TOUCHING CHINA

Ken Allen, July 2, 2007

Observing China is like looking at a fractal obscured by fog. Approaching from the air, its ragged coast is first obscured by cumulus clouds punctured by black streaks underneath which is the haze of the evident eternal brown air that blankets all of Asia in this season--not even a monsoon rain can wash the air blue for more than a few hours. The coast stretches for thousands of miles, pocked with massive cities surrounded by deltas and huge container vessels plying the seas. It has been exactly ten years since the Handover, the day that Hong Kong peacefully and symbolically rejoined the government of Mainland China in a federation in which Hong Kong became a Special Administrative Region, with its own currency, citizenship, court system and economic policy, but a governor appointed by the Central Committee and a military umbrella populated by the largest army in the world. It is also the ten-year anniversary of the last big collapse of the Asian monetary systems, when the Thai currency started a downward spiral that shook the world financial markets. Not much has changed in Hong Kong, to the relief of the cosmopolitan population, as then President Deng Xiao-ping promised no changes for 50 years. By then, the cultures and economies should be so integrated that change would go unnoticed and unfeared. Except all the street directions may well be reversed. Hong Kong drives on the left, the Mainland on the right.

Hong Kong has been the West’s window into China, along with Singapore and to a rapidly growing extent the emerging international metropolis of Shanghai, and of course Beijing. However, a relatively new city of a population size comparable to Hong Kong is emerging in northeastern China, a city most Westerners have never heard of called Dalian. Dalian is both international and thoroughly modern China in character. It is a central urban district and an urbanized greenbelt region that straddles a mountainous peninsula that juts westward, separating the Yellow Sea from the Bahai Sea, the huge bay that is the gateway to the water corridor to Beijing. The peninsula is bounded to the west by an extremely strategic naval port named by the first British occupiers as Port Arthur, a hidden harbor city now renamed Lushun that is closed to casual visitors, since it berths the fleet that guards the entrance to the Yellow Sea. The peninsula is midway between the triangle formed by North Korea, southern Japan and Beijing, in the Liaoning Province of Manchuria. Dalian is a city only 120 years old. It was forcibly ceded along with Port Arthur to the Russians in 1894 as a defense outpost, captured by the Japanese after a long siege in 1904, whereupon the Japanese purged the region of its Chinese inhabitants after capturing the Russian mountaintop fort at Mt. Dongjiguan and destroying the Russian fleet trapped in the harbor using long range artillery. It was returned to the Soviets in 1945. Only since 1955 has it been under Chinese control. All of this history is very much fresh in the minds of the locals. Dalian has Chinese, Russian, German, Japanese and British elements still evident today. Surprisingly few Americans reside there, a situation the young mayor Dr. XIA Deren wants to remedy by expanding western medical facilities and international schools in support of the goal of developing the predominant software capital in Asia and principal rival of Bangalore, India. In less than ten years, Mayor XIA, professor of economics and university president, has transformed Dalian from a flat industrial port to a resort destination and financial and software center with skyscrapers and open space that are the envy of any place in the world.

Thomas Friedman discovered Dalian for himself and reported on it in his now famous sequel book on globalization, “The World is Flat” (2006). Friedman is the talk of every leader in China, both government and private. Here is part of Friedman’s report on Dalian:

“I needed to see Dalian, this Bangalore of China, firsthand… Dalian is impressive not just for a Chinese city. With its wide boulevards, beautiful green spaces, and nexus of universities, technical colleges, and massive software park, Dalian would stand out in Silicon Valley. Dalian…symbolizes how rapidly China’s most modern cities…are grabbing business as knowledge centers, not just as manufacturing hubs. The signs on the buildings tell the whole story: GE, Microsoft, Dell, SAP, HP, Sony, and Accenture—to name a few—all having backroom work done here to support their Asian operations, as well as new software research and development.

