The Shanghai Game

In this in-depth feature, Matt Orlich, co-founder of Shanghai-based studio Ant Hive Games (The Line HD) speaks of his experiences in the ever-changing Chinese capital of game development as he and his company chart a course for the future.

[In this in-depth feature, Matt Orlich, co-founder of Shanghai-based studio Ant Hive Games (The Line HD) speaks of his experiences in the ever-changing Chinese capital of game development as he and his company chart a course for the future.]

So much is said about the shift in economic power from West to East. For a company in Shanghai, it is good to know you are in prime position to catch this wave... That is, if you can get on your board and stay on.

Shanghai is a city of outsiders, aspirational people journeying to the bright lights of the big city looking for streets paved with gold. So don't expect people to line up patiently, and do fully expect people to drop in on you. There are 1.6 billion people on the move in China, and Shanghai is right on the crest of the economic wave.

Despite the occasional blips, I have great warmth for the Chinese who I have met and worked with. They work hard and constantly aspire. They have a love for food, family, and friends, and seek simplicity even as all about becomes more complex.

But as a seasoned traveller, all the points I make about China, the Chinese, and doing business here could be the observations made of many of the new emerging economies.

What is unique about Shanghai is that it has the growth, but also a buzzing cultural life, a large gaming and artistic community, great infrastructure, affordable overheads and a rich pool of labor: all the pieces for building a game studio.

This article is my personal account of being in the middle of establishing and running game studio operations in Shanghai for the last five years, trying to be mindful that I'm not coming off like a self-proclaimed China expert.

Made in China

The first priority for a game studio is talent, recruiting and retaining it. Obviously in a country the size of China you'll find lots of job-seekers. In my previous startup effort you can see from the picture below how many people you can hire in one short year...

Circa 2007

However, hiring the right people is significantly harder for a foreigner, even if a great deal of care is taken assessing candidates. Egon Zehnder's book on recruitment details the difficulties of landing the best talent, and this is all assuming you are in your own country. He states that to secure the best talent -- i.e. the top 10 percent of management talent -- even a 90 percent success rate in your interview process means that 50 percent of the candidates will not be what you were seeking.

With a starting sample of 100 people, you would end up hiring nine top talents and nine non-top talent. As a foreigner with all your cultural and linguistic disadvantages, you'll be lucky if you get that high of a hit rate.

So when it comes to hiring talent, it is vital to have the support and input of a local partner. Equally important is to be clear in what you want from your candidates and be very analytical whether performance goals are being met in the early stages of employment. You must assess and re-assess employee performance constantly, as the actual work will be your best indicator in the murky water of language and cultural barriers.

All good relationships are built on mutual respect and understanding. From everything I've seen, the Chinese clearly respect Western culture, but may not always understand it. As a Westerner operating in China it is your responsibility to help them understand Western business practices, as well develop and understanding and respect for their culture and ways. Without this you'll be unable to retain your employees.

As a foreigner this will require effort, especially if you are like me, and paid little mind to China before you were air dropped in. There is obviously a ton to be gained from simply observing and assimilating, but a real effort needs to be made beyond that. The most recent book I've read is a fascinating account of migrant factory workers in southern China called Factory Girls by Leslie T. Chang. Although for a game studio you'll be employing primarily the college educated, books like these I feel help to reveal some universal truths of the Chinese approach to work and life.

Incorporate This!

To operate in China as a foreigner you'll need to set up a WOFE (Wholly Owned Foreign Enterprise). Detailing this process would take several pages of writing and surely put you to sleep, so I'll run through it as briefly as possible.

  1. Get three Chinese names ready.
  2. Establish your business scope. (This has to be tightly defined. Changing it later can be as complicated as setting up a whole new business.)
  3. Rent an office that has the legal right to be a registered address (many are not).
  4. Obtain a temporary business license.
  5. Obtain your company stamps.
  6. Obtain enterprise code certification.
  7. Register at the Statistics Bureau.
  8. Obtain foreign money exchange approval.
  9. Register with the Tax Bureau.
  10. Open both RMB & foreign exchange bank accounts.
  11. Register with the Customs Bureau.
  12. Wire in capital.
  13. Let the taxpaying fun begin...

Given that almost every one of these steps not only requires a lot of paperwork, but also multiple visits to various government offices scattered around town, you will obviously need an agent. There are local agents and there are foreign agents that specialize in helping foreigners. In my experience, you'll save about a third of the cost by going with a local agent.

Foreign agents will go on about the big scary process and how you desperately need their help to get it right. However, the truth of the matter is that it really just takes a lot of running around, and mucking up your business scope description is about the only thing that can really come back to bite you. In our case, we had a local advisor that watched over the local agent running the process and everything went smoothly and quickly. It usually takes three to six months; ours was done in fewer than three.

