How global brands gave away the store. Literally.
I’m an expert at Search Engine Optimization (SEO). I’ve been doing it for 25 years and I’ve worked for some of the biggest companies in the world. So I speak from a bit of authority here.
I’ve also been a fan of Amazon since 1998. But have you noticed in recent years, there have been a number of strange changes?
- You’ll see more and more strange brand names that you never heard of before, names like CHUCHIOK. SGILE. FONLLAM. FLY2SKY. JETFLIP, and FONLLAM
- Products from these brands will rank on the top of Amazon for whatever you search for. They’ll also have hundreds if not thousands of reviews which look legitimate–they say “Amazon verified purchase” and seem to be well-written.
- Over time, these brands will start getting highlighted by “real” review sites like Wirecutter and Consumer Reports.
So what’s going on here? It comes down to one simple thing. China is cutting out the middleman by gaming Amazon’s systems, and Amazon is aiding and abetting them by looking the other way.
Let me explain.
A Brief History of How China “Opened” Its Economy
American manufacturing had started to outsource to Asia in the 1970s and 1980s–as telecommunication and air travel made the world a smaller place. Despite the best efforts of labor unions to promote “Made in the USA”, more and more you saw “Made in Japan” or “Made in Taiwan” on products. Why? Boardrooms did the math. If you were paying $3.10 an hour to a factory worker in the US, but you could make the same widget in Japan paying someone $1 an hour (while charging the consumer the same price), shutting down your US factory would end up netting a nice profit, meaning higher stock prices and bigger bonuses for your executives.
In 1978, under Deng Xiaoping, China started to open up under its Open Door Policy. For the first time since the Communist occupation, foreign investment was allowed in China. This included airlines re-establishing routes that had been dormant for decades. My dad went back to his hometown for the first time in almost 30 years, seeing family and neighbors he hadn’t seen since he was a student. My mom went back as well. She had been separated from her mother in 1949 and never saw her again, so for the first time she could go back and visit her gravesite.
By 1984, the central government placed less and less control on private businesses and local provinces. For the first time joint-stock companies like the China Merchant’s Bank and Ping An Insurance were established. The Shanghai Stock Exchange was re-opened in 1990, and the Shenzhen Stock Exchange was founded by 1990. The private sector exceeded 50% of China’s GDP in 2005, and by 2010 China surpassed Japan as the largest economy in Asia.
Sounds great, right? But there’s one thing to remember. Even though China’s economy was opening up, every aspect of this was controlled by the Chinese Communist Party. And the CCP wasn’t going to let anything jeopardize its power. So of course the last two Presidents of China, Hu Jintao and Xi Jinping, have also been the General Secretary of the CCP.
Strings Attached: What Western Companies Had to Do to Play
“Opening up” the economy came with some very strict rules. The most important rule: any foreign company that wanted to do business in China had to form a “joint venture” with a China-based company. This means that all your engineering and manufacturing knowledge, all your proprietary information gets shared. There are no secrets. And by the way, every company in China has to hire a member of the CCP who watches over everything that happens in the company.
American companies, in their wisdom, thought–we can keep our corporate headquarters in America and outsource our manufacturing, distribution, and customer service to cheap countries. We’ll keep the marketing jobs and of course our executive jobs here in the US. Consumers will always come back to our brand name. And of course, our intellectual property is safe with this “joint venture” because our counterparts in China will honor their NDAs.
Having spent most of my life in corporate America, another problem is that executives looked only at short-term gain. They didn’t care about the long-term prospects of their companies–nor for their communities or their country for that matter. The way they saw it, they may be in their executive position for at most 3-5 years. So if they can boost their stock price up and leave with a golden parachute, that’s all they cared about.
Unintended Consequences of Western Companies Selling Out
But what were the unintended consequences of this?
From the 1990s until today, virtually every American, European, and Japanese company (which I’ll refer to as “Western” companies) that outsourced to China signed away everything–access to their patents, their blueprints, their methods and procedures, their commercial secrets, their years of experience–to their counterparts in China. Ironically, if a competitor in their own country had stolen this information they would have been arrested for corporate espionage. But these companies shoveled intellectual property to their China counterparts like candy.
At first, everything went well. Manufacturers in China were producing everything they were being paid to produce. Corporate profits went up as companies shut down their own domestic manufacturing plant and fired their own labor workforce.
But something strange happened. Suddenly, you could see more and more knockoff products on marketplaces like eBay. And unlike the “MOLEX” watches and “GOACH” bags you used to find in Chinatown, these knockoffs are indistinguishable from the real thing. What was happening? In many of these cases, the same factory that produced a licensed brand name product for an American company by day continues to run through the night, producing products to be resold under a different label (or in some cases, as counterfeits of the same label). In other cases, they simply “borrowed” the same blueprints and molds used to make Western products and duplicated the manufacturing operation.
