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NEWSLETTER

China after the Olympics


NEWSLETTER

China after the Olympics

This issue of the Value Partners Newsletter is dedicated wholly to China, on the eve of the most anticipated Olympic Games in history. The Chinese people view the Beijing Olympic Games as a showcase of the new role of China among the world’s leading nations and the Games represent both a seminal turning point for the country and an ideal opportunity to review the changes taking place.

China after the Olympics July 2008 In this issue:

As the countdown to the Olympics draws to an end, it is time to assess what

• The middle class: the new battle field

China has achieved and what is going to change after the closing ceremony, especially now that the country is gradually morphing from the world’s factory into a great marketplace, a key player in the financial markets, a global

• Who’s driving the middle-class expansion?

pacesetter for technology, an active participant in acquisitions abroad, a pioneer in the clean energy revolution and a driver of ever-greater advertising

• The China plus one strategy

investments. • The new labour law

Value Partners has been operating in China for many years from its registered

• Rebuilding trust in “Made in China” products

offices in Beijing, Shanghai and Hong Kong. In this newsletter, we look at the country’s key economic sectors and offer a perspective on the changes taking

• Renewable energy: the winds of change

place and their implications. We highlight how foreign companies need to evolve into fully-fledged organizations integrated in the Chinese context with

• Going for gold in the financial sector

local supply chains and distribution networks while domestic groups need to protect their “home turf” from increasing competition with new offers, improved service levels and a performance-driven culture. A common challenge for both sides will be to attract, motivate and develop local talent. At the

• Private wealth management: the magic wand of the financial market • Opportunities and challenges of life insurance

same time, the Chinese Government is steering the country towards a new growth model based on value-added, rather than pure low cost, as gradual urbanization, lifestyle changes and mass mobility continue to require massive

• Dawn of a new era for the telecommunications market

investments in infrastructure. Adoption of WTO requirements is gradually

• The rise of mobile VAS

opening new industries, such as financial services, to foreign competition. • China Tech 2.0: from world factory to technology powerhouse

While the Olympics’ closing ceremony will mark the end of the largest global

• Commercialisation and competition in the media sector

sports event, the competition in China’s economy is only just beginning to take off fully: a new wave of competition spanning all sectors of the Chinese economy, is set to be launched even after the Olympic flame has left Beijing.

• Advertising and its brokers: an undiscovered gem

This issue also introduces Value Partners’ new office in Dubai, which further

• Building authentic brand experiences

strengthens the firm’s international network. Out of the Dubai Media City

• Five post-merger tips for foreign financial institutions

office, Riccardo Monti and Santino Saguto lead the team that serves clients in the telecom, media, and financial services industries.

• Challenges of international growth for Chinese companies Value Partners Newsletter | Published by Value Partners | Via Vespri Siciliani 9 - 20146 Milan - Italy | Editor: Tina Guiducci| Registered in Milan. Reg No. 84-01/31/2008 | valuepartners.com | newsletter@valuepartners.com | Copyright © Value Partners Spa | All rights reserved | This newsletter is sent by Value Partners SpA | If you wish a printed copy or would like to be removed from our mailing list, please write to subscription@valuepartners.com and we will act accordingly. Special thanks to Rachel Healy, Mel Stamatakis and Monica Martinez.

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• Value Partners opens in Dubai • New headquarters in Milan


Over the last 5 years, China’s Nouveau Riche have attracted the attention of nearly all the big luxury brands prompting them to start up or expand their business in the country. The market is satuRiccardo Battaglia, senior rated with top brand boutiques, at least in all mamanager and Louis Qiu, jor cities, to the point that today the market’s top consultant, Shanghai office end in Beijing, Shanghai and Guangzhou (but also Harbin, Chengdu, Shenyang, ...) has reached – if not exceeded – the standards of any other developed metropolises.

NEWSLETTER

China after the Olympics

The middle class: the new battle field

Along with the Olympic Games, global attention has focused on the new Chinese middle class: one step below luxury, this group likely numbers over 250 million individuals with a purchasing power that goes beyond strictly necessary goods.

The Chinese middle class: over 250 million individuals, one step below luxury, with a purchasing power that goes beyond strictly necessary goods.

Stimulated by the winds of recession in more mature markets, the pressure on foreign companies to seek out new consumers has grown stronger and stronger. The rise of this “new” consumer, indeed, had been long expected and it has been a widely discussed subject for several years, though in most cases no action has followed words. In the common perception, the Chinese market is still made up of only two segments: luxury and the rest, where the rest is generally undifferentiated, characterized by low quality and low margins due to strong price competition. This all used to be true until recently, when things have rapidly changed. Only a few foreign companies in this field have taken advantage of the situation this far. The Greek brand Folli Follie, for example, started up its business in 2002 and now has more than 70 stores in over 25 cities. Other brands are new to this market or are about to enter it (e.g. H&M, Zara and medium-sized enterprises like American Apparel). The rush has started. Newcomers will have to face some of the Chinese companies that have benefited from the absence of foreigners in that segment of the market and have developed a distribution and selling network with hundreds of stores, earning themselves a name and reputation with Chinese consumers. While it is true that their brands and products don’t have the same appeal as Western ones, they have the advantage of being the “home players”. Despite a conventional misconception, Chinese companies, often with French – or Italian – sounding names, have positioned themselves in the market at prices comparable to those in the European or US markets (US$100 for cotton chinos or US$150 for a pair of sneakers, for example). After the Olympic Games, Chinese consumers will be the new battle field. It goes without saying, everyone will do their best to win it. Chinese companies will focus their strategy on a massive attack to saturate the market in depth, covering all Tier 2 and Tier 3 cities. On the other hand, foreign companies will bet on a better product - in terms of design and quality – and on their ability to develop the brand catering to the richer niches (Tier 1 cities, young people, ...). While Chinese companies may be able to take advantage of cheaper local cost structures, the game seems to be balanced, but there are some possible moves that could re-define the rules in this market. For instance, what would happen if a Chinese company bought a Western company with a valuable brand? Or perhaps purchase some of its skills to design better products, refit shops and upgrade the level of customer service? Or, if a Western company managed to develop an extensive distribution network for its high-quality products? Most foreign companies cannot rely only on their own strengths to rapidly cover such a vast, peculiar and sometimes difficult territory as China. Up to

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After the Olympic Games, Chinese consumers will be the new battle field. It goes without saying, everyone will do their best to win it.


now, many of them have selected local partners to distribute their products with variable results. But today, new regulations have made franchising the key to opening the doors of the heart of the Chinese market. The first one who makes a move could win the game and create a huge gap with the rest of the players.

Who’s driving the middleclass expansion? Interview with Shaun Rein, founder and Managing Director of the China Market Research Group (CMR)

Value Partners met with Shaun Rein, founder and Managing Director of China Market Research Group, in order to glean his views on what will likely be the most profitable segment for the Apparel and Accessories industries.

