Summary

• Same same but no different is not a strategy
• When entering a foreign market, it is very difficult to compete head to head against local rivals in the mass market space who already have production economies of scale
• Important to consider the industry economics and whether you can realistically be competitive quickly, especially if scale is key determinant of success
• If cannot be competitive quickly in scale and costs, then explore M&A3 (mergers & acquisitions, alliances, and alternatives) to quickly buy, build or borrow such scale advantages

Background

Swedish appliance maker Electrolux spent 15 years trying to be a major mass-market supplier of washers, refrigerators and other home appliances in China before conceding defeat and is now preparing to reintroduce itself in China as a premium brand.

What Electrolux Did Poorly

The initial plan was to build factories to make cheap simple appliances better than Chinese competitors.   Not surprisingly, the result was merchandise which failed to differentiate itself with Chinese consumers - i.e. Chinese consumers did not consider the Electrolux appliances special.

The real failure of this strategy was Electrolux's production costs were far higher than those of Chinese rivals because it lacked scale starting from zero.  Its Chinese rivals already were producing millions.

Changing a Bad Strategy is Expensive in Terms of Both Lost Time and Money

To reduce costs, Electrolux closed 3 of 4 factories in China. Its remaining plant, in Hangzhou, concentrates on cooking appliances. It will rely on imports of other appliances from an Electolux factory in Thailand and on outside contractors in China.

Electrolux still must persuade Chinese shoppers that its appliances merit a premium price, which will require massive investments in marketing and distribution.  This will be even more challenging now that many Chinese consumers consider home-grown brands of suitable and sometimes even better quality than foreign products in mass market space.

What Electrolux is Doing Differently

Electrolux plans to launch variety of appliances aimed at people seeking more style and features instead of trying to compete on cost in basic appliances.  Easier said than done as so is everyone else.

What Electrolux Learned from Brazil

In Brazil, unlike in China, Electrolux bought a large Brazilian manufacturer, Refrigeração Paraná, in 1996 and spent several years investing to build sufficient scale.

Important to success, managers at Electrolux Brazil were systematic in efforts to understand consumer preferences and design and develop innovative products and features to tap into these preferences.   The company interviews about 5,000 Brazilians each year and developed the "70% rule." When a new model is being considered, Electrolux creates a prototype and shows to consumers alongside the most popular rival offering. At least 70% of consumers must prefer the proposed Electrolux model before the company proceeds with a launch.  

Conclusion

Should happen without saying, but local adaptation of a global product is not sufficient - must design from the start with local needs and desires in mind, and standardize the components, especially internal components not visible to consumer's eye.  All consumer business' are local.

Source:
"Wash, Rinse, Rebrand: Electrolux Spiffs Up Appliances in China", Wall Street Journal, September 19, 2013
http://online.wsj.com/article/SB10001424127887324807704579083494127969298.html?mod=ITP_businessandfinance_2

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

In 1993 Rupert Murdoch commented, "advances in the technology of telecommunications have proved an unambiguous threat to totalitarian regimes everywhere.”  China took notice and quickly scuttled Murdoch's plans for expanding satellite media in China.  Jump 20 years later to 2013, and it looks like the Communist Part of China is using this threat to its advantage to save itself.  

Today, millions of China's netizens are using microblogging services to raise awareness and bring transparency to 2 issues which threaten the Communist Party's legitimacy:

• Corruption by government officials
• Government officials fast-tracking their children into highly sought after government positions

And the central government is letting it happen.

The joining of internet users and officials is a new approach in graft-busting in China with officials taking clues from the public in social media before  launching investigations into implicated officials

The Central Commission for Discipline Inspection (CCDI) said Liu Tienan, vice-director of the National Development and Reform Commission (NDRC), was being investigated by the agency for serious violations of discipline - a common euphemism for corruption.  The official report follows accusations against Liu first made in December by Luo Changping, a deputy editor with Beijing-based Caijing magazine, who posted the allegations on his microblog account, which has tens of thousands of followers.  Previously, several high-profile corruption allegations by internet users led only to the downfall of low- to mid-level corrupt officials.

