For those of you who have been following this blog, you know I have had an interest in the development of Tata as an automobile entity, and especially the plight of the Nano and Jaguar/Land Rover (see Is Nano the New Yugo?, Tata and JLR I, Tata and JLR II, Tata and JLR III, Tata and JLR IIII).

Anyhow, this week’s issue of The Economist provides a nice review of the most recent Nano developments (see Stuck in Low Gear). Their conclusion: So far, it’s been a marketing disaster!

Since its launch with great fanfare in 2009, the Nano has swerved from one crisis to another. There was opposition to Tata’s original plans to site the factory in West Bengal, forcing a last-minute scramble to switch the site to Sanand. It opened last summer, but not enough cars came off the production line to meet a huge surge of early orders. The orders then petered out. To make matters worse, a few cars burst into flames, raising fears about the Nano’s safety. Sales, which had been predicted to be 20,000 a month, fell as low as 509 in November last year. Sales recovered to 10,000 a month in the spring, but have fallen back again this summer: 3,260 in July, amid a slump in the Indian car market caused by rising interest rates and fuel prices.

Carl-Peter Forster…head of Tata Motors…admitted earlier this year that he was having to reinvent the Nano business model. There was no real national distribution scheme, very little marketing and advertising, and no effective system of consumer finance.

The Nano’s marketing problems began with its product positioning. The price crept up by around 15%, putting it out of the reach of first-time buyers with no regular employment or payslips to back an application for credit. And by emphasising its cheapness rather than its basic but appealing qualities, it deterred slightly better-off consumers who could afford one but aspired to more sophisticated vehicles…

Interesting stuff, and fully consistent with my priors.

Although the Nano is a wonderful concept in theory. In practice, it has turned out to be much harder to turn into a successful reality.

A hysterical translation of Facebook’s terms of service from legalese to vernacular provided by Slacktory (see Play Nice, B*tches, ht Gene).

The Entire Facebook Terms of Service in Bro Speak

The Facebook Terms of Service is a b*tch to read. So we translated it into a more familiar vernacular (with a lot of swearing). You can also read it in parts. Everything from here on out is from Facebook. Kinda.

We use English, b*tches. Yeah, we translated it for some of you, but if the translation says anything different at all, English rules. So if you’re not reading this in English, technically none of it matters. Just FYI. Also, you foreigners should check out section 16, f*cking stat.

We last f*cked with this: April 26, 2011.

Statement of Rights and Responsibilities

All these rules are based on some other rules we have that aren’t really rules so much as guidelines. These rules, though, are the real rules, and they say what you can and can’t do on Facebook, and what we can and can’t do with your sh*t.  We treat your use of Facebook exactly like college athletes treat silence – consent, motherf*ckers.

1. Privacy

We give lots of f*cks about your privacy, so we wrote this. Read it, so you know what the f*ck we’re going to do with the sh*t you post, so you’re not all “Facebook, I had no idea!” when your sh*t is in our press releases. That way you know the deal when you’re deciding what to post...continue reading

I stumbled across an interesting opinion piece authored by Anil Gupta and Haiyan Wang in the Wall Street Journal several weeks ago that echoes my sentiment regarding China as a potential powerhouse in innovation (see China as an Innovation Center? Not so Fast). The article provides some compelling evidence that China has a long way to go before it is able to catch up to the West in this important economic dimension.

Hardly a week goes by without a headline pronouncing that China is about to overtake the U.S. and other advanced economies in the innovation game. Patent filings are up, China is exporting high-tech goods, the West is doomed. Or so goes the story line.

The reality is very different. China is indeed mounting considerable efforts on the innovation front. However, many of the pundits seem to confuse inputs with outputs. The “inputs” for innovation are impressive. China’s R&D expenditure increased to 1.5% of GDP in 2010 from 1.1% in 2002, and should reach 2.5% by 2020. Its share of the world’s total R&D expenditure grew to 12.3% in 2010 from 5.0% in 2002, placing it second only to the U.S., whose share remained steady at 34-35%.

At first blush, data on “outputs” also look impressive. According to the World Intellectual Property Organization, Chinese inventors filed 203,481 patent applications in 2008. That would make China the third most innovative country after Japan (502,054 filings) and the U.S. (400,769).

Yet there’s less here than meets the eye. Over 95% of the Chinese applications were filed domestically with the State Intellectual Property Office. The vast majority cover Chinese “innovations” that make only tiny changes on existing designs. In many other cases, a Chinese filer “patents” a foreign invention in China with the goal of suing the foreign inventor for “infringement” in a Chinese legal system that doesn’t recognize foreign patents.

A better measure is to look at those innovations that are recognized outside China—at patent filings or grants to China-origin inventions by the world’s leading patent offices, the U.S., the EU and Japan. On this score, China is way behind the others.

The most compelling evidence is the count of “triadic” patent filings or grants, where an application is filed with or patent granted by all three offices for the same innovation. According to the OECD, in 2008, the most recent year for which data are available, there were only 473 triadic patent filings from China versus 14,399 from the U.S., 14,525 from Europe, and 13,446 from Japan. Data for patent grants in 2010 by individual offices paint a virtually identical picture.

Starkly put, in 2010, China accounted for 20% of the world’s population, 9% of the world’s GDP, 12% of the world’s R&D expenditure, but only 1% of the patent filings with or patents granted by any of the leading patent offices outside China. Further, half of the China-origin patents were granted to subsidiaries of foreign multinationals…

…Yes, China is making rapid strides in some areas…However, on an across-the-board basis, it still has quite some distance to cover before becoming a global innovation power.