A CMR survey found that young, under 30, college graduated Chinese consumers, employed by international companies, are driving China’s middle-class expansion. Despite inflation and a volatile A-share market, these individuals are extremely optimistic about their prospects and China’s economy and have great aspirations for a better career and comfortable life. This segment’s annual household income ranges from US$6,000 to US$15,000 and the average reported saving rates hover around 0%. Thus, a high percentage of this sum is considered disposable income for the purchase of branded products. Many foreign companies have traditionally focused their efforts on courting high-end demand. Therefore, the current situation represents an underserved segment of ~250 million consumers and, as the lower segments aspire to become middle class, outstanding potential for growth. Until now, the middle class nucleus has been located in Tier 1 cities such as Shanghai and Beijing. However, a rising affluent demand for mid-range products in Tier 2 and Tier 3 cities is making places such as Chengdu and Dalian legitimate markets for consumer goods. Consumers are changing too. The Chinese middle class is becoming increasingly sophisticated and brand-savvy. Now, as Shaun Rein stressed, the key to brand loyalty lies in the ability to create emotional ties with the consumer, who can become brand spokesmen, virally recommending friends to purchase a particular brand. In terms of cachet and quality control, the Chinese customer has higher expectations from foreign brands than Chinese ones. This has motivated many Chinese firms to market and position themselves as French, Italian or even Canadian. Irrespective of the actual origin of the brand, real added value and fine quality are required attributes to persuade this educated generation of customers to pay a premium. A foreign name is just not enough any more.

The China plus one strategy Luca Altomare, senior manager, Singapore office

Ten South-East Asian country members of ASEAN have been experiencing strong industrial production growth in recent years (+6.5% p.a.) despite China’s phenomenal performance (+17% p.a.). This has been driven by the increasing trend for Western companies to establish a second base in Asia beyond China. Diversification of risk, costs, logistics, human resources and intellectual property protection are playing a big role in companies’ decision to deploy new investments outside China.

The challenge for China is to retain its investment from Western companies and the

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Shaun Rein is the founder and Managing Director of the China Market Research Group (CMR). Columnist for Business Week and widely published, he was named one of the “Top 30 Consultants Worldwide Under the Age of 30” by Consulting Magazine. He also won an award from Harvard University for “Excellence in Teaching” and is a frequent guest lecturer at universities worldwide.

NEWSLETTER

China after the Olympics


NEWSLETTER

China after the Olympics

opportunity is for foreign companies to use China as a stepping stone to other Asian markets for certain activities. A number of companies are already adopting a China plus one strategy. In 2007, Intel invested US$1 billion in Vietnam; Flextronic – the world’s largest electronic manufacturing services company - which has several factories in China chose Malaysia for its new contract manufacturing plant for Hewlett Packard; Yue Yuen, a Hong Kong company and one of the world’s largest contract shoe manufacturers decided to boost production in Indonesian and Vietnamese factories and reduce production in China (after wages began to skyrocket and anti-dumping duties were enforced by the EU in 2006). Certainly, China remains an attractive location for manufacturing activities compared to some of its close neighbors thanks to the quality of infrastructure, presence of suppliers and overall size of the domestic market. However, a larger number of companies are adopting a “China plus one strategy” by also investing in additional territories in Asia. Not only is this strategy about diversifying risk but it is increasingly also about reducing costs - hiring an engineer in Guandong already costs more than hiring one in Malaysia, for example. The cost of less skilled labour in Guandong is even higher – between 2 to 5 times greater when compared with that of Vietnamese and Indonesian workers. In addition, energy costs and “prime” industrial estate prices are much higher in China’s coastal regions than in some other South-East Asian countries.

The challenge for China is to retain its investment from Western companies and the opportunity is for foreign companies to use China as a stepping stone to other Asian markets for certain activities.

China’s response has been to try and encourage companies to locate outside of the Eastern coastal regions to reduce costs. To date, China’s eastern coastal regions have attracted most of the sizeable investment that enabled China to double its share of global production to more than 7%. Now however, costs are rising sharply in these areas and local governments are moving “low-value-added” production to other provinces. “Going West” may guarantee lower labour costs, but companies must be prepared to face an even higher shortage of skilled labour, higher logistics and transportation costs to get the products out of the country and the resistance of expatriate workers to move with their families to more remote areas of China. On top of this, China’s poor record of intellectual property protection has been driving away investments in major value-added manufacturing and R&D facilities such as medical services, pharma, electronics and specialty chemicals to more IP-friendly Asian countries, notably Singapore. Achieving full integration of ASEAN countries is still some way down the line but the competition with China in order to play a key role in defining the Asian manufacturing blueprint is only just beginning and opens additional routes to market for companies willing to make the investment.

The Labor Contract Law of the PRC (the “New Law”) took effect on January 1, 2008. While the New Law adopts the general principle of the Wang Dongpeng, Old Labor Law (which is to safeguard the lawassociate with Jun He Law Office ful rights and interests of employees, who are viewed to be the weaker party compared to employers in the employment relationship) it also introduces changes which will have an impact on human resource management for employers in China. While the New Law requires employers to follow certain procedures and to be prepared for ever increasing collective bargaining, ultimately employers are still able to achieve their business objectives. Below we highlight the key changes engendered by this new law and assess its impact in more detail.

The new labour law

There are four key areas of change in legislation, namely: procedural requirements for introducing changes to company policies and procedures; incentives to adopt open-term

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The New Law will have an impact on human resource management for employers in China.


NEWSLETTER

China after the Olympics

labor contracts; limitations on the use of contract workers and caps on severance payments. We now review each of these in turn. In terms of changes to policies and procedures, the New Law requires an employer to fulfill a number of procedural requirements when introducing or revising company policies and procedures. The requirements are limited to the procedures and policies which directly impact the primary interests of employees, such as remuneration, working hours, leave and vacations, workplace discipline etc. The New Law stipulates that to make any changes to the policies and procedures employers must raise proposals for discussion at an assembly of employee representatives, or with all employees, and engage in reciprocal and equitable consultations with the trade union or employee representatives regarding the proposed changes. Despite the required consultation, the New Law does acknowledge that it is ultimately up to employers to formulate the company’s policies and procedures. As such, the requirements above are primarily procedural in nature. In terms of open-term labor contracts, the New Law encourages employers to enter into open-term labor contracts with employees. Open-term labor contracts are those that do not contain a defined expiry date. The Chinese legislature considers open-term labor contracts an effective tool to guarantee long-term and stable employment relationships, which is considered vital for Chinese society at this stage of its social and economic development. It is important to note that the open-term contract does not mean a lifetime contract. In fact, in terms of legal basis for early termination, there is no difference between the fixed-term and the open-term contract. However, given the difficulty faced by an employer who must dismiss an employee, the expiry date meant a guaranteed exit for the employer and this was often favored by some employers. The downside of the open-term labor contract for the employer is the loss of this guaranteed exit.

Wang Dongpeng joined Jun He Law Office in 2001. Since then he has assisted corporations and leading Chinese firms on a wide range of issues, mostly related to direct investment, PRC employment law and dispute resolution.

Regarding labor secondment, the New Law discourages companies from using contracted employees in two ways- firstly, by limiting the scope of use and, secondly, by increasing employment costs for such arrangements. These cost increases could significantly impact the margins of heavy users of contract services and ultimately will make it a less attractive way to do business. As for severance pay for highly-compensated employees, the New Law limits the amount of severance pay payable to highly-compensated employees, while the calculation method for severance pay remains basically unchanged. The New Law stipulates that if an employee’s monthly wage exceeds 300% of the average monthly wage in the city in which the employer is located, the salary base for calculating the severance pay payable to the employee shall be capped at that level. Additionally, such employee’s service years reflected in the calculation of the severance pay shall also be capped at 12 years. These changes could help employers reduce costs when downsizing their workforce.