"The joining of hands between internet users and disciplinary officials is a seemingly new approach in graft-busting," Wang said, adding that the latter took note of clues provided by the public before launching investigations into allegedly implicated officials.

Unlike the 1980s, ordinary people are now more willing to stand up and point fingers at suspected corrupt officials.  The current leadership has shown its determination to crack down on corruption at all levels.  With the help of internet users, central government leaders will keep targeting corrupt officials, as this helps drive support from the general public.

China's netizens are exposing a culture of nepotism in the promotion of young officials which is causing overwhelming public disgust in China

Recent cases:

• 30-year-old Yuan Huizhong, the daughter of a former secretary of the Communist Party political and legal affairs commission in Yangzhou , whose appointment as deputy secretary of Yangzhou's Communist Youth League in February was exposed by a microblogger.  The media quoted an expert as saying it usually took at least nine years for a township cadre to be promoted to her level.
  
• Chang Junsheng, 22-year-old deputy secretary of China Communist Youth League's Wangjiang county committee in Anhui province, was sacked just over a week ago after the qualifications he presented in an open selection of officials were found to have been falsified. His father is the official in charge of promotions in the county.
• Xu Tao, nominated as deputy secretary of Xiangtan county in Hunan in December at the age of 27, was removed from the post on May 7 after microbloggers raised questions about his five years of work experience. His father had been chairman of the local people's congress and his mother was deputy director of the district's procuratorate.
  
  

With support of the top leadership, the internet and social media netizens are nullifying the old Chinese saying "the sky is high and the emperor is far away", which is used to describe how central officials make policy, then local officials do whatever they want.

Sources:

• "Nepotism puts system for promotions in spotlight", South China Morning Post, May 26, 2010
  http://www.scmp.com/comment/insight-opinion/article/1246072/nepotism-puts-system-promotions-spotlight
• "Social media seen as new weapon in graft-busting in China", South China Morning Post, May 14, 2013
  http://www.scmp.com/news/china/article/1237116/joint-effort-between-social-media-and-officials-hailed-probe-official
• "The Son also Rises: nepotism doesn't disappear in China, it just gets a promotion", South China Morning Post, May 13, 2013
  http://www.scmp.com/news/china/article/1236343/son-also-rises-nepotism-doesnt-disappear-china-it-just-gets-promotion
  
• "How Murdoch Got Lost in China", New York Times, May 4, 2008
  http://www.nytimes.com/2008/05/04/business/media/04shelf.html?_r=0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Article in SCMP about shadow banking practices includes telling examples of how business is really done in China.

Conflict of interests are rife in China.  When there is the opportunity for employees to use their company positions for personal gain, assume they are doing so.  Even if they have to put personal interests and enrichment at the expense of company interests.  Chalk this up to the lack of a moral compass in Chinese culture as the result of the communist government stamping out religion.  Everything is acceptable unless caught.  Company policies are not compliance in China.

• With an average loan size of 133,000 yuan, loans of 20 million yuan loan to a fish farm and a 5 million yuan loan to a furniture store. Within a year, both defaulted.
• Undeterred by the defaults, made another 20 million yuan loan at cut-price rates and over an unusually long maturity to a small local air-conditioner company that boasted it was in line for a stock exchange listing.  Discovered,  the managers had accepted stock options from the company in the hope that a loan would translate into a handsome profit for themselves personally when the borrower finally listed.
• Private equity investor who used his connections with a big state bank to obtain cheap funds, which he proposed investing in local government infrastructure projects. Only his "equity" stakes would come complete with a buy-back clause, which effectively meant they were loans, disguised to allow the bank's executives to exceed both their loan quotas and their lending rate cap to pocket a handsome 25 per cent return."

Source:
"Illuminating confessions from a shadow banker", South China Morning Post, May 15, 2013.
http://www.scmp.com/business/article/1237823/illuminating-confessions-shadow-banker

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Adidas is shaking up its retail strategy in China.  After years positioning itself as a top sports brand, adidias is widening the adidas brand in China beyond shoes and sweats. The new retail strategy will have individual stores focus on specific niches ranging from basketball and other athletic apparel to teen and casual wear.  No more "one size fits all" with each store trying to stock everything.

