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

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

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

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.

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.

Summary:

• Indian's are increasingly hiring MNC food brands to cater and make their weddings stand out from the rest.
• This provides MNC food brands with fantastic opportunity to connect with their target customers - while being paid to do so.
• But MNCs need to be selective and make sure the weddings they cater match the brands' objectives.
• If you cannot maintain the quality of your product in a wedding setting, then the only winning move is not to play.
• The key India marriage seasons are November-February and April-May.
  

Imagine having MNC fast-food chains such as Domino's, Costa Coffee, Haagen-Dazs and Baskin Robbins entertaining guests at your wedding.  The Indians are doing it.  India definitely sets the standard for wedding ceremonies.  One way the rich marriage hosts now seek to make their wedding stand apart from the rest is to have MNC branded food and beverage stalls at the wedding ceremony.  Some even go so far as to replicate their outlets in malls, complete with similar seating arrangements.

A Fantastic Consumer Connect

MNCs are attracted to this trend because it provides them a direct channel to their target audience.  They are in effect being paid to promote themselves to the wedding audience, which just happens to be their target demographic.

A Haagen-Dazs parlour costs 5-8 lakh (INR 500,000 - 800,000) for one evening.  A Costa Coffee bar costs about 3 lakh (INR300,000).

New and Growing Business Channel

Caterers and wedding planners say the demand for branded food has gathered pace in the last 2 years.  15-20% of weddings these days demand branded stalls along with traditional snacks and cuisines. Demand for branded outlets is a growing trend all over the country, particularly in Chennai, Gujarat, Rajasthan, Mumbai, Punjab and Delhi. 

Dominos is taking advantage of this growing demand by forming a separate vertical for outdoor catering with dedicated staff, cold vans, pizza ovens and other paraphernalia in select markets such as Delhi-NCR, Mumbai, cities in Punjab and Uttar Pradesh. Domino's says wedding accounts for 50% of the outdoor catering vertical's revenues during the marriage seasons of November-February and April-May.

But Need to be Selective

A company must be selective about the kind of marriages they go to.  Revenue is not huge, so one must balance the consumer visibility, the wedding profile and the number of wedding guests.

And Not For Every Company - Must Be Able To Maintain Product Quality

McDonald's India does not do outdoor catering.  Creating and relocating a full store at weddings is logistically very difficult.  More importantly though, it is difficult to maintain the quality of its products outside its outlets.  In this situation, the only winning move is not to play.

Why India?

People are willing to spend to make theirs a grand Indian wedding.  Wedding hosts want the snob value and the bragging rights to have famous MNC brands at their weddings.  Indian weddings are becoming more and more about ostentatious showmanship with hosts wanting emphasize the specialness of the wedding event.

Source: "MNC food giants like Domino's, Costa Coffee, Haagen-Dazs eye a fast buck at Indian weddings", Economic Times of India, February 21, 2013
http://articles.economictimes.indiatimes.com/2013-02-21/news/37221580_1_weddings-future-brands-sushil-wadhwa

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 India government is taking an interesting approach to try and attract more much-needed foreign investment.  The India finance ministry, while trying to attract foreign direct investment,  is initiating some rather interesting tax collection actions against some very well known MNCs.  And of course this news is being read around the world outside India.  Some examples:

• India's Finance Ministry wants Vodafone, as the buyer, to pay the capital gains tax for Hutchinson Whampoa, the seller, after Vodafone bought out Essar via the Mauritius legal entity.
• Royal Dutch Shell used a unit in the Netherlands to invest into Shell India via a share purchase of Share India.  The India Finance Ministry is claiming Shell should have paid a higher price (18x) for those shares, and thus higher taxes on the share purchase.