“Because of its proximity to Japan and Korea, each only about an hour away by air, its large number of Japanese speakers, its abundance of Internet bandwidth, and many parks and a world-class golf course…, Dalian has become an attractive locus for Japanese outsourcing. Japanese firms can hire three Chinese software engineers for the price of one in Japan and still have change to pay a roomful of call center operators ($90 a month starting salary [compare also $250/month for graduate engineers, $2500/month for experienced managers]. No wonder 2800 Japanese companies have set up operations here or teamed up with Chinese partners.

“…[According to WIN Liu, director of U.S/EU projects of DHC, one of Dalian’s largest homegrown software firms,] “Americans don’t realize the challenge to the extent that they should.”

“Dalian’s dynamic major XIA Deren, forty-nine, is a former college president. (For a Communist authoritarian system, China does a pretty good job of promoting people on merit. The Mandarin meritocratic culture here still runs very deep. …[T]he mayor told me how far Dalian has come and just where he intends to take it. ‘We have twenty-two universities and colleges with over two hundred thousand students in Dalian… More than half…graduate with engineering or science degrees,and even those who don’t,those who study history or literature, are still being directed to spend a year studying Japanese or English, plus computer science, so that they will be employable.’ The mayor estimated that more than half the residents of Dalian had access to the Internet at the office, homer, or school.

“‘The Japanese enterprises originally started some data-processing industries here, and with this as a base they have now moved to R&D and software development…In the past one or two years, the software companies of the U.S. are also making some attempts to move outsourcing of software from the U.S. to our city…We are approaching and we are catchin up with the Indians. Exports of software products [from Dalian] have been increasing by 50 percent annually…Though in general our English is not as competent as that of the Indian people, we have a bigger population, [so] we can pick out the most intelligent students who can speak the best English…Today, the U.S., you are the designers, the architects, and the developing countries are the bricklayers for the buildings. But one day I hope we will be the architects.’

“…[A]lthough some of what he had to say gets lost in translation, he gets it—and Americans should too: ‘The rule of the market economy,’ this Communist official explained to me, ‘is that if somewhere has the richest human resources and the cheapest labor, of course the enterprises and the businesses will naturally go there.’” [Thomas Friedman, “The World is Flat,” pp. 33-35]

On April 26, 2007 in Pittsburgh, a city that is transforming itself from a rust belt industrial city to a major financial center, successful consultant/CEO and one of the U.S. presidential candidates Mitt Romney spoke about China: “China is not like the Soviet Union of old,” he said. “The Soviet Union, Khrushchev in particular, wanted to bury us. China doesn't want to bury us. They want to see us succeed and thrive so we can buy more Chinese products. And they’re our competitor economically. More power to them. We know how to compete. We want to make sure the competition is fair and legal and they protect their intellectual property rights and have a monetary policy that is fair. So we’ve got some challenges to make sure the playing field is level with China…If I'm lucky enough to be president, making China a partner for stability in the world will be one of my highest priorities.” [Reported in The Pittsburgh Post-Gazette, April 28, 2007] [complete quote http://www.post-gazette.com/downloads/20070429_Romney_K.mp3].

I discovered just how flat the world is becoming as I flew along the mountainous south coast of Dalian, looped back over Dalian Bay, glided past the aging steel and chemical plants and new shipyard, landed at Dalian Zhoushuizi International Airport, taxied past the dozen and a half Chinese jet fighters parked on the western tarmac, and disembarked into the modern though modest terminal. There I was met by young software executive Jeffery Liu, the Townsend contact in Beijing, China, and my liaison with an astounding variety of Chinese industrialists and government officials. Jeffery is a top graduate of prestigious Chinese universities who speaks and writes passable English, particularly for someone who has spent his entire life in China. His title is Government Strategy Manager, Department of Global Sales and Marketing of Worksoft Creative Software Tech, Ltd., one of the leading software outsourcing firms in China. He is responsible for the translation of the Townsend firm brochure and the preparation of a Townsend Chinese banner used to promote the visibility of the Townsend presence. He also translated my PowerPoint presentation to the Chinese International Software and Information Service Fair, the only State recognized national software convention. As one of the few Westerners at the convention, I was treated like royalty. I was immediately provided with a black Camry sedan, one of about 40 vehicles owned by the central city, driven by Mayor Xia’s driver. I was housed at the Shangri-La Hotel, a five star gem at 66 Remin Road, the site of many of the events of the four-day convention. Although the travel and lodging and touring were on my Yuan/nickel, the modest prices and lavish treatment made it all worthwhile.

