Productivity (or not) in Russia

After reading an American business article breathlessly gushing about the supposed strength of Russia's economy, with such details as a high employment rate under 3%, it seems worthwhile to draw attention to facts known about the topic.

More than 40% of the enterprises in Russia – including both civilian business and firms dedicated to military production – are shorthanded. Want to expand your business, or buy a house? The Bank of Russia has set its benchmark rate at 16% and still expects inflation not to fall quickly. A commercial loan isn't going to be made at the bank benchmark rate.

The same article that celebrated Russia's economic "strength" reported that Russia's employment situation benefitted from Russia's "voluntary" military recruitment model. Sure, there are some Russians who signed contracts to kill Ukrainians for $2,000 per month; that's true. But there's also a regularly scheduled conscription system that pulls several hundred thousand young Russians into the military each conscription cycle and, despite Russian law that states conscripts cannot be sent abroad to war, they've been sent to Ukraine from the very start of the war. These hundreds of thousands of men haven't had an easy time of it; Western estimates put the number of dead and wounded over 400,000. Few of them will work normal jobs again. More workers have fled Russia to avoid conscription – the UK Ministry of Defense estimated fleeing Russians numbered 1,300,000 in 2022 alone. Many of the fleeing Russians have been the most employable: young people in technology work who left because it was easy to do their work abroad.

That full-employment picture looks less cheery when one considers how many Russians fled the country or were sent to Ukraine to die, to get Russia to its low unemployment rate. And those who are working are being courted by military supply firms to lure them from economy segments that sustain and improve Russians' quality of life. Inflation is a direct result of military suppliers outbidding civilian employers to satisfy Russia's demand for weapons and ammunition.

When calculating GDP in Russia, translation into dollars is tough: selling rubles for dollars is illegal, so there is no market value for rubles. The rate of exchange for rubles is a government-promulgated fiction. Who knows what it'd be worth.

Russia is still in the war in Ukraine for the simple reason that enemies of the democratic West – primarily China, Iran, and North Korea – are showering Russia with supplies from which to make war materiel. It should be no surprise that Ukraine requires support itself. Like the Cold War ended when Russia bankrupted itself in an arms race against the so-called "Star Wars" (technically the Strategic Defense Initiative) defense programs, the conflict with fascist dictatorships allied against the West may be won luring them into an escalation of commitment to an unwinnable fight to expand Russia's borders.

And the more Russia embarrasses itself failing to defeat Ukraine, the more Russia's neighbors will be emboldened to reach out to make alliances with the capacity to support them in improving their quality of life.

Russia Over the Long Term

 Much ink has been spilled arguing about the impact of sanctions on Russia using such evidence as the "price" or the Russian rouble or GDP figures that turn on the sales volume of exported energy products, but these metrics don't offer much insight into the strength of Russia's ability to sustain itself while antagonizing the world's democracies with renewed imperialist ambition. (This article won't describe those ambitions; anyone interested in them is well served to read Putin's speeches going back the last few decades to appreciate his longing for the era of Stalin and his hope to return Russia to a similarly feared global power of similar size and international influence.)

What's wrong with looking at the price of the rouble to understand the nation's economic strength? The question one might ask is, whose price? The price available in a free market can hardly be assessed in Russia, where post-invasion law promptly forbade forbade banks and brokers to sell dollars, euros, and other foreign currencies to rouble-paying buyer. If you can't sell roubles, how do you know its price? Russian gaming of currency didn't end there, either. Despite having long-term contracts that required Russia to supply energy products to foreign buyers in currencies such as the euro, yen, or dollar, Putin declared that all purchases would be made in Russian roubles or not at all. Basically Putin declared the power to unilaterally change contract terms at a whim and held energy products hostage to enforce it. The upshot is that nobody knows what the rouble is worth in a free market because there is no free market in roubles after Russia's invasion of Ukraine. Nobody who wants to bail out of roubles can. Indeed, nobody who wants to bail out of Russian assets can: foreigners can't sell stock on Russia's exchanges, they can't sell their interests in Russian energy programs, and they can't liquidate any proceeds they do have in local currency in order to leave with their own currency.

Russia simply seized Western investment. Since nobody will be selling it for foreign currency, the "market" in Russian assets, firms, and currency will not depict the exodus.

What will?

Production.

