Samsung’s new Galaxy S IV is reported to have a very cool feature: eye scrolling.  The phone will track a user’s eyes to determine where to scroll.  E.g. when a user reads an article on their phone or tablet, and their eyes reach the bottom of the page, the software will automatically scroll down to reveal the next paragraph of text.

In January 2013, Samsung filed for a trademark in Europe for the name “Eye Scroll” (No. 011510674). In February 2013, Samsung filed for the “Samsung Eye Scroll” trademark in the U.S., where it described the service as “Computer application software having a feature of sensing eye movements and scrolling displays of mobile devices, namely, mobile phones, smartphones and tablet computers according to eye movements; digital cameras; mobile telephones; smartphones; tablet computers.”

Samsung also filed for the trademark “Eye Pause,” without describing what the feature does.

But Samsung may not be the only player with this cool feature.  A tech company called Tobii, which received $21 million in funding from Intel last year, has been working on a technique that uses infrared sensors to track precise eye movements.

Although eye tracking systems have been in development for a while, it seems Samsung has finally cracked it. Current capabilities use the front-facing camera to know when a person is looking at the screen to keep the screen lit instead of 
automatically dimming.

Interested to see how practical and accurate this feature will be.

Source: "Samsung’s New Smartphone Will Track Eyes to Scroll Pages", New York Times, March 4, 2013.http://bits.blogs.nytimes.com/2013/03/04/samsungs-new-smartphone-will-track-eyes-to-scroll-pages/

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.

STMicroelectronics unveiled a screen-sensor technology which uses motion sensors to allow users to control a device without actually touching it.  Users simply hover their hand a few inches above the surface. The technology is expected to go into a tablet to go on sale this year.

The inspiration for this technology originated with a Russian invention from 1919, yes, nearly 100 years ago.  In 1919, a Russian named Leon Theremin (aka Lev Terman) invented the termenvox (aka theremin), an electronic musical instrument built around two antennas which allows users to play music by hovering their hands above the instrument without having to touch it.

STMicroelectronics' clients include Samsung, Apple, Nokia and Blackberry.

I do wonder how practical and accurate this technology will be.

Sources: 

1. "STMicro Lures Samsung With Hover Screen Amid Venture Exit", Bloomberg, February 27, 2013.
   http://www.bloomberg.com/news/2013-02-26/stmicro-lures-samsung-with-hover-screens-amid-chip-venture-exit.html
2. "How an Old Russian Invention Inspired STMicro’s Hover Screen", Bloomberg, Febrauary 27, 2013.
   http://go.bloomberg.com/tech-blog/2013-02-27-how-an-old-russian-invention-inspired-stmicros-hover-screen/
   

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.

Summary:

• Nokia lost the consumer smartphone market to Apple and Samsung/Android.
• Nokia is targeting Blackberry's business customers in its bid for survival.
• Samsung and Apple are also targeting Blackberry's business customers.
• Nokia is betting on a third software ecosystem for smartphones.  The history of the software market shows this rarely happens in mass markets. 
• When smartphone markets converge, consumers not businesses set the standard.
  

When Smartphone Markets Converge, Consumers Not Businesses Set the Standard

Nokia, once the global leader in mobile phones, missed the smartphone market.  Blackberry finds itself on the ropes after misjudging how smartphones would open cracks in its stronghold with business users.  Building a dominant position in the business market is crucial for both Nokia and BlackBerry as they fight for survival since Apple and Samsung have built dominant positions in the consumer smartphone market.  Unfortunately, Apple and Samsung and are now targeting business users.

In targeting Blackberry's stronghold, Nokia is betting its partnership with corporate-computing giant Microsoft will help it win business users.   Nokia, as the biggest seller of handsets running Windows, is trying to appeal to IT chiefs seeking easy synchronization between smartphones and company computers, which most often use Microsoft’s operating system.

Unfortunately for Nokia and Blackberry, the iPhone and Android have already captured a combined 78% of the business- smartphone market in 2012.  BlackBerry 16%.  Nokia 4%.  The reality is Blackberry missed the impact people choosing their own phones for use at work, and they were choosing Apple and Samsung, would have on its business. 

