Emerging markets are attractive as MNCs seek to tap new sources of potential growth.  However the risks are very different than what most leadership teams are used to dealing with in their mature markets.

Government's Attitude Can Change for the Worse:  Diageo completed its acquisition of Shui Jing Fang, Chinese maker of baijiu (liquor generally made of rice) in july 2013.  12 months later Diageo had to write down the value after Shui Jing Fang's sales fell 78% in response to Chinese government’s ban on giving of “gifts” to officials.   In Kenya, government imposed unexpected tax on Diageo’s beer in Kenya.

Foreign Exchange Rate Risk:  Russia's (t)rouble and Nigeria's Naira are tanking because of exposure to falling oil prices. Russia's dispute with West over Ukraine, and sanctions not helping.  Sudden depreciation of Venezuelan bolívar caught several MNC off guard. 

Political Risk:  Russia's dispute with West over Ukraine, and the imposition of sanctions on Russia, has forced Russia to respond with imposing its own ban on the import of some western products or more bureaucratic interference with locally run businesses of Western MNCs.  Russia has excluded spirits from ban it imposed on some Western imports in response to sanctions, but this could easily change. Jack Daniel’s Tennessee Honey, flavoured whiskey from America, and Kentucky Gentleman bourbon, already removed from Russian shops’ shelves under pretext of violations of consumer safety. 

Economic Policy Risk:  Economic mismanagement has put end to Brazil’s once-bright prospects for sustained high growth. 

For foreseeable future most MNC profits will come from home markets and rich world, and most of investments will be put into poorer places looking for future growth.  Recipe comes with no guarantee of success, and sustainable success even more difficult if do not take real emerging market risks into account.

Source: 
http://www.economist.com/news/business/21635022-emerging-markets-are-grim-global-spirits-firms-america-looks-good-cheers-uncle-sam

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Debt guarantee chains in China, where companies guarantee loans to other unrelated companies, are not as strong as they are meant to be.  Everything appears rosy in good times, when such arrangements are made.  The real risk is the same economic headwinds driving the original debtor into default, often also negatively affects the debt guarantor's ability to pay.  This is especially true for small or mid-sized companies in a concentrated geographic area.  Given most banking relationships are local, this risk is always present.

This risk is magnified in China because such guarantee chains have played large role in driving it's rapid massive debt expansion since the 2008 financial crisis.   About 25% of US$13trn in total outstanding loans as of end of October 2014 was backed by promises from other companies and individuals to pay up if borrower defaults. 

Lenders outside traditional banking system, aka shadow bankers, have also relied heavily on guarantees to assure investors their funds were secure and to circumvent government restrictions on lending to certain types of businesses.

As typically happens when things start to slow down or go bad, what was once considered isolated, separate, and secure, turns out to really be closely linked and threatens broader/deeper risk.

Guarantees were traditionally used by state firms to back loans to undercapitalized units, Recently, they have been directed to unrelated companies.  US$20.6bn of guarantees have been extended by companies listed in Shenzhen and Shanghai to firms other than their own units over the last 2 years (+76% increase),  according to data provider Wind Information.

Guarantees play a key role in many countries where governments leverage their own balance sheets to encourage lending to small firms or to support home ownership. In US, Fannie Mae andFreddie Mac guarantee trillions of dollars’ worth of mortgages. Credit default swaps are used by private-sector lenders to insure themselves against risk of borrower defaulting.

China is, as always, different.  In China, individual companies are the guarantor.

Such guarantees gave banks false sense of security and they did not scrutinize borrowers’ ability to pay, some analysts and banking executives say.

Customers of companies forced into liquidation can also have their business negatively impacted as the debtor's assets, including machines and inventory are locked up awaiting liquidation.  Production scheduled, becomes unscheduled.

Source: http://online.wsj.com/articles/loan-guarantee-chains-in-china-prove-flimsy-1416775097

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Tesco is in news a lot lately for all the wrong reasons: financial shenanigans from early recognition of commercial income and delayed recognition of related expenses.  What is also coming out now is how much Tesco in the past used off-balance sheet financing (special purpose vehicles (SPVs) and sale and leaseback arrangements) to artificially reduce its debt - i.e. hide its true debt picture from investors - even though it was either required to make guaranteed lease payments or buy properties back.

