• Transcript

Jon:
Welcome to Episode 75 of The Digital Life, a show about our adventures in the world of design and technology. I’m your host, Jon Follett, and with me is founder and co-host, Dirk Knemeyer.


Dirk:
Hey, Jon, good to be here.


Jon:
Yeah, Dirk, it’s exciting. We got to go to a conference last week together and spent some time chatting in person, which is a little unusual for us because I’m in Boston and you’re in Ohio, so that was great. We really got to talk about some new topics related to both the show and to our studio, so that was an exciting backdrop for the topic that I’m going to raise on the show today, which is the growing importance and significance of China in both digital product design and in the product design cycle generally speaking.

I wanted to get started with what I think is a significant event which is last week, Mark Zuckerberg spoke at a university in Beijing and he spent at least 30 minutes or so practicing his Mandarin in front of a fairly large audience and taking questions and answers. While I’ve seen the mixed reviews come in as to the quality of his speaking in Chinese, I think just the fact that billionaire CEO from one of the most important digital company is currently running, the fact that he was in China speaking the language and attempting to take question and answer, I think that’s a significant event.

What were your thoughts on that, Dirk?

Dirk:
Yeah, I think very significant. I’m not a fan of Mark Zuckerberg, I’m not a fan of Facebook, but hats off. People who are saying that the quality of it was some was good, some was not, hey, let’s see some of you folks try and do that. He went basically seamlessly. Spoke for about half an hour, answering audience questions that were not pre-prepared and dealing with them pretty darn well. I was really impressed and I was particularly impressed because it speaks to a degree of long-term vision and strategy that is so unusual in U.S. corporations. Of course, it’s so common in China. By comparison, China, historically and certainly in modern days in a lot of ways, the Chinese are much better at looking ahead, looking forward, being strategic than the U.S. We’re always much more short term.

Here, Zuckerberg clearly, I don’t know what sort of a time investment but I’m going to guess months, if not years ago, said, “Hey, I’m going to learn Mandarin pretty well.” That’s the sign of someone who really has isolated the importance of the Chinese market, of China in the international world of business and is committed in a very deeply authentic way to wholly move toward that. For a CEO like Zuckerberg of a tech company like Facebook, like rock on. I just can’t … and, again, I don’t like the guy. There’s a lot that I disagree with that he’s been a part of, but in this front, good for him. Good for him. What a smart way to spend time, what an intelligent way to be the vanguard of your company’s future business dealings.

Jon:
Yeah, I think one thing that Zuckerberg also has going for him is, I think, his significant other is Chinese-American as well. It might be a little easier to pick up Mandarin if you have someone to practice with or, at least, learning a new language. I think the fundamental understanding that we, as digital product designers, should take away from that is that the time we spent focusing solely on the English speaking world for our digital products is going to change and it’s going to change sooner than we think. I’m not saying that in regards to … I know there are lots of digital products that are localized to take advantage of emerging markets and markets other than English speaking ones.

Translation services, some of which we’ve actually done some work for, I’m fully aware of those. What I mean is in a product strategy sense, you can see that for Facebook, having entry into the Chinese market is going to be critical for their growth over the long-term. They absolutely need that. I think from the digital product side, we can expect as China has more and more resources that they are going to be an important player in the digital products marketplace internationally. What I mean by that there is going to be products that are developed for a Chinese audience that are going to start coming to the U.S.

There’s no longer necessarily going to be American exports like, say, Facebook. You can see this in the largest tech IPO which was Alibaba at the end of September. Billions of dollars raised and you’re not even really buying a piece of that company. You’re buying a contract with, I think a Bermuda-based corporation that shares in the profits of Alibaba. There is still massive interest in this stock. I think as, at least, from my vantage point which has been largely English speaking up until now, these types of events really remind me that as much as we say the world is getting smaller, that that’s going to have some real world consequences for digital product design coming fairly soon.

