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| November 2005 |
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| COMPANY IN ACTION |
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Citigroup Invests in China Firm
Citigroup Inc's venture capital unit has invested $25 million in one of
China's biggest firms providing loan guarantees to small and medium enterprises,
a senior Chinese executive said on Friday. Though small, the investment
underscores the appetite among global private equity players to take a bet on
the country's underdeveloped financial services sector.
Citigroup Venture Capital International (CVCI) would become the second major
foreign entity to pour cash into Credit Orienwise Group Ltd. after the Asian
Development Bank invested $10 million in recent months, he said.
"The Citigroup unit has invested in us," Peng Jize, chief operating officer at
Credit Orienwise, said by telephone.
Citigroup declined to comment.
Foreign private equity firms are flocking to China, tipped by some analysts to
become the region's biggest market in a few years, to invest in everything from
tourism to property.
High profile private equity investments in the country's financial sector
include the purchase of a near-18 percent stake in Shenzhen Development Bank Co
Ltd by U.S. buyout fund Newbridge Capital last year.
Goldman Sachs's private equity arm is part of a consortium that has signed an
in-principle agreement to buy a 10 percent stake in Industrial and Commercial
Bank of China for more than $3 billion.
Investing in loan guarantees could prove lucrative given the difficulties faced
by countless small and private Chinese firms which are unable to access bank
loans without the right political connections or collateral.
Shenzhen-based Credit Orienwise had provided guarantees for around 14 billion
yuan worth of loans by September of this year, up from just 540 million yuan in
2001, Peng said.
Earlier plans to float shares had not come to fruition.
Asked about any listing plans in the future, Peng said:
"Entering the capital market is our strategic goal, but we do not have a clear
timetable."
Sources: China Daily
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VC Nation: Excited and Wary, Investors Look at China
WHEN Joe Schoendorf, a Silicon Valley venture capitalist, was in Shanghai a few
years ago to hear a pitch from a Chinese start-up company, he sensed something
familiar. He interrupted the meeting, walked to the window and pulled back the
curtains.
"What are you looking for?" he remembers the would-be entrepreneurs asking.
"I just wanted to make sure I was in China and not back in Palo Alto," he
responded.
China's high-technology community, with its brains and competitive spirit, is
probably more like its counterpart in Silicon Valley than any other in the
world.
Yet Silicon Valley's views of investment in China have tended to swing between
wild optimism and deep anxiety - with the anxiety going beyond a fear of losing
money. Some worry about helping Chinese start-ups move up the technology food
chain.
These days, the Valley venture capitalists are sharply divided in two camps: one
rushing into China and one holding back.
"The Valley is excited and it's scared at the same time," said Richard Shaffer,
editor in chief of VentureWire, a venture capital newsletter publisher.
The dominant perspective is that China is a vast sea of opportunity, from its
low-cost skilled labor pool to its enormous consumer market that is more than
one billion strong.
In fact, it is now routine for venture investors to demand that their start-up
firms place the bulk of software development and manufacturing efforts in China
or India. (A supply chain problem at a manufacturing arm in China, however, can
easily ruin financial results in any given quarter.)
For China skeptics, the concern is that American investment will help energize a
formidable competitor, which could come to dominate both markets and
technologies.
The fear is based in the Valley's complex relationship with China as supplier,
partner, customer and competitor. Most venture capitalists say this evolving
relationship will define the future of the Valley and maybe even technology
development in the United States.
The Ningbo Bird Company is one case in point. It went from being a contract
manufacturing supplier for Motorola to being a serious rival in the Chinese
handset market in a matter of a few years.
Still, last year, most of the Valley seemed to throw caution aside as venture
firms invested nearly $1.3 billion in China, up nearly 30 percent from 2003,
according to Zero2IPO, a venture capital research and consulting company based
in Beijing.
But in the first half of this year, investment slowed drastically after several
changes in Chinese securities regulations. Those new rules caused "a decline of
50 percent in the first two quarters," said Dixon Doll, managing director of
Doll Capital Management, based in Menlo Park, Calif.
The lull is ending, though, in part because of the high-profile success of the
initial public offering of Baidu, a Chinese search engine company that was able
to raise $86.6 million in August, and a securities rule change in October. In
September, Sequoia Capital, a major backer of Google, was reported to be
planning a $200 million fund and hiring several employees in China.
That announcement followed an earlier joint agreement this summer by Accel
Partners, a leading Silicon Valley firm, and the International Data Group to set
up a $250 million fund.
There have even been reports recently that Kleiner Perkins Caufield & Byers, the
Valley's highest-profile venture firm, was creating its own China fund, though
people briefed on the firm's plans said that was not true. While Kleiner has
recently added Colin L. Powell as a partner to serve as a "rainmaker" in Asia,
it remains concerned about changes in Chinese security laws that could
complicate the return of investment funds to the United States.