A look at Russia's production of domestic cars yields some insight into the effect of Russia's policies on Russia's ability to produce passenger cars. The year ending March 2023 shows Russia's automotive production suffering a short-term near-halt, with eventual recovery to about one third of the nation's pre-invasion:

Automobiles don't really show the whole range of Russian production capability, but consider the non-mobilized population of Russia and its interest in normal life. With foreign auto makers bailing out of Russian production partnerships and halting export to Russia, Russians face the alternatives of domestic production or imports from Chinese firms which Russians historically avoided. Although Russian auto sales plummeted over 60%, Chinese share of those sales more than tripled to nearly a third of Russia's ailing auto market. Soviet-era auto brand revivals feature Chinese designs and key components.

As interesting as the evolution of seized foreign plants into Russian production centers may be, the story of Russia's consumer vehicle market isn't the story of Russian GDP. Consider something closer to the priorities of Putin's war machine: trucks required to support war logistics. Russia actually needs trucks to re-establish the empire Putin imagines in his fantasies. Trucks have a certain priority. Before Russia's invasion, a February 2022 estimate foresaw Russia's commercial vehicle market growing at over 3% per year through 2028 on the strength of joint ventures with foreign firms bringing their expertise to the Russian market. The dislocations described above killed growth in Russian commercial vehicle production just as the war in Ukraine destroyed thousands of trucks driven by Russia to lose in Ukraine:

Outside the realm of trucks, Russians find themselves relying on suddenly slower, costlier, and more tenuous supply lines for foreign goods ranging from perishable food items to teabag paper.

Given that Russia now apparently depends on China for its domestic supply of automobiles and trucks, one must ask where Russia is getting the money to pay China for the exported parts. Here, at least, there is no mystery: exported raw goods, primarily in the form of energy products. With the departure of experienced foreign operators, Russia's gas production has already fallen 10% in the last year. Gas is kind of a problem, because its existing pipelines to China won't take more volume and Russia lacks the ability to create LNG terminals to shift gas production to export by ship. Making big capital investments isn't really the style of the Russian empire: it expects others to make the investments on which it depends. By contrast, Russia's oil exports have declined only slightly since its invasion of Ukraine:

Russia is selling all the oil it can to the closest buyers it can manage, because each round trip with an oil transport ship to Europe took something like one week whereas it can take months one-way to India. There's not enough ships to handle all Russia's export if Russia ships oil to India, and Europe has slammed the door on it. It turns out that China is close. And it doesn't matter so much what currency China pays for oil, as Russia must immediately pay Chinese firms that same currency to buy the auto parts, computer chips, cell phones, automobiles, drones, communications equipment, food, and everything else Russia imports from China. 

By reducing itself to a raw good supplier and a finished goods buyer, Russia has remade itself into, in effect, a colony. China, recognizing this, has approved a new map model that renames Russian border cities with old Chinese names (e.g., Vladivostok swapped for Sea Cucumber Bay ("Khaishenvai")), and is already publishing the new maps. Border territories are also renamed. Xi does to Putin what Putin does to former Soviet republics: he's reneging on border-fixing deals Yeltzin made in the '90s. 

Putin can hardly object: he's rendered Russia so wholly dependent on Chinese matériel and funds that he's got to accept what China offers. A Chinese-speaking informant who saw Putin appearing with Chinese officials noted that the Chinese translation of Putin's remarks appeared to suggest the entire speech had been written by the Chinese, as the Chinese text veritably drips with language of a vassal addressing his emperor. Putin either accepted this, or he's an oblivious fool. And it doesn't matter which: he's helpless. Russia no longer poses a credible threat of projected military power. China will enjoy this for a while, no doubt, observing the developments in Ukraine, before taking action. However, Russia will have no practical ability to oppose China when China starts changing street names and flags in former Soviet lands that interest Xi. 

As Russian population has failed to keep Russian resources productively employed, Chinese have taken over former Soviet farms and now own and live on land in Russia. There aren't a lot of ethnic Russians in the eastern reaches of what is left of Russia's empire, so the takeover is already well underway. Putin's Russia endures like a frog in a heating pot: at the sufferance of a chef who's already got the rest of the dinner cooking.

Security Problems in Paris

In Paris recently, an armed crew hit a Saudi prince's convoy to heist his suitcase of cash.

This isn't the only evidence of security problems in Paris.  Earlier this year, French officials confirmed they'd deploy Chinese police to patrol parts of Paris in which Chinese tourists were likely to desire additional security.