Dirk:
Yeah. Yeah, for sure, and it’s like the wave is finally crashing. The Alibaba IPO is at the CNN level. It’s like that was so big that CNN and all the other mindless media outlets are covering it. It’s really bringing home something that’s been building up for a long time. I mean I remember in 2004, I gave a talk at Yahoo called the “Future of Digital Product Design” and I talked about this 10 years ago. This was coming in a really big way. Now, we have Alibaba in 2014, but what’s really interesting is according to the United Nations Statistics Division, in either 2015 or if not, most likely 2016, China will surpass the United States as the largest consumer market in the world.

Now, on the surface you might say, “Well, so what? China has a billion plus people. Of course, they’re the largest.” As recently as 2009, China was only the fourth largest and China was less than 20% the total of the United States. The U.S. was more than 5x, almost 6x, larger as a consumer market than China. In the course of just 6, 7 years, China went from being fourth in the world, a fraction of the United States to soon to be the largest consumer market in the world. The scale and speed of growth is massive and it really speaks to long-term strategy which we talked a little bit about earlier in this recording. I mean China in 2009 when they were still under 20% the size of the U.S. as a consumer market, as a percentage of their GDP, China was only spending 37%.

Now, why that’s important is because the United States as a percentage of GDP was spending 71%, almost double. If you look at the other Top 25 nations, there’s only two others that were less than 50% as a percent of their GDP. Those were the Netherlands at 46%, and they were the 17th largest consumer market, and Norway at 49% which is the 25th largest consumer market, and itself, a full order of magnitude smaller than China. China has this really smart long-term strategy that started, I’ll say started in the 90s. I mean conceptually, started earlier than that certainly, but of using manufacturing, a strategy of urbanization, manufacturing, to grow into this immensely powerful nation that has just modernized in, relative to the scale, a remarkably short period of time.

That strategy from an infrastructure perspective was well cemented in the mid-aughts, yet they were still low on that consumer market size. I mean fourth in the world isn’t low, but compared to the United States, compared to the European Union, as a whole, even compared to Japan, much smaller. Getting all the pieces in place, modernizing, urbanizing, and now, that market is developing. The stats that I haven’t seen but the question on my mind is if from 2009 to 2016, they’ve gone more than 5x to surpass the United States, how long will it be until they’re double or triple or five times the United States? What is the outer limit of the possible growth of China as a market? It’s certainly double the United States, but how much higher could it be?

Once you start looking at these numbers, once we really start talking about it from a quantified perspective, it puts into focus just how immense the opportunities there are, but also the potential threats to people in the United States and other places just from the standpoint of the overall society and knowledge workforce and where the workers of the future and the tasks of the future are going to be done.

Jon:
Yeah, I think in terms of understanding the market that China represents for us form an export standpoint, I have not seen a lot done in that area. What I mean by that is we’re very satisfied to import our electronic gadgets from China but we can see that with so much consumer money available now, there is going to be fantastic opportunity for businesses from the U.S. who can go overseas and who can provide some of that innovative products that the United States is known for, but for the China domestic market. Anecdotally, I’m beginning to see this happen. I have a friend of mine who’s in fashion design and it looks very possible that her designs … there’s interest in them in China for the domestic market and I remarked -


Dirk:
Domestic meaning Chinese market?


Jon:
Correct, yes. What that means is there is the possibility that she could become a very successful designer and sell possibly millions of units and never be known as a designer in the U.S., but have an incredible audience overseas. That is an opportunity, it’s really never been framed that way for American creative entrepreneurs whether you’re in a physical product like fashion or digital products like ourselves. The thought of us looking abroad for new markets, I’m sure that’s going to be a greater part of the American future. In fact, I would almost guarantee it.


Dirk:
Yeah, and we as a nation aren’t responding really well. We’re not evolving into new industries. We’re not evolving into the technologies of the future at a pace that is equal to what in China they’re doing in particular. There’s real failings at a strategic long-term planning level that could really penalize us in the decades ahead in ways that it’s too early to see right now. It’s a definite cause for concern.


