:21:32
and
00:21:34
the
00:21:35
based on the analyst reports it looks
00:21:37
like it's doing pretty well
00:21:39
certainly heyers performance
00:21:42
has
00:21:43
jumped dramatically
00:21:45
uh from 2012 to 2013
00:21:49
and a time when its main domestic
00:21:51
competitors haven't done
00:21:53
quite so well
00:21:56
but
00:21:57
there's
00:21:59
another
00:22:00
issue i think needs to be explored
00:22:05
the paper described brief describes
00:22:07
briefly the team structure of higher
00:22:10
the so-called zzjyts
00:22:14
that operate as if they're standalone
00:22:16
businesses even though they're very very
00:22:18
small
00:22:20
12 13 people perhaps
00:22:23
the question is whether
00:22:26
these
00:22:27
teams
00:22:29
become even more independent of the
00:22:32
center of higher
00:22:34
some instances already
00:22:36
they
00:22:37
the teams do internal m a one team will
00:22:41
literally acquire another through an
00:22:43
internal bidding process
00:22:46
sometimes they do joint ventures
00:22:49
with their distributors with their
00:22:51
retailers
00:22:55
they have partial hr function at this
00:22:57
point i mentioned hiring village
00:22:59
coordinators to you
00:23:02
some
00:23:03
have begun
00:23:05
to spin out of higher and become totally
00:23:10
independent legal entities still within
00:23:12
the family
00:23:14
but legally separate
00:23:17
and so the big question i want to
00:23:19
research
00:23:20
is whether
00:23:21
this is the future of capitalism of
00:23:23
china
00:23:26
are we going to see the devolution of
00:23:29
the firm
00:23:32
our standard theories
00:23:35
going back many many years
00:23:37
alfred chandler the historian oliver
00:23:40
williamson the theorist of transaction
00:23:41
cost economics
00:23:43
talk about the integration of the firm
00:23:46
from
00:23:47
market to hierarchy
00:23:49
but my question is whether in china
00:23:52
they're going to ultimately solve the
00:23:53
problem of enterprise reform which has
00:23:55
proved intractable quite frankly
00:23:59
by reversing this process
00:24:02
by going from hierarchy to market by
00:24:04
spinning out
00:24:06
of large organizations whether or not
00:24:08
state-owned higher is not state-owned
00:24:12
by spinning out of large organizations
00:24:14
little pieces
00:24:16
and by having these pieces
00:24:20
become
00:24:21
the central economic actors uh in the
00:24:24
marketplace of china i don't know the
00:24:26
answer to that but i think it's a
00:24:27
fundamental question and it has to be
00:24:29
pursued
00:24:31
given china's highly fragmented market
00:24:33
structure which
00:24:35
i don't think will change fundamentally
00:24:37
despite a rail system despite a highway
00:24:40
system
00:24:41
it's entirely possible
00:24:44
that rather from market to hierarchy
00:24:47
you'll see china go from hierarchy to
00:24:49
market as a solution to many many
00:24:51
problems
00:25:13
you
