Technology-first solutioneering serves facility operators navigating the transformation of Digital into AI facilities.
Facility Management Transformation
Facility management and maintenance have undergone significant transformations over the past decades, from labor-intensive manual work to automated smart buildings, driven by technological advancements and changing operational needs.
AI and machine learning technologies are poised to accelerate this transformation, putting further pressure on facility operators and facility solution providers to drastically expand their services and deepen their skill set in order to keep physical and digital assets up to date.
The Olden Days
Before the rise of modern technology, facility maintenance was primarily manual, physical labor with rudimentary tools. Devices and equipment were repaired or replaced as they broke down and inventories were kept track of with pen and paper (or on a whiteboard, as below).
Superintendent of Buildings and Grounds Harold M. Wadsworth (left) and custodian foreman Dean Gardner of Utah State College select the crew staff for training in 1955. (facilitiesnet.com)
As industrialization and urbanization accelerated, the introduction of mechanical and electrical systems revolutionized facility management. HVAC systems, automated elevators, centralized electrical grids, and early security systems were integrated into buildings, requiring more specialized skills to maintain these systems. During this period, computerized maintenance management systems (CMMS) began emerging, allowing facilities to track and schedule maintenance more efficiently.
This evolution demanded an initial shift in services offered by facility solutions providers, moving away from providing hands for manual labor to bringing the expertise to operate electrical systems and computers.
The Digital Revolution
With the rise of advanced and connected computing, facility management saw another major shift towards digital solutions. The integration of enterprise resource planning (ERP) systems, sophisticated CMMS platforms, and building automation systems (BAS) now allowed facility managers to monitor and control multiple building systems remotely.
Energy efficiency became a growing concern, leading to the introduction of energy management systems that optimize heating, cooling, and lighting based on usage patterns. This decision-making forced facility operators to increasingly rely on digital information and data systems, which facility solution providers would develop and maintain for them.
The skills required to manage facilities dramatically shifted from craftsmen to skilled professionals familiar with digital technology stacks. The fundamental shift to technology-first facilities solutions and maintenance laid the foundation for an accelerated path towards smart and connected buildings.
The Internet of Things (IoT) has transformed facility maintenance, making real-time monitoring and predictive analytics an industry standard. IoT sensors collect data on equipment performance, environmental conditions, and occupancy patterns, which in turns enables us to develop maintenance strategies to anticipate equipment failures.
AI Transformation
Facilities are poised to be transformed by the impact of artificial intelligence in the coming decade. Aside from cloud computing, digital twins, and smart energy further enhancing energy efficiency, reducing operational costs and minimizing downtime, on-premise “AI workers” will take over more and more facility floor space as they assist companies to grow and expand more cost-effectively.
An AI generated image of a modern office where a human and a humanoid robot are interacting (dall-e)
These “AI workers” aren’t just robots sitting alongside the production assembly line, but are also security drones monitoring the premise, call center agents solving customer problems, internal sales assistants providing training to sales staff, quality assurance teams ensuring faulty products are caught before shipping out, and so on. This is challenging facility solution providers once again as it requires a new layer of skills to be offered to facility operators.
These new skills include not only assembly and maintenance of AI systems, but also providing AI solutions that ensure the “AI workers” continuously learn from their human counterparts working at the company. To remain competitive, it’s no longer good enough to rely on an off-the-shelf software solution or SaaS; proprietary business processes that provide a competitive edge in the market must be encoded within AI models and reinforced with your team’s best practices, innovative ideas, and lessons learned.
That’s the particular challenge MTS Solutions is tackling on behalf of our customers as we help our customers navigate the exciting transformation of Digital into AI facilities.
Is AI supposed to be labor-serving or labor-saving?” is one of the most often asked questions when talking about AI transformation. Time and time again, we (at MTS Solutons) emphasize the same point:
AI is meant to be labor-serving, not labor-saving.
Henry Ford – founder of the 121-year old Ford Motor company – addressed a similar concern a century ago. As the mechanized assembly line revolutionized industry, many feared machines would replace workers entirely. In 1929, Ford put it plainly [1]: “For unless machinery is labour-serving, it has no excuse for being.” We can adopt that sentiment and say:
“For unless artificial intelligence is labor-serving, it has no excuse for being”
We see the same fears today with AI. Some predict that artificial intelligence will inevitably take over many human jobs, leaving workers with no place in the economy. But history tells a different story.
When stronger, faster, higher-powered machines emerged in the early 20th century, it didn’t eliminate work — it transformed it. Businesses became more productive, industries expanded, and new jobs emerged that were previously unimaginable. Furthermore, the new jobs required more human intelligence, not less.
Ford also noted that the power generated to run the machines by itself, is meaningless. You need people to extract the benefits from the abundance of power through the use of machines.
The same applies to AI today. The raw computing power of modern AI chips is useless unless it’s used to develop algorithms that enhance human productivity, helping people perform their jobs better, not eliminating them.
That said, of course some tasks and jobs will be fully automated by artificial intelligence — but only where automation makes sense. A good rule of thumb is this: if a task requires no judgment, no creativity, and no decision-making, then it’s better handled by AI. There’s no point in having a person spend time on repetitive, mindless tasks when they could be focusing on higher-value work — work that requires out of the box thinking, intuition, problem-solving, or relationship-building.
“The old method works just fine—so why change it?“
… is probably the biggest hurdle we face when introducing new technologies. It’s not the technology itself that holds companies back — it’s our natural resistance to change. Many hesitate to shift away from familiar ways of working, often because they see new systems as disruptive, unnecessary, or at that moment even performing worse. But adopting technology for the sake of novelty isn’t the goal. The real question isn’t whether something is new, but whether it’s better.
The only way to break through this resistance is through results. Time and time again, we must prove that new technologies aren’t about replacing people or cutting corners — they’re about making work more effective, reducing inefficiencies, and allowing teams to focus on what truly matters: serving the public.
Why AI?
If we look beyond the buzzword, AI is really just about using the immense raw computing power of modern computer chips to mimic and automate human activities — whether it’s writing stories, painting pictures, answering customer questions, or making sense of trends and data. The automation makes sense if past events accurately predict future events.
The reason why we can do today what we couldn’t do twenty years ago is the availability of immense, raw computing power. With the help of modern AI chips we can define and describe human activities using billions or trillions of parameters – something impossible by humans. So, no matter how complex we find an activity, if past events accurately describe future behavior, we can use chips to turn the process into a (very big) algorithm, and then leverage the algorithms to automate the process.
Now, imagine applying that same idea to running a business. In theory, any process — from hiring employees to managing inventory to responding to customer inquiries — can be learned and automated by AI. We’re already seeing this in action. Chatbots handle customer service, AI-powered tools draft emails and reports, and smart software helps businesses detect fraud, optimize supply chains, and predict sales trends. But right now, most of these AI tools work in isolation—each one doing its own specific task.
That’s about to change. Over the next couple of years, Agentic AI will evolve from handling individual tasks to managing entire workflows. Instead of just answering customer service chats, it’ll track orders, schedule follow-ups, highlight anomalies, and recommend actions — all without direct human intervention.
Think of it like the early days of factory automation—first, machines replaced individual manual tasks, and eventually, entire assembly lines became automated. This transformation isn’t just about efficiency — it’s about re-imagining how businesses operate. Just like factories in the 20th century scaled up production like never before, AI-driven businesses will be able to scale decision-making, creativity, and problem-solving at levels we’ve never seen. And that’s where things start to get really exciting.
[1] Ford, H. (1930). Moving forward. Doubleday, Doran & Company.
Business strategy has only one ultimate aim, maximize the potential business value, and can do this by utilizing one of the 7 available powers. That’s the central axiom underlying foundation of business strategy, as detailed in the 2016 book “7 Powers: The Foundations of Business Strategy” by Hamilton Helmer.
Business Strategy vs. Operational Excellence
While the purpose of business strategy can be summarized in just a few words (“maximize the potential business value”), those few words carry a lot of weight. Let’s break them down.
Business value is defined in the same way a value investor looks at a business: the sum of initial capital investment, the discounted cash flows from business operations, and the discounted terminal value. Finance students will recognize this as the Net Present Value (NPV) of an investment.
The definition of business strategy contains another very important word: potential. A strategist’s job is to help the firm identify business opportunities that maximize the return potential. However, it’s the management team’s job to ensure the potential value is captured and converted it actual business value.