Imagine that in your neighborhood.  Crazy, no?

Property Rights in China

A few years ago, China amended its constitution to provide an express right to private property. Presumably, this was intended to reassure foreigners that their investments would be safe from seizure by government officials.

But what does it mean for individual Chinese? Apparently, very little. When police showed up at the home of Shen Jianzhong after it was beset by a mob of 50 thugs bent on running him off the property to facilitate a developer's plans, the police told him to sign their contract.

The Jaded Consumer has covered China's official oppression over supposedly-protected property before.

China: Another Debt Bubble?

Although the national government of China is famously a net creditor with substantial sovereign investment assets, the national government in China isn't the only government in China. Closer to where the rubber meets the road, municipal governments stand responsible for building numerous infrastructure and even housing projects. Local government units in China are restricted in their fundraising. As a result, the frauds that are commonplace everywhere else in China (from fake Apple Stores to fake infant formula, nothing appears too sacred to defile) are equally common in government funding schemes.

In one example, Loudi raised infrastructure development funds with municipal bonds fully secured by numerous tracts of developed land. The problem? To secure the huge bond issue, the land – located in a place you've never heard, with an annual household income less than $2,500 and severe under-occupancy of existing housing – is given a fictitious value commensurate with fully-occupied Chicago suburbs with an average annual household income exceeding $250,000. And based on this Bloomberg report, payment on the bonds requires the claimed land values to go up.

Chinese rating agencies, unsurprisingly, are as easily motivated by politics and favor-trading as by financial reasoning. Ratings on the Loudi bonds range from junk status to one step above U.S. Treasury obligations. According to Moody's, the aggregate local government debt in China is understated by Chinese state auditors by 3.5 trillion yuan – reflecting the murkily unclear status of local debt issuance and whether some of the off-balance-sheet local government fundraising schemes even constitute enforceable obligations. To the extent that Chinese banks are debt holders, the safety of Chinese banks may be in jeopardy. To the extent that official Chinese debt accounting is off by as much as 25%, the reliability of Chinese financial reports is gravely in doubt.

Local Chinese debt may not look very big from the U.S – a mere couple trillion bucks – but they haven't been working to build it up very long, they have no apparent checks in place to prevent issuance scams, and they're working with the central government to issue more. CNBC's John Carney asks an interesting question: if the entire GDP of China has yet to reach $5 trillion when its debt exceeds $2 trillion, what should we conclude about the strength of the economy that's producing China's current output? (For comparison, the U.S. GDP exceeds $14 trillion, and its debt has been accumulating for decades at the local, state, and federal level until it presently exceeds $17 trillion. But the U.S. economy isn't rumored to have been on fire these last few years as the Chinese economy has been reputed.)

Asian study of American business strategies didn't end with the adoption of mass production facilities, did it?

CNAM: The Year(s) Ahead

Leaving aside for the moment that China's currency – the operative currency of CNAM's business – may become more valuable as it is repriced, let's look at what the year ahead holds for CNAM and its shareholders on an assumption of steadily-valued renminbi.

The April 1, 2010 guidance offered by the Company shows an expectation of revenue growing from 86.9M to $220M and net income blooming from $5.1M to over $12M. If CNAM had less than 12M outstanding shares (based on current BusinessWeek stats), CNAM would be headed toward over $1/sh. However, CNAM recently issued shares under the exercise of warrants conveyed to buyers in a private offering conducted in 2008. The expected 2010 income per share hasn't been projected to reach $10 after this dilution, but north of $0.80. At a P/E of 10, this implies a valuation after publishing the 2010 numbers that should exceed $8. On the other hand, perhaps CNAM's growth rate will prove to justify a greater P/E than 10 ....

Considering CNAM's recent pull-back, and thinking on the fact eliminating the Chinese currency's 40% devaluation over the next four or five years will add approximately 50% to the value of whatever earnings or assets exist at that time, it seems CNAM is an attractive long-term buy. Leveraging its infrastructure expertise through the dramatic increase in the capital it is able to deploy will allow CNAM to earn much more than it used to earn on its traditional commodity delivery business, and the new steel recycling business appears on track to reach full capacity in a Chinese marketplace with a long term trend toward consuming increasingly large quantities of steel. CNAM's growing income in Chinese currency will increase in local currency even as the Chinese currency itself increases in value.