Think of it as specialized shops offering specialized products to attract the right audience interested in what is in the store.  

Challenges to correctly manage 

• Store branding will be key so consumers are not confused or disappointed by going to the wrong store.  
• The stores should be seamlessly integrated so a customer can be led from one store to the one carrying what they are looking for.  I.e. if someone interested in basketball gear walks into a store focused on fashion, what happens?  Will a customer take the time to go to the other store if far away?
  
• Consider dominating real estate by crowding out competitors.  Think of Starbucks being across the street from each other.
• How to determine which stores (and franchisees) focus on which niche?
• Marketing will be key to making sure consumers understand what the adidas brand stands for as the brand will be split at the retail level.

Implement first in company-owned stores, then roll out to franchise stores

To persuade China franchisees to adopt the new niches, adidas is first making changes in its company-owned stores.  Leading by example is smart.  adidas is then in a position to show the results to franchise owners.

However, before it can really roll out nationwide across China where adidas has about 7,000 stores, 90% which are franchisees, adidas must, and is, tightening control over inventory management. adidas is analyzing sales data of  franchise partners and overseeing ordering.

Test, prove, expand

Adidas tested this new retail strategy in China's central city of Wuhan.  It took 5 identical adidas stores and split them up to focus on different crowds: e.g. basketball players, fashion, etc.  The results were promising.  Sales at the revamped  stores jumped 80% in 2012 compared with a year earlier.

Source: "Adidas Sportswear Is Hot on Nike's Heels in China", Wall Street Journal, March 7, 2013.
http://online.wsj.com/article/SB10001424127887324034804578345741263753994.html?mod=ITP_businessandfinance_0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

There is poor taste.  And then there is really poor taste.  

On Monday a man stole a car parked outside a shop in Changchun, Jilin province.  Police say when the thief realized there was a 2-month old baby on the back seat he strangled him and buried him in the snow.  The thief/killer then gave himself up on Tuesday after a manhunt involving more than 3,500 policemen and media appeals.  The death of the baby was met with shock, disbelief and outrage on Chinese media and social media.

A Buick car dealership in neighbouring Liaoning province used their Sina Weibo account to say their cars carry a GPS system "allowing the lockdown of a stolen vehicle at any time and place. Why not buy a completely safe Buick?" The advert used a picture of the dead baby, along with two of the dealership's new cars.

This attracted strong condemnation online and a calls for a boycott of the car-maker. The dealership has of course since apologised, saying the ad was totally inappropriate and it deeply regretted the "hurt it had caused to the family of the victims and society".  Damage has already been done.

In order to protect its brand in China, Buick China should:

• Release its own statement condemning the behavior of the local dealership
• Initiate support for a child-protection campaign of some kind
  
• Use this as a case study of "what not to do" to educate it dealers so nothing like this happens again

Other companies would also be wise to use this as a case study to educate its own staff and dealers.

Sources:  

1. "Chinese anger at murder of carjacked baby", BBC News, March 6, 2013.
   http://www.bbc.co.uk/news/world-asia-china-21680747
2. "辽宁天合别克借婴儿失踪案营销 骂声一片", TopNews9, March 6, 2013.
   http://www.topnews9.com/arc/20130306/17660.html
   
3. "别克4S店借婴儿随车被盗案营销", NJ Daily, March 6, 2013.
   http://www.njdaily.cn/2013/0306/342805.shtml
   

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

It is no secret one must be skeptical and sanity check Chinese government statistics and data.  It is not that there is always an element of deceit, but rather China is just too big to manage since most local officials grade their own report cards on a generous curve.  The sky is high and the emperor is far (天高皇帝远 / tiān gāo huángdì yuǎn).