Classic Case of Disruption: Consumer Smartphones Ultimately Become Smart & Secure Enough for Business Users

Apple and Samsung are not standing still. In January 2012, Samsung, acquired a stake in security software company Fixmo Inc. In February 2013, Samsung introduced its Knox security software, which it teamed up with General Dynamics, a military contractor, to develop to ensure its phones met the strict security standards of government agencies.

As tablet computers become more commonplace, the company which is strong in both tablets and smartphones will have an advantage with business customers.  This favors Apple and Samsung over Nokia and Blackberry.

Third Ecosystems Rarely Exist in Operating Software

Nokia insists there can be a “third ecosystem” in the smartphone business.  Unlikely.  Smartphones are smart because of the software.  In every other software business, especially operating systems, one or two become dominant and everyone else is relegated to a small niche on the sideline.  Think Windows and Apple for computers.  Of the two dominant software systems, one is an open system (e.g. Windows), and the other is proprietary (e.g. Apple).  Symbian, Nokia's own attempt at a smartphone operating system, was unsuccessful for several reasons.  Symbian was late to the party after iOS and Android.  Google gave Android away and Nokia stuck to charging royalties.  The result is iPhones and Android devices together account for about 90% of smartphone sales.  Blackberry 3.2%.

Blackberry Missed Being Disrupted Because it Mis-Defined the Market's Needs

BlackBerry insist the BlackBerry is still the top phone for professionals. And yet in 2012, according to IDC, Android phones and Apple iPhones replaced BlackBerrys as the most-used phones among workers all over the world.  More businesses are buying iPhones for their employees.  Android phones the most popular among workers buying their own phones. Nokia and Blackberry are competing for a far distant third place after Samsung and Apple in both the consumer and business smartphone markets.

Will Blackberry be the Next Iridium?

If Blackberry is not acquired by Nokia, it will likely go the route of Iridium, which was re-built targeting use in environments and locations other phones could not reliably provide service to.  Blackberry may become the dominant niche in corporate and government communications requiring THE ultra-secure network.  But this will be a small market.

Sources:

• "Failing to Beat Apple, Nokia Aims for BlackBerry", Bloomberg, February 27, 2013.
  http://www.bloomberg.com/news/2013-02-26/failing-to-beat-apple-nokia-aims-for-blackberry.html
• "Samsung Armors Android to Take On BlackBerry", New York Times, February 27, 2013.
  http://www.nytimes.com/2013/02/28/technology/samsung-armors-android-to-take-on-blackberry.html?pagewanted=all&_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.

Summary:

• Mexican food is unfamiliar to most Londoners and Brits.
  
• Chipotle is struggling in its international expansion plans, including London.
• Many other competitors have failed to gain significant traction in the U.K., which raises the question of why target this market?
• Chipotle is expensive compared to the alternatives.  This strategy works when selling an experience in an emerging market, but not in an advanced market with insufficient marketing and many alternatives.
  
• Chipotle is spreading itself too thin (pun intended): Few restaurants means lost opportunity to take advantage of scale in operations, sourcing and marketing, further raising the hurdle to successful expansion.  It should focus on a few specific markets and achieve scale before entering a new market.
• Chipotle needs to invest in marketing which is educational (about the food) and entertaining/humorous (about the Mexican-American angle) to create an image and atmosphere which makes people want to first try, and second come back with friends.

American-Mexican food restaurant chain Chipotle has a strong following in the U.S.  They seem to have trouble translating this success as it expands overseas.  The south-of-the-border food is failing to attract a following across the pond in London.

Why choose to expand abroad into a market where similar products have struggled?

Mexican food has always struggled in the U.K. Taco Bell launched in the U.K. in the late 1980s and had 3 outlets in London and 1 in Birmingham.  All 4 were closed by the mid 1990s.   Taco Bell returned in 2010 and now has three whole (sarcastic emphasis added) restaurants in the U.K.  Taco Bell positions itself at the lower end of the price-spectrum.  Chipotle positions itself at the higher end as “gourmet burritos and tacos” as American-style Mexican food.

U.K. burrito chain Tortilla was founded in 2007 by California-native Brandon Stephens.  By February 2013 after 5+ years, Tortilla has opened 11 restaurants.