The best way to maximize captured business value is by achieving operational excellence. This is an important observation because it clarifies why operational excellence is not a business strategy (even though it is so often designated as such).
To achieve business success, you need both a great strategy and great execution. If either is lacking, the business might not be so successful. That’s why we often hear that a “great strategy poorly executed” is not worth more than a “poor strategy greatly executed.”
Fundamental Business Equation
Helmer distills the definition of business value into the following fundamental business equation:
$latex V = M_{0}\ g\ \overline{s}\ \overline{m}&s=3$
Where:
$latex V$ = potential business value
$latex M_0$ = current market size
$latex g$ = discounted growth factor
$latex \overline{s}$ = long-term average market share
$latex \overline{m}$ = long-term average differential margin (margin in excess of cost of capital)
$latex M_0$ and $latex g$, together, represent the Market Scale. $latex \overline{s}$ and $latex \overline{m}$, together, represent the Power.
Power is the potential to realize persistent differential returns and the key to value creation. Combining Power with operational excellence is a sure way to create significant enterprise value.
The third and fourth factor of the equation, $latex \overline{s}$ and $latex \overline{m}$, are carefully defined as the long-term average of the market share and differential margin. The long-term nature is a key attribute of what makes a Power, a Power.
The reason why a Power must be durable is rooted in the mathematics of the discounted cash flow model. As Helmer puts it in the book: “If a company were growing at 10% per year, the next three years account for only 15% of its value.” In other words, future cash flow is very important, and Power is what ensures you get those.
Aside from the long-term nature, Power has two other important attributes: benefits and barriers. A benefit is something that materially improves the cash flow to the firm. A barrier is something that prevents competitors from arbitraging out the benefits.
Strategy Statics: The 7 Powers
Strategy statics are defined as the study of strategic position at a single point in time. According to Helmer, there are only 7 Powers, or strategies, available to a company. The 7 powers are:
Counter-Positioning: Adopting a new, superior business model that the incumbents can’t easily or are unwilling to replicate due to potential damage to their current operations.
Cornered Resource: Preferential access at attractive terms to a coveted asset that can independently enhance value.
Scale Economics: A business in which the per unit cost declines as production volume increases.
Network Economics: A business in which the value realized by a customer increases as the install base increases.
Switching Costs: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
Branding: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.
Process Power: Embedded company organization and activity sets which enable lower costs and/or superior products, and which can be matched only by an extended commitment.
The exhaustive nature of the 7 powers makes it an attractive framework for business strategists. Each of the 7 powers provides a benefit to the firm that has the power and presents a barrier to the competitors that don’t.
Benefits from Power
The benefits generated by Power can be separated into two major categories: either they increase the perceived value of the products or they decrease the cost of making the product. We can analyze how this enhances the potential business value through the lens of the value/price dynamic chart I discussed in a previous blog post:
Increasing the perceived value while maintaining the acquisition cost will increase a customer’s willingness to purchase. This will grow the top line of the business. Decreasing the cost while maintaining the perceived value for the customer will increase the firm margin. This will grow the bottom line of the business.
Benefits are relatively common and often bear little positive impact on the company value as they are generally subject to full arbitrage.
Barriers due to Power
The barriers imposed by Power can also be split into two categories: the competitor is either unwilling or unable to challenge the Power.
The best way I found to think of how a barrier works in the real world is to view it through the lens of Sun Tzu’s Art of War: “The supreme art of war is to subdue the enemy without fighting.” A great barrier will cause your competitor to evaluate that the cost of breaking down the barrier exceeds the benefits it would yield after the barrier has come down.
Unlike benefits, barriers are uncommon and often a true source of company value specifically because they can prevent arbitrage. Often, it is the quality of the barrier that truly defines the impact of the Power.
Strategy Dynamics: Technology, Invention, Value
Strategy dynamics, on the other hand, is the study of strategic development over time.
Technology Sows Invention, Invention Creates Value
Helmer identifies two key fundamental forces that drive strategy dynamics: invention and technology.
Invention necessarily precipitates Power. The age-old adage “me too won’t do” guides the creation of Power. Invention is fueled by a founder’s passion or domain mastery, not by the analyst’s Excel sheets.
The relentless forward march of technology assures tectonic shifts in the external environment will always create new threats and opportunities for firms, large or small.
While the relentlessness of technology creates opportunity which, through invention, can yield Power, that doesn’t guarantee a successful business strategy. Remember, the aim of a strategist is to maximize the potential business value, and the business value is a combination of Power and Market Size.
The degree to which invention creates compelling value for the customer determines the potential market size for your product or service. There are three distinct paths to creating compelling value: capabilities-led, customer-led, and competitor-led.
Capabilities-led: firms translate some capability into a product with compelling value.
Customer-led: incumbents know of the unmet demand but don’t know how to satisfy it.
Competitor-led: inventor beats incumbent with a product that elicits a “gotta have” response.
The relentless forward march of technological progress sows the ground for inventions to create compelling value.
Business Lifecycle & 7 Powers
A second aspect of strategy dynamics is the relevant timing of each of the 7 powers in relation to the business lifecycle. I previously discussed the business lifecycle when I wrote about the six phases of transient competitive advantage.
The concept of the transient competitive advantage is not entirely compatible with Helmer’s theory of the 7 Powers, since a key attribute of a Power is its long-term nature and a transient competitive advantage is by definition limited in time. However, that won’t stop us from trying.
According to Helmer, the most critical part of establishing power is during the business take-off – basically that’s when the business sees explosive growth. Therefore, the timing for introducing a Power can be split into three windows:
Before take-off (origination)
During take-off
After take-off (stability)
The origination phase is characterized by the period before a firm clears the compelling value threshold. In other words, it’s when the groundwork for Power is laid but the market size isn’t there yet for a Power to become relevant.
This phase aligns with Phase 1 of the transient competitive advantage framework. Two Powers become available during this phase: counter-positioning and cornered resource.
The take-off phase is characterized by a period of explosive growth as the compelling value becomes obvious to the customer and the product elicits a “gotta have” response.
This aligns with Phases 2 and 3 of the transient competitive advantage framework. Three Powers become available during this phase: economies of scale, network effects, and switching costs.
The stability phase is characterized by a high growth but not exponential growth period. The crucial element is that growth has slowed enough for the market size to not double every two to three years. That’s the case when annual growth is around 30-40%. Growth beyond that creates sufficient flux in the market that counter-moves by competitors can spark change in market leadership.
This aligns with Phases 4 and 5 of the transient competitive advantage framework. Two Powers become available during this phase: brand and process.
Further Discussion
Low-effort strategy development
From the fundamental business equation $latex V = M_{0}\ g\ \overline{s}\ \overline{m}$ one could argue that the low-effort way a strategist can increase the potential business value is by redefining the market size. For example, rather than focusing exclusively on the domestic market, you expand regionally and thus perhaps 10X $latex M_{0}\. That will drastically increase V, all things kept equal.
Obviously, all things are not equal since expanding into new geographies also introduces new potential competitors which will impact your s and m. Therefore, the equation provides business leaders with a good tool to evaluate business expansion by asking the question: what happens to V if such a decision is taken.
Powers & Monopolies
The most important factor of a Power is its ability to put up barriers to existing and potential competitors from arbitraging out the differential margins obtained as a benefit of the Power. This is in line with Peter Thiel’s mantra that “competition is for losers” because it usually drives down prices and margins, but contrary to Jan Eeckhout‘s perspective that market power lack of competition is bad for the economy as a whole because it prevents competitive forces from driving down consumer prices.
Importance of Market Share
You often hear people say “Revenue is a vanity figure” because, really, it’s the free cash flow generation that keeps the business running. Similarly, one could argue market share is a vanity figure because share size without a suitable (differential) margin will not bring you healthy free cash flows.
However, market share is relevant if your chosen Power is economies of scale because, typically, large-volume production provides room for lowering input and processing costs.
Power Density
We can think of a Power as the defining key winning attribute of a business. Therefore a firm should double-down and allocate as much resources as possible to energize this Power. This would yield highly specialized firms with intense “Power Density,” which we define as firm resources allocated to energize the Power relative to a firm’s total resources available to the firm. Allocating as much resources as possible to a certain Power would hinder vertical integration strategies due to lack of sufficient resources.
That raises the question whether a single firm successfully manage resource allocation across such diverse power requirements? Or will it always get beaten by a strategic alliance of two distinct Power-dense firms?