Over the past few decades, China has established its position as a world leading producer. Its export rate has consistently grown at 17% per annum. Chinese made Sean Liu, consultant, Shanghai office products, in particular at the low-end segment, have become commonplace worldwide. Yet, consumer confidence in the safety and quality of “Made in China” products has been negatively impacted by a spate of recent bad publicity regarding the quality of toys made in China. Most notably, US toy supplier Mattel recently had to recall more than 20 million toys sourced in China that were deemed hazardous to children. The subsequent publicity negatively affected consumer confidence in Chinese products, this despite an apology from Mattel which conceded that the flaw was in the design they provided and not in the actual production.

Rebuilding trust in “Made in China” products

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Over the past few decades, China has established its position as a world leading producer. Its export rate has consistently grown at 17% per annum.


NEWSLETTER

China after the Olympics

The challenge for China’s government and the manufacturing industry is how to restore the trust of citizens in Western countries in ‘Made in China’. Below we suggest three actions that we think could help. Firstly, the Chinese government could demonstrate its commitment to quality by running a strict product monitoring system, issuing relevant guidelines and regulations and ensuring their enforcement. Beyond playing the role of supervisor, government could also help Chinese producers adapt to international standards, which would involve more extensive cooperation with foreign quality inspection and testing institutions. Secondly, Chinese producers will need to strike a good balance between cost reduction and quality assurance. Price cutting will become less attractive to foreign purchasers, who are more concerned with marginal quality than marginal price. Thus, Chinese manufacturers should ensure well-functioning quality control systems and workable testing systems. They should follow a set of well-established, and internationally recognized, production and product standards. Finally, Chinese manufacturers should also increase their commitment to technology development and product engineering. Currently, Chinese manufacturers lag well behind their US and Japanese counterparts in research & development investment. Increasing R&D spending can result in a better quality product and thereby deliver a positive brand image to consumers.

The Chinese government could demonstrate its commitment to quality by running a strict product monitoring system, issuing relevant guidelines and regulations and ensuring their enforcement.

It must be a top priority for China to regain the trust of global consumers. Its next chance will be the Beijing 2008 Olympic Games where venues, merchandise and catering will be on show to the world.

Renewable energy: the winds of change Marco Venneri, manager, and Sarah Zheng consultant, Shanghai office

China has been expanding generation capacity at double-digit rates over the last 4 years and looks likely to continue apace. Around 80-90 GW, close to the entire power output of the UK, were deployed in 2007 alone to reach an installed base higher than 700GW.

While many know China for the gloomy pictures of coal-dust polluted central provinces, few are aware that the country is actually one of the world leading investors in renewable energy. Targets set by the government indicate that, by 2020, renewable sources should reach 20% of total energy output. In terms of installed capacity this means that 350-400GW of the forecasted ~1,300GW in 2020 will be provided by non-fossil power plants, implying an investment of nearly $270 billion, according to NDRC estimates. The challenge is how to reach this goal and the opportunity is to demonstrate China’s achievements to date on a world stage. Initiatives to achieve this goal include increased use of hydro power, increased deployment of next generation nuclear reactors, and R&D efforts to develop cleaner coal technologies. Two of the most interesting areas of development are wind and solar photovoltaic which we now look at in more detail. Wind is the hot energy topic in China, with an installed base expected to grow from 5 to 30GW by 2020. Central government is exerting pressure on energy producers to increase the share of clean energy in their portfolio. This pressure is leading to under-capacity equipment and difficulties in access, under concession agreement mechanisms, to the available natural resources. Apart from a few foreign multinationals, the equipment market is dominated by Goldwind, the widely supported local champion. Other Chinese players play a marginal role and are largely manufacturing old design/low output turbines under third party intellectual property licences, due to lack of technical

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Targets set by the government indicate that by 2020 renewable sources should reach 20% of total energy output.


NEWSLETTER

China after the Olympics

know-how in critical components (gearboxes, bearings, blades and towers). The photovoltaic sector follows a completely different pattern: a number of Chinese players have already established themselves in the global arena and many of them - Suntech being one example - are already listed in global markets. Seven companies debuted on various stock exchanges, raising more than US$1.5 billion between the end of 2006 and 2007. The country has become one of the main manufacturing bases for photovoltaic cells and modules. Locally-produced equipment is almost entirely shipped to Europe, US or Japan, with penetration still negligible in China. The rationale behind these trends for a clean energy revolution is that China needs to find a balance between the huge demand for cheap energy on the one hand and the need to pay more attention to environmental impact on the other. While wind can compete in cost per kWh with traditional generation sources, provided there is some form of government subsidy, solar power is still far too expensive. High cost is also why alternative sources such as biomasses or fuel cells will play little more than an advertising role in the short term. However, the scenario might change in the longer term, and according to some optimistic forecasts, biomasses could eventually account for 30 GW by 2020.

Central government is exerting pressure on energy producers to increase the share of clean energy in their portfolio.

And what better opportunity than Beijing 2008 to exhibit China’s commitment to green energy? Plenty of initiatives will be displayed before the eyes of a massive audience: wind will satisfy 20% of the energy demanded from Olympic venues and geothermal energy will be the engine for heating and conditioning 400,000m2 of facilities. Moreover, 80% of the street lamps will rely on solar power and the “Bird’s Nest” Stadium will stand as the world’s most environmentally-friendly sporting arena.

Fuelled by the growth of the country’s economy, the Chinese financial industry offers unprecedented opportunities across all sectors. Commercial bankRuggero Jenna, director, and Claire ing, the most mature segment, has Zhong, consultant, Shanghai office been growing at a rate of 17% per year over the last five years*. The number of bank cards has increased by 29% per year in the same period, yet there are still only 1.1 cards/person compared to 6.6 in Taiwan. Assets under management increased by 280% in 2007, yet they represent just 14% of GDP vs. around 80% in the US. New leasing business volume has grown by 33% per year between 2005 and 2007, yet it only represents 1.1% of gross fixed investments vs. 15-20% in European countries.

Going for gold in the financial sector

Chinese regulators are shaping this development by maintaining tight control over the industry, while progressively introducing competition. Control is mainly exercised through central definition of deposit and lending rates as well as allowed volume of activities, as in the case of loan quotas to individual banks. Competition is being introduced by allowing local banks to expand their business across different sectors (for example all the major banks are now active in investment banking and fund management) and allowing greater access to foreign banks, which, since 2007, can provide full RMB services if they incorporate locally, as has already been the case with 27 major banks. In this dynamic context, domestic and foreign players face different challenges and opportunities. Foreign banks are moving quickly to establish their presence before domestic players become too strong. Examples so far indicate that strategies purely based on acquiring minority stakes in Chinese banks have brought few industrial advantages, while combinations of M&A and organic plays in banking and other sectors show greater potential. In this sense, the challenge for foreign players is to identify opportunities which can create value and to actively pursue them, alone or with local partners.

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Fuelled by the growth of the country’s economy, the Chinese financial industry offers unprecedented opportunities across all sectors.


NEWSLETTER

China after the Olympics

National Chinese banks are using their financial firepower to fund improvements in service levels and to introduce new services to reduce their dependence on interest-based business. They are also aggressively expanding into other sectors to capture a larger share of wallet from their clients. The largest banks have sufficient resources to pursue international expansion opportunities, as ICBC has successfully done in Africa for example. To be successful in these ventures, Chinese banks will need to make their organizations more market-oriented and invest significant amounts in processes, information systems and training. City Commercial banks are also under pressure and need to find new ways of developing their businesses. These might include protecting their local franchise, developing excellence in some segments, forging alliances among themselves to create stronger entities and allying with foreign partners to launch new products and expand outside the home base. Clarity of vision and speed of decisions will be key in their case.