Many of the people analyzing or reporting Chinese government statistics do not actually understand what goes into certain statistics.  Take retail sales for example.  In China, the reported figures include purchases by the government and consumers.  Since the government routinely orders government departments to make purchases when the economy is slowing, it is hard to use the retail sales figure to gauge real consumer demand.

Different data points give different pictures in China.  For example:

• The official retail-sales index in December 2012 was up 15.2% yoy. 
• Nielsen's index of sales of fast-moving consumer goods, which should include fewer of the government purchases which distort the official data, was up just 9% in December 2012 yoy.
• Latest result from sports retailer Nike, fast-food Yum Brands  and home-electronics giant Gome were all weak.

If you are going to use Chinese statistics in your business planning or valuation models, you must understand what is and what is not included in Chinese government statistics.  Then vigorously sanity check using public sector proxies without losing your sanity.  Difficult, but not impossible.

Source: "Hidden Risks of a Hard Landing in China", The Wall Street Journal, February 24, 2013.
http://online.wsj.com/article/SB10001424127887323864304578320410950879552.html?mod=ITP_businessandfinance_6

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Summary

• The concept of guanxi is not unique to China
  
• Guanxi in China is often based on transactions & reciprocity not emotional personal connections
  
• "Face" makes guanxi different in china
  
• A LinkedIn will succeed in China, just maybe not the LinkedIn
  

A recent article by Agence France-Presse about the challenge a company liked Linkedin will face in China triggered this post.  Many people Chinese people improperly convey guanxi's (关系) meaning to foreigners, and in turn many non-Chinese misunderstand guanxi.

The main premise of this article is Linkedin will struggle in China to overcome the obstacle of guanxi.  In the article, Wei Wuhui, a professor at Jiaotong University in Shanghai, states online alternatives to guanxi like LinkedIn will have a hard time supplanting guanxi's deeply embedded cultural role.  He states, "I don’t think the Chinese middle class has the same needs in terms of professional networks as people in the West, because of the concept of guanxi.  In China people do not want to meet with people they don’t know. The Chinese have a culture based on relationships among family members and close friends.”  Absolute nonsense.

Guanxi (关系) is usually defined as China’s system of personal relationships or connections reinforced by mutual favours which plays a vital role in getting things done, whether conducting business, navigating government bureaucracy, or anything which requires a favor to get something done.  It is the words "personal" and "relationships" which creates the misunderstanding how Chinese and non-Chinese understand guanxi.  Guanxi in China is purely about reciprocity.

THE CONCEPT OF GUANXI IS NOT UNIQUE TO CHINA

Contrary to popular portrayal, guanxi is not something special or unique about operating in China.   The concept of people trading favors based on one’s experience or position or using a relationship to get something done exists in every culture.  This is as old as the human race.  In other parts of the world guanxi is called:

• Greece: rousfeti (literally reciprocal special favor)
• India: vyavahar 
• Italy: arrangiarsi 
• Poland: załatwić
• Russia: blat or swjasi

GUANXI IN CHINA IS OFTEN BASED ON TRANSACTIONS & RECIPROCITY NOT EMOTIONAL
PERSONAL CONNECTIONS

Guanxi in China is based on transactions and reciprocity and often completely lacking any emotional connection to the other party.  One of the reasons corruption is so prevalent and entrenched in Chinese culture, which is not to say it does not exist anywhere else because if of course does, is because many relationships are not based on friendship or family ties, but rather "what have you done for me lately".  A recent confession by a retired Chinese government official online in Xinhua (since taken down by censors) but reported in the South China Morning Post exposes the farce of guanxi:

• "A retired Chinese official said he was disappointed that old acquaintances, who used to give his children lai see packets containing thousands of yuan, did not give them any this year, reported Xinhua state news agency this week.  Nothing has changed except that he’s now retired, the former official said.  “In the past a single red envelope could contain as much as 10,000 yuan (HK$10,240),” the unnamed former official said.  But "friends" stopped passing out heavy lai see packets after he retired. Now it’s only relatives who give out red envelopes - and much thinner ones."