For example, Intel currently manufactures and designs chips, requiring economies of scale for manufacturing and a different power (cornered resource, switching costs, brand, process) for design. The alliance between TSMC (manufacturing) and NVIDIA (design) has made it such that Intel is currently uncompetitive in both businesses.
In this blog post, I tell the story of how we achieved the first ever 9 GHz and 9.1 GHz CPU Frequency overclock by using liquid helium cooling.
What is (Extreme) Overclocking?
Overclocking is the art of increasing a processor’s operating clock frequency beyond the warranted manufacturer specification. The practice has been around for as long as processors had a clock frequency. Consumers do it to achieve extra (free) computing performance and companies do it to showcase the reliability of their products.
Extreme overclocking involves the same process of increasing the operating clock frequency beyond the warranted specification but with the use of exotic cooling techniques such as dry ice, liquid nitrogen, and liquid helium. The primary impact of such exotic cooling is that the significantly reduced operating temperatures substantially improve the overclocking headroom. That allows the user to achieve operating clock frequencies that yield record-breaking performance.
An extreme overclocking computer system
I have been deeply involved in the (extreme) overclocking community for over two decades as a reviewer at Madshrimps, an administrator and later owner of HWBOT, and currently as a content creator at SkatterBencher. I’ve participated in several overclocking regional and world championships and achieved several hardware class and overall benchmark overclocking records.
One of the first times I ever tried extreme overclocking was to push the Athlon 64 3000+ to 3.6 GHz back in 2006, nearly 18 years ago when I was 17 years old. That result still stands as the 4th highest overclock for that particular processor. I actually published a report about that session on Madshrimps!
17-year old me extreme overclocking in my bedroom
However, few, if any, of those achievements match the grandeur of being the first to achieve a 9 GHz CPU frequency.
CPU Frequency Overclocking World Record
I track the history of the CPU frequency overclocking world record on the SkatterBencher website. The record has a long history which was in part fueled by the frequency race among semiconductor manufacturers and in part by human’s desire to compete.
The pace of achieving frequency milestones was excruciating in the first decade of the millennium:
First 1 GHz on October 7, 1999, with an AMD Athlon 650 MHz
First 2 GHz on December 3, 2000, with an Intel Pentium 4 1.4 GHz
First 3 GHz on September 5, 2001, with an Intel Pentium 4 2.0 GHz
First 4 GHz on March 27, 2002, with an Intel Pentium 4 2.4 GHz
First 5 GHz on July 3, 2003, with an Intel Pentium 4 3.2 GHz
First 6 GHz on May 25, 2004, with an Intel Pentium 4 560
First 7 GHz on August 9, 2005, with an Intel Pentium 4 670
First 8 GHz on January 22, 2007, with an Intel Pentium 4 631
However, around 2005 semiconductor vendors realized that increasing the clock frequency as a means to increase compute performance also meant prohibitively increasing the power consumption. As the frequency race ended, the multi-core race began. Semiconductor companies focused on using the ever-smaller transistors to add more cores to improve compute throughput rather than increasing the operating frequency.
Perhaps as a consequence of the reduced focus on achieving ever-higher operating clock frequencies, the CPU frequency overclocking world record stalled for many years. Since 2007, only two CPU micro-architectures have been able to break the world record: AMD Bulldozer and its direct successor Piledriver. Ultimately, AndreYang achieved nearly 8.8 GHz on November 19, 2012, well over a decade ago.
For a variety of reasons, the AMD and Intel micro-architectures released in the years following Piledriver never came close to achieving frequencies surpassing 8 GHz.
During the Intel Innovation 2022 event in September 2022, Intel announced the Raptor Lake processor architecture as the successor of Alder Lake. Two slides stood out at that event.
First, Intel claimed the upgraded Intel 7 process, featuring the 3rd generation SuperFin transistors, would bring peak frequency improvements of +600 MHz. Second, Intel teased the very first processor clocked at 6.0 GHz out of the box. This processor would later become known as the Core i9-13900KS.
The highest frequency achieved on Alder Lake is 7800 MHz. So even with the improved Intel 7 process, no one expected Raptor Lake to touch AMD’s 8.8 GHz frequency record.
But that all changed one month later when the ASUS ROG overclocking team achieved 8812.85 MHz, breaking the decade-old world record. The most remarkable part about that overclocking result is that it was done with liquid nitrogen, not liquid helium.
Liquid Helium for Overclocking
The obvious reason why liquid helium is used by overclockers is that it can cool the processor down to near absolute zero temperature. In theory, liquid helium (4.2K) provides a 73 kelvin advantage over liquid nitrogen (77.36K). Lower temperatures usually increase the overclocking headroom.
Modern Intel processors are surprisingly good at handling extreme temperatures. With a combination of the right motherboard and voltages, a lot of processors will operate without problems at minus 196 degrees Celsius.
Helium is indeed a rare element on earth and, thus, there’s a finite amount available. It’s a non-renewable resource too, so some claim using helium for overclocking records is an unacceptable waste of scarce resources. However, keep in mind that during an overclocking world record attempt, usually only 100 to 250 liters of Helium is consumed. That’s a blip of the estimated 160 billion liters produced annually.
Furthermore, in the words of Max Planck, the 1918 Nobel Laureate in Physics, “Scientific discovery and scientific knowledge have been achieved only by those who have gone in pursuit of it without any practical purpose whatsoever in view.”
First 9.0 and 9.1 GHz Clock Frequency
Following the exciting record-breaking achievement of Raptor Lake in October 2022, the ASUS ROG overclocking team strongly considered using liquid helium to improve the CPU frequency overclocking world record. This is where my story begins as I was invited to join the overclocking team for the attempt.
We achieved the first 9 GHz on December 9, 2012, in preparation for the Intel Core i9-13900KS product launch. We initially aimed to set the record with the KS, but turned out that the 13900K was a one-of-a-kind chip. It could run colder and faster and was the only processor capable of breaking the 9 GHz barrier. For the occasion, Intel had also sent out a video crew.
We achieved 9.1 GHz for the first time on March 7, 2024, while preparing for the Intel Core i9-14900KS product launch. The Core i9-14900KS is the final evolution of the Raptor Lake processor architecture. It represents the best of the Raptor Lake silicon, symbolized by its out-of-the-box frequency of 6.2 GHz.
Unfortunately, this time around there was no professional film crew present to capture the moment. However, I did put together a video detailing the event.
Conclusion
I’ve been around the (extreme) overclocking scene for a very long time and in very different capacities. While I’ve been deeply involved since I was a teenager, never could my younger self have imagined I’d be part of this little aspect of computer history.
Being a part of the team that achieved the first 9 GHz CPU clock frequency will be something I’ll treasure for the rest of my life!
“Add Oil!” or “加油” (jiāyóu) is one of the most well-known phrases you’ll hear when visiting or living in Taiwan. But where does it come from?
Introduction
If you’ve lived in Taiwan for as long as I have (over a decade now!), then you’re undoubtedly familiar with the phrase 加油, or jiāyóu. Literally translated as “Add Oil!”, the phrase 加油 is used to spur on or encourage perseverance.
加油 can be used in many settings. Sports fans may shout it to encourage their sports team or favorite athlete. Teachers may say it to give courage to their students right before an important test. Colleagues at work use the term to spur on each other when an important deadline is coming up. Or you can use the term to give courage to a friend during a difficult period. You can even shout it to your cat when they’re playing fiercely with a toy.
Last week, I used the phrase with a (non-Taiwanese) friend. He asked where the term comes from. I had no idea. Fortunately, a 2012 paper discusses the semantic evolution of the term and helps answer the question.
Original Meaning of 加油
The original meaning of 加油 is straightforward.
“加” doesn’t have a fascinating origin. Initially, it referred to falsely accusing, lying, or exaggerating a story. However, the usage was later extended to mean adding, supplementing, applying, or exceeding something. As an adverb, it can also mean “more.”
On the other hand, interestingly, “油” originally referred to an ancient river’s name. The river was west of present-day Songzi County (松滋市), Hubei, Central China. It flowed southeast to Gongan County (公安县), where it entered the Yangtze (長江) river. Later, the term was used to symbolize fats from animals or plants. Over time, it became a generic term for mineral hydrocarbon mixtures, such as gasoline.
In ancient Chinese texts, the term 加油 was used literally as “adding oil” as early as the Tang dynasty (618–907 CE). However, its modern meaning of encouragement didn’t appear until the early 20th Century.