Jon:
Yeah, I think part of this will also come along the lines of how are we educating our populace? Now, thinking about, “Hey, will my son have the opportunity to learn Chinese in school because I think that’s probably going to be a really important trade language for him to learn?” I’ve been thinking about that for years mainly because I was interested in it, but also because I thought that Chinese would be an important language to know. Things like that where they’re embedded into our everyday infrastructure like education here where we can accept that the world is changing and that we need to change with it. Whether it be just from a societal standpoint or from a business standpoint as well.

Dirk, I know that you have some business relationships with Chinese suppliers as we put together various products at Involution Studios and I know you have great interest in building those relationships over time. Could you give us a little insight into how those began and maybe some of your thoughts on having these Chinese-American cross-cultural business relationships?

Dirk:
Sure. We have some of our printing of our products for Invo done in China by a company called Panda Game Manufacturing and the things we’re printing are not games, but the relationship again, because in my free time I develop tabletop games and in trying to figure out where to get them produced, like many new Indie business people I talk to, I had that, “Oh boy, this is going to be made in USA” thing going on right at the beginning. I quoted, let’s see, three companies in the U.S., one company in Germany, and then Panda, and they’re technically based in Vancouver, British Columbia to Canadian-born brothers whose parents immigrated from China so they speak Mandarin fluently. I think of them as a Chinese company even though they’re technically Canadian.

I quoted all of these five companies and what I discovered was that Panda was both the least expensive which was fully expected but they also were the highest quality which was not at all expected. I felt like I had my hands tied at that point. They were probably 10% cheaper, 20% cheaper than the U.S. providers but the quality was probably double as good as the U.S. providers. The German company, the quality was actually very similar to Panda. I preferred Panda, but the German company was competitive at least, but they were much more expensive.

That’s how the relationship began was just through a normal quoting process. Yeah, I mean that’s the relationship now that I’ve had for 3 plus years and with Invo, we’ve had for a couple years now. They’ve been an absolutely great partner but one of the things just in my interest in the Chinese market and also because for a variety of reasons, our relationship with Panda is getting ever more strategic, I’m planning on going on a trade mission basically in Q1 of 2015 to get a tour of the different works of Panda and talk to some of their different people from ownership to the floor manager and some of the workers, and also just have a little walk about in China and really get a sense because it’s one thing sitting in my comfortable home reading stories, talking to people, getting a lot of secondhand information.

Intellectually, I think I get the situation pretty well, but there’s nothing like full immersion. I’m going to break out of the bonds of being the analyst, intellectualizing it on the side and go out there and immerse myself in the culture and in our business relationships a little more deeply and see how that impacts my perspective.

Jon:
I’m totally jealous. That sounds like a really exciting trip.


Dirk:
I hope so, yeah. I’m really looking forward too. I’ve gotten to be real buddies with the Lee’s, the brothers who run Panda, so I’m sure they’re going to make that a hell of a time for me.


Jon:
Listeners, remember that while you’re listening to the show, you can follow along with the things we’re mentioning here in real-time. Just head over to thedigitalife.com. That’s just one “L” in the “digitalife,” and go to the page for this episode. We’ve included links to pretty much everything mentioned by everybody, so it’s a rich-information resource to take advantage of while you’re listening or afterward if you’re trying to remember something that you liked.

If you want to follow us outside of the show, you can follow me on Twitter, @jonfollett. That’s J-O-N-F-O-L-L-E-T-T. Of course, the whole show is brought to you by Involution Studios, which you can check out at goinvo.com. That’s G-O-I-N-V-O.com. Dirk?

Dirk:
You can follow me on Twitter, @dknemeyer. That’s @-D-K-N-E-M-E-Y-E-R. Email me: dirk@knemeyer.com, or read me: dirk.knemeyer.com.


Jon:
That’s it for Episode 75 of The Digital Life. For Dirk Knemeyer, I’m Jon Follett, and we’ll see you next time.