Chinese Currency Report Headed to Congress Soon

According to CNN, China's currency manipulation is the subject of a report being withheld from Congress "to provide more time to address China's alleged currency manipulation."

With China's currency remaining inflexibly pegged to the U.S. dollar, market forces that would ordinarily tend to change countries' buying power as their fiscal policy and financial security oscillate have been held in abeyance. Once one establishes the manipulation, one is free to debate whether this works against the U.S. in ensuring a terrible trade deficit and costing local jobs to seemingly-cheaper foreign production, or works in favor of the U.S. by having foreign workers' compensation artificially depressed in order to allow Americans to afford more of everything they want to buy (which is everything, because lots of the money crossing the border has been in the form of U.S. government bonds held now in China ... so those 30-year mortgages that are in effect subsidized by government guarantees are really available largely because Chinese laborers are being screwed in every paycheck to keep the exchange rate favoring dollar holders like the Chinese government at the expense of those – like the vast citizenry of China – who are being paid in renminbi that would be a lot more valuable if the Chinese currency traded freely against the U.S. dollar).

Since the Chinese currency is undervalued something like 40%, it looks like the return ride from 60% back to 100% calls for an appreciation of 66%. This is why I like investment ideas that turn on business opportunities involving Chinese-denominated assets or value streams. Among those I've bought (some of which I've not discussed much here) are China America Holdings (CAAH), China Logistics (CHLO), and China Armco (CNAM). In this market – the market for little Chinese stocks – it's critical to make sure you're buying not only a company whose numbers interest you but also a ticker that has enough volume to enter/exit without taking a beating. Once you leave the major exchanges, you can run into issues with bid/ask spreads and thin volume that make what you think you are reading in stock quotes completely useless.

Somewhere, someone must be doing serious work on picking good value opportunities that are also good plays on China's currency and the economic explosion of China in the 21st century. The combination play is too interesting to miss. Someone with an idea where to look for high-quality investment fodder to take advantage of this play, please post!

Chinese Currency To Dump Dollar Peg?

China – whose "remminbi" (or "Chinese Yuan") has had its value under government rather than market control, most recently by an official policy pegging it to the U.S. dollar – seems to be signaling that it's currency's peg to the U.S. dollar has a definite lifespan. Zhou Xiaochuan, governor of the People's Bank of China, said of China's currency-valuation policies: "Sooner or later, we will exit the policies." He just didn't say when.

Since the dollar peg had kept Chinese currency undervalued relative to the value it would have if freely traded, the end of the peg promises to elevate the value of assets valued in Chinese currency, including the present value of Chinese-currency income streams. This means everything in China could pop, simply as a result of currency conversion rate rationalization.

So, what has the Jaded Consumer thought worthwhile in China?

First, China Armco (Amex:CNAM), which I first invested in just over $3 around the time CNAM had its private offering about a year and a half ago. This company has just launched a steel recycling plant, and its future income will dwarf prior income because it will be engaged in higher-margin business as a producer than it enjoyed as an importer/distributor before it raised the funds to launch its recycling operation. Increased value of growing income is bullish, especially in the face of an impending currency re-valuation. All those facilities just build with U.S. dollars, all being re-valued in an overnight currency conversion ... what excitement!

Second, I've still got China Direct Industries Inc. (NASDAQ:CDII), which seems to have converted its business from primarily helping Chinese companies access U.S. capital markets (for a fee and participation with options and equity) to primarily operating portfolio companies to offer magnesium and basic materials in China (with a consulting sideline advising U.S. companies whose primary businesses are Chinese operations). CDII's portfolio companies make it a major supplier of magnesium in China, and as the US-dollar value of magnesium sales priced in Chinese currency climbs with local currency's price rationalization, the value of this market position will grow. CDII has gone from taking several Chinese companies public in the US every year, and being priced as a financial, to mostly being priced as a magnesium distributor that is still losing money. However, with total liabilities and equity of $77,719,439 and shares outstanding of 27,381,946, the company's book value per share of $2.84 has a long way to go from its current position at $1.76. Moreover, its operational expertise has delivered an enormous reduction in loss compared to its performance in the prior year. Although CDII has a production capacity of approximately 42,000 metric tons of magnesium, the company sold and distributed fewer than 12,000 tons in the 2009 period it describes as "transitional". Since magnesium is the third most commonly used structural material, CDII's magnesium operations should be better able to utilize their capacity as China and the world regain a more normalized construction and consumption pattern. I initially liked this business because it was an opportunity to buy a diversified portfolio of Chinese operations – the portfolio companies – and make money providing financial services while I was at it. The business is now different, in that the financial services no longer appears to dominate the company's future and the primary driver seems to be its consolidating control over various China-situated magnesium facilities. Since I've got it, and the shares appear underpriced both against current book and especially against values following a rationally-priced Chinese yuan, I'm holding in the expectation of significant price improvement (operations, plus currency re-valuation). This business sort of reminds me of the description given of an old value-investor's targets: unsexy businesses that weren't dead yet, old cigar-ends with some puffs left in them, being sold below the value of their constituent tobacco – nothing to make the papers perhaps, but a good buy nonetheless (and perhaps as a consequence).