Tsinghua University Cafeteria Slang
To uncover the roots of the modern meaning and use of “加油” (“jiāyóu”), we need to go back to the historic grounds of the Tsinghua University (清華大學), founded in 1911 and formerly known as Tsinghua School (清華學堂).
The story of the modern use of 加油 begins sometime in the early 1920s. While there is no official documentation on the origins of the use of 加油 as a slang, contemporary sources such as student diaries and school newspapers mention several uses of 加油.
Initially, the term was used in the traditional sense of “adding oil” in the school cafeteria when students would complain there was not enough sesame oil on their vegetables. “加油” thus meant adding more sesame oil. It appears that enough students asked for more sesame oil, so 加足 became a widely known and used phrase around the campus.
From Cafeteria Slang to Sports Cheer
Then, as the story goes, someone (for whatever reason) shouted the term during a school sports event. This unintentional chant struck a chord across the campus, and 加油 became Tsinghua’s signature cheer. The cry eventually spread to national sporting events and became synonymous with encouraging sports athletes “to put in more effort.”
One student named 孙瑜 (Sūn yú), who was at Tsinghua from 1919 to 1923, mentions in his memoirs that the school held an autumn sports meeting in 1922. His classmates encouraged him to join the 100-meter race. Sun Yu writes that while he wanted desperately to “加油,” unfortunately, he didn’t have any “油” left to “加.”
When later remembering the event, Sun Yu mentioned that he knew what 加油 meant but implied that it wasn’t a commonly known term. So often, the term would have to be explained, even in sports contexts.
The official documentation of this shift from a cafeteria expression to an athletic encouragement surfaced in Tsinghua’s magazine. In a 1924 issue, a piece mentioned athletes who had qualified for special cafeteria privileges due to their sporting achievements. They were said to have “加足了油” (“Jiā zúle yóu”), meaning they “added enough oil” to earn the special treatment.
Another 1924 issue explicitly used “天天加油” (tiāntiān jiāyóu), meaning “every day add oil,” as a synonym for continuous training, showcasing the evolving interpretation of “加油” to signify persistent effort.
From Sports to Broader Public
Because of its simplicity and clarity, the term “加油” gained popularity beyond the sports sphere at the Tsinghua campus.
In addition, at that time, Tsinghua University often participated in off-campus regional or national sports meetings. Furthermore, the Tsinghua teams were pretty good. So, the Tsinghua “加油” sports cheers started spreading around the country.
Use of 加油 in 1933 cartoon depicting a sporting event
From the 1930s onwards, “加油” was widely used as a cheering slogan in various sports competitions nationwide. Furthermore, the term started spreading internationally. It has even traveled across the ocean with Chinese fans. It has become a slogan to encourage and cheer for Chinese athletes at foreign events.
One such story is described in an August 5, 1948, Ta Kung Pao (大公報) newspaper article covering the Chinese athletes’ performance during the 1948 Summer Olympics in London.
At the Olympics, the Republic of China basketball team competed against Belgium, Chile, Iraq, the Philippines, and South Korea in the group stages of the tournament. The action took place in the Harringay Arena in London.
1948 Summer Olympics Chinese basketball team
On August 4, China suffered a 51-32 defeat against the Philippines, despite, as the newspaper writes:
“中国球迷和外国观众仍没有放弃，他们高呼‘中国加油’！声震整个哈灵盖运动场。这个呼喊，果然有效，中国五将控制着皮球，互作稳健和快捷的传递” “Chinese fans and foreign spectators still did not give up. They “shouted ‘Come on, China’! The sound shook the entire Harringay Stadium. This cry was indeed true. Effectively, China’s five generals control the ball and interact with each other steadily and quickly.”
By the late 1930s, the usage of “加油” evolved beyond sports contexts, branching into broader domains of encouragement within society. Its transformation from a sports cheer to a motivational phrase for various scenarios became evident in publications like “Nankai University Weekly,” where “结婚加油” (“加油” for marriage) was used to encourage a bride during her dressing up, or in articles discussing national efforts, urging people to 加油 for the country’s betterment.
Final Note
For this blog post, I explored the intriguing etymological journey of the Chinese term “加油” (“jiāyóu”). Originating in the middle of the first Century as simply a means to “add oil,” it has transformed through the Tsinghua University cafeteria and sports events to become the go-to phrase for encouragement in the streets of Taipei, Taiwan.
To avoid the middle-income trap, China may need a predominantly rural labor force that thrives and excels in its affordable public education system so it can transition from a middle-income country relying on low-skill, low-wage jobs to a high-income country driven by technological innovation.
Introduction
Let’s begin by stating something that may sound controversial but certainly isn’t: a prosperous China is good for the world.
A prosperous China would mean it continues to be an engine of growth for the world economy by providing the world with ever-increasing technological innovation and growing demand from an increasingly larger consumer base. Vice versa, a struggling China would mean a detriment to the world economic growth, or, following what we know from Xi Jinping’s concentric circles, possibly worse.
In this blog post, I summarize the book “Invisible China,” published by the University of Chicago Press and authored by Rozelle S. and Hell N. The book’s central thesis is that China’s historical lack of focus on investing in human capital development at a rate that matches the economic growth will cause it to get stuck in the middle-income trap.
What is the Middle-Income Trap?
The middle-income trap is an economic concept coined by Indermit Gill and Homi Kharas in 2007 and later elaborated on by Homi Kharas and Harinder Kohli in 2011.
The idea is pretty simple. A country can develop from a low-income economy into a middle-income economy by making abundant and cheap labor available to the international market to attract low-skilled, low-wage manufacturing jobs. As foreign funds flow into the country, there’s job growth and economic growth, ultimately raising the country to a middle-income country.
The middle-income trap describes a country where economic growth fueled by low-wage labor finds itself less and less competitive as wages rise quicker than in other low-income countries. If the country does not sufficiently develop comparative advantages in high-tech or innovative products, it risks being uncompetitive with high-income countries. Thus, the country is trapped due to uncompetitive labor wages and uncompetitive technological innovation. This results in economic stagnation or even regression.
Graduating from the middle-income trap is difficult but not impossible. Several countries have been able to do so. But if we look closer at why they graduated, we can find several external factors that played a significant role.
Many European countries graduated after completing the process of European integration, essentially riding the coattails of already high-income economies. Similarly, certain former Soviet block countries managed to make the transition. However, these countries were wealthy before the iron curtain fell across Europe, and thus their transition could be considered a return to a previously held status.
Countries that graduated from the middle-income trap most similar to China include the Asian Tigers (Hong Kong, Singapore, South Korea, Taiwan), Ireland, and Israel. These countries did not benefit from tight economic integration with high-income nations or a history of high GDP.
Why Escaping the Middle-Income Trap is Important to China?
Assuming the underlying axiom of Xi Jinping’s leadership is that, to ensure a prosperous future for the Chinese people, the Communist Party of China must remain in power indefinitely. To ensure the Party’s survival, it understands that ensuring economic prosperity is fundamental to political legitimacy and national unity.
Now we can understand how important it is for China to escape the middle-income trap. Economic growth is not simply a desire for better living standards for the Chinese people. It is a prerequisite to the survival of the Party, which, according to its ideology, is a prerequisite to the survival of the Chinese people.
The Relationship Between Human Capital and the Middle-Income Trap
The authors describe a crucial data point to illustrate the importance between the development of human capital and escaping the middle-income trap: the share of the labor force with at least a high school education. This metric is a proxy for the labor skill level in an economy. A higher high school attainment rate would reflect a better-educated labor force that has acquired the skills required in a high-income, technological, innovative economy.
As the authors point out in the book – where they mentioned 30% high school attainment in 2015 – that’s very similar to countries like Turkey, Mexico, Brazil, and South Africa which are trapped in the middle-income bracket. In contrast, by 1976, Taiwan’s secondary school enrollment rate was almost 70%.
The authors capture this idea powerfully on page 28 of the book: “[…] no country has ever made it to high-income status with high school attainment rates below 50%.” So, China today looks more like 1980s Mexico or Turkey than 1980s Taiwan or South Korea.
How China Got Here?
There are several contributing factors why China has low high-school attainment rate. For the purpose of this blog, I will only mention them briefly.
During the Mao era, the pursuit of academic excellence was highly discouraged. This is exemplified by the Cultural Revolution starting in 1966, which saw many intellectuals persecuted. Schools and universities closed, and many urban intellectuals were forced to move to the countryside to work on farms. I would recommend the opening chapters of the book “How the Farmers Changed China” for a first-hand account of this.