Hardly numbers which are going to move the needle to a company the size of Chipotle.  But Chipotle seems to be spreading itself too thin when it comes to international expansion.  In Canada, Chipotle has opened 5 stores in 5 years.  This reduces Chipotles ability the achieve scale in operations, sourcing, marketing, etc. in any single market, in effect weakening its position in each market.

Why choose to expand abroad into a market where consumers are unfamiliar with your products?

Given the proximity to each other, there are obviously more Mexicans in the U.S. than the U.K.   This makes Mexican food staples like salsa, guacamole and tacos novel and unfamiliar in the U.K.. Customers even had basic questions on how to just eat the food - some would unwrap their burrito to eat it.

Why choose to expand abroad and then not invest in marketing to educate and entertain potential customers?

KFC, McDonald's, etc. have been successful expanding abroad in part because they were selling American-culture in an age of America The Undisputed Superpower.

Most Londoners are not yet familiar with the Chipotle brand.  This is no surprise given they have 6 stores and have not done any interesting marketing.  Chipotle is not selling American culture.  It needs an angle.  Chipotle could have some interesting and fun marketing around Mexican and American themes to educate people about the food and the restaurants.

Chipotle's prices are not helping.  in the U.K., many diners have a mental barrier against paying more than £5 for a lunch item. Chipotle’s burritos start at £6.50.  If you want to charge a premium, you need to use marketing and the customer experience to convince customers the premium is justified.

Source:  "Why Chipotle Sales Lag in London", BusinessWeek, February 26, 2013
http://www.businessweek.com/articles/2013-02-26/why-chipotle-sales-are-low-in-london#r=hpt-ls

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.

Summary:

• Perpetual bonds have no formal maturity and pay interest until the bond is bought back by the issuer
• Caveat Emptor: Perpetual bonds are much riskier than the name implies

What are Perpetual Bonds?

Perpetual bonds are bonds issued which pay an interest rate (usually annually) with no formal maturity and the issuer will usually have a call option to buy back the bond under specific circumstances.  A perpetual bond can theoretically last forever, with investors never being repaid their principal but instead forever collecting an interest payment.

What are the Risks of Perpetual Bonds?

Perpetual bonds are much riskier than the name "perpetual" implies. 

• Seniority: Perpetual bond debt can be subordinate to other company debt.  This means perpetual bond investors are at the back of the creditor line behind all the other debt holders if a perpetual bond issuer defaults.  An investor should make sure they understand whether their perpetual bond is senior or subordinate debt.
  
• Interest Rates: Perpetual bonds are very sensitive to interest rate movements since the cash flows are far in the future. When interest rates rise, their attractiveness falls since it is paying an interest rate less than an investor could currently get.  This means the perpetual bond price falls to a price which matched the current available yield.  
  
• Interest Rate Reset:  This feature means the interest coupon rate will be adjusted periodically as interest rates rise after the initial interest coupon rate.  f this feature is part the perpetual bond, keep in mind the interest rate does not normally reset regularly, but rather once every few years, sometimes once every 5 years.
• Interest Rate Step-Up:  This feature means the interest coupon rate will be adjusted for interest rate increases, and by an extra set percentage (called step-up margin) on top of adjustments for interest rate increases as interest rates rise after the initial interest coupon rate. If this feature is part the perpetual bond, keep in mind the interest rate does not normally reset regularly, but rather once every few years, sometimes after 10 years.

If Institutional Investors Will Not Touch Them, Whey Should You?

Institutional investors normally avoid buy perpetual bonds because the risks are too high compared to the interest they pay.  When institutional investors are not buying, bank push perpetual bonds on their private bank clients to buy.

"Perpetual bonds are favored by individual investors, some of whom are thirsty for yields and focus on short-term investments. Managers of large bond funds usually shun the instruments because perpetual bondholders rank low in a company’s capital structure and would be the last to recover their capital if the issuer defaults."

When will an Issuer Buy Back a Perpetual Bond?

The interest rate reset and step up may create an incentive for the issuer to buy back their perpetual bonds, because as interest rates rise, there becomes a point when interest rate payments become too expensive for the issuer to continue and will refinance.  Investors in perpetual bond issuers will then get their principal back.

