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| May 2005 |
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| COMPANY IN ACTION |
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A French Lesson on Business in China
The French telecom equipment firm Alcatel has sold its stake in its joint
venture in China just nine months after formation.
Alcatel has agreed to sell its 45 percent stake in its mobile phone joint
venture to its partner, China-based TCL, for HK$63 million (6.4 million).
Alcatel agreed to place its handset business in the venture just nine months
ago. At that time, Alcatel valued the cash and assets it injected into the joint
venture at 45 million. The group said that it had the option of selling its
stake in four years time.
The joint venture posted a 36 million net loss in the first quarter.
When Alcatel entered the venture to produce handsets, it injected 45 million
worth of assets. It now emerges with stock in TCL worth around 6 million. The 85
percent writedown may sting, but staying in would have resulted in far higher
losses.
The joint venture posted a 36 million net loss in the first quarter -- meaning
Alcatel's share of the loss was 16 million. This is at a time when global mobile
phone sales are booming.
The problem is that it sells less than 2 percent of all handsets worldwide, so
it cannot compete on price against Nokia. And the joint venture focuses on the
cheaper end of the market, where price is everything.
One suspects that losses will be far higher when handset growth eventually
slows. Folding now looks like a smart move, even if it had to sell its share at
a discount to get around a four-year lock-up provision.
The exit may not appear significant given Alcatel's market capitalization of 11
billion. But consider how large a headache divestment could have been.
The division was hardly a gem, so it is rather surprising the Chinese were even
interested. And shutting it down would have been politically painful.
If Alcatel had sold the business straight to the Chinese, it likely would have
encountered much more flack. Just look at all the problems that IBM encountered
in selling its PC business to a Chinese company, and that was in the relatively
non-dirigiste US.
Alcatel's exit is not a glorious end to Alcatel's long-running ambitions in
handsets, but it does free the group from its imbroglios.
Sources: CNN Money
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GM Opens Shanghai Plant, Doubles Capacity
General Motors' (GM) flagship China venture opened a new plant in Shanghai on
Saturday that brought its nationwide production capacity to almost half a
million units in an increasingly competitive market.
The new facility, part of GM's $3bn investment blueprint with its Chinese
partners, is capable of churning out 160,000 medium-sized Buick Excelle sedans
and could produce the Cadillac STS luxury sedan in the future. Operations at the
plant, located on the outskirts of Shanghai's financial district, began on
Saturday, the US auto maker said.
"There is no country more important than China for the auto market," said GM's
Asia Pacific chief, Troy Clarke, at the opening ceremony of the plant. Mr Clarke
said China's auto market would develop faster than any other market in the world
in the next 10 years but did not elaborate. Mr Clarke has previously said the
Chinese market would grow through the end of the decade at an average annual
rate of 10%.
The new facility doubles the venture's capacity in Shanghai to 320,000 units and
brings its nationwide capacity to 480,000.
Sources: The Economic Times Online
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Starbucks Expects China to Be No. 2 Market
Starbucks Corp. expects tea powerhouse China to eventually become the coffee
chain's second-biggest market after the United States, an executive said Friday.
The company has 9,373 stores worldwide and hopes to expand to 30,000, said
Martin Coles, president of the Seattle-based coffee chain's international
operations. Coles didn't give a timeline for the expansion.
Coles said that Starbucks expects China to become its No. 2 market after the
U.S. in the "long-term." The chain has 120 stores in China now.
"We believe that China has enormous growth potential," he said. "We see it as a
major source of future growth for the company."
Starbucks was supposed to make an announcement about its China business on
Friday. But at the last-minute, the company decided to delay the news for
undisclosed reasons.
The chain's China stores are in Beijing, Shanghai, the northeastern city of
Qingdao and the southern province of Guangdong
The company plans to open stores in the northeastern city of Dalian and the
southwestern city of Chengdu within the next six months.
Coles said the response so far has been great, especially from expatriates.
"Some of them have told us that they have been waiting for the store for four
years," Coles said.
He added, however, that his company isn't looking for success overnight.
"China is a longer-term play for us," Coles said. "Certainly, we are not looking
for it to become the crown jewel in the next year or two. It is an investment."
Sources: Associated Press
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Multinationals Shifting China Strategies
Multinationals are rethinking their Chinese strategies as the country shifts
from being a manufacturing powerhouse to a consumer-driven nation.
These companies are facing fresh challenges as market changes make doing
business domestically more complicated. For manufacturers it is no longer as
simple as finding a prime location and suitable employees, producing in foreign
markets and then exporting.
Consumer goods manufacturers and service providers often find the market is so
big their current presence in some big cities is not widespread enough for
success.
To counter this, firms may decide to increase investment in research and
development (R&D), marketing and the service sectors, intensify penetration of
the market and integrate management.
Among the multinationals that modify their goods for Chinese applications and
expand their local service network, a common strategy is improving the
efficiency of local management by setting a single goal, a single plan and a
single brand. Such practices are expected to significantly improve
multinationals' competitiveness.
Philips celebrated 20 years of business in China last month. It has 35 joint
ventures or wholly-owned subsidiaries and more than 60 offices nationwide.