Following the death of Mao in 1976, the economy gradually opened up, fueled by the farmer’s desire to be in charge of their own destiny. We discussed this in a previous blog post. During the Deng period, a gradual process of opening up more toward a market-driven economy, many rural farmers migrated to the cities for a better life and better opportunities.
Long story short, young people had two choices to improve their living standards: pursue an academic career, join the CPC, and rise through its ranks, or find work in the city and gradually work their way up.
Here I want to briefly highlight the importance of the hukou household registration system in China. As I discussed in a previous blog post, Hukou links a person to a place of residence which is defined as either Urban or Rural. The registration is based on where your parents live. So you are born Urban or born Rural. The Hukou system has far-reaching consequences for your entire life as it prohibits you from going to certain schools or migrating to certain places.
The CPC has always favored the urban population by providing subsidies for food and goods and better living and working opportunities. The rural population was largely left to its own devices, certainly post-Mao. By this, I mean that the rural population had to figure out how to increase its living standards independently.
Until recently, people in rural areas preferred to find a low-skill job in the city because (a) there were always plenty available, and (b) the wages continued to increase. However, the job growth trend has recently reversed, but the wages remain high relative to China’s low-cost labor neighbors such as Vietnam, Cambodia, or Indonesia.
To wrap up the story, one should consider that young rural parents have not considered education a primary driver for economic success. Therefore, it is less likely they will put their children’s education as the top priority. Government incentives will play a crucial role in turning this trend. In the book, you can find several examples of how the government is taking action already.
Everything considered, the situation looks dire. There are approximately 300 million rural migrants currently in the labor force who are first to suffer from a steady decline in low-skill job opportunities on which they depend to provide for their families. If we include the people in their families, perhaps 500 or 600 million people depend on these jobs. A large fraction of these migrants have no proper education and will have great difficulties pivoting to a high-skill job. They may also not be satisfied with the kind of income working in agriculture provides.
Other Factors: Quality of Human Capital Investment
So, we have established the following.
It is crucial for the world economy and the Party that China can avoid the middle-income trap.
It may need to follow the economic growth models from Israel, Ireland, South Korea, and Taiwan to do so. That means investing in human capital development at a rate that matches the economic growth to provide the population with the skill sets demanded in a high-income economy by the time it aims to transition from a middle-income country.
Unfortunately, China’s rural population has largely ignored the importance of higher education in favor of benefiting from low-skill jobs and economic growth to provide for their families.
So, what can be done? There’s only one option: heavily invest in education. According to the authors, the central government is taking action to do exactly that. However, some barriers make this challenging.
I already discussed the structural barrier of the hukou system that prevents rural children from having access to the higher-quality urban school system.
Another barrier is time-related. Children born today who receive a complete education will only enter the labor force in 25 to 30 years. So, even if all the required changes would take effect today, China would only see the effect of this around 2050.
Of course, there’s the option to re-educate the current labor force. However, with most of the labor force never really learning how to prosper in an academic environment, that may prove more complex and less efficient than hoped.
Other important factors discussed in the book contribute to this challenging situation. Here’s a brief list:
China’s rural infants raised in traditional family environments are not always given everything they need to develop healthy cognition. This leads to academic under-performance.
China’s rural children sometimes lack health care and nutritional needs. These also lead to academic under-performance. Examples include access to glasses and the epidemic of anemia.
The rural vocational high school system can improve its quality of education, ensuring that those students who choose further studies are equipped with the skill set demanded by the 21st-century high-income job market
While the cost of the rural education system is significantly reduced already, it is often still a significant financial burden to rural families and hence a possible cause for children to drop out in favor of looking for work.
To transition from a middle-income country relying on low-skill, low-wage jobs to a high-income country driven by technological innovation, China may need a predominantly rural labor force that thrives and excels in its affordable public education system.
In this blog post, I provide an alternative perspective from the point of view of business strategy to the profit paradox.
The Profit Paradox
The Profit Paradox by Jan Eeckhout (ISBN: 978-0691214474), published by Princeton University Press, tells a story about firms exploiting market power enabled by technological innovation. Market power enables firms to set selling prices higher than they would be in competitive markets. Furthermore, the resulting increase in firm profits are kept within the firm rather than passed on to employees.
A key statistic is that the ratio of profit share vis-a-vis labor share of revenue has increased. In the early 1980s, firm profit share was 2% of revenue and labor wage share was 20%. Today, firm profit is 10% of revenue while labor wage share remains stagnant at 20%. So, the ratio of firm share to wage share increased from 5% to 50%.
The Profit Paradox points out that technological innovation is both good and bad for everyone. It is good because in competitive markets it lowers the cost of goods and services, therefore, lower the price of those goods and services to consumers. It is bad, because firms use the technological innovation to construct moats and increase barriers to entry to make the market less competitive. Due to the less competitive markets, the cost-savings from technological innovation actually end up maintaining the high prices for the consumers.
It reminds me of this incredible Counterpoint statistic I saw a while ago, which stated that, within the global smartphone market, Apple captured 85% of the operating profits with only 48% of the revenue share and a measly 18% of the shipment share.
A Business Strategist’s Perspective
As a consumer, my instant reaction to the significant increase of firm profits vis-à-vis stagnant wages is anger. Firm profits could be passed on to the consumer as lower prices or to employees as higher wages. I feel that’s very much the popular sentiment that drives the fight against “corporate greed.” However, as a business strategist, I can’t align that sentiment with what I see day-to-day.
Another perspective may be considered if we look at the post-1980 explosion in the field of corporate and business strategy theory (i.e., Porter’s Five Forces) and the subsequent rapid increase of professionals (MBAs) applying those theories in the real world.
Source: National Center for Education Statistics (NCES)
These professional managers are first and foremost tasked with looking after the firm’s health, not the broader economy. The increased productivity comes partly from professional managers focusing more intensely on best practices (i.e., Toyota TPS) which enable higher efficiency with a given capital investment. Suppose productivity increases are firm-specific, meaning the inter-firm optimized interaction between people and assets. In that case, it seems fair to attribute the resulting increases in profit to the firm and not employee wages. Hence, we get an increase of the profit share vis-à-vis the wage share.
Furthermore, business strategists have learned that competition is bad for business precisely because consumers will pick the lowest price if all other things are equal. So, there’s a solid incentive to devise business strategies that avoid competition (i.e., Blue Ocean vs Red Ocean). Operating within a “blue ocean” with no direct competitors offering near-identical products or services enables companies to set pricing as they see fit. That results in higher prices and higher profits.
Lastly, perhaps we should not say “higher” prices and profits but “healthier” prices and profits, at least from the firm’s perspective. Healthy operating profits are essential to firms because they enable healthy reinvestment in the firm. This reinvestment comes in various forms, including hiring more people, increasing inventory levels for faster customer delivery, expanding operations, or diversifying into new markets. Too low profits prohibit these “healthy” business activities. Too high profits entice other firms to compete and steal some market or, even worse, have innovation disruptors come for your entire market. In other words: maintaining a healthy profit share is simply good business practice, even if that means less goes to wages and consumers pay higher prices.
This reasoning would ultimately imply that healthy businesses are bad for the economy. I find that hard to wrap my head around.
May 10, 2023 Update
Following my blog post, I reached out to the author for additional feedback on my line of thinking. The author was kind enough to provide an insightful clarification on the topic which adds more food for thought.
The crux of the argument laid out in the Profit Paradox is that the while business efficiency improvements (like Toyota TPS) are help improve the efficiency of the company, they don’t necessarily improve the efficiency of the market as a whole. Less efficient markets – where certain players exert excess market power – are not good for the consumer as they end up paying higher prices and see their wages stagnate.
Healthy markets provide a platform for many firms to make healthy profits, but avoids few firms making excess profits.
As a final note, I also appreciate the author’s perspective on mergers and acquisitions. Not only because of the arguments related to increasing market power as laid out in the book but also because M&A is notorious for being the #1 firm value destroyer, as NYU professor Mr. Damodaran has argued many times over.
Whether it’s increasing market power or destroying firm value, M&A tends to benefit no one other than those collecting fees and commissions on executing the transaction. Therefore it’s probably in most people’s best interest to put the onus on the acquirer to prove a transaction will create value prior to regulator approval.
In this blog post, I summarize the emergence of a market-oriented ecosystem in rural China following Baochan Daohu in the late 1970s, as detailed in the 1996 book “How Farmers Changed China” by Zhou Kate. While the book discusses the topic of market creation, I intentionally use the term “market-oriented ecosystem” to bridge with Ulrich’s Market-Oriented Ecosystem in a follow-up blog post.