China is full of open secrets to instant guanxi in all parts of China society:

• School headmasters and teachers accept bribes.
• Doctors take special care of individual patients.
• Drug companies bribe their way into hospitals.
• Suppliers bribe key people at companies they want to supply.
• Judges can be bought.
• Government officials are in bed with the business owners they are supposed to supervise. In many cases, even owning shares (directly or indirectly via family members) in the companies they are supposed to oversee.

In China guanxi is closely tied to and actually reinforces corruption throughout all of Chinese society including government and business.  If you cannot trade favors, you can just buy them.  If you do not have guanxi based on a personal relationship such as relative, friend or schoolmate, bribes speed up the relationship building process.

The best guanxi is of course established over time.  A company’s guanxi will become established through its own relationships and reputation with its business partners and government officials.  A foreign company’s guanxi will ultimately be based on the number of people it employs, the taxes it pays, and its social contributions.  Guanxi does not quarantee success.  Coca-Cola learned this when its proposed acquisition of Huiyuan was rejected by the Chinese government.

The long-term is another myth in China.  Guanxi is all about what can you do for me right here, right now.

"FACE" MAKES GUANXI DIFFERENT IN CHINA

Face (面子) and guanxi are closely intertwined within Chinese culture.  When a real personal relationship is involved, not extending guanxi will impact one's face or perceived status.  But this only applies when there is a real personal relationship.  When guanxi is based on transactions and reciprocity, guanxi in China is the same anywhere else in the world.

A LINKEDIN WILL SUCCEED IN CHINA, JUST MAYBE NOT THE LINKEDIN

It is no secret most Western internet companies have been spectacular failures in China.  What is usually missed by people is the reason they fail.  By the time the Western internet company enters the China market, whether Google, eBay, Groupon, etc., there are already many entrenched local competitors with a long head start.  The foreign company does not give Chinese users a good reason to switch.  A LinkedIn in China will probably succeed, it just may not be the LinkedIn and may be a local competitor.  Professional social networking sites have yet to take off in China, partly because language is an issue.  LinkedIn is not in Chinese, yet.

Wei Wuhui, a professor at Jiaotong University in Shanghai, thinks business network sites face a huge extra obstacle to success of  guanxi.  He states online alternatives will have a hard time supplanting guanxi's deeply embedded role in Chinese society. He does not think the Chinese middle class has the same needs in terms of professional networks as people in the West, because of the concept of guanxi.  “In China people do not want to meet with people they don’t know. The Chinese have a culture based on relationships among family members and close friends.”  True, but guanxi in China is often not about family members and close friends.

Alibaba is an interesting case of why a LinkedIn will succeed in China.  Alibaba's success was built on a platform providing a means for Western buyers to connect with Chinese suppliers.  '"Connect" being the operative word.  Chinese companies are active participants in the platform because it opens a window to new business opportunities.  This is why a LinkedIn will do well in China.  A LinkedIn is a means to develop new opportunities by helping a user develop and maintain their guanxi.  

There are several additional reasons a LinkedIn will succeed in China.  For those who have spent time in China, it is no secret fake qualifications are rife in China.  There is also distrust of dealings over the internet because of fraud.  Viadeo says it is developing a system to check profiles, akin to Twitter’s verified identities.  This is something companies will find valuable as a tool to weed through candidates with fake backgrounds.  Candidates with legitimate backgrounds will aggregate on a LinkedIn, because companies will be attracted to this user base when looking for new hires.

Chinese employees are notorious for job hopping.  A user will be attracted to a LinkedIn to be able to find and have access to company job postings matching their interests and background.  It is all about maximizing employment opportunities.  If a LinkedIn can successfully do this, professional social networks will become successful in China.  The internet allows people to maintain one's close/strong connections and develop your new ones.  What Chinese person looking for new opportunities would not be attracted to this?

Interesting side note, Professor Wei Wuhui's name is a homonym for wùhuì  (误会), a noun or verb meaning misunderstand.