If a perpetual bond has no interest rate reset or step-up features, or the interest coupon rate increases are not enough to incentivize an issuer to buy back the perpetual bond, turn and run away from it as fast as you can.  Investors will probably be left holding a long-maturity bond which declines significantly in value when interest rates rise.

Sources: 

• "Perpetual Bonds", South China Morning Post, February 25, 2013.
  http://www.scmp.com/business/money/markets-investing/article/1156330/perpetual-bonds
• "Investors Get a ‘Perpetual’ Headache", The Wall Street Journal, January 21, 2013.
  http://blogs.wsj.com/deals/2013/01/21/investors-get-a-perpetual-headache/

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:

• A company's name and brand should be consistent with each other and consistent with how its consumers view it: i.e. consistent with its marketing communications, products, and customer experiences.
• A strong brand name is no substitute for a compelling product.
• Less is more:  A company and brand name should be short and to the point.

The best brands are built around mutually reinforcement.  Marketing communications, product, customer experience all reinforce the brand.  Recently some big names have changed their company names.  Royal Philips Electronics is going to become Royal Philips.  Research In Motion (RIM) became Blackberry.  These 2 companies are good examples where the product brand IS the company brand in the consumers' mind, but the corporate name is inconsistent.

Philips is making the right move to remove "Electronics" from its name since it recently divested the consumer electronics business.  But Philips should go even further.  CEO Frans Van Houten in a recent statement about the proposed name change stated, “Philips is a diversified technology company focused on delivering meaningful innovation in healthcare, energy-efficient lighting and consumer health and well-being.”  Notice the CEO of Philips itself referred to the company as Philips and not Royal Philips Electronics.  This is because in people's minds, the brand is Philips.  So why not change the company name to just Philips instead of Royal Philips?  Philips can add sub-brands like Philips Healthcare, Philips Lighting, and Philips Well-Being.

RIM did it right changing its name to Blackberry, its well-known product, but the change probably came too late. Blackberry was always the much more well-known moniker, even becoming part of people's vernacular.  At the end of the day, however, a company and brand name is no substitute for a compelling product.  Even if RIM changed its name to Blackberry years ago, it would still have missed the smartphone revolution, despite having a front row seat.

Sources:

• "RIM changes name to BlackBerry, unveils 2 phones", the Wall Street Journal, January 30, 2013. http://online.wsj.com/article/APcf657d7bad8340c38efa06b77283db0c.html
  
• "When it comes to branding, Why Philips plans to drop 'Electronics' from its name", CampaignAsia February 26, 2013.
  http://www.campaignasia.com/Article/334582,why-philips-plans-to-drop-electronics-from-its-name.aspx

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.

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.

Family-owned single-brand Lego has come a long way from being the poorly managed and stagnant business in 2003.  It is now the 2nd largest toy company in terms of revenue behind #1 multi-brand Mattel and ahead of #3 multi-brand Hasbro.  What is impressive is while Mattel's and Hasbro's revenue has largely been flat from 2008 through 2012, Lego's has grown 150%.  The toy business is facing many challenges:

• Competition from consumer-electronics with hand-held devices is changing the way children play in and between offline and online worlds
• Tough economic conditions are cutting discretionary spending
• Intense retailer competition (especially in the U.S.) and e-commerce is driving prices and value down

Not surprisingly, revenue growth of the overall U.S. toy market was flat in 2012 from 2011.  What is surprising is the building block sector grew 20%.  Lego's U.S. building-block market share is 85%.

Understandably, competitors are looking to enter Lego's domain and create and sell their own versions of construction building block toys.

• In 2011, Hasbro launched its Kre-O Transformers construction sets which are compatible with Lego
• In 2012, Mattel teamed up with Canada's Mega Brands to launch a line of Barbie construction toys, directly challenging Lego Friends and trying to reinvent the Barbie doll, which itself saw sales decline in 2012.
• In 2013, Hasbro plans to launch Kre-O G.I. Joe.