In summary, following the CPC’s victory in the Chinese civil war, the party took control over land and agricultural production by placing it in the hands of local cadres (party loyalists). Unlike the farmers, who had managed food production thousands of years prior, local cadres were unfamiliar with managing land for food production. The cadre’s technical incompetence, combined with the disincentivized farmers, planted the seeds for food production output below expectations.
Farmers held the local cadres responsible for the millions of deaths during the Great Leap famine. Slowly, the farmers tried to regain control over the land and food production process to ensure subsistence at the very least. Mao’s death in 1976 enabled farmers to pursue family autonomy further, and efforts ultimately led to the Deng Xiaoping government formally recognizing and encouraging Baochan Daohu.
Baochan Daohu Generates Surpluses
At its core, Baochan Daohu is about generating surpluses from production activities. Just like for any business, a well-functioning operating model generates surpluses. The surpluses have two effects:
When your operating model generates surpluses, your basic needs are covered. That is certainly the case when you have a high surplus, but also when you have a low surplus.
When your operating model generates consistent surpluses, you can “trade” and “reinvest” them.
The implication of the first effect is significant for the farmer. When farmers regained control over the food production processes, they also controlled their own food production. The farmers felt incentivized to generate food surpluses that cover their family’s basic needs and, preferably, a little extra just in case.
The implication of the second effect is essential for the emergence of markets. All that you don’t consume, you can exchange for things you don’t produce, like food products or money. It also encourages specialization and diversification to make surplus produce more attractive or of higher value. That facilitates searching for better production processes, including biological and technological innovation.
“When the basic production quota was fixed, and farmers were allowed to keep or to sell the rest of the harvest, farmer’s incentives soared, leading to the greatest sustained increase in productivity per worker and hectare in Chinese history”
How the Farmers Changed China, p77
Dealing with the State Procurement System under Tonggou Tongxiao (统购统销)
After the approval of baochan daohu, the farmers quickly started dealing with the state apparatus directly rather than dealing with the local party representatives. The state would issue a production quota at a fixed price to the farmer. Then the farmer would sell this directly to the state procurement station.
Farmers were mandated to ensure sufficient production to meet the quota and sell at the fixed state-mandated price. Farmers could sell to the state at a higher state-fixed price or market prices for goods produced more than the production quota. For goods produced where there wasn’t a production quota, farmers could also choose where to sell.
From the market perspective, the new arrangement institutionalized three distinct price levels:
Tier 1: state price for the portion of the produced goods that fall within the state-mandated production quota
Tier 2: state price for the portion of the produced goods that fall outside the state-mandated production quota
Tier 3: market price for the portion of the produced goods that fall outside the state-mandated production quota
The new market dynamics quickly caught up with the state. The state found it increasingly more challenging to procure highly valued goods for which the state price was lower than the market price. In addition, farmers flooded the state procurement stations with low-value goods like grain and cotton, for which the market price was lower than the state price. That didn’t necessarily cost the state cash, as they refused to buy or issued IOUs. However, it did create a surplus problem rather than the scarcity problem from before.
Take the example of grain.
The state offered two prices: one price for the quota production and a higher price for the above-quota production. This incentivized farmers to produce more than the agreed-upon quota. The farmers could sell the above-quota output to the state or on the market. Due to the surge in production, the market price for above-quota grain would fall below the state price for above-quota grain. Thus, farmers would try to sell the above-quota grain to the state at a higher-than-market price.
From a business point of view, the product mix of below- and above-quota production determines the average selling price (ASP). To achieve a higher ASP, the farmers would heavily invest in rapidly and intensely increasing the output to sell nearly all the products at above-quota prices to the state. Ultimately, the state had to lower the purchasing prices for certain goods to disincentivize overproduction. The state sometimes even implemented a fengding or selling cap.
峰頂 (fēng dǐng) = peak
On the surface, this may look like a significant wealth transfer from the state to the farmers since the state would pay, on average, more for every ton of grain produced. However, the state balanced the wealth gain by the farmers with state-controlled price increases for the raw material inputs such as fertilizers. So, while farmers could sell grain at a higher price, their production costs also increased.
The State’s Perspective Under Tonggou Tongxiao (统购统销)
From the state’s perspective, one could argue it had the perception of being in control because the state could set production quotas, below- and above-quota pricing, and reserve the right of purchase refusal or utilize non-cash payments. However, the state apparatus was much less flexible in dealing with ever-changing market conditions. Thus, creating marketing problems. For example:
The state did not have sufficient staff to deal with the increased production output, thus creating dissatisfaction with the farmers who had to wait for days to sell their produce.
The state did not have sufficient warehouse capacity to store all the production outputs. That resulted in significant waste, especially for perishable goods.
While the state offered price flexibility to the rural farmers for purchasing the output goods (above-quota purchasing prices), they did not have the same flexibility for selling the input goods to the urban industrial sector. So, the more the state purchased at above-quota prices, the less it made by selling at subsidized prices to the urban industrial sector.
The state commercial sector could not meet the farmers’ increasing consumer goods needs.
While the state increasingly purchased grain at above-quota prices, it continued selling it to the urban population at subsidized below-market prices. That caused a budgetary crisis where the more they bought, the more they lost.
It is important to remember the mechanism with which the state subsidized the urban population: hukou and danwei. I discussed these topics in my previous blog post. In short: Hukou links a person to a place of residence, and Danwei links a person to a place of work. Urbanites would receive coupons and subsidies through both Hukou and Danwei registrations.
More open markets could reduce the pressure on the state budget by allowing state actors to purchase at market prices if those fell below the above-quota or below-quota prices. However, free markets don’t align with the government’s ideology. That said, the government’s desire to reduce its debt eventually led to more tolerance for markets.
Either way, as they did in the past, the farmers tested the boundaries of what’s allowed and started opening up their own markets. They had every incentive to do so. After all, if you’re trying to sell perishable goods to the state and the state cannot keep up with the purchase, you either find a way to sell elsewhere or your goods rot.
In 1985 the government sought to alleviate the financial burdens by ending the procurement system and replacing it with Paigou.
派购 (pài gòu) = unified purchase
Paigou (派购)
Under Paigou, the state contracted with individual farm families to set a sales quota. That allowed the state to always purchase at a low price and regain control over production and marketing. Naturally, it reduced the incentives for farmers to sell to the state.
So, the state instituted Sanguagou. Under this scheme, the state provided 30% of the agricultural inputs at subsidized prices. However, that was not enough of an incentive, not in the least because the state provided the Sanguagou coupons through the sometimes corrupt cadres.
三掛勾 (sān guà gōu) = the three hooks
The state did achieve to lower grain production. As a result of the supply reduction, it increased its market value, and thus market prices rose above the state purchasing prices. That allowed the state to lower its total expenditure on grain. However, since the market price exceeded the state price, it also made the farmers desire ever more selling to the market instead of the state.
The most effective way to escape the grip of Paigou was the development of the rural industry, the service sector, and commercial trade activities.
Business Model Disruptive Innovation in Market Economy
So, here’s the status quo in 1984:
The state owns all land but allows farm families to contract the land use intended for agricultural production.
The farm families must fulfill state-mandated production quotas and sell at a state-mandated price enforced by the local party cadres.
Farmers can use the land for other means if they fulfill the quota. Furthermore, they are allowed to sell surplus production.
The state purchases the farmers’ agricultural goods at a low, fixed price, then sells them to the subsidized urban population. The state also sells subsidized agricultural inputs to the farmers to help maintain a low agricultural production cost.
For the farmers looking out for their families, the most attractive place to sell their goods is at the market, as the market price is generally higher than the state price. Thus, the land used to produce commercial crops increased much faster than the land used for state-procured crops.
The attractiveness of selling on the open market incentivized farmers to look for new ways to be successful. One of those ways is through the garden economy or tingyuan jingji, which could include any of the following: two gardens (vegetables and fruit), two pens (fowl and livestock), one fish pond, and one small factory. In one 1986 survey cited in the book, 85% of farm households argued cash income as their principal reason for raising pigs.