There's much more in China, but the Jaded Consumer will call it quits here for now and pick it up later. Happy hunting!

Chinese Sell Crummy Goods Locally, Too

The low-quality and mislabeled goods shipped to your hometown from China don't reflect Chinese hatred for foreigners especially; if this story is any guide, that's just the way they do business. Imagine: a third of condoms being counterfeit. (And likely unsterilized, lubricated with vegetable oil, and untested for suitability to function as intended.) While it's nice to see a (single) bust put an end to an IP theft/consumer fraud/public health threat, the fact that the aggregation of fraud so dominates the market invites serious questions (how the market should be approached, how one should distinguish one's products, how consumers should be educated to seek their intended products, how things got so bad without a revolution, etc.).

Chinese assumptions about the relative trustworthiness of foreigners (Chinese trust foreign brands more than domestic brands) may bode well for high-value brands seeking access to the growing market of middle-class and wealthier Chinese.

Costly Chinese Bird's Nest

Last year, the Chinese-hosted Olympic Games showed off a glitzy new open-topped stadium known (due to the twig-like appearance of externally-visible steel lattice supports) as the Bird's Nest.  It turns out that the soccer team set to play in the stadium has backed out of the deal, and the structure's operators are struggling to make money in a venue with an $8.8 million dollar maintenance cost.

Currently, the main business there is ticket sales to tourists who want to walk around and buy trinkets in a gift shop.  The hope is apparently that the structure will within a few short years anchor a major shopping district.  The fact that the planet is plunging into a major international credit crunch and financial depression makes the creation of a major new shopping district something of a puzzle -- perhaps the brainchild of command-economy strategists -- but we'll see.

The decision to make the costliest Olympics ever might yield more expense yet.

ACAS Opens Asian Office

American Capital (ACAS), which as I write trades above its last-published NAV after trading at a substantial discount for some months, announced today that it is opening an office in Hongkong.

Just to be clear: ACAS isn't announcing the launch of an Asian analog of European Capital. ACAS is announcing that ACAS has opened an Asian office, (a) to help existing portfolio companies access Asia, and (b) to establish relationships with Asian institutions. ACAS is thus targeting Asia with expansion efforts (a) targeted at the businesses of its portfolio companies (which might benefit from better relationships with Asian customers and suppliers), and (b) targeted at growing its funds management business. It's this second thing, growth of funds management business, that will eventually give rise to an Asian subsidiary that does for Asia what European Capital does for Europe. That's not today's announcement, however.

ACAS appears to be executing nicely. ACAS hasn't paid a fortune for an Asian equity boutique, but is building at modest cost using organic growth methods. If and when ACAS develops meaningful Asian funds management business, it will do so at low cost -- to the benefit of existing investors.

Since ACAS is trading above last-published NAV, it is unable to use the stock buyback authorization even if a window opens in which the company isn't barred from making purchases. I have a faint hope that ACAS made some purchases while the stock was in the toilet, but based on past performance I expect most of the quarter has been spent in a trading blackout.

Wronged Over Rights In China

When China was selected as to host the 2008 Olympics, critics of China's rights record were shushed with the assurance that the Olympics would spur greater openness. The output should have been fairly easy to guess up front: China's immediate response in 2001 to being awarded the 2008 games was to convict a Chinese-American scholar in a closed-door trial and censor Olympic officials' comments about expected human rights progress. Lack of concern about China as a nation worthy to conduct something that should be as sacred and untainted as an international sporting competition suggests that the voting for Olympic venues was as corrupt as the voting at the games themselves.