Background

Between 2009 and 2013, Goldman Sachs helped Tesco execute a sale and leaseback plan which used 6 SPVs to issue around £4bn worth of property bonds. Analysts think the effect of this off-balance sheet financing has been to artificially reduce Tesco’s net debt by around £2bn.

Between 2009 and 2013, 6 SPVs — Tesco Property Finance 1 through 6 — issued around £3.6bn of 30 year bonds to investors. These SPVs are not Tesco subsidiaries, although Tesco is contractually obliged to cover interest and principal payments.

Structure

For each transaction, Tesco established limited partnership to which it sold package of properties, which it leased back for 30 years with annual rent increases linked to the retail price index (RPI). 

Purchase was financed by issue of 30-year bonds by SPV, which loaned proceeds to partnership. 

Bonds and partnership loan have identical, back- to-back terms, with same fixed interest rate and repayment schedules. 

To solve cashflow mismatch between RPI-linked rents paid by Tesco to partnership, and fixed payments due on bonds, partnership and SPV, and SPV and Tesco entered into back-to-back swap arrangements. Netting off various swap and other payments, Tesco receives amounts equal to rental income and pays to SPV amounts equal to interest and principal repayments on bonds. 

Rent payments are completely circular: Tesco pays rent out of one pocket to partnership and receives it back (via SPV) in another. In simple terms, Tesco receives bond proceeds and repays interest and principal; bond investors look to Tesco as source of all bond payments, while underlying property leases are, in effect, irrelevant.

These bonds don’t appear on Tesco’s balance sheet, being treated as regular operating leases instead. But even here, disclosure is limited. While leases have 30-year term, Tesco has break option after 10 years if it buys back the properties – so it only has to disclose minimum future lease payments up until that point. And because Tesco only has option to buy back properties — and is not required to do so — cost of buying back properties is not treated as an obligation either. 

Tesco has choice between 2 obligations: (1) Buying back properties or (2) paying rent.  Yet Tesco's off-balance sheet financing allowed it to avoid recording either obligation by saying both are options.  There is only one true option, to recognize the lower of the 2 values at your liability exposure.  Tesco failed this test.

From 2010, Tesco had regular wording buried in its annual report setting out the above — until this year, when it added:  "
Current market value of these properties is £5.4bn (2013: £5.2bn) and total lease rentals, if they were to be incurred following option exercise date, would be £4.2bn (2013: £4.1bn) using current rent values.  

Discounting £4.2bn back to present value increases Tesco’s total debt by £2bn.

How many times until leaders learn off-balance sheet financing is a paper allocation exercise which simply serves to mask the true transparent situation of the company.  Rarely is it really off-balance in the send the liability does not belong to the company itself in the end.

Ultimately, when leadership of a company becomes more focused on managing numbers, they lose focus on managing to take care of customers.  Result is a company in double whammy trouble:  The business suffers as it loses touch with satisfying customer's needs who defect to competitors and the financial situation turns out to be worse than everyone saw on paper.

Sources:
http://ftalphaville.ft.com/2014/09/22/1979462/tescos-off-balance-sheet-wheeze-courtesy-of-goldman-sachs/
http://discount-investing.com/2014/08/26/tescos-hidden-debt/

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.

20 people were injured, and 7 sent to hospital, when promotional stunt in Seoul for LG's G2 smartphone went wrong.  LG cancelled series of events promoting the handset as result of incident in Seoul.

Bad Idea: Race to grab 100 free smartphone vouchers hanging from helium balloons released in outdoor park.

Why?: Customers arrived with BB guns and knives on sticks to shoot down balloons and surged forward when they were released.  One person carried pointed staff to event.

LG has taken responsibility for the situation and said it would cover related medical costs.

Source: http://www.bbc.com/news/technology-23681200

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Anticipating when players will move on is essential part of recording revenue in mobile-game industry, where sale of “virtual durable goods,” such as cows and tractors in “FarmVille” or cannons and dark barracks in “Clash of Clans” is major source of income.  When game companies change assumptions it can skew short-term results.  

Virtual goods for single use, e.g. potions and spells, are accounted for as one-time sale.

Virtual durable goods are continually available to the player. E.g. superhero character or tractor, depending on game.  These are accounted for like services or club memberships. Companies book part of payment upfront, but defer rest until end of average period in which item will be used—whether 4 days or 14 months.