Dalian, as Friedman noted, is a thoroughly modern city in transformation. It appeared to me that the whole Lushun/Dalian/Liaoning region/province is a huge civil engineering project. Not surprisingly then, that the country’s President Hu Jintao is a civil engineer and the mayor is a professor of economics. And they and their successors have an enormous task. An American businessman living in Dalian and Japan observed that a Chinese democracy at this time would not be able to accomplish the huge task of bringing the country out of the 19^th Century, where much of it is still mired. Its financial system is fragile. Most of its infrastructure must be replaced and employment found for a continuously swelling population, so it is easier and cheaper to move people around. Rural poverty is being addressed by moving three hundred million(!) of the six hundred million rural residents from overpopulated rural farms to urban cells near major metropolitan areas. The de facto federal system where local leaders wield enormous control is being tapped to carry out the development. Regional government agencies work with the governing state central committee to implement major urban renewal projects, build reliable power plants, modern clean water and sewer facilities, build broad roads and rapid mass transit, spectacular office buildings and greenbelts, industrial and high-rise residential communities and commercial retail centers, all able to withstand the rigors of a harsh weather environment.

The CISIS conference was a networking event for State and local government administrators and private businessman, real estate and banking leaders and developers and consumers. It was ceremonial more than an exchange of substantive ideas. As a VIP, I was introduced to prominent local government officials and business leaders, and I was often filmed and photographed.

The first event on the morning of the first day of the conference was a plenary session. Rather than to be seated in the audience of 400, I was escorted to a smaller meeting room, then set up as an anteroom for honored guests and in which I spoke that afternoon in a breakout session, since the room was then transformed into a lecture hall. Among the guests introduced to me were the Mayor of Dalian, Dr. XIA Deren, the young Vice Mayor of Dalian Ms. DAI Yulin, the Director General of the State (Central Government) Council Informatization Office XU Yu (who oversees all government software and office automation operations in China, and later the cabinet level Vice Minister of the Ministry of Commerce YI Xiaozhun, who oversees all commercial operations in China. I also was introduced to the General Manager of Oracle’s Global Support Center in Dalian, Henry Ong B.H.; the conference organizer Ms. Lui Zhihong; the Chairman and CEO of Neusoft, the largest software company in China Dr. Jiren Liu; the President of Intel China TAN Wee Theng; the Executive Vice Chairman of Yangszhou Ms. YANG Rong; the head of SAP China and Vice President of SAP AG Andreas Reuther; and the General Manager of the 21^st Century Business Herald (the most prominent business publication in China) CHEN Dong YANG. Even officials of other, even remote cities in western provinces were there to network: from Chengdu, Jiaxing, Wuxie City, and Sheng Province. Needless to say, our colleague Jeffery Liu was most helpful and knew most of these people, and there were piles of business cards exchanged in the genuflecting of introduction ceremonies among VIPs.

The opening session took place in the ballroom of the Furama Hotel, next door to the Shangri-La, with great ceremony: stage lights, huge screens and music segued between introductions and speakers. Simultaneous translations with wireless headsets were provided in Mandarin Chinese, Japanese and English, as the speakers presented prepared remarks. A number of camera crews and photographers tracked all the action, and reporters seated along a table-lined side wall with laptops and wireless connections logged the event. Printed program books with full color photos, biographies and profiles of companies in Chinese and English were provided at each seat. Townsend received prominent mention in the book for the breakout session where I spoke and shared a forum. In all the sessions, each audience was attentive and amazingly patient, not moving for an unbroken four hours.