Although I had not seen the patent data cited by Gupta and Wang, the findings do not surprise me. In fact, I expressed similar concerns in previous posts (see Innovation in China, Technological Ascendancy: Lessons for China, Emergence of Emerging Market Innovation, China Attracting High-Tech Research, China Alternative Energy).

For example, in the Emergence of Emerging Market Innovation I wrote:

…with respect to the prospects for developing countries (and their firms) to quickly close the [innovation] capabilities gap with the developed world…Despite the incredible potential…my position has been that we ought not get too giddy thinking that developing countries will be able to catch up anytime soon

Similarly, in Innovation in China (part one) I mentioned:

It will take a long time for developing countries like China that rely on manufacturing for export to close the innovation gap with the West.

Finally, in comparing Taiwan’s development to China’s (in Technological Ascendancy: Lessons for China) I suggested that…

…China (and many other developing economies) risks finding itself in [a commodity trap] as it continues its commitment to manufacturing and export-oriented growth…The key for countries like Taiwan and China is to transition from an economy that simply manufactures the goods that are designed and developed elsewhere to one in which innovation, creativity, and high value-added services take root. Unfortunately, for developing countries, those transitions take an inordinate amount of time.

Nevertheless, I really enjoyed reading the WSJ piece. And I’d encourage you to take a look at it in its entirety. It speaks to the substantial gap that remains between China’s innovation, and that of Europe, Japan, and the US.

Nice article in this week’s Economist about the downside of outsourcing (see Trouble with Outsourcing). This is a topic I’ve recently discussed in this blog (see Reevaluating Outsourcing).

According to the Economist:

Outsourcing has transformed global business. Over the past few decades companies have contracted out everything from mopping the floors to spotting the flaws in their internet security. TPI, a company that specialises in the sector, estimates that $100 billion-worth of new contracts are signed every year. Oxford Economics reckons that in Britain, one of the world’s most mature economies, 10% of workers toil away in “outsourced” jobs and companies spend $200 billion a year on outsourcing. Even war is being outsourced: America employs more contract workers in Afghanistan than regular troops.

Can the outsourcing boom go on indefinitely? And is the practice as useful as its advocates claim, or is the popular suspicion that it leads to cut corners and dismal service correct? There are signs that outsourcing often goes wrong, and that companies are rethinking their approach to it.

These are not new questions. These issues are central to the fields of international business and strategy (see also Williamson and Transaction Cost Economics). In fact, outsourcing has been one of the hottest topics in both literatures for at least the last 25 years.

But the topic is certainly worth revisiting every once in awhile. And although the economics of outsourcing can be compelling, it is also important for managers to keep in mind that outsourcing is not without strategic consequences.

As the Economist recognizes:

Outsourcing can go wrong in a colourful variety of ways. Sometimes companies squeeze their contractors so hard that they are forced to cut corners…Sometimes vendors overpromise in order to win a contract and then fail to deliver. Sometimes both parties write sloppy contracts. And some companies undermine their overall strategies with injudicious outsourcing.

It is this last outcome that poses the greatest strategic threat. When firms outsource important value-creating activities, it often portends a phased exit from a part of the business that later precludes them from reentering that business.

Think Apple.

For a long time, Apple refused to follow the industry trend to outsource elements of the value chain – operating system, hardware, peripherals. Instead, they remained staunchly closed and proprietary. Apple was roundly criticized for doing so. Most industry analysts had written them off, and Apple was, at one point, on the verge of extinction.

However, it is Apple that got the last laugh.

Apple was ultimately able to benefit from their decision to keep much of their value chain in-house. Indeed, they experienced a miraculous recovery sparked by the innovation that their integrated approach allowed. Their competitors, by contrast, had jettisoned many of the complementary value-chain activities that, in the long run, helped differentiate Apple. As a result, many are now struggling.

One extreme example: IBM. The mighty IBM, king of the PC, fell prey to the very industry outsourcing trend that they helped create, …and they are now completely out of the PC business.

The moral of the story: Beware the long-term consequences of outsourcing.

Japan’s Panasonic announced its plans to sell its Sanyo unit to the Chinese white-goods firm Haier last week (see Haier Acquires Sanyo). According to Reuters:

China’s Haier will buy Panasonic Corp’s Sanyo Electric washing machine and refrigerator units in Japan and Southeast Asia for about $130 million, in a move that will give the Chinese appliance giant better access to the world’s third-largest economy, sources said.

At face value, this news seemed rather uneventful. Companies sell divisions all the time. It is not at all uncommon for companies to divest small divisions in an effort to restructure operations and rationalize businesses in order to focus on more strategic, and profitable, business segments.

However, there were several facets of this deal that caught my attention.

1. Although M&A deals have increased in recent years, it is still relatively rare for large Japanese firms to divest assets.
2. Not only did a large, Japanese firm (Panasonic) decide to sell a division, but it sold the division to a foreign firm
3. And finally, not only did Panasonic decide to sell to a foreign buyer, but to a Chinese buyer (Haier) no less. Given the history of tempestuous relations between China and Japan, this struck me as most surprising.

Given that background, it will be interesting to follow this deal in the coming years to see whether Haier is able to capitalize on this purchase to make inroads in the broader Asian white-goods market…