It is important to note that there are simply types of business that foreign-owned companies are not allowed to do in China. Look to Blizzard's need to have a local operator as clear example of the strict guidelines in place for accepting payments from online game players in China.

Lost in Translation

Of course, no article on operating in a foreign country would be complete without a mention of language barrier challenges. As if trying to learn a system which requires 3000 characters at a minimum isn't challenging enough, Chinese sentence order is usually the exact opposite from English and often there are no direct translations word for word (which might explain some of why you see so much funny "Engrish" around).

To compound the difficulties in a work environment, Chinese have a cultural norm which is referred to as "saving face." Of course, we understand this concept in the rest of the world -- being that no one ever really likes to be embarrassed in front of others. But there is something deeper going on here. Even in the most banal of conversations, if there is a way out of admitting a lack of understanding, it is considered the preferred method.

This can make confirming understanding difficult at times. Confirmation of whether the matter was understood sometimes does not come until the resulting work has been received or reviewed.

Fortunately, in my experience, it also seems that the Chinese in general don't have the same issues that Westerners have about others watching over their shoulders or checking in on them too much, so do it often without reservation.

But even with the existing language challenges, it could be a lot worse. One of the great surprises upon moving here was seeing the effort the Chinese put into learning and accommodating English. Especially for an American -- I grew up around the general attitude that you can either speak English or you can get out.

After living here I have to say I have a newfound appreciation of those who have migrated to the U.S. I really don't know how they were able to do it.

All in all, the effort the Chinese are putting into breaking down the language barrier is amazing. They certainly are not waiting for the Western world to meet them half way. With the upswell of Western media influence and desire of the younger generations to learn English, the language barrier is becoming less and less of an issue every day.

Things Are Cheaper in China

By and large this is true. But in many cases the old adage of "you get what you pay for" comes to mind. In the spirit of brevity (this is a rich subject), I'll just highlight a few necessities. Shanghai is funny in that I don't know of a place that that has a wider disparity of prices when it comes to rent. As for housing, it literally goes from U.S.$100 to $10,000 a month, and beyond... entirely dependent on the living conditions you are looking for.

Can you eat cheap? Most definitely. A simple local style lunch can cost as little as a dollar. However, if you want Western comforts, expect to pay the same or in often cases more than in the West. Hamburgers at nicer places around town can go upwards from 80 RMB ($12). I haven't been to the U.S. in a while, but that seems pretty high for an average-tasting burger. Yes, my two necessities include housing and hamburgers. Perhaps beer as well, which thankfully is super cheap here.

As for specific data points, it would probably be irresponsible of me to share too many details on our cost structure publicly, but I see no harm in sharing at least our office rent costs. Our office is in a district called Changning, which is a couple of subway stops from what you might consider the center of town (really, though, Shanghai is just one massive sprawl of a city). We are paying 14,000RMB (around $2,100) a month -- after initially spending $4,000 in renovations. Our office is in a renovated shoe factory complex (of all things) and is about 130 square meters.

Relative to the West, salaries in China are lower. However this is a Communist Party-led state, after all, so it's reasonable to assume there are going to be some taxes involved. When you hire an employee, there are seven different funds that need to be paid to the state every month.

These include a pension fund (22 percent), medical insurance fund (10 percent), another local government medical insurance fund (2 percent), an unemployment fund (2 percent), a work-related injury insurance fund (0.5 percent), maternity fund (0.5 percent), and a housing fund (7 percent). Mercifully this is not based on the individual salaries, but rather on a city-wide average, and has a maximum, so it ends up not being as scary as it initially sounds.

However, it is still on top of what you are paying your employee and he/she never sees that money directly, nor considers it a part of the compensation package. From that standpoint, it is kind of a bitter pill to swallow, knowing that your employees' perceived compensation is lower that what you are actually paying, as the extra money goes directly to the government.

It generally seems to be assumed that this will be spent at the discretion of those lucky enough to land a cushy government job, and may or may not ever benefit the worker personally. I'm sure there are similar behind-the-scenes employee taxes in all nations, but I'm doubtful many reach the extent they do here.

Also, over the past several years, there has been a noticeable increase in the cost of living in Shanghai, which shows no signs of stopping. With the RMB on the rise, the joy of converting greenbacks into lots of redbacks is turning more and more into an "Oh crap, that's all?"

All things considered, China is quickly becoming less of the off-shore cheap labor pool extravaganza it once was, and -- in my opinion -- only those with plans to go after the local market should think about setting up operations here at this point. However, at the end of the day, as an entrepreneur, it's a pretty comfortable place to be. If times get tough, it is very possible to pull back your expenses to almost nothing and still be able to survive.