If people lose interest in a game and play for shorter periods, it drives faster revenue recognition. Shorter playing period is negative for business, but drives higher revenue.

Game makers base their estimates on historical data, but playing periods can change substantially each year, especially for newest and more popular games as players are fickle. 6 of top 10 revenue generating games in September 20914 were not on last year’s list, according to data tracker App Annie. And a mall percentage of players account for bulk of purchases (as expected using Pareto's 20-80 rule).

Companies making similar games might make different choices in booking sales and costs, which can make it difficult for investors to compare.

Ironically, analysts get around confusion by looking to performance benchmarks that do not follow US GAAP accounting rules.  Analysts at bookings more than revenue. Bookings include all cash paid for any virtual item, consumable or durable, and independently of whether those items have been used or not.   Bookings are realized right away, and people really focused on that metric as measure of health of the business.

Source: http://online.wsj.com/articles/how-mobile-games-makers-account-for-magic-wand-sales-1415670273

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.

The real work begins AFTER you find the real estate property you want to invest in - because disclosure laws have important loopholes.  Since real estate agent only gets paid commission when transaction closes, they are incentivized to close the deal at all costs - even at client's expense.

Massive oversight. You’ve just bought a residence right next door to soon-to-be constructed 20,000-seater stadium. So how on earth did you and your lawyer miss this?  Well, sadly, because there’s no obligation for this sort of info to be disclosed in buying process.

In UK, searches don’t have to reveal any information on nearby properties or planned private developments at all.  Only pertain only to generic public work such as road or urban renewal, or commercial centre developments. Unless you know to ask seller or estate agent specifically about private developments, they’re not obliged to offer info at all. 

Until recently, estate agents were not obliged to disclose information about any external factors that may affect property being marketed, such as train lines, flood plains or flight paths. At least, not unless they were specifically asked about such matters.  This changed in 2014 with repeal of Property Misdescriptions Act, which shifted industry to oversight of Consumer Protection from Unfair Trading Act in October 2013. From now on agents obliged to provide all price-sensitive info they have on property to prospective buyers.

Unfortunately, there’s still blurry line on what constitutes price-sensitive information. Typically understood to mean factors that materially alter residential experience.   

Every real estate agent would happily publicise a respected author, politician or playwright once having lived in property they are marketing. It makes sense because there’s value to be exploited. But what about the opposite?  Grey area is discovering property’s murky or spooky history.  Has a murder taken place in the property?  Were previous owners running brothel or drug lab on premises?   What if previous owners convinced house was haunted?  Unfortunately, no clear system to help prospective buyer acquire this info.

Real estate agent’s best strategy would be to obscure this info or market property to foreign buyer unfamiliar with local concerns.

If it's too good to be true, it is.  Better to lose a good deal, then win a bad one.  Caveat emptor, especially when no one has your best interests in mind because they are incentivzed against it.

Source: http://www.ft.com/intl/cms/s/2/08ea7f5a-601a-11e4-98e6-00144feabdc0.html#axzz3IddbN0g4 


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How are you using technology to improve your customer's experience by replacing pain-points with faster, cheaper, simpler options?  Put customer needs first to identify the pain points.  Then test tech to figure it out.

“A lot of our members are saying, ‘I want to skip the front desk,’ ” said Geraldine Calpin, senior vice president and Hilton’s global head of digital.   “It’s superefficient,” he said. “Hold up your iPhone and, zoom, you’re in.”  Hotels say their research tells them that the prospect of being able to skip line at front desk is appealing to business travelers, well any traveler really.

“I’ve stayed in a lot of hotels where, at the end of the day, you’re tired and you’re waiting in line,” Mr. Monk said. Being able to go straight to his room saved him time and hassle, he said. “It made everything a lot easier.”

Starwood offering smartphone key apps at 10 hotels in its Aloft, Element and W hotel brands, including 5 in US.   

Hyatt Hotels and Resorts started testing mobile keys at 1 hotel in New York City.  Pilot expected to conclude early 2015.  This quarter, 

Hilton Worldwide starting test of  mobile keys at 10 hotels in US, a project expects to finish early 2015. By middle of 2015, loyalty program members in US visiting Hilton, Waldorf-Astoria, Conrad and Canopy by Hilton brands will be able to use phones as keys.