Of special note was the attention paid to issues the West knows about, including the temporary advantage in labor costs and of the current exchange rate. Tom Friedman was cited often, with speakers frequently voicing “The World is Flat” in English, and warning the audience that the benefits for export are inherently temporary and thus unstable. Mayor Xia and others apparently repeated the theme he had recited to Friedman in his previous visit. They were serious and aware of the need to further transform their country.

That afternoon, I was tasked to address the breakout forum on investment. My theme dovetailed well into the discussions in the forum: “Lessons to learn from the experiences of Silicon Valley.” Based on my thirty years of ground-level observations and with help from friends heading Joint Venture Silicon Valley Network who prepared statistics and analyses, I gave a 20-minute talk, with an introduction by me in halting Mandarin Chinese and slides all in Chinese characters, in slow and articulated English (but only after the translator said the slides so well described my printed notes that I had no need for side-by-side translation). As a reality check, I asked the audience of 100 how many could understand what I was saying, and most raised their hands, to my relief. At the end, I was joined in a question and answer session. By LEO Yeun Kee, General Manager of Ascendas, a private equity funded state-chartered turn-key industrial park developer and operator with parks from Singapore to Manchuria, a kind-of Asian version of the combination of Silicon Valley developers/managers/builders Peery-Arrillaga, WSJ Properties or Sobrato and the local post office and telecomm providers. Mr. Yeo was delightful and very fluent in the most nuanced conversational English. You can tell how well someone understands English if they laugh at good jokes. And he could laugh. He spoke Mandarin Chinese but conceded he didn’t read it well. In the preparation session the night before, after he reviewed my presentation materials, he told me to take the whole speaking time and he would simply augment it in the question period. And so it went. The questions were lively and the audience was engaged, even though it was the end of a very long day, with a number of attendees asking me to expand on a few points. Afterwards, the organizers asked me to come back next year, and one independent inventor showed me a PCT application he wanted to pursue—albeit in Chinese, and I arranged for a local referral to a patent agent who could help him. Mr. Yeo would of course like us to open an office in his new 500,000 square foot office tower in his new development on a mountain overlooking the South China Sea.

That evening, like every evening of the conference, featured a ceremony, Chinese dancers and musicians and an 11 course Chinese meal of Dalian cuisine—mostly boiled plates with lots of seafood and fish so fresh they were alive at the kitchen door. Fruit juices were plentifully provided to wash it all down. Alcohol was rare, as was smoking in public places, helped apparently by a new strong anti-smoking movement.

I dined at the English-speaking banquet table with two American business professors from the Midwest doing field research, members of the consular corps from Britain and Ireland (there was no American consular presence), the Vice President of Dalian Software Park, the other large business park holder in Dalian who often recruits at Stanford, an American outsourcing company executive from Los Gatos and American-born entrepreneur Michael Novak, the CISIS liaison with the US and CEO of a potential new software patent client for Townsend called Tertia. We talked at length that night and then privately late into the night the next evening after dinner about his new technology, and I saw his non-proprietary demo. He hopes to peddle the technology soon to the international television news networks. Let’s say it a clever and clean way of enhancing the understanding of spoken English for an ESL audience. He used as his demo text an internationally distributed English book for which there is an audio recording available in English. He had no ties with its publisher but thought it would be an appropriate tool to assist in its understanding. Surprisingly to both him and me I had ties to the publisher and knew the book well—The Book of Mormon. And further, he had made an offer of use of the technology to current presidential candidates--and thus he also found a further tie-in through me. It appears networking helps, however random the meetings may occur.