Shanghai's Got Gamers

The IGDA meetings in Shanghai five years ago typically had about five to 10 of the same people turn up; now they can reach upwards of 500 during convention weeks. I've long lost track of the number of studios that have been opened since I've been here, and they continue to pop up like enemies in Robotron. But just like in Robotron, as the competition increases, so does your ability to play the game.

I had a brief period of not liking the idea of people moving in on "my turf," but quickly realized that A) this isn't my turf and B) it really was a great thing having so many colleagues around to bounce ideas off and get advice. I've come around to the idea of "the more the merrier," and as a gaming community we are stronger with each other's support.

With that in mind I started a community effort a couple years ago called ShangHai Association of Gamers, or SHAG. With 250 members and growing, all local to Shanghai, my hope is that through it I can do my part to help foster the local gaming community and be a contributor to it.

Of course, Shanghai isn't the only city in China. One thing you'll find is that there is no end to the various cities and local governments encouraging you to set up shop in their towns -- and they offer free trips to go see for yourself. Although they can sometimes offer huge incentives via tax breaks, discounted office space, etc., I've always opted to stay in Shanghai.

One thing that I've learned from being in the trenches is that I would always take someone who has at least won one battle (successfully completed a project, for this metaphor) than an army of fresh unproven graduates any day. Even though the many cities around China have many schools, with many graduating students, Shanghai is where you find almost all the hardened veterans, and especially those that have successfully completed projects to Western standards.

Recently, there have been some closings/downsizings of ex-pat lead studios in Shanghai. Obviously there are winners and losers in every business sector, and in the game industry we are no different. And with so many people throwing their hats into the ring these days, it seems we have an ever-increasing list of winners and losers.

However, from what I've seen of recent carnage in the past couple years, there has been relatively less damage in Shanghai. Studios on the downtick seem to be primarily ones that focus on AAA development or servicing the AAA market, so when AAA went out of fashion with publishers and financiers, they took the hit along with the rest of the world.

Of these studios that I've had exposure to, it seems to me that the ones that were able to survive were the ones that had put some heart and soul into their operations, building enough goodwill with both their markets and clients, and their local staff, to weather the recent storms. Having myself been on the edge of financial disaster more than once during my time here, nothing has been more rewarding than to see the team rally together to overcome the challenges faced.

This solidarity, sense of purpose, and community is what I see as a central component to long term success of any business, and it's more challenging to attain operating in a foreign land.

Attack of the Clones

ChinaJoy isn't so much a gaming conference as it is an assault on the senses. Google it and you'll see what I mean: wall-to-wall booth babes in bikinis -- not so much soft-sell as soft porn.

Squeezed in amongst the flesh are a smattering of what appear to the same fantasy themed MMORPG in every booth (at least in the booths that even bother to display games at all -- seriously, very few actually have any PCs). All this being, of course, an attempt to colorfully introduce the next topic: cloning.

In addition to the plethora of MMO clones, I'm seeing more and more very obvious clones on iTunes coming from China. In all fairness, I don't believe there is something in peoples' blood that made them born to clone; rather I see it as more of matter of practicality. The Chinese have an extremely pragmatic approach to doing business, and cloning has become the most predictable ways to mitigate your cost vs. risk profile, second only to having an established franchise to sequalize.

This is more of an industry problem than a China problem, as evidenced by one of the biggest offenders being one of the largest foreign-run game studios in Shanghai, Gameloft -- who make their money by throwing big teams at high production value clones. And it is hard to argue that it doesn't work: the successes from their earlier clones are now getting sequels and everyone seems to have forgotten they were ever clones in the first place! It's no wonder people here look at the success of that model and try to replicate -- in other words, clone -- it.

As passionate game makers that believe in the unique creative opportunities our medium provides, we are adamantly opposed to any form of cloning. We founded our studio here with the mission to create an indie studio atmosphere and take risks with unique ideas. In this way we hope to bring the concept of indie game development to China, as well as twist the unique flavor of Asia into our Western design mentalities.

Our first effort is out on iOS: The Line HD, which was specifically designed to not be describable as something like "Angry Birds meets Plants vs. Zombies." In a lot of ways, marketing something that cannot be easily described by its similarities to other games in the casual-driven iOS market is a challenge.

As old timers with backgrounds in PC and console gaming, we'll likely continue to skew more towards more complex games and trust that, as we did at the advent of home video gaming, new gamers of today will tire of overly-simplified mechanics and seek out deeper experiences as the market matures. It's easy to forget that the app market as we know it only came into existence a few years ago... and one can only assume it's just a matter of time before people tire of flicking birds and clicking plants.