Source: http://www.nytimes.com/2014/11/04/business/hotels-test-turning-guests-smartphonoes-into-room-keys-.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.

Tata's Nano, launched in 2009 as world's cheapest car with price of 100,000 rupees (£1,400) is getting image makeover because buyers shunned low-budget image.

Nano was launched amid great fanfare as answer to India's aspirational middle classes and appeal to Indian families looking to enter car-buying market.  Problem was consumer aspirations to have car was not aligned with Nano's cheap image. Think Yugo deja vu.  Cheap does not equal quality in people's mind.  Poor quality product can never live up to consumer's aspirations.

Nano is being re-positioned as smart city car following disappointing sales.  "We are now focusing on making it smart city car and targeting young customers."

Future quality improvements for Nano include: power steering options, improved interior and exterior, be available in more colours, and better fuel efficiency.

Source: http://www.bbc.com/news/world-asia-23792196

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J. R. Simplot Company, based in Boise, Idaho, one of US’s largest potato producers and major supplier of frozen french fries to McDonald’s, developed the potato by altering its DNA so less of chemical acrylamide is produced when potato is fried. Acrylamide has been shown to cause cancer in rodents and is suspected human carcinogen. Newly designed potato resists bruising.  Resistance to bruising is characteristic long sought by commercial users of potatoes because damage, which usually occurs during storage and shipment, makes them unusable.

Source: www.nytimes.com/2014/11/08/business/genetically-modified-potato-from-simplot-approved-by-usda.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.

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

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For years, consumer goods companies have relied on consumers "overdosing" to drive their growth.  Examples of overdosing include consumers pouring more laundry detergent than is needed or putting more toothpaste on the toothbrush than is really needed, etc.  This is because consumers tend to over-pour or over-use products which are in larger package sizes   Also larger spouts or wider bottle openings in package design also encourage overdosing.

In certain categories, such as laundry detergent, the overdosing phenomenon became more pronounced when manufacturers rolled out increasingly concentrated detergent: consumer-product makers could count on extra sales from shoppers who poured in too much concentrated detergent with every load.

P&G decided to think different and burst this bubble.  P&G introduced Tide Pods capsules, which fixed the amount of detergent used per wash and ushered in the era of "unit dose" products.   The result was total U.S. sales of laundry detergents fell 2.1% in the 12 months to March, according to market-information firm Nielsen, whose data excludes sales from Costco and some other retailers. Compared with the pre-pod age 3 years ago, detergent sales are down 5.1% in dollar terms, to US$7.06b from US$7.44b.

Competitors selling low-price detergents have been negatively affected by P&G's Pods and the shrinking of the size of the industry. Church & Dwight, which sells low-price detergents under the Arm & Hammer and Xtra brands, blames P&G.

Traditional thinking is new products should expand the revenue pie for manufacturers and retailers, not shrink it.  The last round of more-concentrated liquid in 2008 drove laundry detergent sales up 5%. Clorox noted concentrated bleach helped lift overall bleach sales.

If your strategy relies on giving consumers more product than they really need to, and can, use, somewhere out there is a competitor thinking about how to disrupt your business.  By thinking differently, P&G figured out a way to make the economics of pods shift to its favor, at the expense of several competitors.  Consumers pay about US$0.25 per load for Tide Pods vs. US$0.20 per wash load for bottled Tide.  This compares to US$0.07 for competitors' low-price detergents.  By shifting its customers to pods, P&G is earning more money.

P&G expects sales of Tide Pods to hit US$500m in the fiscal year ending in June 2013 with sales of unit dose and higher-priced detergents growing while the low-end market is losing share.

Strategy and new products are about growing the higher/top-end, not the bottom end.  Competing at the bottom end is based purely on price.  Innovation, differentiation and value comes from competing in the top end.

Source:
"Is Innovation Killing the Soap Business?", Wall Street Journal, April 3, 2013
http://online.wsj.com/article/SB10001424127887323916304578400521297972496.html?mod=ITP_marketplace_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.