An idealist might have imagined that the establishment of official protest zones would indicate tolerance for diverse opinion to be expressed in Beijing during the games -- a start on genuine freedom of expression. Apparently, filing for permission to protest in the free speech zones can get you sentenced to re-education through physical labor. Given that the two cane-carying elderly little ladies sentenced to labor camps in the story linked here were just trying to attract attention to the insufficient compensation they were given when their homes were taken, one can conclude that the Chinese Constitition's explicit protection of the right to property is as much a farce as its guaranty of human rights. When the rights described in the constitutional amendments were unanimously adopted by China's Congress, China's Premier Wen Jiabao vowed, "We will make serious efforts to carry them out in practice."

I wonder who the "we" was in his promise. I'm guessing it doesn't include the police or the work-camp operators. An attorney who's been arrested, beaten, and otherwise harassed for trying to bring to reality the rights China's law claims to guarantee explains the government's position against granting protest petitions in clear terms: “For Chinese petitioners, if their protest applications were approved, it would lead to a chain reaction of others seeking to voice their problems as well."

A cynic might conclude a formal system for obtaining protest permits would simply allow the government to identify malcontents for reconditioning, while providing excuse to oppress non-permitted protestors (i.e., for lack of a protest permit).

Having gotten away clean with this kind of conduct while the world's cameras were on Beijing, China will be emboldened to continue with business as usual. Locals, of course, will read nothing about this from censored papers, but will be fed victory propaganda about China's success in the Games.

Just for curiosity: are there any amateurs left in the Olympics? From any country?

iPhone Stalled En Route to China

Apple, once criticized for not being able to satisfy demand for the product, will on September 7 expand iPhone 3G sales to include Best Buy Mobile, a U.S. joint venture between Best Buy and UK-based Carphone Warehouse (Apple's UK iPhone reseller partner). Apple's production rate on iPhones is reported to have reached 800,000 per week [1], a volume to crush Apple's initial calendar 2008 sales goal of ten million units. Apple's list of countries in which the product is sold with carrier support for all its features (e.g., visual voicemail) is set to more than double, if the "Coming Soon" list is to be taken seriously. Apple's announced schedule calls for another twenty nations to move from "Coming Soon" to "Now Available" on August 22.

Between opening new stores, expanding sales outlets with third parties, and opening whole new jurisdictions to supported sales and service, one would not be embarrassed to conclude that iPhone sales represent a huge growth story for Apple, which barely over a year ago first entered the mobile phone market. Is iPhone 3G an unstoppabble train?

Alas, no.

Part of Apple's success with iPhone 3G is its price. The price, ironically, is also a barrier to Apple's access to the Chinese market.

iPhone 3G: Smaller Price Tag Than Prior iPhone
iPhone 3G sales now benefit from lower sticker price due to carrier price subsidies. Prior to the subsidy, buyers who took phones overseas for resale or use on unapproved carriers could make a business in phone resale, creating demand in official markets based on demand in non-target markets. In theory, this meant more handset sales; in practice, it meant also that Apple lost potential phone service revenue in its pre-subsidy carrier contracts. With service revenue sharing agreements a substantial part of Apple's expected revenues, post-sale use of handsets can impact Apple's profit from the devices. Under the subsidy arrangement, Apple received revenues up-front and bears no apparent risk of post-sale disappointment.

Apple must greatly prefer the security and predictability of the subsidy arrangement. However, it's prevented iPhone sales in China.

Why Can't Apple Sell iPhones in China?
With revenue sharing off the table, Chinese carriers can talk turkey with Apple about phone distribution agreements. It shouldn't require a degree in rocket science to figure out that the real sticking point in these negotiations is the money Apple must be paid by carriers for each phone it wants to put in a customer's hand.

So, why can't Apple sell an unsubsidized phone in China in the meantime? In the US, folks bought v1.0 phones to the point of sellout before Apple's $200 price drop. But, the price drop wasn't what you call a success. The price drop ... the infuriated customers indignant with a sense of betrayal ... the apology and $100 coupon ... not pretty. Apple came off looking like it had no idea how to price its products, and it was seen as punishing early adopters while doing so.

This may explain why Apple doesn't itself sell an unsubsidized 3G phone in China while awaiting carrier agreements.