Mr. Schoendorf, who is an Accel partner, sees benefits in helping China to
become a fierce new competitor. He likens this moment of anxiety and promise to
the 1970's, when Japan began to compete successfully with the United States.
"The Chinese graduate more engineers than we do," he said. "They're smart, they
work hard, and so the only way to compete with them is to remain more
innovative."
Sources: New York Times
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A-B Sees Booming Business in China
Anheuser-Busch Companies has set up 14 breweries in China, said the chairman of
board August Busch III. "Now we have 15 breweries outside the United States, 14
in China and the other in the United Kingdom. China has a large market for beer.
Our business sees booming growth," said Busch III at the recent Wuhan
international consultant conference in central China's Hubei Province.
Currently, the company is the owner and operator of Budweiser (Wuhan)
International Brewery Co. It has 27 percent of the shares of the Tsingdao Group,
China's largest beer producer. China's fourth largest beer producer Harbin
Brewing Group Ltd. is also under its management.
"Anheuser-Busch's success in China is due to its thorough knowledge of China's
policies on economic development," said the chairman, adding that they make
efforts in promoting their business and get great support from the local
governments.
Anheuser-Busch, a Fortune 500 company, has 11 percent of the global shares in
the beer market and 50 percent in the American market. In 2004, its annual sales
totaled 17.2 billion US dollars.
Sources: Xinhua News Agency
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U.S. Farmers Eye China's Growing Market
China's huge population and rising standard of living have U.S. farmers hoping
the Chinese will cross culinary lines and sample fare that's a little more
foreign to them.
Many of China's 1.3 billion people, with ever more disposable income, are
becoming more receptive to different food choices, said New York State
Agricultural Commissioner Nathan Rudgers. He traveled to China last month to
help market U.S. agricultural goods, including dairy products from his home
state.
While it may seem obvious that farmers would look to China as a place to expand
¡ª the country continues to embrace capitalism even as the Communist Party
remains in political control ¡ª there are numerous hurdles to clear to make it
profitable.
In 2004, the United States exported $5.5 billion of agricultural products to
China while importing $1.6 billion worth of that country's farm goods. The
largest U.S. agricultural exports to China were soybeans, cotton and other raw
products. Factories paying low wages turn the raw materials into goods, such as
clothing, that are often then sold back to the United States at prices lower
than are sustainable by U.S. manufacturers.
Agriculture officials in the United States hope to change that. They foresee a
time when the average Chinese, like the Japanese, will partake of everything
from California wines to New York bagels and bialys.
"There are people that are leaving their rural livelihoods and are coming to the
cities and (China) has a demonstrated record of raising the wealth of a huge
population in a very short period of time," Rudgers said. "And all those people
with newfound wealth are looking for improved diets and looking to try new and
different things."
Still, officials concede it could be a stretch to get the Chinese ¡ª without
Japan's freer market economy and embrace of American pop culture ¡ª to buy and
enjoy foods such as cheddar cheese or breakfast cereal that are common to
Americans.
"They are not used to eating something in a bowl that is not warm," Rudgers
said. "It's rare they would eat something without chopsticks. Being (that) fresh
milk has been hard to come by, the concept of taking cold cereal, putting it in
a bowl and pouring fresh milk on it is totally foreign to them."
The U.S. market share of agricultural products in China is about 8 percent.
Officials hope that number will grow to around 20 percent by 2010. That may be a
tall order considering it took two decades to get to the current market share.
"China is a huge market opportunity, but there are differences in what we can
produce and what they can pay," said Duncan Hilchey, an agricultural development
specialist at Cornell University. "If in time their economy grows and we can
produce products at a price they can afford we may be able to find things we can
sell them. Currently it's the reverse."
China has multiple markets that vary by region. And wealth levels differ greatly
from the major cities like Shanghai and Beijing to the rural, less developed
areas of the interior.
"You can't just say `I'm going to go sell in China,'" said DeWitt Ashby of the
National Association of State Departments of Agriculture. "It's way too big and
complex a place."
For example, a U.S Department of Agriculture report highlighted Chongqing, a
city on the Yangtze River with a population of 6 million, as a potential market
for U.S. goods that has largely been untouched. There were 76 supermarkets in
Chongqing, covering more than 1 million square meters and numerous five-star
hotels catering to business executives, according to the report. But the report
also noted there are problems with distribution to the city.
China likely will have little choice but to become a larger importer of food as
its economy develops fast and living standards rise steadily.
China has "a quarter of the world's population and 6 percent of the world's
arable land," Rudgers said. "There's an equation there that suggests they are
going to be consumers of food and agriculture products in a developed economy."