Will they be successful?  Hasbro and Mattel have plenty of brands.  But Lego is one of those rare iconic brands which defines an entire category.  Think Xerox, Kleenex, Q-Tips, Band-Aids, Coke, Swiss Army Knife, FedEx, Ziploc, iPod, Skype, Google, etc., which enter common usage as either a verb or noun to describe all competitors.  

For Lego, the block is core.  For Hasbro and Mattel, the block is simply an extension of their main toy brands.  Lego has history.  Many generations have grown up playing with Legos, who then encourage their kids to play with Legos and so on in a virtuous cycle.  Some kids who grew up playing with Legos remain customers of much high-priced collector edition sets, which is a big part of Legos turnaround over the last decade.  Lego is the dominant product, with everyone else being looked at as a copycat.  If you are invested in huge Lego sets, you do not want to play with blocks which are not compatible.  Would Hasbro and Mattel not be better off entering licensing agreements with Lego so all the big brands can integrate into the Lego platform?  Habsro and Mattel would sell more.  Together, Lego, Hasbro and Mattel could create an even stronger incentive and attraction for kids to put the video games down.  This is a good example of where instead of turning an indirect competitor into a direct competitor, cooperation would yield better results for all. 

Source: "Lego Shrugs Off Toy-Market Blues", Wall Street Journal, February 21, 2013.
http://online.wsj.com/article/SB10001424127887323549204578317603729616028.html?mod=ITP_businessandfinance_3

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.

When something happens domestically in China which makes China look bad or exposes serious flaws in the system and party, CCTV has instructed its foreign correspondents to find analogous situations in the country where they are stationed. Think landslides, bridges collapsing, food scandals, environmental pollution, etc.  China's CCTV is on a mission to convince Chinese people problems happen around the world, and not just in China.  Fair enough, but Chinese people are seeing through this misdirection when it is a blatant attempt to divert attention on serious local problems such as environmental pollution/degradation and food scandals.  

While there are problems everywhere around the world, in many instances, China's problems are the direct result of fraud and corruption.  The moral compass is missing.  Case in point.  CCTV is dedicating large amounts of coverage to the horse meat scandal in Europe.  Horse meat is not toxic, it is just not the beef it is labelled as.  At the same time, CCTV is giving scant coverage to the latest food scandal which involved Chinese people adding hazardous and poisonous chemicals to duck meat in order to pass it off as more expensive mutton.  In Chinese this is called 鱼目混珠 (yú mù hùn zhū) which translates as "to pass fish eyes off as pearls".  It is a common theme when doing business in China, which is why no one trust anyone else in China.

Chinese people are understandably interested in both what happens in China and overseas.  Seemingly constant Food scandals and environmental pollution is seen as the result of incompetent or worse corrupt regulators responsible for stopping this.  China's netizens are always very active online in these themes.

China's government has a history of trying to distract its people from its own problems by focusing attention on something overseas.  Usually it is Japan's invasion of China.  

Honesty really is the best policy in the digital world as people have access to much greater information, even in China behind the Great Firewall of China.  Chinese people are not going to be distracted from their concern about their own food and environmental issues, regardless of what happens in Europe or the U.S.  Chinese people care about their lives in China.

Understandably, CCTV's efforts have simply created a backlash against itself and CCTV and China’s already loathed food safety and environmental regulators.  In the West, the press/media serves as a check and balance on companies and government.  In China, Chinese netizens are filling this void when Party mouthpieces like CCTV continue to live in past when propaganda was unquestioned.

Soft power is hard to do right.  China still has a long way to go.

Source:"In China, Horse With a Side of Poisonous Fake Mutton", Bloomberg, February 20, 2013.
http://www.bloomberg.com/news/2013-02-19/in-china-horse-with-a-side-of-poisonous-fake-mutton.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.

China's latest food safety scandal involved poisonous fake mutton made from cheaper duck meat and illegal chemicals in northeast China's Liaoning Province.

Large amounts of chemicals, dye and adhesive as well as imported mutton grease from New Zealand were used  to make the duck meat taste like mutton and to endure the high temperature of hotpot cooking. 

Ref flag something was wrong: The fake mutton was sold at <RMB20 per kilogram while real mutton costs RMB40-60.

The fake mutton was found to also contain excessive amounts of heavy metals and cancer-causing sodium nitrite exceeding national food standard by >2,000x.