Eventual carrier subsidy agreements would have the effect of dropping the phone's price. Unsubsidized self-paid buyers will not receive a discount on paid minutes merely because they didn't buy the phone with their service, and Apple will have no leverage to negotiate a subsidy with its carriers over phones sold prior to the agreement, and independently of the carriers' services. Chinese carriers can't be expected as a class to be less greedy than carriers elsewhere, can they? So when the subsidy agreements begin in China, the effect on customers will be a price drop, and Apple will face the anger without having the benefit of subsequent recoupment from carrier revenues.

Upshot?
Apple's addition of countries -- in some cases, more than one carrier per country -- to its list of places Apple's phones can be bought with vendor support is likely to continue. However, as appealing as some of those places might be, the big-footprint growth that is not on the list is pretty significant: China and Russia. While Apple doesn't reach an arrangement with carriers serving either country, Apple will be unable to make ideal revenues from either. So long as Apple imagines a subsidy arrangement being worked out, it will hesitate to try selling unsubsidized phones due to the price-drop backlash. So long as no supported phone sales exist, demand will be met by gray market efforts to bring phones into those jurisdictions.

While Apple stands willing to offer unlocked, unsubsidized phones in jurisdictions requiring separation of phone sales from service contracts, it would seem Apple might want to make hay while the sun shines by selling phones under the same terms in jurisdictions where carriers seeking to out-deal Apple are not getting with the program.

Particularly if Apple is already opening stores there.

On the other hand, if Apple is looking for the high-volume sales and doesn't imagine satisfying them through a small handful of new retail stores, perhaps the decision to sell from such stores would be insignificant. Apple's sales of all products through all channels to China and Russia are pretty slim as a fraction of all Apple product sales, suggesting that the existing channels -- Apple does have some official resellers in China -- are just not up to the task of such a high-volume business. Given the training apparently required to be able to oversee phone activation, dropping iPhones on computer resellers isn't a plausible option.

So, what's Apple to do?

[1] Present production volume may represent pre-launch stock-up volumes in advance of new jurisdiction roll-outs, and may not represent anything like normal sales volume. Remember, numerous countries launch later this month.

Temple of Lies

Iran's propaganda machine is much more effective than the Americans'.

This week, Iran released missile launch video and said belligerent actions would be met with harsh reprisal. The fact the video was apparently doctored to conceal technical failures in the launch, and the fact that the missile launches were mostly short-range missiles and not the more concerning longer-range missiles indicated by the government in Tehran, will probably go largely unnoticed in the part of the world where the video was intended to be digested.

Last year, Iran made a show of strength by kidnapping British sailors patrolling Basra on the pretext that they were trespassing in Iranian waters. When one confronts stateless terrorists, one expects grainy videos of disheveled prisoners being subjected to public humiliation by being made to read ultimatums and participate in propaganda. It is, however, surprising to see such maltreatment accorded uniformed soldiers captured by Geneva Convention signatory states. Ratification of terrorist conduct isn't new for the regime in Tehran, though. Ratification by directly apeing it on television may be a clearer admission than previously available of exactly how uncivilized the nation's leadership is. Interestingly, British doctrine for soldier interactions with captors, updated to handle the realistic probability that capture will be by stateless criminals uninterested in honoring the international laws governing civilized behavior, turns out to fit in just fine when Tehran stages a kidnapping. In the Middle East, where the video was intended to be digested, Tehran's behavior was interpreted not as barbarism but evidence of strength.

Iran has been reassuring anyone who would listen that bombings and murders and assassinations within Iraq are not a product of Iranian training or funding or direct involvement, but result solely from US policy blunders.

Well, that latest point might be half-true. The policy blunder of the United States is a failure to articulate its objectives in a way anyone -- foreign or domestic -- can understand. Years after ousting the tyrant who used to run Iraq, Americans haven't established a "victory condition" sufficient to support departure from the theater of operations -- or explain why Americans should be in the area indefinitely. The result is widespread belief -- supported by opposition propaganda -- that Americans efforts are a failure and that the United States is in an endless, losing battle against local forces. In short, failure to articulate its definition of success has left opponents to define it however needed to depict its impossibility.

Without a clearly articulated vision of success, America can hardly claim victory is feasible. Indeed

On the theory advanced by some critics -- that inability of Americans to leave with their heads up proves their failure -- the U.S. occupations of Germany and Japan are also a failure, in that they're still there and still face both embarrassment and failures in local relations as a result.