Money Matters

Without a doubt, there is money to be made in the Chinese market, especially if you are selling luxury items for the nouveau riche or signing up World of Warcraft subscribers. But for a small independent game developer, the road to revenue is less clear. Even though there seems to be a transition afoot to create and regulate legitimate channels for IP, from a consumer standpoint it seems a long way off before people will accept paying for what has, in effect, for a long time been free.

Mobile gaming is obviously going online, and many companies are being funded based on this trend. Currently in China, the only real source of game revenue is generated from MMOs, but as mobile technology quickly advances, the opportunity to recreate that model is here, and we are betting that we can absorb some of Shanghai's MMO talent into our efforts. As well, ad-based models for mobile games are on the rise, and through some partners, we hope to be able prove this out as a viable way to monetize mobile games in China.

The channels seem to be opening and morphing quickly, and the signs are good that more opportunities will emerge. Generally speaking, though, it seems hard to argue that as far as monetizing games goes, China has to be one of the toughest markets. But as the saying goes, if you can make it here, you can make it anywhere.

In a lot of ways the Shanghai (and China-at-large) game sector has yet to shape its own destiny. Up to this point it has been mostly about outsourcing and cloning, applying the factory model to bring in foreign money and ideas.

But this has laid the foundation for a next wave of creativity and independence to emerge, and we feel good about being caught by that wave as well.


As valuable as the past and present might be, the future is where the money is. No smarty-pants article would be complete without some predictions, so here we go!

It's no mystery that the opportunities in China have thus far been lower-spec online MMORPGs. In the future, this will stay true, but I also see the same opportunities emerging on mobile. Currently data plans are expensive and generally not utilized by consumers, but this will certainly change, and thus open the door for more online type experiences on mobile – which is the key to monetizing games in China.

Residents are very largely dependent on buses, trains, and taxis for their commutes to the office. Presently you will see a great many idling that time away with a mobile device of some kind. Usually watching videos or playing offline games, but as in the West, once you go online with your smartphone, there's no going back.

I fully expect to see a continued integration of East and West, as both sides have so much to learn from each other, and really up until very recently, there has not been much widespread exposure.

As this integration continues, there will surely be a lot of learning that needs to happen and lot of mistakes made, but I truly believe that the Chinese ultimately seek harmonious relations with the West, and there is no reason (other than fearmongering) to believe otherwise. Having just returned from an extended trip to the U.S., I certainly saw a fair share of "us against them" sentiment in relation to China.

Shanghai will remain in a constant state of upheaval; there is not a day that goes by where buildings are not torn down and new ones constructed, where businesses fail and new ones take their place, where people come and go in droves, where fortunes are won and lost. Throwing your hand in here is not for the faint of heart and not for the risk-averse. One thing for sure is competition will never cease, and like any other big city, it requires a fair bit of grit and street smarts to survive.

If you think about China as a growing economy of 1.6 billion people, how could there not be massive potential? For every roadblock that is placed by the Chinese government, a ten lane super highway is also being built. The trick will be to not find yourself on the roads that are blocked, or get hung up about the fact you were -- and then fail to have the flexibility to re-route.

Change is guaranteed; predicting this change accurately is how businesses become successful. The pace of change in China is staggering to watch unfold, and in turn windows of opportunity close as fast as they open, with the wildcard being government policy, which can come down without warning and change the playing field completely overnight – which is seemingly impossible to predict.

There is evidence that Western IP is starting to get some protection from the government, which is no longer just sitting idly by watching pirates distribute their stolen wares. This will take time, but I believe will ultimately start to resemble more of what we see in the West, which really has more to do with consumer behavior than simply the accessibility of pirated media.

The future of ex-pat led companies and foreign subsidiaries' fates in China will, I believe, be largely determined by their ability to integrate with the local culture, and ultimately service the local market. To say that China has a deep-rooted, complex culture doesn't even begin to describe how vastly deep and complex it really is.

The status once prescribed for those working for foreign led/owned companies is quickly reversing as the status of Chinese companies rises. There is a nationalist pride that also cannot be understated, which points them always in the direction of supporting the home team whenever possible. In order for ex-pat business owners and leaders to attract and retain the best talent in China, it will require a much deeper assimilation of company culture and a respect for retaining the values that have, in effect, been developed over thousands of years.

This not only relates to the building successful resource centers to China to support Western markets, but to unlocking the Holy Grail that is the Chinese market. Can Western game developers unlock the Chinese market? That's the million dollar question -- or maybe more specifically in the case of China, the billion dollar question.

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