Sources:

1. "LinkedIn, others face challenges against China ‘guanxi’", Agence France-Presse, February 24, 2013.
   http://www.scmp.com/news/china/article/1157651/linkedin-others-face-challenges-against-china-guanxi
2. "Retired official says family no longer receives heavy lai see packets", South China Morning Post, February 15, 2013.
   http://www.scmp.com/news/china/article/1150868/retired-official-says-his-family-no-longer-receives-heavy-lai-see-packets

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Chinese company ChinaCast Education went public in the U.S. via a reverse-merger in 2007. It was de-listed from Nasdaq in June 2012 after a former executive siphoned off the firm's assets.  All this happened under the watch of a Big 4 accounting firm and Board of Directors.

What went wrong?:

• Same bed different Dreams.  In early 2011, U.S.-listed shares in several Chinese companies started falling on reports of financial fraud, especially firms like ChinaCast which legally dodged U.S. disclosure rules by listing through reverse mergers.  U.S. investors thought the company's performance in the face of this falling share price signaled it was time for ChinaCast to launch a share buyback. Investors were then pleased when Chen announced a plan to repurchase US$ 50 million worth of common shares over 12 months.  Shareholders waited for the buyback to begin, but nothing happened. Frustration ensued and soon the two sides were fighting.   Chen was offered but refused two years compensation in exchange for a voluntary resignation. Chen was then removed by the seven-member board, four of whom backed Sherwood, and replaced Chen with Feng.
• In 2011, American shareholders, the 10 largest of which controlled 55% after the listing, initiated a shakeup of the company's management, ousting then CEO and chairman Hong Konger Chen ZiAng.  Derek Feng Yiyi was installed as the new chairman.
  
• In February 2012, Deloitte attempts to check the books at the company's Shanghai office were blocked by the company's employees.
  
• In the weeks prior to Derek Feng's appointment as Chen's replacement as Chairman in March 2012, Chen looted the company before shareholders or the Board could do anything to stop him.
• In December 2012, ChinaCast announced all quarterly and annual financial statements from the beginning of 2009 to the end of September 2011 could not be trusted - despite being audited by a Big 4 firm.  The announcement also revealed other problems at the firm, including loss of control of equity in subsidiaries and a great amount of assets that did not exist.

What was Chen able to do:

• Several hundred million yuan was transferred from company accounts without the approval of the board of directors.
• In September 2011, ChinaCast subsidiaries Shuangwei Co. and Yupei Co. each had 100 million yuan in Shanghai's Bund Branch of Huaxia Bank. The money was used as collateral in September 2011,  for loans issued to three other companies unrelated to ChinaCast.
• Company's business license vanished.
• Company's registration seals vanished.
• Company's computer records vanished.
  
• Company's paper files and accounting were shredded.
  
• Loss of control of equity in key subsidiaries.  Ownership of ChinaCast's colleges – Hubei Polytechnic University School of Business, Guangxi Normal University Lijiang College, and Chongqing Normal University's College of Foreign Trade and Business – had been transferred to several people including a former company president Jiang Xiangyuan without board approval.
• Large amount of assets did not actually exist despite being audited by Big 4 firm.

Ned Sherwood, who held 800,000 shares, was the leader of the management reorganization.  He says he never authorized the asset transfers and was later stunned by the financial maneuvering that eventually hollowed out the company.  No disrespect intended, but I am guessing he is not very experienced at doing business in China.  If he was, he would have known a foreigner cannot make any changes to the leadership of a Chinese company without having many trusted people physically on the ground and in key positions such as holding the company chops, controlling bank accounts and having authorized bank signatories, the heads of HR and finance.

Sherwood said he conducted due diligence before buying ChinaCast stock on the Nasdaq exchange.  Really.

Due Diligence should be 'Do' Diligence and not just rolling the dice:

• ChinaCast's former president Jiang Xiangyuan, who was also removed in the shakeup and, according to records obtained by Caixin, may have played a role in the disappearance of funds.  A probe by Feng's management team found Jiang had been convicted in 2001 by the Shanghai Hongkou District Court for misappropriating public funds and given an 18-month suspended sentence.  Jiang's conviction had gone undetected during due diligence long before ChinaCast crumbled.