A 2009 version of the same scam: duck was dipped in non-toxic lamb urine to infuse it with muttony flavor.  Now that is a piss-poor idea, pun intended.

Do not take anything at face value (also pun intended) in China.

Source: "34 Suspects Seized in Poisonous Fake Mutton Ring", CRIenglish.com, February 4, 2013
http://english.cri.cn/6909/2013/02/04/2982s746760.htm

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.

Before the ubiquity of smartphones, retailers had the advantage over consumers.  It was nearly impossible for consumers to compare prices in real time between offline and online retail channels.  The smartphone leveled the playing field for consumers.  Not surprisingly, prices are being leveled in the process.  All else being equal, consumers want to pay less than more.   Duh! Consumers, with the new found power in the palm of their hands, understandably took to showrooming to make sure they were getting the best price/deal. 

Showrooming is when a consumer checks out a product in a physical store then goes online to make the purchase.  Showrooming impacts some retailers more than others.  E.g. Customers showroom electronics more than any other product category.

Where digital is integrated in the real world, there is only going to be one price (adjusted for shipping and handling, warranty, etc) for both offline and online retail channels.  Retailers would be wise to use their pricing strategy to encourage consumers to visit their physical store, their online store, or both, and purchase via whichever makes them most comfortable.  With pricing leveled, retail success will be driven by service and selection.

Best Buy recently launched a new initiative "to price match the current pre-tax price for new, identical, immediately available products from local retail competitors and select designated major online retailers at the time of purchase only. (No subsequent price matching of competitors is allowed).  If Best Buy lowers a price on a product (online or in-store) we will allow price-matching up to 15 days following the original purchase."

With pricing leveled, Best Buy will have to compete on service and selection.  

Must Haves for Customer Service Differentiation:

• Seamless integration between offline and online
  
• Knowledgeable and supportive retail experience whether offline or online with no forced upselling
• Ability to purchase online in-store if out of stock in-store
  
• Do the homework for consumers and make it easy for consumers to self-educate themselves on why your price is  the best value for the product including delivery and warranty

Must Haves For Product Selection Differentiation:

• Exclusivity, even if only for a lead period
• If a mass market retailer, wide selection across styles and price points
• If a niche market retailer, unique selection at price points relevant to target consumers
• Latest models

Source: "Best Buy Says It Has Killed 'Showrooming' For Good", Business Insider, February 18, 2013
http://www.businessinsider.com/best-buy-new-price-matching-policy-2013-2

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 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.

When government money is involved, the potential for abuse and fraud is ever present.  There will always be people who will always look for ways to scam the system.  Waste and fraud quickly becomes a problem.  

The federal program is question is the LIfeline program which subsidizes wireless phone service to ensure poor people have the ability to call their families, jobs or for emergency help.

Until 2012, the FCC allowed consumers to self-certify their eligibility, and in many states documentation was not required.  Very poor idea.

Not surprisingly, A Wall Street Journal review of FCC data showed >40% of the 6 million subscribers at 5 of the program's top carriers were either ineligible or failed to show that they qualified.

Investigators have discovered questionable tactics by companies participating in the program.  For example: 

• Signing up customers in hospital rooms
• Enrolling subscribers by mailing them unsolicited phones
• Signing up ineligible customers
• Signing up the same customers multiple times
• Signing up children
• Applications lacking required signatures
  

Clues something was amiss:

• In 2012, the government spent US$2.2 billion on the Lifeline program, up from $819 million 4 years earlier, as dozens of small companies were authorized to start providing the service.
  
• Oklahoma experienced subscribers growing so fast the state is likely to exhaust the supply of phone numbers in the 405 area code sooner than expected.
  
• Carriers signing up so many subscribers, more than mathematically possible.
  
• A spike in Lifeline payments to specific carriers.  One in  Wisconsin went from receiving 1% of Lifeline reimbursements in the state in Q2 2010 to 33% of disbursements in Q2 2011.

Detecting and monitoring such waste and fraud becomes expensive and time consuming - a further waste of taxpayer money and government resouces.  Which raises the question: Should governments even get involved in this in the first place or are taxpayers and intended beneficiaries better off by an alternative arrangement?