National Chinese banks are also aggressively expanding into other sectors to capture a larger share of wallet from their clients.

Specialized players, like securities and fund management companies, will be impacted by the new competition from bank-affiliated subjects. In particular, it will be increasingly difficult for them to rely on loose, non-exclusive agreements with banks to distribute their products and they will need to pursue new strategies based on stronger brand equities and proprietary networks. Beyond strategic considerations, loopholes in regulation will continue to leave room for opportunistic moves by industry players and outsiders (including Private Equity firms) who will be able to identify undervalued assets and introduce new business models. * Measured in terms of bank assets

China’s robust growth is creating a larger upper class and the country Private wealth management: is set to become the largest Asian the magic wand of the wealth management market. Accordfinancial market ing to Barclays Wealth, the increase of high net worth households in China Xu Huang, manager, and Sean Liu, is among the largest in the world. In consultant, Shanghai office 2007, China had 22 thousand households with wealth in excess of US$ 1 million, this number is expected to rise above 400 thousand by 2017. In addition, the Chinese middle-class, mostly concentrated in developed cities and coastal areas, is also expanding fast, forming a bottom tier of the new wealth pyramid. Bank deposits are the traditional investment channel for the Chinese citizen with large savings whilst the culture of investing in a diversified portfolio of financial assets is not yet established. This is in part due to a scarcity of alternative investment vehicles: for that reason real estate was for a long time the main channel of investment for the wealthier classes. However, China’s “Private Property Law”, that took effect in 2007, points to a growing acceptance of private ownership in China, cultivating Chinese ambition to maximise return from personal wealth. Chinese investors are now more conscious of personal wealth management than ever before. Yet the wealth management market in China is still to blossom; it remains highly regulated and under developed with a simple and standard product offering and limited service. Chinese wealth managers are facing difficulties both in capturing the soaring demand and in meeting the needs of high-end segments. For the time being, wealth management products are provided mainly by large stateowned banks, which leverage on their networks to promote wealth products. Another cluster of players are non-bank financial institutions: securities firms, trusts companies

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The wealth management market in China is still to blossom; it remains highly regulated and inexperienced with a simple and standard product offering and limited service.


NEWSLETTER

China after the Olympics

and funds management companies. However, in terms of investment capabilities, banks are relatively weak in asset management, due to their limited experience and level of professionalism, while fund management companies, thanks to their experience in mutual funds, have the strongest capabilities. There is a broad spectrum of wealth-management products. These are frequently derived from traditional financial instruments and recomposed with different level of customization, and include mutual funds, trusts, QDII funds, fixed-income products, structured instruments (i.e. asset-backed and mortgage-backed securities), aggregate accounts asset management (by securities firm) and segregated accounts asset management. With the exception of QDII, most of these are on-shore products. The minimum amount of assets that can be deposited to a wealth manager can vary from player to player: 500 thousand RMB or more for most public banks (both Chinese and foreigner, for example China Merchant Bank, HSBC Premier or CITI Gold set this limit); 1 million or more for trust companies and private banks and 50 million RMB or more for fund management companies. One of the problems of the Chinese wealth management business in China is that not all companies have a track record, so it is quite difficult to identify best performers and therefore many Chinese people are concerned. In this respect, foreign managers are better perceived in terms of both brand and service.

The distinct difference between local and foreign managers is that the former consider wealth management complimentary to their core businesses, while the latter often consider wealth management a strategic business.

Another distinct difference between local and foreign managers is that the former consider wealth management complimentary to their core businesses while the latter often consider wealth management a strategic business. Since early 2006, the Chinese government has allowed foreign banks to engage in Chinese currency trading though a local incorporation procedure. This licence opened the door to foreign corporations targeting very affluent Chinese clients, with CITI Bank leading the way, followed by RBS, EverBright Bank and others. Competition is expected to become increasingly intense between local and foreign banks. Foreign banks have better operational and service experience, global asset allocation techniques and financial product development capabilities, while local banks have local market knowledge, a broad distribution network and existing client bases. Beyond competition, there is another issue for local and international players which is the scarcity of good wealth managers. Overall, the Chinese wealth management market will continue to expand at double digit rates in the coming years, but significant improvements still have to be made before reaching Western standards. However, if the objective of China is to become a global financial player, then overcoming these difficulties is necessary to guarantee a leading place in the future international financial market.

China’s life insurance industry has made great strides over the past 20 years. Life insurance premium revenues hit RMB495 billion in 2007, ranking in the top 8 globally. Since the CAGR of life premium in China has been 29% in the last 15 years (higher than China GDP David Liu, consultant, growth rate during the same period), we believe that Shanghai office this trend will continue in the long term. If China’s economy continues to grow at a rate of 8%-10% per year, we expect the growth rate of premium to remain at 15%-20%.

Opportunities and challenges of life insurance

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Life insurance premium revenues hit RMB495 billion in 2007, ranking in the top 8 globally.


2007 was a good year, but sustaining the growth is going to be a challenge. Investment assets of all insurance companies appreciated quickly in 2007 but this growth was driven largely by stock market performance which will be difficult to replicate in 2008. In addition, most life insurance companies, especially joint ventures, have accelerated the pace of building networks but this has in turn led to increased competition, the impact of which will be felt in 2008 (thirteen life insurance companies, nine of them joint ventures, increased their registered capital and set up a total of 49 new subsidiaries in 2007). Finally, while investment-linked products prevailed in 2007 the strategy used by small and medium-sized insurance companies of selling high guaranteed return policies will not be easy to replicate in 2008. Rather, the nature of the current economic climate suggests that policies that provide stable returns with an emphasis on protection will regain popularity, resulting in market share returning to large insurance companies in 2008. Given this situation, the opportunities and the challenges that will emerge are subject to changes in market competition and the sales environment. Market competition will become fiercer as many new entrants continue to establish new subsidiaries aggressively, particularly in Tier 1 cities. The smaller players will find it increasingly difficult to compete with large insurers, due to their lack of scale and brand equity. We expect to see a number of them to be merged with, or be acquired by, large companies. Meanwhile, large companies will face the impact of new life insurance companies established by banks, and such bank-backed insurers have clear network advantages from the start. But these changes in market competition bring opportunities, particularly for foreign investors. The coming round of M&A and restructuring of small & medium sized companies will open opportunities for foreign investors to obtain essential licences at a reasonable price, enabling them to access the market quickly. In addition, as more banks are approved to establish/acquire life insurance companies, they will be inclined to invite investors with industry background to help them develop their insurance business (CIBC has already invested in Tai Ping Insurance together with Fortis). Therefore, banks can offer platforms for foreign investors to enter the Chinese life insurance market.

Market competition will become fiercer as many new entrants continue establishing new subsidiaries aggressively, particularly in Tier 1 cities.

Regarding the sales environment, the key challenge is rising interest rates and high inflation which, combined, mean that the sales environment will become increasingly challenging. Life insurance products have already become less attractive and this trend looks set to continue, particularly given recent events in the Chinese stock market. Again though, these trends bring opportunities. The size of the opportunities that emerge will depend on how well insurers can identify customer preferences and how quickly they can design products to satisfy those needs. Recent natural events causing human suffering in China have reminded people of the importance of financial protection as well as return maximisation and new products can be created to meet that need. In addition, there is the opportunity to target new customer segments -for example, designing low cost insurance policies for rural residents or individuals with low incomes.