庭院经济 (tíngyuàn jīngjì) = garden economy
While farmers flooded the market with their produce, many traders emerged. These traders visited the market solely to buy goods to then resell. They tried to leverage the price arbitrage that existed between regions. The state initially forbade the practice of trade, though, as the author points out in the book, one could argue that the practice is already out of hand when prohibition is needed. The state didn’t legalize long-distance trade until 1983
Either way, the market dynamics quickly spread from local trade between the rural population to trade between rural merchants and the urban population. That gave rise to a class of trade-specialized farmers: the rural merchants. Perhaps unexpectedly, Chinese farmers were the first class to own private cars, trucks, and tractors.
Rural merchants became formidable competitors of the urban state sales organizations for six reasons:
Thanks to lessons learned from operating under baochan daohu, they pay close attention to operational profitability and consumer dynamics. They are entirely market-oriented.
They are more knowledgeable than their urban counterparts about the product, particularly agricultural and perishable goods. This product know-how translates into better sales tactics.
They are directly responsible for their losses, so they pay attention to the management of the goods.
They have more flexibility to purchase high-quality goods at lower prices when supply exceeds demand.
Their operating costs are generally lower than state actors due to lower overheads
They are intrinsically motivated to work hard and build better and more comfortable lives for themselves and their families
In business terms, we could say that the farmers provided a better sales experience with better products at a lower cost. That’s a business model disruptive innovation strategy.
From Business to Market-Oriented Ecosystem
The rise of rural merchants and increased economic activity promoted rural specialization and diversification. Furthermore, it also created a market for rural services and industrial goods in addition to rural agricultural goods.
Included in the rural services are transportation, construction, and marketing services. Transportation services enabled farmers to deliver their products to ever more-remote customers. Construction services allow farmers to build new facilities tied to their business operations, for example, warehouses and small factories. Marketing services enabled farmers to trade at markets more effectively.
The farmers initially traded at the Jishi or market town in the countryside. However, over a decade, the jishi evolved from a place of local trade to a place where farmers and urbanites went to buy goods. Slowly, the jishi took over from state-planned markets as the primary source where people, farmers and urbanites alike, would go to purchase their food.
集市 (jí shì) = market
In 1983, sales at jishi represented 14% of all retail sales. In 1989, 70% of the goods sold in the cities were at jishi.
The success of the jishi was also favorable to the state for two reasons:
The state-controlled grocery stores offered subsidized food. The more urbanites purchased their food at the jishi, the less they required subsidized good. So, the less the state had to subsidize.
The state collected taxes on sales done at the jishi
The local jishi eventually expanded to a variety of different types of markets. Those include roadside markets near the cities, specialty markets which focus on specific products, and wholesale markets where you could go and buy nearly everything.
In addition to the sale of goods, farmers also pioneered in private restaurants and inn-keeping. This primarily served the needs of the rural merchants who needed a place to sleep and eat will traveling around to different markets. A key side-effect of the farmer-driven development of services industry that I want to quickly mention is that the more general availability of food decreased the power of the state-issued food ration coupons in the cities.
In this blog post, I provide a framework that helps you understand what you can do to become or continue to be a premium company.
What is a Premium Company
To get straight to the point, here’s my definition:
A premium company is a company that can consistently convince its customers to pay more than what they had initially intended for a certain product or service by virtue of its value proposition.
Let’s now dissect this definition and provide more context.
Product vs. Company
The first essential element to clarify is the difference between company, business, and product.
A company or firm is the organizational structure, in legal terms no not, that operates one or more businesses.
A business is the exchange of goods produced or services provided for money.
A product is one of the outputs of a business.
Avoiding product- or pricing-specific answers is essential when trying to answer what makes a premium company. They are not mutually exclusive. A premium company can offer non-premium products, and a non-premium company can offer premium products. However, what makes a premium company is its ability to deliver premium products to the market consistently.
Relative Positioning
The second important element to clarify is that “premium” is not an absolute or fixed position in the market but relative to the target customer needs. We can draw upon Clayton Christensen’s disruptive innovation framework to clarify this idea.
The framework defines a market or arena with multiple customer types: high-end, mid-end, and low-end. To avoid confusing these terms by their commonly used association with pricing, let’s call these high-needs, medium-needs, and low-needs customers instead.
High-needs customers require the product to offer various attributes and features. In addition, the features must be up to standard. To put it in terms I used in an earlier blog post titled “Attributes and Values: Business Strategy Core,” high-needs customers have many attributes that need satisfying and more than a few that need championing.
Low-needs customers require the product to meet their basic needs sufficiently and nothing more. They are willing to accept sub-standard attributes or forego them entirely.
Medium-needs customers fall in between high-needs and low-needs customers.
Collectively, we define the needs of a customer type as the required product performance.
Firms can now develop and market products catering to different customer types. Generally, the goal for the firm is to understand the customer performance expectations appropriately, then deliver a product that closely matches those expectations. We can call upon the price/value framework from an earlier blog post titled “Value and Price Dynamic” to understand the tension between Value Offered, Value Perceived, and Purchase Price.
This framework offers three possible customer segments in a market with high-, medium-, and low-needs customers. However, in relative positioning, the firm also has the option to make a deliberate choice to either exceed the customer expectations or fall short of the customer expectation. Let’s call this premium and discount positioning.
In premium positioning, the firm delivers a product that offers more or better attributes than the customer needs or expects. It also comes with a slightly higher price tag. The company must communicate to the customer the extra value offered and why it’s worth the additional money. Customers may be willing to spend more than planned if they appreciate the additional value offered.
In discount positioning, the firm delivers a product that offers fewer or worse attributes than the customer needs or expects. It also comes with a slightly lower price tag. The company must communicate to the customer why the lack of value offered is not a concern. Customers who appreciate this story will happily pay less for the product.
The Premium Company
Let’s return to the definition of a premium company. A company is a premium company when it can consistently market premium products relative to its target customer needs and consistently convince customers to pay more for those products.
Notice how I emphasize the word “consistently?” One premium product doesn’t make a premium business. And one premium business doesn’t make a premium company. The challenge of becoming and staying a premium company is that you need to consistently outperform your customer expectations, even when those expectations increase year after year.
Another critical challenge of being a premium company is thoroughly understanding your customer’s needs and wants. Based on that information, you must plan to exceed those needs and wants. And if that’s not enough, you must also be able to execute this plan. It’s tough being a premium company!
The benefit of being a premium company is that over time customers will associate premium with your brand and products and thus will automatically expect to pay a higher price than for an equivalent product of another brand.
Premium Company Margins and ROI
As a final note, I want to cover the topic of profit margins of premium companies briefly.
Following the framework of the premium company, we can say these companies can charge higher average selling prices (ASPs) and higher margins. Thus, the premium companies enjoy higher ROE and can invest in new projects more easily.
However, we must separate the premium positioning from a firm’s ability to capture the value. Whereas premium positioning allows a firm to charge higher ASPs, the margin and associate ROE highly depend on the operating model. Inefficient premium companies won’t be able to capture the appropriate margin and may not achieve the expected return on investment as a premium company.
In this blog post, I summarize the history of Baochan Daohu, the household responsibility system, as detailed in the 1996 book “How Farmers Changed China” by Zhou Kate. In a follow-up blog post, I will also cover the emergence and evolution of markets as described in the same book.
The book’s central thesis is that rural farmers and not the party elite were the main driving force behind’s China’s rise from the ashes of the civil war mid-20th century to a world-leading economic power. While I’m not the right person to judge the accuracy of the thesis, I want to share some of the insights from the book about grassroots Chinese entrepreneurship within the environment of early communist rule.
Before Communism
Before the communist victory in the Chinese Civil War, most Chinese people were self-sufficient for their daily needs. Chinese families ran independent family farms that provided daily food and sometimes surpluses which were traded in the village. They generally avoided centralized structures for organizing everyday life. This open class system was around for thousands of years.
Tonggou Tongxiao (统购统销)
Following the victory in the civil war, the Communist Party of China (CPC) took control of the country. It began to organize food production through agricultural and land reforms (1950-1953), which removed the family from the nexus of local organization and decision-making.
The CPC installed loyal cadres as party representatives to run the villages. The cadres executed agricultural reforms to create a more equal land distribution and increase food production. The reforms included the formation of farming cooperatives (communes and later production teams), which brought together small farmers to share resources and increase efficiency. This replaced the family unit as the organizer of food production.
Most importantly, while the state allocated land for farmers’ use, it denied them ownership and control. Before the farmers could even start enjoying the fruits of the land reform, their autonomy was further reduced by the introduction of Tonggou Tongxiao, or the Public Grain Procurement System.