Background

• Suntech Power Holdings was forced to put its Chinese solar unit into bankruptcy in March 2013
• The slide into insolvency began in 2009 when customers linked to the company's founder were not paying their bills and yet the company booked the sales as revenue anyway
• Suntech suffered a €60m (US$720m) fraud resulting in a US$541m bond default

Missed Red Flags

• Suntech was booking revenue from sales to related companies with unbuilt projects in a fledgling industry - solar.
• Suntech guaranteed loans to those related companies. 
• Suntech relied on a former sales agent to secure one guarantee with bonds it never saw or verified actually existed.
  
• Suntech had uncollected bills from related-company projects exceeding sales from those companies by a widening margin. Receivables were US$44.7m in Q1 2011, against US$33.6m in revenue booked from the companies. Sales dried up in later quarters and uncollected bills remained.
  
• Suntech’s vehicle for investing in new solar projects in the credit crisis was Luxembourg-registered Global Solar Fund, run by Javier Romero, who was once Suntech’s external sales agent in Spain. Romero persuaded Shi to commit 258 million euros to Global Solar Fund beginning in 2008, eventually giving Suntech an 86% equity stake.  Shi himself committed €32m for almost 11% of the fund. Suntech wound up with 79% of the fund after giving part of its stake to Romero as an incentive payment.  Global Solar Fund invested in 7 solar projects, mostly in southern Italy. They became the Suntech customers that had difficulty paying their bills. One of them, Solar Puglia II S.ar.L, required the guarantee of a €554.2m bank loan from China Development Bank.  Suntech told the SEC that Global Solar Fund backstopped the guarantee with €560m of German government bonds.  Romero assured Suntech that the bonds could be sold at any time to pay China Development Bank if the project defaulted on its debt, Suntech wrote to the regulator. Trouble was: The German bonds Romero promised as a backstop never existed, Suntech said in December after looking for them for four months.
  
  

How did people miss this?  They did not check the SEC files and correspondences available online.  

The SEC’s first letter to Suntech was in November 2005, and its latest was April 2011. All of its letters were available to the public by mid-June 2011. There were about 38 equity analysts covering Suntech as of July 1, 2011, of whom 31 recommended either holding or buying the stock, data compiled by Bloomberg show.

Source:
"Suntech Unit Bankruptcy Had Roots in Deadbeat Customers", Bloomberg, April 4, 2013
http://www.bloomberg.com/news/2013-04-02/suntech-unit-bankruptcy-had-roots-in-deadbeat-customers.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.

In July 2012, Intrepid lost control of its 80% stake in Indonesia’s Tujuh Bukit deposit.  The deposit may contain 25 million ounces of gold and 15 billion pounds of copper, in July.

Australia’s Intrepid Mines Ltd. entered into an agreement with Indonesia’s Indo Multi Niaga in 2008 for stake in the Tujuh Bukit deposit in East Java.  Indo Multi was sold to a new owner and the new holder of the project license,  Bumi Sukses Indo controlled by Indonesian businessman Edwin Soeryadjaya, in 2012.  The mining license was transferred to a separate entity, dishonoring the agreement between Indo Multi Niaga and Intrepid.  Intrepid claims it had already spent A$95 million to develop the project.  

Hong Kong-based private equity investor Quantum Pacific Investment Ltd., which represents a group holding 5.4% of Australia’s Intrepid Mines Ltd., thinks it can negotiate a new deal with Bumi Sukses Indo better than Intrepid itself.  Unlikely  to happen without any leverage on the operations.

Quantum Pacific claims the current Intrepid board has pursued a strategy that has not gone over well with the new title holders.   Instead of going in as a bull in a china shop, Quantum Pacific has gone in and tried to sit down with the new local title holders and that has gone over well, and we have gotten confidence that there is a negotiated deal to be done.  

Quantum Pacific is seeking to remove five Intrepid directors, including Gordon, at a shareholder meeting on June 20 and thinks a new leadership could recover a stake in the Indonesian asset in six to nine months.

This is exactly what Edwin Soeryadjaya wants - the foreign investors fighting each other while he moves forward with his own plans without them.

Like China before it, Indonesia plays by its own rules.  If you are a foreigner expect to get fleeced unless they have continuous control and leverage over the operations.  This means controlling the money and the licenses.  Anything less is amateur hour at the comedy club.