The key lesson for investors is due diligence can do very little when the shell is in the U.S. and the business is in China. Overseas investors and regulatory agencies will always be at a disadvantage trying to understand what really goes on on the ground in China, or any market for that matter.

Sources: 

• "Shareholders of Looted Firm Sue Auditor in NY Court", Caixin Online, February 20, 2013.
  http://english.caixin.com/2013-02-20/100492666.html
• "Hard Lesson for China-Concept Stock Investors" Caixin Online, May 16, 2012.
  http://english.caixin.com/2012-05-16/100390800.html
  

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

This is a good case study on how NOT to enter a foreign market.  Partner with a local company whose core business is unrelated to yours to enter a highly regulated industry and compete against much larger, entrenched, politically-connected, and dominant competitors.  And be limited to a minority equity position.  This battle was over before it started.

Foreign insurers have to set up JVs with Chinese companies to enter China's life insurance market. More than half of the 26 Sino-foreign insurance JVs involve non-financial Chinese partners. Only AIA, the Asian life insurer once owned by AIG, has its own full license obtained after years of lobbying China's leaders.  Examples include:

• Manulife partnered with a unit of Sinochem Group, a state-owned chemicals firm.
• Japan's Meiji Yasuda Life partnered with Haier, known for washing machines and refrigerators.  Haier has since sold the bulk of its stake to unlisted Founder Group, controlled by Peking University. Haier now has around 20% . Meiji Yasuda holds 29%. 
• Japan's Nippon Life partnered with Chinese consumer-electronics maker SVA.  SVA has since sold its entire 50% stake in the JV to Beijing-based Great Wall Asset Management.
• Korean insurer Samsung Life Insurance partnered with Air China, the airline.
• Sino French Life Insurance was formed by China Post Group, China's post-office operator, and French insurer CNP Assurances.
  
• AXA partnered with banking giant Industrial & Commercial Bank of China (ICBC) and Chinese metals giant Minmetals.
  
• Sun Life Financial reduced its stake in its partnership with China Everbright Group, the lone case the foreign party realizing the limitations they face in China and their capital is better deployed in other markets.
  

China's insurance market may be large, growing and hold much future potential, but it is dominated by a handful of Chinese firms: State-owned China Life Insurance, privately owned Ping An Insurance, and China Pacific Insurance.

The 26 Sino-foreign JV collected <5% of the industry's total premiums in 2012.  The figure was down from 8% in 2007.

Large potential markets tend to create untenable expectations.  A McKinsey consultant stated most of these JVs were hoping to break even in the first 7-8 years, but it took many much longer, and many are still losing money.  Understandably, the Chinese partners, particularly non-financial companies, are waking up to the fact a rising tide does not automatically lift all boats, and many are jumping overboard. 

What went wrong:

• Failure of Chinese partners with a large customer base to capitalize and cross-sell insurance products, even with the help of foreign insurers
• Insurance JVs face challenges expanding beyond their permitted geographies under their licenses allow.  There are complex regulatory requirements each time. Smaller firms also need constant capital injections from their owners to maintain strict government capital requirements.

Source: "China Firms Lose Interest In Insurance", Wall Street Journal, February 19, 2013
http://online.wsj.com/article/SB30001424127887323764804578313602576294418.html?mod=ITP_businessandfinance_0

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

In order to draw attention to environmental pollution in his area, Jin Zengming, a Zhejiang entrepreneur offered a RMB200,000 reward to the environmental protection bureau chief if he swims in the polluted Ruian river for 20 minutes.

By posting this on Sina Weibo, he is sure to garner a lot of attention from China's netizens.  He did 3 very smart things:

• Tapped into popular sentiments and emotions
  [China's chronic environment pollution and government official corruption]
• Headline grabbing amount of money
  [for China]
• A daring challenge which puts challenged person in a lose-lose situation:
  [the government minister with specific responsibility for the problem is in a lose-lose situation because if he does the swim, he will lose face; if he does not do the swim, he will also lose face.  In either situation, China's netizens are going to have a field day keeping attention focused on this.  Do not be surprised if this official is replaced shortly]

If you want to draw attention to your cause, this is a smart example to learn from.