统购统销 (tǒnggòu tǒngxiāo) = unified purchase and sale
Under the Tongou Tongxiao, the government required farmers to sell their grain at a fixed price to the state. No private merchants were allowed to deal with grain. This ensured the state had enough grain to feed the urban population and the army. The government also used the proceeds from selling surplus grain on international markets to fund industrialization and other development projects.
Through a business model lens, one could say the state forced input prices to stay low while selling industrial goods at a high price (jiandaocha). The surplus value (800 million yuan between 1953 and 1978) extracted from the market was used for industrial development.
剪刀差 (jiǎndāochā) = price scissors
The local farmers communicated with the party via the local cadres. Thus the local cadres had enormous power over the local population. They were sometimes referred to as tuhuangdi (土皇帝, tǔhuángdì) or local emperors.
When faced with the difficult situation of lack of control of your destiny and the feeling of oppression by the local party cadres, why not simply move for better opportunities?
In the mid-1950s, many farmers left their villages to find city work. Since cities were unprepared to deal with such an influx of migrants and the state needed the farmers to produce the grain for food, the state issued four documents to stop the flow of rural-urban migration. This system is known as Hukou.
户口 (hùkǒu) = household registration system
Hukou & Danwei (户口 & 单位)
The Hukou system, also known as the Household Registration System, is a system of household registration to register and identify individuals based on their residence.
Under the Hukou system, every individual is registered in a specific location, either rural or urban, depending on their family’s registered location. This registration determines their access to public services such as education, healthcare, social welfare, and housing.
The Hukou system divides the population into two categories: rural and urban. Rural residents are often excluded from many of the benefits of urbanization, such as access to better-paying jobs, social welfare, and education. They are often subject to discrimination in urban areas. Effectively, it made the Chinese village become a closed society.
With an urban hukou, one received Liangpiao (food rationing coupons). People without this coupon, such as rural migrants, couldn’t buy food in the city. Without an urban hukou, one couldn’t get housing in the city. Rural migrants had to get a letter of introduction from their commune cadres to stay in a hotel.
粮票 (liáng piào) = ration card
Urbanites also had a Danwei or registration for the urban work unit. The danwei linked a person to a place of work in the city. Under the danwei system, workers were not only employed by their workplace but were also provided with social welfare benefits such as housing, medical care, and education by their workplace. In addition, workers were expected to participate in political activities and study sessions organized by their danwei.
单位 (dānwèi) = work unit
The Danwei provided job security or, as it was often referred to: Tiefanwan (铁饭碗, tiěfànwǎn) or an iron rice bowl.
The polarity of the Chinese society, with, on the one hand, the cadre-bound farmers who were obliged to produce grain for the state and, on the other hand, the subsidized urbanites who received plenty of support from the state, was fertile ground for the eventual changes.
Baochan Daohu (包产到户)
Baochan Daohu is the practice of turning grain production over to the household. While many credit Deng Xiaoping with the introduction of the practice, in the book Kate Zhou argues that this transition involved an unplanned struggle between the farmers and the state that started decades before the official party policy.
包产到户 (bāochǎn dào hù) = household responsibility system
The book breaks down four phases of baochan daohu.
Phase 1: 1956-1957
Phase 2: 1961-1962
Phase 3: 1967
Phase 4: 1977-now
To recap the status quo: the agricultural reforms placed land under collective ownership, transferring it from the household to the local party cadre. The party cadre was responsible for managing food production and meeting the central government’s quotas. Families became members of the production team, brigade, and commune. Food distribution was according to the work points earned, ultimately dependent on the cadre’s decision-making.
Phase 1: 1956-1957
Following collectivization, farmers pressed for greater autonomy, including the freedom to engage in sideline production and marketing.
The term baochan daohu first appeared in Zhejiang Daily on January 27, 1957. It contained four elements:
Baochan daodui: output quotas for the production teams
Zeren daohu: each household responsible for the production quota
Dinge daoqiu: the output of land was fixed, and anyone responsible for the land would decide how many work points a worker could receive
Tongyi jingying: production and distributive decisions were made by the team leaders
This approach spread rapidly in parts of the Zhejiang province. It became known as the la niu tui she movement. However, the political response by Mao to this idea was quick and was framed as a capitalistic idea of a “nouveau riche” farmer. Eventually, the political movement led to an expansion of the collective system in 1958 and gave rise to the People’s Commune
Phase 2: 1961-1962
The Great Leap famine fundamentally changed the relationship between the state and the farmers as the farmers held the local cadres responsible for the famine. This opened the door for a renewed policy towards the rural people and a push for agricultural reforms. In various locations, local cadres experimented with different approaches. Two examples:
Sanbao yijiang (三包一奖, sān bāo yī jiǎng) ,or 3 contracts plus reward, was a system where the production team contracted with the production brigade to produce a certain quantity of grain at a certain cost with a certain labor force. Any surplus was retained as a reward.
Zeren tian (责任田, zérèn tián), or responsibility land system, was a system where commune members received work points according to the output of the land, and there was unified distribution within the collective.
An important note is that these systems did not provide rural people with freedoms beyond the scope of field management. Crucial decisions about farming were still handled at the brigade level.
The local successes were communicated to the central leadership and were initially met with support. A 1960 emergency directive from the central government called on production teams to have sanbao yijiang. It permitted farmers to have limited private land (5%) to produce sideline products. Deng Xiaoping supported the zeren tian system ~ “no matter whether the cat is black or yellow, the cat is good as long as it can catch mice.”
In July 1962, Mao launched an attack against zeren tian at a party conference. He launched the Socialist Education Movement (1962-1965), stripped provincial leaders supporting zeren tian of power, and forced farmers back to collective farming.
Phase 3: 1967
Farmers took advantage of the chaos of the Cultural Revolution (1966-1967) to press for the expansion of the household and the market. This took the form of civil disobedience and even armed struggle. However, not much is known about the extent of the protests. Many of the demonstrations were organized by a local central figure, allowing the party and local cadres to counter-act with precision.
The organized attempt to force collective farming during the Cultural Revolution was successful.
Phase 4: 1977 – Now
Following the Cultural Revolution, farmers’ resistance to collective farming took a silent but daily form. As the state pressed back against a farmer’s desire for independent agriculture, the movement went underground and on the defensive. Despite the many central government initiatives to increase the growth of grain production through the introduction of modern technology, grain production growth grew at low single digits. It did not keep up with population growth.
Mao’s death in 1976 gave farmers a new opportunity to pursue family autonomy. Unlike the previous attempts, the farmers did not try to organize or make demands from the central governments. Instead, they succeeded by making individual deals with local cadres and giving them more than they expected.
The idea is to incentivize the local cadres to allow family farming. The cadres would receive a significant percentage of the production surplus in return for more autonomy. This bargaining strategy worked best in poor areas where local cadres didn’t live in good conditions.
The combination of the corruptibility of local cadres and unorganized farmer’s individual deals allowed to break the collective dike. While the movement was not organized, baochan daohu spread through informal networks across villages. An important role is played by women whose marriages voiced their preferences.
This form of baochan daohu was different from the three previous versions:
Farmers didn’t ask for land ownership. They didn’t riot. They didn’t fight the local cadres
Farmers didn’t organize. They made individual deals with cadres.
This is a SULNAM: Spontaneous, Unorganized, Leaderless, Non-ideological, Apolitical Movement.
After baochan daohu, the family head again became the dangjiaren (master of his own house).
当家人 (dāngjiārén) = head of family
The response from local and provincial governments was supportive of baochan daohu. However, the support took different forms. Often the governments would initiate reforms that mimic the effect of baochan daohu without formally adopting shared practices.
The response from the central government was not supportive. At the Third Plenum of the 11th Party Congress in 1978, the state specified that baochan daohu was illegal. Note that Deng Xiaoping was deeply involved in drafting the resolution.
It was not until 1981, when Chen Yizi (陈一咨), a research fellow and government adviser, submitted a report about the impact of baochan daohu to the reform leaders, that the central government would consider supporting the practice. The report, titled “The Dawn for the Rural Area, the Hope for China – Report of a Survey on the Implementing of ‘Baochan Daohu’ in the Rural Area in Anhui Province,” provided evidence that baochan baohu improved productivity and the living conditions for all. After reading this report, on May 31, 1981, Deng Xiaoping discussed the “baochan daohu miracle” with a few senior leaders.
Deng and his reform leaders facilitated the spread of baochan daohu in 1983, following the evidence of increased productivity. In January 1983, the central government formally recognized baochan daohu and encouraged its development in rural China.