India Taking Transfer Pricing Scrutiny to a New Level

India is right to scrutinize MNCs and their transfer pricing.  India audits companies with back offices in India to ensure the parent companies and other subsidiaries outside India are paying their Indian subsidiaries at arm's length, with a rate equivalent to what they would pay a third party for similar services.  Parent companies and their subsidiaries pay subsidiaries on a cost-plus basis to guarantee the subsidiary a certain profit over the cost of the labor and parts that go into the subsidiary's business.  India is trying to take transfer pricing to a new level:

• India wants to switch to a system where MNCs assign a portion of their total global profits to their Indian subsidiaries.   India obviously wants more tax revenue, but MNCs have options and will invest elsewhere.
• Indian tax authorities claim when a MNC run expensive marketing campaigns in India, they are transferring intangible value to the brand world-wide and the Indian subsidiaries should be taxed for that. LG Electronics has been fighting such a case for years. A Delhi tax tribunal upheld the tax authority's view last month.

Source: "India to Foreign Firms: Pay More Taxes", The Wall Street Journal, February 25, 2013.
http://online.wsj.com/article/SB10001424127887323864304578317821999568656.html?mod=WSJASIA_hps_LEFTTopWhatNews

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.

Ever hear the joke about what is the easiest way to become a millionaire?  Start off as a billionaire and buy and airline.

Is the airline industry in India going to follow a similar path as telecoms?

The India dream:  Indian aviation has enormous long-term growth potential and is expected to produce tremendous upside for first movers.  As India continues to modernize and grow over a 10- to 15- year time horizon, large number of Indians will be able to fly for the first time in their lives and an increasing number of people will be able to afford flying.  India is the only country which has this potential growth for airlines. They need to capture good Indian demand for their overseas services.

The India Reality: India is a challenging market.  India’s private airlines, once seen as a bright symbol India's modernization, soon found their hopes of boundless growth grounded in red ink losses. Intense competition for the loyalties of highly price-sensitive travelers, and high operating costs, led to years of losses and mounting debts.  Since 2007, Indian carriers, including state-owned Air India and now-grounded Kingfisher Airlines, have lost a combined total of about US$8.5bn after years of below-cost ticket pricing and overambitious expansion.  Indian carriers together have cumulative debts of >US$14bn to their lenders, plus debts of about $1.5bn to their various suppliers.  Government policy is often an obstacle instead of a solution.  Flying is taxed as a decadent luxury rather than an essential element of a modern economy. Indian Carriers pay up to 70% more for jet fuel than regional peers.  All of this limits potential demand. 
Telecom operators in India entered the market with similar rising tide lifts all boats mentality, only to find out the losses just kept coming as regulations and stiff competition created a market which had some of the cheapest call rates in the world.

In September 2012, the India government allowed foreign carriers to own up to 49% of domestic airlines.  No doubt to encourage others to invest in shoring up the finances of the India airlines so the government did not have to.

India's airline market growth story may have a different ending than the telecom market has had so far as foreign airlines, especially from the Gulf, are looking at tie-ups with existing Indian carriers, to help them capture more Indian passengers for their own international networks.  Analysts say tie-ups with Indian airlines will help Gulf carriers synchronise schedules and seamlessly connect travelers from smaller cities with their international routes.

But investors and operators would do well to look closely at the market realities and adjust their expectations and execution accordingly.

Source: "Foreign airlines see beyond clouds in India", Financial Times, February 21, 2013.http://www.ft.com/cms/s/0/38d491ee-7be5-11e2-99f0-00144feabdc0.html#ixzz2Lb7YAOQE

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.

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.

Coca Cola faced a challenge in India:  How to sell chilled beverages in India's hinterlands during the hot summer when there are frequent power outages?  

Coca Cola India's pragmatic solution:  Provide solar-powered coolers to women retailers.  The “eKoCool” solar coolers help retailers chill their drinks using solar power but also empowers women.  

Beverages remain chilled for at least two-and-a-half hours after sunset.  Besides cooling drinks, the "eKoCool" solar cooler can also charge lanterns and cell phones which helps the women earn a little extra money. 

During the initial test using 20 solar coolers in Agra, sales jumped nearly 5x for these retailers.  Coca Cola has installed 110 coolers so far and has plans to roll out over 1,000.

Definitely a real solution for the real world.


Source: "Coca-Cola focuses on growing with communities", The Hindu Business Line, February 14, 2013.
http://www.thehindubusinessline.com/industry-and-economy/marketing/cocacola-focuses-on-growing-with-communities/article4415385.ece

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.