Source: 
"Quantum Says Can Recover Intrepid Indonesia Stake With New Team", The Jakarta Globe, May 20, 2013
http://www.thejakartaglobe.com/business/quantum-says-can-recover-intrepid-indonesia-stake-with-new-team/

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.

S&P estimates China will need more than $8 trillion for refinancing during the five years ending 2017, accounting for half of such needs in the Asia-Pacific region.  

Bloomberg data shows borrowers from Hong Kong and China have sold 7x more bonds to repay existing debt this year than in the first five months of 2012. 

Bright Food Group Co., which has operations from dairy to wine, issued US$500 million of securities maturing May 2018, according to data compiled by Bloomberg. The company will use the funds to repay financing for its acquisition of British cereal maker Weetabix Ltd., Moody’s Investors Service said in a report on May 7.

This is how the beginning of the end begins.  Companies and governments issue new debt to pay off old debt as the cash flows of the underlying asset/investment do not generate sufficient returns to pay off the original debt.  And they never will.  Kicking the can down the road works for a time, that is until the road ends either because runaway inflation prevents governments from continuing to print money or investors balk at rolling over the debt again forcing a bankruptcy restructuring.

Source:
"China Corporate Debt to Overtake U.S. Within Two Years, S&P Says", Bloomberg, May 15m 2013
http://www.bloomberg.com/news/2013-05-15/china-corporate-debt-to-overtake-u-s-within-two-years-s-p-says.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.

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.

A recent settlement between the U.S. SEC and a husband-and-wife team that ran a Chinese maker of pollution control equipment provides another shining example of how due diligence was not "do" diligence.

In this case, CEO Zou Dejun and his wife, the chairwoman, Qiu Jianping, ran Rino International, at one time worth about US$500 million on Nasdaq.  It collapsed after short seller Muddy Waters accused it of claiming revenue from nonexistent contracts. More than three years ago, the company raised $100 million from American investors in a stock offering.

The S.E.C. complaint said the company kept two sets of books. The Chinese books, which the S.E.C. said were correct, showed total revenue of $31 million from the first quarter of 2008 through the third quarter of 2010. The United States books, which were used in financial statements, showed revenue of $491 million, or about 15 times as much.

Shocking!  A Chinese company with more than one set of books?  This surely has never happened before in China or anywhere else.  Nod, nod, wink, wink.

The S.E.C. said that days after the 2009 public offering, the couple, who together controlled 65 percent of the company’s stock, used $3.5 million of the money raised to buy a home for their use in Orange County, Calif., then gave conflicting accounts to auditors regarding how the money was used. They eventually signed notes indicating that they had borrowed the money from the company.  So they got caught with their hand in the company cookie jar, and the auditors did not think maybe something else is going on and just took everything else at face value?  Well done to the due diligence team.

The fraud fell apart in November 2010 after the Muddy Waters research Web site, which seeks out stocks to sell short and has exposed a number of Chinese frauds, released a report saying some of the company’s reported revenue came from fraudulent contracts with purchasers.   A few days later the company’s auditors, Frazer Frost, reported that Mr. Zou had admitted that some of the contracts did not exist. The auditors withdrew their previous certifications of the financial results.

Again, well done to the Frazer Frost auditors for the level of rigorousness on this one.  They were clearly more concerned with getting paid than fulfilling their responsibility for investors.

On Nov. 30, the company sent a letter to the S.E.C. saying it intended “to file restated audited financial statements” for 2008 and 2009 “as soon as practicable.” It has made no such filings since, and the company’s Web site is no longer available.

Source:
"Couple Settle Fraud Case Involving Chinese Company", New York Times, May 15, 2013
http://dealbook.nytimes.com/2013/05/15/chinese-couple-settle-s-e-c-fraud-case/

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.

Indonesia is getting a lot of attention lately from bankers, consultants, and MNCs because of its large population and growing consumer class.  But it  not an easy place to do business in terms of distribution and infrastructure.

Tupperware, the American seller of plastic items, has a business model perfectly tailored to meet the challenges here.  It uses a sales force mostly of homemakers to store and deliver products.  Tupperware avoids the poor roads and scarce shelf space which hinders many retailers here.

Tupperware's sales force has exploded to >170,000 people here from only 2,000 a decade ago.  It uses its direct-sales network avoid a complicated supply chain and store infrastructure.  "Many foreign retailers blame overburdened roads and a lack of retail space on the country's 17,000 islands for slowing expansion here. But Tupperware's representatives sell to friends and family in their homes and pick up Cake Takers and ravioli makers themselves at the company's warehouses."