Source: "Abuse Worries Grow on Phone Aid for Poor", Wall Street Journal, February 18, 2013.
http://online.wsj.com/article/SB10001424127887323764804578312574084396946.html?mod=WSJ_hp_LEFTWhatsNewsCollection

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.

Cash is cash, even when management tries to pass it off as non-cash impairment charges.

First, a company pays cash for part or all of an acquisition.  Then it turns out the acquiring company overpaid because either the valuation assumptions were unrealistic or irrationally exuberant, performance failures or even fraud.  In the end, the acquired company turns out to be worth much less then it was purchased for.

Accounting rules state the acquirer must then write down the value of the company it acquired.  Management refers to this loss as "non-cash" because it is technically a non-cash charge at this point in time.  However, it also gives false impression the acquirer did not lose any real cash.   This is completely false and misleading to investors.  When a company acquires something for cash, and then must later write down the value of that asset, the company did lose cash - cash paid out earlier.

When management tries to explain a loss as, "do not worry, it was a non-cash charge", they are either intentionally misleading you or do not understand what really happened.  In either case, put your hand on your wallet and quickly walk away.

It is also misleading when a company acquires another company with stock and subsequently has to write down its value, calling this charge non-cash.  This may technically be non-cash, but management wasted company value that could have been invested in something else.  When cash was used, real cash was lost.  When shares were used, real value was lost.  In either case, management did a poor job and should be held accountable.

Source: "Wrong Way to Admit You Blew Millions of Dollars", Bloomberg, January 25, 2013
http://www.bloomberg.com/news/2013-01-24/wrong-way-to-admit-you-blew-millions-of-dollars.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.

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.

Maker's Mark faced "unforeseen demand".  Instead of communicating the temporary supply constraint to its customers and the market, and in the interest of maintaining its price competitiveness, it decided to decrease the proof of its whisky from 90 to 84 proof - i.e. Maker's Mark announced it would be diluting the alcohol content of its whisky.  A surefire way to kill your brand is to water down your product (or service)!

Since the one-brand company does not purchase bourbon from other distillers, forecasting and meeting demand is sometimes difficult. The brand was able to keep ahead of shortages in the past because the age range of the whiskey is 5 years 9 months to 7 years.  The recent growth of Maker's Mark and whiskey in general changed this.

Maker's Mark said they tested the watered-down bourbon themselves and validated their own findings with consumer research. Both agreed that "there's no difference in the taste."  Customers thought otherwise to the idea and an "overwhelming response" online against the move by customers led Maker's Mark to reverse the decision to dilute its alcohol.

If you want to change your product, create a brand extension or a new brand.  If you dilute your product, you dilute your brand.  If you do not respect your brand, do not expect your customers to either. 

Sources: 
(1) "Maker's Mark reverses decision to lower alcohol content", Reuters, February 17, 2013
http://www.reuters.com/article/2013/02/17/us-beam-makersmark-idUSBRE91G0EM20130217
(2) "Maker's Mark Won't Cut Alcohol Content", ABC News, February 18, 2013
http://gma.yahoo.com/blogs/abc-blogs/makers-mark-wont-cut-alcohol-content-192224565--abc-news-Recipes.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.

No disrespect to South African Olympic sprinter Oscar Pistorius (aka the Blade Runner), who at the time of this post was being held on suspicion of murder in the shooting death of his girlfriend.

But referencing guns, bullets, weapons, violence, etc. in your marketing is dangerous.  Even more dangerous when your marketing is centered around famous people as anything they do or happens to them gets widely covered in the press.  The buzz will focus on your company's and brand's negatives.

Nike's choice of athletes to sponsor leaves much to be desired lately: Marion Jones (doping), Tiger Woods (cheating husband and philanderer), Michael Vick (dog fighting), Lance Armstrong (doping), and now Oscar Pistorious (murder?).  Who is next?

Source: "Oscar Pistorius Nike ad takes on new, chilling resonance after tragedy", Yahoo, February 15, 2013
http://sports.yahoo.com/blogs/olympics-fourth-place-medal/oscar-pistorius-nike-ad-takes-chilling-resonance-tragedy-182235671--oly.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.