The question I see is whether anti-Soviet military presence in newly democratized countries (or, in the case of Germany, re-democratized) is a good model for countering the new crop of religious radicals (the Soviets were arguably radical in asserting there was no God and punishing unapproved religious conduct as China now does) and their hypocritical efforts to bring righteous government to the masses by murdering them until they accept some self-proclaimed caliph as their absolute master. The basic idea is the same: a frightening ideology that promises to steamroller the engines of human progress threatens to overtake legitimate governments by force, and has shown willingness and capability to throw weak governments into chaos at the expense of local life and prosperity. Communism and Islamofascism aren't much different in that regard. The question is simply whether the tactics that were applied to the last eruption of the threat are good tactics for the current bout.

It's an interesting parallel to attempt, and we shouldn't look at the end of the Soviet Union as a model for relations with the proponents of the present evil. I think that Americans and the Soviets eventually reached a kind of realization that their assets and interests were too important to risk by a serious escalation. By contrast, Iran has little compunction -- and stateless terrorists none at all -- about killing people who stand in their way. Like the beginning of the conflict against international totalitarian movements masquerading as communism, the beginning stages of the conflict against reactionary tyrants pretending to advance Islam is doomed to be violent.

As in the old conflict, we will need to pay close attention to the terms in which the conflict is cast, and take care not to lose control of the framing of the conflict. Losing control of how the conflict is framed in the public dialog will result in propaganda defeat, and cause great increase in the duration and cost of any American effort toward any objective American policymakers may eventually deign to articulate.

It may not be possible to prevent other players from cheating, but it doesn't hurt to announce the rules. The United States' failure to articulate an achievable military purpose when it sent forces into Iraq (or failure to articulate a follow-on purpose after it was clear Mr. Hussein's regime no longer controlled the country) invited critics to supply their own framing of the issues, tailor-made to ensure the United States has as little opportunity as possible to achieve political objectives involving the region. The United States has made this error before, and lost the propaganda conflict for minds despite success on the field.

The powers that be should wake up and smell the coffee. What effect swords (bullets), if their achievement can be readily undone by an unchallenged pen (video)?

China Mobile: Apple Now Speaking Our Language

Apple's insistence that China Mobile agree to revenue-sharing terms reportedly killed iPhone talks in early 2008. But the talks are back on.

But was Apple's position on revenue sharing really so hard? Last November, T-Mobile offered Germans a €999 unlocked phone, which one could activate with any carrier. T-Mobile's alternative was a €399 phone with a 24-month contract. Not to be beaten (and with regulators watching), Orange offered a no-contract phone for €649 to keep France from intervening in its handset-and-service deals. French regulators weren't the only ones concerned about mandatory hardware/service lockups. With arrangements in place with European carriers that could not possibly have involved subscription revenue sharing (just a big one-time payoff), how could Apple really claim it was unable to see its way free of revenue sharing?

When Apple announced a new subsidized phone deal for its upgraded phone (3G, A-GPS, improved headphone jack -- don't laugh, the old recessed headphone jack really made it useless to those of us who might have plugged it into a regular mini-stereo jack and just killed its use as an iPod replacement), the announced price was a subsidized price. That is, the price to the customer after the carrier tossed in the extra bucks to Apple that used to come from the customer directly (or from siphoned service fees). The new price of the phone with contract is a bit higher (e.g., $1,237), which should not surprise customers looking at a phone for $199 ($299 to upgrade from 8GB to 16GB).

Remember when you upgraded to a desktop computer with 64K, and it cost thousands and was a greyscale machine with no pointing device? How times have changed ....

Now that Apple has devised a way to get paid by carriers from funds they expect to glean from subscribers, and this method -- gasp -- looks exactly like every other handset manufacturer's subsidized set scheme -- China Mobile is now happy to talk turkey with the iPhone vendor. Still, "there are practical issues to be resolved."

Like, how much money Apple wants for these things, in a country where T-Mobile's unlocked price last year is easy to confuse with an annual income. Average annual expenditure on consumer goods last year was $543, which I reckon might not include China Mobile's service plan but could easily encompass the subsidized iPhone price announced in North America. The upside: China's middle class is projected to eclipse the entire present population of the United States in the next dozen years. And India's middle class isn't doing too badly, either. Establishing Apple's software platform in those markets may be an investment worth making, if Apple can keep up the relative value of the platform over time.