Tupperware points out, "There is a limited retail infrastructure once you get away from major metropolitan areas,but our salespeople take our products to the villages in scooters and on buses."

Tupperware's network is also an asset it can leverage and charge other marketers which complement Tupperware for access to.  Think products which will drive the use and need for Tupperware's products.  Food and beverage companies are a strong complement.  Banking and insurance products, while not a complement, are not a competitor to Tupperware and could leverage Tupperware's network.

When planning on entering any market, emerging or not, it is important you align your distribution with the realities of that market's limitations.

Source:
"Indonesia Provides a Tasty Dish for Tupperware", Wall Street Journal, April 24, 2013.
http://online.wsj.com/article/SB10001424127887323551004578440513921118512.html?mod=%253C%2525mst.param%2528LINKMODPREFIX%2529

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.

Picture a badly battered woman on crutches who is being pressed by a cop to pick a suspect out of a police lineup of five African-American males and a goat named Felicia.   The goat Felicia—in a male voice—taunts the battered woman with phrases like "snitches get stitches, fool," "keep your mouth shut" and "I'm going to get out of here and do you up."

I wonder if any of the "smartest guys in the room" signing off on this actually thought this one through.  But I guess we already know the answer - which is obvious to pretty much everyone except these people.

PepsiCo says it's pulling this Mountain Dew commercial which offended online viewers due to sensitivities towards racism and violence toward women. Duh!

The actors are members of the music group Odd Future whose alternative hip-hop ensemble's co-founder, Tyler, The Creator, developed the ad.  The only redeeming factor in this sordid episode is the ad was created by a black man.  Double standard? 

PepsiCo stated, "We understand how this video could be perceived by some as offensive, and we apologize to those who were offended."  Only "some" might perceive this as offensive?  Seems drinking Pepsi and Mountain Dew is not only bad for your health, but also your brain.

Source:
"Mountain Dew Pulls 'Most Racist Commercial in History", AdWeek, May 1, 2013
http://www.adweek.com/news/television/mountain-dew-pulls-most-racist-commercial-history-149061

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 seems to be no shortage of offensive ads from MNCs and their ad agencies these days.  Makes one wonder how disconnected from reality are these people?  This example is from GM's Chevrolet's Trax's retro-styled ad titled "After Midnight".

The ad refers to China as "the land of Fu Manchu", where people say "ching-ching, chop suey".  While this might have been considered acceptable, even amusing, when the lyrics were originally penned in the US in the 1930s, times have changed.  And China is now GM largest market.  

"The giant carmaker is now pulling the advertisement from worldwide markets, saying it had received complaints about the "offensive content"."  Duh! 

In today's media-is-everywhere environment, anything which can be interpreted, rightly or wrongly, as insensitive or offensive, certainly will be.  And the media will be there to pick up on it and carry the story globally.

Source:
"GM pulls 'racist' Chevrolet 'ching-ching, chop suey' ad", SCMP, May 3, 2013
http://www.scmp.com/news/world/article/1227375/exclusive-general-motors-pulls-racist-chevrolet-ad-over-ching-ching-chop

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.

In order to distance itself from disgraced founder Lance Armstrong and his scandals, the Livestrong Foundation unveiled a new logo.  The new logo emphasizes the "foundation" and removes references to Lance Armstrong.

The designers of the new logo remained tied to the old logo by using the original same "LIVESTRONG".  They could have used lower case letters to de-emphasize this.  E.g. "LiveStrong".  This would also make the "FOUNDATION" part stand out.  They could also have added a tagline to reinforce the message of what they do and why they are still relevant without a relationship with Lance Armstrong.  For example: "Helping Families with Cancer LiveStrong".  Most importantly, they could have changed the bold emphasis to "live" instead of "strong" to reinforce the "living" message".

In explaining the new logo, the EVP of operations stated, "The positioning of the bars suggests forward and dynamic movement.".  Brand logos are all about showing and not telling.  If you have to explain your logo, it will be lost on the typical person.  The best brand logos reinforce emotional connections to the audience.  This does not happen when one has to  explain those connections so people "get it".