Source: 
"Chinese official offered huge reward... if he can swim in polluted river", South Cina Morning Post, February 18, 2013.
http://www.scmp.com/news/china/article/1153028/chinese-official-offered-huge-reward-if-he-can-swim-polluted-river

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

Like nature always finding a way, Chinese people are adept at finding and exploiting any loopholes to circumvent the government's bureaucracy and regulations.  Case in point is China's financial system.  Large Chinese banks controlled directly and indirectly by the government provide loans to mostly large companies leaving small and mid-size companies starving for capital.  Chinese regulators also control the level of interest a bank must pay to depositors, and the lending rate to borrowers.  This spread is always in the bank's favor at the expense of consumers, and currently savings rates are negative when adjusted for inflation.  When Chinese regulations instruct banks to stop or lower lending to certain sectors like real estate developers or small and mid-sized companies, nature finds a way.  Enter under and sometimes un-regulated Trust companies and wealth management products.  Trust companies pool together large amounts on money from individuals by offering to pay interest rates much higher than what a bank would pay a depositor in interest.  Often using wealth management products, the capital raised is then lent out to high risk borrowers and high interest rates.  

The main borrowers from trust companies are those which have difficulty obtaining funding from banks and the bond market: local government financing vehicles with unprofitable projects, property developers, and firms in industries with large amounts excess capacity brought on by the previous lending boom, such as steelmakers and cement producers.  Hardly an ideal concentration of risk in a lending portfolio.

At what point does this game of musical chairs end?  And when it does, will it end badly?  Defaults are already regularly occurring. Some of the defaults are the result of outright fraud.  A large portion of trust loans extended over the past couple of years will mature this year. 

The structure of mainland financial markets has changed recently with large amounts of new lending occurring outside the traditional banking system and instead via a shadow financial system of wealth management products and company-to-company loans, while the corporate bond market has taken off.  This shadow lending system is so large now, that were the Chinese government to shut it down, the economy would collapse - that is how big this lending has become.  A big problem is no one is really sure how big this shadow financing system has become, which means no one has a good idea what the risks really are.

Some trust products are outright ponzi schemes in the early years when the project invested in requires several years to get off the ground and generate returns.  In such cases, later investors are used pay interest to earlier investors until the project generates cash flows.  If these cash flows never happen, game over.   

Sources:
(1) "The black hole that is wealth management products", South China Morning Post, February 14, 2013
http://www.scmp.com/business/banking-finance/article/1149718/black-hole-wealth-management-products
(2) "New dangers lurk in trust firms' rush to finance", South China Morning Post, February 18, 2013
http://www.scmp.com/business/banking-finance/article/1152695/new-dangers-lurk-trust-firms-rush-finance
(3) "Beijing can't afford to rein in the shadow financing system", South China Morning Post, January 24, 2013
http://www.scmp.com/business/article/1134686/beijing-cant-afford-rein-shadow-financing-system

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.

A consumer's challenge in China: From contaminated milk to chickens fed with excessive amounts of antibiotics and hormones, a new food scandal seems to occur every week in China.  Consumers are rightly scared.

The solution:  Until "the system" changes, a food safety testing system which yield results in minutes.

Scientists at Tianjin University of Science and Technology created such a solution.  The food testing indicator paper will help consumers identify food products contaminated with pathogenic bacteria and excessive drug residues.  During tests, the paper was found to change color to suggest over 60 varieties of chemical factors in food samples during lab research conducted at university.  Food safety testing usually requires complex testing machines and procedures in laboratories. With this test paper, however, certain harmful substances can be identified in a few minutes.

Definitely a real solution for the real world.

Source: "Home kit to test food for toxins could be on sale soon in China", South China Morning Post, February 15, 2013
http://www.scmp.com/news/china/article/1150879/home-kit-test-food-toxins-could-be-sale-soon-china

CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.