Dawn of a new era for the telecommunications market Olivier Letant, manager Jian Ming Cao, consultant, Beijing office

The May 24th announcement by the Chinese government of the restructuring of the telecom industry marks a new era aimed at creating a more equitable telecommunications market in China.

The government has enacted four new policies intended to promote market competitiveness. Firstly, the government has committed to adopt an asymmetrical regulatory framework within a period of time; secondly, it has mandated that mobile operators open up their networks to rivals for inter-operator roaming at government defined fee levels; thirdly, it has stated that three 3G licences will

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The May 24th announcement by the Chinese government of the restructuring of the telecom industry marks a new era.

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China after the Olympics


NEWSLETTER

China after the Olympics

be granted upon restructuring completion and, finally, it has committed to be a strong supporter of domestic innovation and intellectual property. Despite this favourable regulatory environment, many challenges remain for emerging players. The restructuring will create three telecoms giants operating both fixed and mobile networks, namely China Mobile, China Telecom and China Unicom. China Mobile will acquire China Tietong, formerly known as China Railcom, the smallest of the three existing fixed-line operators, focusing on broadband services. In this merger the biggest opportunity is likely to be in the creation of back-end synergies on the network and operations side. On the customer side, opportunities for bundled services such as converged billing remain limited due to China Tietong’s small commercial footprint. China Mobile is thus expected to leverage its mobile subscriber base to capitalise on the ongoing fixed-mobile substitution trend. China mobile will also be able to use its management and organizational skills and effective operational model to optimise the China Tietong business. The new landscape also carries uncertainties for China Mobile around whether its significant investment in TD-SCDMA, a Chinese 3G mobile telecommunications standard, will pay off.

The restructuring will create three telecoms giants operating both fixed and mobile networks, namely China Mobile, China Telecom and China Unicom.

China Telecom will acquire China Unicom’s channel access method (CDMA) network, as well as China Satellite, a provider of satellite communications services. China Telecom is most likely to leverage its existing relationship with its broadband subscribers and the largely idle CDMA capacity to compete in the mobile Internet space. However, it is facing three potential roadblocks ahead: firstly, existing shortages of CDMA handsets, which could be mitigated through a more targeted strategy; secondly, the impossibility to compete with China Mobile’s dominant positions in Voice and VAS; and thirdly the impossibility to compete with China Unicom’s future W-CDMA 3G services. China Unicom GSM operations will merge with China Netcom fixed network operations and the focus should be on targeting China Mobile’s existing subscribers with 3G handsets who cannot use the 3G service. These ‘high-end’ subscribers are usually mobile internet users. China Unicom would thus compete on speed rather than coverage. China Unicom’s challenge revolves around how fast it can build a 2G / 3G network core and the necessary backhaul to cater for the 3G network requirements. Although the new government directives will be disruptive to China Mobile’s existing monopoly, their impact will be limited to the medium term, because China Mobile has been preparing for quite some time now. Many difficulties remain ahead for the three newly created telcos, suggesting that in the near to medium term, this new move might prove to be more value-destructive than value-creative. Despite the opportunities that may arise for the formerly fixed-line only operators-China Telecom and China Netcom-China Mobile will probably retain its dominant position for quite some time.

The rise of mobile VAS Chuan Wei Lim, senior manager, Singapore office

The mobile VAS market in China is a tempting proposition for mobile media companies worldwide – provided they form partnerships with local operators, overcome weak Intellectual Property (IP) rights protection and understand the correct content.

Riding on the popularity of basic VAS, such as mobile messaging and ring-back tones, the market has experienced phenomenal growth over the last five years. Between 2006 and 2007 alone, total mobile VAS revenues grew 30% to US$16.0 billion – albeit with a majority coming from SMS. Currently the third-largest market in the world, after the US and Japan, China is widely expected to overtake both markets in the next four to five years,

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The mobile VAS market in China is a tempting proposition for mobile media companies worldwide.


given the sheer size and potential of its mobile subscriber base. Even today, with mobile penetration at only 40%, China already has the world’s largest mobile market with approximately 530 million subscribers. More importantly, of these existing subscribers 39% are in the 18 – 24 age range – a key target segment for advanced mobile applications (e.g. mobile TV, mobile music and gaming, internet access) that will likely drive the next wave of VAS take-up. Furthermore, the impending Olympic Games are likely to generate richer and more varied content and potentially also drive the rollout of infrastructure on which more advanced data services could be built.

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China has already the world’s largest mobile market with approximately 530 million subscribers. More importantly, of these existing subscribers 39% are in the 18 – 24 age range.

Nevertheless, international media players should tread carefully in China. Firstly, the mobile VAS market is extremely operator-centric, with the mobile market being dominated by only two operators – China Mobile and China Unicom (holding market shares of 70% and 30% respectively). Content aggregators, such as Tom Online and Linktone, which previously helped these operators develop their VAS offerings, are losing relevance as both operators are focusing on either developing mobile applications in-house or sourcing mobile content directly from content creators. The China Mobile – News Corp and China Unicom – Warner Music Group deals in 2006 are indicative of this trend. Potential investors should therefore look to form direct partnerships with the operators, rather than the content aggregators. Investors should also recognise that the operators will likely dominate the relationship due to their stronger bargaining position. Secondly, any mobile VAS offering will need to take account of the weak IP rights protection regime in China. Ideally, international media players should focus on mobile applications that are difficult to replicate. The lack of IP enforcement in China means that it is relatively easy for operators, or other VAS service providers, to copy a provider’s mobile content. Although developing less replicable applications, such as proprietary ‘killer’ video or music content, will help ensure that such a situation is avoided, demand for mobile video and music will nevertheless still be undermined by widespread piracy in China. Thirdly, the media sector is heavily regulated with onerous restrictions on foreign investment: local partnerships are a ‘must’, but foreign investors cannot own more than a 49% stake in any joint venture. The Chinese authorities also impose a high degree of censorship on foreign media content. While no clear regulations apply specifically to mobile content currently, the regulator will likely intervene once take-up of mobile TV/video and music becomes significant. International media players may have to exercise a degree of self-censorship, but this could compromise a company’s public perception in its home country. Google’s experience in China is illustrative in this respect. Overall, the Chinese mobile VAS market is extremely attractive but a cautious approach is imperative for its full potential to be realised.

Today, China is the world’s second largest technology industry and the second largest technology product exporter. In 2006, total revenue of the technology industry exceeded US$706 billion with its added-value, Jenny Ng, contributing 8% of GDP growth. Exports of principal, Hong Kong office technology products stood at US$282 billion in 2006, accounting for almost one-third of China’s total export volume. By 2010, the industry is expected to hit US$1.45 trillion, according to a report from a leading Chinese policy group.