The next day was the ceremonial signing of a huge software development contract between EDS and the Chinese government, evidently worth multibillions of dollars and many years in the making. Parent company GM’s long presence in China and McKinsey’s analysis of the needs and a white paper of the proposal were featured topics. Vice Minister YI Xiaozhun represented the Chinese government in the signing, to recorded ruffles and flourishes, as media people clamored for a favored video and photo. The EDS and McKinsey representatives spoke at length in English about the import of this pact for the development of China, and copies of the white paper were on every desk. Unfortunately they spoke so fast and so few people had rented the translation receivers that few could understand those important remarks. However, I recorded it and passed on a digital copy to Jeffery Liu for him to study and to share. Mr. MA Jun Guo, the Director of the Dalian Bureau of Information Industry, my government host and one of the delegation that visited us at Townsend in Palo Alto last year, was evidently not present at this ceremony. He speaks no English. But I picked up Chinese language copies of the McKinsey white paper and gave them to him at the farewell banquet, my small contribution to improved international communications.

That afternoon I toured the floor of the exhibition hall next to the grand Xingha Square at the south beach (four times larger than any comparable square in Beijing). The exhibit hall featured exhibits of many well-known multinationals, from Indian Infosys and American IBM and Intel, to Daxian, Sony, Oracle, SAP, Dell and others, particularly those specializing in software outsourcing and back-office operations. Jeffery Liu introduced me to Vice Minister YI Xiaozhun in front of rolling Japanese television cameras by his company’s booth. After a long speech by Jeffery about Townsend and intellectual property, Minister YI turned to me and handed me his card with English language comments to the effect, “We will respect and protect intellectual property rights in China.” I wouldn’t be surprised if part of that interview appeared that evening on Japanese television.

The next morning, I sought out the Japanese-Chinese forum breakout session on intellectual property. Fortuitously, it was being conducted in Japanese by our Seiko Epson client and colleague of Georg Seka, patent attorney manager Masataka Kamiyanagi, who immediately introduced himself to me and passed on his greetings to Seka-san. Unfortunately, the session was only translated into Chinese, and since my Japanese is only rudimentary, I decided not to stay. Instead, I toured the municipality of Dalian, highlighted by a seaside drive along the South China Sea, with his pebble beaches, parks, forests, hills, cliffs, resorts, museums, sculptures, valleys and zoo. I also learned how to count in Mandarin with the help of the guide and the non-English-speaking driver, and I taught the driver to count in English.

The next day featured a tour to the Russian fort overlooking Lushun harbor, where the most important historical battle for possession of the peninsula occurred in 1904. The events were well recounted in posters in Chinese and broken English. (Evidently the text was not well vetted prior to printing, a common observation about the dual-text signage and writings of China.) The day was rounded out by a tour of the new industrial park of Ascendas, a drive through the existing technology park mentioned by Friedman, a drive to the university and a tour of the new museum of modern industry with its glimpse of current and recent past industrial history of the region. It shouldn’t come as a surprise that many Japanese-branded consumer goods were manufactured here, the closest Chinese port to Japan, in one of these industrial parks. Also located here is a ball bearing factory capable of making micro bearings and wheel bearings 15 feet in diameter, as well as the shipyard of China COSCO shipping company. The final day was a visit to Golden Pebble Beach, a seaside resort north and east of Dalian Bay featuring a business conference center, a world-class golf course, a hunting forest, a natural rock formation of a dragon sea serpent, and a spectacular natural sedimentary rock formation recently excavated. Its features were reminiscent of the features found in the canyon country of the American southwest, only in miniature. There was also a hunting park where we got to sample the firing range with .22 caliber target rifles. (I plugged within two rings of the bullseye at fifty yards without a scope on both shots.) There was also a Kung Fu Chinese martial arts theater, a wax museum and a museum recounting the life of Chairman Mao, the only such one in China. The Chinese are proud that this area has been dubbed by the UN as an international resort attraction.

The final evening was a private banquet with my government host Mr. MA Jun Guo, Director of the Dalian Office of Information Industry, and CISIS exhibition organizers Jianli Wang and Helen Xu of the Dalian Bureau of the Information Industry, my liaison with CISIS. They had visited our Palo Alto office, and I had hosted them in a tour of Stanford and Silicon Valley in September 2006. Jeffery Liu stayed an extra day for this ceremonial final banquet. Mr. Ma wanted to learn more about American graduate schools for his 22 year-old daughter, so even though this was the last formal visit, we arranged to breakfast together the next day to meet with his daughter Sophia MA Yuan Ting. She is an English major who would like to try teaching Mandarin to westerners.