U.S. businesses, however, may have to take losses at first to get established
across the Pacific.
"It is about having patience," he said. "It is starting not with containers but
individual cases of product and being willing to serve that market probably at a
loss for a time until folks develop a taste for what we're providing."
Sources: Associated Press
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Distribution Centers Roaring In China
There is a rush to build distribution centers (DCs) in China, following the
recent massive manufacturing surge. But there may be one more important reason
for this movement. The cost of warehouse workers in China is $2 an hour, while
in the U.S. it's $14 to $15 an hour.
Global shippers such as UPS, FedEx and DHL are making big moves in China. DHL
has 16 distribution centers there and is spending $110 million on its hub and
sorting facility in Hong Kong alone. UPS Supply Chain Solutions, which has 40
DCs in China, is adding ten more this year.
These centers are located adjacent to major manufacturing centers and are often
used to sort and directly ship a lot of merchandise that would ordinarily have
been resorted on arrival in the U.S. Some retailers are even building their own
centers and, as with Wal-Mart Stores, these also serve to stock their stores in
China.
Other retailers and manufacturers are not building their own distribution
centers in China. They are using third-party logistics providers to process and
sort those goods there.
"They are skipping a couple of steps in the supply chain and doing the same work
at a fraction of the cost," says Bill Zollars, CEO of Yellow Roadway. ¡°The
retailers can do the sorting by store in China. Their products can go into a
shipping container and all the way to a store in Boise.¡±
Normally, enterprises have manufactured in China and sent the products by
container ships to distribution or warehouse centers in the U.S.--often on the
West Coast. This new trend can expedite the shipping and remove many
supply-chain links.
¡°Yellow Roadway is providing a service that moves whole pallets from China. We
manage shipments with logistics partners from end to end. The consolidation is
done in China and not in facilities as on our West Coast. We take advantage of
the great labor rates,¡± says Zollars.
Still, shipping specialists say expansion in Chinese distribution centers won't
do away with the need for some similar facilities in the U.S.
"The movement of goods in full containers from China directly to stores still
calls for lead-time protection," says Jeff Schwartz, CEO of Prologis, which
builds, rents and manages distribution centers. "That means U.S. inventory. The
distribution centers here have inventory because of demand variability." A
shipment from China can take a week from its Chinese point of origin to its U.S.
local carrier. Meanwhile, a retailer can lose business.
The scale of centers that are being build in China is also growing. Prologis is
developing a distribution center in Shanghai as part of what is expected to be
the world¡¯s largest port facility. It represents an investment of $14.9 million.
Most centers being put up by UPS in China are in excess of 200,000 square feet.
One in Shanghai will be 400,000 square feet. As staggering as this size may
seem, it is merely midrange by distribution-center standards. UPS is also
upgrading its air and port facilities in China.
In the United States, distribution centers are most often built in rural areas
where there is relatively cheap real estate and where nonunion labor abounds.
The rural locations may provide easier access than urban locations, since
manufacturing centers are rarely in central cities these days. Companies that
have chosen China as a location weigh the real estate costs and accessibility
with the same factors in mind.
New U.S. centers are often 1,000,000 square feet in area and several stories
tall. ¡°They can be recognized most easily by the nearly endless truck loading
docks that they have on all sides,¡± says Schwartz.
The concept of distribution centers represents a new way of thinking in
logistics. Distribution centers are a creature of just-in-time manufacturing and
products processing. Goods are essentially sorted, not saved.
So it is little wonder that Wal-Mart excels in distribution centers. Their
Hopkinsville, Ky., center is 1.2 million square feet, with five of these
behemoths in Georgia. A typical Wal-Mart distribution center is ten times the
size of its average store. Wal-Mart¡¯s centers can have 250 docking stations and
can comfortably serve 500 big rigs a day. These centers are busy places and
contribute enormously to the edge Wal-Mart has in its marketplace. Distribution
centers are giving Wal-Mart the same edge in China, where it already has more
than 40 stores and regional distribution centers such as the one in Shenzhen.
Most distribution centers function essentially as exchange centers. Goods can
come in one loading dock and out to a different truck. Truckloads can be broken
down into individual pallets and redistributed to a number of loading docks.
These loads then go on other trucks for broader distribution. This process is
referred to as cross-docking or flow-through.
Within the distribution center, goods and packages are bar-coded with
information on what, where and when. Or they will be given an radio frequency
identification (RFID) treatment using wireless technology and advanced sensor
design. They are then sent on their way as scheduled and recorded by a logistics
or warehouse software application. This process assures the supplier, the
retailer or manufacturer of real-time arrivals and departures. The value that is
associated with this process is that everyone gets the same information at the
same time--one sharable record and less room for error.
Sources: Forbes.com
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