China Tech 2.0: From world factory to technology powerhouse

However, although the industry is growing rapidly and the future prognosis looks extremely positive, several important caveats should also be raised. Firstly, Chinese technology companies need to think carefully about how to improve

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Today, China is the world’s second largest technology industry and the second largest technology product exporter.


their competitiveness, because they will have increasingly fewer opportunities to take advantage of cheap labour. Rising inflation, new labour laws and the fees China pays for using patents not only pose serious challenges to longer term survival but could also hinder the growth and development of the industry as a whole. Secondly, while the technology industry is very much centred upon innovation, products in China tend to be more like commodities, with numerous substitutes. Price is the major differentiator. Many Chinese technology firms still capitalise their growth on increasing volume rather than value, leveraging the greater spending power of the Chinese population as a whole, rather than focusing on the more high-end requirements of the highest income households. The development of cutting-edge technology is not as high a priority as mass production of “commodity” products and it is therefore not surprising to find that most technology firms are still in the low added-value downstream assembly business. Having said that, however, there are promising signs that China is beginning to establish itself as an innovator in the technology space, with several companies holding several thousands of patents in 2006 (Haier 7,008, Huawei 2,575, Lenovo 2,331, Midea Group 2,210). China Resources Microelectronics, ZTE, Huawei and a handful of other firms that recognise the importance of core technology and independent intellectual capital rights, have spent over 5% of their total revenue on R&D. The commercialisation of research has made both Huawei and ZTE respected global players, competing against leading international heavyweights such as Cisco.

China is taking its technology industry to the next level.

It is evident that China is taking its technology industry to the next level. China plans to focus on IC and software, next generation mobile communications, next generation Internet, digital voice and video technologies, advanced computing, biological medicine, commercial planes, satellite and new materials. Its position at the forefront of global technological development is likely to be further secured due to its R&D funding for high-performance CPUs and its investment in Chinese-originated standards, including a 3G standard (TD-SCDMA), a domestic wireless LAN standard (WAPI), a domestic audiovideo codec (AVS), digital TV standards and Enhanced Versatile Disc (EVD). China knows what needs to be done and its emergence as a technology powerhouse is now less a question of if, than when.

Television is popular in China, with 400 million households and 93% of the population having access to a television set. On the surface, the choice and range of channels available is diverse, with 2,000 channels available Laurie Patten, at different locations - a small number at the senior manager, Hong Kong office national level (those from state broadcaster CCTV), others at the regional level and many more targeted only to individual cities or small local areas.

Commercialisation and competition in the media sector

Beneath the surface, however, the situation is less positive, with many channels losing money, lacking focus and offering poor production quality. Over the past few years, we have witnessed the gradual introduction of the dual forces of commercialisation and competition in Chinese media. The Olympics in China will also help to accelerate development, with High definition TV services and bolstered advertising revenue both supporting improved programme quality. However, regulatory and government policy still determines how much commercial forces are able to shape the development of the sector. Hunan TV is the leading example of a broadcaster introducing populist programming and drawing on the reality TV formats that have been so successful in many international markets. Its “Supergirl” singing competition attracted 280 million viewers for the

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Television is popular in China, with 400 million households and 93% of the population having access to a television set.

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final show. With the programme generating telephony/SMS revenues and attracting international advertising, it is a model that other large regional players, such as Shanghai Media Group, are also adopting. However, this more commercial approach to channel scheduling has been criticised by regulator SARFT*, which labelled it ‘vulgar populism’ and sought to limit the genre on prime time television and curb lucrative voting. The regulator’s and government’s future positions on this issue will be critical to determining how far the sector embraces the programming and channel economic trends seen in other markets. At a local level, the picture is changing rapidly. The number of channels has fallen by 30% over the past four years, primarily through mergers but also closures. Public channels are facing pressure to support themselves financially, but their small scale and lack of access to advertising make this difficult. Many are reinvesting themselves, such as Chaoyang TV in Beijing, which focuses on local information and issues and has streamlined its operations. The future of many of these local channels is questionable if the current trend of commercialisation and financial accountability continues. Greater competition between the large broadcasters is a key trend. Significant regional players now provide competition to CCTV, at the national and pan-regional level, through carriage of their most popular channels in other regions. Equally, a channel syndication model has emerged where provincial channels team up to share content and pool advertising. Here, CSPN is a recent example, aggregating sports content from a range of provinces and seeking to compete with national sports channel CCTV 5 ahead of the Olympics. The extent to which such competition creates sustainable major media players will, again, depend on the regulator and the influence of CCTV on policy, but the economics are compelling.

A further trend shaping the industry is digitisation of the cable network and emergence of ‘true’ pay television services. There are currently 150 million pay-TV households of which 24 million are digital cable.

A further trend shaping the industry is digitisation of the cable network and emergence of ‘true’ pay television services. There are currently 150 million pay-TV households of which 24 million are digital cable. SARFT is pushing for aggressive rollout of digital cable, but the industry is lagging behind due to the uncertain economics – set top boxes have to be fully subsidised and there are pricing caps on basic services. In this context, it is unclear how far operators will be permitted to use the platform to expand subscription revenues and develop the commercial pay-TV models that have acted as industry drivers elsewhere. Commercialisation and competition now exist in the Chinese media landscape, with scope for rapid development over the next few years. However, it remains to be seen how far media regulators and the government will permit these forces to shape the sector as has been the case in other markets. * The State Administration of Radio, Film, and Television, executive branch under the State Council of the People’s Republic of China

The Chinese advertising market was worth US$15 billion in 2007, representing an 18% jump in revenue compared to 2006. While the Beijing OlymJenny Ng, principal, Hong Kong office, and pic Games has been the major catalyst Jenny Tang, consultant, Hong Kong office in recent years, the strong underlying growth of the economy has also contributed to making this a very promising sector. By the end of 2010, China is expected to displace Germany as the world’s fourth largest ad market.

Advertising and its brokers: an undiscovered gem

Media platform owners, i.e. TV channels, will be the first to benefit from such growth. However, those in the middle of the value chain – the media brokers, who help advertisers acquire ad inventory – will ultimately benefit most.

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Brokerage seems to be the only sector in the media industry that is open to foreign investment.

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To those outside the industry, the role of the media broker has long been viewed with some suspicion, compounding an already complex and non-transparent airtime trading system in China. After all, isn’t it simply quicker and cheaper to buy the airtime directly from the TV station? Why pay a middleman an additional commission? The importance of the role played by media brokers in China is explained by a number of factors quite unique to this market. In such a vast country, top firms in any industry will rely on a “pyramid” distribution chain of wholesalers, middleman and brokers to physically distribute goods. Only the largest corporations with a wider geographical presence, such as Coca-Cola, can afford to build their own distribution networks and, even these, will only cover key cities and towns. Buying and selling TV airtime or media space through extended distribution channels is simply an extension of an already widespread commercial practice. Moreover, unlike the Western world, where broadcasters are concentrated amongst a few media groups, there are over 2,000 broadcasters in China. TV channels range from Urumqi TV in the far north to Hainan TV in the far south, west to Kunming TV, back east to Shanghai Media Group and Beijing TV. For any potential advertiser, the logistics of meeting and negotiating with every station to get the best airtime price will require an army of skilled and trustworthy TV negotiators - a unique skill set that is in very short supply in China.

In such a vast country, top firms in any industry will rely on a “pyramid” distribution chain of wholesalers, middleman and brokers to physically distribute goods.

The key role of brokers in the Chinese market is their ability to secure large blocks of airtime inventory from TV stations. Brokers will buy upfront, or be granted, the exclusive rights to sell the airtime across a channel, across a particular time slot or, most commonly, for a specific program. A broker will typically buy out the rights for this slot for the year upfront and then break down the inventory into packages of airtime to be sold on throughout the year. Profit is made through a mark-up or commission on the airtime. Contacts and cash are key to gaining exclusive rights to the most valuable ad inventories. This is also why the brokerage market is still dominated by domestic players. All the top spots in the industry are local players that have established close relationships with broadcasters. Due to its cash-generating ability, we see growing interest in the sector, most notably from foreign investors. But perhaps the most attractive proposition of the industry lies with its relatively low barrier of entry – brokerage seems to be the only sector in the media industry that is open to foreign investment. As long as the Chinese Government maintains the current policy, we believe media brokers will soon emerge as the, as yet largely undiscovered, gem amongst the vast array of opportunities.