I asked my hosts what message I could share with my western colleagues, particularly our potential and present government leaders. The message was this:

1. Please don’t meddle in China. We have huge problems we are trying to deal with internally and a very delicate peace that is promoting prosperity. We are aware that we must adjust to the outside world, for we know we are changing the world whether we want to or not. We need help, not criticism.

2. Learn Chinese. By that we mean learn about our language, our thought and our writing. Learn to think as we do, symbolically like our characters. Every character has a concrete and an abstract meaning. Sometimes they overlap in meaning. Our written and spoken language is not as precise and nuanced as Latin-related languages, and so some things can be lost in translation. We are trying to accommodate by learning English and other languages, but sometimes we simply cannot translate what our culture is communicating with itself. Be patient.

So in summary, don’t meddle and learn Chinese.

Other observations. I found only one location where obviously counterfeit goods were being peddled: The open market in the tourist street in the Russian Quarter. There were the ubiquitous fake Swiss watches, along with other things, I’m sure. I didn’t look very hard. Public media is pretty tame and refreshingly free of distractions. I found modern Dalian amazingly free of political rhetoric and the English language government news-casting reasonably neutral and thorough. CNN, Bloomberg and Reuters were also available for comparison. However, the open channels demonstrated a degree of censorship for anything stronger than PG-13 material, in contrast to the more free-wheeling scene in Hong Kong, my next stop.

I do not see an immediate opportunity to provide intellectual property law services to clients in Dalian. Perhaps I did not meet the people in need of those services. Innovation was not immediately in evidence, as the focus of the fair and possibly the whole region was on production in behalf of others, not on R&D. Unlike Tom Friedman, I did not meet the R&D movers and shakers, though I am sure I met people who know them or where to find them. Due to the vast differences in exchange rates and fee tolerance, the locals will have to be convinced they need the quality of counsel and service that our expertise can provide. No one seemed interested in taking on outsourced IPR service work, unlike India. With a change in economic balance among China, India and the U.S. over the next decade, however, and given the rapid change and new direction of the Chinese economy, IPR services of some sort will eventually become necessary. So at least for now, an outpost for us in China, particularly Dalian, will have to be deferred. Nevertheless, I have been invited to return to Dalian, and Jeffery Liu now reports that I am one of the three celebrity visitors to Dalian, along with Singapore real estate magnate Yeo Yuen Kee and American entrepreneur Michael Novak.

Beijing, in contrast, may be another story. Jeffery Liu has offered to arrange for me to address the law students at the leading law school in China, at Beijing University, about US developments in intellectual property. Perhaps this is an opening to promote a paid-for CLE lecture series to educate Chinese lawyers-to-be, would-be inventors and patent agents about IP laws and patent drafting and prosecution techniques. After all, it was about a quarter century ago when our then Managing Partner Tom Smegal acted as a paid consultant to the Chinese Government in drafting the first modern Chinese Patent Statute.

So on Monday, June 25, I was off to Hong Kong, where the next day, in the sweltering heat and to the accompaniment of spectacular thunderstorms and torrential rains in 100 deg. F heat, I gave a two-hour lecture to faculty and graduate students of the Chinese University of Hong Kong. Thereafter I met with a faculty inventor picking up new patent disclosures and met at length with the operating head of the University and pitched for more funding for its increasingly successful technology licensing office, which has been my client contact for the last dozen years. I was gratified to learn that the Office has generated revenues approaching US$1.5 million per year on the strength of patents that I prosecuted. The prospects for continued work are there, although it will require patience and dedication to develop the client base beyond the University. At this point, the technical community of Hong Kong is likely to be more interested in using U.S. patent counsel than those on the Mainland. However, the potential for work with the Mainland is unbelievably vast.

I have since returned with business referrals, 250 photos and an invitation to come back.

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