Fast forward a few years. Instead of producing knockoffs, companies in China started to realize that with all the knowledge they’d been given by big global companies, they could build their own factories and produce their own products, using the same techniques and parts that they used to produce the products. Sure, they’d change just enough to make it clear they weren’t copying. But the guts of these products were straight from the intellectual property of the companies who were foolish enough to trust them.
The poster child of this phenomenon is a company called Huawei. Huawei was in 1987 by an officer in the People’s Liberation Army. In Huawei’s early years its business model was to reverse engineer foreign technologies. But then the 1990s happened. Firms like Nortel, British Telecom, Symantec, Vodaphone, 3Com, and others formed “joint partnerships” with Huawei. Huawei recruited employees from its competitors. Huawei used its US-based engineers to spy on the competition. Companies like Motorola, T-Mobile, and Cisco started seeing their intellectual property show up in Huawei products–and Huawei either denied it or got a slap on the wrist with a fine when they were caught (a fine that they’d quickly recoup by continuing to sell their infringing products). And like magic, they are today one of the largest telecommunications equipment providers in the world and control huge portions of the online world.
And one by one, that’s how China is catapulting its way into dominating an increasing number of product categories. And like pigs returning to their vomit, American businesspeople just keep chasing after fool’s gold only to find that they’ve given away their own technology to China who will use it one day to dominate their market. And we’re not just talking coffee makers and clock radios. Ask Elon Musk how it’s going for Tesla.
Cutting Out the Middleman
And we’ve now a point where companies in China are asking themselves–why am I only getting a fraction of the revenue, when I could be getting 100%? After all, the manufacturing was the hardest part. It’s the administration, the marketing, and whatever it is the executives do that are the easiest things to replicate. I hate to break it to the CEOs making millions of dollars a year, but you know more than anyone that without your intellectual property, a local base of operations, and a base of loyal employees whose jobs you don’t outsource, you are just a tin pot leader.
And don’t think that the CCP is not taking an active role in this. They’re not idiots. Remember that the Chinese Communist Party (emphasis on the word “communist”) is rooted in Marxism. Marxism as in “control the means of production”. Mao tried to do this in the 1950s to tragic ends. In the 1960s, they rooted out anyone who posed a threat to their Marxist dreams. By the 1970s they started to take on an “if you can’t beat them, join them” mindset. But then by the 1980s something happened. They realized that just by saying they had billions of potential customers, global companies would fall over themselves trying to get access to their market. And so they realized they could call the shots. (They also forgot the fact that the median annual household income in China is $6,000 compared to $43,000 in the US…so 1.4 billion people are not going to be buying their $1,500 phone or their $80,000 electric car).
Sure, anyone could start their own business in China. As long as this business owner knew who was really in charge, they could stay in business. But the moment he got a little too big for their britches and started to think he could call the shots and challenge the State, it was time for him to be humbled (can you say “Jack Ma”?)
In a perverse way, global companies did for China what decades of Marxist incompetence could not. They allowed China to control every aspect of the “means of production”, from tapping their own natural resources (with no limits on environmental damage), to employing their population (with no limits on labor abuses), to owning all the facilities, machinery, tools, and processes within their borders. They know full well that once a country monopolizes manufacturing, they could quickly pivot into dominating a market, especially if they justify the wholesale theft of intellectual property through nationalism (“the West exploited us in the 19th century, so our companies stealing their intellectual property is just fair play).
And so not only do they encourage China brands to grow their market share, they subsidize them so that other brands can’t compete on price in the global marketplace. The death spiral begins for the global brands who are forced to give up the low end of the market and focus on the high end, resulting in loss of both economies of scale and profit margins for the global companies, and increasing efficiency and profit for companies in China (and their CCP overlords).
Think about it–in 1971 the US had no diplomatic relations with China and did just fine. But if the US were to cut off diplomatic relations with China today, what area of your life would NOT be completely disrupted? You wouldn’t be able to brush your teeth, shave, or wash your face. You’d need to walk around naked because you have no shirt, pants, socks, or underwear. You’d have no dishes to eat on, no pots and pans to cook with, no utensils to eat with, and no machines to make coffee with. You’d likely go to work with no cell phone or computer, driving a car missing half its parts. And you’d come home and sleep on the floor, without a mattress or bedsheets. If you want to talk about national security, what will do more harm to a country’s morale–sending bombers and troops to occupy them, or stripping away every bit of material from their materialistic lives?
The takeover is almost complete. The only thing missing (up to now) was branding and distribution. Enter Amazon. By gaming Amazon’s system, these companies in China could bypass all the years their global counterparts needed to build a credible brand and reach out to the American consumer. The very gullible American consumer.
Do you want to know the secret of how they gamed Amazon’s system in particular? Read on.
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