Building authentic brand experiences Simon Adriatico General Manager of Real Brand and Business China

New consumer touch-points are being added to the marketing mix at a faster rate than many companies and agencies are able to develop strategies that create meaningful brand experiences. This poses a problem for a monolithic industry defined by long marketing cycles and a strong dependence on big media stakeholders like TV and print.

This is especially true for China where TV, print and Retail Marketing have only really taken off over the past two decades. These industries are in their infancy com-

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Chinese consumers are adopting new communication & entertainment technologies faster than any market before.

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pared to their western counterparts which means companies are only now starting to understand how their brand message can be most effectively communicated via these media. The problem is exacerbated by the fact that Chinese consumers are adopting new communication & entertainment technologies faster than any market before (testified by, for example, the increasing number of mobile users which grew to 574 million in March 2008, a jump of 27.3 million since December 2007). Text messaging has increased by 23% over the same period and there is similar uptake of Social Networking Sites and online gaming. The scale of users involved highlights the massive opportunity available and, although it is certainly true that organisations are becoming increasingly aware of this, many have yet to do anything about it. Most companies in China are still focused on print or TV whether because of the lure of scale, the prestige of being everywhere or pure habit - because that is the way they have always done things. Typically, they simply do not understand how to speak to consumers on these new channels and so avoid them.

Simon Adriatico is General Manager of Real Brand and Business China. He has worked extensively in Asia, Australia and US developing a range of business strategies, with a particular focus on Internet, brand and sales management issues.

The great danger for Chinese companies, aside from brand diffusion and wastage of marketing dollars, is missing the chance to build a meaningful dialogue with their consumers. The key to success is clearly to adopt an integrated approach but, even more importantly, to maximize each individual touch point. The challenge is for brands to understand why, where and how their consumers are spending their time and to frame their brand message in a way that has resonance in that environment or interaction. What is the lure of a social networking site? How can a brand capitalize on the tribal sense of belonging in that environment? What are consumers viewing on their iPods during their morning coffee break? How do I get them to drink my product while they’re viewing it? These are fundamental questions that brands should be asking in order to understand how consumers are interacting in these new channels. The key is authenticity. Finding the native language of the medium and communicating the message in that language. This means understanding how the medium connects with the consumer. In the case of a video game, for example, a consumer connects if the experience is entertaining and immersive. So Coca Cola would be much more effective in connecting with a gamer if they programmed a bottle of Coke into the video game to give the player extra energy, for instance, than they would by simply being a naming sponsor.

The challenge is for brands to understand why, where and how their consumers are spending their time and to frame their brand message in a way that has resonance in that environment.

Chinese Companies that master this level of understanding of individual touch points when developing their strategies will be able to create more meaningful connections with their consumers and will create greater long term brand awareness.

China, changing its status from manufacturing hub to consumer market, has seen the entry of an increasing number of foreign enterprises in the tertiary segment and in the financial market in particular. By the end of 2007, most major interXu Huang, manager and David national banks had already opened commercial Liu, consultant, Shanghai office branches or representative offices in China. 24 out of the 54 Chinese insurance companies are foreign invested joint ventures, 16% of Chinese mutual funds are managed by foreign

Five post-merger tips for foreign financial institutions

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For a successful presence in China, execution of post-merger plans is critical for foreign investors.

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institutions and, from 2008 on, an increasing number of securities brokerage firms will open the door to international players. Most foreign entities approached China through a merger or acquisition. Joint ventures involving a Chinese partner has proved to be the fastest method to build market knowledge and gain access to the local relationship network. For a successful presence in China, execution of post-merger plans is critical for foreign investors. Based on our experience, we have identified five key success factors to ensure successful post-merger integration in China. Firstly, build and maintain good relationships with Chinese partners. The level of support that the foreign investor obtains from the Chinese partner can strongly determine the future success of the joint venture. Local players have access to a broad network that encompasses a wide range of institutions, including government. Maintaining good relationships is an ongoing task where attention to detail is essential. It is important to remember that the Chinese businessman views the value of his partner as being more important than the value of the partnership. Secondly, adopt a long-term gradual approach. Foreign investors tend to make radical changes right after closing the deal. Local professionals typically perceive this as an invasion. Only by working closely with Chinese executives can systems be modified effectively. In the long term, this approach pays dividends, as demonstrated by market leaders HSBC and Citibank, who entered China in the early 1900s and who have actively participated in the evolution of the Chinese financial system. Thirdly, act fast in executing the post-merger plan. Rapid changes in laws and regulations are major obstacles to the successful implementation of the strategy. Therefore, speed in executing an action plan, together with flexibility in a post-merger plan, is essential. Fourthly, hire local people to develop local business. One critical decision for a foreign invested company is the level of localization of its professionals. In a large number of multinational companies, top executive positions are still occupied by foreign managers, with Chinese professionals frequently located in the middle management. However, an emerging trend suggests that skilled local executives with overseas experience will increasingly occupy the top level positions. For example, Eurizon, one of the largest European fund management companies, preferred to have a Chinese CEO to head its new joint venture in China, Penghua Fund Management Company.

• Build and maintain good relationships with Chinese partners • Adopt a long-term gradual approach • Act fast in executing the post-merger plan • Hire local people to develop local business • Assuming a positive attitude towards the Chinese market is essential.

Finally, assuming a positive attitude towards the Chinese market is essential. Western experience does not necessarily guarantee success in China. Google and e-Bay are not as successful as Baidu and Taobao for example. After an acquisition or joint venture, a good post-merger plan needs to be accompanied by an open attitude towards the Chinese market and active participation with local partners. These two characteristics are fundamental to paving the way for further growth in the Chinese market.

Challenges of international growth for Chinese companies Jenny Ng, principal, Hong Kong office, and Ruggero Jenna, director, Shanghai office

In parallel with the growth of the country, Chinese companies have become stronger and some of them have started looking abroad for international expansion. Chinese outward foreign direct investments (FDI) have soared from less that 3 billion US$ in 2003 to more than 12 billion in 2007. This is still one fifth of inward FDI in China, but it is enough to make China the second originator

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China is the second originator of foreign investments after the United States.

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of foreign investments after the United States. Recent surveys show that the motivations for international expansion can be grouped in two types: on one side gaining access to natural resources, which explains many of the Chinese investments in Africa and Latin America, on the other gaining access to new markets, new technologies and new capabilities. The second motivation is becoming increasingly important, as Chinese companies try to move up the value chain to escape from fierce price competition at home in the most commoditized segments of the market. Consistently, foreign investments in manufacturing and service sectors are gaining share on total outward FDIs. Over the past years there have been some remarkable success stories of foreign investments by Chinese companies, for example the acquisition of IBM Personal Computers division by Lenovo and the commercial expansion of Huawei to mention just the most famous ones. Success of these expansion initiatives has been subject to factors unique to the transaction and is not always the norm. The Lenovo-IBM success is, for example, very much due to the management’s ability to leverage on the superior quality of IBM’s products and customer services. Justin Chang, a partner at TPG, also a board member at Lenovo, suggested that the company has been operating at the same level of R&D since acquisition. This is all part of the company’s strategy in retaining existing customers as products have always been one of IBM’s core competitive edge. Justin also noted that subsequent to the transaction, management has also been quick in identifying the core cost centres of the unit - supply chain management and procurement in the US with rapid actions taken to transfer the respective operations to China to cut costs. Most importantly, both IBM and Lenovo realised the importance of cultural fit in an organization and has made the integration of the two companies’ cultures and values a top priority. All these initiatives have contributed to the success of the acquisition.