The firm has begun integrating some common functions at its ventures into
unified platforms under the One Philips principle, according to David Chang,
president of Philips China.
The consolidation covers the information technology support unit, a unified
human resources management system, financing, training, marketing and public and
government relations.
"The company also formed a China Strategy board with the participation of heads
of its five business units that is responsible for formulating the direction of
the company," Chang said.
Like Philips, 35 per cent of multinationals are consolidating operations in
China, according to a survey by the Chinese Academy of International Trade and
Economic Co-operation completed earlier this year. The academy is a think-tank
affiliated with the Ministry of Commerce.
The survey shows multinationals have been fine-tuning their management
structure.
But their methods are somewhat different. Some, such as Japan's Matsushita, put
previously independent business units under the umbrella of the company's head
office in China.
Others, like Finnish company Nokia, have merged their manufacturing bases.
As China's economy evolves - growing larger, more complex and more competitive -
so too does the way that multinational corporations are managing their
operations, according to experts from the Boston Consulting Group.
CEOs and other senior executives at multinationals in the United States, Europe
and Asia are focusing more of their time and resources on China, a study by the
Boston Consulting Group shows.
China operations have a very senior, accountable sponsor at the global level -
at Samsung, for example, the China CEO is one of three top group executives. A
continual, top-down management push is reinforced by management processes -
Michael Dell of Dell Computers and other CEOs visit China at least once a year.
Multinationals are working to bring the industry value chain, including R&D,
into China. Samsung has set up a 300-strong handset R&D laboratory in Beijing.
All these firms' China operations tend to be given a value-added role. Kodak's
China organization is preparing an integrated strategy across six businesses.
"With the survey, we tried to look at some general ways in which these
multinationals, despite being large, complicated, global organizations, were
able to achieve some sustained focus on China and orient their companies toward
accelerated activities in China," said David Michael, a vice-president at the
Boston Consulting Group's Beijing office.
Expectations that China's market will continue to grow are driving some
multinationals to go deeper into the country, such as Coca-Cola which has an
ambition to "go to the villages."
Its China President Paul Etchells said that he wants to increase the
geographical spread of the company's bottling plants and aims to increase its
penetration in less developed and rural areas of China.
The move was based on the company's prediction that China will be its
third-largest market by 2008.
With GDP growth continuing to increase at a rate in excess of 8 per cent, the
prosperity that was once confined to the larger urban areas is now starting to
filter into the countryside.
Many migrant workers that have returned to the countryside have brought with
them the necessary capital to set up their own businesses or invest in existing
family ventures. This means increasing spending power in rural areas - something
food and beverage companies will continue to keep an eye on.
Coca-Cola's marketing and distribution network has tended to concentrate in the
three main urban areas around Beijing, Shanghai and Guangdong. But with growing
wealth distribution and a rapidly developing infrastructure outside the main
urban areas, opportunities are increasing further afield, Etchells said.
Foreign retail companies are also moving into second-tier cities, spurred on by
retail sales rising by 13.3 per cent to 5.4 trillion yuan (US$649 billion) last
year, and the increasing competition in the major cities.
Wal-Mart, the world's largest retailer, plans to open as many as 15 new stores
in China this year, competing for a foothold with Carrefour and Metro Group.
Wal-Mart, which has 40 outlets in major cities such as Beijing and Shenzhen,
will focus on smaller provincial cities, Joe Hatfield, Wal-Mart's chief
executive for Asia, said in an earlier interview in Beijing.
Sources: Australian IT
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BoA Eyes China Bank Stake
Bank of America Corp. has signed a memorandum of understanding to take a
strategic stake in China Construction Bank (CCB.UL), one of China's big four
state lenders, the Economist magazine said on Friday.
Citing unnamed sources, the magazine said the No. 2 U.S. bank was in talks to
buy about 5 percent of China's biggest property lender for $1.5 billion to $2
billion.
Temasek, the Singapore government's investment agency, is also in advanced talks
with CCB for a similar stake, and CCB is also talking to other banks and private
equity firms, the Economist said. .
Bank of America spokesman Bob Stickler said "we do not comment on speculation."
The CCB was not immediately available for comment.
Bank of America Chief Executive Kenneth Lewis said on May 4 that the Charlotte,
North Carolina-based bank was considering buying a strategic stake in China.
Following its $48 billion acquisition in April 2004 of Fleet Boston Financial
Corp., Bank of America now has about 10 percent of all U.S. deposits, the most
allowed, forcing it to invest elsewhere.
China's state banks are angling for foreign investment for know-how and to bring
credibility to an industry tarnished by loan fraud and corruption. These
strategic stakes are key to selling shares to overseas investors in planned
public offerings.
Foreign banks are allowed to buy up to 20 percent of any one Chinese bank.
London-based HSBC is the biggest investor so far, having paid $1.75 billion last
year for 19.9 percent of Bank of Communications.
Beijing is scrambling to shore up a creaky financial industry saddled with more
than $200 billion in bad loans. Domestic banks will face intensifying
competition once the market is opened wider to foreign players at the end of
2006.
Sources: Reuters
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