Over the past years there have been some remarkable success stories of foreign investments by Chinese companies.

However, while the IBM-Lenovo acquisition has been a success story, other initiatives have encountered more difficulties or even failed, essentially for two key reasons. First, Chinese investments often face significant political barriers, as was the case for example in CNOOC’s attempt to acquire Unocal or in Haier’s bid for the US-based Maytag, both of which ultimately failed. Second, Chinese companies typically encounter significant integration challenges due to differences in culture and style, as was the case, for example, for the TV producer TLC after it acquired Thompson in France. Moreover, many Chinese companies – particularly the smaller ones – lack a deep knowledge of international markets and competitors and this limits their confidence in embarking on ambitious expansion strategies. These companies typically adopt an opportunistic approach in scouting for targets, but they lack a clear vision so they often give up when they face the first difficulties. We believe that, in order to succeed in overseas expansion, Chinese companies should go through three key steps. First, they must develop their international strategy, starting from an understanding of their internal strengths and weaknesses, analyzing the global competitive scenario in their industry and defining clear priorities that must be endorsed by all top management. Second, they should develop a “globalization roadmap”, taking into account the efforts required and the resource constraints and organize themselves for execution by deploying adequate resources and making sure that they are put in the best positions to succeed. Third, they have to dedicate a special effort to the post-acquisition phase by defining mechanisms to integrate the culture of the target into their own and to motivate key resources of the acquired company to continue making their contributions in the new situation. Ultimately, this process will create more global Chinese companies, in which international career paths will be not the exception but the rule.

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• Develop an international strategy • Draft a “globalization roadmap” • Dedicate a special effort to the post-acquisition phase.


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Value Partners has opened a new office in Dubai to serve its clients in double-digit growth countries in the Persian Gulf region (United Arab Emirates, Qatar, Saudi Arabia, Kuwait, Bahrain, Oman) and Africa. Value Partners has been doing business in this area for many years, primarily working on projects in the Media & Telco sector, such as new mobile licence allocation processes and the development of new services on multimedia platforms. We have also led Customer Relationship Management projects in Egypt and South Africa.

Value Partners opens in Dubai and strengthens its presence in the Middle East region

The new office will be located in Dubai Media City. This will be our base for supporting clients operating in telecommunications, media, financial services and specific industrial sectors, working alongside local companies and international groups interested in growth opportunities in the Middle East. Dubai and Abu Dhabi have become clear reference points for development of the area.

Value Partners has opened a new office in Dubai to serve its clients in double-digit growth countries in the Persian Gulf region and Africa.

“Opening the Dubai office is part of Value Partners’ international growth strategy, which is leading us to set up our new offices in emerging markets with high profit potential, a feature that is particularly significant for companies interested in global markets”, says Santino Saguto, the partner responsible for the Dubai office. “European companies are looking at the Gulf countries with increasing attention, not only due to their great wealth, linked to the rise in oil prices, but also because they represent an exceptional entry point to Asian, Indian and Chinese markets. Dubai is becoming a new global hub in the same way as New York, Hong Kong or Singapore.”

Value Partners’ new headquarters in Milan

Value Partners’ new headquarters, an interesting example of one of the few eco-sustainable buildings in Milan, was designed by De Amicis Architetti and PorfiriStudio .

The most advanced environmental sustainability requirements for reducing air pollution and lowering energy consumption have guided the composition of the entire building, together with a sustainable use of resources and materials, a better use of natural light and innovative low-energy service systems. Green is the unifying element of the new building, characterized by an intelligent combination of working spaces and large green areas, such as the winter gardens, a five storeyhigh blooming green wall in the entrance lobby, and rooftop gardens, which act as a sort of large garden for the houses nearby. A broad stainless steel baseboard and orange steel-framed windows make the headquarters façade immediately recognizable.

Value Partners in Chinese characters

A Chinese company name should never be a mere translation of the original name. It should be instead a genuine brand, conveying the principles and the essence that the firm represents.

Wei Pu, Chinese expression for Value Partners, is a juxtaposition of two characters which combined mean “prestigious global operator”. Besides having a phonetic link to the original brand, the Chinese name recalls the sound of the initials VP.

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Value Partners in Chinese characters


Value Partners Group Milan Via Vespri Siciliani 9 20146 Milan Italy Tel. +39 02 485 481 Fax +39 02 485 48 720 Value Partners Management Consulting Milan Via Vespri Siciliani 9 20146 Milan Italy Tel. +39 02 485 481 Fax +39 02 485 48 720 Rome Via di Porta Pinciana 1 00187 Rome Italy Tel. +39 06 697 648 1 Fax +39 06 697 648 51 London Greencoat House Francis Street SW1P 1DH London United Kingdom Tel. +44 (0) 20 7630 1400 Fax +44 (0) 20 7630 7011 Helsinki Vilhonkatu 6 A 00100 Helsinki Finland Tel +358 9 4780 1300 Fax +358 9 4780 1301 Istanbul Sunplaza Dereboyu Sk. No:24 Maslak 34398 Istanbul Turkey Tel. +90 212 276 98 86 Fax +90 212 276 98 82 Dubai Business Central Towers Suite 1304 A Sheikh Zayed Road Dubai Media City United Arab Emirates Tel. +971 50 788 0187

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Value Team IT Consulting & Solutions Milan Via Vespri Siciliani 9 20146 Milan Viale Cassala 14 A 20143 Milan Italy Tel. +39 02 489851 Fax +39 02 4898 5999 Rome Via Della Grande Muraglia 284 00144 Rome Italy Tel. +39 06 526 131 Fax +39 06 526 133 14 Turin Corso Svizzera 185 10149 Turin Italy Tel. +39 011 772 241 Fax +39 011 771 644 6 Pisa S.S. del Brennero km 4 Loc. La Figuretta 56123 Pisa Italy Tel +39 050 8009 401 Fax +39 050 8009 626 Treviso Viale della Repubblica 12 31020 Villorba - Treviso Italy Tel +39 0422 2511 Fax +39 0422 251251 Istanbul Sunplaza Dereboyu Sk. No:24 Maslak 34398 Istanbul Turkey Tel. +90 212 276 98 86 Fax +90 212 276 98 82 Helsinki Vilhonkatu 6 A 00100 Helsinki Finland Tel +358 9 4780 1300 Fax +358 9 4780 1301 São Paulo Avenida Brigadeiro Faria Lima 201 (12 Andar) 05426-100 São Paulo – SP Brazil Tel. +55 11 3817 2200 Fax +55 11 3817 2210 Rio de Janeiro Rua da Candelária, 60 10º andar Centro Rio de Janeiro – RJ CEP 20091-020 Brazil Tel. +55 21 2213 9191 Fax. +55 21 2213 9190

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If you would like to discuss any of the issues raised, please contact your nearest Value Partners office or write to newsletter@valuepartners.com


Value Partners - China after the Olympics